Consulting by RPM || Free Advice Blog

Steve Landsburg: The Man, the Myth, the Legend

I have been so busy that I forgot to name-drop that during my recent trip to Rochester, I had a candlelit dinner (not of our request) with Steve Landsburg in the hotel restaurant. One of the most interesting points of discussion (which he gave me permission to mention) was that he had gone through not one, but two phone interviews with the people from the Colbert Report when one of his books came out. (I’m assuming More Sex Is Safer Sex, but Steve can correct me in the comments.)

Apparently, Steve didn’t give them what they wanted, since he was never on the show. But holy cow, it never occurred to me that they have an extensive screening process to get on such coveted shows. And if you did get on the show (or the Daily Show), you would be torn because on the one hand, you’d want to show them you could be funny too, but on the other hand, when most people go on such shows trying to be funny, it bombs.

Anyway, if you are interested in free-market economics and have never read Landsburg’s older stuff, I highly recommend it. It’s not even that I necessarily agree with it all–in fact, most of my internet writings on Landsburg have been critiques–but that he takes very clear positions and so if you think he’s wrong, you can go through and convince yourself what step in his argument is at fault. You walk away knowing your own position better.

For those who think Landsburg is a softie, check out how radical some of these quotes are from one of his books. I’ll simply reproduce a blog post I did in 2008 on Crash Landing:

* * *

In the past, I have been known to criticize University of Rochester economist Steven Landsburg (one, two, and three). We can only speculate as to the source of my criticism; jealousy over Landsburg’s column in Slate is surely a factor.

I am happy to report that all is forgiven, because Landsburg’s Fair Play is a remarkably radical book. The subtitle is “What Your Child Can Teach You About Economics, Values, and the Meaning of Life.” The format of the book is Landsburg relaying anecdotes involving his daughter, and how these lessons/conversations relate to economic principles.

In terms of fun analyses that will make an econ geek think, this book isn’t as fruitful as his earlier book, The Armchair Economist. However, extreme libertarians will be pleasantly surprised at some of the positions Landsburg takes in FP.

Rather than giving an official review, I’ll just reproduce some of the better quotations below:

[My daughter Cayley’s] teachers have pronounced from on high that because water is valuable to others, we should be exceptionally frugal with it…[Yet] teachers rarely argue that “because building supplies are valuable to others, we ought to build fewer schools”; even more rarely do they argue that “because skilled workers are valuable in industry, we ought to have fewer teachers.” (p. 26)

Jim Crow was (among other things) a barrier to trade between the races. And economists know that barriers to trade are generally detrimental to both populations. Whites who were discouraged from serving black customers, or patronizing black businesses, or hiring black workers, or working for black employers, were victims of Jim Crow, just as their black counterparts were. To argue otherwise would be bad economics. It would also be racist. Jim Crow prevented blacks from dealing with whites, and it also prevented whites from dealing with blacks. Who would want to argue that being denied the right to trade with white people is a form of oppression, but being denied the right to trade with black people is no big deal? (pp. 131-132).

SNL Subtly Embracing WikiLeaks

This is really great that SNL has such a subversive skit. Like any good jester, they cloak their critique of the regime behind humor.

Prince of Peace, but God of Justice

On Facebook someone (who shall remain anonymous to preserve Facebook etiquette) hailed Jesus as the Prince of Peace, and asked that militaristic Christians reflect on that title this Christmas season. In the comments, someone was challenging this view, by pointing to aggressive statements that Jesus made. In response, the original poster analyzed the context of those statements, and showed that they were consistent with Jesus being a paragon of peace, not hostility.

I think there is a definite tension, or apparent contradiction, that stems from the admittedly difficult Christian claim that Jesus was both fully God and fully man. There can be no doubt that in His capacity as a man, as a role model for how we should live our own lives, Jesus was a pacifist. It would be inconceivable that in the gospels Jesus would have physically harmed someone as punishment for that person’s transgressions. (The only thing remotely close is Him driving the money changers from the temple.)

On the other hand, there can be no doubt that the God of the Old Testament was punitive. Look at Jeremiah 15: 1-9:

1 Then the LORD said to me: “Even if Moses and Samuel were to stand before me, my heart would not go out to this people. Send them away from my presence! Let them go! 2 And if they ask you, ‘Where shall we go?’ tell them, ‘This is what the LORD says:

“‘Those destined for death, to death;
those for the sword, to the sword;
those for starvation, to starvation;
those for captivity, to captivity.’

3 “I will send four kinds of destroyers against them,” declares the LORD, “the sword to kill and the dogs to drag away and the birds and the wild animals to devour and destroy. 4 I will make them abhorrent to all the kingdoms of the earth because of what Manasseh son of Hezekiah king of Judah did in Jerusalem.

5 “Who will have pity on you, Jerusalem?
Who will mourn for you?
Who will stop to ask how you are?
6 You have rejected me,” declares the LORD.
“You keep on backsliding.
So I will reach out and destroy you;
I am tired of holding back.
7 I will winnow them with a winnowing fork
at the city gates of the land.
I will bring bereavement and destruction on my people,
for they have not changed their ways.
8 I will make their widows more numerous
than the sand of the sea.
At midday I will bring a destroyer
against the mothers of their young men;
suddenly I will bring down on them
anguish and terror.
9 The mother of seven will grow faint
and breathe her last.
Her sun will set while it is still day;
she will be disgraced and humiliated.
I will put the survivors to the sword
before their enemies,”
declares the LORD.

Now I know a lot of Christians justify violence against evildoers because they think they are simply being instruments of God’s justice. But that’s hard to reconcile with some of Jesus’ explicit commands (e.g. Matthew 5: 39, “But I tell you, do not resist an evil person. If anyone slaps you on the right cheek, turn to them the other cheek also”).

To repeat, one possible resolution of all this, is to say that God will smite evildoers, and that we are not supposed to worry about others, but instead should focus on the beam in our own eyes.

(Of course, if you are given an explicit order from the Lord to go out and, say, invade another country–like the Israelites received–then obviously that’s what you’re supposed to do. I am talking about the default presumption of how a self-identified Christian should live his or her life.)

It’s ironic because evangelical Christians are some of the loudest opponents of genetic engineering and other such attempts to “play God.” You never hear a pastor say, “It’s fine for us to tinker with the genetic code, because after all God created life as we learn in Genesis.”

So the fact that God would wipe out people for their idolatry by itself is hardly proof that therefore it’s fine for us to establish earthly systems of punitive law enforcement, in which some men (and women) pass judgment on others and throw them in cages or even put them to death.

Scott Sumner Assumes a Can Opener

It’s possible that I have blogged about this before, but in any event one of the things that bothers me about Scott Sumner’s proposal to have the Fed target nominal GDP (NGDP) is that he often argues almost from definitions, rather than the economics. This is analogous to a Keynesian justifying stimulus spending by pointing out Y = C + I + G + Nx.

Now before we get going, a note on definitions: Nominal GDP is the actual dollar amount of total spending. Real GDP, in contrast, is the amount of spending, after the “price level” has been normalized to some reference year.

So for example, suppose this year total spending is $10 trillion, while the price level is 100. Then next year, total spending is $11 trillion, while the price level rises to 107. NGDP went up 10%, but RGDP only went up about 2.8%. So the actual increase in real output–the increase in the number of cars, iPods, apples, etc. produced in the second year–was only 2.8%. The rest of the measured increase in total spending was simply due to the fact that price tags increased on average by 7%.

OK back to Sumner and his recommendation that the Fed set a target of (say) NGDP growing by 5% per year. I am arguing that Sumner argues from definitions sometimes, and ignores the economics of what he is saying. The most blatant example I’ve seen came in November when Scott (yes, I think we are on a first-name basis) was taking Robert Hall to task.

In one component of the critique, Scott first quoted Hall who had the audacity to write:

The worst financial crisis in the history of the United States and many other countries started in 1929. The Great Depression followed. The second-worst struck in the fall of 2008 and the Great Recession followed. Commentators have dwelt endlessly on the causes of these and other deep financial collapses. Less conspicuous has been the macroeconomists’ concern about why output and employment collapse after a financial crisis and remain at low levels for several or many years after the crisis.

Scott didn’t like this. Instead, he said Hall should have written:

The worst depression in the history of the United States and many other countries started in 1929. The Great Banking Panics followed. The worst recession since the 1930s struck in December 2007, and dramatically worsened in July 2008. The Great Financial crisis of the fall of 2008 followed. Commentators have dwelt endlessly on the causes of these and other deep financial collapses. Less conspicuous has been the macroeconomists’ concern about why output and employment collapse before a financial crisis and remain at low levels for several or many years after the crisis.

Now here’s the important part: Look at the reasoning behind Scott’s suggested alternative paragraph:

We know that severe declines in NGDP are likely to cause severe declines in RGDP. The reasons are murky, although I believe sticky wages are an important transmission mechanism. There is more controversy about what causes NGDP to plunge. But given the recession began in December 2007, and given the severe plunge in NGDP occurred between June and December 2008, it seems a bit hard to believe that the financial crisis of the fall of 2008 was the cause.

First, look at the part I put in bold. Isn’t that a bit like saying, “We know that severe declines in numerators are likely to cause severe declines in quotients. The reasons are murky, although I believe sticky denominators are an important transmission mechanism.” ?

Second, look at how Scott is re-writing history to vindicate his theory. In his suggested paragraph, Scott wanted Hall to write that the worst recession since the 1930s “dramatically worsened in July 2008.” If that were true, then it would bolster Scott’s theory, since NGDP started plunging in June 2008.

But actually, I don’t remember people flipping out about the recession in July 2008. In fact, a whole month later, Bryan Caplan–who Scott admits is smarter than him, or at least sounds smarter at a lunch table–was talking about how great central banks were.

No, it was not obvious that the recession had taken a turn for the worse, until September 2008, i.e. exactly when Hall said it happened. I doubt Caplan would have blogged the above post, in late September.

Skip to Scott’s most recent post. Scott is arguing with Arnold Kling, who had said that Scott’s idea of targeting NGDP might lead to “high and variable inflation.” Scott disagreed, saying:

I believe…that inflation would not become high and volatile. In order for inflation to be high (on average), RGDP growth would have to average much less than 3%. Let me repeat; much less, not slightly less. A trend rate of 1% or 2% RGDP growth will not get you high inflation on average, unless you think inflation was still high after Volcker brought it down to low levels.

So there we have it again, the trick of using definitions to defend his policy. Let me paraphrase what Scott is saying, “If my plan doesn’t screw up economic growth, then my plan will be good for the economy.”

Well, yes, I grant you that Scott. But I go you one better: The Murphy plan calls for the Fed to buy and sell RGDP futures contracts, to hit a target of 5% growth per year. Don’t get me wrong, I’m not saying we’ll always get real growth of 5% per year, but that’s what we’ll hit on average. The years when we’re below target, the Fed will do what it has to do with the monetary base, in order to grow extra fast the next year and catch up with it.

Finally, let me simply say that I disagree with Scott when he writes:

Much more importantly, I don’t think high or variable inflation is a problem as long as NGDP growth is on target. All of the problems that are widely believed by economists to flow from high and variable inflation; actually result from high and variable NGDP growth:

1. Excessive taxation of capital in a non-indexed tax system results from high nominal rates of return, associated with high NGDP growth.

2. Unfair borrower/lender redistributions actually result from volatile NGDP, not volatile inflation.

3. Distortions to the labor market (when nominal wages are sticky) are caused by NGDP shocks.

4. Even the “shoe leather” cost of inflation may be better described by NGDP growth, assuming real interest rates and real GDP growth rates are strongly correlated.

I’m not going to bother going into each one. I claim, without proof, that Scott is simply mistaken. For example, if I have a ten-year bond paying me $25,000 per year that I’m supposed to live on, I don’t really care what happens to NGDP. I get killed when P goes up faster than I expected. Yes, it’s true that in most cases, that’s going to happen when NGDP goes up more than I expected, but that’s because of the definitional trick. Notice that I had to DEFINE NGDP in the beginning of this post, since I couldn’t be sure most readers would even know what it was. So Scott really should stop acting is if everybody “really” cares about NGDP, not P.

Last point: This post should not be construed as me saying Scott’s idea is dumb. It is actually elegant, from a theoretical perspective, and for all I know it might be better than some other rule-of-thumb we could give the Fed, like a Taylor Rule.

All I am saying is that Scott often retreats to an argument from definitions, when he seems to think he is appealing to economic analysis.

A Reader Quiz!

As long-time readers know, I only visit a sparse number of blogs in my daily routine. Two bloggers whom I read constantly are Bob Wenzel and Scott Sumner.

For a fun reader quiz, I will now quote a passage from a recent blog post by one of these men. Can you guess which one? (You only get one guess.) Since I’m not providing a link, it will be tough, I realize. But these guys have their own distinctive writing styles, and with careful analysis you should be able to confidently identify the writer of the below passage. Good luck.

I recently was invited by Brink Lindsey to speak to a group of bloggers, reporters, academics, think tankers, and policymakers in Washington DC. I was surprised at how many well known people showed up to hear my views on monetary policy. Many of the faces (Bob Samuelson, Bruce Bartlett, Ezra Klein, etc) were instantly recognizable (even though I had never met them.) I met two of my favorite bloggers for the first time; Ryan Avent and Matt Yglesias. The next day I had lunch with a bunch of George Mason faculty/bloggers, including Tyler Cowen, Alex Tabarrok, Bryan Caplan, Garett Jones and Robin Hanson. I’m not used to feeling like the dumbest guy at the table.

A Sneak Peak at the Lara-Murphy Report

In the Lara-Murphy Report, we have a section “Pulse on the Market” where we give quick tidbits on various news items for people who don’t slavishly read Wenzel or ZeroHedge. Here’s the blurb I wrote for one issue:

==> Inflation or deflation? Depending on how you parse the numbers, you can “see” price inflation or deflation. Much of the mainstream press, fueled by Keynesian analysis, thinks that when the economy is recovering from the shock of a financial crisis, it takes years for the spending spigots to open up and put upward pressure on prices. And indeed, their preferred index of “core inflation” (which takes out food and energy prices!) shows a modest 0.7 percent increase from last year—the weakest dribble since the 1960s. On the other hand, those of us alarmed by Bernanke’s injection of a trillion new dollars in high-powered money into the banks, can point to not only stocks and bonds (which we believe are in another bubble), but also to producer prices. Specifically, the further up the chain—away from the beleaguered consumer—you go, the bigger the price spikes. In the past 12 months, here are the hikes in the various indices maintained by the Bureau of Labor Statistics: crude producer goods, up 12.8%; intermediate producer goods, up 6.3%; finished producer goods, up 3.5%. In contrast, the Consumer Price Index (which includes food and energy), rose only 1.1% from November 2010 to November 2011. We will watch these trends very carefully, but it sure looks like Bernanke’s is pumping in money on one end, while the unemployed, debt-ridden consumer has very little to spend on the other.

What do you kids think? As my recent mea culpa indicated, I obviously was wrong in thinking all the money-creation would have shown up in conventional CPI by this point.

But does that mean the Keynesian (or even Sumnerian) position has been vindicated? If money has been too tight lo these past two years, as Scott believes, would we see such high increases in the various PPI components?

I don’t remember seeing Krugman or Scott predict that producer prices would zoom upward. For sure, Mish didn’t see that coming. I remember Scott shrugging off gold prices as due to mining difficulties or whatever, and I know Krugman says that commodities are volatile.

That’s fine, and perhaps commodities have leveled off and will be fairly flat in 2011. But again I repeat, from the perspective of people who correctly predicted that official CPI wouldn’t zoom upward in 2009-2010, did they also beforehand call the big jump in producer prices?

If so, let me know. As Sitting Bull (?) says in that goofy movie with Dustin Hoffman, “I would like to meet this man, and smoke with him.”

I Don’t Mean to Be a Debby Downer But…

…is anyone else’s Spidey sense tingling with all the acceptance of Ron Paul in mainstream circles now? I still can’t believe they let him get the position.

I know, I know, people will say, “Oh but Bob, they couldn’t possibly have denied it to him. People would have been outraged.” Right, but people were outraged over the TARP bailout, too.

I do not pretend to know the strategeries that the people behind the curtain employ. But here’s my concern: Suppose for the sake of argument that the shrill amongst us have been right, and that Bernanke’s actions in the last two years are truly setting us up for a collapse of the dollar.

Well, what better cover, than to have that “nutjob” Ron Paul heckling Bernanke nonstop during the 18 months before the collapse? Then Krugman (and Megan McArdle) can say, “We told you so.”

Just to be clear, folks, I think it’s amazing that Ron Paul has attained this position, fame, and belated acceptance in wider and wider circles. But I can’t believe that the banksters have decided the jig is up and have given up their precious printing press. It’s entirely possible that their willingness to allow Ron Paul to oversee the Fed, is a sign that they know the dam is about to burst.

Regrets, I Have a Few…

…and since it’s late / now I’ll list them.

OK Bob Wenzel says that if you have bad news, you should dump it late on a Friday when nobody will notice. So here goes:

* Bill Woolsey is right that I skipped a step in my Bernanke bashing. Ever since people started saying, “Of course we won’t have big price inflation; Bernanke can just bump up the interest rate on reserves!” I have said that that is literally just postponing the problem while it grows exponentially. I had in mind the idea that if excess reserves are, say, $1 trillion, and the Fed has to offer 10% to keep M1 from exploding, then excess reserves next year are going to be $1.1 trillion. But, Woolsey is right (assuming I’ve understood his objection) that technically that doesn’t have to happen. The Fed could (at least for a while) simply reduce its “equity” position, either in a relative sense or even an absolute sense. For example, if $100 billion of Treasury debt is maturing, and normally the Fed would just roll it over, instead the Fed could pay that $100 billion to the banks. So total reserves (and hence excess reserves) wouldn’t go up. The Fed would basically be sterilizing its interest payment to the banks, by selling off a chunk of its bond portfolio. (I think I have this right. If not, Woolsey can take me to the woodshed again.)

* As far as this post and this post, well shoot what can I say.