Angus Burgin on The Great Persuasion

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Interviewed by Russ Roberts, Burgin says,

if you argue that you have an abstract logic that’s universally true, that you can derive wholly from thoughts within your head, if other people don’t believe that they share that logic, you are going to have an enormously difficult time convincing them that you are right. And Friedman said, in contrast, what I can do, my method, is I can say: Okay, we both share the same end; we share the end of the well-being of the poor; but I think that if you examine the data, I can show you that my way of organizing society will be more successful at achieving that than your way. And whether or not one buys into how Friedman read the data, Friedman was adamant that that mode of argumentation was much more likely to get somebody to rethink the views that they already hold than a mode that proceeds based on an abstract logic alone.

And here is a quote that’s a keeper:

this representation of ideas as being scientifically based that aren’t necessarily so can happen on the right and on the left. And the one uniform thing is that it bothers colleagues on the other side of the aisle who watch it occurring.

Toward the end, Burgin contrasts the pessimistic outlook that he associates with Hayek with the optimistic outlook that he associates with Friedman. Hayek resonated in the Depression era and again after the financial crisis. Friedman resonated in better times. I am reminded of one of my favorite Scott Sumner blog posts, and my response to it.

I may have to give Burgin’s book another chance. My first impression was that I would not like the author’s framing of the subject.

Consumption contagion

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A paper by Marianne Bertrand and Adair Morse. (An earlier draft)

Have rising income and consumption at the top of income distribution since the early 1980s induced households in the lower tiers of the distribution to consume a larger share of their income? Using state-year variation in income level and consumption in the top first quintile or decile of the income distribution, we find evidence for such “trickle-down consumption.” The magnitude of effect suggests that middle income households would have saved between 2.6 and 3.2 percent more by the mid-2000s had incomes at the top grown at the same rate as median income.

I cannot wait to see the policy recommendation to tax high incomes. That is, take income away from people with a high marginal propensity to save and give it to government, which has a negative marginal propensity to save.

Macro Without Theory

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Garett Jones writes about sticky-wage Keynesian economics.

there’s no failure of “effective demand” for final goods in a sticky-wage Keynesian world. The reason there’s so little output during a recession according to sticky-wage Keynesians is because high wages make output too expensive to produce.

I think that Keynesians have good reason to resist being boxed into a particular microfoundations model, or theory. I think they are better off just asserting that more spending leads to more output, and responding to the question of “why” with hand-waving. To me, Keynesian economics is nothing more and nothing less than the view that spending creates jobs and jobs create spending. The attempt to articulate microfoundations has never added value.

Incidentally, the Scott Sumner view is that nominal GDP creates jobs, which might appear to be close to the Keynesian view. However, Sumner argues that the central bank controls nominal GDP, which means that fiscal policy only affects the mix between private-sector and public-sector spending.

The Keynesian counter-argument is that the central bank is constrained in some way. Again, I think they are better off just asserting this rather than relying on some specific explanation, such as low nominal interest rates. First, there are powerful arguments that low nominal interest rates are not a constraint. Second, I do not think that Keynesians want to tie themselves down to a view that says that fiscal stimulus is completely unnecessary when interest rates are above zero.

For those of you not already familiar with my own views of macro, see the papers listed here.

Tyler Cowen on the Classical Liberal Tradition

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He writes,

The nation-state is a good practical institution, but it does not provide the final moral delineation of which people count and which do not. So commentators on trade and immigration should stress the cosmopolitan perspective, knowing that the practical imperatives of the nation-state will not be underrepresented in the ensuing debate.

Read the whole column.

Also, read Peter Sutherland.

migration is the original strategy for people seeking to escape poverty, mitigate risk, and build a better life. It has been with us since the dawn of mankind, and its economic impact today is massive. Migrant remittances exceed the value of all overseas development aid combined, to say nothing of the taxes that migrants pay, the investments they make, and the trade they stimulate.

Pointer from Kari Kohn.

Development economist William Easterly coined the dichotomy between searchers and planners. The strong relationship between migration and poverty reduction shows the value of bottom-up searching.

Fed, Stress-test Thyself

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While central banks stress-test private banks, James Hamilton stress-tests the Fed.

if interest rates should rise more quickly than the Blue Chip consensus, the Fed’s losses would be larger than anticipated under our baseline assumptions. In our paper we evaluate a number of alternative possibilities. To highlight the most dramatic of these, if the Fed continues expanding its balance sheet during 2014 rather than hold it constant as assumed in our baseline scenario, and if interest rates are 200 basis points higher starting in 2016 than assumed in our baseline, we calculate that the Fed’s deferred asset account could reach as high as $370 B.

I think that it all depends on the fiscal environment. The left-wing pundit view of the world is a double “Don’t worry.”

1. Don’t worry about a default on the debt, because it is denominated in our own currency.
2. Don’t worry about inflation, because it is low now and will be low in the future.

Yes, I can construct a scenario in which both of these “Don’t worries” pan out. However, I also can construct a stress test in which they become contradictory. Suppose that in 2015, inflation has reached 5 percent, the interest rate on short-term Treasury debt is 7 percent, and the rate on long-term debt is 9 percent. Because of the high level of debt, the government is choking on its interest expense. Under those circumstances, I have a hard time picturing the Fed being allowed to curtail its purchases of Treasury securities, much less sell them off. In other words, to resolve worry #1, the Fed has to keep expanding the money supply, which compounds worry #2.

The pundits who tell us not to worry about short-term fiscal policy think that those of us who are worried about it are nutters. I hope they are right. If the progressives are sober, and I am a nutter, then the country is in good shape. If it’s the other way around, then heaven help us.

Have a nice day.

Cyprus: Have a Nice Day

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The New York Times reports

In the early hours of Saturday morning, after 10 hours of talks, finance ministers from euro area countries, the International Monetary Fund and the European Central Bank agreed on terms that include a one-time tax of 9.9 percent on Cypriot bank deposits of more than 100,000 euros, and a tax of 6.75 percent on smaller deposits, European Union officials said.

Pointer from Tyler Cowen, who thought it worthy of a follow-up. A couple of further thoughts:

My understanding is that the depositors would receive bank equity in exchange for debt. No one believes that this will make them happy. (Perhaps the depositors should be asked to read Admati and Hellwig?) In fact, every economist I have read has pretty much the same reaction as mine to this policy.

While a surprise tax on bank deposits may seem like the best idea that the eurocrats could come up with under the circumstances, it might not bode well for the longer term. In terms of the two drunks model, this looks like both drunks falling down without making it home.

Consider: Suppose that you hold bank deposits in a bank in a fiscally troubled country, such as Italy, Portugal, Spain, or Japan. You are deciding whether to keep those deposits there. Until Friday, you had not considered that the government might confiscate a portion of your deposits. Now, how much assurance do you need that your deposits will not be suddenly taxed in order to keep you from running to your bank and shifting your funds elsewhere? Solve for the equilibrium, as Tyler would say.

ERP

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Sudeep Reddy does a very nice job of extracting substance from the latest Economic Report of the President. For example,

“The ‘labor share’ is the fraction of income that is paid to workers in wages, bonuses, and other compensation. … The labor share in the United States was remarkably stable in the post-war period until the early 2000s. Since then, it has dropped 5 percentage points. Because capital income is distributed more unequally than labor income, the decline in the labor share accounts for some, but not all, of the rise in inequality…”

The accompanying chart shows that this has been a worldwide phenomenon.

Overall, this year’s ERP continues to represent a step down from the quality of reports prior to the Obama Administration. It used to be that after patting the President on the back in the first chapter, the ERP would settle down to serious, careful analysis suitable for recommending to upper-level undergraduate economics majors. The decline of the ERP and the emergence of the blogosphere have combined to reduce the significance of the ERP, particularly for economic education.

The History of American Education

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Kevin Carrie-Knight reviews The American Model of State and School, by Charles Glenn.

At root, The American Model of State and School tells the story of a gradual centralization of many local models of schooling in America into an increasingly uniform system with increasing government involvement. Before the Whig reformers of the 1830’s and 1840’s succeeded in ushering in common schools, “the state role in schooling – apart from the rhetoric of state constitutions – was long a matter of financial bookkeeping than of determining how education would be provided and for what purposes” (p. 125). Using a wide array of primary and secondary sources, Glenn shows how reformers (with the best of intentions) evolved a school system that became more centralized and standardized and less responsive to American diversity and parental input.

Some random thoughts:

1. Goldin and Katz describe the expansion of schooling in America from the early 1800s through 1950 as a highly decentralized process.

2. I do not know if Glenn gets into this, but the consolidation of school districts since the 1940’s has played a major role in making schools more centralized and less responsive to parental input. It is doubtful that school district consolidation resulted from the sort of grass-roots reform movements that drove earlier efforts to standardize education.

3. When I saw this:

American public education should be “disestablished,” just as state churches were in the decades after the revolution.

I thought of Ivan Illich, who used the same term and made the same plea in 1971. It appears (based on a search at Google books) that Glenn mentions Illich, but only once and not in the section of the book quoted in the review.

4. Lately, I have been puzzling over the relationship between coercion and education. Do we not often act as if we believe that education must involve coercion? If left to themselves, young people would not learn what “we” think they should? If left to themselves, parents would not educate their children? If left to themselves, teachers would not teach the “right” curriculum? If left to themselves, local school principals would not promote quality education? It seems to me that beliefs like this implicitly underly the American education system today.