The GMU onslaught continues . . .

I just checked Econlog, and there are two more posts challenging my views.  One is on monetary policy, the other on utilitarianism.  Let’s start with Arnold Kling, who claimed that the Fed is not able to quickly change the inflation rate, at least with conventional policies that exclude cases such as hyperinflation.  I responded with examples like 1921 and 1933, where powerful, clearly identified monetary policies did quickly change the inflation rate, and also the NGDP growth rate, which is what I am actually interested in.  Here is his response:

Beware of proof by selective example. Some thoughts:

1. The monetary regime in 1920-21 was different than today’s regime. It could be that relative to the gold standard, prices had risen way too much in 1919, and everybody knew it. That would have made it easy to bring prices back into line.

2. As to the 1933 episode, what was the long-term impact on general wages and prices? In the short run, the wholesale price index (WPI) can be dominated by commodity prices, which are volatile. Today, in order to gauge the trend of inflation, economists use broader price indexes, and they remove changes in food and energy prices in order to focus on “core inflation.” I wonder how “core inflation” behaved during the episode in question.

3. I can do “proof by example” going in the other direction. Consider how long it took for inflationary expectations to rise from the early 1960′s to the late 1970′s. Consider how long it took for inflationary expectations to fall from 1980 to 2000, even though the “regime change” under Paul Volcker was sharp and highly publicized.

Let’s take these in reverse order.  I consider the Volcker disinflation a perfect example of what I am talking about.  A brief bout of tight money in late 1979 had little impact, which is what I have been saying all along.  Monetary policymakers need a credible policy changing the expected future path of nominal aggregates.  In late 1981, a more determined Fed went at it again, and this time they achieved almost instantaneous results.   CPI inflation, which had been running at double digit rates from mid-1979 to mid-1981, fell almost immediately to rate of about 4% in late 1981, and basically stayed around that rate for the rest of the decade.  Doesn’t this show the power of monetary policy to quickly change the rate of inflation?  And if you use my preferred NGDP target, there was a similar abrupt slowdown in late 1981.  It is true that the speed of the slowdown caught the public off guard, but that’s not surprising as it also caught the Fed itself off guard.  The had hoped for a more gradual fall in inflation.

In the late 1960s and the 1970s inflationary expectations did rise more slowly than actual inflation, but that has no bearing at all on my argument.  I was arguing that the Fed can quickly change actual inflation rates.  To the extent that I mentioned expected inflation, it was to argue that the Fed has an easier time moving actual inflation if they also shifted inflation expectations.  But in the 1970s the Fed was not trying to raise inflation, nor did they have an explicit inflation target or even a prediction of rising inflation.  So the public’s delay in recognizing the problem of inflation exactly mirrored the Fed’s overly optimistic inflation forecasts.   The public was flying blind in the 1970s.  Inflation was far higher than peacetime norms, and the Fed itself kept claiming that each upsurge was just a temporary blip.  In contrast, I was proposing that in mid-2008 the Fed set a target for NGDP growth that was consistent with what had been happening for the past 15 years.  That is far easier than suddenly shifting NGDP growth (or inflation) expectations

Regarding 1933-34, it is true that the broader indices rose at a slower rate than the WPI, but all of them rose, which itself was quite a turnaround from the severe deflation of 1929 to early 1933.  In addition, I don’t like using “core inflation,” which I have argued is a very inaccurate measure of monetary conditions.  I prefer NGDP growth, and that changed dramatically after FDR adopted a more expansionary monetary policy.  BTW, the WPI was the actual price index that FDR decided to target, so that’s one reason I focused on that index.

Arnold Kling argues that prices were too high in 1919 and “everybody knew it.”  Does “everybody” include all those traders who bought commodities just before the price of those commodities plunged by 40%?  Or the workers in 1919-20 that signed wage contracts without any cut in nominal pay?  Nevertheless, I do think Arnold is partly right about the gold standard, and I would agree that its effect on expectations helps explain why the 1921 depression was shorter than one might have otherwise expected.  But think about what that means.  If the gold standard did affect inflation expectations, doesn’t that show the importance of having an explicit price level or NGDP target?  The gold standard is a sort of nominal anchor, albeit a crude one.  If the Fed announced it would target the price level to follow this path:

100, 102, 104, 106, 108 . . .

Then it might be easier to move the actual price level back to that path, if it temporarily diverged.  We should be trying to raise prices, or even better NGDP, back to some optimal path (which the Fed won’t even specify.)  And we are now trying to do so with fiscal policy, which is extremely costly and highly ineffective.  Why aren’t we using monetary policy to try to get back onto a specified path?

Part 2.

In a more recent post, Bryan Caplan takes me to task for my views on utilitarianism.  More specifically for my claim that liberals are approximately utilitarian and that utilitarianism is a pretty good value system for evaluating public policies.  Before defending utilitarianism, let me point out that I am a pragmatist, someone who thinks social issues are very messy, and don’t fit neatly into ideological boxes.  In the paper I also said that most liberals I know are illiberal on at least one or two issues, and that includes me.  Rather, I consider utilitarianism to be a sort of Platonic ideal of liberalism, something that real world liberals more or less approximate.

OK, so if I am making a pragmatic argument, the next question is whether it is useful to think of liberals as having this value system.  In my paper, I cite a few examples to illustrate what I see as the distinctive liberal way of looking at things, and how it differs from illiberal ideologies.  One case is the Swedish laws on prostitution, which make it illegal to be a customer, not a prostitute.  In most countries prostitution is viewed as being immoral, and the prostitute is seen as a villain.  Hence she is thrown in prison.  In Sweden the prostitute is viewed as a victim.  This seems a very utilitarian way of looking at things, as social science research suggests that prostitutes are often abused.  Another example is welfare, where liberals focus on the well–being of the poor, and pay much less attention than conservatives to the notion of the “deserving poor.”  The concept of “just deserts” is of course foreign to utilitarians.  I could go on and on.  Liberals view issues like condoms for high schools students, needles for addicts, euthanasia, the well-being of illegal immigrants, etc, from a utilitarian perspective, not a moralistic or nationalistic perspective.  Are they precisely utilitarian in all cases?  Of course not, but I don’t see any other moral considerations that reliably trump utility.  Bryan mentions that some basic rights are given up only under extreme duress, and I think that is a very good counterargument.  Let me respond in two ways:

1.  There is an argument for “rules utilitarianism,” which I think helps explain at least some of the cases Bryan might have in mind.  Thus liberals might favor a broad free speech rule, on the grounds that limitations on free speech will, on average, reduce aggregate utility.  Part of this argument is based on the assumption that it may be too costly to determine the few cases where total utility might rise with censorship, so it’s not worth even bothering.  Better to have a blanket prohibition on censorship.  But note that this argument does open the door to allowing censorship in broad categories, like commercial speech, if liberals though the benefits of censorship exceed the costs in those well-defined areas.  (BTW, I think they are wrong, but I do understand their reasoning process.)

2.  But I also think Bryan is partly right here.  Earlier I alluded to cases where liberals (including me) do not slavishly adhere to utilitarianism.  One case I could cite for myself would be seat-belt laws.  I think these laws probably do “work,” but they offend my sense of dignity.  The government treats adults like children.  Of course I could argue that “dignity” should go into my utility function; but that would be unfair, it would turn utilitarianism into a virtual tautology.  So I’d rather just grant Bryan’s point in that case.  BTW, most real world liberals do support seat-belt laws, precisely for utilitarian reasons.

I recently had lunch with Brink Lindsey, and he gave me a good example of where liberalism and utilitarianism diverge.  He noted that liberals would oppose a system of requiring prisoners to donate kidneys, even though it could save many lives.  I agree.

So with all my concessions what is left?  What’s left is that I can’t think of any real world policy disputes facing Congress, now or in the past, where liberals did not take what they saw as the roughly utilitarian position.  And I can see lots of cases where conservatives, dogmatic libertarians, or econ-nuts took non-utilitarian positions.  Until I see a real world policy counterexample, not a hypothetical, I will continue to view liberalism as having roughly utilitarian values, for the very pragmatic reason that it is useful to do so.

Thus my defense of utilitarianism is roughly the same as a civil engineer’s defense of Newtonian physics.  A very bright engineering student named “Bryan” might tell the civil engineer: “How can you use the discredited Newtonian system of physics, when the famous “eclipse” experiment of 1919 showed that theory is false.”  The engineer might reply: “It’s not precisely true, but it is accurate enough for designing the Golden Gate Bridge.”  I hope Bryan likes this argument, as I recall in his blog he once argued that it was OK to call something “true” that was only approximately true.  I think the specific example he used was if someone said the next town was 5 miles down the road, the statement will still be true if it was actually 4.93 miles away.  That’s how I look at utilitarianism.

PS.  Please don’t assume I agree with the liberal policies that I discussed.  I think liberals are wrong in many of the policies they advocate (such as the Swedish prostitution laws.)  I am just trying to explain their mindset, not argue they reached the right conclusion given their values.


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33 Responses to “The GMU onslaught continues . . .”

  1. Gravatar of Joe Joe
    29. September 2009 at 05:42

    Pragmatism: Soemthing rarely heard of these days; why does it take soemone as bright as you to understand that the world really is gray (Maybe Tyler and Alex also see gray)? Why are most people in a black and white either or world? My guess is either o rmakes life much easier and less problematic.

    Scott, if you ever get down to NYU let me know; I wouldlove to hear more of your ideas?

  2. Gravatar of ssumner ssumner
    29. September 2009 at 06:20

    Thanks Joe, Are you a faculty member there? Perhaps I could present a paper sometime at NYU. I like visiting NYC.

  3. Gravatar of Current Current
    29. September 2009 at 06:35

    In the case of a recession the expansion of the money supply is about satisfying an increased demand for money. It seems unlikely that doing this would be a problem. I understand that even long ago it was quite possible.

    Something to remember is that money supply is much less seasonal than it was, and it is now sometimes seasonally adjusted. Mises mentions in “The Theory of Money and Credit” the specific dates around the end of each financial quarter when many trades would take place. At this time caps on the issue of banknotes were temporarily released and the note portion of the monetary base expanded nearly a third to meet transactional demand.

    I don’t see how this business of temporary and permanent expansions in the monetary base changes this.

  4. Gravatar of woupiestek woupiestek
    29. September 2009 at 06:44

    As a Dutchman, I’m very interested in what you think of our prostitution laws and policies…

  5. Gravatar of Current Current
    29. September 2009 at 07:11

    On utilitarianism….

    What political discussions hinge on in practice is a sort of Marginalist, opportunity cost/benefit, comparison. Should X or Y be done? That is what all of your examples hinge upon, that idea is very local in scope though. Utilitarianism (as it is often described*) though is an invalid sort of extension of this idea that assumes omniscience.

    Also, comparing things with the history of Marginalism may help. The analogy I would make here would not be with Newtonian Physics, it would be with Classical Economics and Utilitarianism. Many classical theories of local Microeconomic questions are reasonably valid. There overall theory, the macro part and the Labour-Theory-of-Value (which is Microfoundation part) is wrong.

    What the “counter examples” of Utilitarianism point to is something quite similar to what the counter-examples of the Marginalists pointed to. The overall idea is flawed because it doesn’t really refer to reality in a valid way. Idealizations are always needed, but some are worse than others, Utilitarianism is one of these. We should abandon the global version but keep the local version.

    * Whether this “is” utilitarianism is a difficult question. Earlier utilitarians had a more nuanced view of it than the simple one that has been attached to the word recently.

  6. Gravatar of Philo Philo
    29. September 2009 at 07:27

    “Brink Lindsey . . . noted that liberals would oppose a system of requiring prisoners to donate kidneys, even though it could save many lives [which would lead utilitarians to endorse it].” This is unconvincing. This system would have many other consequences besides saving lives, which a utilitarian would have to consider. And the liberal case *against* this system is not obvious. If it is alleged to violate the prisoners’ rights, what about their right to freedom of movement?

  7. Gravatar of D. Watson D. Watson
    29. September 2009 at 07:39

    There’s another, more fundamental, response to the first part. If you want to prove that something ALWAYS happens, yes, proof by example is not proof. If you want to demonstrate that something CAN happen, you only need one. If the claim is that it CAN happen CONSISTENTLY, you need a few more with very few counter-examples.

    Your claim: it can.
    His claim: it can’t.
    It only takes one example to show who’s right.

  8. Gravatar of Admiral Admiral
    29. September 2009 at 07:39

    Excellent point about Volcker. I’m slowly coming around to your perspective. As documented in MONEY AND POWER, Vol. II by Frazer, the Fed is not in truth some completely independent institution that does not depend on the political sector. When Volcker initially entered, people gained some confidence, but quickly lost it and inflationary expectations rose.

    Volcker also missed his targets for a few years, which wouldn’t do much for confidence.

    “As testimony indicated, Paul Volcker must have welcomed the Reagan developments. His rhetoric supported them, even if in the guise of the leader of a so-called independent Federal Reserve. However, the fact remains that the turn toward monetarist restraint did not come to Washington, D.C. with Volcker rather than Reagan.”

    And yet, something still seems missing.

  9. Gravatar of Joe Joe
    29. September 2009 at 10:25

    Scott,

    No, Sorry, I am just a Stern Alumni, but work near campus and go whenever they have a good guest with intesting ideas. (Sorry, this excludes most CFR people, especially Shlaes who somehow is part of the Stern Econ Dept. I wrote Dean Cooley, and told him the Alumni(at least this one) expect more from Stern than that and have stopped my donations, but I digress…). Enjoyed some Roubini macro lectures while I was there…
    Joe

  10. Gravatar of Don the libertarian Democrat Don the libertarian Democrat
    29. September 2009 at 12:55

    I use utilitarian in the sense of practical or useful, not in the philosophical theory sense. My own view is that a teacher and friend of mine, until he couldn’t take me any longer, Bernard Williams, long ago put a fork in Utilitarianism. By the way, he was never my professor, but a friend and teacher nevertheless. Sadly, he is now deceased. He was without doubt the best assessor of arguments that I ever met.

    In that sense, I could be wrong, of course, but we are both Pragmatists, who use utilitarian in the sense I mentioned above. It can be confusing, as can the use of “pragmatic”.

    Another problem word is “epiphenomenon”. In this case, I use the word in a more technical, philosophy of mind, way, to mean that something cannot be causal, because it isn’t physical, although it is related to or associated with something causal. The more general use is simply non-causal, but related, which always leads me to ask how the word is being used when I come across it.

  11. Gravatar of ssumner ssumner
    29. September 2009 at 15:10

    Current, Yes, I agree that expanding the money supply to meet money demand shifts is appropriate. If the Fed wants to change the expected path of NGDP over time, then they need to change the money supply by more than money demand, and do it permanently.

    woupiestek. My state recently decriminalized the use of marijuana. But the supply-side of the market is still illegal. Unfortunately, this means all the gang warfare associated with the drug trade continues unabated. So my general view is that it’s better to go the way New Zealand did with complete legalization or prostitution, rather than the Dutch route, which I understand is only partial legalization. I’ve read that the Dutch approach makes it easier to exploit prostitutes, as they can’t operate on their own.

    But I really don’t know much about this subject, so you shouldn’t put much weight on anything I say.

    Current; You said;

    “Utilitarianism (as it is often described*) though is an invalid sort of extension of this idea that assumes omniscience.”

    I don’t agree, why do you say this? What about expected utility?

    Philo, I suppose Brink meant this as an argument against utilitarianism. You are right that it isn’t airtight, as we take away other prisoner rights. But I do consider it a fairly powerful argument against the view that liberals always line up on the utilitarian side of issues. I think there are lots of liberals who’d say:

    A. I think it would increase aggregate happiness
    B. I oppose it anyway.

    What I find striking, however, is that there are so few issues like that. (In contrast to conservatives.)

    As I got older and read Richard Rorty I lost interest in airtight or perfect social systems or philosophical systems. Except pragmatism itself.

    Thanks D. Watson, Although I suppose he’d say that if there’s just one example there could be some other hidden factor at work. But I put a lot of weight on the few clearly identified monetary shocks that we have. And they’re mostly before WWII.

    Admiral, That’s a good point, I don’t know why it never occurred to me. Reagan was one of the few presidents who supported tight money. And Volcker didn’t get down to business until Reagan took office. Maybe Reagan didn’t win the Cold War, but he did beat inflation.

    Thanks Joe.

    Don, Good points. But saying someone definitively disproved utilitarianism is like saying they disproved capitalism or Keynesianism. How do you do that? It is an entirely pragmatic issue as to whether utilitarianism is a useful way of looking at the world. Philosophers seem to think if you find some counterexample you’ve disproved the theory. I can find a counterexample to any so-called natural right. What if a very uncomfortable illness that would affect billions could only be prevent by forced inoculation. And assume that it would kill one person. Does that person’s right to life trump the need for billions of people to avoid a life of pain? I say no, but the natural rights people say yes, they say the right to life for a minority cannot be taken away to provide comfort for the majority. So you can find counterexamples for any moral system.

    I’m not too sure exactly what ‘epiphenomenon’ means, but I thought that by using it I sounded kind of intellectual.

  12. Gravatar of van van
    29. September 2009 at 16:44

    scott, this may not be blog for this, but does it mean that the gold standard was a sort of nominal anchor? i am trying to equate that to other anchors, like an inflation or NGDP? is it because the value of the dollar was held constant in gold terms? unclear.thanks

  13. Gravatar of smokedgoldeye smokedgoldeye
    29. September 2009 at 17:01

    Scott, you wrote: “And assume that it would kill one person. Does that person’s right to life trump the need for billions of people to avoid a life of pain?” Did you know that the tissue and organs from one sorry prisoner could vastly improve the life of perhaps ONE HUNDRED people? (2 kidneys, 2 lungs, 1 heart, 1 pancreas, 1 liver, 2 corneas, 30 ligament/tendon sports injuries, 2 scleral straps/eye reconstructions, 10 burn victims, 10 spinal discs or bone screws, 3 saphenous vein implants, 5 revision hip replacement femoral head bone powder, 50 dental/jaw abscess bone powder, 20 collagen fiber plastic surgeries etc. etc.) Not billions released from pain, true, but quite utilitarian nonetheless, would you agree? When should we start? Why wait for prisoners? Let’s “pragmatically” select other helpful donors. I’d like to be in the selecting group, please (versus the selectee group). Three cheers for utilitarianism!!

  14. Gravatar of Don the libertarian Democrat Don the libertarian Democrat
    29. September 2009 at 17:59

    Scott,

    I meant that Williams’ essay had a huge influence on academic philosophy. The book is still in print:

    http://www.amazon.com/Utilitarianism-Against-J-C-Smart/dp/052109822X/ref=sr_1_2?ie=UTF8&s=books&qid=1254279360&sr=1-2

    I could be biased and exaggerating.

    Here’s an anecdote that agrees with your view:

    Many years ago, I was a student of the philosopher Paul Grice. At the time, he appeared and dressed a little oddly in my opinion. Nowadays, I’m looking and dressing more and more like him. Someday, the resemblance will be uncanny.

    Anyway, I used to spend a good part of my time sitting on the steps of the philosophy building. I was called the gargoyle of the philosophy building. The story was that one of my teachers had been known as the gargoyle of Emerson Hall when he was in college and graduate school, because he spent a good part of his time sitting on its steps, and he had made a remark that I reminded him of his younger self, and so I was so named. The truth was probably more like we’re both short gnarly guys who look a bit like gargoyles.

    So, one day, when I should have been reading Davidson, Quine, or Strawson for class, I was sitting on these steps reading Bradley. Grice walked up to me and almost rolled over, saying something like, ” Good Lord, Bradley. Well, every philosopher comes back in vogue someday”.

    The thing was, I wasn’t reading Bradley because of philosophy. As I recall, Eliot had written a book on Bradley which I’d managed to come across, so I’d decided to read Bradley afterwards.

  15. Gravatar of Mike Sandifer Mike Sandifer
    29. September 2009 at 18:16

    Dr. Sumner,

    To quote Kling:

    “3. I can do “proof by example” going in the other direction. Consider how long it took for inflationary expectations to rise from the early 1960’s to the late 1970’s.”

    Kenneth Rogoff argues that inflation didn’t begin showing up until the early 70s, because Nixon leaned on Fed Chairman Burns to lower interest rates to help him get re-elected.

    To quote Rogoff:

    “Next, consider monetary policy. In theory, the U.S. Federal Reserve is independent of the executive branch. But just listen to the 1972 White House tapes of Nixon’s blistering
    exchanges with then Federal Reserve Board Chairman Arthur Burns. Historians can debate whether Nixon intimidated Burns or if the chairman simply succumbed to faulty economics. Regardless, Burns certainly delivered the goods. In the run-up to the 1972 election, he printed money like it was going out of style, wreaking havoc with global price stability and exacerbating worldwide inflation.”

    You can find this quote on page 2 of his paper here:

    http://www.economics.harvard.edu/files/faculty/51_Bush_Throws_A_Party.pdf

  16. Gravatar of Mike Sandifer Mike Sandifer
    29. September 2009 at 18:18

    Obviously, Rogoff didn’t necessarily attribute the Fed’s monetary expansion to pressure from Nixon. I just wanted to corect that mistake above.

  17. Gravatar of Current Current
    30. September 2009 at 01:02

    Scott: “Yes, I agree that expanding the money supply to meet money demand shifts is appropriate. If the Fed wants to change the expected path of NGDP over time, then they need to change the money supply by more than money demand, and do it permanently.”

    I understand that you advocate that so that debts work out as they would have been expected to a few years ago. I don’t really agree, but that’s another matter.

    However, since MV=PQ is falling it seems to me that something could obviously be done to meet money demand. It may be challenging to go above money demand because of reasons of expectations. But surely that’s a secondary problem.

    Current: “Utilitarianism (as it is often described*) though is an invalid sort of extension of this idea that assumes omniscience.”
    Scott: “I don’t agree, why do you say this? What about expected utility?”

    I depends on your flavour of Utilitarianism. For example Robert Nozick’s example of the “Utility Monster” requires that utility be comparable amongst individuals, but, it is not. So, the problem has no real significance.

  18. Gravatar of Current Current
    30. September 2009 at 01:39

    Bob Murphy comments:

    http://consultingbyrpm.com/blog/2009/09/arnold-klings-bizarre-monetary-theory.html

  19. Gravatar of StatsGuy StatsGuy
    30. September 2009 at 04:28

    IMHO, I remain impressed with Hamilton’s take, the main critique being that he’s underestimating how significant the impact of rapid and assertive global monetary responses would have been; watching the crisis on a daily basis, the only thing that prevented a immediate asset collapse in early September was the belief the Fed would act; it was the slow and grueling process of perceived Fed (and ECB and BoJ) impotence that caused investors and credit markets to lose confidence. Consumers took their cues from the plummeting Dow Jones, and scaled back demand _in anticipation_ of losing their jobs. Business cut back inventories (and employment) _in anticipation_ of lower demand. Banks cut off credit partly _in anticipation_ of firm failures due to lower economic activity (and _partly_ due to “exogenous” credit channel constraints) but also _in anticipation_ of loan defaults due to asset price collapses that would require them to build massive loan loss reserves. The notable thing about the recession was the speed – everything moved simultaneously in anticipation of a collapse, and the one agency capable of stopping it – the Fed – stepped back from its coordinating/expectation-setting role.

    (If Fisher believes it was all the Evil Credit Channel Blob, then what – exactly – marked the beginning of the turnaround in March? Geithner’s PPIP program, which FINALLY closed a deal this month? Are we to believe that PPIP magically unlocked the credit channels and everything turned around as a result?

    http://www.nytimes.com/2009/09/17/business/17loans.html?_r=1

    I think Hamilton hit it right in identifying how the Fed’s misplaced views impacted their actions in October through November. Believing the problem to be credit channels, they “sterilized” their efforts to open the credit channels through other operations for fear of inflation. (Did Fisher not learn anything from the failure of those efforts?)

    Having said all of that, let me reiterate one final belief – in the _long term_, the structural credit issues and currency valuation issues DO create constraints in monetary policy in the sense that they lower the maximum capacity utilization that can be achieved under neutral inflation. Hitting an NGDP target of 5% can still be achieved when these structural issues are dominant, but we run the risk that the composition of NGDP growth is unfavorable (e.g. 3.5% inflation and 1.5% real growth). In a sense, structural issues contract the Fed’s pareto frontier that defines the employment/inflation tradeoff. A Fed staffer called this “Second Best Punchbowlism” in response to a lecture. And although I know you will certainly tear holes in it, I commented on that concept here:

    http://baselinescenario.com/2009/09/26/escape-from-punchbowlism/

  20. Gravatar of StatsGuy StatsGuy
    30. September 2009 at 05:03

    Can someone explain something to me:

    Is Kling’s notion of “Recalculation” basically the same thing as frictional unemployment (just using information processing lingo)? Or is there something different about it?

    This is what I don’t seem to get about Kling:

    Let’s concede that there was some frictional unemployment and “Recalculation” going on. There are three problems with his response (and I’ll use his information processing lingo just to stay in the same mode):

    1) He should _still_ be in favor of NGDP targeting to accelerate “Recalculation”. Redeployment of human capital is accelerated when demand-pull is strong. NOMINAL price collapses throw massive noise into the real price signal (in exactly the same way he describes, when he talks about growth-industries being unaware that they _should_ be growing).

    2) In Kling’s information processing metaphor, it seems we can decompose Recalculation into two parts – the real part, and the nominal part. The real part is frictional unemployment and redeployment of assets. The nominal part is the price signal distortion. It seems that Ssumner’s argument is that the real part dominated until late summer 2008, and then the nominal part dominated due to the Fed’s contractionary policies. Kling believes it’s mostly the real part that dominates throughout. IF Kling was correct, then we should see growth industries _at least_ slowly growing through the crisis. But, in fact, unemployment rises across the board in all sectors and occupations.

    3) Kling’s “Recalculation” argument seems to completely ignore long term contracting and maturities mismatch, which was SET based on expectations of 2% inflation. (It also ignore undepreciated capital which was intended to be paid for with future earnings streams at projected price levels.) A long term change to the price level trend means that many highly leveraged companies (especially leveraged companies with long term producing capital), which SHOULD be viable, become non-viable due to an increase in real debt costs. In other words, much of the dislocation is caused by changes in the _distribution_ of wealth, which cause viable companies to go bankrupt (and then change ownership), or to dramatically cut costs to try to avoid bankruptcy. This is NOT “reallocation” of resources due to a Great Recalculation. This is _redistribution_ of resources due to a de facto change in monetary policy, and the resulting disolaction is not resource shift, but resource CHURN (with huge, unnecessary, and arguably inequitable effects on employment – particularly among the world’s poor).

    Kling’s arguments have a grain of truth, but (unlike Selgin and Hamilton, who concur that NGDP targeting would have helped a lot but not quite as much as Ssumner argues) he does not seem to admit that better Fed policy would offer much improvement at all.

    Here’s my ranking of responses so far:

    Hamilton
    Selgin
    Kling
    Hummel

  21. Gravatar of Current Current
    30. September 2009 at 06:09

    By the way, for those who haven’t looked, there are loads more replies on the Cato site now.

  22. Gravatar of Bababooey Bababooey
    30. September 2009 at 16:20

    You don’t think progressives legislate based on strict morality? Why did they promulgate a ban on using cost-effectiveness as a factor in environmental legislation? Why did the stimulus bill remove incentives to work for welfare recipients (it was said to be cruel), irrespective of its success in improving lives? Do you think the GM bailout was urged on by legislators solely because of utilitarian reasons, or did naked ambition play a part and moral concern for pensioners play a part?

    Obama agrees with me, he campaigned as a pragmatist to set himself apart from do-gooder, partisan liberals.

    By the same token, many conservatives operate with utility in mind, not just dogmatic nutjobism.

    Take the deserving poor. A conservative might say that welfare without strings is an incentive that creates (1) dependency and dependency is a bad outcome; (2) more poor and more poor is bad for the neighborhood; (3) more poor which means more welfare which damages the economy; and (4) more kids of dependent poor, who do not succeed at the rate of the working poor.

    Or needles– when you subsidize something you get more. We don’t more heroin addicts because they hurt themselves and commit crimes against others.

    The conservative publications I read reason in those terms, what is best for the individual, for society, etc. Its not just bible thumping and threats of hell.

    At any rate, it seems like a rhetorical exercise to me. Many Progressives & Conservatives act from moral & religious beliefs, venality, ambition, and all the other emotions of a normal human. Each group’s collective output arrives from an amalagam of their motivations. To assign utilitarian philosophy, or even their stated (i.e., contrived) philosophy, as the dominant motivation seems off.

  23. Gravatar of Current Current
    1. October 2009 at 01:01

    Bababooey: “Take the deserving poor. A conservative might say that welfare without strings is an incentive that creates (1) dependency and dependency is a bad outcome; (2) more poor and more poor is bad for the neighborhood; (3) more poor which means more welfare which damages the economy; and (4) more kids of dependent poor, who do not succeed at the rate of the working poor.”

    I think you’re absolutely right about that. The idea of the “deserving poor” isn’t necessarily separate from an broadly utilitarian outlook. It just requires seeing past the most immediate consequences of an action.

  24. Gravatar of Scott Sumner Scott Sumner
    1. October 2009 at 09:39

    van, Yes, the gold standard was clearly a nominal anchor. Inflation could only occur to the extent that the real value of gold fell. Nominal anchors don’t always keep the price level steady, they just keep it from being completely indeterminate.

    smokedgoldeneye. Yes, I mentioned that exact example in a recent post. Indeed I think that’s a good argument against utilitarianism. But I think my hypothetical involving billions of people is an equally good argument against non-utilitarian moral systems. That’s the point.
    In the end, I think utilitarianism is the most useful moral system for public policy decisions, but I don’t think it is perfect, and the prisoner example is one reason why.

    Don, That’s a nice story. I keep telling myself that I need to study philosophy someday, but it probably won’t happen (in any systematic way) until I retire.

    I think you are right that utilitarianism is widely viewed as being discredited. But people like Peter Singer still carry the torch.

    Mike, I agree with you about Nixon and Burns. Nixon’s economics were surprisingly left wing (and that may be unfair to honest left wingers.)

    Current, I’m not familiar with Nozick’s “utility monster.” Is it a monster that has a high level of utility? If so, we should care about the monster’s utility.

    Statsguy, Those are some very thoughtful comments, in the post and the link you attached. My only real comment relates to monetary policy. Earlier I argued that inflation was overemphasized, and that NGDP growth is what we should care about. Thus I think we should pick a number, (such as 3% or 5%) and stick to it no matter what the real growth rate is. I agree that it is entirely possible that real growth will fall to a 1.5% trend. But the damage that most people think is caused by inflation (such as the “optimal quantity of money” argument, or the inflated tax on capital, actually apply to nominal interest rates. And nominal interest rates are arguably more closely correlated with NGDP growth, than they are with inflation. So I think monetary policy can survive these potential real constraints, becasue I believe NGDP is the only variable they should care about. If 5% is too high, make it lower. but not because inflation has fallen. Otherwise we’d just be back to an inflation target.

    But in general I like your comments on Hamilton, they are right on the mark.

    Statsguy#2, I don’t think I can add much to your comments about Kling. I am also not too clear about why NGDP targeting wouldn’t have eased the transition. Plus I think much of the problem wasn’t transition, but just factory workers temporarily laid off becasue AD was too low.

    I disagree about Hummel. I am not as libertarian as he is, but his final post is excellent.

    bababooey, You said;

    “You don’t think progressives legislate based on strict morality? Why did they promulgate a ban on using cost-effectiveness as a factor in environmental legislation?”

    I don’t consider eco-nuts to be true liberals. I understand that seems a weak argument, but I think the left includes true liberals, as well as people motivated by non-utilitarian views like Earth worship, and envy of the rich.

    Most right-wing intellectuals that I read are not true conservatives, they lean toward pragmatic libertarianism. I discussed this in the paper I presented at GMU. Someone told me that Peter Boettke has it at his website. In any case I agree with your impressions, but I still think that the average conservative is very motivated by concepts like the deservingoor. And they might oppose welfare to the ‘undeserving poor’ regardless of elasticities of labor supply. So while I agree with your points, I ay not agree with how to divide the world into liberals and conservatives. My partitioning is not about left/right distinctions in the US. I have Milton Friedman and Hayek in the “liberal” camp in terms of values. And lots of “progressives” are not liberal, nor do they believe in progress.

    Current and bababooey, I also oppose the welfare state, but not because the poor aren’t deserving, but because of the incentive effects. So I agree with much of what you say, but I still think there is a distinction between a utilitarian opposition to welfare, and moralistic opposition.

  25. Gravatar of Current Current
    1. October 2009 at 09:56

    Scott: “I’m not familiar with Nozick’s “utility monster.” Is it a monster that has a high level of utility? If so, we should care about the monster’s utility.”

    http://en.wikipedia.org/wiki/Utility_monster

    Scott: “Current and bababooey, I also oppose the welfare state, but not because the poor aren’t deserving, but because of the incentive effects. So I agree with much of what you say, but I still think there is a distinction between a utilitarian opposition to welfare, and moralistic opposition.”

    I agree. My point was that this sort of thing is really what many conservative are thinking about too. Not just regarding things like labour markets, but also other broader effects on society. For example, I’ve heard conservatives argue against unemployment welfare because they think the idleness it supports leads to criminality. I don’t really agree, but regardless, that argument is really quite utilitarian.

  26. Gravatar of Bababooey Bababooey
    2. October 2009 at 07:06

    I think you’re saying: liberals are generally utilitarian pragmatists because the many who aren’t aren’t really liberals, and conservatives are moralizers because the many who aren’t aren’t conservatives.

    That’s your model, and its your blog, so Godspeed, but surely you accept that you’re using an unusual definition of political leaning? More common definitions arise from how people self identify, which party they vote with the most, their view of government’s role, their view on a range of public issues, etc.

    And if one uses those more common definitions, I think one would find that the segment of practical liberals is no larger than its conservative group.

  27. Gravatar of ssumner ssumner
    3. October 2009 at 10:40

    Current, Nozick provides a new high in idiotic anti-utilitarian arguments. I have two responses.

    1. It will never happen so we need not worry about it. Recall, I think the argument for utilitarianism is pragmatic, not theoretical. All social science debates should be resolved on pragmatic grounds.

    2. If it did we should feed the monster, make it really, really, happy. Why not?

    By the way, that example has quasi-Christian implications. What if God decides it pleases him to enact a “day of judgment?”

    Bababooey, Unfortunately I’m not able to explain all my reasoning each time. Earlier I have posts discussing all the various permutations of liberalism; Classical liberalism, modern liberalism, neoliberalism, etc. You might notice that very few of these correspond to what Americans now consider “liberal,” but all of them roughly correspond to what I think is the deep root of liberalism—utilitarianism. That is, in each case the proponents tend to think their views would make for more aggregate happiness than the opposing conservative views. On the other hand, when conservatives oppose illegal immigration from Mexico, I don’t think the utility of the illegal immigrants figures much in their calculations.

    Liberal does not mean “left wing,” only Americans look at the word that way.

  28. Gravatar of Current Current
    4. October 2009 at 14:15

    Scott: “Nozick provides a new high in idiotic anti-utilitarian arguments. I have two responses.

    1. It will never happen so we need not worry about it. Recall, I think the argument for utilitarianism is pragmatic, not theoretical. All social science debates should be resolved on pragmatic grounds.”

    You may think that Utilitarianism is pragmatic rather than theoretical. But I don’t think many others do.

    In the things that I’ve read the word is brought up to try to systematise morality and come to a theoretical view of something that is normally seen as practical.

    Apart from that I agree with you to some extent that as a piece of theoretical apparatus Utilitarianism doesn’t make much sense.

    Scott: “2. If it did we should feed the monster, make it really, really, happy. Why not?”

    Well, what if you had the power to make such monsters?

    Also, what would society have to look like to serve such a monster?

    Lastly, if you can read another’s thoughts and emotions (and that is necessary for this example) then why can’t they be directly manipulated?

  29. Gravatar of ssumner ssumner
    5. October 2009 at 06:47

    Current, I still insist that you can find silly, and hypothetical, counterexamples to any moral system, not just utilitarianism. So those who think the debate is theoretical need to consider that their own preferred theoretical solution will be just as easy to discredit.

    I don’t know what to say about the monster case. Of course in the real world we can’t know it would have higher utility, as we can’t read minds. Thus it would have no bearing on our behavour. If we could, then who knows how we would behave. Maybe we would download out brains into some “happiness computer.” I’d have to see a real world example before making any judgment on what we would do. But I don’t find Nozick’s thought experiments convincing. Nozick once did a thought experiment claiming people preferred “real life” to a happiness machine that gave them a pleasant dream. But recent research shows Nozick is wrong (as I discussed in an earlier post.) So I thinks Nozick’s intuition about these sorts of things is pretty worthless (as is my own.)

  30. Gravatar of Current Current
    5. October 2009 at 07:24

    Scott: “I still insist that you can find silly, and hypothetical, counterexamples to any moral system, not just utilitarianism. So those who think the debate is theoretical need to consider that their own preferred theoretical solution will be just as easy to discredit.”

    I agree. But, the problems with other theoretical moral system doesn’t help utilitarianism.

    I think that historically the purpose of the idea of Utilitarianism has often been that it allows utilitarians to say “we have a fully worked out theory of morals, but you don’t”. It is often a tool by which liberals attack the views of conservatives, which they consider haphazard. But, this isn’t really correct. Both parties views are haphazard.

    Scott: “but recent research shows Nozick is wrong (as I discussed in an earlier post.) So I thinks Nozick’s intuition about these sorts of things is pretty worthless (as is my own.)”

    Doesn’t what you said earlier show that Nozick view was at best incomplete. Even if it is an example of status-quo bias I think it still serves as an indictment of simplistic utilitarian ideas.

  31. Gravatar of Current Current
    6. October 2009 at 02:58

    Also, have folks read Bryan Caplan’s comments? They’re quite good….

    http://econlog.econlib.org/archives/2009/10/are_conservativ.html

    I especially agree with him that liberals “focus on the message that society would be sending”. Whether something or other is effective doesn’t really matter what matter is whether it befits the nobility of a Social Democratic state.

  32. Gravatar of ssumner ssumner
    6. October 2009 at 17:12

    Current, I agree with your first post. I think utilitarianism can only be defended as a rough approximation of the ideal, or as approximate guide to policy.

    I don’t associate with those philosophers (like Bentham) who thought utilitarianism was some sort of perfect moral system. So I can see why others would find them annoying.

    I just left a long response to Bryan on his post. He makes good points. But I think liberals are more idealistic than he does. I think they really believe their programs would make the world happier. But I also think there are leftists (like Mao) who aren’t liberal. So that’s a problem of definitions.

  33. Gravatar of Current Current
    8. October 2009 at 04:36

    I see what you mean, and I broadly agree.

    By the way, Bentham was not as careless as later writers (or at least he wasn’t always as careless). He and early Utilitarians did have quite reasonable answers to some of these problems that we are discussing here, but they involve moving away from what would be called “Utilitarianism” today.

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