American liberalism: reality and ideology

David Henderson has some fun the other day with a New York Times article on Anthony Weiner:

Neither Ms. Abedin [Anthony Weiner’s wife] nor Mr. Weiner earn lucrative salaries, and Ms. Abedin is worried about her husband, who has been in politics much of his adult life, finding work. Mr. Weiner would still be eligible to collect his pension after his resignation.

David commented:

But that’s obviously not what Raymond Hernandez meant. He meant that the annual salary of $174,000 that Weiner made until recently is not lucrative. Nor, in Hernandez’s opinion, is Huma Abedin’s salary lucrative. But he doesn’t tell us what her salary is. Does he know? He’s a reporter for the New York Timesand so you would expect him to check. Did he? I’m guessing her salary is well in excess of $100,000. To me, that’s lucrative. Notice also that if I’m right, the couple’s salaries together totaled over $250K. Isn’t that supposed to be the magic number in this country that makes you rich? It was when Abedin’s big boss, Barack Obama, ran for president in 2008.

Let’s consider the average well educated affluent East Coast liberal who reads the NYT.  Does any one think that they would ever utter the following statement at a cocktail party:

George, I heard the Sanderson’s have become quite wealthy, they are each earning about $150,000/year!

No, to them a family income of $300,000 is certainly not wealthy.  On the other hand their official ideology insists it is, and they have no trouble mocking a University of Chicago professor who insists that a $300,000 family income is not wealthy.  There are two realms in which they talk, real life and ideology.  In their ideology they would claim some students do poorly because of underfunded schools.  Granted, their own kids don’t go to underfunded schools, but even if they did I doubt they’d accept that as an excuse for a D plus GPA from their teenage son.  They’d tell him to study harder.  (Just to anticipate commenter complaints, I am not arguing conservatives don’t do the same–they want a muscular foreign policy, but want their sons to go to law school, not the military.)

The question of whether a family making $300,000 is rich or not is not very interesting.  They are very rich compared to most people alive today, and indeed compared to most people who have ever lived.  But the same is true of an American family making $60,000.  Instead, I find these sorts of inconsistencies more interesting when they expose some of the internal contradictions of liberalism.

Here’s Obama Education Secretary Arne Duncan:

Teachers “shouldn’t have to take a vow of poverty,” Duncan said. “Great teachers should have the chance to make “” pick a number “” $130,000, $140,000, $150,000.”

Often when I read liberal pundits I get the feeling they see America as being split up between the poor and the rich, with no middle class.  This despite the fact that 90% of Americans consider themselves middle class, and despite the fact that the vast majority of American families earn middle class incomes.  Obviously Arne Duncan thinks in terms of the two Americas, you are either rich, a couple making $130,000 each, or you have taken a “vow of poverty.”  There is no in between.

But here’s the problem.  If you think the rich need to pay a lot more taxes, then won’t that couple each making $130,000 be knocked down into the sub-rich category.  And of course that means they’d be poor, as recall that there is no middle class.

I also recall that liberals find it extremely distasteful when conservatives bash wealthy government workers.  It’s almost like talking about welfare queens driving Cadillacs.  OK, but which is it?  Would a married couple of two teachers each making $130,000 be rich, or not?

I don’t much care about exactly how much teachers make.  But I find logical inconsistencies to be very annoying.  I want the Obama administration to clearly make one of the two following statements:

A.  We think some public school teachers should be wealthy.

B.  We don’t think a couple making $130,000 each is rich.

Disclaimer, my wife and I are both in the low 6 figures.  Call me rich or not–I don’t care.  Just make up your mind and stop demagoguing the issue.

Progressive wishful thinking

Progressive bloggers have many admirable characteristics.  They try to rely on real science, not junk science.  They look for public policies that reduce suffering.  But when it comes to government they often become slightly unhinged, adopting the sort of “faith-based” reasoning that they tend to deride in conservatives.  Recently I’ve notice three blog posts by Greg Mankiw that (directly or indirectly) challenged progressive faith in big government.  All were derided by progressive bloggers, but in each case Mankiw was clearly right.

Part 1.  In May 2010 Greg Mankiw reported some data on tax revenue per person in some big economies.  From that data I’d guess that the US and European tax systems raise roughly equal amounts of revenue per person, even though US taxes are slightly less than 30% of GDP, and European taxes are closer to 40% of GDP.

Mankiw didn’t even comment on the data, he merely reported it.  But the post received all sorts of criticism, none of it valid.  I’d go much farther than Mankiw.  I’d argue that this data is strongly supportive of the view that both the US and Europe are near to tops of the Laffer Curve for total taxation.  I did not say then, nor do I claim now, that we are precisely at the top.  But I also don’t see any reason to believe that if we raised taxes from 28% to 40% of GDP, that revenue would rise anywhere near proportionately, with no change in GDP per capita.

The progressive response is that the Laffer Curve idea is far-fetched, and that higher tax rates don’t reduce GDP per capita.  Instead they argue that the lower European GDP/person represents mysterious cultural differences, a preference for leisure.  Even worse, this cultural trait developed only recently, as during the 1960s (when French tax rates were similar to those in America), they worked just as hard as we did.

All this may be true, but progressives can’t point to any European models (except perhaps special cases like Norway and Luxembourg) that raise the sort of revenue they claim the US would raise if we boosted taxes as a share of GDP to European levels.  For instance, in Mankiw’s data the Germans raise $13,893/person with taxes of 40.6% of GDP.  The US raises $13,097/person, with taxes of just 28.2% of GDP.  The progressive denial of the Laffer Curve is an implied claim that if we raised our tax rate to German levels, our GDP would not decline, instead we’d raise an astounding $18,856/person in tax revenue, despite the fact that no other major country with Euro-style tax rates comes close to raising that kind of revenue.  Quite a leap of faith.

Part 2:  Then Mankiw linked to a post showing the US tax system was more progressive than most other systems, again without much comment.  Once again progressives rushed in to attack his (implied) claim.  Matt Yglesias :

As I’ve long said, I think progressives do tend to overemphasize the importance of progressive taxation as opposed to adequate taxation. But people should have the facts. The rich pay a huge share of the total taxes in the United States because they have a huge share of the money.

And Brad DeLong:

Second, the U.S. income tax system is not more progressive than the systems of other industrialized nations. The rich in the U.S. pay a greater share of income taxes because the rich in the U.S. capture a greater share of income.

But these attacks were wrong, as anyone who has read the important work by Peter Lindert would immediately have known.  Lindert showed that Europeans were able to raise more tax revenue only by having more regressive tax systems than the US, i.e. tax systems that relied more heavily on consumption taxes.  This is now pretty much common knowledge in the public finance area.  But many American progressives keep insisting that we can get closer to the (egalitarian) European model by making the US tax system more progressive, by having the rich pay more.

There is a respectable counterargument to all this.  The regressivity of European taxes is offset by the much greater progressivity of their social insurance programs.  So the more thoughtful progressives (including Yglesias, and I’d guess DeLong) will often acknowledge that higher taxes on the middle class are also necessary, but then we can have a decent system of social insurance for the poor, plus high speed rail.  The problem with this argument is that we’ve just seen that it is not at all clear that the US can raise all that much more revenue.  If we raised our tax ratio to 40% of GDP, who’s to say we wouldn’t start working German-style hours?  This is double trouble for progressives.  Any attempt to raise more revenue will require much more regressive taxes, and that merely gets you a higher share of GDP, in absolute terms you probably wouldn’t raise much more revenue.

I have a different solution.  Recognize that $13,000/person is enough revenue (if used wisely) to provide for a decent society.  (Canada spends less.)  Stop spending $15,000/person on Medicare in counties like McAllen Texas, where per capita income is only about $15,000.  Decentralize everything and level the playing field by giving lump sum grants to counties based on per capita income levels in those counties.  Don’t try to raise lots more revenue, try to get much better results with the revenue we already raise.  Spend less on the military.  Use ideas from Singapore (which provides universal health care at a very low cost to the taxpayer.)

Part 3:  Progressives also seem to have excessive faith in fiscal stimulus, despite the fact that for decades our best macroeconomists have been saying that that fiscal stimulus is a bad idea.  These progressives counter that fiscal stimulus is needed because the Fed can do no more at zero rates, even as the very same progressives bash the Fed for not doing lots more at zero rates.  In March 2009 Greg Mankiw pointed out that the CEA growth projections for RGDP seemed to violate research showing a unit root in RGDP.  The CEA forecast negative 1.2% growth in 2009, and then roughly 4% a year out to 2013.  That’s a total of 15.6% RGDP growth between 2008 and 2013.

Paul Krugman had a scathing attack, arguing that you’d expect above trend growth during the recovery.  Greg Mankiw challenged Krugman to a bet, and Krugman refused.  I have no problem with that, as I don’t do bets on macro outcomes (I believe in targeting the forecast, so there is nothing to bet on in my view.  We immediately know all we need to know after policy initiatives.)  Nevertheless, we are now about half way through that 5 year period, and it is pretty obvious that Mankiw’s going to be roughly correct; total RGDP growth during 2008-13 will come in way under 15.6%.  For progressives, that was another triumph of hope over experience.

Brad DeLong recently linked to this John Berry post:

[O]n the local level, it seems even conservatives have no real doubt that federal spending can create jobs. What about at the national level?

The Congressional Budget Office certainly has no doubts about it. A CBO report last month said that provisions of the American Recovery and Reinvestment Act, the stimulus bill passed in early 2009, had the following effects in the fourth quarter of calendar year 2010:

  • Raised the level of inflation-adjusted gross domestic product by between 1.1 percent and 3.5 percent.
  • Lowered the unemployment rate by between 0.7 percentage points and 1.9 percentage points.
  • Increased the number of people employed by between 1.3 million and 3.5 million.
  • Increased the number of full-time-equivalent jobs by 1.8 million to 5.0 million as additional workers moved from part-time to full-time work.

I have a number of posts showing that Krugman, DeLong, Dean Baker, etc, all falsely claimed that evidence of regional growth after fiscal stimulus was evidence that the multiplier was greater than zero.  Of course that’s engaging in the fallacy of composition.  And what can one say about the CBO estimates?  They plug numbers into a model that simply assumes fiscal stimulus works, and the model tells us that fiscal stimulus did in fact work.  The modern macro models that were dubious of fiscal stimulus tended to assume central banks were engaged in inflation targeting, and hence would offset the fiscal stimulus.  But these pro-stimulus studies typically assume no monetary offset, despite the fact that the Fed recently adopted QE2 precisely because inflation was falling below their comfort zone.

Progressives believe that the US can raise lots more revenue, that the US tax system is not progressive enough, and that fiscal stimulus can work.  Those are all examples of the triumph of faith over reason.  Blind faith in government that can only lead to bad outcomes.

PS. Recently I’ve been way too nice to Mankiw.  Just to show he’s not bribing me, I’ll criticize him here for not being tougher on the Fed—not encouraging more unconventional stimulus.

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.

Progressives and “unmet needs”

Conservatives often complain that progressives, aka “liberals,” are insatiable.  Whenever they see unmet needs they call for more regulation, or new entitlements.

I’m not sure this criticism is fair, but I think conservatives see two particular problems with the “unmet needs” approach to policy:

1.  There will always be problems in society, and hence this approach would lead to a larger and larger role for government.  In other words it would put us on the road to you know where.

2.  Government regulations aimed at fixing one problem often create new problems.  Bank branching regulations were intended to prevent concentrations of financial power.  These laws resulted in bank panics in the US, which led to deposit insurance.  Deposit insurance created moral hazard, which led to reckless lending by S&Ls.  This led to re-regulation of S&Ls in the 1990s, etc, etc.  The same dynamic is underway in health care.

How does this apply to monetary policy?  As long as there are “unmet needs,” i.e. aggregate demand is short of target, the progressives should be calling for more monetary stimulus.  And in this case the conservatives should as well, as monetary stimulus is essentially costless.   (On average, the Fed might incur a capital gain or loss, but a non-stimulative policy is likely to create even larger gains or losses to the Treasury.)  And monetary stimulus is no more “interventionist” than non-stimulus, just as setting a steering wheel at NNW is no more interventionist than setting the wheel at WNW.

Here’s what puzzles me, why don’t progressives agree with me that the Fed caused the recession, not the bankers?

One answer is that in 2008 many progressives thought the Fed was out of ammo.  But in 2009 and 2010, progressives became increasingly critical of the Fed for not doing more to stimulate the economy.  Suddenly the Fed wasn’t out of ammo.

Do progressives apply the criterion of “unmet needs” to monetary policy?  I think the answer is yes.  Look at almost any Krugman column that is critical of the Fed for not being more aggressive.  He repeatedly cites data on inflation and jobs.  Krugman says there’s no excuse for the Fed to tighten as long as inflation and jobs are below the Fed’s implicit target.  And he keeps pressing the Fed to do more.  And more.  And more.  And he’s basically right (although I’d rely on NGDP, rather than inflation and jobs.)

I see that as an “unmet needs” approach to monetary policy.  Keep doing more until the expected growth in AD shows no “unmet needs” for more AD.  So if this is the progressive approach to monetary policy, doesn’t that mean that the Fed caused the big drop in NGDP between 2008 and 2009 by not following this criterion?

There are only a tiny number of economists who believe the Fed caused the Great Recession with an excessively tight monetary policy, relative to the needs of the economy.  Why don’t progressives believe this?

A.  They might have thought the Fed was out of ammo in 2008, because rates were only 2%.  But if so, why do they think the Fed is not out of ammo in 2010, despite zero interest rates.

B.  They might have understood the Fed could have pursued much more aggressive stimulus in 2008, but thought it was inappropriate.  But why did they think monetary stimulus was appropriate in 2010 when the economy was already recovering, but not in 2008 when it was falling off a cliff?  And why did they call for fiscal stimulus in 2008?

C.  They might believe that the Great Recession was not caused by a big fall in AD, but rather by structural problems, and/or Obama’s interventionist policies.  But then why do progressives criticize conservatives for making this argument?

It seems to me that the logic of the “unmet needs” approach to policy, combined with the obvious fact that progressives have become highly critical of the Fed for not doing more, points to tight money being the cause of the Great Recession.  So why does almost no one agree with me?

PS.  For new readers I should point out that it is generally understood that there is no absolute indicator of easy or tight money; interest rates and the money supply are both highly unreliable.  When I say “tight money,” I mean tight relative to the policy objective, which is the only meaningful way to talk about the stance of monetary policy.

The progressive inflation hawks

Paul Krugman and Joe Stiglitz are brilliant Nobel-prize winning economists.  Both have been known to be somewhat caustic in their criticism of others.  Most importantly, both are public intellectuals who often criticize the orthodox establishment from a liberal or progressive vantage point.  I used to think they were sort of similar.

Until now.  In the field of macro, Krugman >>>>>>>>> Stiglitz.  Check this out:

NEW YORK (Reuters) – Ultra-loose monetary policies by the U.S. Federal Reserve and the European Central Bank are throwing the world into “chaos” rather than helping the global economic recovery, Nobel Prize winning economist Joseph Stiglitz said on Tuesday.

A “flood of liquidity” from the Fed and the ECB is bringing instability to global foreign exchange markets, Stiglitz told reporters after a conference at Columbia University.

“The irony is that the Fed is creating all this liquidity with the hope that it will revive the American economy,” Stiglitz said. “It’s doing nothing for the American economy, but it’s causing chaos over the rest of the world. It’s a very strange policy that they are pursuing.”

And here is Robert Reich:

Washington is actively pursuing a weak dollar as a jobs policy. (The dollar just plunged to a six-month low against the euro.)

How? The Fed is keeping long-term interest rates so low global investors are heading elsewhere for high returns, which bids the dollar down. Every time another Fed official hints the Fed will start printing even more money (“quantitative easing” in Fed speak) the dollar takes another dive.

Meanwhile, Congress is ginning up legislation to allow the President to slap tariffs on Chinese imports because China is “artificially” keeping its currency low relative to the dollar.

But using a weak dollar to create American jobs is foolish, for two reasons.

First, no other country wants to lose jobs because its currency becomes too high relative to the dollar. So a weak dollar policy invites currency wars. Everyone loses.

At least a half dozen other countries are now actively pushing down the value of their currencies. Japan recently sold some $20 billion of yen in order to keep the yen down, the biggest ever sell-off in single day.

Last week, Brazil’s Finance Minister lashed out at the US, Japan and other rich nations for letting their currencies weaken to spur jobs. Brazil’s high interest rates are attracting global investors and pushing up the value of Brazil’s currency. This is crippling Brazil’s exports and fueling unemployment.

Perhaps Krugman will have to send out another memo to Ezra Klein, as it’s hard to keep track of which side are inflation hawks and which side is pro-stimulus.  No matter how often I criticize Krugman for one thing or another, at least you can sense some sort of coherent model—you understand why you disagree.  It’s often a very minor point of interpretation; is monetary or fiscal stimulus more likely, or did Japan really try to escape its liquidity trap?

I have no idea where these guys are coming from.  A currency war causes everyone to lose?  Why is that Mr. Reich?  Because it leads to high inflation?  And what causes the high inflation?  Rising AD?  And what is the point of the fiscal stimulus you favor?  Higher AD?

The name of my blog never seemed more appropriate.  We’re hardwired to think disputes must be over who gets what—who’s favoring the capitalists and who favors the workers.  It’s much more than that.  It’s mass confusion about the nature of monetary policy.  Krugman and Stiglitz are distinguished economists with impeccable progressive credentials, and they both can’t be right.  The AFL-CIO opposed FDR’s dollar depreciation of 1933, even though it led to a rapid increase in production.  Every day that goes by I’m reminded more and more of the intellectual climate during the 1930s.  We’ve learned nothing.

HT:  Liberal Roman