Tag Archives: Scott Sumner

Reading Is Fundamental, Mr. Krugman

Paul Krugman:

A followup on the post about mostly economics reading; on politics, culture, etc. there are other blogs I read fairly often. On politics, Greg Sargent, Josh Marshall, Digby, and I still get a kick out of Atrios, who gets to use all the words I can’t. And I’m a big fan of the folks at Crooked Timber.

Some have asked if there aren’t conservative sites I read regularly. Well, no. I will read anything I’ve been informed about that’s either interesting or revealing; but I don’t know of any economics or politics sites on that side that regularly provide analysis or information I need to take seriously. I know we’re supposed to pretend that both sides always have a point; but the truth is that most of the time they don’t. The parties are not equally irresponsible; Rachel Maddow isn’t Glenn Beck; and a conservative blog, almost by definition, is a blog written by someone who chooses not to notice that asymmetry. And life is short …

Mark Hemingway at The Weekly Standard:

Bear in mind that this paragraph comes right after Krugman lists a lot of perfectly respectable (though shamelessly ideological and hyperbolic) liberal blogs.

So in other words, if you’re reading this you’re probably more informed than at least one Nobel Prize Winner.

Scott Sumner at Wall Street Pit:

That’s right, and George Will isn’t Michael Moore; and a liberal blog, almost by definition, is a blog written by someone who chooses not to notice that asymmetry.  No need to read Marginal Revolution, Becker/Posner, Econlog, John Taylor, Greg Mankiw, Robin Hanson, Steven Landsburg, etc, etc.  Nothing of interest, just move right along folks.  I’m always amazed when someone so brilliant can be so clueless about life.  How someone can reach middle age and still live in a kindergartener’s world of good guys and bad guys.

Perhaps if Krugman would get out a bit more he might make fewer embarrassing errors,  like this one, where he forgot the fallacy of composition, something taught in EC101.  I guess none of his liberal friends have the nerve to point out these sorts of silly errors.  So it’s still there, uncorrected after two weeks.  A monument to his pride at being ignorant of the views of those with whom he disagrees.

You might ask whether I’m being a bit harsh calling him “ignorant.”  Actually, he’s the one who proudly flaunts his ignorance of conservative thought.

I find that reading good liberal blogs like Krugman, DeLong, Thoma, Yglesias, etc, sharpens my arguments.  It forces me to reconsider things I took for granted.  I’d guess that when Krugman tells people at cocktail parties that the post-1980 trend of lower tax rates, deregulation, and privatization was a plot devised by racist Republicans, they all nod their heads in agreement.  If he occasionally read a conservative blog he might learn that all those trends occurred in almost every country throughout the world after 1980, usually much more so than in the US.

I wonder if his blanket condemnation of reading conservative outlets would include books that attack silly liberal arguments for protectionism.  Or articles that show the folly of liberal opposition to sweatshops.  Are those conservative ideas also no longer worth reading?

Kevin Drum:

The problem is sort of a Catch-22: reading the loony tunes blogs isn’t worthwhile except for entertainment value, so I mostly don’t bother. Conversely, the more moderate types have interesting things to say, but they’re so out of touch with mainstream conservatism that they often don’t seem worthwhile engaging with either. I mean, what’s the point in arguing over some technocratic point that’s a million light years away from the views of actual, existing conservatism, which doesn’t yet admit that cutting taxes reduces revenues or spewing carbon into the air heats the globe? It all has a very ivory tower feel to it.I’ll go on reading the non-insane conservatives, because (a) it’s worth having my views challenged by smart people and (b) you never know: maybe someday the tea party version of conservatism will collapse and the moderates will regain a bit of power. That sure seems like a pipe dream right now, though.

James Joyner:

This is a recurring theme and, while I certainly read plenty of conservative pundits–and, indeed, still consider myself one–like Kevin, I read fewer than I used to. I prefer rational, facts-based analysis and find more of it across the aisle than on my own side.

Partly, it’s a function of the fact that academics and policy wonks with strong academic backgrounds are more likely to produce the kind of writing I find interesting and those groups tilt to the leeward side. But I’m not the only conservative who has noticed that even mainstream journals on the right have gone crazy. And the David Frums, Bruce Bartletts, and Daniel Larisons have largely been written off as RINOs angling for invites to liberal cocktail parties.

Are the rational conservatives simply being outshouted? Out-promoted? Or are there just too few to matter anymore?

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Hey Kids, Tyler Cowen Wrote A Book!

Tyler Cowen’s new book, “The Great Stagnation”

Tyler Cowen:

That’s the title and it’s by me, the Amazon link is here, Barnes&Noble here.  That’s an eBook only, about 15,000 words, and it costs $4.00.  If you wish, think of it as a “Kindle single.”

Your copy will arrive on January 25 and loyal MR readers are receiving the very first chance to buy it.  Very little of the content has already appeared on MR.

Many of you have read my article “The Inequality that Matters,” but there I hardly touched on median income growth.  That is because I was writing this eBook.

Has median household income really stagnated in the United States?  If so, why?  Are the causes political or something deeper?  What are the important biases in how we are measuring national income and productivity and why do they matter for economic policy?  Are we getting enough value for all the extra money we are spending on the health care and education sectors?  What do some major right-wing and left-wing thinkers miss about this phenomenon?

How does all this relate to our recent financial crisis?

I dedicated this book to Michael Mandel and Peter Thiel, two major influences on some of the arguments.

Why did big government arise in the late 19th and early 20th centuries, what is its future, and why is science so important for macroeconomics?  How can we fix the current mess we are in?

Read (and buy) the whole thing.

Scott Sumner:

How great was Tyler Cowen’s marketing coup?  Well he forced a technophobe like me to actually learn how to use Kindle.  I wasn’t too happy about that, which makes me inclined to write a very negative review.  But that’s kind of hard to do credibly when I agree with the central proposition of the book; that technological progress (at least as traditionally measured) has slowed dramatically, and will continue to be disappointing for the foreseeable future.

In an earlier post I argued that my grandma’s generation (1890-1969) saw the biggest increase in living standards; most notably a longer lifespan (due to diet/sanitation/health care), indoor plumbing and electric lights.  Less important inventions included home appliances, cars and airplanes, and TVs.  From the horse and buggy era to the moon landing in one life.  And all I’ve seen is the home computer revolution.  Not much consolation for a technophobe like me.  I’m probably even more pessimistic than Tyler.

The parts of the book I liked best were those that discussed governance.  I had noticed that there was a correlation between cultures that are good at governance, and cultures that are good at running big corporations.    But Tyler added an interesting perspective, arguing that the technologies that facilitated the growth of big corporations also facilitated the growth of big government.  I don’t recall if he made this point, but I couldn’t help thinking that the neoliberal revolution, which led to some shrinkage in government size, was also associated with a move away from the big corporate conglomerates of the 1960s, towards smaller and more nimble businesses.

Tyler has a long list of complaints about the wasteful nature of our government/education/health care sectors, which he hinted is really just one big sector.  While reading this section I kept wondering when he was going to mention Singapore, which has constructed a fiscal regime ideally suited for the Great Stagnation.  When he finally did, on “Page” 830-37, he did so in an unexpected context, as an example of a society that reveres scientists and engineers.  He had just suggested that the most important thing we could do to overcome the stagnation was:

Raise the social status of scientists.

My initial reaction was skepticism.  First, how realistic is it to expect something like this to happen?  I suppose the counterargument is that every new idea seems unrealistic, until it actually occurs.  But even if it did, would it really speed up the rate of scientific progress?  My hunch is that if we doubled the number of people going into science, there would be very little acceleration in scientific progress.  First, because the best scientists (think Einstein) are already in science, driven by a love of the subject.  Second, with a reasonably comprehensive research regime, progress in finding a cure for cancer may require a certain set of interconnected discoveries in biochemistry that simply can’t be rushed by throwing more money and people at the problem.  Similarly, progress in info tech may play out at a pace dictated by Moore’s law.  Given Moore’s law, no amount of research could have produced a Kindle in 1983.  Could more scientists speed up Moore’s law?  Perhaps, I’m not qualified to say.  But that’s certainly not the impression I get from reading others talk about information technology.

Here’s another exhortation that caught my eye:

Be tolerant, and realize there are some pretty deep-seated reasons for all the political strife and all the hard feelings and all the polarization.

I couldn’t help thinking of Paul Krugman and Tyler Cowen, the two brightest stars of the economic blogosphere.  If only one of those two are able to have this sort of dispassionate take on policy strife, how likely are the rest of us mere mortals to be able keep a clear head and remain above the fray?  Still, it’s great advice.

Ryan Avent at Free Exchange at The Economist:

Mr Cowen’s book can be very briefly (too briefly) summarised as follows. The rich world faces two problems. The first is that a decline in innovation has reduced the growth rate of output and median incomes, making it hard for rich countries to meat obligations accepted when expectations were higher. The second is that a lot of recent innovation is occuring in places like the internet, where new products are cheap or free and create very few jobs.

Mr Sumner’s response is a good one. What Mr Cowen is essentially saying, he suggests, is that the actual price level is tumbling. Technology has created a lot of great things that are available for free, and so the price of a typical basket of household consumption is dropping like a rock. People used to spend a lot of money going to movies, buying books and records, making expensive long-distance phone calls, paying for word processing software, and so on. Now, a lot of that can be done at almost no cost. Prices are falling.

That has a couple of implications. It suggests that real incomes are actually rising, at least for those consuming the bulk of the free online content. And perhaps real incomes are too high, in some cases, for labour markets to clear. Given broader disinflation (understated because non-purchased goods aren’t included in price indexes) both prices and wages may need to adjust, but if they’re sticky, then they won’t. What’s needed is reinflation.

To a certain extent, Mr Cowen is concerned about society’s ability to pay off old obligations, and one reason society might struggle to do this is that new innovations deliver value through non-monetary transactions. But the value is still there, and that’s what should really matter for the paying-off of obligations. When you borrow, you’re offering to compensate the lender with more utility tomorrow for less utility today. Thanks to the internet, utility today is cheap, and that’s only a problem because the obligations we acquired yesterday were denominated in dollars. But we can print enough money to meet yesterday’s obligations. Indeed, we should, in order to offset the deflationary pressures from the cheap innovations.

Imagine a world in which technology has advanced to the point that robots can build robots that operate at basically no cost at basically no cost, such that people can have anything that want anytime for free; the only constraint on consumption is the time available. That would be a cashless economy, and as a result, debtors would be totally unable to pay creditors. But does that matter?

Paul Krugman:

Tyler Cowen argues that technological change since the early 1960s hasn’t been as transformative for ordinary peoples’ lives as the change that went before.

I agree. I wrote about that a long time ago, using the example of kitchens:

Better yet, think about how a typical middle-class family lives today compared with 40 years ago — and compare those changes with the progress that took place over the previous 40 years.

I happen to be an expert on some of those changes, because I live in a house with a late-50s-vintage kitchen, never remodelled. The nonself-defrosting refrigerator, and the gas range with its open pilot lights, are pretty depressing (anyone know a good contractor?) — but when all is said and done it is still a pretty functional kitchen. The 1957 owners didn’t have a microwave, and we have gone from black and white broadcasts of Sid Caesar to off-color humor on The Comedy Channel, but basically they lived pretty much the way we do. Now turn the clock back another 39 years, to 1918 — and you are in a world in which a horse-drawn wagon delivered blocks of ice to your icebox, a world not only without TV but without mass media of any kind (regularly scheduled radio entertainment began only in 1920). And of course back in 1918 nearly half of Americans still lived on farms, most without electricity and many without running water. By any reasonable standard, the change in how America lived between 1918 and 1957 was immensely greater than the change between 1957 and the present.

Now, you can overstate this case; medical innovations, in particular, have made a huge difference to some peoples’ lives, mine included (I have a form of arthritis that would have crippled me in the 1950s, and in fact almost did 20 years ago until it was properly diagnosed, but barely affects my life now thanks to modern anti-inflammatories.) But the general sense that the future isn’t what it used to be seems right.

David Leonhardt interviews Cowen at NYT

Derek Thompson at The Atlantic:

Tyler Cowen’s celebrated Kindle publication “The Great Stagnation” has received a lot of attention from the Web community. The New York Times David Leonhardt gets the author to sit for an e-interview on his e-book and asks a good first question: If our innovation motor is broken, what should we do know?

Cowen responds that we should double down on science…

The N.I.H. has done a very good job in promoting medical innovation and this is in large part because it allocates funds on a relatively meritocratic basis; Congress doesn’t control particular grants and on many important fronts the N.I.H. has autonomy. It is one reason why the United States is the world leader in medical research and development and I would expand its funding, provided it retains this autonomy. Basic research is often what economists call a “public good” and it offers economic and health returns for many years to come.

… and get realistic about clean energy.

“Clean energy” is a very important issue, for reasons of climate change, but it won’t be a job creator in a useful sense. In terms of energy production, fossil fuels are quite powerful. With green energy, at this point, we are simply looking to break even, namely to receive some of our current power but without the negative environmental consequences which accrue from carbon. That’s a worthy goal, but we shouldn’t start thinking about green energy as speeding up economic growth or creating jobs. It’s more like a necessary burden we will have to bear and the fact that these costs lie in front of us – from both the climate change and from the technological adjustments — is a sobering thought.

These are smart thoughts from a very smart guy. But let’s think about NIH funding from a jobs perspective. If the government increases science funding and this results in more pharmaceutical drugs coming online, that’s a great thing for the pharmaceutical industry. But new drugs, like any new technology, can be disruptive. For example, a drug to ease the side-effects of end-of-life diseases might replace the need for home health aides, which are projected to be one of the fastest growing jobs in the country for low-skilled workers. That’s not a reason not to develop a totally useful rug! But it throws a wrench into a claim (one that I’ve often made, too) that innovations in biosciences are pure job-creators.

Ezra Klein:

Cowen’s characterization of plumbing, fossil fuels, public education systems, penicillin and so forth as “low-hanging fruit” bugs me a bit. It took human beings quite a while to figure all that out. But Cowen is right to say that once discovered, those innovations produced extremely high returns. From the economy’s perspective, the difference between having cars and not having cars is a lot larger than the difference between having cars and having slightly better cars. A 1992 Honda Accord and a 2010 Honda Accord aren’t the same, but they’re pretty close.

The obvious rejoinder to this is, “What about the internet?” The problem, as Cowen points out, is that the Internet is not yet employing many people or creating much growth. We needed a lot of people to build cars. We don’t need many people to program Facebook. It’s possible, Cowen thinks, that the Internet is just a different type of innovation, at least so far as its ripples in the labor market are concerned. “We have a collective historical memory that technological progress brings a big and predictable stream of revenue growth across most of the economy,” he writes. “When it comes to the web, those assumptions are turning out to be wrong or misleading. The revenue-intensive sector of our economy have been slowing down and the beg technological gains are coming in revenue-deficient sectors.”

Maybe the Internet just needs some time to come into its growth-accelerating own. Or maybe the Internet is going to be an odd innovation in that its gains to human knowledge and enjoyment and well-being will serve to demonstrate that GDP and even median wage growth are insufficient proxies for living standards. Either way, we’re still left with a problem: Stagnant wages are a bad thing even if Wikipedia is a big deal.

And it’s not just the Internet. Even when we’re growing, things look bad. The sectors that are expanding fastest are dysfunctional. We spend a lot of money on education and health care, but seem to be getting less and less back. The public sector is getting bigger, but it’s not at all clear it’s getting better. For much of the last few decades, the financial sector was was generating amazing returns — but that turned out to be a particularly damaging scam. And economic malaise is polarizing our politics, leaving us less able to respond to these problems in an effective or intelligent way.

Kevin Drum:

Tyler makes a bunch of other arguments in “The Great Stagnation” too, some more persuasive than others. Like some other critics, I’m not sure why he uses median wage growth as a proxy for economic growth. It’s important, but it’s just not the same thing. Besides, median wage growth in the United States slowed very suddenly in 1973, and it’s really not plausible that our supply of low hanging fruit just suddenly dropped by half over the space of a few years. I also had a lot of problems with his arguments about whether GDP generated by government, education, and healthcare is as “real” as other GDP. For example, he suggests that as government grows, its consumption is less efficient, but that’s as true of the private sector as it is of the public sector. A dollar of GDP spent on an apple is surely more “real” than a dollar spent on a pet rock, but there’s simply no way to judge that. So we just call a dollar a dollar, and figure that people are able to decide for themselves whether they’re getting the same utility from one dollar as they do from the next.

The healthcare front is harder to judge. I agree with Tyler that we waste a lot of money on healthcare, but at the same time, I think a lot of people seriously underrate the value of modern improvements in healthcare. It’s not just vaccines, antibiotics, sterilization and anesthesia. Hip replacements really, truly improve your life quality, far more than a better car does. Ditto for antidepressants, blood pressure meds, cancer treatments, arthritis medication, and much more. The fact that we waste lots of money on useless end-of-life treatments doesn’t make this other stuff any less real.

To summarize, then: I agree that the pace of fundamental technological improvements has slowed, and I agree with Tyler’s basic point that this is likely to usher in an era of slower economic growth in advanced countries. At the same time, improvements in managerial and organizational efficiency thanks to computerization shouldn’t be underestimated. Neither should the fact that other countries still have quantum leaps in education to make, and that’s going to help us, not just the countries trying to catch up to us. After all, an invention is an invention, no matter where it comes from. And finally, try to keep an even keel about healthcare. It’s easy to point out its inefficiencies, but it’s also easy to miss its advances if they happen to be in areas that don’t affect you personally.

David Brooks at NYT

Cowen and Matthew Yglesias on Bloggingheads

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Economics Is Hard And Then You Die

Michael Wade at The Examiner:

A senior research economist with the Federal Reserve Bank of Richmond, Mr. Kartik Athreya, recently penned an essay “to open-minded consumers of the economics blogosphere” in which he argued that bloggers, and other economics writers, who portray macro-economic policy as simple matters are doing us all a disservice. In short (with apologies to Douglas Adams), Athreya asserts that “Economics is hard. Really hard. You just won’t believe how vastly hugely mindboggingly hard it is. I mean you may think doing the Sunday Times crossword is difficult, but that’s just peanuts to economics. And because it is so hard, people shouldn’t blithely go shooting their mouths off about it, and pretending like it’s so easy.  In fact, we would all be better off if we just ignored these clowns.”

Or at least, that’s what I took from it anyway.

As examples, he specifically cites not only Matt Yglesias, John Stossel, Robert Samuelson and Robert Reich, but also the hugely popular Paul Krugman and Brad DeLong. For the most part, these are leading lights of the politically liberal point of view, but Athreya’s critique does not appear to be aimed at either left or right commentators. Instead, he questions why we should listen to anyone who assumes complicated economic matters can be so easily dispensed with:

But why should it be otherwise? Why should anyone accept uncritically that Economics, or any field of human endeavor, for that matter, should be easy either to process or contribute to?  To some extent, people don’t. Would anyone tolerate the equivalent level of public discussion on cancer research? Most of us readily accept the proposition that Oncology requires training, and rarely give time over to non-medical-professionals’ musings. Do we expect advances in cell-biology to be immediately accessible to anyone with even a college degree? Science journalists routinely cite specific studies that have appeared in specific journals. They generally do not engage in passing their own untrained speculations off as insights. But economic blogging and much journalism largely does not operate this way. Naifs write books, and sell many of them too. People as varied as Matt Ridley and William Greider make book-length statements about economics. I’ve never done that, and this is my job. This is, to say the very least, bizarre.

Although there is a bit of a “don’t cast pearls before swine” attitude to his essay, as someone who likes to write about and analyze economics, I think Athreya has a good point. It certainly isn’t uncommon for writers such as myself (not to mention those with vastly more expertise than I) to opine about economic policy in a way that assumes certain underlying premises are unassailable fact, rather than difficult and sometimes contentious theory. Whether it’s a discussion of how the Community Reinvestment Act is responsible for the collapse of Wall Street, or why universal health care would boost our GDP in the long-term, bloggers/writers of both left and right are surely guilty of assuming too much at times.

By the same token, I think Mr. Athreya is missing an important distinction. Although economics lies at the heart of what many of these writers discuss, it is in fact politics that is the real subject. As opposed to laymen arguing the finer points about advances in cell-biology, Yglesias, et al., are making political policy arguments and supporting them with economic reasoning. Even when writers such as Krugman or Delong tackle macro-economic subjects head on, they are typically doing so in order to advance a specific policy position that they prefer, rather than seeking to refine our knowledge about economics itself.

In other words, while the economic principles may be oversimplified to an extent, the same came be said about computer science when arguing the pros and cons of owning an Apple or PC. You don’t need to be a computer expert to make a choice.

Mark Thoma:

Let me start by noting that the essay is not even digitized in a convenient form — it is a pdf — and to me that says a lot about the writers knowledge of how the digital world works. Why not make it available in a convenient form (unless the goal is to overcome the fact that federal reserve work cannot be copyrighted by making it difficult to reproduce)?  (This is an irritation more generally, and the Kansas City Fed is the worst. Even the president’s speeches are offered only as pdfs — and they are locked to prevent copying — rather than in a more convenient digital form. Are they trying to discourage this information from more general circulation? If so, why?) [Update: I added a few follow up comments on pdfs at the end of the post.]

Scott Sumner:

That’s right; no need to pay attention to Gary Becker, John Taylor, Paul Krugman, and all the other quacks who lack Athreya’s sophisticated understanding of the “science” of economics.  BTW, any time someone wields the term ’science’ as a weapon, you pretty much know they are an intellectual philistine.  Am I being defensive yet?

To get serious for a moment, in this essay Athreya is confusing a bunch of unrelated issues:

1.  The style of bloggers; are they polite or not?

2.  The ideology of bloggers

3.  The views of bloggers on methodological issues

4.  Are bloggers competent to opine on important public policy issues?

I don’t recall ever reading a Greg Mankiw post that I didn’t feel knowledgeable enough to write.  On the other hand I’ve read lots of Mankiw posts that I didn’t feel clever enough to write.  That’s an important distinction.  Mankiw is a great economist in the “scientific” tradition, and he’s a great blogger—but for completely different reasons.  He’s a great blogger for the same reason he is a great textbook writer.  There are other bloggers who are also very clever; Krugman, Tyler Cowen, Robin Hanson, Steve Landsburg, Nick Rowe, etc, etc.  Several on that list also wrote textbooks.

I don’t know if Krugman has done a lot of recent research on macro, but he knows enough about the literature to offer an informed opinion.  I often disagree with the views of Krugman, DeLong, Thoma, et al, on fiscal policy, but they can cite highly “scientific” papers by people like Woodford and Eggertsson for all of their fiscal policy views.  There must be dozens of economics bloggers who either teach at elite schools, or have a PhD from elite schools, and who are qualified to comment on current policy issues.

Arnold Kling:

He is suggesting that bloggers supply more noise than signal on economic topics. I understand his point, but I disagree with it.

It is a fair point that it is tempting when writing for an audience that includes non-professionals to try to oversimplify, to make your views sound more well-grounded than they are, and to make others’ views sound sillier than they are. If you read just one economics blogger, you will get that blogger’s prejudices and blind spots along with whatever insights might be on offer.

It is possible, however, for the collective efforts of many bloggers to produce more signal and less noise. That would be the case if the competitive market serves as a check on the more unsound ideas. I am not saying that it works that way, but it might.

Athreya takes the view that the academic process of refereed journals is more rigorous and works well. I do not fully share that view. The peer-reviewed journal process may be the better than anything else someone has come up with, but it is a deeply flawed process. It rewards ritual over substance, and trend-following over originality. The process failed badly in the area of macroeconomics over the past thirty years, an era which I believe Paul Krugman is justified in describing as a Dark Age.

Athreya draws an interesting contrast between reactions to the economic crisis and reactions to natural disasters. He points out that the tsunami in East Asia and the earthquake in Haiti combined to kill hundreds of thousands and to impose hardships on many others that are far worse than what has been inflicted by the recession. Yet neither of those disasters was met by a denunciation of seismology for failing to predict them nor an outpouring of ill-informed speculation about what happened. He may be forgetting the “God’s revenge” explanation proposed for the Haiti earthquake, but his point is well taken.

My pushback would be that economists have claimed to know more about the process of recessions than seismologists have claimed to know about earthquakes and tsunamis. No seismologist has ever said that we have “conquered” such events the way that economists have in the past claim to have conquered the business cycle.

I agree with Athreya that non-economists should express opinions about macroeconomics only with great humility. Where I disagree is that I think that economists, too, need to show humility.

Brad DeLong:

I’m going to duck out of this one, and leave it to Federal Reserve Bank of Minneapolis President Narayana Kocherlakota.

He will explain to Kartik Athreya that someone who has taken a year of Ph.D. coursework in a decent economics department (and passed their Ph.D. qualifying exams) is unlikely to be able to say anything coherent about our current macroeconomic policy dilemmas:

Why do we have business cycles? Why do asset prices move around so much? At this stage, macroeconomics has little to offer by way of answer to these questions. The difficulty in macroeconomics is that virtually every variable is endogenous – but the macro-economy has to be hit by some kind of exogenously specified shocks if the endogenous variables are to move. The sources of disturbances in macroeconomic models are (to my taste) patently unrealistic. Perhaps most famously, most models in macroeconomics rely on some form of large quarterly movements in the technological frontier. Some have collective shocks to the marginal utility of leisure. Other models have large quarterly shocks to the depreciation rate in the capital stock (in order to generate high asset price volatilities). None of these disturbances seem compelling, to put it mildly. Macroeconomists use them only as convenient short-cuts to generate the requisite levels of volatility in endogenous variables…

If Narayana is right, Kartik is wrong. I’m betting on Narayana.

Matthew Yglesias:

I think there’s a lot that’s wrong about Athreya’s essay, much of it explained by Scott Sumner, but most of all I think his argument hinges on two category errors, one about what I’m doing and one about what he’s doing.

First me. Do I have anything interesting to say about economics? Well, “interesting” is relevant to audience. I should hope that PhD economists working in central banking systems aren’t learning about economics from my blog! That’s what grad school, conferences, the circulation of academic papers, etc. is for. But perhaps you’re a citizen of a liberal democracy who speaks English and tries to keep abreast of political controversies. Well you’ve probably heard politicians talking a lot about jobs and the economy. You’ve probably noticed that voters keep telling pollsters that jobs and the economy matter to them. Jobs and the economy may matter to you! You may have seen that political scientists have found that presidential re-election is closely linked to economic performance, and thus deduced that the fate of a whole range of national policy issues hinges on economic growth. Well then I bet you are probably interested in the fact that a wide range of credible experts (with PhDs, even) believe the world’s central banks could be doing more to boost employment. Is Athreya interested in this? Well, I hope he would know it whether or not he reads my blog—he’s working at a central bank somewhere and probably knows a lot more about this than most people.

But now to Athreya. His essay seems to partake of the conceit that what economic policymakers do is just economics and that for political pundits to second-guess their decisions would be on a par with me trying to second-guess someone doing particle physics. Completely apart from the fact that the “science” of economics is a good deal less developed than what you see in real sciences, the fact is that economic policy is economics plus politics. For example, according to Ben Bernanke, the Fed could reduce unemployment by raising its inflation target but this would be a bad idea because it runs the risk of causing inflation expectations to become un-anchored. That’s a judgment that contains some “economics” content but it’s largely a political judgment. It’s part of his job to make those judgments, but it’s the job of citizens to question them.

At any rate, the next time anyone finds me claiming to have broken original ground in macroeconomic theory I hope someone will call the expertise police. But you don’t need a PhD in sociology to see how it might be the case that the Federal Reserve Board of Governors would be unduly attuned to the interests of college educated Americans to the exclusion of the working class, or that the European Central Bank might be unduly attuned to the needs of Germans to the exclusion of Spaniards and Italians.

Tyler Cowen:

My view is a little different than Brad’s.  I would say that economics is really, really, really, really, really, really, really hard.  And that’s leaving out a few of the “reallys.”

It’s so hard that experts don’t always do it well.  The experts are constantly prone to correction by non-experts, by practitioners, by people who are self-educated economic experts but not professional economists, and by people who know some economics and a lot about some other field(s).  It is very often that we — at least some of us — are wrong and at least some of those other people are right.  Furthermore those other people are often more meta-rational than a lot of professional economists.

Even very simple problems can be quite hard, such as why nominal wages are sometimes sticky or why particular markets don’t always clear, in the absence of legal impediment.  Why doesn’t the restaurant charge more on a Saturday night?  You can imagine how hard the hard problems are, such as what level of public expenditure is consistent with an ongoing and workable democratic equilibrium.

Putting aside agreement and ideology, and just focusing on how one understands an issue, I’ll take my favorite non-Ph.d. bloggers over most professional economists, six out of seven days a week.  Not to estimate a coefficient, but to judge public policy, thereby integrating and evaluating broad bodies of knowledge?  It’s not even close.

Ryan Avent at Free Exchange at The Economist

Atrios:

I got bored pretty quickly with that essay, a poorly written combination of “people I agree with are smart, people I disagree with are stupid” and “elites know what they’re doing so shut up Shut Up SHUT UP SHUT UP SHUT UP SHUT UP.”

There’s little reason to believe the high priests at the Fed had any clue what they were doing as the housing bubble was happening. More than that, there’s plenty of reason to believe that they are much more concerned with inflation than unemployment, and millions will continue to suffer because of it.

Economics provides a framework for thinking about certain problems, but there’s rarely any one “right” answer. Too often the existence of tradeoffs are unacknowledged or completely ignored. If the priests knew what they were doing we wouldn’t have 9.7% unemployment. They, uh, failed.

Mike Konczal at Rortybomb:

Never, and I mean never, during the financial crisis, where we’d leave work on Friday and wonder whether or not the world would collapse during that weekend or what kind of market we’d walk into on Monday, did I think “man I wish there were more academic economists around.” Academic economists had very little language with which to describe the crisis. Most of our narratives come straight from journalism or sociology. There are no “toxic assets” in economics, that evocative description comes to us from business world and journalism. Same with the culture and pitfalls of high mathematical finance, math predicated on the efficient markets hypothesis. Even now it feels kind of sad to see them try and shoehorn the entire financial crisis into agency problems. The last time we had one of these it changed economics completely with the Keynesian revolution. I am really rooting for INET to change some paradigms, but it’s going to be an uphill battle. You can barely move old-school Keynesian thought into academia, and I can easily see the journals publishing as if this crisis was just us “forgetting” some technology.

I think he took down the essay, but he mentioned how bloggers who haven’t taken the first year of Economics PhD coursework, and passed the prelim exam, shouldn’t be writing. I think I’ve pieced together the first year between some coursework and self-study, and here are my thoughts: My very first economics class ever was auditing a graduate macroeconomics class where we went through the Lucas/Stokey “Recursive Methods in Economic Dynamics” and Ljungqvist and Sargent “Recursive Macroeconomic Theory.” I still remember asking my classmates “no seriously, this isn’t what macroeconomics is, is it?” It was like they were training to be electrical engineers, but could do no actual engineering. I still am terrified of what macro graduate students are cooking.

And speaking as someone who has taken graduate coursework in “continental philosophy”, and been walked through the big hits of structural anthropology, Hegelian marxism and Freudian feminism, that graduate macroeconomics class was by far the most ideologically indoctrinating class I’ve ever seen. By a mile. There was like two weeks where the class just copied equations that said, if you speak math, “unemployment insurance makes people weak and slothful” over and over again. Hijacking poor Richard Bellman, the defining metaphor was that observation that if something is on an optimal path any subsection is also an optimal path, so government just needs to get out of the way as the macroeconomy is optimal absent absurdly defined shocks and our 9.6% unemployment is clearly optimal. (An unfair description perhaps, but I wasn’t an actual student. This is a better, though mathy, take on the problems.)

Will Wilkinson:

While I agree with Athreya that economics is very hard, it is not so hard to understand why it is so hard. His argument for why it is so hard –economics is full of phenomena ”pathologically riddled by dynamic considerations and feedback effects”– sounds to my ear like an argument for the unreliability of pathologically oversimplified economic models, and for the proposition that economists will more often than not fail to converge on a consensus position on which the rest of us can rely.

Economics is a grab bag of theories,  just like psychology, sociology, biology, and so on. Any intelligent person with a taste for abstraction and some degree of critical acuity can perfectly well grasp, explain, even cogently criticize most scientific theories. When it comes to formal training, I find that the rigorous standards of argumentation taught in good philosophy programs are useful generally, and certainly have enabled me to detect and explain defects in the arguments of even highly esteemed economists. More specifically, a solid background in the philosophy of science is especially useful when it comes to explaining why many economic theories fail to meet the basic standards of adequate science. Most economists, sad to say, have a woefully poor grasp of the ways the idealized assumptions of their models affect the relevance of those models to the explanation of the real economy and the evaluation of economic policy. And here we arrive at the real the issue: economic policy and who governs.

It seems to have escaped Athreya that this here country is a liberal democracy, and not some kind of bloated Singapore. His response to worries about the rule of experts seems to be that there is no reason to worry because of peer review. Yet as far as I can tell, there is no reason at all to believe that academic peer review in economics favors work relevant to policymaking in the real, embodied political economy as opposed to clever mathematical accounts of phenomena in fictional worlds that bear at best some tenuous structural similarities to this world. I guess it’s not all that surprising when someone who labors inside a technocratic institution with limited democratic accountability fails to wonder whether technocracy on average delivers better policy than democracy. (I don’t know, but I wonder!) And it’s not all that surprising that he would assume that free and open public discussion of economic policy by amateurs threatens to undermine the authority of quiet experts who, as we all know, have a stellar track record of wrangling professional consensus and truth from topics “pathologically riddled by dynamic considerations and feedback effects.”

Andrew Leonard at Salon:

The stupidest part of Athreya’s essay is its title: “Economics is Hard,” which automatically summons up the memory of Teen Talk Barbie’s “Math class is tough” utterance. (Sadly, Wikipedia tells me that Barbie never actually said “math is hard,” and call me a crazy mob-trusting fool, but I’m going to go with the group mind fact check on this one.) The reason why many women were upset with Teen Talk Barbie was obvious: It played into stereotypes that assumed women just couldn’t do the math. So why even bother try?

I will be the first to acknowledge that I stumble flat on my face when I hit the math sections included in cutting-edge economic theory. But that doesn’t mean I am discouraged from trying to learn more, an important part of which means learning who to trust in the cacophony of econoblogospheric debate. Whose articulations of the problem more closely resemble reality, and resonate with history? Who is best able to take the economic data of the day and slot it into a narrative that makes sense? Who is obviously a cynical, ideologically shuttered fool? I marvel every day at the power of the Internet to put me in the middle of conversations between trained economists and a vast universe of interpreters and filters. I once called the econoblogosphere an ongoing graduate-level seminar in economics, open to everyone, and see no reason to back off on that now. Sure, the democratization of information means that there is a lot of silliness out there — Sturgeon’s 90 percent of everything is crap law undoubtedly applies to Internet discussions of economics.

But pay enough attention, do your homework, and you will find yourself more able to educate your more thoroughly on topics relevant to the pressing matters of the moment than ever before.

The good stuff floats to the top. That, I fear, is not likely to be the fate of “Economics is Hard.”

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” Take A Load Off Fannie, Take A Load For Free, Take A Load Off Fannie, And You Put The Load Right On Me”

Lorraine Woellert and John Gittelsohn at Bloomberg:

The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.

Fannie and Freddie, now 80 percent owned by U.S. taxpayers, already have drawn $145 billion from an unlimited line of government credit granted to ensure that home buyers can get loans while the private housing-finance industry is moribund. That surpasses the amount spent on rescues of American International Group Inc., General Motors Co. or Citigroup Inc., which have begun repaying their debts.

“It is the mother of all bailouts,” said Edward Pinto, a former chief credit officer at Fannie Mae, who is now a consultant to the mortgage-finance industry.

Daniel Foster at The Corner:

You’d think reversing the thrusters and getting us away from the event horizon of this fiscal black hole would be higher-up on the list congressional priorities than telling Macy’s how much it can charge you to use your debit card, wouldn’t you? Well, you’d be wrong. The Goldman-Sachs endorsed Dodd Bill barely lays a finger on the GSEs (though, if you’re lucky, maybe the newly-created consumer protection agency will send you a little pamphlet outlining the risks of investing in the housing sector).

But hey, thank Kevin for giving us a little perspective here. That $1 trillion is little more than a rounding error against the figure of our total public debt.

Matt Welch at Reason

James Poulos at Ricochet:

One treeeeeeelion dollars. It’s one thing for a government to spend more money than we have. It’s another to spend more than we can imagine. Cross that threshold, and people will start to ask: how imaginary is the value of this unimaginable amount of money?

Rod Dreher

Mike Shedlock at Howe Street:

The amazing thing to me is the credit given to Bernanke for doing nothing but kicking the can down the road. We had an easy chance to do the right thing which was to make the Fannie and Freddie bondholders share in the pain.

Instead, Bernanke, Congress, and the Treasury collectively forced broke taxpayers to bail out wealthy bondholders. Now Bernanke is scrambling for an exit and praying for a miracle, but no exit or miracle will be found.

How the hell can Fannie and Freddie pay a 10 percent annual dividend on the shares owned by taxpayers when they are losing billions of dollars a year? Secondly, can the Fed unload the $trillion in Fannie and Freddie debt on its balance sheet without disrupting the market?

What can’t happen, won’t happen.

Meanwhile, Congress, the Fed, and the Obama administration all foolishly wants to “support” housing although we have more houses sitting vacant than anyone knows what to do with. To top it off, FHA Volume is Sign of ‘Very Sick System’; Fannie, Freddie, FHA Account for 90% of Mortgage Market

Without government guarantees, there would be no mortgage market. With government guarantees taxpayer losses mount by the minute. … And supposedly Bernanke is a genius for this setup.

Scott Sumner at Wall Street Pit:

We could pump up the economy through monetary policy, or we can have Fannie and Freddie continue to throw $100s of billions down the drain, socialize the auto industry, extend unemployment benefits to 99 weeks, etc.  And if that isn’t enough there are also calls to move away from free trade policies.  And then there’s the higher taxes we’ll pay in the future to cover the costs of debts run up in a futile attempt to stimulate the economy.

Just as in the 1930s, the right seems to have decided that a little bit of socialism is better than a little bit of inflation.  What do I mean by a little bit of inflation?  I mean enough so that the post-September 2008 trend rate of inflation is the same as the pre-September 2008 trend rate of inflation.  Apparently even that little bit of inflation is more distasteful than massive government intervention in the economy.

And the irony is that many of the policies I describe, such are Fannie and Freddie propping up the housing market, unemployment insurance extensions, and trade barriers, are themselves slightly inflationary.  But they don’t just raise the price level, they also cause all sorts of distortions—they move prices away from their free market equilibrium.   (I’m looking at you Morgan.)

The even greater irony is that this isn’t even one of those pick your poison cases.  The inflation I am calling for would be nothing more than a continuation of the inflation that occurred in the previous two decades.  We’d want it even if we hadn’t had a housing crisis and recession.  I don’t recall conservatives complaining loudly that 2% inflation was a disaster when Clinton was president.  So why the sudden and hysterical opposition to 2% inflation?  Is that really a fate worse than socialism?

[…]

Just to get serious for a moment; when I get upset at “Those People,” I am thinking about the Congressmen who created Fannie, Freddie and the CRA.  And yes, I know that the CRA was only a minor factor in the crisis, but everyday it becomes clearer that Washington’s attempts to enlist Fannie and Freddie into their crusade to make every American a homeowner lies at the center of this crisis.  Indeed the misdeeds of the “too-big-to-fail” banks (and their associated bailout with TARP funds), now comes in a distance third (or fourth if you include the Fed), far less costly to taxpayers than even the misbehavior of smaller banks that exploited the incompetence of the FDIC.

The experts say we can’t eliminate F&F right now, and I suppose they are right.  But only because we don”t have a monetary policy that stabilizes NGDP growth expectations.

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Do You Remember 1980? Because We Sure Don’t

Peter J. Wallison at The Wall Street Journal:

In the rapturous days after Barack Obama’s victory and the Democratic congressional sweep that accompanied it, House Financial Services Committee Chairman Barney Frank declared that the new Congress would enact a “new New Deal.” Few people really thought at the time that he or his party meant this seriously. After all, the original New Deal—as anyone who has read history knows—failed to revive the economy.

Indeed, the modern era of rapid economic growth commenced after both Democratic and Republican presidents undertook to lift costly and stultifying New Deal regulations. The deregulation of trucking, railroad and airline rates produced lower prices for travelers and lower costs for consumers. The deregulation of interstate voice and data communication fostered the growth of the Internet and the cellphones that are ubiquitous today. The deregulation of oil and gas prices eliminated shortages and gas lines; and the deregulation of fixed commissions for securities trading led to markets where shares can be traded literally for pennies.

But Barney Frank was right. The signature initiatives of the Obama administration were very much in the mold of the old New Deal—the heedless spending, a stimulus plan focused on government employment, a health-care program that brought one-sixth of the economy under government control, and now the financial regulatory bill that would control another sixth. It will be years before the damage can be undone.

Richard Green on Wallison:

Using the National Income and Products Account, I looked at real annual GDP growth between 1933 and 1980 (the stultifying years) and 1980 to 2009 (the “rapid economic growth” years). Between 1933 and 1980, GDP grew by about 8-fold, or more than 4 percent per year (actually 4.5 percent per year). Between 1980 and 2009, real GDP did slightly better than doubling, or 2.7 percent per year.

I try to respect people whose points-of-view differ from mine, but who decides to let this guy waste ink?

Paul Krugman:

Green points out that growth has actually been slower since the big rightward shift circa 1980. But what he doesn’t seem to realize is that Wallison is just following the party line. Read almost any conservative commentator on economic history, and you’ll find that the era of postwar prosperity — the gigantic rise in living standards after World War II — has been expunged from the record.

You can see why: the facts are embarrassing. Here’s a rough-cut version. The blue line, left scale, shows median family income in 2008 dollars; the red line, right scale, shows the top marginal tax rate, a rough indicator of the overall stance of policy. Basically, US postwar economic history falls into two parts: an era of high taxes on the rich and extensive regulation, during which living standards experienced extraordinary growth; and an era of low taxes on the rich and deregulation, during which living standards for most Americans rose fitfully at best.

DESCRIPTIONCensus, Tax Policy Center

This does not, to say the least, make the case for free-market orthodoxy. So a large part of the right has invented an alternative history in which the good years came after, not before, the Reagan revolution. Hey, that’s what should have happened; who you gonna believe, the doctrine or your own lying eyes?

More Krugman:

Unfortunately, some of the comments indicated that my point didn’t get across. So, a few notes:

1. This is not meant to show a causal relationship. I used the top marginal tax rate as an indicator of the changing policy climate, with the sharp drop as conservative ideology took hold; the point then is that contrary to myth, the good years came before that shift, not after.

2. I used a logarithmic scale for income because in that case the slope of a trend line represents the rate of growth; for those wishing I’d shown growth rates instead of levels, they’re right there if you just lay something straight along the blue line.

3. No need to use a comparable scale for the top tax rate; see 1.

4. Family size etc.: this is complicated, yet simple. One one hand, yes, families have gotten smaller, so on a per capita basis we’ve done better. On the other hand, the typical family’s income gains since the 1970s largely reflect women entering the paid work force, so if you look at income per hour it’s actually worse than the median income. The key point, however, is that by any measure the first half of the postwar era was much better than the second half.

5. International competition etc.. In general, having your trading partners reduced to rubble is NOT good for your standard of living, so the idea that postwar prosperity was made possible by the wreckage of WWII is odd. Anyway, the United States did very little trade in the postwar generation, relative to GDP. This was not an export-led boom.

The basic point I was trying to make is that the US economy did very well with tax rates and levels of regulation (and strong unions) that, according to modern mythology, should have been crippling. That’s why conservatives have invented an alternative history in which it never happened.

Scott Sumner:

Suppose you had gotten a room full of economists together in 1980, and made the following predictions:

1.  Over the next 28 years the US would grow as fast as Japan, and faster than Europe (in GDP per capita, PPP.)

2.  Over the next 28 years Britain would overtake Germany and France in GDP per capita.

And you said you were making these predictions because you thought Thatcher and Reagan’s policies would be a success.  Your predictions (and the rationale) would have been met with laughter.  Indeed around that time most of the top British economists signed a petition asserting that Thatcher’s policies would fail. For those of you not old enough to remember 1980, let me explain why.  Labour rule of Britain had reduced their economy to a shambles.  The government ran the big manufacturing corporations and labor unions were running wild.  They had 83% MTRs, 98% on capital.  There was garbage piling up in the streets of London.  Britain had been the sick man of Europe for decades, growing far more slowly than Germany, France and Italy.  The US wasn’t doing as badly, but certainly wasn’t doing that well either.  We had also been growing much more slowly than Europe and Japan.  Unlike Britain, we were still richer than most other developed countries, so this convergence was viewed as partly inevitable (the catch-up from WWII), and partly reflecting the superior economic model of the Germans and Japanese.

Now let’s look at what actually happened over the next 28 years.  All GDP per capita data are from the World Bank, and are normalized as a fraction of US GDP/person:

Country       1980        1994      2008

USA              1.000      1.000    1.000

Australia      .841        .770      .837

Canada        .905        .818      .843

Britain         .688         .705      .765

France         .780        .730      .713

Germany     .803        .812       .763

Italy             .756        .754      .675

Sweden       .868        .777      .794

Switz.          1.146      .987       .915

Asia

HK                .547      .845        .948

Japan          .732      .815         .736

Singapore   .577      .899       1.064

Latin America

Argentina     .395     .300       .309

Chile            .210     .251        .311

Note that four countries gained significantly on the US, two were roughly stable (Australia, Japan) and the rest regressed.  The four that gained were Chile, Britain, Hong Kong and Singapore.  Of course lots of poor countries gained on the US, but that’s to be expected.  But I will show that the performance of every single country on the list is consistent with my view that the neoliberal reforms after 1980 helped growth, and inconsistent with Krugman’s view that they did not.

Krugman makes the basic mistake of just looking at time series evidence, and only two data points:  US growth before and after 1980.  Growth has been slower, but that’s true almost everywhere.  What is important is that the neoliberal reforms in America have helped arrest our relative decline.  The few countries that continued to gain on us were either more aggressive reformers (Chile and Britain), or were developing countries that adopted the world’s most capitalist model. (According to every survey I have seen HK and Singapore are the top two in economic freedom.)

Krugman responds:

We can try to parse whether that’s true — but in any case it’s not a response to my original point. That was about the claim, quite common on the right, that the US economy was stagnant until Reagan did away with those nasty New Deal policies — a claim that is simply, flatly, false. The era of strong unions, high minimum wages, high top marginal tax rates, etc. was also a period of rapid growth and rising living standards. That doesn’t prove causation; it does disprove the widespread dogma that these things are always economically devastating. And it’s telling that so many on the right have airbrushed the whole postwar generation out of history.

Given all that, what do we learn from the fact that since 1980 the United States has more or less maintained its relative GDP per capita, after substantial decline previously? Well, that’s not a simple story. Part of the answer is that our relative decline for 30 years after WWII largely reflected technological catchup by others; by the 80s that catchup was largely over, with all advanced nations at roughly the same technological level, so there was no reason to expect faster growth in Europe and Japan.

There’s also an issue of labor-leisure choices. In the 70s the long-run trend of taking productivity gains out partly in the form of shorter working hours came to an end in the US, while continuing elsewhere. What that’s about is the subject of dispute, but it’s important to understand that a large part of the GDP difference between the US and Europe reflects that choice. France, in particular, is a country with about the same level of technology and productivity as America, but with roughly 25 percent lower GDP per capita; this mainly reflects longer vacations and earlier retirement, which may or may not be bad things, but are not a straightforward case of inferior performance.

But back to the original point: where this all started was with the common assertion that the US economy was a failure until Reagan came along. This should be true, according to doctrine — so that’s what people believe happened, even though it didn’t.

Reihan Salam:

Sumner tried to contrast U.S. growth performance relative to other societies. But I actually think Sumner could have gone further than he did. The logic of conditional convergence suggests, as I’ve argued earlier, that Europe and Japan should have grown faster than the U.S., as ideas and capital flowed relatively freely across the OECD throughout this period and there was a great deal of room for the non-U.S. OECD to embrace productivity-enhancing managerial innovations. Krugman disputes this:

Part of the answer is that our relative decline for 30 years after WWII largely reflected technological catchup by others; by the 80s that catchup was largely over, with all advanced nations at roughly the same technological level, so there was no reason to expect faster growth in Europe and Japan.

I’m not sure this is true. Krugman is very familiar with the failures of the Japanese retail sector. And of course the U.S. saw considerable productivity gains in this sector throughout the 1990s. “Roughly at the same technological level” might be right, but the fact that the U.S. still had a higher level of GDP per worker hour than all but a handful of high-unemployment OECD economies suggests that there was still room for technological catchup, if we use the term technology broadly.

Krugman goes on to discuss, very rightly, the labor-leisure tradeoff.

France, in particular, is a country with about the same level of technology and productivity as America, but with roughly 25 percent lower GDP per capita; this mainly reflects longer vacations and earlier retirement, which may or may not be bad things, but are not a straightforward case of inferior performance.

I find it very peculiar that Krugman is using France as his example, given that France went through a series of transformative neoliberal reforms during the 1980s as well. I strongly recommend reading Perry Anderson’s brilliant 2004 essay on postwar France in the London Review of Books.

Over twenty years, liberalisation has changed the face of France. What it liberated was, first and foremost, financial markets. The capital value of the stock market tripled as a proportion of GNP. The number of shareholders in the population increased four times over. Two-thirds of the largest French companies are now wholly or partially privatised concerns. Foreign ownership of equity in French enterprises has risen from 10 per cent in the mid-1980s to nearly 44 per cent today – a higher figure than in the UK itself. The rolling impact of these transformations will be felt for years to come. If they have not yet been accompanied by a significant rundown of the French systems of social provision, that has been due to caution more than conviction on the part of the country’s rulers, aware of the dangers of provoking electoral anger, and willing to trade sops like the 35-hour week for priorities like privatisation. By Anglo-American standards, France remains an over-regulated and cosseted country, as the Economist and Financial Times never fail to remind their readers. But by French standards, it has made impressive strides towards more acceptable international norms.

And how about those strong French labor unions?

Under the Fifth Republic, the French have increasingly resisted collective organisation. Today fewer than 2 per cent of the electorate are members of any political party, far the lowest figure in the EU. More striking still is the extraordinarily low rate of unionisation. Only 7 per cent of the workforce are members of trade unions, well below even the United States, where the comparable figure (still falling) is 11 per cent; let alone Austria or Sweden, where trade unions still account for between two-thirds and fourth-fifths of the employed population. The tiny size of industrial and political organisations speaks, undoubtedly, of deep-rooted individualist traits in French culture and society, widely remarked on by natives and foreigners alike: sturdier in many ways than their more celebrated American counterparts, because less subject to the pressures of moral conformity.

Granted, I’m being unfair here: I am analyzing France as though it were an actual country rather than an abstraction conjured up by “so many on the right” or “so many on the left,” some of my favorite interlocutors.

Let’s return to one of Krugman’s observations.

The era of strong unions, high minimum wages, high top marginal tax rates, etc. was also a period of rapid growth and rising living standards.

Krugman helpfully notes that the international context was important, though of course his interpretation of that international context is somehwhat idiosyncratic — i.e., there was little room for catchup growth in Europe and Japan post-1980, a pretty remarkable statement. My sense that Europe and Japan are ahead of us in some technological domains (broadband penetration comes to mind) while we’re ahead in many other domains, many of which fit under the rubric of managerial innovations that enhance capital productivity.

Will Wilkinson:

Taken together, this pair of outstanding posts by Scott Sumner and Reihan Salam seems to me a pretty decisive rebuttal to Krugman’s preferred narrative about the relationship between economic policy and American growth.

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A Town More Famous For Hops Than Vouchers

Rick Hess at Education Week:

The University of Arkansas School of Education, home to my good friends Patrick Wolf and Jay Greene, yesterday released new research showing that students in Milwaukee’s two-decade old voucher program (the Milwaukee Parental Choice Program) “scored at similar levels as their peers not participating in the school choice program.”

Wolf, who has led this effort as well as the federally-endorsed evaluation of the DC voucher program, summarized, “Voucher students are showing average rates of achievement gain similar to their public school peers.” Translation: when it comes to test scores, students with vouchers are performing no differently than other kids. (It is worth noting that MPCP students are being educated more cheaply than are district school students).

What to make of the results? First off, 20 years in, it’s hard to argue that the nation’s biggest and most established voucher experiment has “worked” if the measure is whether vouchers lead to higher reading and math scores. Happily, that’s never been my preferred metric for structural reforms–both because I think it’s the wrong way to study them (see “Science and Nonscience“) but, more importantly, because choice-based reform shouldn’t be understood as that kind of intervention. Rather, choice-based reform should be embraced as an opportunity for educators to create more focused and effective schools and for reformers to solve problems in smarter ways. Whether any of that pays off is much more a question of quality control, support, talent, investment, infrastructure, and the rest than it is of whether or not a choice program is in place.

Second, congrats to Wolf and his team for reporting this straight and for not trying to spin the results. There’s way too little of that, for my taste. And I was happy to see Wolf, who generally favors school vouchers (as do I), not engaging in tortured efforts to make the data tell a happy tale. Advocating for vouchers (or charters or merit pay) by struggling to extract some favorable coefficients from math and reading scores has always been a problematic way to argue the need to fundamentally rethink the design of schooling.

Kevin Carey at The Quick and the Ed:

I’m having a hard time understanding the distinction here. Vouchers aren’t a teaching method or curriculum or instructional intervention. They are, as Hess notes, purely structural, shifting control over resources toward parents and widening the range of institutions that can receive those resources. Since “more focused and effective schools” are properly defined as “schools where students learn more” i.e. “schools with higher reading and math scores,” if vouchers didn’t result in more such schools then vouchers failed. One might argue that vouchers created the opportunity for educators to create such schools and educators didn’t take advantage of it, but what’s the difference? The whole point of structural reform is to change incentives and conditions; if the change was insufficient to create desired behavior then ipso facto the reform failed. A purely structural metric for evaluating purely structural reforms misses the point altogether.

Hess then suggests that vouchers (or school choice programs more generally) are better understood as a necessary but not sufficient condition for improvement that also requires “quality control, support, talent, investment, infrastructure, and the rest.” Perhaps, although it’s worth remembering that those are things that can be effectively applied to the cause of school improvement without vouchers. All in all, I think this lends credence to my theory that you either try vouchers for real or you don’t. Half-measures, of which even the Milwaukee vouchers are an example, will never produce satisfactory evidence either way.

Reihan Salam:

This strikes me as really wrongheaded. It takes time for more focused and effective schools to emerge. Moreover, if they do emerge, as they have in Sweden under that country’s choice regime, they’d likely scale up as national franchises. Milwaukee is a great American metropolis. It’s not going to spontaneously generate the dense marketplace that you’d need.

Am I just recapitulating the argument made by advocates of state socialism — it didn’t work because we didn’t really try it? I don’t believe so, in light of the socialist calculation problem and other vexing challenges facing central planners. I can see how one might feel otherwise. I do caution us, however, against approaching this problem too narrowly.

The truth is that Hess’s arguments are a little too sophisticated for a binary debate. He has made an active effort to make educational reformers, particularly on the right, to go beyond a narrow focus on school choice, and instead to focus on the secondary markets and institutions that can make the broader educational system better faster.

This, by the way, is a good way to think of lots of complicated regulated markets, including the health sector and the financial sector. Choice is important, but it’s certainly not enough. It’s just that in those sectors, we don’t even contemplate restricting choice as severely as we do in the educational space.

Matthew Yglesias:

Giving parents choices about where to send their kids to school has certain kinds of virtues. It turns out, however, that parents of low-income kids don’t seem to particularly use this freedom to select schools that are good at improving kids’ academic performance. At least they’re not sufficiently invested in doing that so as to put a lot of pressure on schools to figure out ways to improve academic performance. The choice program does seem to lead to a lot of consumer satisfaction, but not actual improvements in performance. It’s sort of like when people switch to a “low fat” version of a product, find it’s surprisingly delicious, and don’t pay attention to the fact that it actually has just as many calories as the old variety.

At the end of the day, to improve academic performance you need policies that specifically focus on that goal. You can shut down charter schools that consistently deliver below-average demographically adjusted academic performance and allow operators of charter schools that consistently deliver above-average performance to open new franchises. You can pay teachers who consistently deliver above-average performance enough to persuade them to keep teaching. You can recognize that schools that teach a lot of poor kids are going to need more resources rather than fewer. You can try to research which pedagogical methods actually work instead of just guessing. But you can’t just throw some procedural switch and fix everything, especially if the process you put in place doesn’t even specifically focus on improved academic achievement.

Andrew Coulson at Cato:

The evidence of this literature is starkly one-sided. The vast preponderance of findings show private schools outperforming public schools after all the normal controls. What’s more, when we focus on the research comparing truly market-like systems to state-run school monopolies, the market advantage is found to be even more dramatic (see Figure 2 in the paper linked above). To draw policy opinions from a small, selective handful of those studies while ignoring the rest is policy malpractice, and it is dangerous to children.

Even the recent Milwaukee result described by Yglesias as a failure shows voucher students in private schools performing as well as public school students who receive roughly 50% more government funding. How is a program that produces similar academic results to the status quo at a much lower cost to taxpayers a failure? And what of the research suggesting that students in the Milwaukee voucher program graduate at higher rates than those in public schools?

More importantly from a long term policy perspective, how is a program limited to 20,000 or so children in a single city, being served almost entirely by non-profit entities, a test of market education? Would Apple have spent hundreds of millions developing the iPhone or the iPad if its market were limited to the same customer base? Of course not. The dynamism, diversity and innovation we have come to expect from competitive markets in other fields relies on the prospect of ultimately scaling up to serve mass audiences. Without the prospect of a large-scale return on investment, there is no incentive to invest in the first place.

Joseph Lawler at The American Spectator:

I think that Coulson has accidentally understated the argument that the vouchers are a lot cheaper because of what looks like a simple arithmetic error: Milwaukee spends $6,442 per voucher student and $14,011 per public school student. That means that they spend more than 100 percent more per public school student, not 50. (The government doesn’t pay all of the voucher students’ tuitions. The average cost per voucher student is $7,703, meaning that the schools must come up with over $1000 of private funding per student.)

The larger point that Hess and Yglesias are getting at is that these voucher students are still not getting a decent education, which truly is a failure. But given the available evidence that school choice works in general and the fact that the system is saving significant amounts (a very salient fact when you consider the condition of state and city finances), it’s probably wise not to overemphasize this one disappointing finding.

Scott Sumner:

So the voucher program achieved the same learning objectives at a lower cost, or more bang for the buck.  Since when is that regarded as failure?  Let’s consider the following two possibilities:

1.  Spending more money on education (at the margin) increases learning.

2. Spending more money on education (at the margin) doesn’t increase learning.

First assume case one is true.  This would imply that if we adopted vouchers, and spent as much per student as the Milwaukee public schools spend per student, we would get higher test scores.  That is called “success.”

Now assume case two is correct.  This would imply that there is no point in spending more money on education.  We should simply try to hold down costs.  This means that the voucher program in Milwaukee succeeded in the only way schooling can succeed; it provided education at a lower cost than the public school system.

I’m sure that case two sounds very cynical to a progressive like Yglesias.  I imagine that he thinks more spending can make a difference, perhaps if targeted to certain methods that have been shown to work.  OK, then how about taking the tax saving from voucher schools, and giving those schools a government grant to improve education in whatever area progressives like Yglesias think that money can still help at the margin?  Wouldn’t that be a win-win for everyone except unionized public school teachers?  I wonder why such a policy has almost no chance of happening.

I suppose the progressive counter-argument is that the policy failed according to the criterion set by the voucher proponents.  I have been a voucher proponent from the beginning, and certainly never thought success should be measured by test scores.  I’ve always thought parental satisfaction was the proper criteria.  Indeed, I would hope that all free market economists agreed on this point.  There may be some conservatives who argued that test scores would improve, but why should we care what they think?  Every day the progressive bloggers tell us that conservatives are morons.  I’d rather judge the program on how well it actually did, using the standard economic criteria of costs and perceived customer benefits, not the single criterion used by central planners.

If a policy that leads to greater consumer satisfaction at lower cost, and produces no negative side-effects in test scores, is viewed as a “failure” by progressives, then I don’t think we need to worry very much when progressives criticize the free market.  As Dylan once said: “There’s no success like failure, and failure’s no success at all.”

More Salam

Hess again:

The piece I penned last week on the new University of Arkansas findings on the Milwaukee voucher program has drawn a fair bit of reaction in the blogosphere. I observed that the unimpressive results from the Milwaukee voucher evaluation (touted as the most ambitious evaluation of a U.S. voucher program yet conducted) are not all that surprising and that the bleak results ought not be taken as evidence that vouchers don’t “work,” but as a reminder of how little attention choice proponents have devoted to creating the kinds of oxygenated ecosystems that can support dynamic markets. (For a lengthier discussion on this, check out my new book, Education Unbound).

As controversial as this stance has been with choice enthusiasts, and as inclined as choice skeptics are to regard it as an apologia or an attempt to move the goalposts, I have always thought it a rather unremarkable and commonsensical attitude. After all, it was Milton Friedman who once famously opined that the “market is not a cow to be milked” but is simply a powerful mechanism for channeling human ingenuity, energy, and talent. If markets are dysfunctional, corrupt, or inhospitable to law-abiding enterprises (think of post-Gorbachev Russia), they are more likely to lead to venality than socially productive work.

UPDATE: Charles Murray in NYT

Ross Douthat

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Greg Mankiw Does Some Math

Greg Mankiw:

The most common metric for answering this question is taxes as a percentage of GDP.  However, high tax rates tend to depress GDP.  Looking at taxes as a percentage of GDP may mislead us into thinking we can increase tax revenue more than we actually can.  For some purposes, a better statistic may be taxes per person, which we can compute using this piece of advanced mathematics:

Taxes/GDP x GDP/Person = Taxes/Person

Here are the results for some of the largest developed nations:

France
.461 x 33,744 = 15,556

Germany
.406 x 34,219 = 13,893

UK
.390 x 35,165 = 13,714

US
.282 x 46,443 = 13,097

Canada
.334 x 38,290 = 12,789

Italy
.426 x 29,290 = 12,478

Spain
.373 x 29,527 = 11,014

Japan
.274 x 32,817 = 8,992

The bottom line: The United States is indeed a low-tax country as judged by taxes as a percentage of GDP, but as judged by taxes per person, the United States is in the middle of the pack.

Brad DeLong:

**FLASH** MUST CREDIT DELONG **FLASH**: Horrible Tragedy: Republicans Read Greg Mankiw, Move to North Korea Seeking Low-Tax Country

If you are a Republican, you think a low-tax country is the right place to live, right? And now if you read Greg Mankiw he proves that North Korea is the lowest tax country.

South Korean police have been trying to keep Republican lobbyists from trying to cross the border minefields without success all morning. In other news, Coast Guard vessels with bullhorns have been trying to stop Republican entrepreneurs from embarking for Cuba from Key West in small rubber boats…

Matthew Yglesias:

Mankiw concludes that “the bottom line” is that the United States isn’t actually a low-tax country. But while I’m sure Mankiw believes the conclusion that raising taxes isn’t as viable as I (or, say, Paul Krugman) think, I seriously doubt that he believes this mode of analysis is correct. After all, why should the bottom line relate to the United States at all? Does Mankiw really think that Italy has more scope to increase taxes and the size of its public sector than does the United States? Or consider that in Slovakia per capita GDP is just $20,000. By Mankiw’s logic, Slovakia could raise taxes up to 65 percent of GDP and it would still count as a country with a below-average tax burden!

Common sense is that if you’re worried about the impact of taxes on growth, then when you’re worried about is the scope of taxation relative to the total amount of economic activity taking place. For Slovakia to try to raise as much revenue as we have in the United States would involve potentially ruinous levels of taxation. Conversely, for the American government to raise as much revenue per person as they have in France would be relatively easy.

I think that if you want to reach the conclusion that taxes as a percent of GDP understates the extent of government involvement in the economy, the most promising line of argument is to note that there’s a substantial “shadow” welfare state of tax preference and regulatory mandates out there.

James Joyner:

I’m not sure that taxes as a percentage of income wouldn’t be more useful than taxes as a percentage of GDP, since what most of us are interested in with respect to taxes is impact on individual consumption rather than impact on aggregate production.  Then again, I’m not an economist.

It’s also worth noting that the GPP/Person figures are at PPP (purchasing power parity) rather than raw numbers.  I’m not sure what impact that conversion has on the comparison.

[…]

If one’s goal is to determine individual tax burdens, it makes sense to calculate total taxes/total taxpayers.  If it’s to determine the impact of taxation on national productivity, though, the traditional taxes/GDP is almost certainly a better measure than Mankiw’s slight-of-hand.

Tyler Cowen

Ryan Avent at Free Exchange at The Economist

Scott Sumner:

Mankiw is too sophisticated to mention the Laffer curve in polite company, but what he is really doing here is a sort of cross-sectional test of supply-side economics.  He’s saying higher rates may bring little or no extra revenue to the US government.  So first let’s examine what’s wrong with Yglesias’s argument.  Before considering Slovenia Slovakia, let’s consider the Congo and Afghanistan.  It doesn’t take much thought to realize they don’t lie on the same Laffer curve as the US.  They have lower levels of education, less political stability, and higher levels of corruption.  But Slovenia Slovakia isn’t that different from the other developed countries, so what’s wrong with Yglesias’ counterexample?  Here’s the problem, Slovenia’s Slovakia’s not done catching up.  They abandoned communism a few decades back and since then have been gradually catching up to the West.

When I started studying economics the US was much richer than Western Europe and Japan, but was also growing more slowly than other developed countries.  They were still in the catch-up growth phase from the ravages of WWII.  But since Reagan took office the US has been growing faster than most other big developed economies, and at least as fast in per capita terms.  They’ve plateaued at about 25% below US levels, when you adjust for PPP.  This is the steady state.  The big question is why.

Take a look at the data for Germany and Italy.  On average they collect .416 of GDP in taxes, as opposed to the .282 ratio in the US.  And yet the average amount collected is only slightly higher than US tax revenues.

Here’s the $64 dollar question for which I’ve never seen progressives provide a satisfactory answer.  Why is per capita GDP in Western Europe so much lower than in the US?  Mankiw seems to imply that high tax rates may be one of the reasons.  I don’t know if that’s the answer, but if it’s not my hunch is that the factors that would explain the difference are other government policies that the left tends to favor (strong unions, higher minimum wages, more regulation, generous unemployment insurance, etc.)  So I think Mankiw is saying that if we adopt the European model, there really isn’t a lot of evidence that we’d end up with any more revenue than we have right now.  Further evidence for this hypothesis is that the few developed countries that do have much lower tax rates than the US (Hong Kong and Singapore) now have much higher per capita GDPs (PPP) than Western Europe.  Yes, they are small and urban, but Western Europe is full of small countries of about 6 million people that have less than 5% of the population in farming.

Of course the progressives’ great hope is that we’ll end up like France.  But Brazil also has high tax rates, how do they know we won’t end up like Brazil?  For those who like cultural explanations, I’d point out that the US has many people of Spanish, Italian, German and British descent, but not many of French descent.  And those 4 European countries raise about as much revenue as the US, but with much higher tax rates and much lower incomes.

France is more socialist that the US, but consider those industries where we have tried to emulate the French.  We have nuclear power plants built by heavily regulated utilities.  We have high speed rail built by government-owned Amtrak.  Actually we don’t have high-speed rail, we have “high-speed rail.”  And the reason we don’t is not a lack of money, but a different political system.  Progressives imagine cities like Paris and trains like the TGV.  I imagine Three Mile Island and the Acela. The French know how to run government projects better than we do, just as we run them better than the Italians.

In the end, it doesn’t matter what I think.  What matters is what the public thinks.  For several decades the most dynamic part of the US economy has been Texas.  Rich people, middle-class people, and working class people are voting with their feet and moving to Houston and Dallas and Austin.  Whites, blacks and Hispanics are moving to Texas.  Not because of oil wealth (Louisiana has even more oil per capita), and not because of climate (California and Florida are more pleasant), but rather because it best epitomizes the US economic model.   And they are leaving states with fiscal policies more to the liking of progressives like Yglesias and Krugman.

More Avent, responding to Sumner

But then Mr Sumner gets really deep into it, citing Texas the epitome of the American economic model and arguing that it is especially dynamic and successful based on the fact that its population has been growing rapidly while Americans have been moving away from “states with fiscal policies more to the liking of progressives like Yglesias and Krugman”. Certainly, Texas has its upsides. I noted earlier today that better regulation of mortgage lending helped the state avoid a debilitating wave of foreclosures (I suspect that both Mr Yglesias and Mr Krugman would approve of said regulation).

There are multiple problems with these arguments, but I’ll stick with just two of them. First, Americans are moving to Texas, but they’re also moving to lefty bastions like Boston and San Francisco, both of which enjoyed net domestic in-migration from 2008 to 2009, according to brand new Census figures. That’s right, they’re moving to what some refer to derisively as “Tax-achusetts”, even with the comprehensive health insurance coverage. The second point is that Mr Sumner should familiarise himself with an important body of literature on housing markets and migration. I’ll just briefly quote real estate economist, Massachusetts resident, and conservative Ed Glaeser:

In the last 50 years, population and incomes have increased steadily throughout much of the Sunbelt. This paper assesses the relative contributions of rising productivity, rising demand for Southern amenities and increases in housing supply to the growth of warm areas, using data on income, housing price and population growth. Before 1980, economic productivity increased significantly in warmer areas and drove the population growth in those places. Since 1980, productivity growth has been more modest, but housing supply growth has been enormous. We infer that new construction in warm regions represents a growth in supply, rather than demand, from the fact that prices are generally falling relative to the rest of the country. The relatively slow pace of housing price growth in the Sunbelt, relative to the rest of the country and relative to income growth, also implies that there has been no increase in the willingness to pay for sun-related amenities. As such, it seems that the growth of the Sunbelt has little to do with the sun.

Neither does it have much to do with the brilliance of the Texan economic model. Rather, it seems that housing supply growth in places like Boston can’t keep up with high housing demand, which has led—just as economics predicts—to rapidly rising house prices. And rapidly rising house prices—just as economics predicts—ration population growth. Price sensitive households end up following housing supply growth, of which there is a great deal in the state of Texas. To put things simply, if there weren’t a high level of demand for housing in those oppressive Northeastern cities, then prices couldn’t be held at a level so much higher than those in Sunbelt states. But the price differential remains.

There are many lovely things about the state of Texas, as The Economist has pointed out in the past. But it isn’t uniquely representative of American-style economic growth, nor is it a uniquely successful or dynamic part of the American economy.

To summarise: it’s often unwise to cite a few misleading data points in defence of a sweeping argument about economic dynamism.

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