In his quest to rationalize repeating the exact policies followed by Hoover and FDR, Paul Krugman has now endorsed protectionism. That’s right, the Krugman who won his Nobel (Memorial) Prize for his work on trade theory now says:
The economic case against protectionism is that it distorts incentives: each country produces goods in which it has a comparative disadvantage, and consumes too little of imported goods. And under normal conditions that’s the end of the story.
But these are not normal conditions. We’re in the midst of a global slump, with governments everywhere having trouble coming up with an effective response.
As usual, the insanity relies on an externality argument:
And one part of the problem facing the world is that there are major policy externalities. My fiscal stimulus helps your economy, by increasing your exports — but you don’t share in my addition to government debt. As I explained a while back, this means that the bang per buck on stimulus for any one country is less than it is for the world as a whole.
And this in turn means that if macro policy isn’t coordinated internationally — and it isn’t — we’ll tend to end up with too little fiscal stimulus, everywhere.
I don’t see why we’re handling this particular externality differently from all the other ones spawned on a free market. Why doesn’t the government just subsidize subsidies?
Over at Master Resource I sketch what’s going on with Martin Weitzman’s critique of standard models of uncertainty in the climate change debate. Some excerpts:
Weitzman argues that in this situation, standard cost-benefit analysis (CBA) breaks down. When some of the potential outcomes involve the deaths of hundreds of millions of people, not to mention the destruction of the world economy, Weitzman says that it is worse than useless to robotically assign a numerical value to these losses, and then discount exponentially at whatever rate one decides is relevant.
As one might expect, the alarmists in the climate change debate have seized upon Weitzman’s results, because they can use him to knock out the standard models which cannot be tortured into supporting the aggressive emissions cuts that the alarmists favor. The excitable Joe Romm’s discussion of Weitzman illustrates this perfectly…
…Basically, Nordhaus shows that Weitzman’s formal result isn’t as general as one might have supposed. In other words, Weitzman did not prove that anytime one has “fat tails” in the distribution, that CBA breaks down.
Over at Env-Econ, some of the commenters were taking pot shots at the free market in the wake of the salmonella outbreak from the Georgia peanut butter plant. (Incidentally that is a factory I’m talking about, not a photosynthetic organism that secretes peanut butter.) I said:
Ah yes, I think we had this same argument with the tomatoes.
I oppose government regulations because (a) they waste taxpayer money and (b) don’t keep us safe. In fact they give a false sense of security and crowd out private certification mechanisms because people assume “the government is taking care of this.”
How can we distinguish my theory from your guys’? What happened here perfectly fits my worldview.
In contrast, your worldview would be better supported if we had no government regulation of food safety and then somebody got sick from tainted food.
I’ll try it a different way: Suppose for the sake of argument that I’m right. What better evidence could I find, to document I’m right, than to show that businesses (or Bernie Madoff) get away with ridiculous things even amidst the allegedly vital government regulation?
My favorite response:
Have you ever thought to back test your theory by looking back on history before we had all this pesky regulation? Did you know there was a time when it didn’t exist? Are you aware that virtually all of it was AS A RESULT of far worse abuses of the public trust than this peanut fiasco? Your absurd assertion that regulation does not protect us can only be supported by willful ignorance of history. It is factually untrue and that’s not a matter of opinion. Homework assignment #1 read Updike’s “The Jungle”.
If I felt like it I could list literally hundreds of cases of regulation dramatically reducing public harm and with a little more work I could support ever assertion with statistics to prove it. Consider just the example of Airline safety. Look at the deaths per passenger mile flown, and try to explain that dramatic fall with anything other than FAA regulation and enforcement.
John Hood links to my Atlanta Journal Constitution op ed (via PRI) on the fallacy being stimulating consumption.
I just heard Ky Risdall interview Megan McArdle and Felix Salmon on the financial crisis. I think I lost the use of polysyllabic words.
Salmon was cockily saying that nationalization was necessary, in the sort of “at least I’m the adult here who can make the hard choices” tone.
For her part, McArdle said something like, “The market needs to capitulate before things can get better. Until we hit rock bottom, stocks will keep falling. The paradox of capitulation is that if people think things will get better, they won’t.”
That’s not an exact quote, but it’s close. I would just like to say that if she actually believes that, then she is ensuring continued free fall of markets, because she is telling us when to expect recovery…thereby preventing recovery.
I actually did gain something from the interview. I had had the impression that the stock market tanked since November, but it actually has been fairly flat in the grand scheme of things.
One last comment: What was great about McArdle was that Risdall would ask her a specific question–like, “Felix says the banks need to take $4 trillion in writedowns, does that sound about right to you Megan?”–and she would answer like a politician, confidently giving an answer that was orthogonal (my vocabulary is coming back finally) to the question.
I am getting old enough so that the “slippery slope” warnings against government intrusions now have extra validity for me, because I actually lived through this stuff. I vividly remember when the government started cracking down on cigarettes in the 1990s, that “right-wingers” warned, “What’s next? Are they going to start regulating fatty foods? Once they ban smoking in restaurants, will they ban it in your house?” And of course the critics laughed and scorned such scare tactics, when all they were trying to do was save lives from an awful product.
Well, here’s a story about politicians wanting to tax soda to help you lose weight. (Oh, I guess they’ll spend the revenues that come in, but that’s just a minor detail. The point is, they’re here to help you.)
Belmont is set to make history by becoming the first city in the nation to ban smoking on its streets and almost everywhere else.
The Belmont City Council voted unanimously last night to pursue a strict law that will prohibit smoking anywhere in the city except for single-family detached residences. Smoking on the street, in a park and even in one’s car will become illegal and police would have the option of handing out tickets if they catch someone.
The actual language of the law still needs to be drafted and will likely come back to the council either in December or early next year.
“We have a tremendous opportunity here. We need to pass as stringent a law as we can, I would like to make it illegal,” said Councilman Dave Warden. “What if every city did this, image how many lives would be saved? If we can do one little thing here at this level it will matter.”
The really sad thing is (for those of you who are also parents), our kids won’t know that this is unusual. Just like they will think there were always soliders with M-16s patrolling the airport.
Folks, I understand that I am highly critical of other economists, and I probably need to work on that. But I am sorry, Casey Mulligan’s handling of today’s GDP numbers (for 4Q 2008) just sent me over the edge. Let me be clear, I think Mulligan is a really good economist; earlier I trumpeted his awesome arguments against mortgage writedowns being tied to income. But I cannot remain silent in the face of today’s events.
Let’s set the context: Mulligan has been a maverick on many issues lately, saying that the credit crunch is bogus (having an entire “WMD week” to show that Paulson’s warnings were baseless), that the talk about helping homeowners is completely messed up, etc. But another of his “these guys are so stupid” theme was that everybody was freaking out about a depression, when per capita GDP was going to set records and such. Let me quote his post from January 19, entitled “My Q4 GDP Forecast Details”:
The pundits (eg., Goldman Sachs or the White House) say that real GDP will fall about 5 percent (seasonally adjusted at annual rates) Q3-Q4.
I have used three different methods to make my own forecast, and each of them says that the pundits are wrong. Here is what I find for seasonally adjusted real GDP growth Q3-Q4 at annual percentage rates (and thus in the same units as the -5 cited above):
* Productivity based: -2.2%
* Income based: +0.4%
* Spending based: +0.8%
Everybody got that? Mulligan’s big thing was that yes, nominal GDP was going to drop, but price deflation was going to mitigate or even completely offset it (yielding positive growth).
Well, here is how CNBC described the numbers that came out today:
The economy shrank at a 3.8 percent pace at the end of 2008, the worst showing in a quarter-century, as the deepening recession forced consumers and businesses to throttle back spending.
Although the initial result was better than economists expected, the figure is likely to be revised even lower in the months ahead and some believe the economy is contracting in the current quarter at a pace of around 5 percent.
Now, Mulligan does not need to concede defeat here; I would have been perfectly happy if he posted on this release and said, “Well, it doesn’t look good for me at the moment, but let’s all realize that we don’t have new information here. I always conceded that nominal GDP was going to drop, and I just thought deflation would be a lot more than the BEA is admitting. But unless they bring that number down in future revisions, I was wrong.”
Nah, Mulligan didn’t say that, or at least, you would have to really comb through his (many) posts on the new release to realize that is what happened. In fact, the casual reader might be led to think that Mulligan’s predictions had been vindicated. After all, Mulligan has a post today titled, “Wow I was close on nominal GDP,” which opens with:
Wow, in dollar terms, I was close on each of the spending categories (see below)!
I expected the GDP deflator to fall a lot more, and the experts thought it would rise. I wonder how much GDP deflator revision is possible.
Does everyone see what he did there? He’s making it sound as if he was basically right–certainly better than those ignorant “experts” popping off dire -5 percent contraction estimates–when Mulligan was totally wrong, at least regarding the numbers the BEA just put out. Two of his estimates actually had positive growth, when we just got the worst contraction in 25 years.
Hey, that last phrase reminded me of something. Wow I’m good.
UPDATE: I just now saw that Mulligan in this post tries to defuse wise guys like me (I think he wrote this before my post, and I just didn’t catch it):
I had previously predicted that real GDP “might” go up, although I still said that slightly down was the more likely. I was very precise about that: I said that it was 1/3 likely to go up and 2/3 likely to go down.
There are no rules in the blogosphere, but it is factually incorrect to quote me as predicting that real GDP WILL go up. “WILL” and “MIGHT” are different in plain English (not to mention that I also put it terms of probabilities).
Let me be clear: As I continue to read Mulligan talk about his GDP predictions, my opinion of his handling of this MIGHT go up…
This article by Feldstein–who calls himself a conservative economist–is breathtaking. I am not kidding, I don’t see how someone could have written an op ed opposing the current stimulus bill, that would have annoyed me more. I truly think by the end of it, my jaw had dropped. (HT2MR) Here’s the part where he shows we’re all Keynesians now; but you must read the whole thing to see just how awful it is. (“Awful” if you aren’t a fan of the government, I should clarify.)
Start with the tax side. The plan is to give a tax cut of $500 a year for two years to each employed person. That’s not a good way to increase consumer spending. Experience shows that the money from such temporary, lump-sum tax cuts is largely saved or used to pay down debt. Only about 15 percent of last year’s tax rebates led to additional spending.
Instead, the tax changes should focus on providing incentives to households and businesses to increase current spending. Why not a temporary refundable tax credit to households that purchase cars or other major consumer durables, analogous to the investment tax credit for businesses? Or a temporary tax credit for home improvements? In that way, the same total tax reduction could produce much more spending and employment.