Russell Roberts's Blog, page 1422

Nimble government, job creating machine

The New York Times reports that green technology might be the job creation engine some have claimed it to be:

In the Bay Area as in much of the country, the green economy is not proving to be the job-creation engine that many politicians envisioned. President Obama once pledged to create five million green jobs over 10 years. Gov. Jerry Brown promised 500,000 clean-technology jobs statewide by the end of the decade. But the results so far suggest such numbers are a pipe dream.

"I won't say I'm not frustrated," said Van Jones, an Oakland activist who served briefly as Mr. Obama's green-jobs czar before resigning under fire after conservative critics said he had signed a petition accusing the Bush administration of deliberately allowing the Sept. 11 terrorist attacks, a claim Mr. Jones denies.

A study released in July by the non-partisan Brookings Institution found clean-technology jobs accounted for just 2 percent of employment nationwide and only slightly more — 2.2 percent — in Silicon Valley. Rather than adding jobs, the study found, the sector actually lost 492 positions from 2003 to 2010 in the South Bay, where the unemployment rate in June was 10.5 percent.

Federal and state efforts to stimulate creation of green jobs have largely failed, government records show. Two years after it was awarded $186 million in federal stimulus money to weatherize drafty homes, California has spent only a little over half that sum and has so far created the equivalent of just 538 full-time jobs in the last quarter, according to the State Department of Community Services and Development.

The weatherization program was initially delayed for seven months while the federal Department of Labor determined prevailing wage standards for the industry. Even after that issue was resolved, the program never really caught on as homeowners balked at the upfront costs.

"Companies and public policy officials really overestimated how much consumers care about energy efficiency," said Sheeraz Haji, chief executive of the Cleantech Group, a market research firm. "People care about their wallet and the comfort of their home, but it's not a sexy thing."

Ah, seven (!) months to determine "prevailing wage standards" in the industry. No hurry. And even then they couldn't spend the money because consumers, even at subsidized prices, didn't like the program.

Spending other people's money on other people

Milton Friedman wisely observed that we spend our own money on ourselves very carefully. We spend other people's money on ourselves less carefully. But the least carefully spent money is other people's money on other people. Aid to Colombia would seem to fall into the latter category. The Washington Post reports:

The Obama administration often cites Colombia's thriving democracy as proof that U.S. assistance, know-how and commitment can turn around a potentially failed state under terrorist siege.

The country's U.S.-funded counterinsurgency campaign against a Marxist rebel group — and the civilian and military coordination behind it — are viewed as so successful that it has become a model for strategy in Afghanistan.

But new revelations in long-running political scandals under former president Alvaro Uribe, a close U.S. ally throughout his eight-year tenure, have implicated American aid, and possibly U.S. officials, in egregious abuses of power and illegal actions by the Colombian government under the guise of fighting terrorism and drug smuggling.

American cash, equipment and training, supplied to elite units of the Colombian intelligence service over the past decade to help smash cocaine-trafficking rings, were used to carry out spying operations and smear campaigns against Supreme Court justices, Uribe's political opponents and civil society groups, according to law enforcement documents obtained by The Washington Post and interviews with prosecutors and former Colombian intelligence officials.

The revelations are part of a widening investigation by the Colombian attorney general's office against the Department of Administrative Security, or DAS. Six former high-ranking intelligence officials have confessed to crimes, and more than a dozen other agency operatives are on trial. Several of Uribe's closest aides have come under scrutiny, and Uribe is under investigation by a special legislative commission.

U.S. officials have denied knowledge of or involvement in illegal acts committed by the DAS, and Colombian prosecutors have not alleged any American collaboration. But the story of what the DAS did with much of the U.S. aid it received is a cautionary tale of unintended consequences. Just as in Afghanistan and other countries where the United States is intensely focused on winning counterterrorism allies, some recipients of aid to Colombia clearly diverted it to their own political agendas.

Wow. Who would have ever guessed that Colombian politicians spending my money might spend it on stuff that benefits themselves? I guess the word "some" in that last sentence is the silver lining. I wonder what the proportion is.

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." F.A. Hayek

Drinking the Austrian Kool-Aid

Greg Ip of the Economist writes in today's Washington Post that the Republican presidential candidates have rejected earlier Republican orthodoxy and have embraced some crazy economic ideas (Mises and Hayek, for example). The piece opens with how much John McCain 12 years ago appreciated Alan Greenspan:

When John McCain was running for the Republican presidential nomination nearly 12 years ago, he declared that Alan Greenspan was so critical to the economy that, if the then-Federal Reserve chairman died, he'd put sunglasses on the body, prop him up and hope no one noticed.

Yes, the Republican Party used to think more of the chair of the Fed than it does now. That seems pretty reasonable. A lot of sensible people think Greenspan helped create the housing bubble and the crisis by his interest policies of the early 2000s. Ip continues:

It's safe to say that GOP opinions of the Fed have slipped a bit since. Texas Gov. Rick Perry, a newly declared candidate for president, said it would be "treasonous" for Greenspan's successor, Ben Bernanke, to "print more money between now and the election" in an effort to boost the economy. Other candidates have been equally damning if slightly less extreme in their statements. Rep. Michele Bachmann of Minnesota has accused the Fed of "debasing the currency," while Rep. Ron Paul of Texas has written a bestseller called "End the Fed." The party's economic standard-bearer in the House, Paul Ryan of Wisconsin, repeatedly charges the Fed with "bailing out" what he considers President Obama's reckless fiscal policy and wants the institution stripped of its mandate to promote employment.

I am not a Republican and don't think Bachmann or Paul have any chance at the nomination. I think treasonous is an ugly word. But the Fed is out of control. Literally. It is not responsible for its actions in any direct way. When it bailed out the creditors of Bear Stearns it overstepped its bounds. It has decided to pay interest rates on reserves which looks to me like a backdoor bailout of the financial sector. It has purchased a great deal of bad paper from banks and financial institutions which is certainly a bailout. It is non-transparent. I don't know what they paid for those assets–it is not easy to find out. I also agree with Ryan (as do many but not all economists) that giving the Fed a mandate beyond inflation control is a recipe for disaster.

Ip continues:

If Republicans dislike monetary stimulus, they loathe its fiscal cousin even more, routinely labeling Obama's stimulus as ineffective, or worse, counterproductive. They want balanced budgets, the sooner the better. Bachmann, for instance, has advocated an immediate 40 percent cut to federal spending by barring any increase in the debt ceiling. This, too, is at odds with the party's earlier views. The administration of George W. Bush sold its 2001 and 2003 tax cuts as Keynesian-style economic stimulus. Lawrence Lindsey, a top Bush adviser, even likened opponents of the tax cuts to President Herbert Hoover, whose obsession with balancing the budget in 1932 worsened the Great Depression.

Well, yes, George Bush justified his tax cuts in Keynesian terms, particularly the 2008 cuts that Ip forgot to mention. The 2008 cuts accomplished nothing. They were simply rebates, something Keynesians think are effective. The 2001 and 2003 cuts were at least cuts in rates that could have incentive effects that would be characterized as "supply-side."

Ip continues:

Certainly, some of this rhetoric is just political opportunism. The Fed and the stimulus package are handy proxies for Republicans' real target, which is Obama in the 2012 election. But something more fundamental is going on: The economic ideology of the Republican Party has changed in recent years in an important and little-appreciated direction. Liberals and conservatives in the United States have long differed on how much the government should meddle in individual markets, whether for energy or health care. But they have largely agreed that the government should have at least some role in smoothing out the ups and downs of the business cycle — what economists call "macroeconomic stabilization," that is, containing inflation in good times and boosting employment in bad.

But this is the consensus that many Republicans in effect now reject.

Yes, fair enough. But why have the Republican candidates rejected this view? The answer IS political opportunism, but not the kind Ip has in mind. The American people see unemployment over 9%. They see that there has been virtually no net job growth over the last two years. At the same time, the deficit has swollen, the US credit rating has been downgraded and we're on the verge of a double dip. Certainly it is plausible to entertain the possibility that we don't have the knowledge to steer the economy.

Ip goes on to give a stylized history of macroeconomic policy which I don't agree with but you can read it yourself if you're interested. He ignores the importance of Friedman's (and Schwartz's) assault on Keynesianism and blames the Republican candidate's current views on a love affair with Mises and Hayek.

The real flaw in Ip's argument is the dog that doesn't bark. Why aren't the President and the Senate pushing an activist agenda with the economy still struggling? Why isn't anyone listening to Krugman and others who want even more government spending with borrowed money? Is it those crazy Tea Party-influenced Republicans who like The Road to Serfdom who are the barrier to old-fashioned mainstream economic policy? Well there are about 85 of those, maybe. That leaves 350 members of Congress and a Democratic Senate to craft some "sensible" stimulus. Why isn't it happening? The answer is that Democrats aren't so eager to swell the deficit further or bless additional quantitative easing. They want to keep their jobs. And they are as skeptical of Keynesian magic as the out-of-the mainstream Republican candidates.

Quotation of the Day…

… is from page 58 of historian Frank Trentmann's impressive 2008 book Free Trade Nation: Commerce, Consumption, and Civil Society in Modern Britain; the time and place referenced is very early 20th-century Great Britain:

For A.V. Dicey, the leading constitutional expert of the period, 'the worst danger of Protection' was precisely that it would lead to 'the confusion between public interest and private interest.'  Free Trade held out a mutually convenient if idealized concordat: politics kept out of business, and business kept out of politics.

Keynesian Prejudices

Here's a letter to the Wall Street Journal:

I greatly enjoyed Steve Moore's conversation with James Freeman on Keynesian economics ("Why Americans Hate Economics," August 19).

If economists of a 'classical' bent too-seldom acknowledge the petite kernel of truth in Keynesianism (namely, that "aggregate demand" can be inadequate), it's because giving credence to that kernel stokes two dangerous embers that readily ignite into a conflagration of calamitous policies.

The first is politicians' burning desire to spend money borrowed from future generations – a desire whose existence has nothing to do with Keynesianism but is fueled by the intellectual cover conveniently supplied by that theory.

The second is the propensity of many people to heedlessly draw inferences about the economy as a whole from their individual experiences.  Such heedlessness often yields inferences that are invalid.

It's true that Jones suffers if demand for his services falls, and that his suffering ceases when demand for his services is restored.  From this correct observation, however, Jones mistakenly concludes that every economy-wide downturn is the result of deficient aggregate demand – and, hence, that recessions are easily ended if only government would spend more money to increase aggregate demand.  Such a simplistic, pedestrian focus on demand diverts attention away from the many complex structural problems – the "microeconomic problems" – that in reality always are the ultimate causes of sustained economic downturns, and about which Keynesianism says next to nothing.

Sincerely,
Donald J. Boudreaux

Still among the finest essays on this matter is Hayek's 1974 Nobel lecture, "The Pretence of Knowledge."  And EconLog's Arnold Kling, with his focus on "patterns of sustainable specialization and trade," is also worthwhile to check out.

Selgin vs. Skidelsky, Gloves Off

George Selgin admirably defends Hayek (and other non-Keynesians) against misrepresentation by Lord Skidelsky.

Quotation of the Day…

… is from page 107 of my colleague emeritus Gordon Tullock's 1970 book Private Wants, Public Means:

The individual must choose between two monstrous packages of services every time he votes instead of choosing in an incremental manner from a large number of small packages as he does in the market.

Perhaps the Queen Should Knight the U.K. Rioters

Here's a letter to the New York Times:

Katharine Seelye reports that "The weather this year has not only been lousy, it has been as destructive in terms of economic loss as any on record" ("Year Packed With Weather Disasters Has Brought Economic Toll to Match," August 20).  She's correct.

But undoubtedly your columnist Paul Krugman disagrees with Ms. Seelye's conclusion that destruction causes economic loss.

For example, on September 14, 2001, Mr. Krugman wrote in your pages that the 9/11 attacks would prove "favorable" for the economy by generating "at least some increase in business spending" and by forcing government to spend more on rebuilding.  (Here he sung the economic praises of destruction when America's unemployment rate was only 5.0 percent.)  And just last week Mr. Krugman proclaimed that "this slump would be over in 18 months" if governments were forced to use resources to protect earth from invading space aliens.

Your Nobel laureate economist/columnist believes that destruction and the threat of destruction are economic boons.  And he dismisses as economically illiterate those of us (including, presumably, your reporter Ms. Seelye) who deny that floods, fires, terrorism, war, and other destroyers of resources promote economic growth and bestow the blessings of prosperity.

Sincerely,
Donald J. Boudreaux

(HT to John Shonder for pointing me to Seelye's report in the Gray Lady)

The speck of truth that makes Keynesian economics appealing to many people – a truth that no serious pre-Keynesian economist denied and that no serious non-Keynesian economist denies today – is, in the hands of Keynesians, transformed into a gargantuan blob that fills all Keynesian thought, crushes all other considerations, and, hence, renders Keynesianism a ludicrous monstrosity.

On this general point, see this superb post by Mark Perry at Carpe Diem.

Quotation of the Day…

… is from page 43 of my colleague Dan Klein's 1998 monograph 3 Libertarian Essays:

Liberty and dignity complement one another.  Their mutual dependence helps to explain why the price of liberty is vigilance.  Encroach on liberty this morning and you cause an erosion of dignity this afternoon, which itself will generate a new encroachment on liberty tomorrow, and so on.  If we neglect this multiplier effect, we are apt to underestimate the hazards of coercion.

Sex Is Necessary to Keep the Species Alive; Should We Therefore Subsidize Sex?

Here's a letter to Politico:

Helen Greiner and Jared Cohon rightly sing the praises of robotics, which have unmistakably improved manufacturing processes and, as a consequence, raised people's standard of living ("Robots are a boon for the economy," August 19).

But their tune turns discordant when they call for more government "investment" in robotics.  It's both logically and historically fallacious to conclude that, because something is desirable, government should subsidize it.

The lone example Ms. Greiner and Mr. Cohon offer to make their case for robotics subsidies actually does the opposite.  That example is of Drew Greenblatt, CEO of Martin Steel Wire Co.  In 2002 Mr. Greenblatt invested in robotics for his production facilities.  As Ms. Greiner and Mr. Cohon explain, "What seemed like a risky decision has paid huge dividends.  Revenues increased six-fold….  Greenblatt is [now] exporting his wire baskets to China and 34 other countries."

The profit motive clearly inspires firms that can profitably use robotics to use robotics – and, hence, inspires robotic researchers and builders to improve robotics in order to make robots ever-more attractive investments to the likes of Mr. Greenblatt.  And this market-driven process is unalloyed by the partisan gamesmanship and lack of on-the-ground expertise that invariably poison political decision-making.

Sincerely,
Donald J. Boudreaux

(HT Scott Lincicome)