Reason Roundtable on Reform Conservatism

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Self-recommending.

Ben Domenech writes,

[Yuval] Levin’s lofty governing philosophy is at odds with the incongruent grab bag of policies that reformocons offer.

That pretty much summarizes my reaction to Room to Grow, which took me several blog posts to articulate.

In terms of Jonathan Rauch’s dichotomy, the reform conservatives are closer to professional politicians, who scorn ideological purity that leaves you unable to exercise power. Libertarians behave more like amateurs. It certainly is unrealistic to expect a candidate to appeal to the Republican base by taking a libertarian view of immigration, just as it would be unrealistic to expect a candidate to appeal to the Democratic base by taking a libertarian view of education policy, health care policy, etc.

However, even if I try to think like a “professional,” I have problems with what we have seen from the reform conservatives thus far.

On foreign policy, I would like to see reform conservatives commit to not getting bogged down in another nation-building exercise. Can they stay away from promises to Americanize the Middle East and instead acknowledge that many societies around the world are not ready to become open-access orders (in North-Wallis-Weingast terminology)?

On the issue of domestic security, I have long been influenced by David Brin, and consequently I support government surveillance but with vigorous, independent auditing. Read what I wrote eleven years ago.

On economic issues, I start out by doubting that any collection of econo-wonk policy proposals is going to define the reform conservative “brand.” I certainly cannot get excited by a grab bag of tax credits.

To bring me on board, reform conservatives will have to do more than just play small ball. They will have to come front and center on one or both of two issues. One is fundamental health policy reform that leads to a higher proportion of medical services paid for by the people who obtain those services, rather than by third parties. The other is changing the path of entitlement spending to one which is sustainable.

Bernanke vs. Warren-Vitter

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He writes,

The problem is what economists call the stigma of borrowing from the central bank. Imagine a financial institution that is facing a run but has good assets usable as collateral for a central bank loan. If all goes well, it will borrow, replacing the funding lost to the run; when the panic subsides, it can repay. However, if the financial institution believes that its borrowing from the central bank will become publicly known, it will be concerned about the inferences that its private-sector counterparties will draw. It may worry, for example, that its providers of funding will conclude that the firm is in danger of failing, and, consequently, that they will pull their funding even more quickly. Then borrowing from the central bank will be self-defeating, and firms facing runs will do all they can to avoid it. This is the stigma problem, and it affects everyone, not just the potential borrower. If financial institutions and other market participants are unwilling to borrow from the central bank, then the central bank will be unable to put into the system the liquidity necessary to stop the panic. Instead of borrowing, financial firms will hoard cash, cut back credit, refuse to make markets, and dump assets for what they can get, forcing down asset prices and putting financial pressure on other firms. The whole economy will feel the effects, not just the financial sector.

Pointer from Mark Thoma.

In effect, Bernanke is saying that you have to make firms that get into trouble want to be bailed out. If you make bailouts too painful for them, then “financial firms will hoard cash, cut back credit, refuse to make markets, and dump assets.”

I am not impressed by his reasoning. What he calls “stigma” is not a bug of the Bagehot principle. It is a feature.

Normal is an Economist’s Illusion

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Tyler Cowen writes,

Once unsustainable economic structures begin to fail, it takes a significant improvement to make them viable again. Yet because of the difficulty of making major changes under our current political alignment, most new government policies today are no more than changes at the margin. Perhaps the most basic problem is that it is difficult to be sure when a reset is underway, and it is harder yet to raise public alarm about changes that seem to be gradual and slow.

If you have not done so already, read the whole thing.

On China, he writes,

Today’s China is sui generis. The country has grown so quickly that every decade or so there is a very new China. And so we cannot easily look to the past as a guide. In economic terms, China seven years ago is equally removed from China today as the United States about thirty-five years ago is removed from the United States today

I do not know China, but I imagine that this is an understatement.

Normal is over, and it has been over for a long time, particularly if you think of “normal” as workers being temporarily laid off and then getting re-hired to those same jobs when things are back to “normal.” It’s been at least 35 years since we have seen workers recalled from layoffs in any significant numbers.

Going further, I would suggest that the whole idea of “normal growth” is probably an attempt to impose an orderly pattern on processes that are not truly orderly. Economists do this all the time. They “seasonally adjust” data. They “de-trend” data. They draw lines connecting peaks in GDP and thus conjure “potential GDP” and “trend productivity growth” and make up stories about these artificial constructs.

Some of the elements of what Tyler calls an economic “reset” have been playing out for decades. The decline of manufacturing employment as a share of total employment began over 50 years ago. I continue to suggest keeping an eye on four forces, all of which were in place long before the financial crisis of 2008: the New Commanding Heights; bifurcated marriage patterns; factor-price equalization; and Moore’s Law.

Paul Romer’s Case for Ad Hominem

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He writes,

The only way I can see to protect scientific discourse is to limit entry into the discussions of science. But this MUST NOT BE DONE on the basis of beliefs about what is true. It must instead be based on a demonstrated commitment to the norms of science. As part of this process of defending science, exclusion by shunning, plays an essential role. People who show, by publishing even one Willie Horton paper, that they are not committed to those norms, have to be excluded. So too must the people who promote and encourage Willie Horton papers. In science, “It was my PAC, not me” should not be an acceptable defense.

Pointer from Mark Thoma.

Later, he criticizes positions taken by Milton Friedman and George Stigler against the idea of monopolistic competition. On the narrow issue of whether economists should use the model of monopolistic competition, I am entirely on Romer’s side. I tell my AP econ students that we spend most of our time on the nearly-irrelevant models of perfect competition and monopoly, when in the real world we almost always find monopolistic competition or oligopoly.

But I do not agree with Romer’s larger point. What would it mean to shun Milton Friedman because in Romer’s judgement Friedman’s opposition to the theory of monopolistic competition was politically motivated? Would we discard the permanent income hypothesis, the Friedman-Savage utility function, and the Monetary History of the United States?

As I understand Romer, he is arguing that the scientific norms in economics are so delicate that we must shun economists who fail to maintain certain standards. I look at it differently.

I believe that politics pervades the economics profession. Paul Samuelson’s textbook was a political document, and his claim to scientific neutrality was an exercise in (self-) deception. There is no economist so pure as to be free of bias.

It is not desirable to throw out the ideas of biased economists (indeed, if I am correct, that would mean throwing out all ideas in economics). Instead, the ideas ought to be debated as ideas, without regard to who proposed them. If you think that monopolistic competition matters in growth theory, then you should be able to make that case. You can do very well by pointing out the flaws in other people’s work. But attacking their motives adds nothing to the discussion. To say otherwise is to suggest that all economic discourse should consist of asymmetric insight (claiming to understand your opponents better than they understand themselves). Is that really what Paul Romer wants–to turn economics journals into Paul Krugman columns? If so, then Romer should be shunned.

What if Inflation is Lower than Reported?

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Martin Feldstein makes the case. John Cochrane draws out one implication.

It would mean that we really have 0% nominal interest rates, 1.5% deflation rather than 1.5% inflation; +1.5% real rates rather than -1.5% real rates.

I find it much more satisfying to believe that the real interest rate is positive than to buy into secular (demand) stagnation. But some caveats:

1. Tyler Cowen’s third law.

2. I think that talking about “the” rate of inflation is difficult when relative prices are changing by much more than the average of all prices. Prices in the New Commanding Heights sectors of education and health care still seem to be rising faster than other prices. Products that incorporate computer chips still seem to be getting better and/or cheaper. Housing costs are going up in some locations, not in others. Etc.

On Macro and Methods

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This may or may not relate to the issue of “mathiness” raised by Paul Romer, recently cited by by Joshua Gans and by Mark Thoma. It is from an essay I am working on:

Keynesianism treats the economy as a single business producing one output, called GDP. This modeling strategy focuses all attention on the problem of choosing how much to produce. It assumes away the problem of choosing among outputs or the problem of choosing from among many possible production methods or supply-chain configurations.

This single output, GDP, is produced by a single technique, called the aggregate production function. Thus, the Keynesian modeling strategy ignores the existence of multiple alternative patterns of specialization. Keynesians act as if there were exactly one pattern of specialization in the economy. There is no need to choose among alternative patterns, to discard outmoded patterns, or to discover new patterns.

In the Keynesian framework, jobs are only lost when there is a drop in demand. In the PSST framework, and in the real world, jobs are constantly being destroyed, for a variety of reasons.

Economic progress consists of re-arranging production of output to be more efficient. It is an always-ongoing process that necessarily destroys jobs. A new consumer product makes other products obsolete, or at least less desirable. A new invention or managerial innovation makes it possible to produce the same output with fewer workers. A new configuration of trade uses labor more efficiently…

In the Keynesian story, all unemployment looks like the temporary layoffs that used to occur in automobiles and steel when firms accumulated excess inventories. Once inventory balance was restored, workers were recalled to the same jobs.

In the PSST story, all unemployment looks like structural unemployment. That is, workers who lose jobs will not find that those jobs return in several months, or ever. Instead, displaced workers will have to be employed by different firms, often in different industries.

In the Keynesian story, the process of economic adjustment to a shock consists of arriving at the correct relationships between the money supply and the aggregate price level and between the price level and the aggregate wage. In the PSST story, the process of economic adjustment to a shock requires entrepreneurs to discover new arrangements of tasks that add sufficient value to generate sustainable profits. As with all entrepreneurial effort, this is a trial-and-error process. Some new businesses will fail, generating no sustainable employment. Only a few will be so successful that they create large numbers of new jobs. Sorting out this process will take time.

From the perspective of someone who finds that the PSST story fits well with economic thinking, the Keynesian modeling strategy seems contrived and misguided. By aggregating the economy into a single business, Keynesianism necessarily shoves the phenomenon of structural adjustment and the ferment of entrepreneurial trial and error into the background. Keynesians regard this as a useful simplification. Instead, Keynesianism is more like Hamlet without the Prince.

Charles Murray is Revolting

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I have just started his latest book, By the People. You may have heard that he calls for civil disobedience against excessive government. I am wondering how he would handle two objections.

1. How will the other side respond? I could see progressives engaging in civil disobedience, also. In fact, if conservatives were to win in 2016, I expect to see the emergence of a very large, and possibly violent, protest movement. If conservatives/libertarians were to set a precedent of disobeying laws, then I think this would encourage progressives to disobey laws. For example, they might decide that laws protecting property rights are unjust, and proceed to “liberate” the possessions and homes of the one percent.

2. Would civil disobedience not leave most progressive policies untouched? Social Security, Medicare, and the core of regulation surely would remain. At best, the protests would work against the silliest, least significant regulations.

3. Civil disobedience is ultimately a form of voice. Libertarians should be focusing on ways to increase the opportunity for exit.

Occupational Licensing

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Morris Kleiner writes,

Our empirical analysis finds that after controlling for observable heterogeneity, including occupational status, those with a license earn higher pay, are more likely to be employed, and have a higher probability of receiving retirement and pension plan offers. According to our estimates, where governmental licensing is required for the job it raises hourly wages by about 8.4 percent.

Derailing the Narrative

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Various politicians and pundits seized on the Amtrak derailment as a narrative of failure to spend on infrastructure. Then it turned out that at 100 miles per hour the train was going twice the speed limit in the area.

Similarly, when the financial crisis struck, politicians and pundits seized on it as showing an excess of greed and exploitation by banks and an “atmosphere of deregulation” that allowed the banks to run amok. In my view, this is as misleading as the narrative about the train derailment.

Some further comments.

1. Perhaps in the end both misleading narratives will dominate. Maybe that is just the way things work in matters where what matters is the political orientation of most journalists and historians.

2. Perhaps the misleading narrative of the train derailment will not stand. Perhaps the facts will stand in the way. On the other hand, the complexity of the financial crisis makes it difficult to sift through the facts, and by the same token makes it easy to impose a dubious narrative.

3. Perhaps eventually historians will look more carefully and objectively at the financial crisis, and the misleading narrative will be set aside.

As of this writing, my money is on (1).

I Was (somewhat) Right About Greece

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I wrote,

I think that the route by which German money gets to the Greek government will be opaque and circuitous for face-saving reasons, but I expect such an outcome.

The WSJ writes,

Greece‘s latest bailout repayment to the International Monetary Fund may turn out to be one of the debt-saddled nation’s least expensive payments ever.

The article goes on to describe what it calls a “shell game,” a shorter way of saying “opaque and circuitous.”