Yet More on Rules vs. Discretion in Monetary Policy
==> Steve Horwitz weighs in.
==> This was actually one of the few things I thought was cool in macro class in grad school. So let me reproduce the patronizing comment I left at Daniel Kuehn’s blog where he and I have taken the battle:
DK [Daniel Kuehn] wrote:
I suppose I was reading “do something that sucks” too narrowly. After all, presumably you don’t have to do what sucks if you have a rule you like! But that really depends on whether you like the rule or not!
Argh! You can interpret this as either really patronizing, or as kind-hearted. But, I am persisting with this because I’m still not sure you are getting my (modest) point. I keep thinking you and I are on the same page, but then you go and write a comment like this that makes me not so sure…
You can have a rule which simultaneously: (a) makes you worse off in certain situations, according to your own preferences, than you would be in the absence of the rule, and yet (b) makes you better off in the long-term. In other words, you sometimes benefit from having options removed, even if the removal of those options changes your behavior through time.
So suppose society “really” thinks that it is worth tolerating an extra 2 percentage points of inflation for every point of employment, relative to the baseline 2% inflation rate and 5% unemployment rate. Left to discretion, if the Fed found itself in an economy with 7% inflation and 7% unemployment, it would be willing to cut interest rates in order to move to 8% inflation and 6% unemployment, if it thought the Phillips Curve allowed such a tradeoff.
But, because people in the private sector know that the Fed will do this, it affects their long-term inflation expectations from time=1, and that itself influences what tradeoffs are possible, i.e. those very expectations influence the shape of the Phillips Curve.
So, you can come up with a model where if the Fed is forced to pretend that actually it should only tolerate a 1% point increase in excess inflation, if it will achieve a 5% reduction in excess unemployment, then the Phillips Curve is transformed such that, operating under this constraint, the resulting path of the economy is preferable to the one under discretion, even with the true social welfare function.
Then, once you get this result under your belt, you can then see why it makes sense to install a central banker who apparently really hates inflation. I.e. you install a central banker who hates inflation (compared to unemployment) more than “society” really does, so that when this stodgy banker sets discretionary policy, it actually is closer to the constrained rule policy.
Now maybe this type of model captures an important aspect of the real world, or maybe it’s nuts. But the comments I’ve been reading on your blog on these issues (not just from you, but from your commentators) makes it sound like this element is completely lacking. You guys seems to have just been talking about different ways of describing what the Fed could do, as opposed to seeing how (in principle) limits on the Fed could actually improve the outcome.
For further reading, or simply to substantiate my claims…ask Tyler Cowen. I have no idea what papers I read on this, I just remember thinking, “Ah, that’s pretty cool. For once the New Keynesian model with sticky prices and a representative household who lives forever, spits out something I like.”
Potpourri
==> Rob Bradley has some neat quotes from Milton Friedman, some of which I’ve never seen before.
==> Arthur Laffer and Ford Scudder lay out the looming “fiscal cliff.” Some big numbers for tax-rate increases that are currently in the cards.
==> The grand shi strategy of Ron Paul.
==> The mischievous von Pepe sends me John Cochrane trying to explain his inflation warnings vis-a-vis Krugman’s mocking. Eh, I am sympathetic–and Cochrane has some good zingers–but I still am not sure how I feel on the whole thing.
==> I don’t pump every one of these types of posts your way, but here is an example of what I do on a regular basis in my work on energy policy. You would not believe the crazy stuff that some of the left-leaning environmental economists put out. I’m not talking about people saying carbon emissions constitute an externality and so we need a carbon tax. I’m talking about people saying a carbon tax will force businesses to install insulation and they’ll end up with bigger profit margins, etc.
==> I had a long interview with “Manifest Liberty” on all sorts of issues, ranging from free markets (of the Murphy kind, not the Krugman kind) to Christianity (of the Jesus kind, not the Hitchens kind). The first of 5 parts is here on YouTube.
Should We Label Paul Krugman as a “Free-Market Economist”?
Yes kids, once again we return to a familiar theme here at Free Advice: trying to use evidence to get Daniel Kuehn to change his opinion on something involving Paul Krugman. Now many of you will say, “Bob, what’s up? You’ve written a book that has often been (erroneously) described as a NYT bestseller, you have a promising career as a stand-up comedian, and you can stand-in for John Lennon if push comes to shove. Why waste time with this punk Keynesian grad student?”
Well, when you see the quote I have to produce for you, you will know why. Recall that Daniel Kuehn has been saying it is perfectly reasonable for him to describe Paul Krugman as a free-market economist; it all depends on how we define the term. I mean, was Milton Friedman one? What about Hayek? What about Mises (who believed in government militaries and courts, after all)? Surely it’s silly just to reserve the term for anarcho-capitalists in the Rothbardian tradition.
Well, after the below quote, one of two things will happen:
(A) Daniel will offer unconditional surrender on this minor point.
(B) Daniel will have to explain to us why it makes sense to describe as a “free-market economist” someone who just wrote this on his NYT blog:
Romney’s remarks here [on Israel’s health care system] fit the classic…definition of a gaffe: it’s when a politician accidentally tells the truth. The truth in this case is that America’s uniquely privatized system is also uniquely expensive and inefficient; health care is one area in which the public sector does it better than the private sector, and in which free-market doctrine is just a dangerous fantasy.
Either way, I win.
Austerity Bask
OK kids, put your thinking caps on. I just spent an hour on the phone with a journalist for a household outlet, who is trying to give the “rest of the story” regarding the so-called fiscal cliff. He is saying that the conventional treatment of this story is, “Oh my gosh, if the government cuts spending at the end of the year, it will be so awful because all those people will get laid off and then they won’t have as much to spend.” So he wanted me to help him understand the offsetting benefits of government spending cuts.
We spent a lot of time walking through the economics of it, with me explaining the various mechanisms by which lower government spending could lead (eventually at least) to a stronger economy and higher standard of living. I told him upfront that first I wanted to make sure he himself believed in the story, and then we could worry about how to make it compelling to the masses.
One argument I used (in case you’re curious) went like this: “Look, we can all agree that it would be inefficient and make us poorer, if the government literally spent 100% of GDP every year, right? That would clearly be ‘too much’ government spending, on just about anybody’s criteria. So if we somehow found ourselves in that predicament, then it would have to be true that cutting government spending would be a good thing. Even though we could look at the businesses who saw their sales plummet, and the employees getting laid off, it would have to be the case that other businesses and individuals were benefiting, at least eventually. If we couldn’t point to such winners–to more than compensate for the short-run losers–then it must not be the case that 100% government control of the economy is a bad thing, after all.”
OK, so I think most of my readers will agree that this is a sweet argument. However, we can also agree that the average reader of a financial news story will roll his eyes and move on to “the real world.”
So here’s what the journalist wants: He wants to be able to actually interview and quote specific business owners who say, “Oh heck yeah, bring the fiscal cliff on! My revenues would go up 30% in the first quarter if the government cut spending 5%.”
See why that would really seal the deal for the average Joe reading the article? So please give me your ideas on this kind of thing. Off the top of my head, I only came up with three:
==> People in the health care sector who lie outside the official nexus. For example, chiropractors and more “out there” alternative medicine people, might see their business go way up if the government slashes its support for pain pills and other really expensive treatments. So can people give specifics?
==> Operators of vocational schools. If the government totally eliminated all federal support for higher education, then there would be a massive outflow of potential students from conventional 4-year colleges. Many of them might apply to trade schools to learn how to be a mechanic or whatever. Specifics?
==> Operators of small firms in Silicon Valley. If Halliburton, the Rand Corporation, etc. are laying off workers, there will be plenty of highly-skilled individuals who are now willing to work for a lot less. Specifics?
==> Other major categories of immediate “winners” you can think of?
Two Views of Krugman
[UPDATE at end.]
Daniel Kuehn is upset that Don Boudreaux leads his readers to believe that Milton Friedman and people like him have a monopoly on rule-based monetary policy. Daniel writes:
Don, I think, is trying to pull the wool over his readers eyes here. The consensus for a long time now has been that policy rules are superior to policy discretion. All the major Keynesian voices Don usually complains about, and those who he would associate with Nicholas Wapshott, support policy rules – not discretion. Paul Krugman has specifically cited a Taylor rule to govern monetary policy, and has worked out a Mankiw rule answer in the past as well. Brad DeLong has come out in favor of an NGDP level target, although he’s made points in the past grounded in the Taylor rule. And then of course there’s Mankiw who is presumably pro-Mankiw rule and John Taylor who is presumably pro Taylor rule.
In short, Keynesian policy is rules-based policy. People might just cite the need for stimulus right now, because the shortfall is so egregious. But when you ask Keynesians what is required, a rule of one form or another is invoked.
Man, where do we wacky free-market guys come up with these caricatures? Maybe because Krugman writes stuff like this:
Basically, if you listen to Bernanke’s analytical comments, they make a powerful case for more expansion. Underlying inflation is low; unemployment is disastrously high, and the corrosive effects of long-term unemployment are hurting the future as well as the present. More quantitative easing — QE3 and beyond — might not work, but it’s very much worth trying.
And if you think that doesn’t work, surely Ezra Klein’s recent proposal (HT2 Steve Landsburg) fits the bill. Klein suggested:
I don’t pretend to know what is truly in the heart of our top central banker. But in conversations with Fed watchers and economists, I am convinced that there is something more the Fed can do, and that now is the right time for them to do it. I call it Uncle Ben’s Crazy Housing Sale.
Tomorrow morning, Bernanke could walk in front of a camera and announce that the Federal Reserve intends to begin buying huge numbers of mortgage-backed securities with the simple intention of bringing the interest rate on a 30-year mortgage down to about 2.5 percent and holding it there for one year, and one year only.
The message would be clear: If you have any intention of ever buying a house, the next 12 months is the time to do it. This is Uncle Ben’s Crazy Housing Sale, and you’d be crazy to miss it.
I imagine Daniel can point us to the wild denunciations of Klein’s clearly anti-Keynesian proposal, which flies in the face of everything Krugman has been writing for four years.
UPDATE: I can’t believe I have to point this out, but based on the comments at Daniel’s blog, I think I should: If you have a “rule” that goes out the window when the economy is really bad, then it’s not a rule. That would be like declaring, “We don’t negotiate with terrorists! Unless of course they are holding people hostage.”
Singing “Twist and Shout” at Mises U 2012
Here it is. I gave this disclaimer on Facebook: I swear these smart phones are out to get me. I think it sounded much better live. My bit of independent evidence (since Tom Woods et al. would just be nice to me) is that some random Auburn U girl comes up afterwards and says, “You’ve been singing your whole life, haven’t you?” I’m not sure what she meant by that, but presumably it was a good thing.
As always, thanks to Fly By Radio for letting me pretend I’m more than an economist once a year.
After Further Review, I Still Don’t Think Jesus Wants His Followers to Kill Gay People
In the comments of my last post (we missed a week because of blog host shenanigans), Ken B. provided links (here and here) that show Christians themselves wondering about the authenticity of the famous gospel story in which Jesus says, “Let him who is without sin cast the first stone.” I also talked with two people I trust, who know a lot more on these things than I do, and their answers were not definitive that the account is airtight.
So, I agree with Ken B. that I shouldn’t place a lot of weight on that particular passage, until I personally investigate the matter more and can be confident that Jesus actually did say it.
Having said all that, I am still quite sure about my stance on what started this whole thing: I had said that although one could argue that Jesus thought marriage should be only between a man and woman, there was no way any Christian could possibly think that Jesus wants him to stone gay people to death.
My thoughts then provoked people to throw Old Testament quotations at me, and passages saying Jesus and the Father are one, etc. etc. (I may not be perfectly reproducing the progression of the discussion, but I am pretty sure this was the spirit of it.)
In this context, I then cited the case of the religious authorities deliberately trying to trap Jesus on His seeming mercy in light of the Mosaic law, by bringing before Him a woman caught in adultery. Since the Old Testament calls for her to be stoned, what would Jesus say? And–according to that gospel account–Jesus neither commanded her to be stoned, nor did He say the law was invalid. Rather, He (allegedly) said, “Let him who is without sin cast the first stone.”
Now, in light of Ken B’s evidence, I recognize that I can’t be certain that this event actually happened. OK fine, there are still plenty of other places in the gospels where Jesus doesn’t endorse His followers actually implementing the harsh penalties prescribed in the Old Testament. Perhaps the most obvious example is Matthew 5: 38-45:
38 “You have heard that it was said, ‘An eye for an eye and a tooth for a tooth.’ 39 But I tell you not to resist an evil person. But whoever slaps you on your right cheek, turn the other to him also. 40 If anyone wants to sue you and take away your tunic, let him have your cloak also. 41 And whoever compels you to go one mile, go with him two. 42 Give to him who asks you, and from him who wants to borrow from you do not turn away.
43 “You have heard that it was said, ‘You shall love your neighbor and hate your enemy.’ 44 But I say to you, love your enemies, bless those who curse you, do good to those who hate you, and pray for those who spitefully use you and persecute you,[h] 45 that you may be sons of your Father in heaven; for He makes His sun rise on the evil and on the good, and sends rain on the just and on the unjust.
Look carefully at the parts I put in bold. Jesus is clearly saying, “Hey guys, you used to operate under this understanding, but now I’m stepping it up a notch.” Also notice that this older understanding came from the law–it wasn’t some pagan rituals that Jesus is here discussing. For example from Exodus 21: 22-25:
22 “If men fight, and hurt a woman with child, so that she gives birth prematurely, yet no harm follows, he shall surely be punished accordingly as the woman’s husband imposes on him; and he shall pay as the judges determine. 23 But if any harm follows, then you shall give life for life, 24 eye for eye, tooth for tooth, hand for hand, foot for foot, 25 burn for burn, wound for wound, stripe for stripe.”
So to repeat my earlier thoughts, if modern agnostics/atheists want to ridicule the crazy, contradictory doctrines of modern Christianity, OK you can make that argument. But it is simply wrong to assert that if you call yourself a Christian, oops you just agreed you have to stone your teenager if he talks back. That is simply not true. That’s not what Jesus taught.
Here are some other examples of Jesus’ teachings that make it hard for me to see how anybody calling himself a Christian can make posters saying, “God hates f*gs” etc.
==> Following perhaps the most famous verse in the Bible is this (Jn 3:17): “17 For God did not send His Son into the world to condemn the world, but that the world through Him might be saved.”
==> Or how about this one? Jesus is looking at Jerusalem before His ordeal will begin. He laments (Mt 23: 37), “O Jerusalem, Jerusalem, the one who kills the prophets and stones those who are sent to her! How often I wanted to gather your children together, as a hen gathers her chicks under her wings, but you were not willing!”
==> Yet another episode where Jesus clarifies that self-righteous condemnation is not His purpose (Mark 2:15-17):
15 Now it happened, as He was dining in Levi’s house, that many tax collectors and sinners also sat together with Jesus and His disciples; for there were many, and they followed Him. 16 And when the scribes and[a] Pharisees saw Him eating with the tax collectors and sinners, they said to His disciples, “How is it that He eats and drinks with tax collectors and sinners?”
17 When Jesus heard it, He said to them, “Those who are well have no need of a physician, but those who are sick. I did not come to call the righteous, but sinners, to repentance.”
==> And let’s suppose you convince me that God still wants to destroy people for sinning. OK, does that mean you are supposed to carry it out? If you think that, remember Jesus also said (Mt 7:1 – 5):
7 “Judge not, that you be not judged. 2 For with what judgment you judge, you will be judged; and with the measure you use, it will be measured back to you. 3 And why do you look at the speck in your brother’s eye, but do not consider the plank in your own eye? 4 Or how can you say to your brother, ‘Let me remove the speck from your eye’; and look, a plank is in your own eye? 5 Hypocrite! First remove the plank from your own eye, and then you will see clearly to remove the speck from your brother’s eye.”
In conclusion, let me reiterate that I am not a Bible scholar. All I have done is read the book (in its modern translations) and go to church. Yet it seems to me that unless the entire gospel is a fabrication, then followers of the man called Jesus Christ are not here to condemn others for sin. That goes against everything Jesus reputedly stood for.
How Would a Free-Market Society Provide Law and Military Defense?
We answer these central questions in my new online Mises Academy class, which starts August 1. Summer pricing: the 6-week class is only $59! Full infomercial here.
Recent Comments