The Misesian Approach to Economic Laws
For my current course on Basics of Economics: Action and Exchange (where I go through my textbook Lessons for the Young Economist), I “pre-recorded”* one of the lectures because I was going to be in Chile that week and wasn’t sure my internet connection would allow for a live broadcast, which is the norm. Since we argue about these methodological issues all the time–it was the crux of my Porcfest debate with David Friedman–I thought I would share it with you folks.
And hey, if you like what you see, consider signing up for Part II of the course, where we cover the economics of a free-market economy, starting in January.
[*As George Carlin asked, does that mean I recorded it before I recorded it?]
Paul Krugman: The Geezers Have Had an Awful 3rd Quarter
This isn’t really substantive, but inasmuch as I am the world’s clearinghouse for Krugman Kontradictions–real or merely perceived–I couldn’t resist drawing your attention to two of his pieces:
==> “The Geezers Are All Right,” NYT op ed, June 2, 2013
==> “The Geezers Are Not Alright,” NYT blog post, November 19, 2013
Incidentally, not only is the substance of the above consistent–in the former piece, Krugman is saying the federal government’s fiscal house is in order, so we don’t need to cut Social Security/Medicare, while in the latter piece, he’s saying these programs are essential, so we shouldn’t cut SS/Medicare–but Krugman presumably didn’t even pick the first one’s title, as it was an op ed. In contrast, I’m pretty sure he names his blog posts.
The smoking gun is that the former piece uses the correct “All Right” while the latter uses the frowned-upon “Alright.” But don’t hold it against Krugman: In a liquidity trap, grammatical errors become a virtue.
Ken Green Changes His Mind on a Carbon Tax
This was the 3rd presentation at IER’s Carbon Tax conference earlier this year. Here’s the original blog post, but below I reproduce my highlights:
- 2:00 – 4:00 Green explains that in 2007 he and his colleagues looked at the impact of a $15/ton carbon tax. They thought it would be a better policy than cap-and-trade, let alone more explicitly command-and-control regulations, especially if the revenues were used to offset other taxes. They weren’t “for” a carbon tax, but thought it was better than some popular alternatives.
- 4:00 – 5:00 Green said he noticed that the groups inviting him to present in favor of a carbon tax, never ever supported the other elements in his case. They didn’t want to roll back other regulations, or calibrate the carbon tax to the economically “optimal” point.
- 4:55 Green says that in 2011 he wrote a mea culpa, admitting that his “friends in the free market movement were right,” and that a carbon tax would be a step on the path of “carbon seduction.”
- 5:55 Green explains that a tax on carbon, is not really a tax on “bads,” because it applies to a major source of inputs in the economy.
- 7:15 Green says that to test the sincerity of a “market” supporter of a carbon tax, ask if the person would agree to throw out the CAFE standards once a carbon tax is in place. No environmental advocate would ever agree to this, even though in theory the carbon tax should replace all of the other regulations.
- 8:45 Green points out that if we “fix” the regressivity of a carbon tax by refunding money to poorer households, then it partially defeats the purpose: It is supposed to alter behavior by changing the relative price of carbon intensive activities.
- 10:15 Green says he has never seen a policymaker seriously propose a textbook carbon tax in the U.S. Political considerations always make the proposal deviate from the “optimal” configuration.
- 11:00 – 11:30 Green says that even the relatively sensible tax imposed in British Columbia, had only a “shelf life” of five years before environmentalists wanted to double the rate and decouple the revenues from tax neutrality. In other words, they wanted to take the money to spend on their own pet projects, which was not part of how the BC carbon tax was originally sold to citizens.
- 12:20 – 13:00 Green walked through examples of U.S. “trust funds” that have been looted for other purposes. In other words, we can see in practice that a “dedicated” environmental fund from a carbon tax would eventually be raided for general revenue purposes.
- 13:00 – 14:00 Green explains that unilateral U.S. action would not significantly affect the trajectory of global climate change, even according to the standard models.
- 14:00 – 15:00 Green warns conservatives that environmentalists do not want “efficient” pricing of carbon. In particular, he reminds us that Alberta has a carbon tax, and that certainly didn’t stop environmentalists from opposing the Keystone Pipeline in the most sweeping terms. So it is simply not true, Green emphasizes, that by going along with a carbon tax, conservative champions of the market can “take the issue off the table.”
According to His Own Criterion, Paul Krugman Has Low Moral Character
In today’s post titled “What to Do When You’re Wrong,” Krugman explains why his intellectual opponents on Fed policy are not just wrong, but immoral. Here’s the summary of his case against them:
Barry Ritholtz reminds us that we’ve just passed the third anniversary of the debasement-and-inflation letter — the one in which a who’s who of right-wing econopundits warned that quantitative easing would have dire consequences. As Ritholtz notes, they were utterly wrong….
Ritholtz takes the wrongness as a reason not to listen to these people, and it’s certainly a warning sign. My view, however, is that you don’t just want to look at whether people have been wrong; you want to ask how they respond when events don’t go the way they predicted.
After all, if you write about current affairs and you’re never wrong, you just aren’t sticking your neck out enough. Stuff happens, and sometimes it’s not the stuff you thought would happen.
So what do you do then? Do you claim that you never said what you said? Do you lash out at your critics and play victim? Or do you try to figure out what you got wrong and why, and revise your thinking accordingly?
I’ve been wrong many times over the years, usually on minor things but sometimes on big ones. Before 1998 I didn’t think the liquidity trap was a serious concern; the example of Japan suggested that I was wrong, and I eventually concluded that it was a big concern indeed. In 2003 I thought the US was potentially vulnerable to an Asian-crisis-style loss of confidence; when it didn’t happen I rethought my models, realized that foreign-currency debt was crucial, and changed my view.
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So, have any of the signatories to that 2010 letter admitted being wrong and explained why they were wrong? I mean *any* of them. Not as far as I know.And at that point this becomes more than an intellectual issue. It becomes a test of character. [Bold added.]
Before diving into the main point of my post, I note with irony that strictly speaking, there wasn’t an outright false prediction in the letter in question; they just said there was a risk of currency debasement and (price) inflation. But that’s a quibble; certainly many of the people warning of (price) inflation–including me, of course–did not think the Fed would get away with things for so long, as it has done.
Anyway, back to Krugman’s case against the character of these scoundrels. He is upset that not only did they make a bad prediction in 2010, based on on erroneous model, but that they have the audacity to stick to their guns three years later. That’s what makes them bad characters, not merely bad economists.
Now, in contrast, Krugman says he realized he had been wrong in 2003 when he warned of a crisis hitting the US, and adjusted his views accordingly.
Here’s what Krugman presumably has in mind. He wrote in March 2003, in a column titled, “Fiscal Train Wreck”:
[L]ast week I switched to a fixed-rate mortgage. It means higher monthly payments, but I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.
From a fiscal point of view the impending war is a lose-lose proposition. If it goes badly, the resulting mess will be a disaster for the budget. If it goes well, administration officials have made it clear that they will use any bump in the polls to ram through more big tax cuts, which will also be a disaster for the budget. Either way, the tide of red ink will keep on rising.
…Two years ago the administration promised to run large surpluses. A year ago it said the deficit was only temporary. Now it says deficits don’t matter. But we’re looking at a fiscal crisis that will drive interest rates sky-high.
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But what’s really scary — what makes a fixed-rate mortgage seem like such a good idea — is the looming threat to the federal government’s solvency.
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Of course, Mr. Fisher isn’t allowed to draw the obvious implication: that his boss’s push for big permanent tax cuts is completely crazy. But the conclusion is inescapable. Without the Bush tax cuts, it would have been difficult to cope with the fiscal implications of an aging population. With those tax cuts, the task is simply impossible. The accident — the fiscal train wreck — is already under way.How will the train wreck play itself out?…But my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt.
And as that temptation becomes obvious, interest rates will soar. It won’t happen right away. With the economy stalling and the stock market plunging, short-term rates are probably headed down, not up, in the next few months, and mortgage rates may not have hit bottom yet. But unless we slide into Japanese-style deflation, there are much higher interest rates in our future.
I think that the main thing keeping long-term interest rates low right now is cognitive dissonance. Even though the business community is starting to get scared — the ultra-establishment Committee for Economic Development now warns that ”a fiscal crisis threatens our future standard of living” — investors still can’t believe that the leaders of the United States are acting like the rulers of a banana republic. But I’ve done the math, and reached my own conclusions — and I’ve locked in my rate.
That could almost verbatim be something written by a Peter Schiff-type, right? But since his ire was directed at the Bush Administration and its “irresponsible” tax cuts, people nowadays point to it as an example of Krugman’s utter hypocrisy.
Yet he’s telling us now, in today’s post, that Krugman realized he was wrong and changed his views. Okay, well when exactly? As Krugman says of the people who signed the 2010 letter, I can’t find any example of it during the Bush years. I don’t have any example of an op ed or blog post where Krugman said, “In the past I criticized the profligacy of the Bush Administration, but now I realize that this was gold-standard thinking. The US issues its own currency, and has most debts denominated in USD, so Bush’s tax cuts for the rich aren’t nearly the problem I used to think; we just owe that money to ourselves, after all.” Can someone find such a column by Krugman?
So although I found no such mea culpa, what I can find is him still warning that eventually his logic will be right. For example, in May 2005 he wrote:
Over the last few years China, for its own reasons, has acted as an enabler both of U.S. fiscal irresponsibility and of a return to Nasdaq-style speculative mania, this time in the housing market. Now the U.S. government is finally admitting that there’s a problem – but it’s asserting that the problem is China’s, not ours.
And there’s no sign that anyone in the administration has faced up to an unpleasant reality: the U.S. economy has become dependent on low-interest loans from China and other foreign governments, and it’s likely to have major problems when those loans are no longer forthcoming.
Again, Peter Schiff could have written the above. Then, in May 2006 Krugman wrote:
We shouldn’t read too much into a couple of days’ movements in stock prices. But it seems that investors are suddenly feeling uneasy about the state of the economy. They should be; the puzzle is why they haven’t been uneasy all along.
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The rise in stock prices that began last fall was essentially based on the belief that the U.S. economy can defy gravity — that both individuals and the nation as a whole can spend more than their income, not on a temporary basis, but more or less indefinitely.To be fair, for a while the data seemed to confirm that belief. In 2005, the trade deficit passed $700 billion, yet the dollar actually rose against the euro and the yen. Housing prices soared, yet houses kept selling. The price of gasoline neared $3 a gallon, yet consumers kept buying both gas and other items, even though they had to borrow to keep spending (the personal savings rate went negative for the first time since the 1930’s).
Over the last few weeks, however, gravity seems to have started reasserting itself.
And just to be clear about the issue of timing, Krugman had written in April 2006:
Forensics are in. If you turn on the TV during prime time, you’re likely to find yourself watching people sorting through clues from a crime scene, trying to figure out what really happened.
That’s more or less what’s going on right now among international finance experts. The crime in question is the U.S. trade deficit, which … reached an amazing $805 billion last year. The mystery is how we’ve been able to run huge deficits … with so few visible adverse consequences. And the future of the U.S. economy depends on which of two proposed solutions to the mystery is right.
Here’s the puzzle: the trade deficit means that America is … spending far more than it earns. … To pay for the excess of imports over exports, the United States has … borrowed more than $3 trillion just since 1999.
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Why, then, doesn’t the United States seem to be paying a price for all its borrowing?
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If Mr. Gros is right, the true position of the U.S. economy isn’t as bad as you think — it’s worse. The true trade deficit … isn’t $800 billion — it’s more than $900 billion. And America’s foreign debt … is at least $1 trillion bigger than the official numbers say.Of course, optimists have a comeback: if things are really that bad, why are so many foreign investors still buying U.S. bonds? … But I have two words for those who place their faith in the judgment of investors…: Nasdaq 5,000.
Right now, forensic analysis seems to say that the U.S. trade position is worse, not better, than it looks. And the answer to the question, “Why haven’t we paid a price for our trade deficit?” is, just you wait.
Yes yes, we can get into the fine minutiae of federal budget deficits financed by domestic lender, versus international trade deficits financed by foreign lenders. Yet it seems to me pretty clear that Krugman was warning of a disaster as early as 2003, and three years later he was still warning of a disaster and saying the markets were stupid to not see it coming.
Note, I’m not disagreeing with his analysis. I think his fundamental position in the above quotes was basically OK–and that makes sense, because he “sounds like Peter Schiff” and I think Peter Schiff has a good view of economic fundamentals.
The only problem with the above quotations is that Krugman did exactly what he says–now–is evidence of a bad character. Year after year rolled by, and he didn’t change his tune; he just said that any day now the markets would vindicate his warnings. He did back then, exactly what a lot of the “inflationistas” have done since 2008.
Nancy Pelosi Doesn’t Think She Said Anything Wrong About Keeping Health Plans
This is ridiculous.
She sounds like Homer saying, “Now Bart, let’s not dwell on who forgot to pick up whom from school…”
Outsourcing My Krugman Kritiques
Believe it or not, I actually do not relay most of the Krugman critiques that people send my way. Very often they are of the form, “Krugman interprets X according to his Keynesian model, but that’s dumb, because really we should interpret it this other way…” I usually agree with such posts, but they won’t really affect even the openminded reader who initially is sympathetic to Keynesianism.
However, Jeremy Hammond and Ryan Murphy have some gems that I want to pass along:
==> Jeremy Hammond in this piece shows how Krugman’s commentary on the federal debt flip-flopped, depending on whether it was Tea Party Republicans versus Democrats who could be blamed for it. This is something I noted at the time, and Hammond has several of the same Krugman pieces that I linked. But he grabbed one that I had missed, when Krugman wrote in October, 2013, in reference to the possibility of defaulting on Treasury debt:
“[T]this could create an immediate financial crisis, because U.S. debt — heretofore considered the ultimate safe asset — would be reclassified as an asset in default, possibly forcing financial institutions to sell off their U.S. bonds and seek other forms of collateral. That’s a scary prospect.“
Remember, this is the same Krugman who said that who couldn’t even imagine a model whereby the bond vigilantes could hurt the United States economy–let alone did he think it was a realistic worry.
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==> Then in this piece, Hammond digs up Krugman writing the following:
Dollar purchases by China and other foreign governments have … kept U.S. interest rates low despite the enormous government borrowing required to cover the budget deficit…. Here’s what I think will happen if and when China changes its currency policy, and those cheap loans are no longer available. U.S. interest rates will rise… [and] we’ll suddenly wonder why anyone thought financing the budget deficit was easy. In other words, we’ve developed an addiction to Chinese dollar purchases, and will suffer painful withdrawal symptoms when they come to an end.
But that was in 2005, so it doesn’t count. Nowadays anybody who writes the exact same sentences as above, would be dismissed as a libertarian, liar, or lunatic by Krugman.
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==> Ryan Murphy tackles Krugman’s recent claim that there’s no evidence, only politics, to explain why people who claim to be worried about European debt levels, could simultaneously complain that France is raising taxes. I had linked to an ECB bulletin documenting some evidence, but Ryan provides links to the original papers. These are from heavy hitter economists, some of whom are Keynesian, and the journals include AER. This isn’t a memo put out by the Heritage Foundation, in other words (“not that there’s anything wrong with that”). Some of the best examples, with bolding from me:
We examine the evidence on episodes of large stances in fiscal policy, both in cases of fiscal stimuli and in that of fiscal adjustments in OECD countries from 1970 to 2007. Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As for fiscal adjustments, those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions. We confirm these results with simple regression analysis.
–From Alberto Alesina and Silvia Ardagna. 2009. “Large Changes in Fiscal Policy: Taxes Versus Spending.” NBER Working Paper No. 15438.
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This paper investigates the impact of tax changes on economic activity. We use the narrative record, such as presidential speeches and Congressional reports, to identify the size, timing, and principal motivation for all major postwar tax policy actions. This analysis allows us to separate legislated changes into those taken for reasons related to prospective economic conditions and those taken for more exogenous reasons. The behavior of output following these more exogenous changes indicates that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes.
–From Christina D. Romer and David H. Romer. 2010. “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks.” American Economic Review 100 (3): 763-801.
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For U.S. annual data that include World War II, the estimated multiplier for temporary defense spending is 0.4–0.5 contemporaneously and 0.6–0.7 over 2 years. If the change in defense spending is “permanent” (gauged by Ramey’s defense news variable), the multipliers are higher by 0.1–0.2. Since all estimated multipliers are significantly less than 1, greater spending crowds out other components of GDP, particularly investment. The lack of good instruments prevents estimation of reliable multipliers for nondefense purchases; multipliers in the literature of two or more likely reflect reverse causation from GDP to nondefense purchases. Increases in average marginal income tax rates (measured by a newly constructed time series) have significantly negative effects on GDP. When interpreted as a tax multiplier, the magnitude is around 1.1. The combination of the estimated spending and tax multipliers implies that the balanced-budget multiplier for defense spending is negative. We have some evidence that tax changes affect GDP mainly through substitution effects, rather than wealth effects.
–From Robert J. Barro and Charles J. Redlick. 2011. “Macroeconomic Effects from Government Purchases and Taxes.” Quarterly Journal of Economics 126: 51-102.
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This paper provides new estimates of the macroeconomic effects of tax changes using a new narrative dataset for the United Kingdom. Identification is achieved by isolating “exogenous” tax policy changes using the Romer and Romer narrative strategy. I find that a 1 percent cut in taxes increases GDP by 0.6 percent on impact and 2.5 percent over three years. The findings are remarkably similar to Romer and Romer narrative estimates for the United States, reinforcing the view that tax changes have powerful and persistent effects. “Exogenous” tax changes are also shown to have contributed to important episodes in the UK business cycle.
–From James Cloyne. 2013. “Discretionary Tax Changes and the Macroeconomy: New Narrative Evidence from the United Kingdom.” American Economic Review, 103(4): 1507-28.
Noah Smith Uses Theology to Draw Political Conclusions: God Help Us
[UPDATE: I removed an analogy because it would have drawn attention away from Noah’s point.
UPDATE #2: In the comments, Scott Sumner objects that I have misunderstood him. I had thought Scott, in his original post, was being tongue-in-cheek, and giving a mock benefit of the doubt to Noah, since it’s crystal clear what Noah is saying in his post. But, I can’t argue with the author telling me what he meant, so there ya go.]
Scott Sumner links to–and points out the central problem with–a recent Noah Smith post. I can’t summarize it; here’s an excerpt that captures its spirit:
[H]ow does [the God of the Bible] know that there isn’t an even more powerful being – call it “SuperGod” – who has chosen to stay completely hidden up until now? Since the hypothetical SuperGod is, hypothetically, even more powerful than God, there’s no way for God to know that SuperGod does not in fact exist.
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Conclusion: The most powerful being in the Universe, whoever that happens to be, will never be certain of His (or Her) status as such.Now before you reach for the keyboard to write a quick reply (“Of course God knows He’s God, God knows everything, DUH!”), realize that I’m not trying to catch theists with a clever “gotcha”….The most important thing about God is that he chooses to take responsibility for the world.
Think about it. God chooses to create life and humanity, set down laws, punish evil and reward good, send people to various afterlives, and dictate the fate of nations. He doesn’t waste time wondering if there is a SuperGod somewhere out there. He doesn’t need to know for certain that He’s the most powerful being in the Universe; all He knows is that He’s the most powerful being in the neighborhood.
Kind of like you and me.
Some people claim to receive direct communication from God. Others claim to witness miracles. But most of us go through life without seeing direct evidence of the God of the Bible. Instead, we go through life wondering if we’re the most powerful beings in the Universe. And we have to decide whether to take responsibility for those less powerful than us – animals, children, the weak and the poor.
There’s a strong instinct to abdicate that responsibility – to look at things like global warming, poverty, environmental destruction, human misery in all its forms and say “God will take care of that.” For some people it’s not God, but “the free market”, or “evolution”, or “history”. But even if you believe in those things, you don’t really know that they’ll make everything right, any more than God knows whether a hidden SuperGod is guiding all of His actions.
The truth is, whether you like it or not, it’s all on you. The responsibility for those weaker than yourself is not on God’s or the free market’s or history’s or evolution’s head, it’s on your head. So think hard about what you’re going to do with all your power.
My responses:
(1) Noah acknowledges the obvious problem with his premise: namely, that one of the defining attributes of the God of the Bible is His omniscience. With the ellipses above, you may think I’m leaving out Noah’s response, but I’m not. Noah gives no response, except to say that his purpose isn’t to make fun of religion. OK, fine, but it still affects the quality of your blog post, if its initial premise is totally wrong, right?
(2) Scott Sumner pointed out the ironic fact that when Noah talks of people taking “personal responsibility,” he doesn’t actually mean, people taking personal responsibility for these problems. No, what Noah clearly means, is that we should every four years go vote for politicians who “have the power” to deal with these issues, in the way Noah likes.
(3) Noah isn’t a socialist, and he probably favors a “market solution” to climate change, such as a carbon tax. So it would be funny if a Marxist or someone who recommends, say, that the EPA directly order specific energy production techniques, make fun of Noah’s wimpy evasion of his power over food production and climate change. Noah would rather “the market” deliver clothes and food to people, rather than us doing it individually (by enacting a socialist State). He would rather “the market” figure out the most efficient way to curb carbon emissions, with an $x/ton tax. What a coward!
(4) In conclusion, by, “The truth is, whether you like it or not, it’s all on you,” what Noah really means is, “You should agree with my specific policy conclusions on these important issues.”
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