Pop Quiz on Economists!
Pop quiz everyone! I hope you studied! But I’m a softie, so in case you have had the flu or something, I’ll give you, let’s say, 3 minutes to skim this post and get up to speed with where we’ve taken the class this past week.
[Stage manager: Play Jeopardy theme music.]
OK now for the quiz. It consists of two questions, but I warn you one is tricky:
Q: Which economist is completely unremarkable in terms of his academic career, but is a world-famous giant in the geeconosphere?
(A) Bob Murphy
(B) Scott Sumner
(C) Both of the above.
(D) None of the above.
Q: Which economist endorses the following statement? “The initial part of the recession (after December 2007) was caused [at least in part] by…a drop in housing construction…”
(A) Bob Murphy
(B) Scott Sumner
(C) Both of the above.
(D) None of the above.
After you have turned in your answer sheet, look here to see how you did.
The Finely Tuned Universe
I took my son to a birthday party that was at the planetarium. We ended up watching a bunch of YouTubes on the solar system afterwards, including this cool one. (If you’re not “into” it from the get-go, then skip ahead to 2:25 and watch it through 3:45, which is the relevant section for this post.)
One of my favorite arguments for the existence of God is the “fine-tuned universe.” When we ask, “What are the chances that this is all a big coincidence?” it’s not simply the probability that intelligent life could emerge out of primordial soup on earth. As the video above showed, our existence on this vulnerable oblong spheroid is incredibly precarious. Not too many people ever stop and think, “Man, it’s a good thing Jupiter is out there, intercepting killer asteroids before they wipe out the human race.”
Reflecting on these issues also reinforces the idea that it’s absurd to fret over the things we do. For example, I’m very anxious about excess reserves in the banking sector. But in the grand scheme of things, who cares? There are a million-and-one other things that could snuff out all life, and I am blissfully ignorant of them. If God is taking care of that stuff, I can probably chill out about price inflation.
Finally: This is not a call to recklessness or apathy. On the contrary, when you worry about things, you paralyze yourself and lose the ability to actually prioritize properly. To drive home the spiritual point:
So do not worry, saying, ‘What shall we eat?’ or ‘What shall we drink?’ or ‘What shall we wear?’ 32 For the pagans run after all these things, and your heavenly Father knows that you need them. 33 But seek first his kingdom and his righteousness, and all these things will be given to you as well.
Further Explanation of My Defense of Kling from Sumner
OK now that I have a little more free time, I clarified my response to Sumner (in defense of Kling on Recalculation). I am simply re-posting my long comment from Scott’s blog. (If you don’t know what the context is for this, just follow the link. Scott brings you up to speed in his original post.)
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Hi everyone,
I see this is still a lively topic. Mark and I went toe-to-toe in the comments at my post responding to Scott, but let me give a general reaction here, since I like away games as much as playing at home:
(1) Scott showed that housing starts dramatically fell from January 2006 through April 2008. However, during the same period, the national unemployment rate hardly moved. Scott said (possibly paraphrasing), “Looks like those construction workers found something else to do…” One would have thought that construction employment surged into 2006, then fell sharply, even while national unemployment didn’t move. So clearly the Recalculation Story was in jeopardy.
(2) I pointed out that, if this is what Scott and others inferred, they would be wrong. Construction employment peaked and held steady all through the period when the national unemployment rate held steady, and then when construction employment tanked, the national unemployment rate zoomed upward. So the basic Klingian story was back in play–it looked like we could explain the national unemployment problem, by the disgorging of construction workers out of that sector.
(3) OK, but there was an obvious problem: How to relate this to the housing boom? Arnold Kling and others (including me) who say the recession was “real” and not “nominal” often say to the layperson things like, “Too many workers and lumber went into housing. Workers lost their jobs in Nevada and it takes time for them to go somewhere else.” So the problem for us as Recalculation/Austrian theorists is, can we reconcile our original story with the new facts? I.e. we’re on solid ground with respect to total construction employment, but we’ve been talking as if all these workers were building houses. And yet, as Scott showed, housing starts started falling fast after January 2006, whereas we know construction employment held steady for a long time after that. What gives?
(4) Well, one thing is that houses aren’t made in a day. So when we switch to housing completions, we gain “a few” months. (I think it’s technically only “a couple of” months, but since it peaks in March I thought “three months after the start of 2006.”)
(5) Clearly two or three months isn’t going to cut it, because we need to explain the steady construction employment through April 2008 at least. So that’s why I went into the discussion about things that would be related to a massive surge in new home construction, such as adding decks and building shopping malls near the new developments.
(6) When writing up this argument, I made almost an offhand remark about the distinction between housing starts and completions, and then linked to the data. I said housing completions peaked “a few months” after housing starts. That is undeniably true (if you give me an out on “couple” versus “few”).
(7) In light of the above, I am still surprised that Scott thought I was hiding something in the link. Housing completions did exactly what I said they did. That data doesn’t “bolster” Scott’s case, because I’ve already shown that housing activity by itself didn’t mesh with overall construction employment.
(8) Finally: If it had turned out that all the people who were building houses in 2006 were picking vegetables and writing novels in 2007, then Scott would be totally vindicated: Rising NGDP solves all problems, and we don’t need to worry about labor skills matching up with consumer demands. But since Scott himself agreed that the former housebuilders moved into other construction projects–which may very well have been corollaries of the previous housing construction–I think Kling still has a leg to stand on. (Not surprisingly, so does Kling.)
Maybe There Is Such Thing as Bad Publicity
This is why I wrote my post about Arizona. Folks, those of you who are an-caps in the crowd, you have to realize that the people at ThinkProgress are salivating at the quotes this guy is giving them. He is to them, what those nutjob environmental commercials were to Glenn Beck. (And you see the “tie” to Rand Paul?)
The general public already thinks someone calling himself an “anarcho-capitalist” is a nut. The way you defuse that is to be as harmless as a dove. (And sure, don’t forget the corollary of being wise as a serpent. “Dove” doesn’t mean “doormat” or naive fool, it means you don’t threaten anyone, both figuratively and for gosh sakes not literally!)
People keep worrying about when the “feds are gonna round us up.” Don’t you get it? It would be hard for them to justify doing that, if Roderick Long philosophically discusses the nature of the State.
But if self-described anarcho-capitalists go around saying stuff like this guy, they will give the State the pretext to throw prominent an-caps in jail.
The strategy of violence is unnecessary. It only works if you get a sizable portion of the country on your side. But if you have the truth on your side, and you can manage to get 5% to agree with you, then go ahead and repeat until you get 10%, 15%, etc. No fighting is necessary. It’s not as if this guy’s comments are going to “awaken the sleeping giant.” No, they are going to scare off people who may have been intrigued by, say, the quotes from Doug French in Christopher Beam’s article. Anyone who thinks this guy is telling it like it is, was already in his camp. So he’s not adding to the numbers.
I find this quote particularly frustrating:
“As per the Declaration of Indep, when a gov becomes destructive those ends, it may be abolished,” he continued, “and the most moral approach is that which spares the maximum number of lives. Thus, assasination is a legitimate tool.”
No, assassination does not “spare the maximum number of lives.”
If we are choosing historical role models in our efforts to change the political power structure, I choose Martin Luther King over Malcolm X. The power of violence is overrated.
As always, if you advocate anything illegal in the comments, I will delete it. I am just that much of a sell-out.
Instead of a Peek, Scott Sumner Should Have Taken a Ponder
I am so naive. In response to what I think was a magnificent defense of Arnold Kling against Scott Sumner (and Brad DeLong), I was expecting Scott to either blow me up, or to admit that I had a good point and the Austrian theory went up one notch in his book.
But alas, all Scott did was elaborate on one of my own points, while thinking (a) this somehow helped his case and (b) that he was telling me something I didn’t realize.
I am truly strapped for time, so I can’t spell this out completely. In the interest of brevity, I’m going to simply repost the relevant sections from my article, and then give Scott’s response (which to repeat, in my mind is a simple elaboration of my own point). Then I’ll end with my wise-aleck comment that I left on Scott’s post.
So here goes. Remember the context, Scott thought he had dealt a crushing blow to the Austrian/Recalculation explanation of the recession, when he noted that housing starts fell by more than half from January 2006 to April 2008, whereas the national unemployment rate barely blipped upward. Scott said, “So housing starts fall by 1.3 million over 27 months, and unemployment hardly changes. Looks like those construction workers found other jobs, which is what is supposed to happen if the Fed keeps NGDP growing at a slow but steady rate.”
(1) I rushed to the rescue by arguing the following:
There’s just one problem with Sumner’s argument: housing starts are not synonymous with construction jobs. In fact, from January 2006 to April 2008 — the period when Sumner thinks construction workers must have been laid off in droves because housing starts fell by more than half — US construction employment only fell from 7.6 million to 7.3 million.
Then I went on to say:
In the years leading up to 2006, housing starts steadily expanded. Now if they had simply leveled off in January 2006 — so that (annualized) housing starts every month thereafter remained at the permanently high plateau of 2.3 million — construction employment would have continued rising after that date.
The reason is that there’s more to the construction sector than simply starting new houses. That fact alone buys us another few months, as a look at housing completions shows.
But more important, construction workers are needed to maintain an existing stock of housing. In other words, if the builders had kept constructing new homes at an annualized rate of 2.3 million from January 2006 onward, and if families moved in to them as in normal times, total construction employment would have needed to rise above its January 2006 level. Those workers were needed to keep cranking out the brand new houses, and it would have taken new workers (siphoned from elsewhere in the economy) to, say, add a new deck in the backyard or build a shopping mall down the street from a new housing development.
I am an economist, not an expert in housing or construction. I do not pretend to know exactly what construction workers were doing in the two years after housing starts peaked. But what I do know is that Sumner is wrong in his assessment of the labor markets. Contrary to Sumner, there is no huge reallocation of construction workers (from January 2006 to April 2008) that Kling or the Austrians must explain.
Note that the part I’ve put in bold above is new emphasis; this is my point that Scott himself will elaborate in his own response.
(2) Now here’s Scott’s response to my article, in a post titled “Bob Murphy wrongly assumes I won’t peek”:
Bob Murphy responded [to my point about housing starts like this]: “The reason is that there’s more to the construction sector than simply starting new houses. That fact alone buys us another few months, as a look at housing completions shows. [Bob has a link here] But more important…”
Waaaait a minute. Note how Bob tells me housing starts are the wrong data, because construction workers keep working for some time after the starts, and then tells us to look at housing completions. But then he merely provides a link, moving right along to something “more important.” I wonder why? Perhaps because housing completion data also supports my view? Here are the numbers. I’ve also averaged the two, as the average of starts and completions might be a good indicator of ongoing activity.
January 2006: starts 2,303,000 completions 2,058,000 average 2,180,000
April 2008: starts 1,008,000 completions 1,014,000 average 1,011,000
October 2009 starts 527,000 completions 745,000 average 636,000
Using the housing activity average, an even greater share of the total slowdown occurred between 2006 and 2008, when unemployment was stable, and an even smaller share occurred after April 2008. I want to thank Bob Murphy for further strengthening my argument.
Bob also makes another argument, citing data showing that construction employment declined much less than housing construction between 2006-08. But that’s easy to explain, as commercial real estate prices didn’t peak until late 2008. So the commercial RE sector may have picked up some of the workers laid off from building houses. (I don’t know about infrastructure and government building.) And even if commercial RE didn’t add housing workers, if housing is half of all construction then a 20% decline in housing construction jobs would translate into only a 10% decline in all construction jobs. All this of course supports my point. The big drop in housing construction between January 2006 and April 2008 did not cause a significant impact on the US unemployment rate. Doesn’t that suggest that those housing construction workers weren’t [sic] able to find jobs in other forms of construction, or other activities?
As I said, I am not going to connect the dots. If people don’t see that Scott is literally filling in the gaps of my own argument, I don’t know what to say. Those allegedly embarrassingly reallocated construction workers (who stopped cranking out new houses in 2006) didn’t go into fruit picking or software design, Scott hypothesizes that they apparently went into commercial real estate–one of the things I guessed in my quote above (“shopping mall down the street from a new housing development”).
(3) And as far as me hoping against hope that Scott wouldn’t click the link and verify my wild assertions, all I can do is repost my comment on Scott’s blog:
Scott,
What did you think I meant when I said this:
That fact alone buys us another few months,
I know Austrians aren’t good at math, but did you think I believed that from January 2006 to April 2008, only a few months had passed?
In closing, I should note that I’m not expecting Scott to capitulate. I just want him to admit that the Klingian/Austrian story isn’t as farfetched as he and DeLong originally thought. For example, I admitted (not going to dig up the link) that I was “shocked” by the behavior of TIPS yields in the fall of 2008, when Scott told me the Fed had a really tight stance and I thought he was nuts. So I concede that Scott’s theory can much more easily accommodate that fact than mine.
Can Austrian Business Cycle Theory Explain Construction Employment?
With all the excitement over my favorite Keynesian, I almost forgot about the untimely demise of Scott Sumner yesterday.
Joking aside, I really think I snatched victory from the jaws of defeat for Arnold Kling in his argument with Sumner (concerning housing starts and the Great Recession). I emailed this to Kling myself, but I don’t know if he checks his “fan mail.” If any of you personally know Kling–and of course if you agree that I made a great case on his behalf in this article–then please make sure he sees it. UPDATE: He got it.
If you are busy and need to prioritize, I would say this is one of the most important Mises Daily articles* I have ever written. It bolstered my own belief in the power of Austrian business cycle theory.
* Some might argue that this isn’t saying much.
Krugman Refutes Krugman Refuting the Austrians
I’m mostly posting this to make a note to myself…
I am not certain he has me in mind, since I haven’t been following the comments on his earlier posts, but it is entirely possible I am the anonymous target today in Krugman’s post on “Barbarous Economics.” For your convenience, let me reproduce the steps in the argument, and then you’ll understand why I claim Krugman just refuted himself.
(1) Way back in December 1998, Krugman apparently blew up the “hangover theory” of depressions with the following argument (among others):
Here’s the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn’t that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?
(2) In October 2008, in my “sushi article,” I responded to Krugman like this:
I have done my best to paraphrase what I understand to be Krugman’s [point]. I must confess that even while typing out the above, the non sequitur in [the] objection jumped out at me. …Krugman[‘s] argument relies on a static conception of income and spending. Just using that accounting tautology — without indexing for time — Krugman could also argue that real income can never change in an economy, even if the government announced that the most productive 10% of workers in every firm would be shot. (After all, total income would still equal total spending.)
(3) Yesterday, Krugman linked to that very same sushi article, and said I was interesting but dead wrong (and a partisan hack).
(4) Today, Krugman writes of Barbarous Economics:
So I see a number of people saying things along the lines of, “If income always equals spending, then real income can’t possibly change” — and imagining that they’re being wise! More evidence of our descent into a Dark Age of macroeconomics.
To see what’s wrong with this, read a good intro text (pdf) (much updated in new edition, but this gives the flavor). Anyone who believes the above statement literally doesn’t understand the first thing about the subject. Just saying.
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Does everyone see how funny this is? Not Chris Rock funny, I grant you. But for macroeconomics, it’s chortle-worthy.
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