David R. Henderson  

Tea Parties Never?

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Notes on Masonomics, 1: Reaso... Single-Lever Macro...

I've decided not to go to any of the tea parties this Wednesday. My reason is that some of the people who have been advertising them don't agree with me on everything. And some of the people who will be going there didn't protest high government spending when George W. Bush was the perpetrator. I must keep myself pure. I will go only to events that are sponsored by, and attended by, people who are as purely libertarian as I. So what if that means we can meet in a small living room and accomplish zero.

And, since I'm after purity, I'd better stop attending bi-monthly meetings of the Peace Coalition of Monterey County. Although most of the members treat my organization, Libertarians for Peace, quite fairly and the vast majority of them are very nice people, I, horror of horrors, heard some of them say the other day that they favor single-payer health care. Just being around those views might corrupt me. And while I'm at it, I'd better cancel my memberships in the ACLU and the NAACP. They aren't very libertarian either.

Let's face it. Paul Krugman knows best. After all, he won the Nobel prize and we never hear anything foolish or misleading or disingenuous come out of the mouth or off the pen of someone who won the Nobel prize, do we?


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CATEGORIES: Fiscal Policy



COMMENTS (43 to date)
Daniel Klein writes:

Nice.

Always a complex matter, drawing the "circle of we."

JP writes:

David, when are you going to realize that all honest, intelligent people are liberal Democrats?

Youri_Kemp writes:

Hi David,

I understand you loud and clear. Bush made it acceptable for the Dem's to go on a bigger spending spree--they use that are their argument. And, really, how can any conservative argue against it?

Best,

Youri
http://globalviewtoday.blogspot.com/

Bob Murphy writes:

Uh oh, I was agreeing with you until about halfway through when I realized (for sure) that you were being sarcastic.

(Such an "aha" moment occurred much earlier when I was reading A Modest Proposal. I bet Irish people taste bland anyway.)

I'm sure millions of moderately-inclined Americans will agree with David Henderson and show up for the parties and have a great impact on BHO's policies! I'm sure those millions will not in the least be turned off by "John Galt" or "No Taxes" signs and will not bolt for the exits.

I'm also sure that standing on a street corner waving a loony sign is the absolute best way to oppose BHO's policies.

P.S. See my name's link for more on the "parties" as well as something that would be much more effective.

Zhao W. writes:

Uh oh, I was disagreeing with you until about halfway through when I realized (for sure) that you were being sarcastic.

(The continental convention was not unlike.)

Troy Camplin writes:

Got to love irony. The Krugman piece was truly pathetic. At least people like DeLay are honest in their opposition to evolution. The Left lies about being pro-science, including pro-evolution, but if you present any sort of evolutionary explanations for human behavior, they reject it immediately. Which is worse? Openly rejecting evolution, or saying you accept it, but rejecting everything it actually says?

Party Pooper writes:

Are there really going to be Tea Parties with many participants? It seems difficult to believe Republicans could organize such events. Is anyone planning to poll the participants to find out how many refuse to vote, vote Libertarian, or are unaffiliated with any political party?

SydB writes:

Krugman's column this morning is great. The GOP is a failed party. Tea parties, hyped by that yellow journalism tabloid fox news, are yet another pathetic example of GOP style and spectacle over substance. In evolutionary terms, the GOP is a dinosaur unable to adapt to a changed environment.

Certainly you've got better things to do with your time than to hang out with the above.

David S writes:

I agree and disagree. Of course, we shouldn't only join coalitions with people who agree with us 100%. You've got to find allies wherever they are and work with them to effect the changes you all find desirable.

On the other hand, if you're going to do this, I think it makes sense to see who's positioned to make the most effective claim on the resulting narrative of the protest. As varied as the preferences and ideologies are of the folks attending the tea parties, talking heads are going to spin the narrative that each individual at the protests was agitating for said talking head's agenda, which will likely encompass reasons that you didn't have when you showed up. To me it makes sense to at least consider as a possibility that, pure as your motives might be in showing up, you will end up giving fox news wackos more leverage to argue for their totally unhinged views because people are going to (however wrongly) ascribe the views of the people with the megaphones to the people on the streets.

guthrie writes:

Fie, Bob Murphy, and for shame! You ought to know better with such a name! We Irish are as zesty as they come!

Walt French writes:

Gosh, I'm confused: how do the objectives of Monterey Libertarians for Peace differ from other peace groups in the county? (I have some friends (and Friends) who could find alternatives for you, if Peace is the emphasis.) Or is the emphasis on not having Government actually do anything for peace, such as invade Somalia or Iraq?

When you went to the Tea Parties (must've been fun, I'll look for some here in SF), what cause were you advancing? Rejecting the Laws and Taxes of the United States as immoral and illegitimate, due to being imposed on you without your getting all the votes?

"Inquiring Minds Want to Know!" ®

BT writes:

"The Left lies about being pro-science, including pro-evolution, but if you present any sort of evolutionary explanations for human behavior, they reject it immediately"

Please note that in evolution individuals do not evolve only populations evolve. Changes observed are generational and often at very slow rates.

H. writes:

The Left lies about being pro-science, including pro-evolution, but if you present any sort of evolutionary explanations for human behavior, they reject it immediately.

Examples, please. Xenophobia? Gender roles? Yes, we have flawed brains and instincts. I don't think that liberals reject the explanations, they just don't accept using them as a justification for discriminatory policies etc.

Which is worse? Openly rejecting evolution, or saying you accept it, but rejecting everything it actually says?

Rejecting evolution is worse, no question. Liberals have taken the first and most important step by accepting a basic tenet of modern science. It's a good start.

Snark writes:

I don't understand why PK resonates with so many. I suppose it's because he appeals to the basic instinct of those who lack political objectivity. His article seems awfully shallow and sophomoric for a nobel laureate.

Methinks writes:

Examples, please. Xenophobia? Gender roles?

Gender roles? Give me a break. The left is as eager to define my role as a woman for me as the far right. A better example is that humans respond to incentives. The left completely ignores this little fact.

Please note that in evolution individuals do not evolve only populations evolve. Changes observed are generational and often at very slow rates.

Well, technically, evolution is the changing gene sequence of a population over time and does not describe behaviour. But, if we look at what survived, the behaviour associated with survival is responding to incentives. BTW, I don't know what the poster meant exactly but I don't see in his post where he was referring to individuals. For the left's policies to work, there would have to be no incentive effect associated with higher taxation. Since, as you note, changes happen at very slow rates (slower than the Soviets would have wished and they couldn't seem to breed the trait out over several generations), we would expect a Nobel Laureate economist to recognize the inevitable results of altering incentives.

If I didn't know Krugman was a Nobel Laureate, I would have thought he is a high school dropout raised on a Kibbutz. On second thought, if he'd been raised on a kibbutz he wouldn't have been a socialist/fascist (don't bother flaming me for the use of those terms because you don't like them - I'm immune to all pleading and truth is truth no matter how hard it is to bear).

John Pertz writes:

We always get these types of articles when a former ruling party is out of power. 5 years ago the Economist published a book called "The Right Nation" where America was supposedly a right wing country where the left was dying. I thought parts of the thesis were interesting but on the whole the case was largely over blown.

I tend to think there is nothing special about either party. Obama largely rode into office because of the failure of the Bush administration. It seems more than anything that the political party in power seems to attain power only because its opposition shoots itself in the foot.

Both political parties support policies that are so foul. Krugman's mention of Delay is just a small taste of the insanity that both parties support. I mean what does Krugman say about the democrats involvement with the public schools? I mean so much hatred and scorn for the Republican party however, he cant write one editorial criticizing the democrats god awful-puke stained record on education. There arent enough nasty adjectives in the english language to properly account for how foul the democrats are in that regard.

I mean its kind of funny to poke fun at the Republican party for being medieval in so many ways but at the same time how do we account for the Democrats blind spots which concern much of their economic and educational policies. Its not like they are so hot either.

Troy Camplin writes:

The Left subscribes to the blank slate theory. Thus, the Left rejects evolution as an explanatory force for human behavior. The Left consistently reject the discoveries of sociobiology and evolutionary psychology. They do so because what they discover about human behavior and instincts goes almost completely against the Left's social and economic programs (whereas they are inconvenient merely for the Right's societal beliefs).

Let me rephrase my question:

Which is better? A person who disagrees with you openly, or a person who lies to you about supporting you, but really disagrees with you? The Left don't believe in evolution in fact. They only give lip service to belief in evolution. And if their world view is any indication, they don't believe in systems theory, game theory, or information theory, either.

SydB writes:

Wow. Too many strawmen here. The left doesn't believe in blank slate. The left believes in cognitive capabilities that are combination of nature and nurture. But the left believes that much of life is luck and that the unfortunate should be lent a helping hand--and that the government, an emergent property of collections of humans organisms--is one way to help them. The left also believes that evolution is demonstrating the unfit nature of conservatives as they are unable to adapt to new conditions.

H. writes:

For the left's policies to work, there would have to be no incentive effect associated with higher taxation.

No. There is a trade-off between economic efficiency (or growth) and equality, for example. Liberal economists generally accept the concept of trade-offs. Read any mainstream economics textbook.

Also, many liberal economists promote some taxes because they affect incentives. A carbon tax is a good example.


They do so because what they discover about human behavior and instincts goes almost completely against the Left's social and economic programs

Then why do the vast majority of Americans and Europeans support left-of-center policies? Clearly there is something about the free market that goes against people's instincts (such as fairness).

By the way, is Scandinavia going to collapse any time soon? Have they already stopped going to work over there? If not, why not? They have very high taxes.

Troy Camplin writes:

SydB, I don't know what Leftists you're hanging out with, because none of the ones I do believe any of those things. Either that, or you are buying into their rhetoric.

H, there is a difference between what we were evolved to believe and what is actual reality sometimes. The free markets actually create progress, prosperity, and fairness. But it does so completely anonymously. Humans are used to humans affecting them, not impersonal forces. Thus, we are more comfortable with humans controlling us. That is why people support the Left and oppose free markets. Not that free markets are in fact fair, but that we perceive people as being more fair than impersonal forces -- it just so happens that evolution did us no favors there when it comes to living in a modern day society rather than as isolated tribes. The good news is that we are also educable, so we can learn about how economies actually work, what they actually do, and how they do in fact create fairness that human-designed societies can never achieve, no matter how good the intentions. POliticians of all stripes exploit this discomfort to get people to support policies that will actually hurt them.

MikeM writes:

Kudos Dr. Hendorson for standing up to a nobel laureate economist who has nothing better to do than to beat up scarecrows in his bi-weekly column.

I wish more economists who take the Rogerian route day in and day out would step up and condemn Krugman's invective. If only we could be so lucky.

Methinks writes:

No. There is a trade-off between economic efficiency (or growth) and equality, for example. Liberal economists generally accept the concept of trade-offs. Read any mainstream economics textbook.

That is because the left looks only at the equality of output - it never ever looks at the inputs. They completely disregard the unequal skill, risk, capital and innovation necessary to become more productive. Instead, they focus solely on equality of outcome and arrogantly profess to know the correct trade-off for everyone in the economy.

Then why do the vast majority of Americans and Europeans support left-of-center policies? Clearly there is something about the free market that goes against people's instincts (such as fairness).

Fairness? You must be joking. Is it fair to confiscate the product of the labour of the most skilled, hard working and innovative risk takers? The reason for the support of the leftist policies is not that difficult to figure out. People want more than they are willing to work for. The easiest way to achieve that is to use government to steal from the most productive. It has a limited effect, though. The productive tend to be the most mobile and that's why Sarkozy was forced to campaign in London. Every country which has installed these leftist policies of "fairness" has seen a brain drain. The people who are left, of course, want more leftist policies.

H. writes:

The free markets actually create progress, prosperity, and fairness.

Free markets are not the best and most efficient way to achieve those goals. We need to correct externalities, adjust income distribution etc.

The good news is that we are also educable, so we can learn about how economies actually work

That's why all respectable economists are in favour of a mixed economy and support government interventions.

Those who don't know how economies actually work (i.e., non-economist libertarians) think that Obama's "socialist" tax policies will destroy capitalism and turn America into a third world country.

Boonton writes:

That is because the left looks only at the equality of output - it never ever looks at the inputs. They completely disregard the unequal skill, risk, capital and innovation necessary to become more productive. Instead, they focus solely on equality of outcome and arrogantly profess to know the correct trade-off for everyone in the economy.

The flaw in Methinks's thinking (and I don't mean to imply there's only one) is the unwarranted assumption she makes that unequal results can all be attributed to differences in skill, risk, capital, 'effort' etc. Basically there are two sets of things that explain differences in output. Things that we think of as justified and things that aren't. No one has a problem with the idea that putting more effort into something yields more output (i.e. the waitress that logs 12 hours a day gets more tips than the part time one who logs only 3). Likewise no one objects to different skill levels yielding different outputs (the world's greatest surgeon commands more than one who does nothing but basic nose jobs). Ditto for the other things she mentions.

On the other hand, people do consider certain things unfair in determining output. For example, if someone has a company that wins all sorts of contracts because his father is a judge we tend to think of that as unfair....not simply as a type of 'capital' even though you could analyze it as such.

Now there's a lot of blatent stuff that causes 'unfair' differences in outcomes. Racism, legacies, political influences, etc. The difference I think between a hard leftist or socialist and mainstream US figures like Obama and Krugman is that hard leftists think the bulk of outcome differences are from unfair causes rather than fair ones while mainstream ones think that they account for a minor share (but large enough to merit intervention). Another difference is that hard leftists believe that even gross unfair differences cannot be solved by societies usual mechanisms (such as the civil courts) because the inequities are simply too endemic to the system. Mainstream leftists think that blatently unfair causes of difference can be addressed through individual mechanisms (such as a lawsuit). The lesser causes of unfair differences cannot be efficiently traced to their ultimate causes so a more blanket solution of the social safety net is supported in its place. There is another justification of the safety net which is basically paternalism, but since the comment centeres on 'differences in outcomes' I won't go into that now.

What makes Methinks's stance radical and quite frankly implusible is her assertion that no unfair differences really exist, that everything is ultimately attributed to essentially 'fair' causes like people who work harder or people who studied harder or people who just made smarter decisions. The last 6 months have given this POV a lot of setbacks since it appears one could lack all of those qualities and still get put in charge of insane amounts of money and get paid for blowing it. The classic libertarian answer is that this only happens because some gov't policy here or there created bad incentives. The problem is that while this sometimes is the case, a lot of this has a very ad hoc nature to it. For example, not too long ago there was a post here on the WSJ piece that argued that the housing boom was caused by Greenspan cutting interest rates. Why? Why would a short 3 month rate magically cause people to make stupid calls on a 30 year rate? How many times does the 3 month rate fall but the 30 yr rate rises? Or vice versa? But that's another argument.

Methinks's stance is simply not plausible. The response to her critics is essentially ad hominem attack. If you don't believe that all differences are essentially fair then you believe that nothing is fair and must be seeking to overturn the entire capitalist system and replace it with some type of industrial planning model out of the 1960's. While this is applicable to some on the left it isn't to most these days and it's not to Krugman. Which I think is the problem with the tea parties that Krugman's column did a good job of pointing out. it is not that their supporters don't agree on every issue under the sun. It's that the supporters have no coherent message. By coherent I mean both one that they all tend to agree on and is connected to actual reality.

H., what respectable economists? Adam Smith? MIses? Nobel Prize winners like Hayek, Galbraith, and Friedman? Walter Williams? Thomas Sowell? Hernando de Soto? Paul Ormerod? These are the ones I can think of right off the top of my head. Or perhaps you are talking about Krugman, who sold his soul to the DNC for some demagogic power?

I'll ask for some more names at the Hayek colloquium I was invited to this June to see if I can come up with some more names.

I will note though that free markets are not economic anarchy. But free markets, with flexible rules and not coercive laws, have historically produced the most freedom and prosperity. And the freer the markets, the freer and more prosperous the people have been.

MikeM writes:

"That's why all respectable economists are in favour of a mixed economy and support government interventions.

Those who don't know how economies actually work (i.e., non-economist libertarians) think that Obama's "socialist" tax policies will destroy capitalism and turn America into a third world country."

You're being incredibly vague here. The gamut of economic freedom runs from anarcho-capitalism to full on socialism/communism. We know that both results yield disastrous consequences. You're just asserting that "non-economist libertarians" think that there is no place for government anywhere in the economy. If there are any such believers, they don't contribute to this site so there is no need to address them.

You can believe that the marginal tax rate for top income earners in the country can be at 35% and not be called the things that Paul Krugman seems to imply about you. There's nothing out of whack or preposterous or wrong with thinking it should be at 39.5% as well. These are legitimate discussions that Krugman muddies by polarizing the sides to this debate.

to Boonton:
Do you not agree that corrections to problems that we believe are inherently unfair are already in place? Why are these interventions failing? Is more action necessary? Should some of these programs that we've already tried be rolled back? Have you ever considered a Friedman negative income tax to replace the current programs?

Boonton writes:

Lots of questions:

Do you not agree that corrections to problems that we believe are inherently unfair are already in place?

For the most part yes as well as what I would term 'paternalistic protections'.

Why are these interventions failing? Is more action necessary?

I wouldn't say they are failing. We are talking about a heterogenous set of policies here. Some good, some stupid, and everything in between.

Should some of these programs that we've already tried be rolled back? Have you ever considered a Friedman negative income tax to replace the current programs?

Both additional interventions and rollbacks need to be examined on a case by case basis so really it would have to come down to what specific things are we talking about here. In the case of the Tea Parties I don't really see much of anything except a mostly manufactured event attempting to find some type of political grip for the Republican Party.

You can believe that the marginal tax rate for top income earners in the country can be at 35% and not be called the things that Paul Krugman seems to imply about you. There's nothing out of whack or preposterous or wrong with thinking it should be at 39.5% as well.

So what exactly is the point here? Are we protesting bailouts that mostly happened under Bush? Are we protesting a 4 point difference in tax rates as the difference between crushing socialism and blissful freedom? Are we protesting all deficits incurred after 1/20/2009?

Boonton writes:

Let me get to the gist of David's post.

In essence he seems to be saying Krugman's column is calling the tea parties silly because those supporting them have all different types of opinions.

"My reason [for not going] is that some of the people who have been advertising them don't agree with me on everything."

OK but this is not what Krugman says:

1. Tea Party supporters are saying Obama is a socialist:

Thus, President Obama is being called a “socialist” who seeks to destroy capitalism. Why? Because he wants to raise the tax rate on the highest-income Americans back to, um, about 10 percentage points less than it was for most of the Reagan administration. Bizarre.

Actually obama has raised nothing. If anything he has cut taxes. The tax increases that are happening are happening because Bush and the Republican Congress wrote them into law. Odd isn't it that just now we are getting around to throwing Tea Parties? You guys had 8 years to do this and never bothered to do so.

2. Tea Party supporters are a hodge podge of nutcases:

Then there are the claims made at some recent tea-party events that Mr. Obama wasn’t born in America, which follow on earlier claims that he is a secret Muslim. Crazy stuff — but nowhere near as crazy as the claims, during the last Democratic administration, that the Clintons were murderers, claims that were supported by a campaign of innuendo on the part of big-league conservative media outlets and figures, especially Rush Limbaugh.

OK any protest will attract nutcases of various stripes but usually the overall protest has some type of overarching message ('no Iraq war', 'relax laws against illegal immigrants') that can be addressed without getting bogged down in the various nutcases ("Look green haired hippies for socialism and puppies!") that populate popular protests.

3. The Tea Parties are more synthetic than organic

Last but not least: it turns out that the tea parties don’t represent a spontaneous outpouring of public sentiment. They’re AstroTurf (fake grass roots) events, manufactured by the usual suspects.

I think the tea parties started out as a more organic event by Ron Paul types who knew the Bush tax cuts were expiring, and suspected the next President would either be a Democrat or a Bush-type Republican. They have been co-opted by the 'usual suspects' seeking to manufacture what they can't produce naturally, a popular rejection of obama as President. Granted all protests that are non-trivial need to have some type of organization so you can argue this charge is unfair or overblown....but let's be real here. The right is trying to sell this thing as spontaneous and no one is really fooled by it. Calling it a temper tantrum is not out of line and not unjustified just like many left centered protests have been dismissed by the right as such (see the Seattle protest or the recent anti-G20 protests in the UK)

4. Krugman's conclusion: Grow up Republicans

So what’s the implication of the fact that Republicans are refusing to grow up, the fact that they are still behaving the same way they did when history seemed to be on their side? I’d say that it’s good for Democrats, at least in the short run — but it’s bad for the country.

I'd say he's pretty dead on here. Since we need dozens of comments to even know what is being protested it is a good sign this is less about a serious contribution to public policy than it is for Republicans to vent their feelings (in other words, a temper tantrum). If Krugman is wrong about this then please make the case. I haven't seen one from you guys yet, though.

JP writes:

Boonton -- I'm not sure who "you guys" are, but I'm planning to attend the local tea party tomorrow afternoon partly because I'm curious, and partly because I want to express my concern about the size of the deficit. I'm not a Republican or a Fox TV viewer (aside from Seinfeld re-reruns).

Snark writes:

Boonton,

I agree that the Tea Parties are primarily symbolic and aren't likely to effect any real change, although I do sympathize. Tell me, what government policies/interventions are "good" in your estimation? Are you an advocate of bailouts (regardless of the administration)? Do you believe we should rely on Keynesian prescriptions to correct our economy? Finally, are both parties culpable with respect to our current state of affairs, or do you see republicans as the root of all evil?

H. writes:

what respectable economists? Adam Smith? MIses? Nobel Prize winners like Hayek, Galbraith, and Friedman? Walter Williams? Thomas Sowell? Hernando de Soto? Paul Ormerod?

These are not respectable, mainstream economists. Smith should be studied only as part of the history of economic thought. Mises is interesting but largely irrelevant. Hayek and Friedman had useful insights, and their works and essays should be read, but economics as a science has moved forward. Williams and Sowell write about economics, but I wouldn't call them economists.

Here is a better list of present-day economists.

Snark writes:

@H,

"Williams and Sowell write about economics, but I wouldn't call them economists."

Given their academic backgrounds and vocations, what shall we call them, ham sandwiches?

H. writes:

Given their academic backgrounds and vocations, what shall we call them, ham sandwiches?

I meant that they haven't contributed much to the field of economics. Their research has not been published in top academic journals, etc, etc.

There are millions of people who have economics or business degrees and teaching positions.

Boonton writes:

JP

I'm planning to attend the local tea party tomorrow afternoon partly because I'm curious, and partly because I want to express my concern about the size of the deficit.

I hope you enjoy it but so far it seems like the protest are less about the deficit and more about taxes which would make your stance only partially in line with the whatever is this things overall message (to the degree that it has any). Perhaps you could conduct an experiment. Among the signs and speakers you see and hear, could you keep a tally of messages that convey honest statements about the deficit? What I mean by this is exclude messages that have nothing to do with the deficit or advocate things that would make it worse ('no tax increase', 'no gay marriage', 'build a border fence' etc.) and also exclude messages put forth non-serious proposals as solutions.

Snark
Tell me, what government policies/interventions are "good" in your estimation?

I would say in general the safety net is a good intervention. Unemployment, social security, Medicare. In addition to this, we have other policies that are not exactly the safety net help with a similiar function. Banruptcy law, for example, or the tax incentives that retirement accounts get. None are perfect and they will be tweaked endlessly from now until the end of time but few people seriously advocate abolishing the class.

This I think is one thing that bugs me about Republicans. They enjoy wraping themselves in the libertarian blanket but they don't really accept its policy prescriptions (except the goodies like lower taxes). How would you feel if every lazy couch patato you knew suddenly had an 'exercice protest' demanding that gov't force everyone to get in shape only this protest was held on World of Warcraft as the participants munched nachos in their mom's basements.

Are you an advocate of bailouts (regardless of the administration)?

I'm more inclined to bailout those who would be hurt by the failure of a 'too big to fail' entity. I'd prefer to ask, for example, what would happen if Citibank went bankrupt. I'd protect depositors (see FDIC), ask if Citi is performing some type of essential back office function that many of the other banks are depending on (say processing transactions) and see if special provision needed to be made to keep those going until other banks could take it over and so on. In exceptional circumstances, like a depression, I'd be open to the argument that a bailout might be the least bad solution. But in general no I'm not an advocate of bailouts.

Do you believe we should rely on Keynesian prescriptions to correct our economy?

Well we do as well as monetarist prescriptions (BTW, for Troy Friedman would be an example of a Nobel winning economist who advocated gov't intervention. He differentiated himself greatly from Keynes in that he wanted the intervention to come from the Fed but the fact is we can see the line between monetary stimulus and fiscal stimulus gets somewhat blurry when the economy tanks a lot). I don't believe that any serious economist today advocates what the Republicans have asserted rhetorically, that the gov't should adopt a pro-cyclical stance of fiscal contraction during downturns and presumably expansion during upturns. Even economists who were skeptical of the stimulus package would probably say the gov't should be neutral over the business cycle but nevertheless take an anti-cyclical stance.

Finally, are both parties culpable with respect to our current state of affairs, or do you see republicans as the root of all evil?

I think the best summation of reality was one of the last lines of the Battlestar Galactica series. When asked why she thought things would turn out differently, she said 'mathematics, a complicated system will always surprise you if given enough time'. So that is the crises we have now but as for our long run problems? I don't think either party is the 'root of all evil'. We are. If you don't believe me then remind jd to report to us on how many signs he saw at the protest that said "higher hospital copays for my mom's medicare" or "stop giving my well off dad cost of living increases in his ssi check".


Troy Camplin writes:

I see a mixed bag in that list. Many mathematical economists -- which is one of the biggest problems with economics right now. Too many people forget that math is merely a precise approximation of reality, and can only be used to explain very simple things. The more complex the problem, the less useful math becomes. Statistics become more important in such cases. The problem comes in when people (including, if not particularly, mathematicians) forget that math is at best an approximation. When it is used as many who do econometrics use it, as a precise description of reality, you end up back in the planning boat. Never mind that the economy is inherently incalculable -- mathematical economists are going to calculate. The result has been a few major discoveries, and a titanic amount of nonsense.

Take Keynes. If you like runaway inflation (1970's), high deficits (1980's to today) and the kind of artificially low interest rates Greenspan and Bernanke gave us that created the housing bubble by sending out false signals about risk, then Keynes is your man. He's certainly Krugman's. And Larry Summer's. Yet Keynes, despite the fact that his ideas consistently destroy economies, is respected. And the field is dominated by Keyneseans. Don't mistake popularity for accuracy. Being part of a fad doesn't mean you know what you're doing.

Boonton writes:

I'll ask again, how exactly do supposedly 'artificially low' short term interest rates create a housing bubble?

Being part of a fad doesn't mean you know what you're doing.

True and being able to reproduce results indicates you are making valid scientific assertions. If 3% short term interest rates make a housing bubble then why does 0% short term rates fail to do likewise?

MikeM writes:

"I'll ask again, how exactly do supposedly 'artificially low' short term interest rates create a housing bubble?"

The explanation I've heard is that the fed has to flood the banks with capital in order to keep the overnight loan rate low. Since banks were flooded with capital and the standard strategy at the time was to lend to regulatory capacity, so they had to take on more risky mortgages onto their assets in order to lend out all of the capital (this was met by cheerleading from congress and regulators) . This lead to higher demand for housing, which drove up prices and attracted speculators. After development outpaced demand, prices fell and people who were on the margin lost there equity. Since the loans were now "toxic assets" they were marked to market and banks lost into the trillions.

I think the key that your missing is that you assume that people see the fed lower rates and think that must lower mortgage rates. This is completely false, as you pointed out. The difference is that the rate keeps low by the fed buying securities, and banks used this excess capital to issue riskier loans instead of having the capital sit in their vaults.

Arnold has expressed serious skepticism as to whether being flooded with money will spur that kind of behavior or not. So there it is.

Boonton writes:

MikeM,

I think you understand the hypothesis but see the problems in it.

1. Banks are experts in interest rates. It doesn't take an expert to see that overnight loans and short term loans of 3 months must either be paid in full or refinanced constantly. Why would you lock that up with a 30 year mortgage? Why not a 5 year auto loan or business loans that have shorter terms.

2. Long term rates are driven by expected inflation. If the market thinks the Fed is lowering short term rates 'too much' expectations for future inflation go up. Maybe inflation is of some help with mortgage loans since it increases home values but that doesn't change the fact that the response should be higher mortgage rates, now lower ones or easier standards. Remember esp. at the end it seemed like this might have been the problem...remember the dramatic spike in oil and commodity prices?

3. Speaking of inflation due to keeping interest rates too low, where is it? Why are we seeing deflation today and even though the Fed has gone a million times more aggressive with monetary policy we see no inflation? Those 'nobel winning economists' as well as popular economists like Sowell all do agree that if you have too much monetary stimulation the result is inflation, not deflation.

4. "the standard strategy at the time was to lend to regulatory capacity" Huh? Why would this be a standard strategy and why would the way to apply it be to borrow money in the extreme short term and lend it over the extreme long term? Why not borrow short and buy Treasuries? Or short term corporate paper?

5. How exactly is the Fed supposed to know that one area is experiencing a bubble? How is the Fed suppose to pop the bubble? Do we now have 3 goals for the Fed: Full employment, stable prices, and bubble management? Who decided on that and what economic theory (Nobel winning or not) tells us how that is supposed to work?

MikeM writes:

"I hope you enjoy it but so far it seems like the protest are less about the deficit and more about taxes which would make your stance only partially in line with the whatever is this things overall message (to the degree that it has any)."

I humbly submit that the taxpayers are protesting an expected future rise in taxes because they are Ricardian equivalent agents. Even though the stimulus is "temporary" these agents believe their future taxes have to rise anyway. I think this puts a wrench in Krugman's hypothesis, so I think that's why he treats the protesters with such vitriol.

Just sayin'.

Snark writes:

Boonton,

I would say in general the safety net is a good intervention.

The safety net may contain certain elements we could define as “good” (public health and transportation, consumer protection, etc.). But the problem, in general, is the unintended consequences brought about by the perverse incentives it creates. As they continue to grow, most of these programs fail in their objective or require constant reform as a result of fraud, abuse, and long-term insolvency. Not surprisingly, the taxes necessary to sustain them have become oppressive to the more productive members of society. ‘The dangers of a nurturing government’, as Toqueville observed, ‘compress, enervate, extinguish, and stupefy a people until they are reduced to nothing more than a flock of timid and industrious animals of which it becomes the shepherd.’

I agree with you that We the People are the root of our problems. As a democracy, we may get what we want, but we’re not getting what we pay for.

Snark writes:

H,

I meant that they haven't contributed much to the field of economics.

Once you familiarize yourself with the list of critically acclaimed books and articles that have appeared in scholarly journals, you’ll realize how silly it sounds to suggest that “they haven’t contributed much to the field of economics.” Their works have been praised, reprinted, and translated in various countries around the world and have done more to educate people about economics than many other esteemed economists whose research has been published. In particular, Dr. Sowell’s writings are considered, in many respects, to be ground-breaking work that will outlive the great majority of scholarship done today.

There may be millions who have economics degrees and teaching positions, but few rise to the same level of popularity and achievement as Sowell and Williams.

Boonton writes:

I humbly submit that the taxpayers are protesting an expected future rise in taxes because they are Ricardian equivalent agents. Even though the stimulus is "temporary" these agents believe their future taxes have to rise anyway.

Then for every sign complaining about the stimulus I'll expect to see two or three that say "take away mom's Medicare" or something like it. If that happens I'll consider the protestors to be Ricardian equilivant agents. If it fails may I consider the protestors to be agents of the usual Republican idiocy (with the exception of yourself of course).

Also as good Ricardian agents they should have taken note that the Fed recently announced it was/had purchased about $1T in 30 year treasury notes & mortgage bonds. Basically the 2009 stimulus package has been all but monetarized. There should be no complaints about it from a tax perspective then.

Additionally, since like 40% of the stimulus is lower tax rates it is kind of confusing to be talking about taxes so much when the message is supposedly deficits. Since reducing debt would, by definition, mean lower interest spending in the future it sounds like the protestors would be happy with immediate tax increases....but forgive me if it just doesn't seem that way. But that assumes, though, that they have a rational coherent message. What merits such an assumption? Especially considering that many protests *do not* have a rational coherent message (Seattle, G-20, etc.)

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