Russell Roberts's Blog, page 1414

Quotation of the Day…

… is from page 191 of Thomas Leonard's 2009 review, in History of Economic Ideas, of Thomas McCraw's great biography of Schumpeter (Prophet of Innovation):

But Schumpeter thought that Keynes' stagnationist ideology provided intellectual cover to those far more hostile to capitalism than he, and, moreover, that Keynes' emphasis on the short run invited trouble from governments naturally inclined to profligacy and incompetence.  It was naïve, Schumpeter believed, to hope that the State would do what its economic experts tell it to do.

Two nice reviews

Two nice reviews of two of my books. One by Stephen Schmalhofer of The Price of Everything at the Acton Institute blog and one by Katie Cochran of The Invisible Heart at Young Americans for Liberty.

Does a Liquidity Trap Really Turn Economic Laws Topsy-Turvy?

Steve Sexton, over at Freakonomics, argues not.  (HT James McCammon)

This post by Sexton is an example of the economic way of thinking at its finest.  And it's a better response than my own to Krugman's insistence that a liquidity trap nullifies some of the basic laws of economics.

More scientism from the defenders of stimulus

Steven Rattner writes in the Financial Times (HT: Shekhar Patil):

However compelling the merits of long-term deficit reduction, the Keynesian notion of counter-cyclical fiscal policy remains valid. As economists Alan Blinder and Mark Zandi (a former adviser to Republican John McCain) found, the first Obama stimulus saved about 8.5m jobs and may have prevented a depression.

Really? That's what they found? He treats it like a discovery of fact. As in "Blinder and Zandi weren't sure of the distance between the earth and the sun but when they measured it, they found it was about 93,000,000 miles." That isn't the way econometrics works. (Here is what I said when the Blinder Zandi study first came out.)

Rattner continues:

Now Mr Zandi calculates the new Obama plan would create 1.9m jobs in the next year and add two percentage points to gross domestic product. The Republican alternative – slamming on the brakes – would have the opposite result.

Calculates? As in the square root of 144? Or a harder one–the square root of 150. Need those decimal points. As in 1.9m million. Gives it an air of precision, doesn't it? See my comments above.

Rattner continues:

It is always difficult to prove counterfactuals, such as the meltdown that would have occurred had Washington stayed on the sidelines when the crisis hit in 2008, as all the Republican challengers now argue – to varying degrees – should have happened. But we need not turn the economy into a laboratory. Economics is enough of a science for us to know that immediate harsh deficit reduction, with tightened monetary policy, would surely plunge us back into recession.

Alas, economics is not enough of a science to know that.

Quotation of the Day…

… is from page 423 of Frank Graham's December 1944 article in the Economic Journal (Vol. 54, pp. 422-429) entitled "Keynes vs. Hayek on a Commodity Reserve Currency":

Lord Keynes, however, is, I think, not right in saying that 'the error of the gold standard lay in submitting national wage-policies to outside dictation.'  The original gold standard did not submit wage-policies to dictation, by governing authority anywhere, but made them the resultant of impersonal forces issuing out of the disposition, and potentiality, of individuals to follow what they conceived to be their own interest.  This system, as Professor Hayek points out, had many virtues, and we should be badly advised if we throw away its virtues along with its imperfections.

Graham, of course, is correct.  The point on which he here criticizes Keynes is yet further evidence that Keynes's disregard of microeconomics – Keynes's obsession with aggregates, an obsession that numbs one's analytical senses to the need to understand how unplanned order emerges spontaneously from the countless actions of individuals and to the relevant, detailed ways in which that order can be compromised by various snags and imperfections in the microeconomic firmament – rendered Keynes a poor economist.

Crony Capitalism 101

Here's a letter to the Washington Post:

Michael Gerson misses the most germane problem with Pres. Obama's praise of the transcontinental railroad as a shining example of the wonders of "mobilized government" ("Obama fails the Lincoln test," Sept. 13).

Save for the one transcontinental line that received virtually no subsidies (J.J. Hill's Great Northern), the building and operation of the other three lines were contaminated with graft, fraud, and corruption – of which the Credit Mobilier scandal is only the most famous instance.  And on top of these shenanigans that predictably happen when government doles out subsidies were other, equally predictable results: shoddy construction, bloated costs, and inefficient and unsafe operation of the lines.*

On further reflection, Mr. Obama is spot-on to cite the transcontinental railroad as an example of his hope for America: it is a great monument to crony capitalism, under which government officials – constantly cackling about their 'grand visions' and 'commitment' to America's future – launch boondoggles that succeed only in transferring massive amounts of wealth from the general population to the politically connected.

Sincerely,

Donald J. Boudreaux

* The literature on this subject is vast.  This good, brief summary is written by my former Clemson University student Timothy Terrell (now on the econ faculty at Wofford College).

What to Say?

Here's the lead, above-the-fold headline in today's print edition of the Washington Post:

Obama seeking tax increases to fund jobs bill

These eight words reveal volumes about the screwy economics bouncing around in the brains of Mr. Obama, his advisors, and too many other "leaders" and pundits.

(The link above, to the electronic edition, shows the electronic version of the headline to differ on slightly from the print version.)

Quotation of the Day…

… is from page 79 of James M. Buchanan's and Richard E. Wagner's vital 1977 book Democracy in Deficit:

Perhaps it is best simply to say that [John Maynard] Keynes was not particularly concerned about institutions, as such.  His emphasis was on results and not on rules or institutions through which such results might be reached.  And if institutional barriers to what he considered rational policy planning should have worried him, Keynes would have been ready to set up a "national planning board" run by a committee of the wise.

Some Links

Cato's Michael Tanner weighs in sensibly on the "Is Social Security a Ponzi scheme?" question.  He answers "yes."

In my latest column in the Pittsburgh Tribune-Review, I offer further thoughts on Keynesianism.

EconLog's David Henderson points us to a fine blog-post by David Friedman on global warming.  I would add to Friedman's list of the three parts to the argument in favor of vigorous government action to correct global warming a fourth part, namely, the assumption that private efforts that enable us to better deal with the effect of global warming – e.g., the continuing improvement in air-conditioning, and the continuing improvement in weather forecasting – are either more costly than, or less effective than – and have worse third-party effects than – would any likely effort by governments to deal with global warming.  (In Friedman's essay this point is recognized; but it deserves to be listed explicitly as among the assumptions that global-warming alarmists make, often without thinking about it.)

George Will on 9/11.

Further Thoughts on Whether or Not Social Security is Ponzi Scheme

Is Social Security a Ponzi scheme?  Celebrated scholars – left and right – have called it such, or at least alleged that it bears sufficient similarity to Ponzi schemes that the appellation is justly applied to Social Security.

But to call Social Security a Ponzi scheme is, of course, to draw an analogy between Social Security and private schemes of the sort that Charles Ponzi made (in)famous.  Like all analogies, it's not perfect.  What matters is the essence of the 'thing' (in this case, Social Security) that we're trying to emphasize as being especially noteworthy and relevant.

At one extreme end, if the essence of a Ponzi scheme is that its chief saleman has a last name that begins in "p" and ends in "i," then clearly Social Security isn't a Ponzi scheme.  If, at the opposite end, the essence of a Ponzi scheme is that it is a devise that people believe they can use to increase their wealth, then all investments are Ponzi schemes.

Clearly, the essence of a "Ponzi scheme" – as such schemes have come to be understood in common English in the modern world – lies somewhere in the middle of these two extremes.

What is that essence?  I submit the essence of a Ponzi scheme is

(1) its promise that contributions today to the scheme's manager will pay off handsomely (that is, better than alternative investments) in the future to each contributor;

(2) that current contributions to the scheme are not invested but are spent – in particular, are spent to make good on promises made in the past to previous contributors who now expect their stream of pay-offs;

(3) that the manager of the scheme maintains his ability to pay the promised streams of pay-offs only by getting other contributors into the scheme, but

(4) the manager doesn't let on to contributors (and would-be contributors) that the funds for paying off the promises come not from any profitable, productive investment of contributed funds – nor from any actuarially justified program for reallocating risks across persons or across time – but come, instead, simply from the hope that future contributors can be corralled into the system;

(5) that if future contributors do not arrive in sufficient numbers, the scheme has too little money on hand to pay off all promises;

(6) that the manager of the scheme, in short, successfully persuades his or her targets that the scheme is financially something that it really is not.

Note that I do not list "pyramiding" – a "pyramid scheme" – as being among the essential qualities of a Ponzi scheme.

On these points, Social Security strikes me (again, as it has struck even some of its illustrious champions) of having a great deal of Ponzi-ness about it.

…..

I dashed the above thoughts off rather quickly (as I'm occupied for much of the day with administrative work for GMU).  I'm prepared to add to, subtract from, and to modify the above list.