12 Oct 2012

Curb Your Anticipation

Economics, Steve Landsburg 30 Comments

Sorry folks, I have to finish grading…I promised my students. With the LibertyFest activities tomorrow (I’m attending, not speaking) I had better knock it out today.

In the meantime, let me say the following of my two-front war which will soon open to three:

==> Everyone thinks Steve Landsburg is nuts, but actually his case is pretty strong. We’re just arguing over empirical magnitudes at this point.

==> Everyone except George Selgin thinks David Glasner is holding his own against me. No, I absolutely destroyed him on the narrow point under discussion. It’s frustrating that not everyone realizes this.

==> Dean Baker is being saucy and pretending that Nick Rowe had nothing useful to say on the “debt doesn’t burden grandchildren” stuff last year. DeLong has ended his neutrality and has joined forces with the Axis of Obfuscation.

OK if you are a casual passerby, this post means nothing to you. Consider yourself lucky. I will write more coherently after grading…

30 Responses to “Curb Your Anticipation”

  1. Daniel Kuehn says:

    I didn’t weigh in because I don’t know Mises and those were long posts (whine whine whine, I know), but FWIW from my cursory read of the argument you seemed to be shutting Glasner down.

    He was making some claim that Mises was talking about something else if you read your quote in a wider context… don’t know if he has a point there or not. It would require me to actually read Mises. But at face value your case seemed pretty cut and dry.

  2. Ken B says:

    “I will write more coherently after grading…”

    Doctor, will I be able to play piano after the surgery …

    🙂

    Sorry Bob couldn’t resist.

  3. JP Koning says:

    Bob, I think you were right on the narrow point under discussion… whether the historical relevance of Mises’s theory was confined to a gold standard economy or might also relate to a fiat economy. See my comment…

    http://uneasymoney.com/2012/10/10/on-the-unsustainability-of-austrian-business-cycle-theory-or-how-i-discovered-that-ludwig-von-mises-actually-rejected-his-own-theory/#comment-10248

    (note that he had a comeback for my point)

    But that’s just one small aspect of David’s more recent critique of ABCT. You’ve still got a lot of work ahead of you, methinks. Maybe you should ignore that third front… I thought that was cleared up ages ago.

  4. RPLong says:

    I’m with you on Mises. I think people new to Mises read him skeptically by default. Weirdly, the opposite seems to be true for Hayek – people cut him all kinds of leeway and slack. Maybe that’s the power of a Nobel prize? Anyway, the weird thing to me is that people always want to shut down Mises’ arguments, but when you go back over them and read them carefully there isn’t a whole lot of unorthodox economics there. Mises knew his stuff. If you find yourself disagreeing with anything but his most technical points, you are probably getting him wrong.

    And by “you,” I don’t mean YOU, Bob. Obviously…

    • Daniel Kuehn says:

      I think that’s the power of not accusing other libertarians of being socialists….

      just a guess.

      • RPLong says:

        Yeah, I’m sure the whole reason people my age read Mises critically is because of what happened years before we were born, to a roomful of people who are all for the most part dead, and of which we only have one written account attesting to the fact that it actually happened.

        Good theory.

        • Daniel Kuehn says:

          Ummm, you’re really missing the point. That was a particular example that illustrated the broader difference between Hayek and Mises.

          You really think people are attracted to Hayek because of the Nobel Prize?

          The reason people treat Hayek that way is because he comes across as being someone that’s willing to hear out people that disagree with him, and engage a broader set of ideas. Mises doesn’t give you this impression at all. It’s the same reason people react this way to Rothbard. Lots of people, even libertarian and conservative sympathizers of a lot of Mises’s ideas, thought this about him.

          Don’t pretend I’m just making this up. You know the reputation he has. That was just one illustration.

          • RPLong says:

            You get a particular impression from reading a German native writing in English, and impute a certain character to that. I read his work and find him a logical, methodical thinker.

            Given that HE’S DEAD and it’s impossible to know which one of us is right, it seems silly to argue over whether Mises ACTUALLY DID “hear people out.” All we’d be arguing over is whether your impression of Mises is more accurate than mine.

            But either way, you’re proving my point. You read his work and come away feeling that he isn’t hearing you out. That’s weird. They’re HIS books. YOU should be hearing HIM out.

            • RPLong says:

              And just in case someone tries to ding me on my poor phrasing, I don’t mean to say that Mises was a native of Germany, but rather that he was a “native German-speaker.” Given what he says about linguistic groups in “Omnipotent Government,” I realize this was really bad phrasing on my part, but I was commenting on the fly, so…

            • Daniel Kuehn says:

              re: “You get a particular impression from reading a German native writing in English, and impute a certain character to that”

              Oh yes, clearly my different impression of Hayek and Mises is grounded in the fact that Mises was a German native writing in English. Clearly.

              Even if you can manage to convince yourself of that doozy, RPLong, how do you explain the fact that I put Rothbard and Mises in the same boat on this point?

              Of course Mises is dead. We’re arguing over what peoples’ impression of him is. He gave a distinct impression. I’m guessing he was perfectly nice man in person. Maybe a little grouchy sometimes. People that knew him certainly thought so. But that’s not what we’re arguing about – we’re arguing about people’s impressions of him.

              • RPLong says:

                Okay, Daniel, if you’re unwilling to admit that someone writing in a second language might be giving you the wrong impression about his general personality, then I’ll let that “doozy” slide.

                The more important fact is that I’m not going to argue about what your belief about Mises’ personality might have been. Ha ha! Are you serious? Why would I do that? Your impression is what it is – it can neither be right or wrong. it’s just an impression.

                But take heed: Your impression can also never be MORE right than mine. So if I have an alternative impression, we’ve still not taken the discussion anywhere.

              • Major_Freedom says:

                DK is right RPLong…about Mises anyway. Mises was pretty stern.

                Rothbard on the other hand was very jovial, and loved to joke around. Rothbard has his detractors not because of his demeanor, but because of his ideas. His ideas turn many people off, because his ideas are radical.

                Hayek was rather moderate in terms of both his writing and his demeanor. He became popular not because of his demeanor, but because of his writings, which tended to be social-democratic in his later years.

              • Bob Roddis says:

                Hayek was pretty tough in this interview. I recall that Daniel “Peachy” Kuehn was quite disturbed by the rude tone.

                Hayek: You see, another political element was that, of course, politicians just lapped the argument and Keynes taught them if you outspend your income and run a deficit, you are doing good to the people in general. The politicians didn’t want to hear anything more than that — to be told that irresponsible spending was a beneficial thing and that’s how the thing became so influential.

                http://www.youtube.com/watch?v=N364sN5E0hQ&feature=results_video

          • Matt Tanous says:

            “You really think people are attracted to Hayek because of the Nobel Prize?”

            They are attracted to Hayek because of his contradictory and nonsensical theory of coercion that justifies the policies of modern social democrats. Hayek, like Friedman, is palatable to many because his writings that supposedly support the free market leave enough leeway and contradiction to shoehorn their desired interventions in – whereas Mises was quite clear that all intervention can only lead to ever greater intervention until you have full-blown totalitarian socialism and the absence of rational economic calculation.

            • Matt Tanous says:

              This is the same reason they reject Rothbard – he is even *less* supporting of intervention than Mises.

            • Major_Freedom says:

              They are attracted to Hayek because of his contradictory and nonsensical theory of coercion that justifies the policies of modern social democrats.

              Ding ding ding!

          • Martin says:

            Daniel,

            Even Friedman said in an interview that his popularity and acceptance was to a large extent made possible by his own Nobel Prize. Similarly Hayek was all but forgotten when the Nobel Prize rescued him from the wilderness.

            There is little doubt that had Mises received a Nobel prize his thought would be received a lot more sympathetically by the public and fellow economists.

        • Daniel Kuehn says:

          I agree with the fundamental point – none of this should make you take an automatically critical disposition towards Mises’s arguments.

          But if you’re looking for an explanation of why people do that to Mises and Rothbard but not Hayek it’s not too hard to figure out why.

          • RPLong says:

            AFAIC, there is no “Mises and Rothbard.” There is Mises, and there is Rothbard. Blurring the line between them does a disservice to either of them, individually. Their ideas are remarkably different, despite their mutual respect for each other.

          • skylien says:

            I really do think DK has an impression (and you always have an impression) that seems sensible of Mises. Also you still can read someone fairly and open mindedly even if you have a somewhat negative/skeptical impression of them. I read Mises stuff also highly critically. I do the same with Keynes, hell I do it even with Rothbard now. I think it’s good to be highly critical in general while inpreting the arguments in a generous manner.

            I mean I know where RPLong is coming from. Many people are not able to or at least have troubles to separate having an (first) impression of someone with actually engaging that person personally or their arguments open mindedly..

            And in defense of Mises attitude (if it really was that way). If you think about what he has gone through during his life, it really isn’t in any way surprising to be a bit grouchy sometimes..

            • skylien says:

              not *inpreting* but *interpreting*..

  5. Matt Tanous says:

    “Everyone thinks Steve Landsburg is nuts, but actually his case is pretty strong.”

    I still contend that any “extra drilling” at sites that are not forbidden must be less than optimal production levels with given technology – if any extra oil could truly be squeezed out profitably without prices rising, it would already have been drilled for.

    Government banning the production at one site *must* raise the price of oil. The Hotelling rule does not apply to the real world – that I can understand from reading Mises’ section on imaginary constructions in economics in Human Action during lunch.

  6. Silas Barta says:

    I don’t think it’s “just an issue of empirical magnitudes” whether it’s possible for investors to believe that major oil source X will be on indefinite hold, then believe that it won’t, thus bringing the price of oil down.

    Nor do I think it’s an issue of empirical magnitudes whether it’s okay to casually throw off a line like “it doesn’t matter if some oil fields were off limits because the same extraction would have happened somewhere else anyway”.

    • Bob Murphy says:

      I don’t understand what you’re saying, Silas. I mean, those are obviously empirical questions, right? Are you saying it would be like someone saying, “I think cows can jump over the moon” and then I say I disagree with him on empirical magnitudes? Or do you really mean Landsburg is saying something that is conceptually wrong?

      • JSR08 says:

        To conceptually disregard all reasons why a resource couldn’t be extracted once it is known to exist seems wholly unrealistic to me. My implied point in the previous thread was that there are non-trivial reasons (known and unknown) why one might not be able to ever mine the diamonds, and to casually assume them away to make your point is not terribly convincing to some.

        Think of it like this: Let’s say I tell you that I can and will someday beat the world record high-score in Tetris. You would probably respond with skepticism, citing numerous logical reasons why it is unlikely that I will ever do so (and probably not naming them all). Not that you think it is impossible, but just very unlikely. In response, I tell you to conceptually assume all those reasons away and to give me the accolades and recognition I think I deserve for my mere proclamation of intention.

        In the same way, I think Landsburg is asking us to assume all the real world problems with extracting the oil (beating the WR for Tetris) and therefore to believe that its mere existence should affect the current price of oil (get accolades and recognition right now).

      • JSR08 says:

        How about this: Couldn’t Landsburg’s presumption that the current price of oil is affected by oil that exists but cannot be legally extracted because “no administration can constrain the policies of future administrations” be applied to just about anything?

        I mean, for example, I could base my financial future on the belief that a future administration will give me a million dollars to retire with because “no administration can constrain the policies of future administrations” and that future administration could decide to give me a million dollars. However, realistically, I think most would agree that is not a very smart plan.

        It seems to me to be a very slippery slope to start your economic arguments on the basis that a future government *could* change the policies of the present one.

  7. Dan Hewitt says:

    DeLong stays with the crude “to spend is to tax” when it suits his purposes (attacking Mankiw).

    http://delong.typepad.com/sdj/2010/10/greg-mankiw-quits-the-new-york-times.html

    • Bob Murphy says:

      What do you mean, Dan? Are you saying DeLong is being inconsistent here? I just need you to spell it out…

  8. Chase Hampton says:

    When the burden of debt discussion was taking place originally, I wrote my own analysis where I somewhat systematically grouped and considered a bunch of different of different cases of the OLG models being discussed. Whenever I finished, I discovered that a few hours earlier Murphy had settled on a very similar conclusion as the one I had reached. So, I didn’t feel the need to post what I had written. There is one subtlety when it comes to Ricardian Equivalence that I think everyone else missed though. Below is what I wrote if anyone cares to read it (It is longer than a Major_Freedom post). Also, DeLong’s analysis does nothing to take away from what Rowe/Murphy have said on this topic (which I agree with for the most part). Rather, it only considers yet another possible harm of the crowding out of private investment. I had thought this was addressed and those discussing it simply assumed it away since it is fairly obvious.

    Population consists of two groups, young and old.

    Period 1- A is old and B is young
    Period 2- B is old and C is young
    Period 3- C is old and D is young

    Government Transfers

    1) Government transfer is financed by taxes.
    i) A receives transfer paid for by taxes levied onto A in period 1.
    Result: A, B, C, and D are indifferent
    ii) A receives transfer paid for by taxes levied onto B in period 1.
    Result: A is better off at the expense of younger generation B.

    2) Government transfer is financed by bonds which are paid off through taxes in the following period.
    i) A receives transfer paid for by bonds bought by B in period 1 which are paid off by taxes levied onto C in period 2
    Result: A and B are better off at the expense of younger generation C.
    ii) A receives transfer paid for by bonds bought by B in period 1 which are paid off by taxes levied onto B in period 2.
    Result: A is better off at the expense of younger generation B.
    Analysis: B gives up consumption in period 1 for an asset in the form of a promise to be able to consume more in period 2 to be financed through the government revenue in period 2. Unfortunately for B, the government revenue in question was originally B’s period 2 revenue. Thus, though the bond was paid, the promise was not fulfilled and B sacrificed a portion of his period 1 consumption in return for nothing. The result is that the money used to purchase the bond in the first period was essentially turned into a tax.

    3) Government transfer is financed by bonds which are then bought by the next generation and are paid off through taxes in the period 3.
    i) A receives transfer paid for by bonds bought by B in period 1. These bonds are bought by C in period 2. The bonds are paid off by taxes levied onto D in period 3.
    Result: A, B, and C are better off at the expense of younger generation D.
    ii) A receives transfer paid for by bonds bought by B in period 1. These bonds are bought by C in period 2. The bonds are paid off by taxes levied onto C in period 3.
    Result: A and B are better off at the expense of younger generation C.
    Analysis: B is better off since this time the promise of greater later consumption was fulfilled by C. Unfortunately for C, the original promise from the government was not fulfilled since he was only paid in what was originally his own revenue.

    4) Government transfer is financed by bonds which are then paid off by issuing more bonds in period 2. These new bonds are paid off by taxes in period 3.
    i) A receives transfer paid for by bonds bought by B in period 1. These bonds are are paid off by issuing bonds in period 2 which are bought by C. The second set of bonds is paid off by taxes levied onto D in period 3.
    Result: A, B, and C are better off at the expense of younger generation D.
    ii) (Rowe/Murphy Example) A receives transfer paid for by bonds bought by B in period 1. These bonds are paid for by issuing bonds in period 2 which are bought by C. The second set of bonds is paid off by taxes levied onto C in period 3.
    Result: A and B are better off at the expense of younger generation C.
    Analysis: The government’s promise to B was fulfilled by the government. However, C made a similar transaction and, for the same reason as in number 2 part ii, this promise was not fulfilled.

    5) (Ricardian Equivalence) Government transfer is financed by bonds which are then bequeathed to the next generation. These bonds are paid off by taxes in period 3.
    i) A receives transfer paid for by bonds bought by A and bequeathed onto B in period 1. The bonds are paid off by a tax levied onto B in period 2.
    Result: A, B, C, and D are indifferent.
    ii) A receives transfer paid for by bonds bought by B in period 1. These bonds are bequeathed to C and finally paid off in period 3 by a tax levied onto D.
    Result: A and C are better off at the expense of younger generations B and D.
    Analysis: The claim that B is worse off is easily the most controversial one made in this entire discussion since he voluntary purchased the bond and voluntarily gave it up. However, in all the previous examples, B bought the bonds because he saw an opportunity to provide for additional consumption in period 2 which he valued more than the consumption he would have to give up in period 1, an action he would take under any circumstance. This situation, however, is quite different. B sees that a government transfer is going to be made to A which is also to be financed through government debt. Since B does not wish for future generations to pay for such a transfer, he is made worse off as soon as such a transfer is decided to take place. Therefore, that his actions were voluntary is irrelevant. They were two voluntary actions he would have originally preferred not to make.
    iii) A receives transfer paid for by bonds bought by B in period 1. These bonds are bequeathed to C and finally paid off in period 3 by a tax levied onto C.
    Result: A is better off at the expense of younger generation B.

    What we’ve learned about government transfers…

    Simply, that whoever bears the burden of the tax (which is ultimately what finances the transfer) loses. The only exceptions to this rule are when the person paying the tax is the same one receiving the transfer and when the bonds are handed down to the generation which bears the tax burden. In this latter case, the losers are those who are forced to make the decision of whether or not to purchase and bequeath, purchase and realize the gains themselves, or let foreigners purchase and realize the gains. Of course in the case of the growth rate of the economy matching or exceeding the rate of interest to be paid on the bonds, the ponzi scheme of paying off bonds by issuing more bonds can be sustained indefinitely without any harm. But more on this later…

    Government Investments

    For the sake of simplicity, any “government investment” is considered to realize all returns the next period and benefits are equally distributed across the population (the original investment is also brought forward into the next period and is distributed equally among the population as well).

    6) Government investment is financed by taxes.
    i) Tax is levied on A.
    Result: B and C are better off at the expense of older generation A.
    ii) Tax is levied on B.
    Result: C is better off. B may be better off, indifferent, or worse off depending on how he values the additional consumption in period 2 as compared to the consumption given up during the first period.

    7) Government investment is financed by bonds which are paid off by taxes in the following period.
    i) Tax is levied on C in period 2.
    Result: B is better off. C may be better off, indifferent, or worse off depending on how the rate of return on the investment compares to the rate of interest to be paid on the bond. Since the return is split evenly among the population consisting of two people, if the rate of return is double the rate of interest, he is indifferent.
    ii) Tax is levied on B in period 2.
    Result: C is better off. B may be better off, indifferent, or worse off depending on how he values the additional consumption in period 2 as compared to the consumption given up during the first period (The same as number 6 part ii).
    Analysis: Since the promise of greater future consumption (from the interest on the bond) was broken, the purchasing of the bond in period 1 basically turns into a tax and the analysis becomes the same as number 6 part ii.

    8) Government investment is financed by bonds which are paid by issuing more bonds in the second period. The second set of bonds is then paid off by taxes in period 3.
    i) Tax is levied on D in period 3.
    Result: B and C are better off at the expense of younger generation D.
    ii) Tax is levied on C in period 3.
    Result: B is better off. C may be better off, indifferent, or worse off depending on how the rate of return on the investment compares to the rate of interest to be paid on the bond. Since the return is split evenly among the population consisting of two people, if the rate of return is double the rate of interest, he is indifferent. (Note: C would have definitely been better off had the promise of greater future consumption been fulfilled.)

    What we’ve learned about government investments…

    Once again, whoever bears the burden of the eventual taxation is key. More importantly, government investment, when not paid for by those who stand to benefit from such investment, will create a burden on a different (most likely future) generation. If the investment is paid for by those who gained from it, then clearly, just as with any other transaction, benefit needs to be weighed against the cost in order to determine if those involved truly did end up better off. Needless to say, that sort of inquiry goes beyond this discussion, but many arguments made by public choice analysts and free-market economists make a compelling case against these benefits outweighing their associated costs.

    Now, what if we let the economy grow?

    If the growth rate of the economy for a period with or without an government investment is lower than the rate of interest to be paid on the bonds which are due to be paid that period, then, in order to sustain the borrowing without paying any taxes which as we’ve seen would impose a burden on the generation taxed, the interest rate offered on the bonds and therefore the debt to GDP ratio must be increased. I’m guessing this is only necessarily true in the simple two-population model devised, though. Still, the more often that interest rate exceeds the growth rate, the more difficult it becomes to sustain the unstable financing scheme.

    If the growth rate of the economy is greater than or equal to the rate of interest on the bonds, then even in the simple model this scheme could go on indefinitely. Here are a few considerations on this however. First, whoever purchases a government bond would most likely have been better had they just invested privately under these circumstances. Second, maintaining any debt creates a burden just by virtue of its existence. To make this clearer, consider if the borrowing in a period increased the debt to GDP ratio from 50% to 100%. The increase makes it more difficult and more expensive to borrow in the future, which wouldn’t be “fair” to a generation who can no longer employ deficit financing. Finally, does anyone actually think the perpetual borrowing described here is possible in practice or resembles anything in reality? Heck, is it even desirable?

    Conclusion

    When it comes to government debt, no matter what it is used for a transfer or investment, the result is the same. Someone benefits while someone else pays and the burden almost always lies with whoever ends up being taxed, even if it’s the bondholders themselves. After these simple examples and corresponding analyses, no other reasonable conclusion can be reached. So what then was Krugman’s mistake?

    What Krugman failed to observe is the existence of overlapping generations in a single time period. By definition, these generations will be alive for more than one period, which whenever government finances its action with debt, leads to a burden which is to be carried until it is fully realized through taxation. The burden is due to the fact that whenever a government sells a bond, it is making a promise which it can only fulfill by harming someone else through taxation or by making another similar promise again. I’m not sure anyone has made exactly this point.

  9. noiselull says:

    I think the cross-ideological appeal of Bob’s ECONOMIST ZONE post should give hope to all of humanity.

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