Results for “politics isn't about policy” 53 found
The Paul vs. Paul debate
That’s Ron Paul vs. Paul Krugman, the video and transcript is here, here are a few comments under the fold…
1. RP: I don’t understand RP’s claim “I want a natural rate of interest.” Even gold standards allow for monetary influences (distortions? …depends on your point of view) on interest rates. RP has not fully absorbed Myrdal (1930) and Sraffa (1932).
2. K’s response to RP: Numerous good points, but Christie Romer (!) has shown that economic volatility was not higher before WWII. (Somehow that’s one Romer paper which isn’t discussed so much anymore.) That’s a major hole in K’s argument. Relative to the evidence, he is overreaching when a more modest point would suffice.
3. RP: The transcript may be garbled here. In any case, the Fisher effect is imperfect and so inflation does to some extent tax savings, also through interaction effects with the tax system. That said, I don’t see that two to four percent inflation has unacceptable costs, especially when AD is otherwise weak. On Diocletian, via Matt, here is a good recent paper.
4. K’s response: Modern liberals have a bad and selective case of 1950s nostalgia. Krugman is significantly overrating the role of policy here. More overreaching. He should stick to analyzing the “no bailout in 2008-2009” scenario, and how much worse it would have been, including for RP’s preferred ends. On earlier time periods, he should reread his own writings from around the time of The Age of Diminished Expectations. There is very little in The Conscience of a Liberal which actually trumps or overturns the earlier book and its focus on productivity rather than politics.
5. RP: I don’t understand his discussion of the liquidation of debt. Perhaps the transcript is garbled again. He is correct that the massive spending cuts which followed WWII brought no depression but rather the economy boomed. Keynesians have a hard time explaining that episode without recourse to Ptolemaic epicycles, etc., or without admitting the importance of real shocks.
6. K’s response: On Friedman, correct and on target. That said, K’s blogged claim today — that Friedman misrepresented his own views — lacks a quotation or citation altogether; furthermore it is contradicted by this excerpt from Free to Choose, which was Milton at his most popular but still he represented the truth correctly (ignore the heading, which is not from Friedman). K won’t address the WWII point, although he could if he revisited his earlier writings on changing rates of productivity growth.
7. RP’s response: The decline in the value of the dollar since 1913, or whenever, has not been a major economic cost. No one has had such a long planning horizon, for one thing. We don’t see much indexation, for another.
8. RP on the Fed: If we had “real monetary competition,” dollars still would reign supreme. Who now is opening up U.S. bank accounts in other currencies? Or using gold indexing? It is allowed.
9. K’s response: Mostly I agree, though it is odd to think of shadow banking as “currency competition.” It is more akin to “not explicitly regulated banking, with stochastic under-capitalization, and with bailouts in the background and largely driven by regulatory arbitrage.” That makes it less of a counter to RP than PK is suggesting.
10. RP: Equating inflation with “fraud” is an excessive moralization of the issue. The point remains that gentle inflation is usually a good thing, and that the money supply under free banking, or a gold standard, would be excessively pro-cyclical. The best shot is to hope that a natural monopoly private clearinghouse would institute nominal gdp targeting in terms of levels and perhaps “targeting the forecast” too.
11. The exchange about Bernanke: I don’t know whether Krugman literally has “printing money” in mind, so this is hard to interpret. They are stuck in the vernacular, when a more precise economic language would allow for more targeted commentary.
12. PK: Demographics, plus government gridlock and lower productivity growth, make a higher debt-gdp ratio more problematic than Krugman admits.
13. RP: Polemics from RP.
14. K’s response. Very short. But if he likes the market so much, why does he so often seem to be pushing for much higher taxation and higher government revenue? I understand why he wants single payer, but he also seems to favor direct government provision of health care itself.
15. RP: The discussion of debt doesn’t make sense, though it is correct to argue that eight percent measured unemployment underestimates the depth of our labor market problems. I fear, though, that he may be holding an exaggerated version of this point. U6 matters, but it should not be taken as the correct measure of unemployment.
16. RP: Seigniorage isn’t a major source of government revenue, and in general it is worth thinking about why corporate profits are so high and why the stock market, at least in recent times, has done OK. Is it really all about policy uncertainty? Lots of polemic here. Still, RP raises the point that Fed purchases of T-Bills may be helping to keep rates artificially low. This remains unproven, but it is also unrebutted.
17. RP (again): There is no credible alternative to the dollar as reserve currency today. On Spain, it is nonetheless a good point that spending cuts in a dysfunctional economy don’t help very much if at all.
More RP: Doesn’t PK get to speak again? Did Austerians suddenly cut the funding for his part of the transcript? (Had I watched the video, I wouldn’t have had time to write this post.) In any case, pegging the dollar to gold in an era of commodity price inflation would be a disaster and lead to massive deflationary pressures or more likely a complete abandonment of the gold peg rather quickly.
In sum: There were too many times when RP simply piled polemic points on top of each other and stopped making a sequential argument. He overrates the costs of inflation, including in the long term, and for a believer in the market finds it remarkably non-robust in response to bad monetary policy. Still, given that Krugman is a Nobel Laureate in economics, and Paul a gynecologist, the score could have been more lopsided than in fact it was.
Scott Sumner, public choice, and Karl Polanyi all meet up
Through Interfluidity, where else? Here is one bit:
Consider NGDP targeting. Under this policy rule, Treasury securities would become risk assets, whose real return would be geared to the health of the economy. (NGDP path targeting implies that shortfalls in real growth must be matched by increases in inflation.) Treasuries become low-beta index funds, diversified claims on the real production. Nominal yields would be more stable, but the real value of a future payment becomes as uncertain and volatile as the business cycle.
Read the whole thing. In American politics, old people usually get their way. In Western Europe, those governments have been obsessed with protecting insider interests for decades and they are not suddenly swept up with an enthusiasm for free market economics. The problem isn’t “the Austerians”; do you really think that Pete Boettke is in charge?
Relative to baseline forecasts, ACA and otherwise
Ruritania is fighting a war, and the status quo setting is that 90,000 lives will be lost each year. General Blythe comes up with a plan that increases the chance of winning the war, but is likely to cost 120,000 lives a year. He claims his plan costs only 30,000 lives a year, relative to baseline. General Smythe has a war plan which on net costs only 80,000 lives a year, so he argues that his plan saves 10,000 lives a year.
In comparative terms these claims are not incorrect, and there are obvious reasons why bureaucracies should draw up such estimates. Yet an anti-war group, SDS, argues that the real cost of the war is 90,000 lives each year, and that the one alternative plan costs 120,000 lives a year and the other 80,000 lives a year. If you are rethinking the entire war, the SDS estimates are relevant.
If we are going to keep at the war no matter what, the estimates of the Generals may be more useful. In the meantime, the generals get upset that SDS is stepping out of the framework of policy discourse and refusing to offer or accept numbers “relative to baseline.” Discourse fractures and names are flung.
To translate that into 2012, the “war” is the joint view — extremely common in America — that a) tax revenues are on an acceptable track, and b) we should spend more and more on health care each year at high rates, including in per capita terms.
If you think that dual project is sustainable, you may be relatively interested in estimates relative to baseline. If, like me, you think that project is like a failed and failing war, a success “relative to baseline” won’t much impress you. In fact it may scare you all the more to hear about success relative to baseline, as that can be taken as a signal that there is no really good plan behind the scenes. Here are a few factors which could radically upset current mainstream baselines:
1. Rates of growth stay in the range of 1 to 1.5 percent, see the work of Stock and Watson, top macro econometricians. Try redoing budget projections with those numbers.
2. Real rates of growth are higher than that, but they take the form of non-taxable pecuniary benefits.
3. Growth rates are acceptable, but more and more of economic growth is captured by private capital, which is difficult to tax for either mobility or political economy reasons.
4. The United States may need to fight a major war, or prepare to do so. (I do favor cutting the defense budget now, but we can’t be sure that cuts can last.)
5. The political economy of revenue hikes and/or spending cuts becomes or remains intractable. Buchanan and Wagner have been stressing this point for decades. A decision to borrow forty cents of a dollar spent, right now, may end up as more or less permanent, at least for as long as markets allow. Ezra’s excellent posts about how far “right” the Democratic Party has moved on taxes are along these lines.
6. Another major recession may arrive, perhaps from abroad.
7. Life expectancy goes up a few more years than we had thought, yet productivity for the elderly doesn’t rise in lockstep. You don’t have to think of that as “bad news,” but it still would be a major fiscal problem.
Maybe none of those are modal forecasts, but add them all up and I say the probability of being way off baseline is greater than 0.5, and possibly more than one of those problems will kick in. In expected value terms, the costs of those possible fiscal scenarios loom very, very large (yet suddenly the modern liberal desire to think in terms of “worst case scenarios” has diminished).
Imagine people sitting around in Spain, in 2006, debating various scenarios relative to the “baseline budget.” Maybe that’s America today, though we do not face the same particular problems or timing that Spain did.
Now enter Chuck Blahous, who wrote an article charging that ACA is likely to prove very costly, and that we are spending our cost savings on Medicare and other programs in advance, when we in fact need those cost savings to restore fiscal sanity. You will find responses here from Ezra Klein, Kevin Drum, Paul Krugman and there were many others, accessible through Google, Blahous counters here.
I have reread the Blahous article carefully, with an eye toward judging whether Blahous is simply playing “baseline games,” as some of the critics allege. I do not see that he is. He stresses that he is making economic, practical, causal, and public choice arguments, and that those trump baseline games in importance. He is trying to get us out of an obsessive focus on the baseline game, not play it in some misleading way.
To be sure, my view, or at least my emphasis, is different from that of Blahous in at least two ways. First, he is more worried about the political economy of Congressional responses when the trust funds are exhausted, whereas I am more worried about the list immediately above (that said, Blahous very clearly does discuss several other major concerns besides double-counting and he may well agree with these broader worries too). Second, my inclination is to focus on the entire budget, as a unified entity, and not so much stand-alone ACA (or Social Security, as in other debates) per se. I suspect Blahous may well agree with me, but as a more active budget analyst/specialist than I am he is forced into debates on stand-alone analyses, whereas I can play the role of aloof blogger. In any case, “fixing” this difference of emphasis would strengthen rather than weaken the overall thrust of his argument.
At the end of the day, I agree with the basic point of Blahous, which is that ACA, should it stand, is spending potentially available budget savings which we will need for other purposes. I also would argue, though I do not have space to do so here, that this has become standard practice in American politics, with Democrats too.
Here are some choice words from Steven Rattner, who worked at Treasury under Obama:
Given that context, the government’s accounting practice — counting $748 billion of cost savings and $259 billion of revenue increases toward both Medicare and the cost of the Obama plan — is particularly troubling. Moreover, this problem is largely hidden from public view.
Under Washington’s delusional rules, budget crunchers in both the White House and Congress credit this $1 trillion twice: once in calculating that the care law will generate more revenues than costs, and again in concluding that the Obama plan will chip away at the Medicare problem.
You can argue that Rattner isn’t quite correctly describing CBO procedures in his piece, but on the economic and causal arguments he, like Blahous, is essentially correct.
At the end of the day, economic models do not use a “relative to baseline” framework. The effect of “Delta G,” “Delta T,” or any other variable, depends on realized and expected values of that variable and others, and not that the size of that variable relative to what other people are proposing. As I mentioned above, “relative to baseline” does have legitimate bureaucratic and accounting uses. But we should not let it blind us to a) the divorce of that mode of reasoning from traditional economics, b) the likely unsustainability of our current fiscal path, and c) that the actual reality of ACA and other policies that we are spending “cost savings” as soon as we create them or even sooner.
Addendum: I am happy to call out the various Ryan budget proposals as unworkable fiscal disasters, most of all on the revenue side. I also refused to endorse the 43 Bush “tax cuts” at the time, though I was sent one of those pieces of paper to sign. No point in throwing the “Team Republican” charge, which in any case disrupts discourse rather than advancing it.
Will the new eurodeal work?
Sarkozy and Merkel are already prepping their electorates for a pending deal, the usual media sources give some varying summaries of what is up, plus it will evolve anyway. A few of you have written in and asked me if it will work.
I have a simple formula for assessing euro-deals, and it goes as follows:
1. Can Italy grow at two percent a year, more or less sustainably?
2. Will/can the market regard the actions of the seventeen eurozone nations as more or less unified?
If you can add up those two questions to about 1.7 worth of “yes,” then the deal can work. Otherwise not.
You might also wonder, if the answers to those two questions come in at 1.8, is the deal needed in the first place? Probably, to get #2 up to a quasi-yes. (By the way, the Irish seem to think a treaty change and thus a referendum is on the way.)
It is my best judgment — and I stress that word — that the sum answer to those two questions, even with an announced deal by Dec.9, and looser monetary policy, comes in at about 1.16. Which isn’t enough.
Asking for 1.7 worth of yes seems quite modest, doesn’t it?
Addendum: Do not think that Germany has merely to waive a magic wand, or incur a one-time cost, to set things right in the eurozone. Any “set things right” action on Germany’s part is, one way or another, a form of doubling down. If it fails it means a bigger eurozone implosion in the future than would happen now, including much higher costs for Germany. The choice is not “German action vs. doom now,” it is “German action and some chance of even bigger doom later on vs. doom now.” That’s a tough call. The Germans understand that one better than do most of the bloggers I’ve been reading on the topic.
By the way, here is an interesting article on German geopolitics, though I don’t agree with much of it I recommend giving it a read.
General principles for evaluating Medicare reforms
You’ll be hearing lots about the Paul Ryan entitlement reform proposals, but here are a few more general points to keep in mind:
1. As health care develops, it becomes impossible for Medicare (or Medicaid) to cover every treatment.
2. One reform option has government experts rule which treatments are eligible for coverage, with varying degrees of Congressional input.
3. Another option is to let individuals choose in advance which treatments they will be covered for, and which not.
4. #3 can but need not be bundled with voucher and privatization ideas. Without privatization, the government offers people different Medicare packages and they choose one over the others. Government may also recommend a Medicare benefits package for an individual, without requiring that it be chosen.
5. Most plausible policy reforms involve some mix of expert restrictions (#2 )and individual choices (#3) and the real question is to figure out the right mix of the two approaches. When evaluating #2, do keep in mind the potential input of Congress, if only as a background threat.
6. Does individual choice (#3) make more sense for nursing homes and dental care (preferences really matter?), but maybe expert judgment (#2) makes more sense for cancer treatments (expertise really matters?)? I am not endorsing that comparison, it is simply an example to illustrate the issue at hand.
7. If #5 isn’t being addressed, you’re probably just getting polemics. Obligatory citation of David Hume, commit it to the flames, etc.
Outliers
The book is getting snarky reviews but if it were by an unknown, rather than by the famous Malcolm Gladwell, many people would be saying how interesting it is. The main point, in economic language, is that human talent is heterogeneous and that the talent of a particular person must mesh with the capital structure of his or her time if major success is to result. The book is best read as a supplement to Ludwig Lachmann’s Capital and its Structure. The main enduring insight of both Lachmann and Gladwell is simply how much we live in a world of complementarity rather than substitutability.
Nowhere in the book does the name Dean Keith Simonton (check out the headings to these links) appear nor does the phrase "multiplicative model of human success." A lot of the content here has already been done with more rigor and empirical support and also in readable form I might add. Everyone should read Simonton, noting that his hypotheses fare better in the arts than in politics.
If you ask too much from Outliers it will fall apart. It is too easy to find contingency in the world and Gladwell doesn’t begin to look for a theory of which contingencies are interesting or not. For instance arguably Ludwig van Beethoven would not have been a great composer if:
1. An extra butterfly had died two million years ago.
2. The outcome of the Thirty Years’ War had been different.
3. The Germany of his time had not had fortepianos.
4. His parents had conceived their child one second earlier.
5. Haydn had not paved the way.
#3 and #5 seem more interesting than #1 and #4 but that’s because some contingencies just don’t help us understand the world very much. Gladwell never gives us enough theoretical structure to see why his contingencies are the relevant ones. Simply showing the contingencies in personal histories is not, taken alone, very enlightening.
Gladwell’s contingency stories skid out of control. At one point it seems the main claim is that the steady accumulation of advantages is what matters, but once you ask which advantages end up "counting," the claim collapses into tautology.
There is also a "PC" undercurrent in the book of "don’t write anyone off" but if everything is so contingent on so many factors, maybe writing people off isn’t such a big deal. It could go either way. It depends.
Gladwell deliberately steers us away from the contingency of genetic endowment (even for a given set of parents, which sperm got through?), but if you hold everything else fixed you can assign a very high marginal product to the genetic factor if you wish, usually up to 100 percent of a person’s outcome. That mental exercise is verboten but somehow it is OK to hold the genetic endowment constant and vary some other historical factor and regard that as a meaningful contingency. See the discussion of Beethoven above, especially #4 on the list.
Gladwell descends into the swamp of contingency but he is unwilling to really live in it and take it seriously or, alternatively, to find a way out.
In reality the complementarity concept is easier to work with and also more fruitful for thinking about policy implications or for that matter the implications for management or talent training. Success is fragile but foster competing cultures based on clusters of talent motivated by rivalry and emulation. Don’t filter out the eccentrics or the risk takers. That’s about where David Hume ended up but Gladwell never gets anywhere close.
It’s still a good book and a fun book. You can order it here.
Why are UFO reports declining?
Just as our technology for finding and understanding UFOs improved dramatically, the manifestations of UFOs dwindled away. Despite forty-plus years of alleged alien abductions, not one scrap of physical evidence supports the claim that mysterious visitors are conducting unholy experiments on hapless victims. The technology for sophisticated photograph analysis can be found in every PC in America, and yet, oddly, recent UFO pictures are rare. Cell phones and instant messaging could summon throngs of people to witness a paranormal event, and yet such paranormal events don’t seem to happen very often these days. For an allegedly real phenomenon, UFOs sure do a good job of acting like the imaginary friend of the true believers. How strange, that they should disappear just as we develop the ability to see them clearly. Or perhaps it isn’t so strange.
Here is more. I doubt if people have fewer delusions, so presumably they have moved into stories which cannot so easily be refuted. This would include delusions about the future (e.g., extreme forms of transhumanism?), delusions about politics, and delusions about religion. The demand for verification need not outrace the ever-powerful self-deception; "stamp the weasel" is never an easy game to win. And sometimes too much stamping is counterproductive. For all of the associated craziness, UFO delusions have been of a relatively harmless ilk. They made people skeptical about government, drew viewers to science fiction movies, and the policy implications of belief in aliens (appoint another ambassador?) were consistent with fiscal responsibility.
The case for lifetime savings accounts
Glenn Hubbard, former chair of the CEA, argues that we should not tax savings:
While the Lifetime Saving Account (LSA) offers substantial simplification benefits, it also offers a vehicle to save more easily for a downpayment on a home, children’s education, or for medical expenses. With no withdrawal penalties, the account’s greater liquidity will encourage individuals to save, particularly moderate-income households worried about tying up funds for a long period of time. Like the president’s proposal to eliminate investor-level taxes on dividends, the LSA lays claim to the idea that income should be taxed only once. Indeed, given the generous contribution limits, most households could avail themselves of a consumption tax akin to the Flat Tax. They would pay taxes once when they earned wages or business income, but not again on returns to saving. This is an important step toward fundamental tax reform, particularly if the administration continues its recognition of the costs of double taxation of corporate income.
How much would capital accumulation go up?
To assess the impact on capital formation, one should compare the present value of additional private capital formation to the present value of lost tax revenue. Jonathan Skinner of Dartmouth College and I estimated that with even 25 cents of each dollar contribution as new saving, IRA contributions generate $2.21 of new capital per dollar of net revenue cost. If, as suggested by Harvard economist Martin Feldstein, one includes corporate income tax revenue from the higher capital stock made possible by the saving incentives, the ratio rises to $4.84 of net capital per dollar of new revenue cost. If each dollar of contributions contains 40 cents of new saving and one incorporates higher corporate income tax receipts, the savings incentives are actually self-financing.
My take: I’m totally on board kind of sort of. Until we address runaway government spending, tax changes will only bust the budget in the shorter run. Even with elasticity optimism, we won’t ever arrive at the self-financing equilibrium. Furthermore I will never have that much faith in any particular numerical projection. My main worry is stopping the current drain of resources from the private sector. And no, a trip to Mars is not just what the doctor ordered. Right now U.S. fiscal policy needs credibility and needs it badly. Won’t markets just think that any revenue boost will fly out the window as quickly as it comes in? Isn’t politics, and thus economics, first and foremost about subjective perceptions? Hubbard’s proposal, for all its merits, doesn’t address the core problems.
Addendum: Here is Brad DeLong’s recent post on the fiscal costs of social security privatization plans.