Potpourri
==> I finally give my thoughts on Krugman and the iPhone5.
==> I know this is “Dark Age of Macro” thinking according to Krugman et al., but I really liked this WSJ op ed on “the mess we’re in.”
==> The video of my recent participation in the discussion, “Is Capitalism Moral?” at IUPUI. If you click through, you’ll have to move the pointer to about 5 or 6 mins in, when the evert starts. (There wasn’t a camera guy; they just flipped on the camera in the back of the room.) First a literal socialist professor presents for about 25 mins, then I go for about 25 mins, then a traditional conservative (from ISI). Then Q&A.
==> My recent appearance on the Power Trading radio show.
Krugman on the 1920s: A One-Act Play
TOM WOODS & BOB MURPHY: The Keynesians are all wet when they distill their “lessons from the Great Depression” and recommend bigger deficits and looser money for today’s crisis. After World War I, the U.S. government had run up a massive debt, and yr/yr consumer price inflation was higher than 20%. In this grim situation, the US government actually followed an Austrian remedy: It slashed spending 65 percent in a single year, with a constant string of budget surpluses throughout the rest of the 1920s, and the Fed jacked up interest rates to record highs, crashing the monetary base in the process. What followed was massive price deflation: CPI fell 15.8% in 12 months, far greater than any 12-month drop in the Great Depression. Unemployment shot up to almost 12 percent. But, far from being “sticky,” wages fell even more than consumer prices, and unemployment was down to 2.4 percent by 1923. This unimaginable dosage of “austerity” ushered in the Roaring 20s. If the Keynesians (and monetarists) were right about the “inadequate” expansion of budget deficits and interest-rate cutting by the Fed in the early 1930s, then the 1920s should have been far, far worse. So clearly, the Keynesians (and monetarists) don’t know what they’re talking about.
PAUL KRUGMAN: I can’t believe anybody would look to the post-World War I situation as having any relevance for today. Look, the alleged miracle under Warren Harding was a totally different situation. That recession was brought on by the Fed deliberately, in order to bring down the price level after the wartime inflation. There was no banking crisis, and interest rates were still positive, meaning no liquidity trap. So what can we learn from the macroeconomics of the US following World War I? Nothing.
IMF REPORT: Following World War I, Great Britain had run up massive government debt and had inflated too much. So its government tried to balance the budget–it actually had a surplus for a year or two!–and the BOE tried to push down prices with tight money. The 1920s were bad for the British economy.
PAUL KRUGMAN: Wow, everybody needs to read this IMF report! The historical lessons for today are crystal clear: Austerity is a bad idea. The right wingers who recommend budget-slashing and tight money are ignoring the lessons we can learn from the macroeconomic of Great Britain following World War I.
TYLER COWEN: Uh, Paul, I don’t want to start a fight or anything, but I sense an inconsistency in your posts. If you’d like, we can go to a restaurant that doesn’t even spend money on wallpaper, to talk it out.
DANIEL KUEHN: What?! An accusation of a Krugman Kontradiction? Here I come to save the daaaaaaay!
I Am Taking Over YouTube
I’m trying to clear out my browser tabs. Here are some backlogged YouTube appearances:
==> My interview with Redmond W. of Mises Canada, right after the QE3 announcement.
==> “Messengers for Liberty” episode 2 and episode 3. (I don’t turn to the Dark Side in Episode III, sorry to spoil it.)
==> My interview with Tom Woods when he guest-hosted Peter Schiff’s show recently.
UPDATE: Nice! They did a good job of highlighting this particular exchange from the Ron Paul / Paul Krugman debate. Start watching around 19:40:
Sumner Courageously Admits He Can’t Explain Housing Bubble
I know a lot of you wonder why I am always so quick to volunteer the fact that I made erroneous warnings about official price measures thus far, but the reason is that I can’t stand analysts who make all kinds of predictions, and then only pat themselves on the back for the ones they got right. I also think it encourages a sincere debate on the merits, when both sides drop the BS and admit their respective strengths and weaknesses.
In that light, I was very impressed by Scott Sumner’s recent discussion, in a response to George Selgin, where Scott wrote:
We know that 6.5% NGDP growth would not, ceteris paribus, produce a housing bubble. Indeed most other economic expansions saw faster NGDP growth, without a housing bubble. So the [Austrian-type] argument [that the Fed caused a distortion that didn’t show up in excessive NGDP growth] rests on the proposition that the lower interest rates resulting from easy money produced the housing boom. That’s possible, but the difference in the level of longer term real interest rates between an expected 5% and 6.5% NGDP growth is likely to be very small, regardless of what the Fed buys. So I simply don’t see how it comes close to explaining the housing boom. The current price of homes is closely linked to what people think homes will be worth in 5 or 10 years. And I don’t see how a year or two of easy money right now would have much effect on the expected value of homes 5 or 10 years out, unless it led to expectations of very fast NGDP growth. But it didn’t. Of course the weakness of my argument is that I have no rational explanation for the housing bubble. I’ve discussed bad regulation and tighter zoning and rapid Hispanic immigration to the 4 subprime states, but I don’t really think those explanations are adequate. It’s a mystery to me. Had real housing prices been strongly affected by monetary policy in other periods of US history I’d been very sympathetic to this argument.
I do understand why commenters who are closer to the Austrian tradition don’t find my analysis persuasive. I don’t have an explanation for the bubble and they think they do. That’s an advantage to the other side. But until I’m convinced that it’s a general theory that can explain other money–bubble linkages in other periods of history, I’m not willing to sign on.
(For example, in the 1920s real interest rates were not low and NGDP growth was not high. And yet we still had a big stock “bubble” followed by a severe slump.) [Bold added.]
So in the interest of chivalry, let me return the favor and say that looking just at consumer prices since 2008, Scott is looking better right now than I am. That doesn’t mean I’m agreeing with his theory, just as he isn’t agreeing with the Austrians about the housing bubble. Rather, it just means we can both recognize how we must sound to disinterested 3rd parties who are trying to figure out which of us is right.
Here are some additional points on the above excerpt from Scott:
==> I think Selgin was wrong to frame the issue as the difference between 5% and 6.5% NGDP growth. I (as well as many Austrians) completely reject Scott’s approach of using NGDP as the metric for Fed policy. So Scott is wrong (you can see more of what I mean if you click on the full post) to think this is just an issue of NGDP growing 5% versus 6.5%. That’s the whole point of what we’re driving at here: NGDP growth is not a good measure of whether the Fed is “screwing things up.” Scott is asking, effectively, “Oh come on, it wouldn’t matter what the Fed added to its balance sheet in those years, to generate an extra 1.5% of NGDP growth per year. How can you blame the global financial crisis on that?!” Right, and if someone used my body weight as a gauge of Fed policy during the 2000s, we might come to a similar conclusion. Sure, it grew too quickly, but not enough to explain the housing bubble, for crying out loud! So clearly, I am justified in thinking my body weight is the appropriate metric with which to evaluate Fed policy.
==> In my articles at Mises.org (here’s a later one, and follow its links) I gave a decent empirical case for why Greenspan either caused or at least greatly exacerbated the housing bubble. In particular, I showed that monetary base growth was comparable to large stretches of the 1970s–when most economists now agree the Fed was “too loose”–and I showed that Greenspan’s cuts in the fed funds rate corresponded nicely with movements in the 30-year mortgage (though not as much, of course). Then I showed that given the sharp drop in mortgage rates, the rise in the Case-Schiller home price index was pretty “rational” in the early stages of the boom, meaning that if a home buyer had a certain monthly payment in mind, then “how much house” he could buy was explained largely by the drop in mortgage rates.
==> Note the parenthetical claim at the end of the above excerpt. This is the second time I’ve seen Scott do this in the last few weeks. In another post, responding to White (who had warned that moving from the current NGDP trajectory to 5% growth would involve a burst of monetary expansion that would “do more harm than good,” Scott wrote this:
I don’t know of any theoretical models where steady 5% NGDP growth would create bubbles. And even if bubbles did occur, I can’t imagine why they would represent a public policy problem if NGDP continued to grow at 5%. I’d also point out that the US has experienced 3 major equity or residential real estate bubbles in periods of relatively low inflation and NGDP growth (1929, 2000, 2006) and zero major bubbles in periods with high inflation and NGDP growth (1968-81). The 1987 stock market bubble was an intermediate case (which did zero harm, as NGDP continued growing after the bubble.) [Bold added.]
Do you see what’s odd about Scott’s response? As usual, you would need to click through to see Larry White’s original post to understand the full context, but he too (like Selgin) was arguing that from an Austrian perspective, simply looking at NGDP growth could mask the dangerous changes to the capital structure resulting from Fed monetary expansion. So then, in order to tell Larry he was on weak ground, Scott comes back and says that before the two worst calamities in modern economic history (1929 and 2006), we had asset bubbles that didn’t show up as dangerous according to Scott’s preferred metric, and that when Scott’s preferred metric was flashing warning signs, we didn’t get any big bubbles.
To be fair, I totally understand what Scott is doing in the above quotation. It’s just weird that Larry could have lifted that sentence verbatim and used it to underscore his whole critique of NGDP targeting, yet Scott thinks he is helping his own case with these observations.
Sumner on Predicting the Great Recession
Today Scott Sumner writes:
There’s a reason most economic forecasters were not predicting a recession as of June 2008; net worth models are useless. The huge decline in house prices between 2006 would not be expected to cause a major recession, and indeed would not have caused one had NGDP not declined.
OK so there are two things here. First, although I have yet to be vindicated in my warnings about price inflation, here’s what I wrote in a Mises Daily that ran in early October 2007, based on analysis I had actually done in July 2007 for a client:
On September 18 the Fed cut its target for the fed funds rate by 50 basis points (0.5 percentage points), from 5.25% to 4.75%. The move surprised many analysts who had been expecting a more modest cut of 25 basis points.
For those versed in the Austrian theory of the business cycle, as developed by Ludwig von Mises and elaborated by Friedrich Hayek, the aggressive Fed “stimulus” is ominous indeed. Not only will it pave the way for much higher price inflation than Americans have seen in decades, but it will also exacerbate what could be the worst recession in twenty-five years.
…
Looking back at the chart above, we can see why the worst may be yet to come. In (price) inflation-adjusted terms, the early-2000s levels of the actual fed funds rate is the lowest since the Carter years. And many readers may recall the severe recessions of 1980 and 1982 that followed that period.In the Austrian view, the boom-bust cycle is caused by the Fed’s maintenance of artificially low interest rates, which causes businesses to expand, hire workers, buy other resources, and so forth, even though these projects are not justified by the true supply of savings in the economy. The greater the “stimulus” the worse the malinvestments.
From 2001–2004, the Fed kept (real) rates at the lowest they’ve been since the late 1970s. One of the consequences that has already manifested itself is the housing bubble. But a more severe liquidation seems unavoidable. The recent Fed cut may postpone the day of reckoning, but it will only make the adjustment that much harsher.
So Austrian business cycle theory certainly equipped an analyst to think a really bad crash was coming. And I didn’t pull “the worst in 25 years” out of a hat; in the article I explain why I said that.
But what of the second part of Sumner’s quote, where he says: “The huge decline in house prices between 2006 would not be expected to cause a major recession, and indeed would not have caused one had NGDP not declined.” ?
I still say there’s something really screwy about this approach. Absent huge swings in the price level, a recession is the same thing as a drop in NGDP.
I’ve asked this before, but I don’t think I got a great answer. What if we outdid Sumner, and said the Fed should target, not NGDP, but the unemployment rate? Or, actual RGDP as a percentage of potential RGDP? You would find those things tracking recessions and booms like hand-to-glove. I could say stuff like, “Market monetarists think the doubling of the reserve ratio in 1937 led to a double-dip depression, but actually it was the spike in unemployment. If policymakers had simply kept unemployment at 4% like I keep telling them they should, there wouldn’t have been a double dip in 1937. But, they had added insufficient Murphy Sauce in the economy, as evident from the fact that unemployment was above 4%. They confused the doubling of reserve ratios with inadequate Murphy Sauce. This happens a lot among macroeconomists.”
I am exaggerating a tad, because I can anticipate what the first round of replies would be from Sumner et al. on the above. But still, I think it’s good for me to occasionally spell out why I think he’s totally wrong.
Carbon Tax Swaps and the “Tax Interaction Effect”
I have the EconLib article this month, on the above. Here’s the introduction:
For years, many economists have advocated a tax on the emission of carbon dioxide and other greenhouse gases as a way to correct the negative externality of manmade climate change. More recently, even a growing number of conservative economists have embraced a carbon tax, not only as a way to correctly align market forces, but also as a way to offset other, more distortionary taxes. The slogan underlying such “carbon tax swap” proposals is that the government should “tax bads, not goods.”
Although the thinking underlying the conservative case is correct, there is a potential downside from a carbon tax swap. This negative side effect is rarely mentioned in any but the most technical discussions. It is the “tax interaction effect.” A new carbon tax can exacerbate the harms caused by pre-existing taxes, thereby offsetting the potential environmental benefits. What’s worse, not only can the tax-interaction effect operate in theory, but also numerical simulations suggest that it might be very large in practice, greatly reducing the “optimal” carbon tax.
This is actually a high-brow article, though my editor kept me speaking English. The backstory is that I am preparing a fairly extensive study for the Institute for Energy Research on carbon tax swap deals, and I came across this “tax interaction effect.”
Here’s the shocking thing: It is theoretically possible, and empirically considered likely the case by the experts in the field, that the more distortionary the tax code currently is, then the weaker the case for imposing a new carbon tax becomes, even if the revenues from the tax are used to reduce dollar-for-dollar other, distortionary taxes. This is true even if the carbon tax so imposed is a textbook, Pigovian “optimal” tax, that perfectly compensates for the negative externality of carbon emissions.
As I remarked at Daniel Kuehn’s blog (when he linked to my article), this result struck me as so counterintuitive at first, that I didn’t believe it. But if you work through the EconLib article, you should be able to see how it can be true.
Gary North, King of the Internet
Gary North has written two great articles, one that I like because it’s about the Krugman debate, and the other that I like because it’s objectively great.
Here’s North telling Krugman that he (Krugman) shouldn’t debate me:
I strongly recommend that Krugman not accept the challenge. I think he is a rational man, so I think he can understand the following arguments.
First, Murphy is a nobody, and Krugman is a somebody. The fact that he would even acknowledge Murphy’s existence would be an advantage to Murphy….
Second, Murphy is outside of academia, and Krugman is up to his eyeballs in it. Therefore, Krugman is an object of intense envy. There is no group more envious than a bunch of academics, and economists are probably the most envious of the lot. There is only one thing that pleases an academic more than seeing a famous academic taken down a notch: seeing a famous academic taken down two notches. The academics within the big shot’s own discipline are most delighted when this happens, because all of them know that they are far more qualified than the big shot, and they resent the fact that the big shot is so big. If the big shot academic also has access to the media, which means that nonspecialists are actually paying attention to him, the envy is intense beyond anything that the normal person would be familiar with.
Third, Krugman would be regarded as Goliath, and Murphy would be regarded as David….
Fourth, Krugman has spent his entire career in academia, which means he has spent his entire career lecturing to students. He can flunk them if they give him any flak…So, Krugman is without any experience in public debate. He has been able to get away with conceptual murder in the classroom for his entire career. This is why academics usually are lousy debaters.
Fifth, Krugman suffers from a degree of shyness greater than most academics ever experience. He really is stuck for an answer in an elevator if somebody says “hello.” This is not a man to take on a challenger in a public forum which is going to be captured on video and posted on YouTube within 20 minutes after the debate is over.
Sixth, Krugman is a Keynesian. Keynesianism is incoherent in its original form…Therefore, a Keynesian is virtually defenseless in the presence of an Austrian school economist in a public debate forum….
Seventh, Krugman faces an economy with over 8% unemployment, while his colleague from Princeton, Ben Bernanke, has been unable to get the unemployment rate below 8%…
Eighth, Murphy is really good in front of a crowd. Krugman cannot even work an audience in an elevator.
Ninth, Krugman doesn’t lose anything by not debating. Poor people will lose about $80,000 worth of food, but when you’re a full professor at Princeton, and you have been awarded a Nobel Prize, you don’t know any poor people….
In conclusion, Krugman would be a fool to debate Murphy. Krugman is no fool. Krugman is a self-interested, rationally calculating, totally economic man.
Now for grander things, North talks about the impending collapse of Keynesian economics:
I offer this optimistic assessment: the bad guys are going to lose. Their statist policies will bring destruction that they will not be able to explain away. Their plea will be rejected. “Give us more time. We just need a little more time. We can fix this if you let us get deeper into your wallets.”
In the very long run, the good guys are going to win, but in the interim, there is going to be a lot of competition to see which group gets to dance on the grave of the Keynesian system.
Get out your dancing shoes. Keep them polished. Our day is coming.
I know that sometimes I personally don’t read all of North’s articles, because they can be long. But this one I couldn’t stop reading until I had finished. It was very compelling.
Bryan Caplan Turns the Tables on the Libertarian Haters
Bryan Caplan gives a great rhetorical tip to people debating libertarianism. (I gather there are at least 3 of you on the Internet.) I am going to copy and paste most of his post because you really need to see the full context:
“What if a poor person gets sick, doesn’t have insurance, and can’t get friends, family, or charity to pay for treatment?”
“What if an elderly person gets defrauded out of his entire retirement and the perpetrator vanishes into thin air?”
“What if a child is starving on the street, and no one voluntarily feeds him?”
“What if someone just can’t find a job?”
If you’re a libertarian, you face what-ifs like this all the time. The point, normally, is to make you say, “Tough luck” and look like a monster. What puzzles me, though, is why libertarians rarely ask analogous questions. Like:
“What if Congress passes an unjust law, the President signs it, and the Supreme Court upholds it?”
“What if the government conscripts you to fight in an unjust war, and you die a horrible death?”
“What if a poor person drinks and gambles away his welfare check?”
“What if the government denies you permission to legally work?”
“What if the President decides your ethnicity is a national security risk and puts you in a concentration camp, and the Supreme Court declares his action constitutional?”
“What if a person lives an extremely unhealthy lifestyle, so by the time they’re retired, they’re in constant pain no matter how generous their Medicare coverage is?”
“What happens if a President lies to start a war, and voters don’t particularly care?”
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