Preview of My New Book

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From the May-June issue of Cato Policy Report (I did not write the preview, or even read it before it came out, but it provides a good foretaste).

while Kling’s primary audience is other scholars of economics, his writing also provides a first-rate introduction to economic ideas that are easily accessible by students with little or no previous training in economics.

Think of this as the book that every first-year economics graduate student should read (but won’t).

Here is a provocative sentence:

Kling argues that post-World War II economists have mistakenly placed the concepts of scarcity and choice at the center of economic thought.

While scarcity and choice are certainly important concepts in economics, I have two problems with making them central.

1. Scarcity and choice are concepts that focus on a fixed pie. Yet economic growth and the enlargement of the pie are what matter most.

2. Scarcity and choice are taught using “2×2” economics. That is, a choice between 2 activities, hiding the fact that there are millions of specialized tasks in the economy.

These two problems are related. The growth of the pie is the effect of specialization that is vast and mind-boggling in its complexity.

Also, consider where macroeconomics fits in. Your choices are:

1. Treat macro as something that departs from and even contradicts micro. This is the way things worked in the 1960s, and it is where most of the profession seems headed again today.

2. Do macro as general equilibrium theory. This was the attempt to integrate micro and macro in the 1980s, an attempt that strikes me (and others) as having failed.

3. Think of both micro and macro in terms of patterns of specialization and trade. In macro, the focus is on the process of old patterns becoming unsustainable and the process of finding new patterns that are sustainable.

The book makes the case for (3). Along the way, as the preview points out, it takes a hard swipe at MIT-influenced economics for being mistakenly mechanistic in its approach to both micro and macro.

Will the Media Notice the Libertarian Party?

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David Boaz writes,

Lots of Republicans are looking for a sane alternative to Donald Trump and Hillary Clinton, and it looks like the Libertarian Party has just given it to them, now that former Massachusetts governor William Weld has joined former New Mexico governor Gary Johnson’s ticket.

If someone had told two years ago that one party was going to run a ticket with two ex-governors who were regarded as competent and scandal-free while another party was going to run Trump, which would you have guessed would be the mainstream party and which would you have guessed would be the wacko third party?

Between now and November, could the mainstream media take notice of this? How would it affect the race if the media started to take the Libertarian ticket seriously?

It seems to me that any enthusiasm for Clinton is based on the fact that many people fear and loathe Trump. If it started to look as though Trump represented a small splinter party and Johnson-Weld represent a major party, then the “stop-Trump” rationale that bolsters Clinton’s candidacy disappears, and she is left with whatever support comes from people who genuinely think she is wonderful. Or, to put it another way, I think that there are enough voters who are negative about Trump and Clinton to make it possible for Johnson and Weld to get more votes than either one of them, provided that the media give the Libertarian ticket as much attention as the other two.

PSST Watch

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Kerwin Kofi Charles, Erik Hurst, and Matthew J. Notowidigdo write,

while the decline in manufacturing and the consequent reduction in demand for less-educated workers put downward pressure on their employment rates in the pre-recession 2000–2006 period, the increased demand for less-educated workers because of the housing boom was simultaneously pushing their employment rates upwards (Charles, Hurst, and Notowidigdo 2016, 2015). For a few years, the housing boom served to “mask” the labor market effects of manufacturing decline for less-educated workers. When the housing market collapsed in 2007, there was a large, immediate decline in employment among these workers, who faced not only the sudden disappearance of jobs related to the housing boom, but also the fact that manufacturing’s steady decline during the early 2000s left them with many fewer opportunities in that sector than had existed at the start of the decade.

This seems like yet another paper supporting a PSST interpretation of macroeconomic phenomena instead of an AS-AD interpretation.

Contradictory Sentences

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From Larry Summers.

although 2009 could have seen a repeat of 1929-33 and it did not happen, there are no grounds for complacency. As the chart below illustrates, on current forecasts the economy will have performed as badly over the 2007-18 period as it did over the Depression period from 1929-40.

So we avoided another Great Depression, except that we didn’t. On a charitable interpretation, these sentences are not directly contradictory. The good news is that the economy performed better from 2007-2011 than it did from 1929-1933. The bad news is that it seems on track to perform worse from 2012-2018 than from 1934-1940, so that for the periods as a whole we came out the same.

I would suggest looking at both long periods from a PSST perspective. The Great Depression represented a failure to come up with new patterns of specialization and trade to deal with workers with 8th-grade educations, including farm laborers displaced by tractors and factory workers displaced by electric motors. The recent period represents a failure to come up with new patterns of specialization and trade for workers displaced by Chinese labor and computers.

What the Deuce is Going On?

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Tyler Cowen writes,

The contemporary world is not very well built for a large chunk of males. The nature of current service jobs, coddled class time and homework-intensive schooling, a feminized culture allergic to most forms of violence, post-feminist gender relations, and egalitarian semi-cosmopolitanism just don’t sit well with many…what shall I call them? Brutes?

His point seems to be that we are becoming a more feminized society, and some of what we observe is (futile) pushback against that. My thoughts:

1. When one speaks of feminized culture (or at least when I speak of it), it is not to suggest that all women have traits that differ from all men. Rather, think of tendencies that are higher in one gender or another.

2. I am less positive than Tyler about the traits of feminized culture. While the favorable characteristics are there, I also associate with feminized culture: consensus-driven to the point of repressing unpopular ideas; elevation of feelings relative to reason; too much tolerance for roles with authority without accountability and for roles with accountability without authority, rather than constructing a hierarchy that keeps authority and accountability aligned (“the buck stops here”).

My impressions are based on experiences working in organizations as well as observations about society at large. I used to say that I felt uncomfortable at business meetings that were male-dominated or female-dominated. I felt most comfortable with close to a 50-50 mix.

3. I am considering reading another Peter Turchin book, from ten years ago, called War and Peace and War. He apparently offers a grand theory of the integration and disintegration of empires, and I wonder how well 21st-century developments fit the “disintegration” model.

A Point for Hard-Core Libertarians

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I missed this story back in November.

Between 1989 and 2010, U.S. attorneys seized an estimated $12.6 billion in asset forfeiture cases. The growth rate during that time averaged +19.4% annually. In 2010 alone, the value of assets seized grew by +52.8% from 2009 and was six times greater than the total for 1989. Then by 2014, that number had ballooned to roughly $4.5 billion for the year, making this 35% of the entire number of assets collected from 1989 to 2010 in a single year. According to the FBI, the total amount of goods stolen by criminals in 2014 burglary offenses suffered an estimated $3.9 billion in property losses. This means that the police are now taking more assets than the criminals.

It was picked up by the WaPo wonkblog and more recently by the AEI blog, where I finally saw it.

My general outlook on libertarianism is that on a case-by-case basis, I generally agree with libertarian inclinations. However, I try to push back as much as I reasonably can against the unrelenting anti-government line taken by hard-core libertarians.

But the data point quoted above fits awfully well with the hard-core libertarian narrative, which is to model government as a gangster organization. In addition, I would point out that the asset-seizure is really penny-ante stuff compared with the “settlements” that attorneys general and regulatory agencies reach with corporations that they shake down. (Oh, and speaking of shakedowns, there is this). And, of course, even those are penny-ante stuff compared with tax collections, so if you think that taxation equals theft. . .

I like to use the “bake sale” thought experiment. You may have seen the bumper sticker that says “it will be a great day when the Pentagon has to hold a bake sale to fund a bomber.” In fact, I think it will be a great day when all government agencies have to rely entirely on voluntary contributions. That would make each government agency just another form of non-profit organization. So go ahead and make the Pentagon fund itself with bake sales–but do the same thing with the Department of Energy, the Department of Education, the EPA, etc. My guess is that if government agencies had to compete for funds with other non-profits, the agencies would learn to be a lot more effective and a lot more customer-oriented.

Roger Simon on Moral Narcissism and Libertarians

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He writes,

If your intentions are good, if they conform to the general received values of your friends, family, and co-workers, what a person of your class and social milieu is supposed to think, everything is fine. You are that “good” person. You are ratified. You can do anything you wish. It doesn’t matter in the slightest what the results of those ideas and beliefs are, or how society, the country, and in some cases, the world suffers from them. It doesn’t matter that they misfire completely, cause terror attacks, illness, death, riots in the inner city, or national bankruptcy. You will be applauded and approved of.

…Moral narcissism is the ultimate “Get out of jail free” card in a real-life Monopoly game. No matter what you do, if you have the right opinions, if you say the right things to the right people, you’re exempt from punishment. People will remember your pronouncements, not your actions.

This is from a forthcoming book.

He attempts to rope social conservatives and libertarians into his thesis. I am not sure that this works so well. Social conservatives may be wrong-headed, and some turn out to be hypocritical, but I do not see them as trying to use political posturing in order to avoid accountability for the consequences of their actions. Perhaps you can come up with enough examples to prove me wrong on that.

I think that the charge sticks better with some libertarians. When they agree with progressives, libertarians can be as preening and morally narcissistic as, well, progressives.

Also, I think that libertarians share with progressives a certain adolescent inability to admit the benefits of an institution they dislike. In the case of progressives, the difficulty is with admitting the benefits of free markets. In the case of libertarians, the difficulty is with admitting the benefits of government. For all the misguided actions that government takes, you should not take it for granted that you will have internal peace or effective urban sanitation without it.

Moral narcissism allows one to disengage from reality. Paradoxically, the moral narcissist tends to deny that humans have a propensity to be evil while believing in the evil of one’s political opponents.

My Thoughts on Too Big to Fail

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Nobody asked me. Instead, they asked Ben Bernanke and other usual suspects.

Bernanke criticized the notion that a breakup of large financial firms will promote financial stability, or mitigate excessive risk taking. In his remarks, Bernanke argued that in addition to the social costs, size also has benefits when it comes to banking. “In the long run, a US financial industry without large firms will likely be less efficient,” he said.

Pointer from James Pethokoukis. I like the way I expressed it in this post.

From 1980 to the present, our largest banks went from teeny-tiny banks to super-sized banks. I would like to dial them back to what I might call Goldilocks banks. I have three tests for that.

1. The Great Day test. Imagine that an official in Washington gets a call from the CEO from the nation’s largest bank requesting to meet right away, and the official says, “Take a number like everyone else.” It will be a great day when that happens.

2. The “Take my lumps” test. Suppose that you buy shares of stock or bonds issued by the nation’s largest banks. I want you to say, “If that banks gets into trouble, I’ll just have to take my lumps.”

3. The Dry Underpants test. If the Treasury Secretary and the Fed Chair learn that the largest bank in the country is toppling, they should be able to keep from wetting their pants.

I don’t have a precise number in mind, but if today’s largest banks have $2 trillion in assets, then I think that something like $200 billion might work.

During the crisis of 2008, the banks were big enough that Bernanke and Hank Paulsen failed all three tests.

Note that I do not claim that breaking up big banks would do anything for financial stability. What I see it doing is giving big banks a bit less leverage with policy makers and giving taxpayers a bit more leverage with them. To me, that is enough of a win.

Secular Dis-Stagnation

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Check out this chart, which was linked to by one of Scott Sumner’s commenters.

It shows a large secular increase in the spread between risky corporate bonds and 10-year Treasuries.

To me, this chart provides evidence of the bogosity of the secular stagnation story. That story claims that “the” real interest rate has been declining in recent decades, so that we face a constant threat of too-low “aggregate demand.” But focusing on 10-year Treasuries to tell that story is a swindle. Looking at risky corporate bonds, we see signs of dis-stagnation.

There is no unique real interest rate. It’s not just that risk premia diverge. Prices of various goods and services are rising and falling at different rates. In health care and education, where prices have been rising, real interest rates indeed have been negative (a “stagnation” story). For many types of durable goods, where quality-adjusted prices have been falling, real interest rates are decidedly positive (dis-stagnation).

Talking of “the” real interest rate reflects GDP-factory thinking. I look forward to a day when PSST thinking has replaced GDP-factory thinking. Then economists will stop fooling themselves with notions like secular stagnation.