Howley on Immigration: One Night Only!

Heads up Iowa City folk. As part of Human Rights week at the University, Kerry Howley will be giving a talk sponsored by the U of Iowa Advocates of Liberty. Details:

“Migration and Human Rights: How Global Apartheid Keeps the Developing World Poor”

Monday, January 26th at 7 pm

1505 Seamans Center, University of Iowa

I'll be there!

More Macropsychoeconomics

I certainly do not reject the idea that coordinated, population-wide changes in beliefs and/or preferences have macroeconomic effects. I think herd psychology and fool-in-the-shower-style updates of expectations about lifetime income can and do have big macroeconomic effects. In fact, I think we are seeing some of this now. But booms and busts are not only about aggregate demand and animal spirits. Nor are they only about government-induced capital misallocation. I'd like to see somebody with the wherewithal to explain how policy-led misallocation interacts with herdy consumer and investor psychology. Then I'd have a reason to really believe someone who says we merely need to wait and let all the malinvestment shake out, or someone who says we merely need to prop up the confidence of consumers and creditors.

It seems likely that there are in fact a lot of bad bets that need to get squared and that the herd could use some prozac. But what dose? How much is too much; how much leads to just the sort of systemic malinvestment that leads the herd to panic again? This is the sort of thing I feel like no one really knows anything about, though I am more than eager to be shown the secret science.

Daron Acemoglu's VoxEU op-ed reminds me of another piece of macropsychoeconomics I'd like to know a hell of lot more about: backlash threat:

Decisive action on the crisis is necessary; not just soften the blow of the recession but also to avoid a backlash that could be deeply harmful to long-run growth. A deep and long recession raises the risk that consumers and policymakers start believing that free markets are responsible for the economic ills of today. If so, we could see a move away from the market economy. The pendulum could swing too far, bypassing properly-regulated free markets, towards heavy government involvement that could threaten future growth prospects of the global economy.

A comprehensive stimulus plan, even with all of its imperfections, is probably the best way of fighting these dangers. Nevertheless, the details of the stimulus plan should be designed so as to cause minimal disruption to the process of reallocation and innovation. Sacrificing growth out of our fear of the present would be as severe a mistake as inaction. The risk that the belief in the capitalist system may collapse should not be dismissed.

OK. I find the backlash hypothesis totally plausible. The idea here is that (1) good economic institutions require sufficient cultural support, (2) the “do nothing” response will erode cultural support and thereby threaten future economic performance, so (3) we should do something that prevents backlash, but nothing that screws up the very institutions we're trying to preserve by not doing nothing.

So what's the actual evidence for (2)? Acemoglu notes that populist, anti-market backlash is a big problem in developing economies, and I agree with him. But surely places with durable, high-quality economic institutions already have a lot of both elite and popular buy-in, which should limit the magnitude of any  backlash. If the point of “doing something” is really institution-preserving political theater (like Acemoglu, I'm an institutionalist, and think this does count as “economic policy”), then how much theater do we need? What is the minimum that will suffice to keep the pitchforks in the barn? Over the medium- and long-term how much can upgrades in economic literacy do to reduce backlash threat? Obviously, institution-preserving political theater creates a political opportunity to screw up economic policy, or Acemoglu wouldn't be warning us against it. So maybe good long-term economic policy involves prioritizing economics education as a prophylactic against future backlash.

Stimulus and Ideology: What's the Score

Will Ambrosini does some scorekeeping among macroeconomists. It seems like there is maybe more consensus than I had thought, which I guess is somewhat comforting. 

Will Wilkinson has words for macro economists. He got me thinking about the political affiliations of macroeconomists. Here’s what I’ve found:

Macroeconomist’s name IDEAS rank Political affiliation Views on fiscal stimulus
Robert J. Barro 3 Republican?, no political appointments Tax-cuts not spending
Robert E. Lucas 5 ? Con, but concerned about sudden drop in consumption
Edward C. Prescott 7 He signed astatmentopposing Obama’s tax/trade policy ?
Martin S. Feldstein1 8 “conservative” Pro, likes military spending
Daron Acemoglu2 10 ? Con, worries about long term consequences
Olivier Blanchard 13 ? Pro
Mark L. Gertler 14 ? ?, but he says monetary policy can still be effective
Thomas J. Sargent 17 ? Con
Lars E. O. Svensson 21 ? ?, but has written on the effectiveness of monetary policy when interest rates are zero
N. Gregory Mankiw 22 Republican Con
Jordi Galí 25 ? ?, his research is the only legitimately modern macro that shows fiscal stimuls can work
Ben S. Bernanke 33 Republican appointee His public statements are Pro, but I’m not sure what his private opinions are. His research is all money all the time.
Michael Woodford 34 ? ?, but in a survey has said the consensus is “fiscal measures are not suitable for accurate ‘fine-tuning’, even if it is not agreed that they have little effect.”
John B. Taylor 49 Republican appointee Pro, but has shown the recent tax rebate was ineffective at stimulus

 

It seems most macro folks are conservative or Republican. The Gali paper on effective fiscal policy seems like it might be worth taking a look at.

You’ll notice Delong and Krugman (and Alesina, Becker, Cochrane, Fama, Murphy, and Zingales) are missing from this list of MACROeconomists. This is because they are not macroeconomists.

It seems to me the historians were calling the finance people boneheads for their ideas on macroeconomics. I wonder what the planetary scientists think about the exobiologist’s views on theoretical cosmology.

In reply to the contention that right-winger economists have lined up against fiscal stimulus, Brad Delong asks: “What is Martin Feldstein? Chopped liver?” It seems like lots of people think so every time I try to cite his estimates of the elasticity of labor supply when debating taxes. Ah, the fine art of “siffing.”

Tax Cut Stimulus: Better Economics, Wiser Politics

Bruce Bartlett offers an excellent overview of the stimulus debate in Forbes, and in my opinion draws the right policy conclusion:

I think the critics of an activist fiscal policy are forgetting the essential role of monetary policy as it relates to fiscal policy. As Keynes was very clear about, the whole point of fiscal stimulus is to mobilize monetary policy and inject liquidity into the economy. This is necessary when nominal interest rates get very low, as they are now, because Fed policy becomes impotent. Keynes called this a liquidity trap, and I think there is strong evidence that we are in one right now.

The problem is that fiscal stimulus needs to be injected right now to counter the liquidity trap. If that were the case, I think we might well get a very high multiplier effect this year. But if much of the stimulus doesn't come online until next year, when we are likely to be past the worst of the slowdown, then crowding out will greatly diminish the effectiveness of the stimulus, just as the critics argue. According to the Congressional Budget Office, only a fraction of proposed infrastructure spending can be spent before October of next year; the bulk would come long after.

Thus the argument really boils down to a question of timing. In the short run, the case for stimulus is overwhelming. But in the longer run, we can't enrich ourselves by borrowing and printing money. That just causes inflation.

The trick is to front-load the stimulus as much as possible while putting in place policies that will tighten both fiscal and monetary policy next year. As terrible as our economic crisis is right now, we don't want to repeat the errors of the past and set off a new round of stagflation.

For this reason, I think there is a better case for stimulating the economy through tax policy than has been made. Congress can change incentives instantly by, for example, saying that new investments in machinery and equipment made after today would qualify for a 10% Investment Tax Credit, and this measure would be in effect only for investments largely completed this year. Businesses will start placing orders tomorrow. By contrast, it will take many months before spending on public works begins to flow through the economy, and it is very hard to stop it when the economy turns around.

Stimulus based on private investment also has the added virtue of establishing a foundation for future growth, whereas consumption spending does not. As economist Hal Varian of the University of California at Berkeley recently put it, “Private investment is what makes possible future increases in production and consumption. Investment tax credits or other subsidies for private sector investment are not as politically appealing as tax cuts for consumers or increases in government expenditure. But if private investment doesn't increase, where will the extra consumption come from in the future?”

Some may reply that infrastructure stimulus spending does provide a foundation for future growth. But the point is that the timing for infrastructure spending is wrong to work as stimulus. I'm eager to have a debate over whether certain putative public goods are public goods, over whether they are underfunded, over what tax-funded infrastructure is most needed and most conducive to future growth. But this is actually a pretty irresponsible time to have this debate. A government with superpowers that could with laser precision identify immediately those places where economic resources are underutilized and somehow approve a bunch of projects that bring those (and only those) resources online and get those projects started now without undue corruption, waste, etc. might have a chance to stimulate with an infrastructure surge, but that's not a possible government, so it's bad policy. If there are stimulus options that can be well-timed, that do not all-but-guarantee a decade of clusterfuck contracting scandals, that can be easily reversed, and that encourage the development of the real economy, then what is the possible objection?

What's Fair?

In a fascinating guest spot over at The Atlantic's new Brave New Deal blog, my friend Bart Wilson — an actual economic scientist — digs deep into the question of the meaning of a “fair” distribution in the experimental economic games he studies. Drawing on the work of linguist Anna Wierzbicka, Bart reports that the English word 'fair' doesn't really translate one-to-one into any other language. I did not know that! And he argues that fairness judgments are made relative to an implicit or explicit set of customary rules: 

No matter how much we may feel that fairness is a pure principle, it's really a regular social rule, a custom.   (Another surprispingly revealing word:  you have probably seen the words “customary rates” applied to gratuities and sales commissions).  Fairness really boils down to an issue of agreement: can we agree on what rules this particular context calls for? In a future post, I'll expand on what this means for markets and public policy.

Remember, Bart's not riffing from the armchair. He's run a mindnumbing number of experimental games meant to elicit judgments of fair distribution. If he's right, this is pretty interesting. One thing it seems to me to  imply is that a “theory of justice” built on intuitions about fairness is likely to be pretty conservative, echoing the conventional rules underlying fairness judgments, and at best ironing out their inconsistencies. Whether that's a feature or a bug depends on what kind of work you would like a theory of justice to be do. 

Anyway, Bart's work is an outstanding example of what economics looks like when it is also science.

Are Economists Completely Clueless?

The following is a frustrated rant. React accordingly.

I am slowly reaching the conclusion that the current debate over fiscal stimulus — like prior debates over monetary stimulus, and the causes of the financial crisis — has exposed the cluelessness of (many? most?) professional economists and ought to be considered an embarrassment to the profession.

In the debate over economic stimulus, I hear many otherwise brilliant people making a lot of baseless conjectures about mass psychology — about consumer and creditor “fear” and “uncertainty,” and what to do about it. But, as far as I can tell, none of them has even a rudimentary theory about the causes of micro-fear or how it scales up to aggregate consumer demand or aggregrate credit supply, etc. So I feel like I'm hearing a lot of smart people talking out of their asses about a subject they’ve never actually studied –the psychology of coordinated expectations — and pretending it is “economics,” a subject with much greater rhetorical prestige and political power than amateur psychology. 

For example, if individuals' decisions about consumption, savings, and debt are rooted in beliefs about their future incomes — a view I think most economists share — then it would seem that an economy-wide decline in personal consumption would indicate that a lot of individuals have more or less simultaneously revised their expectations about their future economic prospects. As far as I can tell no one has a theory of the events that predict revisions in an individual's estimates of her lifetime income, much less a theory of how the perception of events predicts the magnitude of these revisions. Nor have I encountered a story about how these revisions become coordinated and scale to the macro-level. 

Nevertheless, I hear economists saying things about how easy money is needed to soothe investor worries, about how a surge of government spending is needed to quell consumer anxieties, about how the government's “doing nothing” would cause people to panic and make everything worse, and so on. Do any of them have any idea what they are talking about when they say these things? I'm afraid they don't. And, frankly, I think they should be ashamed of themselves.

If booms or recessions are really based in coordinated psychological changes, then why should we think that monetary or fiscal policy is the most relevant policy lever? If the thoughts and feelings of the population are the issue, then maybe the real problem is that the mass media are unduly scaring people. Wouldn't it follow, then, that good economic policy would have at least as much to do with controlling the media as controlling the money supply? If the problem with handing Maria Bartiromo a script of state-mandated talking points is that it wouldn't work, how do we know that?

It would be pretty interesting if it turned out that manipulating the money supply is what an efficient state turns to when it can't more directly manipulate “animal spirits” through propaganda. If the problem with turning the entire media into a servant of state macroeconomic engineering is not that it wouldn't work, but that it's repulsively illiberal, then we ought to face up to it. Maybe we focus so much on certain not-very-effective policy instruments because those are the ones we consider within the state's legitimate power. We think it's okay that the state attempt to manipulate our thoughts and feeling by printing money, nationalizing banks, and building highly-publicized public works, but we don't think it's okay to do it by intervening in the media in the way the state very much did do during the Great Depression and WWII.

Alright, but then why do we think we can draw policy lessons from those earlier periods when, for moral reasons, we've taken some of our state's formerly favorite tools of economic policy — outright propaganda and control over media — off the table? If you think we've taken these tools off the table for practical reasons, who was it that showed us that they don't work?   

Maybe I'm being unfair here. I hope someone will explain to me how it is that economists, and by extension the American state, isn't just winging it.


Clarification: It's Macro that's Embarrassing

I'm slamming macro below. Even then, I think we know a fair amount, as is implied by my hedging. Economists are useless when it comes to many fundamental questions important to policy, not all. I think micro counts as a science, especially empirically-focused experimental micro. My rhetoric is overbroad, so my apologies to empirically-oriented micro people. 

In another excellent Economix post that I missed (thanks Gherald L), Princeton's Uwe Reinhardt makes a version of my point, showing how easy it is for macroeconomists to cherrypick estimates of, say, the responsiveness of workers to changes in marginal tax rates to support what they've already concluded. The moral of Reinhardt's story deserves emphasis:

So there you have the flexibility, shall we say, that economists enjoy when they apply their professional skills to affairs of state in what may seem, to outsiders, like purely scientific analyses.

In the first lecture of my freshman economics course at Princeton titled “The Art of Siffing Among Seasoned Adults,” I demonstrate how seasoned adults routinely structure information felicitously(i.e., “sif”) to further their own agenda, and I point out that economists can be among the most skillful practitioners of this art.

“If at the end of this course you still trust me,” I warn them, “I have failed in my mission. When economists advise on public policy, the operative mantra is Caveat Emptor!”

I am sad to teach it, but consider it fair and full disclosure.

Crowding Out

If you think markets tend to work better than government in giving people what they want and need, then you'll worry about government spending crowding out private spending. If you think government works better than markets in giving people what they want and need, then you'll want government spending to crowd out private spending. I agree with Arnold Kling that maybe this helps explain why positions on the stimulus debate break so cleanly (and damningly for the scientific pretensions of macroeconomics) along partisan lines. Here's Arnold:

On the stimulus proposal, the division is almost entirely left-right. I cannot think of a single economist on the Left who is skeptical, and I cannot think of a single economist on the Right who is a supporter.

I think that the left-right polarization reflects the fact that the stimulus is ideologically loaded. If nothing else, it shifts large amounts of power and decision-making authority toward government technocrats. If you're a neo-Galbraithian, that is a good thing. For example, Mark Thoma writes

Tax cuts won't build schools, or any other public good.

John Kenneth Galbraith was always complaining that the public sector was starved. He viewed entrepreneurialism as a myth. It comes down to a choice between technocratic planning in large firms or technocratic planning in government, and he preferred the latter.

On the other hand, if you're a Hayekian, the shift in power is appalling.

Well, I am appalled. But also confused, since I didn't think that most mainstream economists who also happen to be Democrats were “neo-Galbraithians.” Arnold says there is pretty much no evidence that neo-Galbraithian policy is good for a recession. As far as I know, there's pretty much no evidence that neo-Galbraithian policy is good for the economy generally. But what mainstream economists who are also loyal Democrats actually says that it is? That's what's confusing to me. My sense was that there was a pretty solid non-partisan professional consensus against neo-Galbraithianism. So how come the stimulus debate is shaping up as if mainstream Democratic economists do want the public sector to crowd out the private sector? What gives?

The War of the Economists

A bit more on the public relations quandary the economics profession ought to be in, if it isn't already…

When I see Delong more or less indiscriminately trashing everyone at Chicago, or Krugman trashing Barro, etc., what doesn't arise in my mind is a sense that some of these guys really know what they're talking about while some of them are idiots. What arises in my mind is the strong suspicion that economic theory, as it is practiced and taught at the world's leading institutions, is so far from consensus on certain fundamental questions that it is basically useless for adjudicating many profoundly important debates about economic policy. One implication of this is that it is wrong to extend to economists who advise policymakers, or become policymakes themselves, the respect we rightly extend to the practitioners of mature sciences. There is a reason extremely smart economists are out there playing reputation games instead of trying to settle the matter by doing better science. The reason is that, on the questions that are provoking intramural trashtalk, there is no science.  

Sadly, there is no one better to listen to.

Thank You, Barack Obama

I couldn't say it better, so I'm just going to cut & paste the entirety of Radley Balko's post:

Credit where it’s due: Well done, Mr. Obama. I’m sure we’ll have our differences, but afer your first 40+ hours on the job, this libertarian couldn’t be happier.

The tally:

  •  Obama rescinded Bush’s 2001 executive order allowing former presidents, vice presidents, and their heirs to claim executive privilege in determining which of their records get released to the public. Even better, he’s requiring the signature of both his White House counsel and the attorney general before he can classify a document under executive privilege.
  • Issued a memorandum to all executive agencies asking them to come up with a new plan for open government and complying with FOIA requests. He is also instructing three top officials, including the U.S. attorney general, to come up with a new policy on open government. The new policy would replace the existing policy, infamously set by a 2001 memo from John Ashcroft that instructed federal agencies to essentially to take every measure they can to refuse FOIA requests.
  • Put a freeze on the salaries of top White House aides.
  • Suspended the military trials at Gitmo, and is expected to issue an order closing Gitmo as soon as today.
  • Said this:

    “For a long time now there has been too much secrecy in this city. The old rules said that if there was a defensible argument for not disclosing something to the American people, then it should not be disclosed. That era is now over. Starting today, every agency and department should know that this administration stands on the side not of those who seek to withhold information, but those who seek to make it known.

    The mere fact that you have the legal power to keep something secret does not mean you should use it. The Freedom of Information Act is perhaps the most powerful instrument we have for making our government honest and transparent and holding it accountable. I expect my administration not only to live up to the letter but the spirit of this law.”

    Yes, it’s only been one day. But this is mighty impressive. Obama’s top priority upon taking office was to sign orders rolling back his predecessor’s expansion of executive power. Put another way, Obama’s top priority upon taking office was to institute limits on his own power.

  • That’s something even a cynic like me can celebrate.

    This is all fantastic news, and a great relief. This is change I can believe in, in fact.