Monthly Archives: August 2013

The Book Changes Again

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I got 20,000 words written, but now I want to start over. Current thoughts:

1. A concise, selective history of macroeconomic thought from 1960-2012. Not a survey or scholarly reference work. By history of thought, I mean to capture the path-dependence of the ideas. Starting in 1960 lets me skip over a whole lot of the discussion that preceded 1960. “What did Keynes mean?” is a well-squeezed orange that I do not want to touch.

2. Organized in two dimensions (three if you count time). One dimension is by school of thought, covering: classical, 60’s Keynesian, Friedmanite, 70’s textbook, general disequilibrium (Clower, Barro-Grossman) New Classical (rational expectations, real business cycle), New Keynesian (rational expectations with sticky wages/prices), Minsky, PSST.

3. The other dimension is by major issue.

Unused Resources–are they a temporary aberration that markets will quickly eliminate? a manifestation of effective demand failure? other?

Wage stickiness–are wages sticky in real terms? in nominal terms? How central is this to explaining macroeconomic phenomena?

Macroeconomic data–is it well behaved? If not, what are the important issues: path dependence? phase changes/regime shifts? structural change? singular events (policy shocks, exogenous shocks)? Can we cut through the causal density in order to test theories?

Fiscal policy–is it an important tool for macroeconomic stabilization?

interest rates–one interest rate or multiple interest rate?, real vs. nominal, ex ante vs. ex post

Money–how unique is it? how do substitution possibilities in terms of assets and transaction media affect the link between central bank actions and the economy?

Credit–do we need to understand credit markets, including credit rationing and changes in risk tolerance, in order to understand macroeconomic behavior?

The Neocon Servile Mind

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David Brooks writes,

The conservatism that [Irving] Kristol was referring to is neoconservatism. Neocons came in for a lot of criticism during the Iraq war, but neoconservatism was primarily a domestic policy movement. Conservatism was at its peak when the neocons were dominant and nearly every problem with the Republican Party today could be cured by a neocon revival.

Kristol and others argued that the G.O.P. floundered because it never accepted the welfare state. “The idea of a welfare state is in itself perfectly consistent with conservative political philosophy,” he argued. In a capitalist society, people need government aid. “They need such assistance; they demand it; they will get it. The only interesting political question is: How will they get it.”

I am reading The Servile Mind, by Kenneth Minogue, which takes the opposite point of view. Minogue argues that the welfare state substitutes political agency for moral agency. As citizens, we lose our moral compass and instead pick up a political one.

I find the book rather heavy going, but I probably will review it somewhere down the road. If you are looking for someone who concedes nothing to the oppressor-oppressed axis and instead views it as undermining Western values completely, then Minogue is your champion.

Back to the squishier conservatives, Reihan Salam lauds Brooks and Irving Kristol.

the right response to programs that really do undermine self-reliance and individual liberty may well be to eliminate or consolidate or devolve them. But it is important to acknowledge that not all programs undermine self-reliance and individual liberty, e.g., wage subsidies are designed to entice low-wage workers into the labor market, a crucial first step if these workers are eventually to climb the economic ladder to self-sufficiency. Wage subsidies are a paradigmatic example of a conservative welfare state initiative, and when well-designed they can do a great deal to strengthen the social foundation of a free enterprise economy by making it more inclusive.

Read the whole thing.

From Cyclical Force to Rounding Error

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Mark Perry reports,

Employment in the durable goods sector for motor vehicles and parts increased in July to 818,000, the highest employment level in that sector since October 2008. Over the last quarter, employment in the US auto industry has increased by 10.8% at an annual rate.

Jeffrey Sparshott of the WSJ blog reports,

Residential and specialty trade contractors — home builders — added 6,300 jobs in July.

Autos and new home construction used to be the big cyclical sectors of the economy. If I take 10 percent of 818,000, I get 82,000. If I multiply 6300 by 12, I get 75,000. So at an annual rate these erstwhile behemoths are adding 157,000 jobs, which amounts to rounding error in a work force of 140 million.

One of the ways in which my macro view differs most from that of the textbooks is that I believe that it is very hard to identify repeatable patterns in an economy that undergoes such important evolution. Developments that probably change the way the economy reacts to fiscal and monetary policy include:

–deregulation of deposit interest ceilings in the 1980s , which reduced the credit-rationing impact of higher interest rates

–change in the labor force participation behavior of men and women

–big drop in the proportion of work force employed as manufacturing production workers

–big increase in the use of credit cards, Internet banking and ATM machines; we can go months without using our checkbook).

–big shift toward education and health care, or what Nick and I called The New Commanding Heights

Howard Dean on IPAB

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He writes,

If Medicare is to have a secure future, we have to move away from fee-for-service medicine, which is all about incentives to spend more, and has no incentives in the system to keep patients healthy. The IPAB has no possibility of helping to solve this major problem and will almost certainly make the system more bureaucratic and therefore drive up administrative costs.

He does not say what we need to move to. Of course, I would say we should move to a system where consumers pay for their health care, and insurance covers catastrophic expense.

Keep in mind that there is no perfect system for compensating doctors. For example, if you pay them a fixed amount of money per patient, then their incentive is to see a lot of healthy patients and avoid the sick ones. If you pay them a fixed salary, their incentive is to work short hours. If you pay them for “quality care,” that means that a central bureaucracy, comparable to IPAB, has to define the meaning of quality.