EconLog
EconLog small logo
Alberto Mingardi

On Greece

Alberto Mingardi

The world is pondering the odds of Mr Tsipras and Syriza succeeding. To win an election on a rather populist platform might be easy, but governing and entering into highly complex negotiations with European authorities is a different matter. I think Syriza's game may be easier than some expect, because it is much closer to the emerging consensus than it appears to many observers. Critics of "austerity" (whatever that means) have achieved a substantially hegemonic position in the European debate--not surprisingly, given the fact the European intelligentsia typically has a soft spot for higher spending.
I'd like to point out some interesting pieces.

On Forbes, Cato Fellow Doug Bandow summarizes the Greek story and writes that Syriza's victory may kill the Greek economy but save democracy. He maintains that, "A Eurocratic elite, consisting of politicians, academics, businessmen, journalists, bureaucrats, and lobbyists based in Brussels and national capitals, favors continental consolidation in part because the system suppresses self-rule and public accountability."

That may well be true, but I would disagree with Doug that "now popular opposition is exploding." I find there is very little sense of the need for "resistance against the ever increasing aggregation of power in Brussels" in most of the current wave of euro-critic forces (UKIP excluded). People who oppose "Troika" packages and "austerity" (again, whatever that means) would cherish tax harmonization at the European level, to give but one example. I think we are just witnessing the inordinate "Europeanization" of national politics. Those who favor ever-increasing public spending now argue for more spending at the EU rather than at the member state level, and deeply resent the EU treaties that are somehow forcing member states to some kind of fiscal discipline. Self-professed defenders of national sovereignty are also self-righteous proponents of a "transfer Union."

Italian journalist Alessandro Barbera of La Stampa pointed to an interesting piece written by the new Greek finance minister, economist Yanis Varoufakis, in June 2012. I find it a bit self-contradictory, not least because it claims both that "austerity" is marching Europe towards catastrophe and at the same time that the original Syriza manifesto "is not worth the paper it is written on. While replete with good intentions, it is short on detail, full of promises that cannot, and will not be fulfilled (the greatest one is that austerity will be cancelled), a hotchpotch of policies that are neither here nor there." Interestingly enough, Varoufakis told his readers not to fear Syriza's ultra-leftism because Syriza's economists "are good, moderate people with a decent grasp of reality." So, don't mind our propaganda, we're good men at heart! (which is in itself kind of an old propaganda trick)

By the way, Russ Roberts had a very enjoyable EconTalk with Varoufakis, in which Varoufakis discusses at length the philosophy of Valve Software, for which he was economist in residence.

Former Polish Treasury Minister and central banker Leszek Balcerowicz authored a timely op-ed, together with Andrzej Rzońca. Balcerowicz has an interesting take on Greek austerity, in that he points out that fiscal adjustment was pursued mostly by tax increases and not via spending cuts, as opposed to what happened elsewhere and to the kind of perception the propaganda by Syriza fosters. As Balcerowicz and Rzońca write:


In response to the crisis that emerged in 2010, Greece has found itself under the supervision of the Troika (the EU Commission, the ECB, and the IMF). There has been a sharp divergence between the agreed and the implemented programs, and the latter has had such a time structure that it has sharply reduced the inherited imbalances. But there have been high costs in the form of a deep cumulative decline in GDP (over 25% between 2010 and 2014) and a sharp increase in unemployment. The implemented policies relied first on the tax increases. They delayed reforms on the spending side as well as the structural reforms, which were absolutely essential to improve conditions for business. This was in sharp contrast to the policies implemented in the Baltics and in Ireland, where rebalancing of the economy after the acute boom bust episodes was achieved at much lower costs to GDP and employment. It had been the nature of the implemented programme in Greece and not 'austerity' (a bad word) which is to blame for the especially high costs of economic rebalancing in Greece.

Belcarowicz and Rzońca nonetheless argue that some progress has been made and that if "the implemented reforms are not reversed and other necessary improvements for the private sector and job creation are introduced (especially reforms of the bloated state structures and the privatisation of the state sector) Greece can be a surprisingly successful economy." Their policy suggestion to European leaders is to be flexible on "further restructuring the official debt" (but no debt forgiveness) but inflexible on reforms, to the point of accepting Eurexit if Greece stops the reform process. I doubt this would be a popular point of view in Europe, and yet I found it very reasonable. Brett Stephens has a good piece with the Balcerowicz's argument on steroids.

CATEGORIES: Eurozone crisis

   


David R. Henderson

What is Ray Lopez Missing?

David Henderson

Regular Econlog commenter Ray Lopez writes, in response to Scott Sumner:

My first objection: aside from the "Open Letter" by the liberal leaning economists, that indeed predicted a 'double-dip recession' if sequestration happened, who else predicted a recession? Not the CBO (which uses a Keynesian model to forecast). Not Krugman (who merely thought the USA might follow the trajectory of the UK). Then who? What am I missing?

I think he's missing who is on the list of 350 economists who signed the open letter. Here are 6 prominent ones, alphabetically:
Dean Baker
Jared Bernstein
Lawrence Mishel
Peter Temin
Robin Wells
Justin Wolfers.

Like commenter Tracy W, I find that Ray Lopez's comment reminds me of the great scene in the movie The Life of Brian.


   


In the face of Jeff Sachs' challenge, Bob Lawson proposes a bet on economic freedom:
"Dear Tyler,

I read with obvious interest your post (and the paper itself) about the endogeneity of institutions. Leaving aside my issues with the IV literature, I decided to take the bait regarding Jeff Sachs' challenge to, "Go back to 1960 and choose any measure of institutional quality you want. Then see how well it predicts cross-national growth since then."

Ok, I will.

The Economic Freedom of the World (EFW) index was first published in the mid 1990s, and the first year of data is 1970. So I'll have to start in 1970 instead of 1960.

Here is a regression with growth from 1970-2010 on the lhs, and EFW and GDP per capita in 1970 on the rhs.

[...]

A one-unit higher EFW score in 1970 correlates to 0.84 percentage points in higher annual growth over the next 40 years. A one unit EFW score improvement during the first decade, 1970 to 1980, correlates to a 1.00 percentage point higher annual growth rate over the 40 years.

I don't know if that satisfies Jeff Sachs' challenge, but it works for me.

Lawson's bet:

Looking forward, I've constructed a back-of-the-envelope indicator that combines each country's EFW rating in 2000 and with its change from 2000-2010. The top 20 (combined highest level & most positive change) versus the bottom 20 (combine lowest level & most negative change) countries are:

Top 20 - Bottom 20 Hong Kong - Haiti Romania - Cameroon Rwanda - Senegal Singapore - Guinea-Bissau Bulgaria - Mali Cyprus - Bolivia Unit. Arab Em. - Algeria Chile - Guyana Mauritius - Gabon Lithuania - Ecuador Slovak Rep - Burundi Albania - Cote d'Ivoire Jordan - Chad Switzerland - Togo Bahamas - Congo, Rep. Of Malta - Central Afr. Rep. Taiwan - Argentina Korea, South - Myanmar Finland - Zimbabwe Estonia - Venezuela

I'm willing to bet anyone $100 (up to 10 people) that the Top 20 group will outgrow the Bottom 20 group by at least 1 full percentage point per year (on average) over the the next 20 year period (2015-2035).

Who will accept the challenge?



   


I'm seeing lots of comments to the effect that the 2013 austerity was not a big deal, and or the dreaded "fiscal cliff" never happened. OK, let's see some numbers. After all, if my critics just know that I am wrong, they must have the correct numbers. In an earlier post I estimated that the deficit fell by $500 billion in calendar 2013.

(It fell by $400 billion in fiscal 2013, but you want to use calendar 2013 because the serious austerity kicked in on January 1st, 2013. Indeed if that date were not important then the deficit reduction estimates would not vary by $100 billion merely by shifting the date by 3 months.)

Questions:

1. Is my $500 billion deficit reduction estimate wrong? I used this source. If it's wrong, what source should I use for monthly deficits? What are the actual numbers for 2012 and 2013?

2. If the dreaded fiscal cliff had happened, what was the estimated deficit reduction that was expected to occur?

3. Is the difference between the answer to #1 and #2 large enough to account for the difference between a predicted recession and a speed up in economic growth (or at worst roughly no change, if you don't buy my speed up argument)?

My commenter Justin over at MoneyIllusion also has some questions:

Two questions for Keynesians in light of this discussion:

1) If the general consensus of the Keynesian camp is that $500 billion of deficit reduction (much of it exogenous and permanent) shouldn't be expected to put a noticeable dent in the time path of GDP or the unemployment rate, why credit the $800 billion stimulus (which only lasted for 2 years) with any meaningful effect whatsoever on the economy during 2009-2010?

2) Should we not try to generate a budget surplus for FY2016 if cutting the deficit by $500 billion isn't really austerity and therefore unlikely to produce obviously negative impacts on GDP and unemployment?

CATEGORIES:

   


Alberto Mingardi

Tsipras and electoral reform

Alberto Mingardi

Alexis Tsipras and Syriza have won the Greek elections on a platform that entails, roughly speaking, 12 billion euros of additional public spending. The program (see here) is certainly questionable on many, many points, but it is still a big step forward in the direction of common sense and realism, when compared to the platform on which Syriza was originally established and ran in the last European election (see here).

I would like to point out that one of the original points Syriza coalesced around, i.e., "Change the election laws to a proportional system," has vanished from their agenda. This was clearly a priority when the party was expected to be far from winning a majority of seats, as is the general rule for new, extreme left-wing parties in most of Europe.

Now Syriza speaks of "deepening democracy" by increasing citizens' participation, but it seems quite content with the current Greek electoral system. It is a semi-proportional representation with a strong majority bonus: this is why with 36% of the votes Syriza has 149 seats, two short of the needed majority in the legislature. It worked surprisingly well for Syriza, which will govern together with the anti-European right-wingers of the "Independent Greeks." As far as I can tell, in Greece, a simple majority of representatives is enough to change the electoral law, so Tsipras and his party could rather easily revert to their initial proposition and transform the electoral system in a more proportional direction. But why should they now?

CATEGORIES: Eurozone crisis

   


Bryan Caplan

Voltaire Reconsidered

Bryan Caplan
Voltaire never actually said, "I disapprove of what you say, but I will defend to the death your right to say it."  But Voltaire would probably embrace this line - just like legions of other smart, well-meaning people.  Interpreted poetically, it's a sublime human rights slogan.  But interpreted literally, the Voltairean maxim is rather silly.  Let's walk through its flaws step by step. 

Suppose for starters that you know for sure that X is true.   Unfortunately, X is so unpopular that loudly asserting your right to say X inevitably gets you killed.  Question: Should you make a point of loudly asserting your right to say X?  Probably not.  You can do so much with the gift of life.  Why is asserting the right to say X so much more important that everything else you'll experience and accomplish by remaining alive? 

Sure, you can devise hypotheticals where courting death by asserting the right to say X is an admirable choice.  Maybe standing up for the right to say X will, via your death, save many innocent lives, or replace an awful tyranny with something much better.  Maybe you only have ten minutes left to live, and want to go out with a noble bang.  Except in such unusual circumstances, however, throwing your life away to speak a few forbidden words seems not only imprudent, but wrong.  Any true friend would beg you to come to your senses and shut your piehole.

Now consider: If standing up for your own right to utter truth X is a grave mistake, why is standing up for someone else's right to do the same any better?  Indeed, common sense morality says you have only modest obligations to help perfect strangers in dire need.  Why then should you assume a blanket obligation to die in defense of strangers' rights to speak when they could easily remain silent?

Notice: So far, I've assumed that dangerous-to-say claim X is definitely true.  Question: Should you be more willing to suffer on behalf of the truth or error?  Truth, of course.  The right to do wrong is important, but how could it possibly outshine the right to do right

All this yields the following moral rank ordering: staying alive> asserting your own right to say truths> asserting others' right to say truths > asserting others' right to say falsehoods.  Voltaire's maxim seems a gross overstatement.  Indeed, it's basically backwards.

Of course, you can flatly deny everything I've said.  But should you take that route, consider these two awkward facts. 

1. The world provides ample opportunities to die defending people's right to make offensive statements.  Reposting Charlie Hebdo cartoons on your Facebook page is only getting your feet wet.  If you're really ready to die for free speech, travel to the Islamic State of Iraq and Syria and start handing out copies of the cartoons in person.  Martyrdom for civil liberty awaits you.

2. Almost no professed Voltairean takes such actions. 

My point is not that Voltaireans are hypocrites, but that they run afoul of the Argument from Conscience.  The fans of Voltaire are fine people.  The fact that Voltaire's most ardent admirers don't throw themselves on their swords for freedom of speech shows that, deep down, they too realize that their maxim is only eloquent bravado.

P.S. Lest I be misunderstood, I staunchly defend the right to say things I disagree with.  But I think it's almost always a bad idea to perish in defense of this right.  Call me cowardly if you like.  I'm just being honest.


   


Against Collectivism

In the last year I have made our sister legal blog, Library of Law and Liberty, part of my newsfeed. I read most of their posts and learn from many of them. Today, blogger and George Mason University Law School Professor Michael S. Greve has a good post on why we Californians are suddenly paying more than $5.00 for a dozen eggs. I noticed the price at the Safeway about 10 days ago, with the first eggs I had bought in the new year. Before reading Professor Greve's post, I already knew why because the Wall Street Journal had an excellent unsigned editorial explaining why.

Here's the key segment from that editorial:

The cause of these price gyrations is an initiative passed by California voters in 2008 that required the state's poultry farmers to house their hens in significantly larger cages. The state legislature realized this would put home-state farmers at a disadvantage, so in 2010 it compounded the problem by requiring that eggs imported from other states come from farms meeting the same cage standards, effective Jan. 1, 2015.

It probably will not surprise regular readers of my posts to know that I voted against this initiative. Why does that matter? You'll see shortly.

Professor Greve's discussion isn't about the economics per se but about the constitutionality of the restrictions and about the odds that the U.S. Supreme Court will crack down (pun intended) on a state government that seeks to regulate interstate commerce. I have nothing to add to his analysis, which, in my layman's view of the Constitution and the players, is excellent.

I do, however, want to challenge Professor Greve on one of his statements. He writes:

You get the idea, even if California voters don't. Mind you: they voted for this stuff and deserve absolutely everything that's coming to them.

But I didn't vote for "this stuff." I don't agree that I have this "coming to" me. Nor do the millions of other Californians who voted the way I voted. Nor do the millions of Californians who were allowed to vote but didn't vote. Moreover, I would wager that fewer than 10,000 Californians under 18 voted for "this stuff." So the millions of people under age 18 don't have it coming to them either.

I think Professor Greve should be more careful in claiming that people who live in a state have coming to them what their fellow voters vote for. Although I'm guessing that he doesn't mean to do so, he is embracing collectivism.

CATEGORIES: Regulation

   


Scott Sumner

Stone Age Economics

Scott Sumner

Back in 2000, Robin Hanson wrote a paper entitled "Shall We Vote on Values, But Bet on Beliefs?", which offered a way forward for economics in the 21st century. Unfortunately his ideas were ignored (and even ridiculed) and today we are still stuck in 20th century economics. In the future, our current approach will be regarded as Stone Age economics.

I will illustrate the problem with modern economics by discussing the impact of extended unemployment insurance. Last spring, Paul Krugman suggested that the elimination of the emergency extended unemployment program in 2014 was not leading to more jobs, thus refuting the claims of conservative opponents of the program. In earlier posts he suggested that ending the extended UI program would mean less fiscal stimulus, and hence more unemployment. As we'll see, this prediction turned out to be as ill timed as his famous "test" of market monetarism comment, which occurred a year earlier. Nonetheless, at the time it looked like Krugman might be right, as the first quarter of 2014 was weak (perhaps due to bad weather.) In addition, Congress was still debating an extension, which would have applied retroactively to those still unemployed.

In numerous posts over at TheMoneyIllusion, I suggested that the 99-week extended unemployment insurance program had probably increased the unemployment rate by about 0.5%. That's perhaps 700,000 people, which is significant, but not the major cause of high unemployment during the recession. I always acknowledged that this was little more than a guesstimate.

Now Tyler Cowen directs us to a fairly rigorous academic study that uses a "difference in difference" approach and estimates that ending extended UI led to an additional 1.8 million jobs in 2014:

We measure the effect of unemployment benefit duration on employment. We exploit the variation induced by the decision of Congress in December 2013 not to reauthorize the unprecedented benefit extensions introduced during the Great Recession. Federal benefit extensions that ranged from 0 to 47 weeks across U.S. states at the beginning of December 2013 were abruptly cut to zero. To achieve identification we use the fact that this policy change was exogenous to cross-sectional differences across U.S. states and we exploit a policy discontinuity at state borders. We find that a 1% drop in benefit duration leads to a statistically significant increase of employment by 0.0161 log points. In levels, 1.8 million additional jobs were created in 2014 due to the benefit cut. Almost 1 million of these jobs were filled by workers from out of the labor force who would not have participated in the labor market had benefit extensions been reauthorized.
Obviously this study is far superior to my guesstimate. And in a sense it does support my side of the debate I'm having with Keynesians, who (falsely) accuse me of promoting the "lazy worker" theory of unemployment. So I should jump on this result, right? Especially since I can't find any flaw in their empirical work (although honestly I just skimmed the paper.)

In fact, I'm not being a good Bayesian, I'm not shifting my prior view that extended UI cost about 700,000 jobs, although I am widening the band around that estimate to include 1.8 million as a plausible estimate. I'll try to explain my stubbornness, and I want smarter, less biased people to tell me if I am wrong.

In 2012 the US created about 2.25 million jobs, and in 2013 it created about 2.35 million jobs. In late 2013, before it was known that extended UI would be repealed, most economists seemed to expect 2014 to be at least as good as the previous two years. The markets also seemed to expect continued growth, although unfortunately we lack good RGDP and NGDP futures markets. But my sense was that 2014 was likely to be similar to 2013, and it seemed to me that forecasters in academia and the asset markets both expected a similar result.

In fact, employment growth in 2014 was 2.95 million, a number quite likely to be revised higher in the next year or two. That's why I still think 700,000 is a decent ballpark guesstimate. I just don't find it plausible that job growth would have suddenly plunged to 1.15 million in 2014, if nothing had been done about extended UI. I saw nothing going on in terms of "shocks" that would have suddenly caused job growth to slow.

Here's where Robin Hanson comes in. Under his "futarchy" plan, prediction markets would decide matters of fact ("beliefs") that have implication for policy, and voters and policymakers would decide the values that get embedded in policy. In this case, two prediction markets would have been set up in late 2013, to predict jobs growth during 2014. One market would be conditional on Congress extending the emergency benefits, and the other market would be conditional on the program being ended.

If the markets agreed with me, the difference would have been about 700,000. If they agreed with Marcus Hagedorn, Iourii Manovskii, and Kurt Mitman, the difference would have been 1.8 million. If they agreed with Krugman it might have been negative (fewer jobs if the program ended.) Think of the market forecast as a sort of meta-study, which efficiently incorporates Krugman's arguments, my arguments, and the empirical work in the study mentioned above.

When I forecast the effect of X, this is exactly what I try to do. I try to guess what the market would guess. Thus I think eurozone QE is something, but not a game changer, because that seems to be what the markets expect, based on their responses to QE news stories.

There is a mountain of evidence that the "wisdom of crowds" can aggregate many disparate views much more effectively than any individual researcher. So why didn't economists follow Hanson's lead? Perhaps we are a bit arrogant, thinking we are smarter that the markets. Maybe we like the idea of economists being a sort of cult of "high priests" that hold the secrets of the temple. It's a flattering position to be in.

I'm not suggesting that this sort of difference in difference study has no value. Just the opposite. It can provide useful information to markets. So please don't take this post as a criticism of this very fine study. Rather I'm saying that when policymakers in Washington decide whether to extend UI, or raise the minimum wage, they should look to market forecasts of the effect of policy. But first someone needs to spend the extremely small amount of money required to set up these prediction markets. I'm trying to do my part.

Most contemporary economists would find Hanson's blog to be a bit "weird." Economists of the 22nd century will wonder why everyone wasn't a Hansonian back in 2015.

CATEGORIES: Labor Market

   


Bryan Caplan

The Lone Collectivist

Bryan Caplan
When you're a normal member of your society, the appeal of collectivism is easy to understand.  Most people believe what you believe and enjoy what you enjoy.  So wouldn't it be great if society as a whole continuously celebrated your worldview and lifestyle?  When you fit in, walking on eggshells to spare minority sensibilities is most tiresome.

If you're weird, in contrast, the appeal of individualism is easy to understand.  Most people neither believe what you believe nor enjoy what you enjoy.  You already feel isolated and alone.  Public celebrations of popular values add insult to injury - especially when these celebrations are infused by the presumption that "These are the values that we as a society hold in common."

Strangely, though, weird people often hail collectivism and scoff at individualism.  Marxists do it.  Greens do it.  And reactionaries do it.  They're totally out of sync with their societies, but they nevertheless lament their societies' lack of community spirit and common purpose.  "A country shouldn't just be a bunch of people living next to each other" is a typical lament.  But weird collectivists rarely ask themselves, "What would happen if I couldn't live next to anyone who didn't share my identity?"  The unwelcome answer, of course, is that Marxists, Greens, and reactionaries would have to recant or relocate.

I'm tempted to say that this is just another mark against the claim that self-interest drives political views.  But I sense more sinister motives.  Namely: Weird collectivists have a three-step daydream. 

Step 1: Seize power. 

Step 2: Use that power to tendentiously claim to "speak for society." 

Step 3: Force their worldview/lifestyle on their recalcitrant societies in society's name

Think of these three steps as the revolutionary version of "Society, stop hitting yourself.  Stop hitting yourself.  Stop hitting yourself."

Perhaps this is overly negative.  But what else could the lone collectivist be thinking?  His true feelings about the community in which he resides must be, at best, mixed.  In a thousand ways, the lone collectivist's community keeps telling him, "You... don't... fit... in."  If he isn't fantasizing about a world where he can authoritatively speak in society's name, why else would the lone collectivist openly yearn for cohesive community?  Stockholm Syndrome?


   


David R. Henderson

A Lesson in Rhetoric

David Henderson

A lesson I learned early in life

On Facebook yesterday, an economist friend wrote that, in criticizing work by Thomas Piketty, he was claiming that Piketty is arrogant. He asked me (and others) if I thought that it was a good idea for him to make a joke linking Piketty's presumed arrogance with his being French and an intellectual.

I advised him against doing so. I said that if it is important to establish that Piketty is arrogant, then it is important not to undercut his case with nasty humor. He agreed and decided not to do so. (He gave me permission to use his name in this story but I have decided against.)

In thinking through this, I realize that I learned the lesson about not getting personal when I was a teenager watching my mother engage in a controversy in our small town of Carman, Manitoba. Indeed, because of that lesson, I would be inclined not even to call Piketty arrogant even if I believed it.

Here's what happened back in about 1965. Gary Loeppky, a friend of my late brother, Paul, and me, decided to grow his hair long. He was the first person at Carman Collegiate, a school with about 300 students, to do so. The principal of Carman Collegiate was a man named Frank McKinnon. McKinnon told Gary that he was expelled from school until he got his hair cut.

My mother, Norah Henderson, thought Gary was getting a raw deal. She wrote a letter to the editor of the local newspaper, the Dufferin Leader, making her case. She signed it "A Parent." I'm guessing the reason she didn't sign her name is that my father, Stan Henderson, was a teacher at that high school and she worried that her writing that letter would make it awkward for him. She probably also worried that it would make it awkward for her because, odds are, my father would have been angry at her.

Why mention that she didn't sign her name? It matters for the story, as you'll soon see.

A week later appeared another letter in that weekly newspaper from a prominent citizen of Carman named Harry Dunn. He argued against my mother's argument, saying that Gary should follow the rules and conform. If I recall correctly, he also said that if people didn't conform in such says, things would be chaotic. (There's a 30 percent probability that I'm imagining that last part, though.)

Two things made his letter interesting. First, my mother and Harry were friends and he probably had no clue that he was arguing against her. Second, he was very flamboyant. Although he was in his sixties, he rode around town on a bicycle. In my town of 1,800, that made you flamboyant in the 1960s. He also wore colorful scarves, the kind you just did not see on any other man. If you had asked almost anyone in town whether Harry Dunn was a non-conformist, you would have been laughed at for asking a question to which the answer was so obvious.

My mother sat down to type out (You remember typewriters, right? If not, then Google it) her answer. "She's going to nail him," I thought. "This is going to be great."

Except that she didn't. She did use his individuality to make her case. I remember one section of the letter saying something like "We all have our different ways of expressing our individuality. Some of us do it with our hair; others with other choices we make."

"Come on, Mum" (we used the British rather than the American version), I said, "Make it more direct. Say something like 'others with our choices of scarves.'"

"No," she said.

"How come?" I said, disappointed that she wouldn't stick in the knife.

"Two reasons," she said. "First, that's mean. And that's enough of a reason. Second, I want to convince not just the other readers but the person who will read this most closely: Harry. If I embarrass him, he's less likely to reconsider his views."

Postscript:
One other thing I learned from this experience was to keep a secret. The principal never knew, none of the teachers knew, the other students didn't know, and even my father didn't know, who wrote the letter.

CATEGORIES: Economic Philosophy

   


Bryan Caplan

The Bolshevik Czar

Bryan Caplan
stalin.jpg

From Stephen Kotkin's new Stalin:
Peasant expectations of a total land redistribution were intense, and the wartime tsarist government had helped spur them, confiscating land from ethnic Germans living in imperial Russia, which was supposed to be redistributed to valiant Russia soldiers or landless peasants. The army, on its own, promised free land to winners of medals, spurring rumors that all soldiers would receive land at the war's end.  Total tsarist government confiscations of agricultural land during the war - which was seized with minimal or zero compensation from some of the empire's most productive farmers, and contributed to the severe shortage of grain in 1916 and the bread riots in 1917 - amounted to at least 15 million acres.
From context, 15 million acres seems to be roughly 15% of contemporary Russian farmland.  I've long known about the many continuities between czarist and Bolshevik policy, but I never before heard that the last Czar of Russia spear-headed massive expropriation of farmers whose only "crime" was membership in a successful outgroup.


   


Not surprisingly, there has been lots of criticism of my claim that the Keynesian test of 2013 failed. Let me respond to some of the points:

1. I was accused of cherry picking dates, as I compared growth in the 4 quarters before and after the onset of austerity on January 1st, 2013 (when all the tax increases kicked in--the sequester came a few months later.) Growth rose from 1.60% in 2012 to 3.13% in 2013 (Q4 to Q4.) But my critics are correct that 2012 was an unusually slow year, so maybe a longer time period would be better. Here are growth rates over:

The previous 2 years: 1.65%
The previous 3 years: 2.04%
The previous 4 years: 1.47%
The previous 5 years: 0.59%
The previous 6 years: 0.81%
The previous 7 years: 1.05%
The previous 8 years: 1.33%
The previous 10 years: 1.91%
The previous 15 years: 2.51%

All lower than in 2013. (I ignored compounding to save computational time; the actual growth rates were slightly less, strengthening my point.)

So cherry-picking data isn't the issue. What if you go forward more than 4 quarters, say 2 years? The winter 2014 quarter was slow because of unusually bad winter; however both the spring and summer of 2014 were red hot. It looks like 2014 will also show decent growth when Q4 data comes in.

Another complaint is that the increase in growth in 2013 was not significant. There are actually two issues here, measurement error, and the problem of ceteris paribus. As far as measurement error, I've always acknowledged that the government probably overestimated the speed up in 2013, as other data like job creation shows a much smaller acceleration. But the point is that even the other data shows faster growth, which refutes the Keynesian prediction that growth would slow.

A better argument is that the speed up was within the normal year-to-year fluctuations reflecting all sorts of factors. To see the problem with this argument, we have to go back and look at the "test," and consider what the Keynesians were trying to show. It might be helpful to first look at a case where the RGDP data went as the Keynesians expected, Britain after the election of the Conservatives in 2010.

The Conservatives were accused of slowing the British recovery with a policy of "austerity." I use the scare quotes because Britain continued to run just about the largest budget deficits in the world during the early years of Cameron. But let's accept the Keynesian method of estimating changes in cyclically-adjusted deficits. One thing I noticed is that Britain had a very odd growth slump:

1. Britain continued to generate more jobs than many other developed countries.
2. Britain experienced relatively high and rising inflation.

Now I'm not arguing that Britain had no AD problem, I think it did have one. But given the jobs growth, surely some of the British slowdown in RGDP growth was due to productivity factors unrelated to low AD. Some have pointed to less North Sea oil output and less earnings from big banks in the City. Perhaps the "big government" policies of the previous Brown government slowed trend productivity growth a little bit. I don't claim to know all the reasons, but Britain would be a textbook case where you might want to question whether it was austerity, or some other factor that explained the RGDP growth slowdown. The ceteris paribus problem.

Nonetheless, the impression I got reading people like Paul Krugman and Simon Wren-Lewis was simply; Austerity ---> RGDP slowdown, case closed.

Suppose that if instead of increasing from 1.60% to 3.13% in 2013, growth in the US had slowed by an equal amount (to near zero). Let's be serious for a moment, and please answer this honestly. Does anyone think the Keynesians would have been saying, "Gee, that pause in the recovery can't be attributed to austerity, because the drop in RGDP growth is not statistically significant?" If any reader answered "yes," I hereby accuse you of intellectual dishonesty.

Now some want to argue that even if Krugman, et al, got this wrong, and also used sloppy techniques for considering UK and eurozone austerity, this doesn't definitively prove market monetarism is correct or Keynesianism is false. Sure, I'd agree with that. Personally, I prefer market tests. I like to look at how market prices respond to new information about monetary policy. And of course this is one reason why the Fed needs to subsidize trading in NGDP (and RGDP) futures markets. And I'd prefer looking at NGDP growth, whereas the Keynesians use RGDP growth.

My point is different; market monetarism passed the test as set up by Keynesians, using the Keynesian ground rules. Their own model failed their own test.

PS. Sometimes Keynesians refer to more systematic studies, but these generally involve lots of observations for regions lacking an independent monetary policy. Numerous researchers have found the correlation goes away if you exclude observations lacking an independent monetary policy. (Mark Sadowski, Kevin Erdmann, Benn Steil & Dinah Walker.)

PPS. I am certainly not dogmatic on this issue:

1. Fiscal stimulus that lowers inflation can be expansionary, even with monetary offset (VAT cuts and employer-side payroll tax cuts are two examples of fiscal stimulus that might work by encouraging monetary stimulus to raise inflation up to target.)

2. Supply-side cuts in capital taxation can boost real GDP growth.

3. Spending on wasteful things like military output can boost RGDP (at the expense of lower living standards) by encouraging people to work harder to try to maintain living standards.

4. If central banks are incompetent in a very specific way then fiscal stimulus might help. But not incompetent in the way the ECB was incompetent when they tightened in 2011 by raising their target rates. More (demand-side) eurozone fiscal stimulus in 2011 would not have helped.


   


Alberto Mingardi

The birthplace of democracy

Alberto Mingardi

Italian newspaper Corriere della sera has featured a piece on Greece that included an interview with Feano Fotiu, presented as the person responsible for "solidarity" (meaning the organisation of a parallel safety net, something in itself rather interesting) with Syriza.

So Fotiu explains the success of his party:

People were paralyzed by the guilt induced by the dominant narrative on the recession. North Europe and the Right painted us as lazy, corrupt Southerners, inferior to virtuous Germans. Greeks felt burdened by the moral responsibility for the national bankruptcy, until Syriza told us of the role played by bankers, of the deception of loans that enslaven us, of rapacious neo-liberalism. And we rose again.

I find this a phenomenal testimony of how democratic politics often works, all the more relevant because it is a (clearly self-righteous) confession. When people are forced to face problems and make tough choices, it can provide them with an easy scapegoat.

CATEGORIES: Eurozone crisis

   


David R. Henderson

We Are Lucky

David Henderson

One of my pleasures in travel in the United States and Canada is running into, and having short enjoyable conversations with, immigrants from Ethiopia. A little game I play, when I have an interaction with someone--typically in a cab, at a retailer in an airport, or in a hotel--who looks Ethiopian, is to say, "Let me guess where you're from." The person then waits and I say "Ethiopia." Typically the person breaks into a smile, happy to be identified correctly and the next question the person asks is almost always "How do you know?"

That happened this morning when I went down to the lobby at my hotel in Toronto to get a plate from the restaurant so I could eat my Chinese leftovers for breakfast. I asked the woman if she was Ethiopian, she beamed, and then she asked me how I knew. I answered that it was the combination of her high cheek bones and her particular color.

Incidentally, I sometimes run into people who seem to think it's wrong to comment on those things. The people I run into, though, are virtually never the people on whom I'm commenting. The whole thing reminds of one of my favorite passages from a book by Steve Sailer, a frequent commentator on this site, usually critical of what co-blogger Bryan Caplan is writing on immigration. In his book, America's Half-Blood Prince: Barack Obama's "Story of Race and Inheritance", Sailer has a section discussing Obama talking about why his skin is relatively dark for someone whose mother is white. Obama explains that it's because the tribe on his father's side was particularly dark. Sailer comments that virtually no one seems to be comfortable talking about this and then ends with this line (I might not get this exactly right because I'm in a hotel and not near my copy of his book.):

We're supposed to celebrate diversity--but not notice it.

Well, I both celebrate diversity and notice it.

I came back to my room with my plate and, after I finished breakfast, I decided to take the plate back to the restaurant because I thought of another part of my answer to why I thought she was Ethiopian. Fortunately, Yet (that's her name) was still there. I said, "It wasn't just your physical characteristics. It's your spirit. You smile a lot and you're happy. You seem to enjoy your job and appreciate that you live here."

She broke into an even bigger smile and then got serious. She said (I'll quote as accurately as I remember):

I tell my daughter that we are so lucky. I can have this coffee (pointing to the coffee machine) and it's delicious. I thank God that we are here. (Then she does a little jig.) We are not back there dealing with hunger. We aren't threatened by terrorists. We are lucky.

She's a more extreme version of me.


   


Bryan Caplan

Foreigner Day

Bryan Caplan
Robin Hanson proposed a Capital Day to complement Labor Day. In that spirit, I suggest a Foreigner Day to complement the world's ubiquitous National Days and Independence Days.  Here's how Robin explains the point of Capital Day:
[J]ust as on Labor Day we may pause to notice the busboy who would usually escape our notice, today let us notice the capital around us, without which we would be impoverished and uncivilized.   Let us also wonder if we take capital too much for granted.  Do we neglect the ways in which we may discourage its creation or maintenance?
Similarly, just as on National Days you take the time to appreciate your nation's virtues and accomplishments, the point of Foreigner Day is to appreciate other nations' virtues and accomplishments.  What can we learn from foreigners?  In what ways should we emulate foreigners?  Is it possible that we take foreigners for granted - or even mistreat them

Foreigner Day is not about self-hatred, but the quest for self-improvement.  Suppose your country is the best on Earth.  It would still be miraculous if your country were the best in every respect.  So why not examine the planet in all its variety and see how yours can improve?  And needless to say, half the world's countries are, by definition, worse than most countries on Earth.  Foreigner Day, for them, is a time to humbly look beyond their borders for solutions their own culture has failed to originate.

Foreigner Day is a simultaneously a celebration of both multiculturalism and Western civilization.  Like multiculturalism, it takes seriously the fact that almost every culture has something of value to share with the world.  But it also embraces Western civilization at its best: Universalism, or, as I call it, openness to awesomeness.

Robin suggests celebrating Capital Day half a year away from Labor Day.  In the absence of a better idea, I suggest celebrating Foreigner Day every January 4th, half a year away from the 4th of July.


   


In a recent post, co-blogger Bryan Caplan cautions against taking any recent event and glibly asserting that the event shows whatever the person using it wants the event to show. I agree wholeheartedly with that caution.

But that doesn't mean that we can't try to extract information from events. Bryan is, after all, a Bayesian, as am I. So whatever probability we put on something, we should allow recent events to affect that probability, even if only marginally.

So take the event that Bryan did not identify but essentially admitted that he was discussing: the Charlie Hebdo murders. (He didn't identify it because, as he said, he wanted his piece to be more timeless. His point applies whether we are talking about the Charlie Hebdo murders or other awful events.)

One person who has, with zero apparent doubt, proclaimed that those murders were "blowback," that is, unintended consequences of an interventionist foreign policy, is Ron Paul. I've known Ron Paul for years and have a fair amount of admiration for him. I think his performance in his debate with Rudy Giuliani in the 2007 presidential campaign was magnificent. But, and I do mean this as a criticism, Ron Paul is no Bayesian. He seems to have close to zero doubt about all his beliefs. I remember meeting with him in his office once and trying to persuade him that he was wrong in claiming that the Consumer Price Index understates inflation and that it's just the opposite. I got nowhere. There was not even a "I'll look into it." He was just positive that he was right and the fact that I was a Ph.D. economist whose work he respected did not matter.

It was no surprise, given that Ron Paul does think that blowback is an important effect of U.S. foreign policy, that he would also think it an important effect of French foreign policy. But given how non-Bayesian Ron Paul is, one should not take his word for it but should, instead, carefully weigh the evidence.

I have not carefully weighed all the evidence because I don't have a lot of the evidence. Neither does anyone else who is addressing the Charlie Hebdo murders.

But there is already some evidence of blowback.

Reason Foundation senior policy analyst Shikha Dalmia, who is a friend and whose work I generally admire, challenged Ron Paul's claim of blowback, writing:

This flies in the face of the declared motives of the attackers. The journalists -- whom the assassins identified by name before summarily executing them -- were not agents of French foreign policy. Their sin was that they violated an Islamic injunction against drawing pictures of the prophet -- and in unflattering ways to boot.

But my antiwar.com colleague Justin Raimondo responds as follows:
Al Qaeda, which took responsibility for the attack on Charlie Hebdo soon after the smoke cleared, has repeatedly declared they are retaliating against decades of Western intervention in the Middle East: this has been a staple of their propaganda since Day One. And Amedy Coulibaly, who worked in tandem with the Charlie Hebdo attackers in murdering four people in a kosher delicatessen shortly afterward, was quite explicit about his own motivation. While Coulibaly was holding the hostages, he answered when French radio station RTL rang the store phone, slamming the phone down but leaving it off the hook so that his rant directed at his victims was heard and recorded:

"'I was born in France. If they didn't attack other countries, I wouldn't be here,' [he said].

"In RTL's recording, the man purported to be Coulibaly tells the hostages that they are accountable for France's actions against Muslim militants abroad, in part because the hostages pay taxes and elect the government's leaders. 'But I am telling you, it's almost over. Militants are going to come. There are going to be more and more. They (France) need to stop. They need to stop attacking ISIS. They need to stop asking our women to remove the hijab ...' You pay taxes, so that means you agree...' with France's actions in Mali and the Middle East, the apparent gunman says in the recording."

Dalmia is right that the Charlie Hebdo people were not agents of foreign policy. But that's not enough of an argument. Much blowback is against people who are not agents of foreign policy. Virtually none of the New York or Pennsylvania victims of 9/11 were agents of U.S. foreign policy. But Osama bid Laden made clear that he was attacking them over his upset about U.S. foreign policy.

Do I know that the Paris attacks were blowback? I do not. Nor do Ron Paul or Justin Raimondo. Does Shihka Dalmia know that they were not blowback? She does not. We simply don't have enough evidence.

Bryan writes:

But the overwhelming majority of recent events are sound and fury, signifying nothing. Serious thinkers don't base their worldview on what happened yesterday, or last week, or last year. Instead, they endlessly ponder the totality of human history, a body of evidence that makes all recent events combined look small and hollow.

Each of those statements is correct. But that doesn't mean that we shouldn't also ponder recent events and try to extract the information from them that we can.


   


Tyler:
I say both men and women are understating their number of sexual partners.  Contrary to what is portrayed in this chart, I postulate an American male average of about four.  I do not agree with the common claim that American men will overstate their number of partners.
In the GSS, males report an average of 14.19, women an average of 4.76.*  If you mean the median, then males report a median of 3, woman a median of 2.  For men, 4 partners is the 62nd percentile.  So perhaps the results are compatible with your guesses.

P.S. The modality of monogamy is not an artifact of age.  Monogamy is modal for 25-44, 30+, and 40+, for both men and women.

Update: Fans have calculated the total number of partners for the main characters on Friends.  It's high.

* Excluding the "989 or higher" bin.

CATEGORIES: Family Economics

   


Ever since the spectacular implosion of Keynesian economics in 2013, I've seen increasingly desperate attempts to somehow salvage the model. In this post I'll outline some of the arguments that I run across, and explain why they are misleading. I hope to leave you better prepared for future debates at the water cooler.

During the course of 2013, real GDP growth was almost twice as fast as during 2012, and nominal GDP growth also accelerated. Today some Keynesian like to minimize the austerity program of 2013, acting like nothing of importance happened. Let's look at the record, starting with what Keynesians were saying in late 2012:

Responding to a letter by 80 CEOs published in the Wall Street Journal calling for budget cuts to reduce the deficit, 350 economists published a letter calling for job stimulus and growth instead.
That letter included this warning:
At the end of the year, we face a congressionally-created "fiscal cliff," with automatic "sequestration" spending cuts everyone agrees should be stopped to prevent a double-dip recession.
Only about 6 weeks later Congress raised the payroll tax by 2 percentage points. Income taxes were raised at the same time. A few months later spending was slashed under the "sequester." By April 2013, Keynesians like Mike Konczal and Paul Krugman were calling the austerity a "test" of the market monetarist proposition that fiscal austerity would be offset by monetary stimulus.

But the double-dip recession never happened; indeed growth sped up in 2013. I haven't seen so many Keynesians get things wrong since that 1981 letter attacking Thatcher. So what could they possibly say in response? Here are things I often see in my comment section:

1. People claim that growth didn't speed up in 2013, as compared to 2012. The trick here is that they use calendar year over calendar year growth rates, which means 2013 growth heavily reflects the very slow real GDP growth in the second half of 2012, before the austerity was imposed. Economists generally agree that when you have a shock that occurs at the beginning of a calendar year, you should look at growth over the course of the year (say Q4 to Q4), not the average GDP in 2013 compared with the average GDP in 2012. Using the correct method, RGDP growth accelerated substantially, from 1.60% in 2012 to 3.13% in 2013. That probably overstates things, but growth certainly didn't slow.

3. The second trick is to downplay the amount of austerity. One trick is to use total government spending, including state and local spending, and then argue that austerity began earlier. But state and local spending is no more relevant to federal decisions over fiscal policy than is corporate investment. From the perspective of federal government policymakers, state and local spending and private investment are equally endogenous. Don't be fooled by the term "G", what matters is federal spending. State and local spending may or may not affect growth, but it's not fiscal policy.

4. Another trick is to look at government output, ignoring taxes and transfers. This is often justified because the "G" in the GDP formula is output, not spending. Alternatively, some point to new Keynesian models featuring Ricardian equivalence to justify focusing on government output. But 99% of Keynesians don't believe in Ricardian equivalence, and they constantly complain that benefit cuts and payroll tax increases will slow aggregate demand. So it's a bit late in the day to suddenly argue that taxes and transfers don't matter.

5. Pick up any textbook and they'll tell you that Keynesian economics is about deficit spending. If you look at the official deficit figures you see an enormous drop in the deficit, from $1,087b in fiscal 2012 to only $680b in fiscal 2013. But it's even worse for the Keynesians. Fiscal years run from October 1st to September 30th. But the 2013 austerity did not begin until the sharp tax increases of January 1st 2013, 3 months into the 2013 fiscal year. I tried to estimate the deficit for the calendar 2013 from this source, and came up with $1061b in 2012 and only $561b in 2013, an astounding drop of $500 billion in just one year. That's austerity! Yes, the numbers that matter are the cyclically adjusted figures. But no one knows exactly where we are in the business cycle, and in any case the growth rate is not high enough relative to trend for the cyclically adjusted figures to be all that different from the unadjusted figures under any plausible corrections. There is no doubt that 2013 was a year of austerity (or at least dramatically less stimulus, if you are a conservative who cannot stomach calling $561b deficits "austerity.")

Don't be fooled by Keynesian excuses. They are the ones that warned about the effects of 2013 austerity. They are the ones who said it was a test of market monetarism. We should take them at their word.

CATEGORIES: Fiscal Policy

   


Shall we claim the word "liberal" back? David Henderson has already written on Dan Klein's gallant effort to regain the word "liberal" for the "Adam Smith liberals" (see here and here).

Klein has a new interview with Jeffrey Tucker, which is well worth listening to. Klein touches upon many of the key concepts surrounding liberalism, and takes a very sane and sober route, by referring to classical liberalism as the tradition by which those who want to interfere with people's lives and stuff bear the burden of proof. This is a simple and lean definition.

Whether his battle is going to be at all effective, it is difficult to say--and there is room for pessimism.

But I don't think Klein's efforts aim, at least in the short term, at changing the way in which the average American uses the word "liberal." We, Klein's liberals, are, so to say, "leave us alone" liberals, in a world in which liberalism is the quintessential "mess with us" philosophy. It's quite a bit of confusion.

What I think Klein's efforts aim at, is actually challenging the idea that contemporary social democracy (which is basically what now in the U.S. people intend with "liberalism") is the ultimate result of a gradual enlargement of the sphere of individual rights. That is, contemporary liberalism is not the ultimate outcome of the fights of "real" liberals in other eras.

Famously Schumpeter noted that "as a supreme, if unintended, compliment, the enemies of private enterprise have thought it wise to appropriate its label". I think Klein's perception is that the compliment was intended: social-democrats wanted to be associated with that allure of tolerance, open inquiry, taste for experimentation, and reform that the tradition of free enterprise, "leave us alone" liberalism emanated.

The idea of massive income redistribution doesn't necessarily evolve out of the idea of individual rights: that's the point Klein is making in trying to gain the word "liberal" back, and that's a very important one.


   


I'm traveling this morning from Pennsylvania to Newark Airport to Toronto and so I'll be brief.

A friend on Facebook recently cited this quote from Frank Herbert. I had not heard it before:

All governments suffer a recurring problem: Power attracts pathological personalities. It is not that power corrupts but that it is magnetic to the corruptable. Such people have a tendency to become drunk on violence, a condition to which they are quickly addicted.

I do think power corrupts also--these are not mutually exclusive--but Herbert makes a good point. Friedrich Hayek makes a similar point in his chapter "Why the Worst Get on Top" in The Road to Serfdom. Hayek quotes Frank Knight. Hayek writes:
Neither the Gestapo nor the administration of a concentration camp, neither the Ministry of Propaganda nor the S.A. or S.S. (or their Italian or Russian counterparts), are suitable places for the exercise of humanitarian feelings. Yet it is through positions like these that the road to the highest positions in the totalitarian state leads. It is only too true when a distinguished American economist concludes from a similar brief enumeration of the duties of a collectivist state that "they would have to do these things whether they wanted to or not: and the probability of the people in power being individuals who would dislike the possession and exercise of power is on a level with the probability that an extremely tender-hearted person would get the job of whipping-master in a slave plantation."

I've sometimes heard public choice economists say, in justifying their use of a self-interest model to explain the behavior of politicians and bureaucrats, "Politicians and bureaucrats are just like the rest of us." No they're not; not on average.


   


Return to top
Most Recent Entries
Alberto Mingardi
David Henderson
Alberto Mingardi
Bryan Caplan
Scott Sumner
Bryan Caplan
David Henderson
Bryan Caplan
Alberto Mingardi
David Henderson
Bryan Caplan
Blogroll
OUR REGULAR READING:
Tyler Cowen and Alex Tabarrok
Russell Roberts and Don Boudreaux
Greg Mankiw
Scott Sumner
Robin Hanson
David Friedman
Mark Thoma
Megan McArdle
Matt Zwolinski, et al
Jason Kuznicki, Gene Healy
Daniel J. Mitchell, Ilya Shapiro, et al
Reason Online
Nathan Smith, et al
John Cochrane
James Hamilton
Bob Murphy
Karl Smith
WE TRY TO KEEP UP WITH:
Stephen Bainbridge
Stan Collender, Pete Davis, Andrew Samwick
Brad DeLong
Evan Goldstein
The Economist
Nicolai Foss, Peter Klein
Lynne Kiesling
Steven Levitt and Stephen Dubner
Mike Rappaport and Michael S. Greve
Wall Street Journal
Mark Steckbeck
John Taylor
David Tufte
A FEW MORE:
Chris Dillow
Peter Gordon
Heritage Foundation
Stephen Karlson
Stephen Kirchner
History News Network
Kyle Markley
Michael Munger
Craig Newmark
William Parke
Virginia Postrel
(was Prestopundit) Greg Ransom
David Warsh
Return to top