Category: Books
Final Comments + Thanks
To all of you who have responded to my posting on Marginal Revolution, many thanks. I have enjoyed the dialogue and the sparring. All of us, I believe, have our country’s interests at heart even though we may come at these issues from different perspectives. My purpose in writing The Price of Liberty – which, as I have noted in several postings is a quote from Hamilton about Revolutionary War debt and not about the Iraq War – was to trace the history of wartime financing from the Revolution through the War on Terrorism to see what we can learn from the past and how we can do things better. I think even those who have taken issue with me about the current set of policy issues will enjoy the history contained in the book. I hope that whatever you think, you will let me know your thoughts, your comments and your criticisms. I hope you at least find it interesting – even if there are parts of it you disagree with.
Thanks again to Marginal Revolution for hosting me as a guest blogger this week.
Warm regards,
Bob Hormats
author of The Price of Liberty
Responses to Comments – Round 1
To Indiana Jim: Thanks for your question. I do not combine war
spending and entitlement spending. The former is in the so-called
“discretionary” portion of the budget; the latter is in the “mandatory”
portion (i.e., it is based on a predetermined formula set by past
legislation and will be paid out under that formula until it is
changed.)
To Freelance: Thank you very much.
To Adrian: Yes. Occasionally bribing foreign governments has been
used successfully, although it has been done covertly for obvious
reasons. But after 9/11, I don’t think we had that option with Al-Qaeda
and the Taliban in Afghanistan. And some terrorist movements are so
fanatical that bribing them is unlikely to work.
To John Thacker: I do not argue that current defense spending is
unsustainable. It could be more efficient, but the levels by historical
standards as a portion of GDP are quite low, as you point out. But this
will still be the second most costly war in U.S. history if it
continues to the end of the year. The cost of entitlements is, as you
point out, likely to grow, and these could squeeze many other programs
in the budget, including defense, in the next decade. They would have
to be reformed even if there were zero money spent for defense because
they are financially unsustainable.
True, FDR promised a balanced budget when he took office, but he
rapidly abandoned that pledge well before the war. But you are correct;
I was underscoring FDR’s call to make sacrifices at home to support the
troops on the battlefield through taxes, borrowing and the other things
you correctly mentioned.
To Barkley Rosser: I agree that Medicare presents a more difficult
problem than Social Security, which in fact, as you correctly point
out, enjoys a surplus. But neither is sustainable over coming decades
given the current trajectories of benefit payments and inflows. The
danger is that neither program will be sustainable without some
reforms, and the sooner they occur the less disruptive they will be.
The alternative is a bid increase in borrowing and/or taxes as well as
a drawing of funds from other programs. In all of these cases, we leave
our children a very bad legacy.
To Mr. Noah: What kind of guide do you need?
To Jay Livingston: Yes, I am. Great to hear from you. Where are you
living now? What great times we had together at Pocono. Hope you are
well. Best regards.
To Barkley Rosser: I agree with your May 28 posting in which you
said that the Social Security System is not in crisis, and indeed there
is a chance that it will not be for some time. But there is a high
probability that inflows will fall far short of benefits within a
couple of decades. That was the risk in the early 1980s, when with a
few changes the Greenspan Commission put it on a sustainable basis and
improved the chances that it would be there for many decades to come.
All I am arguing is for a few adjustments today, similar to those in
1983; to be sure that it is around for those who need it for a very
long time. And I do not want to see it reach a point where it gets so
out of balance that major change will be required, so let’s make minor
ones today.
More of my responses to your comments will be posted tomorrow.
Thanks again,
Robert D. Hormats
author of The Price of Liberty
Does Foreign Ownership of U.S. Debt make us Vulnerable?
I would like to thank the hosts of Marginal Revolution for giving me the opportunity to answer questions about my book “The Price of Liberty: Paying for America’s Wars” and for allowing me to enter into a dialogue with your contributors on the issues I have raised in the book.
If you have not had the opportunity to see it, I also encourage you to read an Outlook piece I did for the Washington Post on May 6. It contains some of the views contained in my book. The Post has been kind enough to allow us to circulate this piece.
In view of the many very interesting postings on Marginal Revolution about international financial matters, I thought it would be useful to focus on one particular aspect of US strategic vulnerability — the growing risk that in the event of a major catastrophe in the US — from a major new act of terrorism, another massive hurricane, or a pandemic — the foreign capital that we have become used to receiving from the rest of the world, to the tune of $700 to 800 billion annually on a net basis at relatively low cost, will not be available in abundant amounts.
Alexander Hamilton called the debt the nation had accumulated during the Revolution the “price of liberty” and insisted that it be faithfully repaid, especially to foreign lenders, whose financial support was critical to the success of the Revolution. He recognized that were there to be another war foreign funds would also be critical to American success — so financial strength, which he took to mean sound finances and robust international creditworthiness, was important to future military strength.
The same is true today. If another major terrorist attack were to take place the budget deficit will increase dramatically as revenues drop due to economic weakness and the government has to bear the cost of recovery and retaliation. Foreigners would then be reluctant to buy American financial assets or will demand a higher risk premium — i.e. higher interest rates — to do so. In either case there would be a major financial disruption harming an already weakened economy. It is worth noting the contrast between today and 9/11; in 2001 the US had had four years of surpluses as opposed to four years of deficits, and then we were only half as dependent on foreign capital as we are today. Both differences increase our vulnerability — and bigger imbalances in the next decade will add to that vulnerability.
This is a concern I have. I would be interested in whether others share it. Do you believe that heavy and growing dependence of foreign capital constitutes a strategic vulnerability in the event of a catastrophic attack. And if so what should be do to reduce this vulnerability?
I look forward to a dialogue on this and related subjects during my blog tour this week and thank you for your willingness to provide your thoughts.
Bob Hormats, Author,
“The Price of Liberty: Paying for America’s Wars” (Times Books)
Caplanianism
Will we one day see a Council of Economic Advisors able to veto legislation for being uneconomic? It seems unlikely but do not underestimate the influence of my friend Bryan Caplan whose The Myth of the Rational Voter flirts with putting limits on the vote-franchise and yet still manages to get a favorable review in the New York Times Magazine!
Nor is that all. An even more powerful demonstration of the spread of Caplanianism can be found here.
Spread the word – buy The Myth of the Rational Voter and go forth and multiply.
Gone With the Wind: The Perfect Book?
It is too perfect. It is light, compact, has decent-sized print, and presumably, even if the story is not great, it would hold my attention on a long plane trip.
That is why I have never read it. I am saving it up for the worst plane trip of my life. As long as I have never read this book, I feel protected against the prospect of that plane trip.
I’ve brought the book on this trip, but I’m not sure I’ll crack the first page. Its liquidity premium is simply too high.
No one makes you shop at Wal-Mart
In increasing order of seriousness.
As noted, the heart of the book is a well-written primer on let’s call it new economics. As such, this book would make a good supplement to an advanced undergraduate class. But the activism and attacks on MarketThink are occasionally distracting. Chapter 1, for example, opens with a
denunciation of inequality. Nothing wrong with that but Slee doesn’t even attempt to show that there is any
connection between rising inequality and the failure of MarketThink theories. He just lumps things he doesn’t like into one pile. If there were no asymmetric information, no
herding, no coordination problems and so forth I guarantee that there would
still be plenty of inequality.
For the most part, Slee illustrates the new economics with insightful, interesting and often new examples. But there are clunkers. I almost threw the book at the wall when he started talking about QWERTY. Surely, Slee knows that this worn-out example is a joke? The supposed superiority of the DVORAK keyboard was shown in studies conducted by … Dvorak. See here. It’s especially annoying that Slee did not reference, Winners, Losers & Microsoft.
As primer, it’s fine to illustrate with examples and move on but as an attack on markets one expects a balanced consideration of opposing theories. For example, Slee looks at beer micro-breweries vs. mass brewers arguing that we are currently stuck in the bad mass-equilibrium because micro-breweries rely on word-of-mouth but the institutions which sustain the word-of-mouth equilibrium only work when there are already lots of micro-breweries about which one can talk. Nice, but here is an alternative theory. Economies of scale made mass produced beer cheaper and when push came to shove consumers chose the cheaper good product over the more expensive but slightly better product (I don’t eat at 5 star restaurants every night). New technologies, however, have made micro-brewing more economic and as they have done so we are moving to the mass-customization world that Slee prefers. Consumers have gotten the best of all worlds – given scarcity – in both time frames. The beer activists in England that Slee likes moved the process along but in the direction that it was already going.
There is no comparative analysis in the book at all. No discussion, for example, of how free riding, asymmetric information, herding etc. distorts government choice. Also, no appreciation that what some of us MarketThink people really advocate is civil society which includes non-profits and voluntary collective action of all kinds. And, no we are not all corporate shills (p. 106).
It’s true that outcomes do not always illustrate preferences but often they do. Maybe people really do not want to walk to school. It’s subtle but Tom seems all too eager to call in the government to force us into the better equilibrium. I worry when people start talking about how government can help us to express our true preferences. Isn’t this what dictators always say? True freedom is oppression.
The chapter on power is terrible, I did throw the book against the wall. Perhaps in order to prepare us to welcome government as the deliverer of our true preferences, Slee wants to diminish the distinction between liberty and coercion. But a true liberal should never write things like this:
…the formal structure of democracy and free markets is not enough to rule out exploitation and plunder – characteristics usually associated with repressive regimes.
If Tom visits GMU (I happen to know he reads MR) he should watch out because I shall kick him in the shins stating, "I refute you thus."
More seriously, repressive governments around the world threaten, rob, torture and murder with impunity. Courageous individuals have died trying to escape such regimes while others have died fighting for their rights. No matter how great are differences in wealth, it is morally wrong to equate what goes on in repressive regimes with capitalist acts between consenting adults.
Shantaram
This 936-page romantic canvas of the Indian underworld, and the adventures of one scoundrel therein, is one of the best bad books I have read. Try this passage:
It seemed impossible that a modern airport, full of prosperous and purposeful travellers, was only kilometers away from those crushed and cindered dreams.
It is a must for all lovers of Bombay. Here is information on the author, who was an anarchist, escaped criminal, and heroin dealer before hitting it big. Most of this tale draws upon his life. Buy it here; if you think you might like it you will.
The Legacy of Max Weber
This obscure but interesting Ludwig Lachmann book is now available on-line for free. I studied with Lachmann at NYU when I was very young, and he helped make me more contrarian. This short book is about how institutions coordinate plans, and how the sociological legacy of Weber is an indispensable component of any theory of Hayekian spontaneous order. From that description alone, you ought to know whether or not you will like it.
What makes England free
The English were well known for their disposition to provide help in emergencies. This disposition went to the heart of their conception of society, as a duty-bound relation between strangers. Their charitable behaviour was a way of emphasizing that strangers are just as important as friends — because all of us, in the end, are nobodies. By devoting yourself to the distressed stranger you make it clear that you too are a stranger in this world. You reaffirm the distance between yourself and others, by showing that the motive that binds you to society is one of impartial justice and objective duty. The charitable relief of strangers was simply another aspect of English reserve.
That is from Roger Scruton’s over the top but nonetheless fascinating England: An Elegy; he portrays the English as a people who have substituted morale and teamwork for intimacy. If you are looking to understand why so many parts of the world find it difficult to adopt either capitalism or free political institutions, this is one of the very best places to start. The English recipe is by no means the only way to go, but from Scruton one gets a good sense of just how much cultural background is needed to sustain liberty.
Is Sarkozy wrong on the Euro?
Free Exchange reports:
Defending the central bank’s independence, European finance ministers warned Nicolas Sarkozy, the incoming French president, not to blame the ECB for France’s economic woe. While electioneering, Sarkozy suggested the ECB’s policy objective be amended from achieving price stability within the Euro Zone to focus on job creation and growth.
Sarkozy is, in my view, correct to think that a bit more inflation would improve the French macroeconomy. France has about the stickiest nominal wages on Planet Earth. A little extra inflation would boost the labor market by allowing real wages to fall. Some inflation might also spur exports in the short run. Do note that the latter effect is, in the first best, cancelled by the inferior French command over non-Euro-denominated imports. Still the job gains might offer some second best benefits in this context, such as alleviating social tensions.
That said, two very important qualifiers are required:
1. It is not useful for a French politician to make ECB policy a political issue in front of the public. If the ECB gives in to French politicians at their whim, it is not long for this world.
2. The Euro probably requires a lower rate of price inflation than does the dollar, even though European wages are stickier. "Price stability" is focal, more or less. "Three percent inflation" is not. There are now 13 countries in the Eurozone, maybe someday 25. Zero is a good number to agree upon, perhaps it is the only number they can agree upon.
This all reflects a very real tension behind European monetary policy. It is much harder to have monetary discretion when many nations belong to the currency union and have an ultimate voice in what happens. I view the current structure of the ECB as somewhat of a contraption. France and Germany had favored strong ECB independence and a price stability mandate and they more or less forced everyone else in Europe to play that game, whether they liked it or not. Can Portugal and Italy really today make such a stink about tight monetary policy? No. But Germany can’t do the enforcing all on its own. Sarkozy needs to not only give in to Merkel, he needs to signal that he will return France to its previous role as partial enforcer of tight monetary policy. Is he up to so much humbling so soon?
Sarkozy is still right on the economics, so I wonder if he’ll be able to see his way past that. Three percent inflation would be better for France over the next five years. It would not be better for Europe over the next thirty.
What are the best novels for teaching economics?
Ezra Klein asks me:
What do you think the best fiction books are for understanding economics? Left and right? From my perspective on the spectrum, I’d go with Steinbeck’s Grapes of Wrath, but I’d be interested to hear your favorites…
Some will cite Harrison Bergeron, the Vonnegut anti-egalitarian short story. Others would nominate Ayn Rand, anarcho-capitalist science fiction, and of course there are the fictional-economic creations of Russ Roberts. But what are the Western classics that — policy polemics aside — teach one how to think like an economist?
My attention is usually drawn to 1660-1775 in British fiction, starting with Defoe and continuing through Swift, Boswell, and just about everyone else. To my eye they all thought like rational choice economists, albeit strange ones with a focus on approbation, self-deception, and the perverse social consequences of individual action (see my In Praise of Commercial Culture, the chapter on literature, for more detail). They are the true roots of Smith’s TMS. Dickens and Balzac are contenders, but I find them a bit too one-note, as is Harriet Martineau. Nonetheless the eighteenth century works remain ahead of their time and they certainly don’t teach basic economics or help one think much about policy.
What are your picks?
What’s the optimal number of book reviews?
Virginia Postrel writes:
As an author, I want more book reviews; quantity matters more than
quality when you’re going for sheer exposure. But as a reader, I only
want more interesting reviews, particularly of books I’m not likely to
learn about otherwise.
Newspaper book reviews, of course, are declining in number. Here is New York Times coverage of the phenomenon.
I can think of three functions for book reviews:
1. They help people learn about good books. If this is true, we should expect a market optimum.
2. No one much uses book reviews, but they make newspapers feel like more prestigious products. In this case book reviews would be an inefficient form of product differentiation by making The New York Times appear more different from The New York Post than readers ideally would like. There would be too many book reviews.
3. People use book reviews as a substitute for reading the books themselves. I call this "book reviews as signaling." Abolish the reviews and either a) people will have to go read the books (an even more wasteful form of signalling), or b) people will forget about literary matters altogether, which lowers signalling costs.
I use book reviews as I would use ads for books and blurbs for books. I just want the bottom line. I would be happier if newspapers published many more one-paragraph book reviews, but with very clear and definite evaluations. Entertainment Weekly does just this, although I find their taste in books unreliable. Nonetheless I am not alone in my preference, and I believe that few people read long book reviews. That makes me think there is something to #2.
Poverty and discrimination
Kevin Lang’s Poverty and Discrimination is marketed as a text but it is far more. Imagine a first-rate labor economist sitting down to tell us what he knows about the topics at hand. This includes who is poor, does economic growth still eliminate poverty, how much does family structure matter, does changing neighborhoods help a family, what have been the effects of welfare reform, how strong is labor market race discrimination, and many others. Lang’s discussions are consistently smart and insightful. While Lang does not offer much of his own ideas and research, only an original researcher such as Lang could produce a survey of this quality and depth.
Why isn’t there a book like this on every topic?
I do have a few quibbles. For my tastes there is too much talk about identification problems and not enough about data quality. Some topics are undercovered, such as the link between mental illness and poverty. I would have added much more on poverty as a behavioral phenomenon of dysfunctional psychology and high time preferences. The old scolding conservative account of poverty has much truth to it, but you wouldn’t know that from reading this book.
This book is academic substance, beginning to end, and for that reason it won’t be a fun read to everybody. But with that caveat, and noting the $60.00 purchase price, it joins my list (Sacred Games, The Savage Detectives, Prophet of Innovation) of must-reads for the year.
Here is the book’s home page. Here is Arnold Kling on the book.
Travel book panic
As the weeks before a trip approach, I assemble piles of books on the dining room table. Each pile is constructed with care. There is a travel guide pile, a fiction pile, a "needed for work" pile, and a "maybe I won’t take this one at all" pile. The most important is the "I’ll probably read this one before the trip comes along" pile.
The books take on a life of their own. At times I lose track of the planned trip and I think of it as little more than a chance to read, free of the usual interruptions.
The excitement mounts. I frequently visit the piles and think about how it will be to experience those books.
But the day or two before the trip, panic sets in. The piles seem totally inadequate. Totally inadequate for my reading. Totally inadequate for my development as a human being. Most of all, totally inadequate for the trip.
I rush to Borders and buy a whole new set of books.
Hrak!
What I’ve been reading
1. House of Leaves, by Mark Danielewski. This experimental novel, written with varying typefaces, page layouts, and interjected footnotes, is a fun mock of the academization of literature. It has a large cult following but can be enjoyed by the general reader. Don’t be intimidated by the heft, a third of the pages are essentially blank. It felt great making so much progress so quickly.
2. The Grid: A Journey Through the Heart of Our Electrified World, by Phillip F. Schewe. Better than no book at all, but this important topic still awaits its definitive treatment.
3. The Triumph of the Thriller: How Cops, Crooks, and Cannibals Captured Popular Fiction, by Patrick Anderson. A good guide and overview, the author argues that Raymond Chandler is overrated relative to say Macdonald or Kehane.
4. Vasily Grossman, Life and Fate. This Soviet-era masterpiece, which covers the Battle of Stalingrad, bored me. I have no complaint about its quality, I simply felt the time in my life is past to further digest those themes in an emotionally meaningful way.
5. Michael Chabon, The Yiddish Policemen’s Union: A Novel. This comic detective story is based on an alternative reality in which Israel loses the 1948 war and the surviving Jews settle in Alaska. It’s the first book of his I’ve liked, though I don’t think it has much substance.
6. Don Boudreaux recommends ten books.