Stephen Williamson Doesn’t Think He’s in a Cult
This made me chuckle. Here’s the opening portion of a blog post by Stephen Williamson:
I thought I would offer some light entertainment today. This Paul Krugman post struck me as perhaps more deranged than usual on the topic of macroeconomists.
Here are the two closing paragraphs, to give you the idea:
In fact, the freshwater side wasn’t listening at all, as evidenced by the way 80-year-old fallacies cropped up as soon as an actual policy response to crisis was on the table; and as for changing views in response to facts, well, we all know how that has gone.
The state of macro is, in fact, rotten, and will remain so until the cult that has taken over half the field is somehow dislodged.
Like most of the macroeconomists I know and talk to, I try to keep up with my field, and with what is going on in the rest of economics. That’s a hard thing to do of course. It burns all the time that is left after teaching students, trying to do one’s own research, and doing whatever else we need to do to get on with life.
It doesn’t surprise me that Paul Krugman isn’t up on what is going on in macroeconomic research. Why should we expect him to go to macro conferences, spend time in seminars, and talk to his colleagues at Princeton? He has plenty on his plate, what with delivering two NYT columns per week, blogging, talking to pundits, and giving speeches. But if he’s not up on the field, what purpose does it serve to make up outlandish stuff for people to read? Maybe this just motivates the Krugman base. I have no idea.
HT2 Daniel Kuehn, who of course is upset that Williamson isn’t being fairer in his treatment of Krugman in this exchange.
Two Genuine Krugman Kuestions
Normally I think I have a handle on the mind of Paul Krugman. People often send me alleged “Krugman Kontradictions,” and while I admire their zeal, I have to tell the eager correspondents, “Nah, I know exactly how Krugman’s fans would reconcile those two positions.”
But I am genuinely puzzled by two recent Krugman posts. Even I, with an almost fanatical devotion to his writings, can’t be sure what he means, because at face value his statements are so preposterous. So I’ll just document them here, and let his apologists offer hypotheses in the comments.
CASE 1: People at the Heritage Foundation Don’t Actually Believe in Supply-Side Economics
OK so Menzie Chinn and Krugman have been running a particularly absurd theme for a few weeks now, claiming that it is a contradiction for conservatives to fret about the “fiscal cliff,” since they were so stridently arguing back in 2009 that the Obama stimulus package wouldn’t boost economic growth. I was astounded that neither Chinn nor Krugman even entertained the possible reconciliation that such conservatives (a) opposed the massive boosts in federal spending in the stimulus package and (b) opposed the sharp tax-rate increases that are scheduled for 2013. You can say that such worries are wrong, but there’s nothing contradictory about them.
Well, the Heritage Foundation explicitly came out and said as much, in response to Chin. Now here’s how Krugman discussed the exchange:
Menzie Chinn is having a dialogue, or something, with the Heritage Foundation. He pointed out that their arguments against stimulus, aside from being primitive and wrong, would also imply that the fiscal cliff is harmless. They respond in part by claiming that all they’re worried about is the incentive effects — yeah, right — and also by claiming that famous economists made the same arguments.
In the above quote, what in the world does Krugman mean by the “yeah right”?! To repeat, I’m not asking people to criticize him saying that; I want to know…what does he mean by that? For example, one possible interpretation is that Krugman thinks the Heritage Foundation was relying on Keynesian theory to worry about a reduced deficit hurting the economy, and then when Menzie Chinn pointed this out to them, they scrambled and in desperation made up a story about being afraid of supply-side incentive problems from tax-rate hikes. Is that what Krugman is saying?! Is his mental model of his opponents really that messed up?
CASE 2: Krugman Wags His Finger at People Who Hold His Exact Position on the Deficit
OK, now in the very next post, Krugman writes this:
Oh, dear. This is embarrassing. Yet another Peterson deficit-scold front grouphas emerged, running a full-page ad in the Times. This time a bunch of national-security types, who should know better — plus Paul Volcker, whoreally should know better — have signed on.
It’s the usual stuff: demanding that our leaders put together
a fiscal framework that results in substantial deficit reduction over the next 10 years and structural changes to our fiscal policies that eventually balance the budget over the long term
The language on taxes seems a bit more open to higher rates than in the past, and they actually call for defense spending cuts. But what makes the whole thing absurd is that they want all of this as part of “the resolution of the fiscal cliff by the end of the year”. That is, in the next two weeks.
OK, let’s walk through this. I didn’t go look up the ad (the link doesn’t go there), but from what Krugman just said above, we can conclude the following about this group’s position:
(a) They want to reduce the deficit over the next 10 years, and eventually balance it in the long term.
(b) They want to cut defense spending.
(c) They want to get a deal in place to avoid the default changes that will otherwise kick in, in 2013.
(d) They are open to higher tax rates on upper income earners.
Somebody correct me if I’m wrong, but…doesn’t Paul Krugman endorse every single thing on this list? Isn’t it odd for Krugman to summarize a group’s views–every single one of which he himself holds–and then describe the whole thing as “embarrassing”? What the heck?!
NOTE: I’m sure if you went to the group’s website, or googled the Times ad, you could come up with some point on which they differed from Krugman’s views (meaning Krugman’s views since 2011, not in 1998, 2003, or late 2008 of course). But Krugman quoted and summarized their position in a way that reflects his own position. It would be like me saying, “This is embarrassing. Krugman says reducing tariffs can improve welfare.”
There Isn’t a Spending Category Called “Deficit Reduction”
[UPDATE below.]
David R. Henderson over at EconLog praised my recent critique of a David Frum article on carbon taxes, but David had one quibble with me. I’m not sure if David and I have a genuine disagreement, or if it’s just a matter of him not understanding what I was trying to say.
Let me first set the context. Frum was arguing that not only would a carbon tax mitigate human-caused climate change, but it would also boost the conventional economy. I pointed to my recent article on the “tax interaction effect” to point out that according to the actual peer-reviewed literature, even if 100% of the revenues from a new carbon tax were used to reduce pre-existing tax rates on income, the net result would probably mean greater deadweight loss. In other words, a carbon tax is more directly damaging to the economy than the income tax, and so even a purely revenue-neutral tax swap would hurt the economy. On net the move might make sense, taking into account environmental benefits, but my point was that this growing call for a carbon tax swap as a “win-win” (for the environment and the economy) was hard to square with the actual literature.
Now, after establishing that even a revenue-neutral carbon tax swap would likely reduce (conventionally defined) economic growth, I then said: “The damage to the economy would be even greater if, as Frum suggests, some of the new carbon tax is not revenue-neutral but instead is spent (i.e. used to reduce the deficit).”
In response to this, David (Henderson) wrote: “I’m not clear why Bob sees reducing the deficit as spending.”
So let me elaborate here… My point is that Frum is not advocating a revenue-neutral carbon tax swap, rather he is advocating a net tax increase. He wants to impose a new carbon tax that will raise $1.5 trillion over the next decade, but he only wants to devote (say) $750 billion to reducing other taxes. The remaining $750 billion will be used to make the federal debt that much lower than it otherwise would be. (Note, I’m making up the 50/50 split, but the $1.5 trillion comes from Frum, based on another outfit’s estimate.)
Thus, what I was getting at is that Frum won’t use the new carbon tax receipts just to cut other taxes–he will also use them to fund government spending.
The reason I framed it like that, is that there’s no category of spending called “deficit reduction.” If the government spends $4 trillion on programs A, B, C, …, Z, while it only takes in $3 trillion in tax receipts, then it has a $1 trillion deficit. If the government then levies a new surtax on millionaires and raises an extra $10 billion, that money goes into some program, say program D, which is bullets for troops in Afghanistan. The government ends up borrowing $990 billion (instead of $1 trillion), of course, but strictly speaking the new tax revenue goes into spending.
Now in fairness, someone (perhaps David himself?) could object along the following lines: “Bob, that’s misleading. When people complain about new taxes being used to fund ‘spending,’ they mean new spending, i.e. that the government spends more on A, B, C, …, Z than it otherwise would have, because now it has more receipts at its disposal. Frum wasn’t arguing for an increase in total spending, he was merely coming up with a way to reduce the deficit needed to finance what was already baked into the cake. Since deficits are effectively future taxes, whether we use carbon tax revenues to reduce income taxes today, or to reduce the budget deficit, either way they are being used to cut taxes–it’s just in the latter case, we’re using it to cut future taxes.”
If that’s what David had in mind, fair enough. But I would then come back myself and say: In the absence of $1.5 trillion in new carbon tax receipts, I think the pressure will be greater upon the politicians to cut spending, if not in absolute terms, at least relative to what it otherwise would be. Chief among the motivations will be the soaring government debt.
Thus, whether in a simplistic or fully-Ricardian sense, I think David Frum’s suggestion to levy a carbon tax and use some of its revenues to “cut the deficit” will in fact lead to more government spending than would otherwise occur. Since even a 100% revenue-neutral carbon tax will likely reduce economic growth, this alternate proposal will be much worse.
UPDATE: I forgot to mention, the reason I have this particular bee in my bonnet, is that during the first George W. Bush Administration (I think?), there was a proposal to allow taxpayers to check a box on their 1040s earmarking 10% of their taxes to “deficit reduction.” The idea was, you could require the government to set aside 10% of your tax payment to reduce the deficit, rather than to fund spending. That was clearly a gimmick that made no sense at all; 100% of what you send in, is used to make the deficit smaller than it otherwise would be, and 100% of what you send in, is used to fund actual government programs (in this context). The only way this conceivably could have made sense, is if the total government budget growth would be constrained, based on how many people checked their boxes. Clearly there was nothing like this behind the idea; it was just a dumb gimmick.
Richmond Fed President Can Talk the Talk on Cantillon Effects
Richmond Fed President Lacker dissented from the recent Fed decision, and said in part:
“I also objected to the continuing purchase of agency mortgage-backed securities. If asset purchases are appropriate, the FOMC should confine its purchases to U.S. Treasury securities. Purchasing agency mortgage-backed securities can be expected to reduce borrowing rates for conforming home mortgages by more than it reduces borrowing rates for nonconforming mortgages or for other borrowing sectors, such as small business, autos or unsecured consumer loans. Deliberately tilting the flow of credit to one particular economic sector is an inappropriate role for the Federal Reserve. As stated in the Joint Statement of the Department of Treasury and the Federal Reserve on March 23, 2009, ‘Government decisions to influence the allocation of credit are the province of the fiscal authorities.’
You see how he covered himself in the last sentence? Now maybe Scott Sumner will take the argument seriously, that it’s crazy for the Fed to be encouraging people to buy certain types of houses.
JP Morgan Says Fed Will Probably Buy “Almost All” New Treasuries in 2013; Market Monetarists Yawn
The fretful von Pepe sends this article, which quotes a JP Morgan analysis saying that with the new policy announcement, the Fed may very well end up adding (“almost”) the equivalent of the entire federal deficit next year to its balance sheet. In other words, the US government is going to spend more than it takes in, and the Federal Reserve will create new money and (indirectly) lend it to the US government to cover this entire shortfall.
But if I understand the views of David Beckworth and other Market Monetarists, this is irrelevant. The only time we need to start worrying about the Fed “monetizing the debt” is when the percentage of the stock (not the flow) of Treasuries owned by the Fed worldwide, falls below above pre-crisis levels.
G. K. Chesterton on Moral Relativism
From “On the Wit of Whistler” in Heretics:
Unquestionably it is a very common phrase of modern intellectualism to say that the morality of one age can be entirely different to the morality of another. And like a great many other phrases of modern intellectualism, it means literally nothing at all. If the two moralities are entirely different, why do you call them both moralities? It is as if a man said, “Camels in various places are totally diverse; some have six legs, some have none, some have scales, some have feathers, some have horns, some have wings, some are green, some are triangular. There is no point which they have in common.”…Of course, there is a permanent substance of morality, as much as there is a permanent substance of art; to say that is only to say that morality is morality and art is art.
Brad DeLong Has Met the Enemy, and He Is Him
Brad DeLong explains how it’s not easy being in a club of Cassandras:
Back in the middle of 2011, in the circles in which I traveled–policy-oriented macroeconomists who actually knew something about the world and about financial history–there was a rough consensus that we all ought to make one last charge for more aggressive policies to boost growth and reduce unemployment. We did not think there was much chance that we would actually influence policy: it was more to lay down a marker for the future…
We had, after all, worried in 2005 that the housing bubble might collapse and create a sticky macroeconomic situation. And we had been ignored. We had, after all, worried in 2007 that the major banks risk management structures were inadequate to the situation. And we had been ignored. We had, after all worried in 2008 that the Treasury and the Federal Reserve’s focus On not enabling moral hazard meant that they were running enormous risks that they did not understand. And we had been ignored….
Thus in the summer of 2011 we expected to be ignored again.
We expected to hear about the limited efficacy of quantitative easing and the substantial risks associated with the expansion of the Federal Reserve balance sheet; about the importance of confidence and the necessity of the near-term down payment on long-run deficit reduction; and about how it all costs the US must not become Greece and was in some danger of doing so. [Bold added.]
That part I’ve put in bold is now a running theme at DeLong’s blog. He is dismayed at the poor arguments put forth by people viewing further Fed action as somehow “risky” and demands to know just what these fools have in mind by such talk.
Given that DeLong and his merry band of truth-seekers have been fighting the good fight against these liars and fools for at least 8 years now, it’s funny that back in January 2009, when Gary Becker wondered why so many economists were suddenly in favor of government fiscal stimulus, DeLong he blogged this in response:
Ummm… Gary… Please phone Reality on the white courtesy phone.
…
The difference between now and 1982 was that back in 1982 the interest rate on Treasury bills was 13.68%–there was a lot of room for the Federal Reserve to cut interest rates and so reduce unemployment via monetary policy. Today the interest rate on Treasury bills is 0.03%–there is no room for the Federal Reserve to cut interest rates, and so monetary policy is reduced to untried “quantitative easing” experiments.The fact that monetary policy has shot its bolt and has no more room for action is what has driven a lot of people like me who think that monetary policy is a much better stabilization policy tool to endorse the Obama fiscal boost plan.
The fact that Gary Becker does not know that monetary policy has shot its bolt makes me think that the state of economics at the University of Chicago is worse than I expected–but I already knew that, or rather I had thought I already knew that.
The Dangers of Gambling, Spice Girls Edition
I lost a bet to a guy on Facebook, and he chose this song for me to perform. If you’re pressed for time, just start it at the 1:50 mark.
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