In Defense of David R. Henderson
David R. Henderson has the enviable task of being the Wall Street Journal’s go-to guy every year when the Nobel (Memorial) Prize in economics is announced. For this year’s recipients, David said the award was given to people whose work put “a sizable chink in the Keynesians’ armor.”
Now David gives a bunch of evidence to back up his claim, mostly focusing on Thomas Sargent. I don’t think anybody has (or can) deny that all of the specific things David cites are (a) true and (b) represent a challenge to Keynesianism either today, or what it used to be. (For example, Daniel Kuehn spins it by saying that S & S did indeed challenge the paradigm reigning in the 1950s, which just so happened to be Keynesianism. But hey, if Austrians had been dominant in the 1950s, then we’d be calling this an anti-Austrian Nobel. So why does Henderson view the attack on Keynesian models, as an attack on Keynesian models? Those nutty libertarians.)
Paul Krugman, of course, continues to get saddle sores from riding his high horse. In a post entitled “Nobel Lies” he declares:
What does an economics Nobel mean? What does it do? Not what some people seem to think.
Anyone who imagines that the Nobel can tip the balance between rival schools of thought in macroeconomics or anything else is just being silly. The committee that chooses each year’s Nobel is just a committee — smart, well-informed, and scrupulous, but not gifted with godlike powers of discernment not granted to mortal men.
Ohhh, so Paul Krugman would never, say, take Peter Diamond’s winning of a Nobel as evidence that Republican opponents of his views on monetary policy were a bunch of idiots… (I know, I know, that’s not a contradiction. When Krugman says someone’s views are dumb, that is an objective repudiation based on hard facts. When David R. Henderson does it, he is a lying ideologue.)
Anyway, David does have a bit of a problem because Sims himself came out and said he rejects the idea that his work is an attack on Keynesianism. I don’t know Sims’ work much, and perhaps David was indeed stretching by including him. However, as I said, in terms of what David cited in his WSJ piece, Sims’ work certainly did challenge the reigning Keynesianism of the time.
Also, for what it’s worth, I was in a meeting with a very prominent “right wing” economist on the day of the announcement, and Sargent winning was certainly seen as “an award for our side.” I guess you can say, “Right, just shows all of you ideologues aren’t scientists,” or, an alternate explanation is to say, “When a Keynesian wins, Krugman claims victory. When a non-Keynesian wins, Krugman says the award doesn’t pick sides.”
Krugman Bask on Bond Vigilantes
Krugman today yet again gives IS-LM all the credit for leading to his good predictions on interest rates. (I’m not being sarcastic; Krugman publicly was saying interest rates wouldn’t spike, when others were.)
But I would like someone to show me where Krugman has actually used the IS-LM model to explain two different things:
(A) Why the bond vigilantes wouldn’t attack the U.S. Treasury.
(B) Why the bond vigilantes attacked Iceland, Ireland, Greece, and (somewhat) Spain.
For example, in this post Krugman actually doesn’t use IS-LM at all (at least explicitly), and has this offhand remark about Greece:
Also, if you think that US interest rates are being held down by the fact that in some sense the Treasury hasn’t had to go to the market lately, since the Fed is buying debt — although the Fed isn’t actually buying it direct from Treasury — consider the case of Greeece. Greece isn’t going to the market at all these days, since it’s getting all its funding from the bailout package. That hasn’t stopped the 10-year interest rate on its outstanding debt from reflecting investors’ perception of its underlying solvency.
So suppose the government keeps running $1 trillion+ deficits, and then Rick Perry takes the White House in 2012. Then U.S. interest rates suddenly do spike. Couldn’t Krugman just say, “Oh, well this is now because the idiot Republicans are making investors worry about the necessary tax increases down the road. The solvency of the government has been called into question, and that’s why interest rates are up. IS-LM wins again!” ?
Let me say it in other words: In the quote above–where Krugman is explicitly contrasting his “Pimco’s Bill Gross is wrong about QE2 ending” call with what is going on in Greece–Krugman didn’t use IS-LM. He used the much more obvious and simplistic, non-liquidity-trap “model” of saying (paraphrasing), “Investors are attacking Greece because they’re worried it can’t service its debt, but they aren’t yet worried about the U.S.”
That’s fine, but that’s not IS-LM. There’s nothing Keynesian about that at all.
Jesus the Great Storyteller
It recently struck me that among His other superlative traits, Jesus was a great storyteller. There was no reason it had to be so. Moses wasn’t a storyteller, nor were any of the other giants from the Old Testament (at least not that I can think of). Daniel would tell some amazing tales, to be sure, but those were prophesies about the future; he wasn’t using fiction as a pedagogical device.
Jesus didn’t just weave stories to illustrate His principles to the masses, but in several places it seems He conjures up a tale on the spot in order to defuse a conflict engineered by His enemies. The most famous example of this is the parable of the Good Samaritan (Luke 10: 25-37), which I encourage you to go read because in the beginning, it’s clear that the motivation for the story is a lawyer trying to test Jesus. (In other words, it’s not that Jesus was working on a sermon for a bunch of His fans, and thought, “Oh, this will be a memorable story to get my point across about loving your neighbor.”)
The example I’ll quote in the present post is recorded in Luke 7: 36-50 when Jesus is a guest for dinner and something “liiiiitle bit awkward” occurs:
36 Then one of the Pharisees asked Him to eat with him. And He went to the Pharisee’s house, and sat down to eat. 37 And behold, a woman in the city who was a sinner, when she knew that Jesus sat at the table in the Pharisee’s house, brought an alabaster flask of fragrant oil, 38 and stood at His feet behind Him weeping; and she began to wash His feet with her tears, and wiped them with the hair of her head; and she kissed His feet and anointed them with the fragrant oil. 39 Now when the Pharisee who had invited Him saw this, he spoke to himself, saying, “This Man, if He were a prophet, would know who and what manner of woman this is who is touching Him, for she is a sinner.”
40 And Jesus answered and said to him, “Simon, I have something to say to you.”
So he said, “Teacher, say it.”
41 “There was a certain creditor who had two debtors. One owed five hundred denarii, and the other fifty. 42 And when they had nothing with which to repay, he freely forgave them both. Tell Me, therefore, which of them will love him more?”
43 Simon answered and said, “I suppose the one whom he forgave more.”
And He said to him, “You have rightly judged.” 44 Then He turned to the woman and said to Simon, “Do you see this woman? I entered your house; you gave Me no water for My feet, but she has washed My feet with her tears and wiped them with the hair of her head. 45 You gave Me no kiss, but this woman has not ceased to kiss My feet since the time I came in. 46 You did not anoint My head with oil, but this woman has anointed My feet with fragrant oil. 47 Therefore I say to you, her sins, which are many, are forgiven, for she loved much. But to whom little is forgiven, the same loves little.”
48 Then He said to her, “Your sins are forgiven.”
49 And those who sat at the table with Him began to say to themselves, “Who is this who even forgives sins?”
50 Then He said to the woman, “Your faith has saved you. Go in peace.”
The above story is amazing in many respects. Reading accounts like that, of Jesus’ value system and the way He conducted Himself in such a situation, reassures me that I hitched my wagon to the right guy.
Twin Spin From Silas Barta
Silas Barta is not so sure he trusts the White House committee that decides which Americans will die based on criteria that are classified, and so he has created a Do Not Kill list.
On a more serious note, Silas has an interesting suggestion for those who take seriously the signalling model of education:
You might have heard about the so-called “Signaling model of eduction”, promoted by Bryan Caplan at GMU (among others!), and it’s something I find plausible.
First, some background: The problem is to explain why people who get a college education are more able to get jobs, and better paying ones. The traditional explanation is that colleges provide you with knowledge skills that allow you to be more productive. (This has always seemed suspicious to those of us who have remarked, throughout our education, that “I’m never gonna use this stuff” … and been mostly right.)
The signaling model, in contrast, says that completion of college simply reveals your possession of good traits for hiring that you already had before, but could not convincingly claim to have until you completed college, since a college degree indicates some combination of intelligence, willingness to do boring stuff that doesn’t make sense, and capacity to be indoctrinated into and conform with a group (I’m simplifying a bit). These things are hard to test in a job interview, or, in the case of intelligence, usually illegal to test for.
A few years ago, I pointed out (HT: Bob Murphy [1]) that one usefully testable implication of the signaling model is that you should be able to earn big profits by running a business that provides high school graduates with the same “signals of good qualities” that a college provides, but at significantly lower (monetary) cost to them, simply by “cutting out the fat” — all the stuff that doesn’t help to signal the student’s ability. You would just set up some school that filters students by IQ, and then puts them through hell, gives them difficult assignments, poor living conditions, etc. No way an unemployable person could survive through that kind of regimen, right?
So there’s your idea: you make students just as employable, but they don’t have to take on nearly as much debt.
To put this in terms that Bryan Caplan would appreciate: If the signalling model is correct, then why don’t we see all kinds of much-cheaper alternatives to college? Don’t tell me accreditation is screwing things up: That’s the beauty of this test–it shouldn’t depend on government standards at all (if Caplan is right), or if anything, accreditation should make it even easier for Caplanesque businessmen to earn a profit from jumping in. Everybody else in the industry is under the impression that employers want kids who actually know stuff like algebra and The Raven, but no they don’t–the employers just want a reliable signal about the intelligence and work ethic of potential new hires. There should be a humongous opening here for businesses to fill this niche in between cost of development, and the $20,000+ per student charged at some “institutions of higher learning.”
So what’s going on, Bryan? Why don’t we see such businesses? Why don’t you take your advance from Parents Don’t Matter and start it yourself?
(NOTE: Silas was not being sarcastic in his idea. Silas is open to Caplan’s theory about the purpose of education in today’s world. I am open to the idea too, except when it is promoted by Bryan Caplan.)
Aggregate Demanders Once Again Hit Below the Belt
In the same spirit as Scott Sumner’s “if we eventually get high inflation, it will probably be due to tight money over the past few years,” I must also call the referee’s attention to this throwaway line from Krugman. After reminding readers that the Obama stimulus was in no way a “test” of actual Keynesian remedies, Krugman writes:
The other part of the story is the troubles of the euro area debtors. Never mind that these have nothing to do with stimulus spending, and that Spain and Ireland were actually fiscal role models before the crisis; this too is spun as somehow anti-Keynesian, rather than a reflection of the disastrous effects of imposing a nouveau gold-standard regime.
I mean really guys, c’mon: How in the world can you have a reasonable debate with your hard-money critics, if now a fiat currency that was explicitly designed from Day One by technocrats and that never had a link to commodity money is being used to discredit the gold standard? Give us a break.
Krugman Accounting Bask
I’m being serious in this post (for once), I want someone to explain exactly where Krugman is coming from when he writes:
[Martin Wolf is] reacting to Cameron’s statement, semi-withdrawn but not really, that what Britain needs is for everyone to pay down debt, said in obvious obliviousness to the fact that if everyone cuts spending at the same time, income must fall.
But then, this kind of obliviousness is very widespread, and my experience is that if you try to point out the problem — if you try to explain that my spending is your income and vice versa — you get a belligerent response. Y=E is seen as a political statement, which in a way it is if one side of the political spectrum insists on believing things that can’t be true.
Krugman seems to be saying (though again, he’s a slippery fish) that if everyone pays down debt, then total spending must fall. Do people agree with me that that is not necessarily true, or is that indeed the (stronger) claim?
Let me restate my question in different words: I agree that if everyone reduces spending, then (nominal) income has to go down. However, Krugman above leads us to believe (without actually saying it), that if everyone tries to pay down debts, then we get a drop in spending (and hence a drop in nominal income). So is that part of what he considers to be an accounting tautology too? I.e. just how “stupid” does Cameron have to be here? Is he really ignoring accounting, or is Krugman conveniently slipping in an empirical assumption or a tenet of Keynesian models, that Cameron need not endorse?
Thoughts on the Econ Nobel Laureates
David R. Henderson is, as usual, much more courteous than I am. He argues that this year’s awards should be construed as “non-Keynesian,” and maybe he’s right.
Yet here was my take:
This year’s Nobel Memorial Prize in Economics goes to two Americans, Thomas Sargent (NYU) and Christopher Sims (Princeton). Officially the award is for “their empirical research on cause and effect in the macroeconomy.”
There is no doubt that these two guys are really sharp, and free-market economists can find a lot to like in much of the work of Sargent in particular. Yet to update what I said of last year’s recipients — who studied labor markets — it’s a bit odd for the economics profession right now to be celebrating two scientists for their work in helping policymakers steer the macroeconomy. It would be a bit like awarding Jonas Salk a Nobel Prize in the midst of history’s second-worst polio epidemic.
…
We ironically seem to be in the midst of one of the causation-correlation traps that I just explained above. Just about everyone is celebrating the work of Sargent and Sims, in effect saying, “Thank goodness you gave policymakers such guidance, especially when they need it now in the midst of the worst financial crisis since the 1930s! We can only imagine how awful the world economy would be today, were it not for your seminal papers.”Yet things might well be just the opposite. The “data” is just as consistent with the opposite conclusion, namely that Sargent and Sims steered the macroeconomics profession along a trajectory that led policymakers to do things that blew up the global financial system, such that we are currently worried about the collapse of an entire continent and its currency. What would things have to look like, in order for us to fine all of the most-influential macroeconomists, rather than giving them a $1.5 million award?
I understand that the Nobel (Memorial) committee is in a Catch-22: If they give awards to people working on stuff with relevance to the financial crisis, then I can zing them like I did above. Yet if they gave awards to economists studying, say, auction theory, then I could zing them for caring about such esoteric things in the midst of a global meltdown.
But there’s a solution: What if the Swedish bank (which awards these things, since there aren’t actual Nobel Prizes in economics) just announced, “We’re not giving out any awards until this crisis is resolved”? I think that would be a welcome gesture, like if a big corporation passed up on bonuses for management in a year where they laid off 5,000 factory workers.
Some people might think my lashing out at Nobel laureates is jealousy, but it’s not. It’s self-preservation. Within a few years, we are going to have full-blown riots in this country. Sure, the mobs will go after the politicians, hedge fund managers, and lawyers first. But right now, unless we do some PR damage control real quick, economists are about 6th on the chopping block.
Yglesias Wants to Abolish the EPA!!
(Hint: At least skim this whole post. There’s a surprise at the end.)
Wow, I stand corrected. I recently implied that on the great scientist/ideologue divided, Matt Yglesias came down on the side of Krugman. Yet in a recent post on Pigovian theory, Yglesias totally proved me wrong (HT2 Daniel Kuehn):
Against Pigovian Taxes, For Private Virtue
John Quiggin says Pigovian externality economics is the most underrated line of thought in today’s profession.
While of course I agree with many of the specific observations made under the banner of Pigovian analysis (private businessmen often do environmentally harmful and self-interested things), I don’t really “get” Pigou’s approach and think I never will. The basic theory (here’s a good recent example from William Nordhaus) seems to go like this:
1) Spread cynicism about private corporations.
2) …
3) Fascism!The psychological and sociological links here seem clear enough. Both fascist political ideology and spreading cynicism about private businessmen serve to raise the status of government officials and lower the status of businessmen. But as a political agenda it doesn’t work at all.
For starters, even in Nazi Germany we still have private businesses. We’re keeping the agricultural producers, the pharmaceuticals, the utility companies, the software developers, the mobile phone providers. These — rather than, say, the smog-belching factory cranking out Chia pets — are the really dangerous part of big business. If you look at a place with no real corporate structure (North Korea, say) the problem isn’t that the businessmen are dumping too many chemicals in the river. The problem is the tyrannical State crushes private enterprise and literally leads to millions of deaths from starvation. When I was in Ethiopa in the 1980s, I gave some of my crackers to a handful of children so that they would be able to eat that day. In the United States, that has never happened to me. Even the homeless here generally get enough to eat, because of the cornucopia made possible by capitalism. The existence of an advanced and self-regulating market place is, where it exists, a triumph of private integrity against the assumption of cynicism.
The observation that bad business practices are a major source of human ills is quite correct, but embracing fatalism about it only exacerbates the problem. What’s needed are efforts to push societies in the direction of taking honor and corporate obligation more seriously, not less so. You want CEOs and shareholders to feel worse, not better about behaving cynically. You want consumers to broaden the interests they consider, not narrow them. In the early 19th century, “let’s kill whales for their oil” was a winning business plan. In the 21st century, “let’s do mountaintop removal to get more oil” is not. That makes all the difference. Suggesting that instances of private environmental harm and self-dealing simply show that such harm and self-dealing are inevitable just eats away at the moral and social fabric that underlies any kind of prosperity.
Last week I was outside my office and I saw a $5 bill on the ground. Famously, economists say you never see a $5 bill on the ground because someone would pick it up. But instead of picking it up, I stood around watching to see if anyone else would. A bunch of people walked by not noticing it. Then one guy saw it, saw me, and asked if it was mine. I said no it wasn’t, I was just curious what would happen. He laughed and made a joke about economists. Then a second guy came by, picked it up, and said I’d dropped five dollars. I said no, actually it was there before me. He looked around, noticed a homeless guy across the street, said “I think he needs it more than me,” walked over and gave it to him.
You may want to click on the link to Yglesias’ original post; I took just a bit of creative license with it.
Recent Comments