Eugene Fama: Who Would Build the Roads? Certainly Not an Efficient Market
Brad DeLong is as cranky about not winning the Nobel as I am, and kicks sand in Fama’s face by bringing up an article the new Nobelist wrote in 2009 criticizing “stimulus.” What jumped out at me was the following passage from Fama’s essay:
Government infrastructure investments benefit the economy if they are more productive than the private projects they displace. Some government investments are in principle productive. The government is the natural candidate to undertake investments that have widespread positive spillovers (what economists call externalities). For example, a good national road system increases the efficiency of almost all business and consumption activities. Because all the benefits of a good road system are difficult for a private entity to capture without creating inefficiencies (toll or EZ Pay booths on every corner), the government is the natural entity to make decisions about road building and other investments that have widespread spillovers.
Does anybody know: Is Fama just trying to clarify that he’s not an anarchist? In other words, if I’m sitting down having a beer with him, is he really going to say that he thinks the inefficiencies of toll collection outweigh all of the Public Choice problems in allowing government to maintain the roads?
In closing, I must relay my favorite line from Tom Woods of all time (not to be confused with The Best Tom Woods Story Ever):
“Who will build the roads?” is the question that belongs at the top of every libertarian drinking game. If we didn’t have forced labor, the argument runs, there would be no roads. There’d be a Sears store over there, and your house over here, and everyone involved would just be standing there scratching their heads.
(Yes yes, Tom is blowing up a particularly naive version of the issue–which is not a strawman, incidentally–but we can match the pro-government-road crowd argument for argument if they want to up the ante as Fama has done.)
If You’re Not Outraged, You Haven’t Been Reading Scott Sumner’s Blog
This post title is misleading, but I couldn’t think of anything wittier. Scott Sumner calmly discusses reflections from Miles Kimball and says this:
In another paper, Kimball spells out the credit policy in more detail. It might involve the government giving each American a credit card with a $2000 credit limit. This is certainly better than fiscal stimulus, but still falls far short of the efficiency of monetary stimulus.
Now to be fair, Scott classifies this idea as “the bad,” while level targeting of NGDP is “the good” and fiscal policy is “the ugly.” Still, when somebody discusses the idea of the government giving each American a credit card with a $2000 limit, I think this is the only permissible reaction.
Now That Debt Crisis Can’t Be Blamed on Tea Party, Krugman Back to Saying It’s Expansionary
[UPDATE below.]
Sometimes the cognitive dissonance in Krugman’s mind could power a small city. As regular readers know, I was going nuts during the debt ceiling standoff, because Krugman was parroting the standard talking points as if a default would be a disaster. For example he wrote on September 25:
Add me to the chorus of those puzzled by the lack of market alarm over the possibility of U.S. default, induced by failure to raise the debt ceiling….[I]f most political reporters are still in denial over the real state of affairs, one can imagine that businesspeople are having an even harder time realizing the extent to which the inmates have taken over the asylum.
But suppose that markets were giving the possibility of default the attention it deserves; how should they be reacting? That’s not actually all that obvious, at least as far as interest rates are concerned.
…So I’m not at all sure that we’re looking at an interest rate spike; maybe even the opposite.
But for sure we should be looking at a plunging dollar, and probably carnage in the stock market too. [Bold added.]
Now the thing that was interesting, was that in the part I omitted, Krugman walks through his analysis that the Fed could sop up the bonds that investors no longer want to hold, thus pinning short-term interest rates down. In short, he gives the exact same analysis that he had deployed earlier, to explain why an attack by the bond vigilantes on the US would actually be expansionary.
So the thing that troubled me, was that Krugman never devoted a single sentence during the debt ceiling standoff to this “silver lining.” He never said, for example, “Sure, it will be bad if the feds have to slash spending, but at least we’ll get the expansionary kick from a plunging dollar and a higher nominal natural interest rate.” This wasn’t just my nitpicking; Tyler Cowen picked up the discrepancy too.
Now, literally the day after the crisis is formally averted, Krugman is back to his old line. He writes:
Matthew Yglesias notes an uptick in Very Serious People warning that China might lose confidence in America and start dumping our bonds. He focuses on China’s motives, which is useful. But the crucial point, which he touches on only briefly at the end, is that whatever China’s motives, the Chinese wouldn’t hurt us if they dumped our bonds — in fact, it would probably be good for America.
But, you say, wouldn’t China selling our bonds send interest rates up and depress the U.S. economy? I’ve been writing about this issue a lot in various guises, and have yet to see any coherent explanation of how it’s supposed to work.
Think about it: China selling our bonds wouldn’t drive up short-term interest rates, which are set by the Fed. It’s not clear why it would drive up long-term rates, either, since these mainly reflect expected short-term rates. And even if Chinese sales somehow put a squeeze on longer maturities, the Fed could just engage in more quantitative easing and buy those bonds up.
It’s true that China could, possibly, depress the value of the dollar. But that would be good for America!
…
The persistence of scaremongering about Chinese confidence is a remarkable thing: it continues to be what Very Serious People say, even though it literally makes no sense at all. As Dean Baker once put it, China has an empty water pistol pointed at our head. [Bold added.]
Now let’s see: In the last month, who has been engaged in scaremongering about the world credit markets not having confidence in U.S. government bonds? Who was warning people that the market was underrating the risk of a plunging dollar?
If Will Ferrell were an economist, I think at this point he’d ask, “Doesn’t anyone notice this?!”
UPDATE: Wow, this is a worse Kontradiction that I at first realized. If you actually click through to read Yglesias’ discussion–which prompted Krugman’s post above–then you’ll see that Yglesias specifically was placing his remarks in the context of the debt ceiling standoff. In other words, Yglesias was saying (my paraphrase), “The worry warts about China dumping our bonds are really in high gear now, because of the debt ceiling shenanigans. But they fail to see that if those shenanigans had made China dump our bonds, it wouldn’t have hurt us.” Then Krugman, in response to Yglesias, was saying (my paraphrase), “Right, but Matt isn’t taking it far enough. As I’ve been saying for a long time now, if China dumped our bonds, that would if anything help our economy because a falling dollar would boost net exports.”
So I hope you realize just how nutty this is, when Krugman a mere three weeks earlier had warned that the idiot Tea Party Republicans were going to possibly cause a debt default, which would lead to a plunging dollar and carnage in the stock market.
I’m Going Galt
But only for 9 days, assuming the customs guys foolishly let me back into the country.
Here’s info about the event if you’re curious.
Avik Roy on What Went Wrong With Healthcare.gov
If these quotes are accurate, this is a pretty damning article. But don’t worry, we’re going to tax rich people enough to make it all work out in the end:
A growing consensus of IT experts, outside and inside the government, have figured out a principal reason why the website for Obamacare’s federally-sponsored insurance exchange is crashing. Healthcare.gov forces you to create an account and enter detailed personal information before you can start shopping. This, in turn, creates a massive traffic bottleneck, as the government verifies your information and decides whether or not you’re eligible for subsidies. HHS bureaucrats knew this would make the website run more slowly. But they were more afraid that letting people see the underlying cost of Obamacare’s insurance plans would scare people away.
“Healthcare.gov was initially going to include an option to browse before registering,” report Christopher Weaver and Louise Radnofsky in the Wall Street Journal. “But that tool was delayed, people familiar with the situation said.” Why was it delayed? “An HHS spokeswoman said the agency wanted to ensure that users were aware of their eligibility for subsidies that could help pay for coverage, before they started seeing the prices of policies.” (Emphasis added.)
…
Robert Pear and colleagues at the New York Times have a piece up today detailing the serious problems with the federal exchange, problems that may get worse, not better. They confirm what we already knew: that the Obama administration refused to delay the implementation of the exchanges, despite the well-known problems, because they were afraid of the political blowback. “Former government officials say the White House, which was calling the shots, feared that any backtracking would further embolden Republican critics who were trying to repeal the health care law.”As I documented last week, IT and insurance experts have been saying for at least eight months that implementation of the exchanges was going badly, that as early as February officials were warning of a “third world experience.” The Times’ sources are just as blunt. “These are not glitches,” said one insurance executive. “The extent of the problems is pretty enormous. At the end of our [conference calls with the administration], people say, ‘It’s awful, just awful.’”
“We foresee a train wreck,” said another executive in a February interview with the Times. “We don’t have the IT specifications. The level of angst in health plans is growing by leaps and bounds. The political people in the administration do not understand how far behind they are.” Richard Foster, the former chief actuary at the Centers for Medicare and Medicaid Services, said last week that “so much testing of the new system was so far behind schedule, I was not confident it would work well.”
Potpourri
==> David R. Henderson on the Nobel.
==> When reading posts like this from Bryan, I wonder if he hands out the syllabus on the first day of class that just says “YOU WILL GET NOTHING FROM THIS CLASS” at the top.
==> MoveOn.org starts a petition to arrest Republicans in Congress for sedition. I’m waiting for Freedom of Speech champion Paul Krugman to defend their right to be wrong.
==> On the debt limit, David Friedman had some great stuff. Check out his critique of the “we can’t prioritize payments” excuse, and Friedman’s follow-up observation: “By all accounts I have seen, the software system for Obama’s 2012 reelection campaign worked flawlessly, in striking contrast to the opposition’s.”
==> What’s really hilarious in the Matthew O’Brien piece on debt default (that Friedman critiqued) is his tone and rhetoric. He starts like this, “The latest absurdity to migrate from the fever swamps to the slightly more respectable Heritage Foundation and on to Congressional Republicans is that not raising the debt ceiling would be no big deal.” A bit later he writes, “Call them the default deniers,” because it’s important to bring in the Holocaust on this issue. But my favorite passage is this: “It’s touching how much faith Republicans have in the government’s ability to seamlessly pick-and-choose which of its 100 million monthly payments to make. But Republicans should perhaps be a bit more skeptical about how much government could solve this problem.” In my book, Matt O’Brien is never allowed to advocate for any expansion in government on any dimension. He doesn’t even think the government is competent enough to reform its payment system, even though he cites an episode in 1979 when the government temporarily fell behind on debt payments after a similar standoff. If government can’t even solve this problem, surely O’Brien is a huge critic of ObamaCare and all foreign occupations by U.S. forces.
==> More examples (here and here) of not only police behaving badly, but how their bosses initially defended them. What’s so crazy about these videos that now pop up weekly if not daily, is that you’re watching to see just how outrageous will it be. Like, did the officers in the first link above actually just gun down a guy for no good reason, or did they completely misinterpret the threat he posed, as he stood there staring at them with his arms at his side? Yet in a competitive market with different security companies, their personnel would be extremely well trained in assessing threats and de-escalating situations.
Lew Rockwell: Gov’t Can Cut Spending By Not Spying on Americans and Killing Foreigners
I don’t remember too many “Tea Party radicals” suggesting these ideas… A special treat in the below clip is to hear a British guy say, “Ludwig von Mises.” Almost as pleasing to the ear as when someone on the BBC says “Baghdad.”
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