Arnold Kling  

Unpresidential Remarks

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Lectures in Macroeconomics, No... Lectures in Macro, No. 2...

Tyler Cowen writes,


If our next president seems flip or overconfident, observers will be skeptical above all else.

Tyler mostly talks about idea traps, a notion that I think of as Bryan's.

Let me make some remarks that are sufficiently flip to assure Tyler that I should never be president.

1. Firms are laying off workers that they probably should have laid off months ago, and they should not hesitate to do so.

2. It is ok for consumers to cut back on their spending; they should not feel they need to go out and spend to "help the economy."

3. Many home buyers are defaulting on their loans, which results in foreclosures, and government should not interfere with that process.

4. In many parts of the country, it makes sense for home builders to curtail activity until excess supplies of houses are absorbed.

5. Auto companies need to renegotiate their obligations to retired workers or go into bankruptcy and let the courts sort it out.

6. State and local governments need to renegotiate their obligations to retired workers or put the matter before legislative bodies and make hard choices.

7. Banks that are definitely insolvent need to be merged with healthy banks or closed by the FDIC.

8. Banks that are possibly insolvent, depending on the value of illiquid securities, need to be placed under close regulatory supervision.

9. New activity by Freddie Mac or Fannie Mae should be frozen. If banks don't want to make mortgage loans, then teenagers don't want to flirt.

10. The Treasury does not know what it is doing with its $700 billion in spending authority, so it should stop doing it.

Once the various excesses have been eliminated from the system and markets are back in balance--especially housing--we'll be fine.


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COMMENTS (30 to date)
adina writes:

I agree with all of your statements, save for the notion that state and local governments should renegotiate obligations to state or local workers. Most of your principles derive from the assumption that a contract is a contract, and therefore must be honored. Governments ought to avoid crafting such foolish agreements again, but must still fulfill the obligations it promised to people who accepted their jobs with the understanding that such agreements would be honored.

Chris writes:

Adina, not that Arnold left an 'or' option. Make difficult choices.

Steve Sailer writes:

Well said!

Todd writes:

Arnold Kling for President!

Brandon Berg writes:

Adina:
The problem with that line of reasoning is that there's no way to make "government" pay the promised benefits. We, as taxpayers, are the ones who get stuck paying for it. I was not a party to those agreements, and I see no reason why I should pay for the irresponsibility of a government I never voted for.

If cutting back on benefits causes some financial hardship for retired members of government employee unions, then let that be a lesson to those who would deal with the devil.

Jonathan Walz writes:

The last seven days produced two notable flourishes of rhetoric. The first was by Eric Posner in response to the Block/Caplan contest over FRB in which he wrote:

"if every contract where the probability of nonperformance is greater than zero were considered fraudulent, we would have no economy"

And then there is this gem from professor Kling.

New activity by Freddie Mac or Fannie Mae should be frozen. If banks don't want to make mortgage loans, then teenagers don't want to flirt.


Tyler Cowen writes:

I agree with most of your list...

Larry writes:

Let's also ...

encourage international trade, not restrict it;
eliminate one -- at least one -- federal program or regulatory agency that is not working or is no longer needed; and, above all else, maintain the full faith and credit of the USG; if that is ever lost, then all bets are off and there will be no recovery.

Lise writes:

The NYT should have asked for your advice rather than Tyler's, Mankiw's, etc.

Ruy Diaz writes:

Arnold, alas, could not be elected street sweeper if street sweeping were an elected office...

El Presidente writes:

Brandon Berg,

"I see no reason why I should pay for the irresponsibility of a government I never voted for."

That's part of the burden of citizenship. In that sense, many people see no reason why they should fight in wars they didn't choose, yet we have conscription. If we allowed individuals to pick and choose which collective obligations they would honor, we wouldn't have the ability for government to establish contractual agreements. The 49% who didn't get their way might simply stop paying their taxes. That would require nearly absolute consensus of the electorate to do anything, and that support would have to be maintained indefinitely. Would you work for an employer whom you could not trust to pay you the negotiated wage? Trust me, you don't want to reduce the incentives for government workers to perform. They're already pretty low.

Alternatively, why shouldn't you be excluded from the benefits of the fortuitous decisions governments make if you have not voted for them?

mjh writes:

El Presidente:

In the U.S., thanks in part to Milton Friedman, we no longer have conscription.

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

I suspect that taxation would be a better example to make your point.

That being said, I suspect that we'd get significantly better policies if only those who wanted them were funding them.

ThomasL writes:

adina,

I agree with your sentiment, but it does pose an interesting question. What is the right thing when it becomes impossible to keep a promise? I do not mean inconvenient to keep it, or difficult to keep it, or straining to keep it, or any other lesser degree: I mean plainly that it cannot be kept.

Some of these state and local governments are approaching that possibility. They have a choice, pay their retired police as promised, but no longer pay current police officers. Pay their retired school teachers, but pay nothing to the current ones. Pay the retired state officials, but no longer fix the roads.

Are these reasonable? I pose this as a real question, not a conclusion. Is it better to keep the obligations to retired workers even if it means abandoning all the services that state was supposed to be performing? (For the moment I am skipping whether the state should even be involved with things like education, as that isn’t directly to the question.)

El Presidente writes:

mjh,

In the U.S., thanks in part to Milton Friedman, we no longer have conscription.

That's an odd statement. We still have selective service registration requirements. (http://www.sss.gov/) Whether or not we are actively drafting people is not the same as whether or not we reserve the option to. I was referring to the latter, and I believe we would exercise that option if we were encountered with a need for so many soldiers. There is certainly nothing in law which precludes it. Besides, you can't very well call it an "all-volunteer" force when we are exercising extra-contractual prerogatives by administering stop-loss orders. That's conscription by any other name. It's just targeted conscription.

El Presidente writes:

mjh,

That being said, I suspect that we'd get significantly better policies if only those who wanted them were funding them.

If only that was practical.

rjlee writes:

I agree with you too....you should never be president.

When youre a tenured professor writing on a blog for a living, its easy to say companies should just lay everyone off.

I love all these great long term solutions toward equalibria. Good thing we'll all be dead by then.

Walt French writes:

"Once the various excesses have been eliminated from the system and markets are back in balance--especially housing--we'll be fine."

But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again. -- John Maynard Keynes
And ditto for politicians. I totally agreed with McCain that most of the jobs in Detroit were toast. Ditto his comments in Iowa (!) on ethanol. But I think his failure to posit a creative spin ("... and we're gonna create BETTER jobs than ever before!") and full response were alone enough to justify electing almost anybody else. If we bother to elect a President, why not one who we think will guide the Republic through tempestuous times?

Ivan writes:

Kling for President!

SheetWise writes:

When unions want to negotiate benefits for their members, it should be up to the unions to provide those benefits -- the state should pay it as a fixed cost. Let the unions fail their members so the state isn't put in that position.

Lordan writes:

rjlee,

you don't have a slightest idea about economics. That's the key. Government should not and cannot supersede markets. Government is not profit institution that can simply step in and give money to someone who needs it. In order to automobile companies or homeowners or whoever else to be "saved" from bankruptcy by the government someone must pay for that, and the only people who pay for government "charity" are taxpayers. Companies should lay off those whom they do not need anymore. Or you think that you and I should pay through taxes for the jobs that are not economically viable. If you want to do that go ahead, but don't expect from me to cover the other's people business failures and to save them from facing consequences of their choices.

Arnold would be great president, because he understands economics and is not willing to participate in demagoguery contests. We had such presidents as him all over the world many times. Margaret Thatcher was one of them. Demagogues and ignorants such as you castigated her for "reckless conservativism" and letting people die, but she transformed a "sick man of Europe" into the one of the leading economic powers of the world, and none "died", but at the contrary, economy had thrived, and overall standard of living dramatically improved. Socialist demagogues as Obama would let people "die" by denying them economic perspective and chance by taxing, regulating, intervening, spending and "organizing" and killing golden goose that way, and not people like Arnold.

bad dog writes:

Lordan:

If only life were like an economics textbook and we got rid of government distorting all our pretty supply and demand graphs, life would be perfect and we'd all be rich. Unfortunately, life is not like a textbook. (If it were, we'd have no government and live in an anarchic paradise.)

Markets are not only imperfect, they are dangerous to nations and individuals, and, being an individual and not a corporation and not an economics graph, I do mind if their volatile fluctuations destroy my life. So I will support monetary policy I believe is wise and mitigates volatility and object to bad policy, which tends, more often than not, to involve government letting the market do its own thing--and I think we can have that conversation without the snark about who gets economics and who doesn't.

- bad dog

Nathan Smith writes:

11. Grant an amnesty to all illegal immigrants currently residing in the United States, to encourage them to make long-term investments such as buying homes. Also, double or triple the number of visas so that more immigrants will come and absorb the surplus housing stock.

mjh writes:

El Presidente:

I'll concede the point on conscription. Not because I agree but because it's not that important.

What I do want to talk about is this:

I said:
That being said, I suspect that we'd get significantly better policies if only those who wanted them were funding them.

You responded:
If only that was practical.

I agree that it's politically impossible to make this happen. But what it looks like is not terribly complicated. It looks exactly like private markets.

For more details see David Friedman

mjh writes:

Lordan:

I like the way that Warren Meyer put it

Willful ignorance or emotional rejection of the well-known precepts of [economics] is at least as bad as a fundamentalist Christian's willful ignorance of evolution science (for which the Left so often criticizes their opposition). In fact, economic ignorance is much worse, since most people can come to perfectly valid conclusions about most public policy issues with a flawed knowledge of the origin of the species but no one can with a flawed understanding of economics.

Francisco Aboim writes:

Based on that platform, i´d definitely vote for Mr. Kling. Not that you would actually be able to get any of that done. Implementation of such policies is subject to "political willpower" and, though charismatic, I doubt there would be any motion in favor of such a platform. Albeit, as a thought experiment, it is pretty interesting to imagine how things would turn out.

I believe that many policy makers drift from their academic framework while in positions of actually implementing such policies not only because of the reason cited above but for fear of what may go wrong (on a personal and national level). Such great responsibility could cause, therefore, a certain inertia in the realm of economic progression.

HPS writes:

mjh:

Nice quote, but what is this supposed to mean? I know, or at least can be pretty sure, that evolution works. I can see it in real evidence. I'm not so sure about economics. Where is the evidence? There is no such thing as a free market and there may never be one.

So unless you can show me an economic theory that explains what we have today (and mind you, not just what we see in the US but pretty much any economy worldwide) and provides evidence on its transition to get there and is based on very few universal axioms, I will regard the analogy as flawed and rather misleading.

Until then I will also continue to believe that *some* regulation by a Government will be necessary to provide safety to citizens. And that, incidentally, is also part of standard economics books today.

El Presidente writes:

I agree that it's politically impossible to make this happen. But what it looks like is not terribly complicated. It looks exactly like private markets.

I would be in favor of user fees for the vast majority of government services if you would be in favor of highly progressive taxation and a negative income tax bringing everybody up to 50% of median income. Deal?

Lordan writes:

bad dog,

are you suggesting that people in government know better how to allocate capital and labor than markets, that government intervention is "perfect" unlike markets? If so, why not to impose full socialism, with government ownership in the means of production, and government control of all prices and wages? If people in government are so smart than they can substitute market in some cases, than we do not need market altogether, let us abolish market and impose socialism. Do you think that people in government know better what are the "real" demand and supply curves in the economy? Someone (something) must determine supply and demand for goods and services. Either that would be profit and bankruptcy (prices mechanism) or politicians via orders and handouts. There is no third possibility.

Monetary policy isn't wise, it is at core of present depression of trade. By encouraging more risky behavior and more unjustified leverage by artificially lowering interest rate, it is substantial contributor to economic crisis. In pure gold standard and free banking system there is no problem of business cycle (please don't mention XIX century America because 1. depressions were milder in XIX than in XX century, 2. American banking system even then was far from free, due to many bank restrictions in state legislations).

Lauren writes:

Hi, Lourdan.

I was looking to you to do better for your case to bad dog.

When you said

(please don't mention XIX century America because 1. depressions were milder in XIX than in XX century,...)
you've gotten your point 1 entirely backwards.

Recessions and depressions were in fact routinely more drastic, extreme, and horrific in the 18th, 19th, and early 20th century than they were in the last half of the 20th century. One of the most important consensus observations by economists since the 1970s has been that business cycles in the last half of the 20th century have become more mild and of shorter duration than they were in the previous hundred years.

Why is this current financial situation more extreme? That's the big question after so many years of economists' noting that business cycles have diminished in magnitude and duration.

Ruling out discussion of the last two centuries when there have only been a few dozen business cycles, much less only a few extreme business cycle conditions mostly dating to the 1800s, is not helpful or conducive to productive discussion. You might as well say that no one should look at medical or physics facts from before the 1900s. Ruling out the factual and analytical discussions by economics analysts such as Friedman and Schwartz and others who looked at the extreme situations in the early 20th and late 19th centuries, is not conducive to productive debate about the current extreme situation.

An important fact has been that every economist who has noted that diminishment in the duration and extremity of recent business cycles has been very clear that there is no satisfactory explanation about why that might be the case. All serious economists have wondered at why the amplitude and duration of business cycles appear to have diminished since the end of WWII. We have only a few dozen instances to study. This recent instance is amazing in its extremity--though maybe it is too soon to tell, because extreme behavior in the stock market has not been perfectly correlated with extreme behavior of the business cycle. Is it something entirely new? Does it fit into other models that have not been seen since the government interventions of the early 1930s or 1970s? Is it a resurgence of previous extremity in business cycles? What caused the Great Depression and previous extreme recessions and depressions, which were common till the end of that event and maybe even until the 1970s?

To cut off conversation about the empirical facts of the 1800s and 1900s in the midst of the recent hypotheses finally being violated is not reasonable. It hurts your case if you say to a challenger that he might not address you on an important point by dipping into whatever sparse history is available. It further hurts your case when you invert or mis-represent facts that are well-known. When facts are scarce, don't tell people to not talk about them.

dearieme writes:

Why not introduce an "illegal immigrant" tax to fund the pensions of all those local government employees?

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