Russell Roberts's Blog, page 1427

Hayek (Selgin & Co.) vs. Keynes (Skidelsky & Co.) Broadcast Today!

Last week in London George Selgin and Jamie Whyte debated Lord Skidelsky and Duncan Weldon on – so I understand broadly – Hayek vs. Keynes.  The debate (or, George tells me, the bulk of it) will be broadcast today in the U.K. at 8pm U.K. time (which is 3pm EDT). Info here.

In addition, here's a teaser, featuring a beautiful come-back from George to a comment by Lord Skidelsky.

And quoting the BBC: " You can listen again via the BBC iPlayer or by downloading the Analysis podcast. Share your thoughts on the Keynes vs. Hayek debate on Twitter using #lsehvk "

Shame on you, Joe Nocera

There is a lot to learn from this Joe Nocera column so I thought I'd go through it in detail. It is full of dishonest polemics.

Here is the opening:

You know what they say: Never negotiate with terrorists. It only encourages them.

That's a bit strong, wouldn't you say? In a democracy, people disagree. It's kind of against the rules to call your intellectual opponents terrorists unless they are killing innocent bystanders. But I guess Nocera is competing with Mr. Krugman.

These last few months, much of the country has watched in horror as the Tea Party Republicans have waged jihad on the American people.

Huh? See previous comment.

Their intransigent demands for deep spending cuts, coupled with their almost gleeful willingness to destroy one of America's most invaluable assets, its full faith and credit, were incredibly irresponsible. But they didn't care. Their goal, they believed, was worth blowing up the country for, if that's what it took.

Like ideologues everywhere, they scorned compromise.

A softening of tone. They're only ideologues. That beats terrorists or Jihadists.

When John Boehner, the House speaker, tried to cut a deal with President Obama that included some modest revenue increases, they humiliated him. After this latest agreement was finally struck on Sunday night — amounting to a near-complete capitulation by Obama — Tea Party members went on Fox News to complain that it only called for $2.4 trillion in cuts, instead of $4 trillion. It was head-spinning.

All day Monday, the blogosphere and the talk shows mused about which party would come out ahead politically. Honestly, who cares? What ought to matter is not how these spending cuts will affect our politicians, but how they'll affect the country. And I'm not even talking about the terrible toll $2.4 trillion in cuts will take on the poor and the middle class. I am talking about their effect on America's still-ailing economy.

Here is where it gets a little more interesting. He's right. What matters is how it affects the economy and the human beings who comprise it. Let's start with the terrible toll of $2.4 trillion in cuts on the poor and the middle class.

According to the CBO baseline spending (go here, page 18), which I understand is the baseline for the cuts of $2.4 trillion, the Federal government will spend $46.1 trillion over the next ten years. So we're going to go from 46.1 trillion over the next ten years to a mere $43.7 trillion? I know Mr. Krugman claimed the debt deal "slashed government spending." This year we're going to spend about $3.8 trillion. For further perspective, in the ten years between 2002 and 2011, the Federal government spent $28.1 trillion dollars. (This includes estimated outlays for 2011 but it will be close. Source for the numbers is here. It does not include inflation which would bump these numbers up a bit if we wanted to compare them to today's dollars. But inflation hasn't been big enough. We're spending a lot more than we did ten years ago.) Do you think that if the "cuts" actually happen that it's going to take a big toll on the poor and the middle class? Throw in the other $1.5 trillion that might happen later and that gets you all the way down to $42.5 trillion over the next ten years, an average of a mere $4.25 trillion per year. Yes, those are draconian slashes in government spending. George Orwell, please call your office.

America's real crisis is not a debt crisis. It's an unemployment crisis.

This is sort of true. If we don't get our debt under control, the current unemployment level is going to look like a picnic.

Yet this agreement not only doesn't address unemployment, it's guaranteed to make it worse. (Incredibly, the Democrats even abandoned their demand for extended unemployment benefits as part of the deal.) As Mohamed El-Erian, the chief executive of the bond investment firm Pimco, told me, fiscal policy includes both a numerator and a denominator. "The numerator is debt," he said. "But the denominator is growth." He added, "What we have done is accelerate forward, in a self-inflicted manner, the numerator. And, in the process, we have undermined the denominator." Economic growth could have gone a long way toward shrinking the deficit, while helping put people to work. The spending cuts will shrink growth and raise the likelihood of pushing the country back into recession.

That's one theory. As I have said before, there isn't a lot of evidence that spending cuts reduce growth.

Inflicting more pain on their countrymen doesn't much bother the Tea Party Republicans, as they've repeatedly proved.

Because they want smaller government? Which they didn't achieve. They just slowed the growth from the baseline. But let's look at the analysis: those of us who think the government spends too much money–we're sadists? We want to inflict pain our countrymen?

What is astonishing is that both the president and House speaker are claiming that the deal will help the economy. Do they really expect us to buy that? We've all heard what happened in 1937 when Franklin Roosevelt, believing the Depression was over, tried to rein in federal spending. Cutting spending spiraled the country right back into the Great Depression, where it stayed until the arrival of the stimulus package known as World War II. That's the path we're now on. Our enemies could not have designed a better plan to weaken the American economy than this debt-ceiling deal.

There was a recession in 1938. Some blame it on tax increases. Some on cuts in spending. Some on monetary policy. And some on animal spirits. What is clear is that the economy did get worse. And as Robert Higgs has argued, the economy struggled through the way until the war ended.

One thing Roosevelt did right during the Depression was legislate into being a social safety net to soften the blows that a free-market economy can mete out in tough times. During this recession, it's as if the government is going out of its way to make sure the blows are even more severe than they have to be. The debt-ceiling debate reflects a harsher, less empathetic America. It's sad to see.

This is grotesque. The government has made sure the blows are more severe? Unemployment insurance has been extended many times. What is he talking about?

This is how the piece ends:

For now, the Tea Party Republicans can put aside their suicide vests. But rest assured: They'll have them on again soon enough. After all, they've gotten so much encouragement.

Suicide vests? Shame on you, Joe Nocera. Shame on you for demonizing people who disagree with you. Shame on you for comparing people who want smaller government to people who blow up innocent bystanders eating a pizza or riding on a bus.

The Fairies Have It

Here's a letter to the New York Times:

Paul Krugman's frequently made case for more government spending rests unapologetically on Keynesian economics.  So what are we to make of Mr. Krugman's advice – offered to counter those who insist that the regulatory, fiscal, and monetary policies of the past few years are diminishing investors' confidence in the economy – to "Pay no attention to those who invoke the confidence fairy" ("The President Surrenders," Aug. 1)?

A key component of Keynesian theory is what Lord Keynes himself famously called "animal spirits" – mysterious phantoms that, although invisible and non-quantifiable, dramatically affect the level of economic activity by messing with investors' minds.

By advocating a theory that relies heavily on disembodied imps called "animal spirits," Mr. Krugman has no business denying the existence of "the confidence fairy."

Sincerely,
Donald J. Boudreaux

In fact, I do believe that animal spirits play some role – just as I believe in the "confidence fairy."  (If anything, the "confidence fairy" is a tad more plausible given that she/he/it is alleged to cause responses in predictable and rational ways to regime uncertainty, while animal spirits are just plain irrational.)

Goldberg on media bias

Jonah Goldberg loses it. It's a rant. But he's right. Most of the media has a double standard. It's weird to have to point it out. But they don't see it so it doesn't hurt from time to time.

Quotation of the Day…

… is from an 1876 lecture in New York City, delivered to the International Free-Trade Alliance, by William Graham Sumner; the lecture is entitled "The Establishment of Protection in this Country."  With this quotation Sumner argues against those who advocate protectionism as a means of strengthening a nation's ability to militarily defend itself against foreign aggressors:

In fact, however, the independence which we seek must be sought another direction.  Independent men are those who have wealth, not those whose houses are stored for a siege.  Independent nations are those which are wealthy, because they can command what they want when want it.  Those will be wealthiest which give industry its freest course in time of peace.

Sumner's point reminds me of an argument made by my teacher Leland Yeager in this 1954 monograph:

The moral is that the United States should not partially freeze its industry by Protectionist policies into a pattern that might well prove, if war finally came, to be out of date—and all at the cost of a sure loss in real national income. Even from considerations of national defense, it would probably be wiser to adopt Free Trade and other policies contributing to general economic strength and to rely, if war cut off foreign supplies, on the conversion of peacetime industry to wartime purposes that would in any case be necessary.

Prof. Gitlin Likely Also Believes that Higher Tariffs Will Never Significantly Reduce Imports

Here's a letter to the Chronicle of Higher Education:

Todd Gitlin classifies the "Laffer curve" as a "crackpot idea," thereby implying that only crackpots deny that raising tax rates always increases – or at least never decreases – government's tax receipts ("Expertise, Dogma, and the Journalism of Crackpot Ideas," July 31).

Contrary to Mr. Gitlin's apparent misconception, the Laffer curve does not demonstrate that all cuts in tax rates increase tax receipts.  It demonstrates, rather, that tax rates can be so high that the resulting tax receipts are lower than they'd be if tax rates were lower.  The Laffer curve, to be a bit technical, is simply an application of what economists call "elasticity" – a concept denied only by genuine crackpots.

Just as the revenue McDonald's would earn on Big Macs would fall if it hikes the price of each Big Mac to $100 (How many people would buy Big Macs at that high price?), so, too, would tax receipts fall if government hikes income-tax rates to very high levels.  If it's not crackpot to see that, in response to higher Big Mac prices, fast-food diners change their activities in ways that can cause Big Mac revenues to fall, it's not crackpot to see that, in response to higher tax rates, income earners change their activities in ways that can cause tax receipts to fall.

Sincerely,
Donald J. Boudreaux

Capitalism = Innovationism

111 years ago today my paternal grandfather, Adrian J. Boudreaux, was born in the swamps of south Louisiana, in a town called Franklin (although I don't believe that it was called "Franklin" when "Paw" – as I called him – was born).  It's southeast of New Iberia, LA, about halfway from there to Houma, LA.

He was the youngest son of Alcide Boudreaux (1864-1962) and (omigosh! I've forgotten my great-grandmother's name).  Paw dropped out of school in fourth grade.  He ran away from home at the age of 15 to New Orleans – where he polished his English (as cajun French was his native language).  At the age of 19 he married Teresa Flanagan.  They had two children: Donald (1924-2008) and Adrian Jr. (my father, 1935-2009).  After working a few odd jobs, Paw drove a street car in New Orleans and, later, a bus.  He retired in 1965.  "Maw" died in 1967 and Paw and died in 1975.  Paw smoked three packs of unfiltered Camels daily.  When he drank (which wasn't often) he drank Dixie beer or Schwegmann's beer.  His skin was leathery.  He never traveled farther west than east Texas, never farther north than north Louisiana, and never farther east than Mobile, Alabama.

I remember sitting many hours with him watching his favorite t.v. show, Gunsmoke.

When Paw was born, life expectancy at birth in America was 47 years.  He beat that by 28 years.

How immensely and wondrously the world has changed since Paw was born!  (And even since he died!)

To get a sense of just how poor life was just 111 years ago even for middle-class Londoners, you can't do better than to watch the 1999 BBC program "1900 House."  (I believe that pretty much all of this series is available on YouTube.)  One of my favorite scenes from "1900 House" is when the hired maid reveals her sudden realization that women were liberated not so much by political activitism as by appliances such as the vacuum cleaner.

Bloody Keynesians

Reading Russ's latest post, in which he quotes Paul Krugman, reinforces the impression that I've always had of Keynesian economics and continue to have to this day: it mistakes a symptom for an underlying problem and then proposes to treat the symptom.

It's as if a person who is bleeding to death because of a gunshot wound in his stomach is brought to a physician.  The physician correctly realizes that the patient is losing massive amounts of blood and, also, correctly understands that such blood loss is dangerous to the patient's health.

So the physician prescribes massive infusions of blood, period.  If the patient doesn't recover, the physician orders that the volume of blood-infusions be increased.  If the patient dies, the physician will forever blame himself for not increasing the volume of blood-infusions even further.

If the patient does recover, the blood-infusions will be praised for saving the patient.

The big hole in the patient's stomach is called a "micromedical" problem.  It might well be a significant problem, the physician concedes, but our physician is  trained to diagnose and cure one specific "macromedical" problem only, which is the problem of bleeding.  Micromedical problems are fundamentally distinct from the macromedical problem, which is insufficient blood coursing through the patient's body.  (Blood, after all, is vital to a person's vitality and vigor.)  When a patient who had until recently been quite healthy begins losing blood, the consensus of many physicians is that by far the most important treatment – certainly a necessary one, and, generally, a sufficient one – is to keep pumping more and more new blood into the patient until his health is restored.

Questions of precisely why, where, and how the patient is losing blood aren't as important as is the realization that the patient is losing blood.  "A bite by a spirited animal" is the famous phrase that is typically used to explain the mysterious bleeding.

It's very simple, really.

……

Like any analogy, this one isn't perfect.  For example, in economies repairing the microeconomic wounds goes a long way by itself toward restoring demand for goods and services, while in wounded human beings (to whom mortality come much more quickly than it does to economies) blood transfusions often are necessary, even though they are seldom a successful treatment for the underlying problem that caused the loss of blood to begin with.

The power of the polemical

Here is Krugman on what is wrong with the budget deal:

We currently have a deeply depressed economy. We will almost certainly continue to have a depressed economy all through next year. And we will probably have a depressed economy through 2013 as well, if not beyond.

The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn't work that way, a fact confirmed by many studies of the historical record.

Slash government spending? A bit strong don't you think? Let's call it an exaggeration. There is no evidence that the deal slashes spending. There isn't any evidence that it cuts it. It might cut the rate of growth. We'll see.

But my favorite bit of polemicism is Krugman's attack on the "confidence fairy":

…that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn't work that way, a fact confirmed by many studies of the historical record.

Unfortunately, Krugman doesn't provide a link to those "many studies" of the historical record. Maybe he was busy or simply didn't have room to provide them. But I will just mention that in 1946, federal spending fell about 55% when the war ended. The Keynesians predicted a horrible depression. Yet despite the release of 10 million people into the labor market with demobilization private sector employment boomed and the economy thrived. That's a great natural experiment. I am eager to read any of the alleged many studies of the historical record.

Alberto Alesina would also disagree. Here is a defense of his work and some other studies of the historical record that fail to find the effects Krugman claims.

Some F.D.A. Links

Here are six links to scholarly work (including videos starring my GMU Econ colleague Alex Tabarrok) supporting the presumption that markets will more reliably protect people against harm on the pharmaceutical front – harm both from pharmaceuticals that people actually consume and harm from the failure or inability to consume pharmaceuticals:

A cornucopia of resources, assembled by my colleagues Dan Klein and Alex Tabarrok, of materials on the F.D.A.

The first of a series of videos of Alex discussing the F.D.A.

An EconTalk podcast with Sam Peltzman (and see the links that Russ includes at the EconTalk site).

Robert Higgs's 1995 paper on the F.D.A.'s lethal regulation of medical devices.

Charles Hooper and David Henderson on the F.D.A.'s war on drugs.

Also, my GMU colleague Jack High – now in GMU's School of Public Policy – wrote several papers about 20 years ago on the not-so-reassuring origins of the Pure Food Act.  See, for example, Jack's paper with Clayton Coppin entitled "Wiley and the Whiskey Industry: Strategic Behavior in the Passage of the Pure Food Act," Business History Review (Summer 1988), Vol. 62, pp. 286-309.