In an extraordinarily rare occurrence, this week I have criticized both Paul Krugman and Tyler Cowen in separate blog posts. But last night I realized I was a bit too harsh. (I am not being sarcastic here, again another extraordinarily rare occurrence.)
This 8-page Krugman essay is actually really good, in terms of history of (mainstream) economic thought. (I had only had time to skim the first page when I ranted about it yesterday afternoon.) I don’t have any problem with his explanation of the battle lines in academia. Of course, the only flaw is that he totally ignores the niche in “theory-space” held by the Austrians. Krugman thinks you have to either believe that markets are flawless and bubbles are literally impossible, or you have to believe that capitalism is flawed and requires government oversight. Of course he is overlooking the possibility that government intervention can cause bubbles and other problems in market economies.
As for Cowen, in this post I flipped out because he first had said, “(By the way, some libertarians like to pretend that Milton Friedman blames the Fed for “contracting” the money supply by one-third in that period but in reality Friedman blames the Fed for having let the money supply fall by one-third and not having run a bank bailout.)”
But then in response to people who challenged this assertion, Tyler clarified by saying, “When I perused Friedman’s writings lately, I found that, as far as I could tell, he never discussed how to deal with widespread bank insolvency. I interpret him as believing that [lender of last resort] and loose money and the FDIC could deal with banking crises…”
As I say, I flipped out here, because it seemed Tyler’s interpretation of Friedman was precisely what the knee-jerk libertarians were “pretending” that Friedman believed.
However, I thought about it some more, and I realized that the case is not as open-and-shut as I originally thought. To say someone thinks the Fed should act in a crisis in its “lender of last resort” capacity can mean all kinds of things. Indeed, you could say that Bernanke himself (except for the outright purchases of some assets) is “bailing out” AIG and others through emergency loans. I think Brad DeLong was the first person I saw who brought up the point that the dividing line between an institution that is merely illiquid as opposed to insolvent is not as clearcut as we normally think. In our example, if the Fed is willing to give “loans” at 0% interest no matter the condition of the borrower, does that mean the Fed is acting as lender of last resort, or is it bailing out that institution?
Anyway, I still think Friedman did NOT advocate massive bank bailouts in the Great Depression, and I also think Tyler is contradicting himself when he says (a) Friedman DID advocate bank bailouts in the Great Depression but (b) Friedman never discussed widespread bank insolvency. (If [b] is true, how can [a] be true?) But my first reaction–where I accused Tyler of admitting that Friedman held precisely those views that Tyler had earlier chastised libertarians for attributing to Friedman–was unwarranted. It all depends on what activities we allow to the Fed when it’s wearing its “lender of last resort” hat.
When I got back in my car after leaving the gym–what, you thought this figure was natural?–I turned on the radio to discover a familiar voice on NPR’s “Marketplace.” The commentator gave a theory of the high price of college tuition.
Out of the 310 words in the commentary, the word “government” appears 0 times. Instead, the commentator said that higher education was a form of placebo effect, and concluded with, “Colleges and universities may appear inefficient or overpriced, but it’s a business model likely to stand the test of time. As long as we keep on thinking that it works, it probably does.”
I don’t need to tell you who the commentator was, do I?
At my request, MercedesRules (who is a serious gold bug) has been sending me some of the commentary from today. A few of the really paranoid guys are predicting that gold will break $1000 tomorrow in conjunction with an awful jobs report. Regardless, they are sure the end of life as we know it is near.
At the Mises Circle last weekend, I reminded the audience that at this stage in George Bush’s presidency, 9/11 hadn’t occurred yet. “So the best is yet to come.”
I’ve been meaning to complain about this for awhile, but with gold flirting with $1000 now’s a good time: Who were the ad wizards that came up with Goldline’s catch phrase, “And it’s never been worth zero!” ? Couldn’t Purina say the same thing about cat food? Should I go long on cases of Fancy Feast?
* John David Fernandez explains the joy that is Mises University. An excerpt: “There is no intellectual arrogance displayed by any of the professors. All of them have a great sense of humor, and always willing to chat or autograph a book. You can talk to them about anything, including the nitty-gritty details of anarchism or classical-liberal theory. You can ask them to read a paper you’re working on, or to comment on what they would do if they were made president for a year and asked to solve the country’s economic woes. Some of them can even sing a mean Neil Diamond — oh, sweet Caroline!”
* Steve Horwitz gives a lot more evidence on that paragon of laissez-faire, Herbert Hoover.
* Lilburne gives an amazing account of the battle of wits between Nicholas Biddle and Andrew Jackson over the Second Bank of the United States. Really, the second half of this essay is dynamite; Lilburne isn’t just good for Krugman-bashing. If the quotes are legit, then Biddle tried to wreck the economy in an attempt to maintain his power. Not saying there’s any relevance to today, of course…
* The New Yorker reviews Pete Leeson’s book on pirates.
* A popular Berkeley (!) physics professor takes on some of the myths in the global warming debate. (HT Rob Bradley)
* “Why Obama Should Learn to Love the Bomb.” I was hoping this was a White Paper on Iran from Bill Kristol, but it’s much less interesting.
* Chip Knappenberger explains the significance (and remaining holes to be plugged) in the recent Lindzen-Choi paper that’s got talk radio in such a tizzy. The opening sentence: “MIT climate scientists Richard Lindzen and collaborator Yong-Sang Choi soon-to-be published paper (Geophysical Research Letters, American Geophysical Union) pegs the earth’s “climate sensitivity”—the degree the earth’s temperature responds to various forces of change—at a value that is about six times less than the “best estimate” put forth by the Intergovernmental Panel on Climate Change (IPCC).” Technical quibble: I think “six times less” means “one-sixth of.”
Tyler Cowen links to this 8-page Krugman essay–and be careful, you might have missed it if you merely check Krugman’s blog. (I.e. I didn’t see it linked from there; I think Tyler gets tweeted whenever somebody rips the free market.) Anyway, Krugman starts off great:
[I]n a 2008 paper titled “The State of Macro” (that is, macroeconomics, the study of big-picture issues like recessions), Olivier Blanchard of M.I.T., now the chief economist at the International Monetary Fund, declared that “the state of macro is good.” The battles of yesteryear, he said, were over, and there had been a “broad convergence of vision.” And in the real world, economists believed they had things under control: the “central problem of depression-prevention has been solved,” declared Robert Lucas of the University of Chicago in his 2003 presidential address to the American Economic Association. In 2004, Ben Bernanke, a former Princeton professor who is now the chairman of the Federal Reserve Board, celebrated the Great Moderation in economic performance over the previous two decades, which he attributed in part to improved economic policy making.
Wow! So a bunch of economists who either had the ear of government or were actively running policy, were horribly wrong. I guess that means we shouldn’t trust the government to pick experts to tinker with the economy then, right Paul?
Of course not. What this all proves is that economists worshipped the market because (a) there was so much money in touting pure capitalism and (b) they wanted to show off their fancy mathematical skills.
I know, you’re saying, “Surely you’re joking! Those are two reasons that Austrians usually give to explain the success of the Keynesian revolution. Wasn’t Paul Samuelson the godfather of mathematical economics?! Is he a free marketeer now?” Well no, I’m not joking, and don’t call me Shirley.
BTW I only skimmed the first page of Krugman’s treatise, but–if I may paraphrase the MarginalRevolution lingo–it is self-loathing, so go ahead and click it if you dare. I’m sure it must be packed with some great stuff about how unfettered capitalism just happened to blow up 16 years after the institution of the Federal Reserve.
Some people accuse Fox News of presenting only one side, but I’m glad to see that the newspaper of record offers a wide range of views. For example, in a column from August 27, the contributor declared:
So new budget projections show a cumulative deficit of $9 trillion over the next decade. According to many commentators, that’s a terrifying number, requiring drastic action — in particular, of course, canceling efforts to boost the economy and calling off health care reform.
The truth is more complicated and less frightening. Right now deficits are actually helping the economy. In fact, deficits here and in other major economies saved the world from a much deeper slump. The longer-term outlook is worrying, but it’s not catastrophic.
Presumably to balance this sanguine view of massive deficits, the NYT ran a column taking the opposite view three days later:
And what about other challenges? Every desperately needed reform I can think of, from controlling greenhouse gases to restoring fiscal balance, will have to run the same gantlet of lobbying and lies.
The New York Times op ed writers: They report, you decide.
Gold has just broken through $987 an ounce. I don’t suppose if it breaks $1000 before Labor Day, you guys would give me my “by summer” gold call, will you? Nah, didn’t think so.
Anyway here’s another way the government does its best to keep you in your financial prison:
[S]ince the IRS has determined gold to be a collectible, owning physical gold would subject the investor to the special long-term capital gains tax rate of 28 percent, not the normal 5-percent or 15-percent ones. (For less than one year it is 35-percent.) Owning shares of an ETF that holds gold or silver makes you subject to the higher rates.