Arnold Kling  

Morning Commentary

David Henderson vs. Mark Weisb... Why the Fed is Buying Mortgage...

Daniel Little discusses Seeing Like a State, which is something of a cult classic among some Masonomists. Thanks to Mark Thoma for the pointer. Well worth a read.

Bill Woolsey says that it is obvious why we had a such a deep recession.

total final sales are 9.28% below trend...the GDP about 1.12% below trend...In the third quarter of 2009, real wages were 1.8 percent above trend.

That strikes me as a very large drop in real GDP for a relatively small increase in real wages. I'm sorry, but I cannot accept "Of course, whenever nominal expenditure is 9 percent below trend, real GDP will plummet." I want a story to go along with it. Otherwise, my story is that real GDP plummeted, prices stayed flat, so nominal GDP fell. It seems like a simpler story to tell. The monetarist story has to first explain why nominal expenditures fell (I'm sorry, but what I take to be the story is that the market intuited some signal from the Fed that it wanted nominal expenditures to collapse, even though the Fed surely did not intend such a signal and even though most economists did not think it was sending such a signal). And it needs a story to explain why the folks who expected this drop in nominal expenditure decided to take the hit in real output rather than cut prices.

I realize that I am asking the current monetarists to explain something that no monetarist has been asked to explain for 75 years. That is, monetarists have been allowed to take it as given that nominal GDP drives real GDP. But I came of age in the 1970's, when Lucas (and, for that matter, Milton Friedman) started wondering how people could get so mixed up about nominal and real variables. In the Lucas-Friedman the model, the attempt by individual agents to distinguish real from nominal shocks served to diminish the real effects of monetary shocks, not amplify them. I want to know what the mixup was in 2008 and 2009.

Finally, on another subject, a reader asked me to say more about Haiti. Jeff Sachs offers a predictable proposal for a massive infusion of aid. I have to admit that compared to other things our government does with our money, I see little reason to object. But the libertarian approach to Haiti instead would focus on opening our doors to refugees.

Look at the track record of refugees in America. It seems to me to have worked out remarkably well in most cases, both for the refugees and for America. Now, compare the track record of American military occupation and nation-building, or the track record of foreign aid to underdeveloped countries.

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Nathan Smith writes:

I'm all in favor of letting in refugees, indeed of letting in all immigrants, refugee or otherwise. But:

"Now, compare the track record of American military occupation and nation-building..."

Germany/Western Europe. Japan. South Korea. The Philippines. Iraq. When we *win* (i.e., not Vietnam/Afghanistan so far) I'd say the results of military occupation and nation-building range from "pretty good" to "mind-bogglingly spectacular." It's not quite clear to me how you appraise the evidence any other way, if you're not ultra-naive about the prospects of places with cultural-geographic handicaps to prosperity and/or ignore the counter-factual of what would have happened if we didn't gone in.

The author of *From Poverty to Prosperity* should understand this. Military occupation and nation-building is a way to export the "software" of development, though admittedly in a buggy form and in need of a good deal of customization.

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