An excellent Ramesh Ponnuru piece on the crash of 2008

Marcus Nunes sent me what might be the first mainstream media article to correctly describe what went wrong in 2008.  It appears in the National Review, one of those conservative magazines that Paul Krugman thinks only publishes articles written by gold bugs and austerians.

Ramesh Ponnuru relies heavily on the views of quasi-monetarists like David Beckworth, Josh Hendrickson and myself.  And he gets it right.  (I hope this doesn’t sound condescending, but the MSM often doesn’t quite understand monetary economics, as the field is full of counter-intuitive arguments and subtle distinctions that are hard to grasp.)

Josh Hendrickson””an economist at the University of Toledo, and like Beckworth a right-leaning blogger””has shown that the Fed did a pretty good job of stabilizing the growth of nominal income at roughly 5 percent per year during the “great moderation” that lasted from the mid-1980s until the current recession. (Although Beckworth notes that growth was slightly above trend during the housing boom, for which he faults the Fed.) Most debts””notably, most mortgage debts””are contracted in nominal terms, with no inflation adjustment. If people are used to 5 percent growth in nominal incomes each year and make their arrangements accordingly, then an unexpected drop will make their debt burdens heavier and also make them reluctant to make plans for a suddenly uncertain future.

That’s what happened during the recent crisis. Scott Sumner””yet another right-of-center econoblogger, this one based at Bentley University””often notes that in late 2008 and early 2009, we saw the sharpest fall in nominal income since 1938.  In his view, much of what we think we know about the recession of 2007-09 is wrong. Not only has money not been loose since the crisis began, but tight money is the fundamental reason the recession was so severe and the recovery has been so halting. He argues that it was more fundamental than the housing bust, since residential-construction employment started falling long before the crisis hit.

The article is entitled “Not Enough Money: Why QE2 Worked.”  Sorry, I can’t find a link.

Karl Smith should be much more famous.  Here he criticizes Paul Krugman’s defense of the liquidity trap.

I wrote an article for the Adam Smith Institute called “The Case for NGDP Targeting.”  I can’t find it online, but they have paper copies.

Paul Krugman: Ignorant, and proud of it

Or so he claims:

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 …

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?

Some conservatives have given up on reading Krugman because of his insulting tone.  That’s a big mistake—indeed it’s playing right into his hands.  Krugman is right in many of his criticisms of conservative ideas (such as tighter money.)  Conservatives need to hear his views.  Better to read things that annoy you, and respond when you are outraged, than to be oblivious to the best arguments against your worldview.  The best liberal bloggers are those who don’t stay in their echo chamber, but rather are willing to also read blogs that annoy them.

PS.  I will be away for a few days, and hence won’t do much blogging.

Update:  Many commenters failed to click on the link in Krugman’s post, so they didn’t realize that he cited Tyler Cowen as the sort of conservative who is so partisan that he “doesn’t notice that asymmetry” and therefore is not worth reading.  I don’t even consider Cowen to be a conservative (much less partisan), but Krugman obviously does.

Saving conservatives from themselves: Forbes magazine and anti-intellectualism

I’ve always liked Forbes magazine, and I’m a big fan of Malcolm Forbes’ proposal to “blow-up” the income tax.  So I don’t have any big problem with the magazine on ideological grounds.  But I do have a problem with several recent Forbes articles by John Tamny, who seems proud of his lack of expertise in the subject he writes about.

In a new column, Tamny has accused me of calling anyone who favors the gold standard a “knuckle-dragger.” I don’t recall making that accusation (in this post), nor do I believe it to be true.  Indeed many highly intelligent economists favored the gold standard, as Tamny accurately points out.  Here’s the statement that led me to accuse Forbes magazine of anti-intellectualism:

Assuming the Fed could do what it cannot; as in fine tune economic activity on the way to stable prices, we would be much worse off if Bernanke et al were to actually succeed.

To see why, it has to be remembered that the cure for high prices is in fact high prices. Or better yet, high prices foretell low prices.

If producers create a consumer product that fulfills unmet needs on the way to high prices, the latter is the signal to other producers to enter the market for the same good on the way to lowering its cost. Gyrating prices are the necessary market signal telling businesses what we need.

Taking this further, if price stability were policy, it would still be the case that a phone call from Houston to Dallas would cost $15 for a half hour of conversation. It would similarly mean that we’d be paying thousands of dollars for flat-screen televisions, not to mention even more for computers that perform very few functions.

When I tell other economists about this passage, even Tamny’s fellow libertarians, they break out laughing.  That’s not good.  I want libertarians to succeed.  We both favor small government.  But we won’t get anywhere if Forbes keeps publishing articles than make conservative/libertarians the laughing stock of the blogosphere.  Just imagine what a Krugman or DeLong would do if they stumbled across this defense of the gold standard.  We need arguments that can stand up to the best the other side has to offer.

In his rebuttal Tamny points out that I am not famous (like he is?)  That’s true.  But the quality of an argument isn’t related to the fame of the person making the argument; it is based on reason, evidence, and even a familiarity with basic terminology.  In the new article Tamny seems to not understand the meaning of the term ‘deflation:’

For that we need stable money values, nothing else. Gold has historically served as the measure meant to make the tickets in our pockets most stable in value. As the great financier J.P. Morgan put it, “Gold is money. Nothing else.”

After that, the money prices of goods change with great regularity for reasons ranging from consumer preference to productivity enhancements. Confused about what deflation is, Sumner presumes that it’s a function of falling prices, but were he to ever emerge from the campus one of these days, he’d understand by virtue of walking the aisles of most any retailer that prices fall all the time.

If this were true, then the Great Deflation of 1929-32 would never have happened, as the price of gold was stable throughout that period.  Then he compounds his mistake, by citing Mill:

Or, as Mill put it, “If one-half of the commodities in the market rise in exchange value, the very terms imply a fall of the other half.” Put more simply, what Sumner presumes to be deflation is not that. The price level can only be altered through a change in the value of money itself, and with the dollar at near all-time lows against gold and nearly every foreign currency, the presumption of deflation promoted by Sumner is laughable, and also sad.

Obviously Mill cannot be referring to the nominal price of goods, as the statement would be absurd.  While I don’t have the Mill volume in front of me, I assume he must be referring to the real or relative price of goods.  But of course in that case the statement has no relevance to the case Tamny is trying to make, as it’s equally true of Zimbabwe and Switzerland.  Indeed it’s merely a property of averages.

Tamny then engages in false modesty:

To answer Sumner’s initial presumption, I should first say I’m decidedly not an intellectual, and will leave what is now a debased adjective to people of his ilk at obscure colleges. But a curious sort, I’ve long sought to read intellectuals of the past and present who actually impacted the policy debate.

It’s clear from reading Tamny’s column that he is an intellectual, quite engaged in policy ideas.  And a very well read intellectual as well.  What makes these two Forbes column’s anti-intellectual is that Tamny is writing on a topic that he knows little about, monetary economics.  He cites famous economists of the past, like Keynes, who supported a fixed price of gold.  But Keynes would be horrified by the arguments that Tamny is making in support of a gold standard.  The problem isn’t so much Tamny, it is Forbes, for choosing columnists who pander to crude populist prejudices, rather than those with expertise in the issues being discussed.

Sometimes I feel like I am trying to save conservatives from themselves.  The free market is a great idea.  Taking monetary policy decisions away from the Fed and letting the market determine the money supply is a great idea.  But when conservatives/libertarians show a contempt for everything that’s been learned in the past 80 years, including the scholarship of distinguished fellow libertarians such as Milton Friedman, they are not going to win out in the battle of ideas.  I don’t have any problem with Forbes publishing a piece with which I totally disagree.  I do have a problem with conservative outlets that publish authors who are ignorant of the key tenets of monetary theory, that do not know the meaning of basic economic terminology, indeed that seem to have created a private language that has nothing to do with the real world.  We won’t get anywhere unless we offer solid reasoned arguments written by people who have the expertise to handle the issues they are writing about.

My criticism of Tamny was not personal; most highly intelligent people know nothing about monetary theory.  He’s obviously very intelligent.  But he’s writing on the wrong topic.  I’d sound like an idiot if I wrote on nuclear physics (a simple field compared to monetary economics.)  Forbes should be publishing pieces on monetary policy that are written by distinguished monetary economists.  (And I don’t give a damn about credentials.  A distinguished monetary economist is someone who understands the field, not someone who happens to teach at a big name university or work at the Fed.)

PS.  It’s Bentley University, not College.  I couldn’t care less, by my bosses do care.

PPS.  I’m not generally viewed as a “quantity theorist” as I don’t favor targeting money, nor do I think the money supply is a good monetary policy indicator.  But it’s a forgivable mistake, as I occasionally make quasi-monetarist arguments.

PPPS.  But I’m definitely not a fan of “collectivist economics.”  That’s unforgivable.

PPPPS.  I am greatly indebted to Bruce Bartlett, without whom I would be a complete nobody.  His encouragement pushed me up to the exalted position of “little-known Bentley College economics professor.”  I’d also like to thank John Tamny, who has pushed me up from the position of being an obscure professor at Bentley, to someone so famous that Forbes devotes an entire article to trashing my “droolings” on monetary economics.  Ma! Top of the world!

Bad arguments against libertarianism

I’m a pragmatist, and hence don’t ascribe to the sort of libertarianism advocated by the true believers—those who base their arguments on natural rights.  I’d like a government that intervenes much less than any real world government, but much more than members so the Libertarian Party would want.

But when I read criticism of libertarianism by outsiders, it almost makes me want to embrace the most dogmatic forms of libertarianism.  Consider a recent critique of libertarianism by Christopher Beam of New York magazine, which struck me as a series of knee jerk reactions to libertarian ideas that seem wacky at first glance, until one actually starts to think seriously about the issues:

There are all sorts of situations the private market isn’t good at managing, such as asymmetrical information (I know my doctor is qualified to treat me because he has a government license)

That’s good to know!  I had almost been brainwashed by some big government advocates into supporting medical malpractice suits.  They kept telling me there are “thousands” of incompetent doctors out there.

I currently have an excellent doctor, but in the past that wasn’t always the case.  How do I know?  Let’s just say that I didn’t evaluate their effectiveness on the basis of whether they are government certified.  Indeed, how many of us have even checked out our doctor’s certification?  (And yes, there are doctors who practice illegally, w/o certification.)

Of course not everyone will agree with me.  But that’s the beauty of libertarianism–if you really are stupid enough to believe that one can judge a doctor’s quality on the basis of certification, you are free to rely solely on doctors who have degrees from respected medical schools.

Beam also ignores the costs of certification—all the residents of poor neighborhoods who are deprived of medical services because the medical cartel has priced health care services at exorbitant levels.  Many ordinary procedures could be performed by people with nurse-level training, for instance.

Here is another critique of libertarianism:

[Penn] Jillette might choose his words differently today. Everyone knows going through airport security sucks, even without “porno- scanners.” But few dispute the need for some line of defense. More-efficient, less-intrusive security would be great. But none at all? Jillette’s tract is a good example of how libertarianism ventures down some fascinating paths but usually ends up deep in the wilderness.

Put aside the empirical question of whether airport security does more good than harm, which Beam doesn’t even consider.  The more serious problem is that Beam confuses libertarianism as a political philosophy with the personal preferences of individual libertarians.

I don’t know the optimal amount of airport security.  My hunch is that it is much less than we have now, but more that Jillette would prefer.  But all that’s irrelevant; the question is whether the market would provide the optimal amount of air security.  I’d guess the answer is no.  People are irrationally afraid of flying.  The data on the safety of flying are literally beyond human comprehension, like the time it would take to ride a bicycle to Pluto—even with terrorism.  But that means the market failure is probably too much security.  Adding the TSA just makes a small market failure into an even bigger government failure.

I’ll stop there, although the rest of the article is almost as bad.  It consists of the sort of counterarguments you’d get from someone who had heard about libertarianism in a bar, but had never actually bother to evaluate arguments showing the myriad ways in which seemingly well-intentioned regulations can actually do more harm than good.

More disappointing was the praise Beam received from normally level-headed Matt Yglesias:

I liked Chris Beam’s NY Mag article on libertarians, but I want to quibble with this:

“Yet libertarianism is more internally consistent than the Democratic or Republican platforms. There’s no inherent reason that free-marketers and social conservatives should be allied under the Republican umbrella, except that it makes for a powerful coalition.”

People, especially people who are libertarians, say this all the time. But we should consider the possibility that the market in political ideas works is that there’s a reason you typically find conservative and progressive political coalitions aligned in this particular way. And if you look at American history, you see that in 1964 when we had a libertarian presidential candidate the main constituency for his views turned out to be white supremacists in the deep south.

So Yglesias thinks the main problem was that Beam didn’t also tar libertarians with the brush of racism?  Why pick Barry Goldwater?  Wasn’t Calvin Coolidge even more libertarian?  He presided over a government that spent 4% of GDP.  Yet the deep south states were just about the only states that Coolidge lost in 1924.  And does Yglesias really believe that libertarianism would appeal to the sorts of people who favor Jim Crow laws?  Wouldn’t it make more sense to see where the votes came from for presidential candidates who actually were libertarian, rather than someone who was a hodgepodge of libertarian, conservative, and militarist views?  The best performance by a libertarian candidate occurred in 1980, when Ed Clark received nearly a million votes.  His strongest support came from socially liberal states like Alaska and California; he did relatively poorly in the south.

Of course any movement collects it share of undesirables.  One can find self-professed “socialists” spanning the spectrum of Nordic-style social democrats all the way to hard core totalitarian communists.  So in that sense Yglesias is correct, it is easy to find examples of unsavory libertarian individuals and unsavory libertarian arguments.  But surely he goes too far when he claims:

And this is generally how politics goes in most countries. You have a dominant socio-cultural group allied with the bulk of the business community, and you have a more diffuse “left” coalition of reformers associated with labor unions and minority groups. There’s nothing “inconsistent” about organizing politics this way.

There are two problems here.  First, there are many places, such as Eastern Europe and Russia, where politics split along libertarian/statist lines.  “Liberals” are socially liberal and free-market-oriented.  Conservatives are strongly religious, xenophobic, and anti-market   And even where the right is “pro-business” it often doesn’t favor free markets.  Italy is the classic case of a country that lacks a pro-market right, but to a lesser extent this is also true in Japan, France and Germany (excepting the Free Democrats in Germany.)  In Latin American the right has traditionally been very hostile to the free market, with the notable exception of Chile after 1975.  China also splits along statist/classical liberal lines.  In much of the world Yglesias would be voting for the more free market party.

Yglesias is partly right about the US, but less than he might think.  There have been only a few truly free market reforms in the US since 1975 (price and market entry deregulation, NAFTA, deep cuts in MTRs during the 1980s, welfare reform, immigration reform, banking deregulation, etc.)  All received extensive support from Democrats, often from liberal Democrats such as Ted Kennedy.  So there is actually very little evidence that the statism/free market divide is what separate American liberals and conservatives.   And on both social issues and foreign policy the libertarians are much closer to the Dems.

Yglesias frequently points out (correctly) that American conservatives don’t really act like they believe in small government.  So he’s previously bashed conservatives for not really being libertarian, and now he’s bashing libertarians for being too close to Southern conservatives.  Yes, Obama has pushed the libertarian movement further to the right, but they certainly didn’t feel they had a home in the big-government conservatism of George Bush.

Here’s how one might defend Yglesias’s argument.  A healthy libertarian movement is a sign of good governance in a country with lots of social conservatives.  Where you have bad governance (say lots of really stupid economic policies, and also laws that discriminate against various groups), the honorable opposition is called “liberal.”  When you have already achieved a free market economy and also eliminated most laws that discriminate against minorities, women, and gays, the remaining fight will be in a few areas;  income redistribution, environmental protection, and affirmative government intervention to help minorities.  In that policy environment the dogmatic conservatives will often line up with cultural conservatives who resent the “undeserving poor” getting handouts, and who have somewhat traditional or tribal views on cultural issues.  With enough infiltration from the right, you’ll even get some so-called “libertarians” rejecting libertarian policies like open borders.

The dogmatic and pragmatic libertarians should really be treated separately, as any generalizations directed at one group will be wholly inappropriate for the other.   It’s easy to make fun of the views of Ron and Rand Paul.  But I don’t recall Milton Friedman losing many debates over libertarianism.  Indeed I don’t recall him losing any.  If Christopher Beam tried to address the arguments of people like Friedman, Hayek, Brink Lindsey, or Will Wilkinson, he might have produced an article worth reading.

HT:  Tyler Cowen

Misleading moralistic macro

Continuing in the theme of cognitive illusions, I’d like to discuss how moralistic reasoning distorts our view of macroeconomics.  Consider the following from

During the recent fight over extending unemployment benefits, conservatives trotted out the shibboleth that says the program fosters sloth. Sen. Judd Gregg, for instance, said added unemployment benefits mean people are “encouraged not to go look for work.” Columnist Pat Buchanan said expanding these benefits means “more people will hold off going back looking for a job.” And Fox News’ Charles Payne applauded the effort to deny future unemployment checks because he said it would compel layabouts “to get off the sofa.”

The thesis undergirding all the rhetoric was summed up by conservative commentator Ben Stein, who insisted that “the people who have been laid off and cannot find work are generally people with poor work habits and poor personalities.”

Both liberals and conservatives are engaging in moralistic thinking, and both are wrong.  They’re fighting the age-old battle over whether the unemployed are the “deserving poor” vs. the “undeserving layabouts.”  To utilitarians like me, there are no “just deserts,” just more or less utility as a result of various public policy options.

I don’t see any evidence that the unemployment problem is caused by laziness.  Or perhaps I should say that I doubt the work ethic of the recently unemployed is much different from the employed.  There are definitely people who would rather not work if they didn’t have to (like me), especially those with dangerous, dirty, or unpleasant jobs.  Or lots of exams to grade.  But people also like money, and I’d guess the vast majority of unemployed people would rather be back at work.

But the liberals are also wrong; 99 week unemployment insurance probably does modestly raise the unemployment rate.  It’s only natural that a person who loses a fairly good job would like to return to a fairly good job.  A laid off accountant would be foolish to accept a job as a maid, janitor or coal miner.

But the main point of my post is that it’s a big mistake to form opinions about the impact of macro policies on the basis of personal observation, or intuition about human nature.  And that’s because of the fallacy of composition.  If an accountant losses his UI and becomes desperate for work, that doesn’t increase his chances of getting his old accounting job back.  But if every unemployed worker loses his or her UI and becomes desperate for work, it does increase the chances of the accountant getting his job back.  The reasons are complex.

Let’s start by assuming that UI doesn’t affect NGDP, rather the path of NGDP is determined by the Fed.  Of course Krugman and Eggertsson would not agree, they’d argue that less UI would reduce NGDP.  But recent actions by the Fed indicate that they won’t let inflation fall below about 1%, and that also puts a floor on NGDP.  Every time the economy weakens, the Fed does more QE, or at least more talk about future expansionary actions.

If we hold NGDP constant, then how does eliminating UI raise RGDP?  It does so by sharply boosting the supply of labor, which depresses the equilibrium nominal (and real) wage rate.  Workers who are desperate for work now throw themselves onto the job market.  Suppose each worker becomes willing to accept a job paying 40% less than his former job.  This lowers wages at all levels, and for any given NGDP that increases employment.  It is equivalent to a rise in AD.  The accountant who suddenly becomes willing to be a bank teller, paradoxically is more likely to get his old job back, because the general expansion of the economy that results from lower wages leads to a greater need for accountants.  Of course this process wouldn’t work perfectly, but there would be some tendency for employment to increase.

So the liberals are right that the unemployed aren’t lazy, but the conservatives are right that less UI would reduce the unemployment rate.

By now you might have assumed that I am advocating cutting UI.  If so, you are again engaged in moralistic thinking, assuming that someone making a technical argument is actually making a normative argument.  I don’t have strong views on exactly where the UI cut-off should be.  In the long run I’d like to see the system reformed to include more self-insurance, but for right now you can make a respectable argument for keeping UI in place, despite the modest increase in unemployment.  It does reduce suffering in the short term, suffering caused by needlessly contractionary policies instituted by policymakers who may not even know a single unemployed person.  (Oops, now I’m being moralistic.)

One other quick example of the problems with moralistic thinking.  Liberals say cutting the estate tax favors people like Paris Hilton.  Conservatives counter with stories of family businesses that must be sold off to pay the estate tax.  If these were actually the two arguments, I’d go with the liberal view.  I’m a utilitarian who thinks a dollar is worth much more to a poor person that a rich person.  But I want to abolish the inheritance tax precisely because it’s not a tax on the rich; it’s a tax on capital, whereas we should be taxing consumption.  We need a progressive consumption tax.

Part 2:  Always avoid annoying alliteration

I just noticed that my last three posts have been entitled Disinflation denial, Avoid asymmetries, and “Misleading moralistic macro.  I apologize.