Archive for January, 2012

David Brooks reviews Charles Murray’s new book, Coming Apart in today’s NYT. Brooks has high praise: “I’ll be shocked if there’s another book that so compelling describes the most important trends in American society.”

Back in 1963, where the story begins:

Roughly 98 percent of men between the ages of 30 and 49 were in the labor force, upper class and lower class alike. Only about 3 percent of white kids were born outside of marriage. The rates were similar, upper class and lower class.

The Brooks review provides a few striking examples of the differences that have emerged since then with respect to male workforce participation, marriage rates, births out of wedlock, church attendance, etc., and some of the comparisons he draws are difficult to reconcile with the dominant narratives on the Right and the Left.

Brooks notes that Murray’s comparisons are “mostly using data on white Americans, so the effects of race and other complicating factors don’t come into play” (indeed, his book is subtitled: “The State of White America, 1960-2010). My guess is, none of this will matter to the critics, who have dismissed every word that Murray has written since Losing Ground and (in particular) the Bell Curve. From my own interactions with colleague/critics—an admittedly small sample–it appears the more clamorous they are in their rejection of Murray, the more likely it is that they have never read a word he wrote. Why would they start now?

Nonetheless, my order has been placed.

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“[In] communist society, where nobody has one exclusive sphere of activity but each can be accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing to-day and another to-morrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticize after dinner, just as I have a mind, without ever becoming a hunter, fisherman, shepherd or critic.” – Marx and Engels, The German Ideology (written 1846 published 1932).

What we want to do, and what others want from us, is one way to articulate the economic problem. Historians, no less than members of any other discipline, profession or trade, would love to believe that there can never be too much of what they produce. This is in essence the position of a curious post by Eric Loomis at the progressive blog Lawyers, Guns, Money.

Loomis is calling for a new national WPA program to put unemployed PhDs in history to work. The American Historical Association, he believes, should make it a priority of its Congressional lobbying efforts. Many of the responses to his post recognize the political weaknesses of the AHA. Loomis himself recognizes this difficulty, but I am struck by how many actually think it is a good idea in principle.

They have not considered the economic problem. It is the problem of what they want versus what others want from them.

The powerful allure of Marx and Engels’ vision was also its failing. Marx and Engels concerned themselves almost entirely with the first part of the problem and left the second part to be worked out by vague references to “society” or to modern methods of production and technology. Wouldn’t it be nice if we could all just do what we wanted to do, when we wanted to do it?

Admittedly, Loomis is speaking of the desire of a vast pool of nontenured potential faculty in history to specialize in a specific area of their choosing. Marx and Engels were speaking of breaking the “tyranny” of specialization. But in point of fact, both Loomis and his socialist brethren are contending for the “freedom” to be what you want to be, when you want to be it.

Loomis’ concern is that a large number of people want to be academic historians, but now cannot. He is bitter that an elite few have obtained their appointments to the exclusion of the rest. He wants the rest to organize to get what they desire from government, which means from the rest of us.

There was a Federal Writers Project once. It was a small component of the original WPA under the New Deal. That portion of it having to do with historical work employed somewhere in the number of just over 300 writers. The aim was mostly archival–to preserve the life stories of various groups throughout the US. It made some important contributions to our historical knowledge. The narratives of ex-slaves is an excellent example. Each state had its own federally funded project. I am particularly fond of the collection of COWBOY AND RANCHING REMINISCENCES AND LORE of Texas. But should it have been done this way?

At its height, the WPA employed some 3.3 million in the Fall of 1936. The idea was to inject money into the economy and create jobs. It had a small impact on the jobless rate, but each time the administration attempted to curtail the program, the rate simply popped back up. People apparently would not voluntarily pay for the things the WPA produced. The program was not self-sustaining, and money had to be continually taken from somewhere else to do the work. With private investment already strained, that meant even less for private sector job creation.

At best, such government spending kept people where they were, but because it had no real mechanism for deciding anything other than what was politically possible, it could not address the second part of the economic problem.

What I want as Joe producer, is not necessarily what I want as Joe consumer. To look only at the first part of the economic problem ignores the constraints of scarcity as well as the reality of diminishing returns. These do not go away when we turn to government. What are the limits then, Mr. Loomis? I might get lots of western folk lore—as much as I like. It might mean that you get too much. And I suppose eventually it might get to the point where I say enough is enough. But who is to decide?

Of course, the original WPA was meant to be only a temporary source of assistance with some useful things done in return. But the problem with this idea applied to historians today is that the unemployment rate for historians well predates the current economic slump by two or three decades. In this context, Loomis’ idea is not so much temporary aid as it is a hope for a going concern.

Loomis forgets that higher education has received lots of public monies over the years and not all of it is dominated by elite private universities. Much much more of it goes to state institutions who get their share of federal spending. Who will manage this WPA, and who gets to decide who will be its beneficiaries?

A former president of the AHA recently wrote in Historically Speaking that “the ideas for reform are out there. All it will take to bring them into being is that elusive thing called political will.” This seems to be a common way of thinking about the economy these days. It is incumbent upon those who would advocate such reform activity, however, to spell out how they intend to make them work. Who will really call the shots? Or will the constraint simply be the limits of personal desire?

Manna from heaven, anyone?

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The mention of public choice theory to those on ‘the left’ of politics can prompt a variety of reactions. Some are based on ignorance about the very existence of public choice economics as a theoretical perspective. This reaction was demonstrated to me following one of the first lectures I gave in my academic career. Having listened to me speak for an hour on the power of incumbent firms to ‘capture’ regulatory agencies an attending student who was an activist in the Socialist Workers Party asked me, ‘when did you become a Marxist?’ Needless to say, for someone who considers himself a radical ‘anti-Marxist’ I was taken aback by this approach! What the question exemplifies though is an attitude that is widespread in academic circles – the assumption that an interest in power imbalances that favour business interests must equate with one having leftist or socialist sympathies. The idea that there might be a classical liberal/free market understanding of ‘power relations’ as exemplified by public choice theory is a possibility that simply hasn’t occurred to this particular species of left-winger.

A second reaction is based on ‘avoidance’. This strategy is adopted by those who are aware of public choice arguments but see them as a direct threat to their most cherished ideas. So why is public choice theory such a threat? I think in part because it offers a more plausible account of ‘power relations’ than its neo-Marxist competitors. Public choice rejects the naive pluralist view that power is evenly distributed across interest groups by offering a non-Marxist account of elite power. Instead of assuming that large ‘classes’ such as ‘capital’ and ‘labour’ are the primary power players on the political stage public choice focuses on how individual incentives affect the capacity of different groups to organise and hence to wield power over others. Yes, business interests can be powerful – but not because they are businesses or because we live in a ‘capitalist’ society. Instead, they exercise power because in some sectors where there are a relatively small number of big players business interests may find it easier to overcome collective action/free-rider problems than other groups such as taxpayers and consumers-who find it much harder to form a cohesive political force. In more fragmented and diverse sectors by contrast ‘business interests’ often lack political clout – and may be less favoured than say labour unions or public bureaucrats with a monopolistic position in the state sector. From a public choice perspective there is no such thing as ‘business’ and ‘labour’ per se. Rather, there are different types of business and labour interest the political success of which depends on the specific incentives and organisational problems facing the actors concerned. As such, public choice offers a more empirically compelling account of the varied special interest outcomes we observe in democratic polities than simplistic theories of ‘class rule’.

A further reason why many on the left see public choice as a threat to their ideals relates to its’ solution to the problem of special interest power. If the interventions of the state are often captured by corporate special interests -as many left-wingers seem to think they are – then how will social democratic efforts to give the state even more discretionary powers to intervene in markets do anything to undermine the power of these interests. Marxists would, of course, make the even less plausible claim that the only solution to ‘power relations’ is the abolition of private wealth and the monopolisation of all decision-making power in some unspecified public body. From a public choice standpoint, however, if the modern social democratic state is the major source of special interest power then by far the most effective way to reduce this power would be to dismantle the apparatus of anti-competitive intervention in markets. This does not require an egalitarian fantasy land where all inequality is abolished. Rather, it requires a framework of limited government where inequalities which reflect superior performance and entrepreneurial ingenuity are welcomed but where those that reflect the power of crony capitalists, crony union bosses and public sector bureaucrats are reduced to a minimum.

The third type of reaction to public choice sometimes encountered is one of denial. Faced with the argument that politics is a game where self-interested businesses, labour unions and government bureaucrats use the state to enrich themselves at public expense, some left-wingers respond by denying that this is so. Politics they say is motivated by ‘values’ and this is something that the economistic focus of public choice theory simply doesn’t take account of. I for one have a good deal of sympathy with this line of argument. It seems far too simplistic to maintain that every public policy that exists is there because of special interest forces. To suggest otherwise is to be guilty of a sort of ‘right-wing Marxism’. The problem for left-wingers who make this sort of response to public choice, however, is that it implies that many of the quasi- conspiracy theories that are often their most important mobilisation tactic have to be abandoned as well. Might it just be that that central banks and financial regulators who pursued a policy of loose money and the lowering of lending standards did so because they believed it was the ‘right thing to do’ and not because they were in the pockets of corporate bankers? If politics is really about values and ideas then perhaps we should look to the power of ‘mistaken theories’ (such as Keynesianism and Monetarism) as the cause of government failure rather than the corrupt dealings of the ‘top 1%’.

So, public choice theory poses some difficult questions for ‘the left’. If one takes an ‘interest-based’ view of politics then public choice offers a more plausible account of the way special interests seek and gain power than its leftist rivals – and of how to minimise the threat presented by such interests. If on the other hand one takes the view that ideas matter more than interests then the left is robbed of much of the ‘them versus us’ rhetoric which historically has been one of its most important vehicles of political recruitment.

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Given all of the labor talk around the country (especially in Indiana), today’s quotation from Lochner v. People of State of New York, 198 U.S. 45 (1905) seems appropriate:

The general right to make a contract in relation to his business is part of the liberty protected by the Fourteenth Amendment, and this includes the right to purchase and sell labor, except as controlled by the State in the legitimate exercise of its police power.

Liberty of contract relating to labor includes both parties to it; the one has as much right to purchase as the other to sell labor.

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The President has decided that now is the time to confront the growing cost of higher education.  As the NYT notes:

President Obama is proposing a financial aid overhaul that for the first time would tie colleges’ eligibility for campus-based aid programs — Perkins loans, work-study jobs and supplemental grants for low-income students — to the institutions’ success in improving affordability and value for students, administration officials said.

As he proclaimed in the SOTU:

“Let me put colleges and universities on notice:  If you can’t stop tuition from going up, the funding you get from taxpayers will go down.”

As the NYT story correctly notes, for public institutions, rising tuition is partially a product of state budgetary decisions in hard times. If the states reduce levels of support, tuition must increase.

Certainly, private institutions are facing a different set of issues. The financial crisis racked a lot of endowments and the impact is still being felt because of spending rules (e.g., many institutions have rules that limit the draw on the endowment to 5 percent of the twelve quarter moving average). Moreover, most private institutions cannot control financial aid (if admissions are partially or wholly need blind) and health care costs. All of this places pressure on tuitions.

But I wonder: How much stock one can place on the story of the increasing costs of higher education given the massive changes that have occurred in the underlying services? Let me illustrate with a brief comparison.

I fondly remember my days as an undergraduate at the University of Wisconsin-Madison some three decades ago. During my time at Madison, I never saw an advisor. The course catalog would be delivered in bulk to Memorial Union (and other locations) and the university assumed that their adult students could make their own decisions about courses, the coherence of their schedules, and the number of courses they wanted to take in any given semester (if it took you longer to graduate than the standard four years, it was your problem). The one year I lived in university housing (a cooperative), I slept in a bunk bed in a cement block room with one window.  The food was rather bland—lots of starch, little in the way of protein—and you had your choice of milk or water (things were a little better in the dorms, but not much). Since no one owned televisions, if you wanted to watch TV you went to a commons area or hit a bar. If you wanted to exercise, you went to a gym that was equipped with an assortment of old steel benches, iron weights, punching bags, and stationary bikes.

The total cost of one year’s education (combining tuition, books, room and board): $5500 in 2011 dollars.

As an academic and a parent who has put two sons through college, I find the contrast between my college experience and the experience of today’s students to be rather striking.

Today, the culture of helicopter parenting has infested the academy. Students are required to meet with their advisors several times a year to receive approval for every course (I love putting that PhD to good work when I need to approve a decision to add or drop a half-credit strength training class).  There appear to be deans, offices, and programs covering every conceivable aspect of a student’s life. We have simply discarded the assumption that students are adults and thus capable of self-governance.  Even in public universities (both of my sons attended them), the quality of the housing has improved dramatically. Everyone seems to have a television and a personal computer, and thus cable and wireless are required amenities. Students dine in what appear to be food courts, making daily decisions about whether to have sushi, vegan, or some quasi-ethnic food, washed down with bottled water, a designer tea, or a latte (to my knowledge, these are among the few decisions that do not require a meeting with an advisor). The fitness centers are nothing short of lavish, with rows of shining weights, ellipticals, stationary bikes, rowing machines, and ceiling mounted television sets tuned to everything from VH-1 to ESPN.  When students select a college, the tour guides devote the lion’s share of their time to exploring the co-curriculum and amenities for a simple reason: This is what attracts students and their parents.

In short, the college experience today is far different than in was a generation ago. Whether it is a net improvement depends on your perspective, I suppose (I am skeptical, and tend to embrace the more Spartan days of the past when students were treated like adults instead of infantilized and resources were lavished on the library instead of the co-curriculum).

It is difficult, in this context, to make sense of the arguments regarding the escalating costs of a higher education. The services that constitute higher education today have little in common with what constituted higher education a generation ago (not to mention several generations ago, when things were even more monastic).

I would write more, but this is the second day of add-drop, and there are undoubtedly some schedule adjustments that demand my immediate attention.

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The new macro (part 1)

Periodically I visit Scott Sumner’s blog The Money Illusion.  I keep asking myself if the market monetarism he and a few others are pushing is important.  I have come to think it is.  Like change-the-world important.  Like Nobel-worthy important.

Well, maybe.

I would usually bounce to Sumner’s blog from a glowing link from Marginal Revolution, and I have found his insights illuminating, though I haven’t always understood them.   I noticed quickly that he was always making references to NGDP (nominal GDP), which I found annoying and odd.  There is perhaps no concept so deeply engrained in an economist’s DNA than the idea that what matters is real.  The first thing we do with any data series is make sure it is represented in real terms, not nominal ones.  I don’t care what is going to happen to my nominal income; I care what happens to my real income–what I can actually buy, not the arbitrary prices that I have to pay for stuff.  Similarly, relative prices matter, not nominal ones.

As a prescription for sound economic policies related to long-term growth, it is the real stuff that matters.  In the long run, markets eventually adjust to shocks and the quantity theory of money holds: if we increase the quantity of money there is no real effect because prices eventually rise.   That isn’t a terribly controversial idea.  But it is the short run that is the rub.  Orthodox economics is about equilibria, but life is about disequilibria.  10% unemployment is a disequilibrium outcome.

Another way to say this is that something is sticking.  Prices for most goods and services do not change frequently, and wages move even more slowly.  But demand and supply can (and do) change very rapidly.  When New York and Washington were attacked on 9/11/01, there was an immediate and profound shock to demand for things like restaurants and a lot of other consumer goods that all of a sudden seemed vastly less important to consumers than they were on 9/10/01.  But the prices charged by restaurants and the and wages paid to their employees did not immediately adjust to the lower demand.   Thus there was an immediate gap between the observed price and the equilibrium prices (fortunately demand recovered before too long).   Most restaurants did not print new menus, but they did respond to the shift in demand by laying off workers, reducing their hours, buying less food from suppliers and a lot of other decisions to cope with the loss of business.  I haven’t seen the data, but I bet that New York restaurants pretty much stopped hiring new people in the wake of 9/11.

A terrorist attack or a hurricane are real shocks.  But there are nominal shocks, too, that can be equally as devastating to the economy, if not more so.  Often these occur because a speculative bubble pops, which has ripple effects throughout the economy.  Nothing real has happened, but expectations have changed which causes spending to change, often very rapidly.  Because of price stickiness, real interest rates do not necessarily reflect that rapid changes that are occurring with respect to spending.  And because prices are sticky, real GDP is dragged down with nominal GDP.  That is bad.  It is the real stuff that affects people’s lives.

Sumner and the market monetarists are pushing a revolution in macro designed to put the Fed’s focus on nominal GDP.   His provocative claim is that the balancing act between employment and inflation that the Fed is charged with can be accomplished not by worrying about output and prices separately, but by worrying about their combination–which is NGDP.  If NGDP is too high, contract; if it is too low, expand.  In Sumner’s view the low expected inflation revealed by interest rates during the financial crisis of 2008 was not a silver lining (as media reports liked to claim).  Instead, the low inflation was the proximal cause of the recession.  When spending tanked in 2008, NGDP (and RGDP) took a nose-dive.  Sumner argues that even though the Fed did increase the monetary base, its policies were highly contractionary, just as they were in 1932.  What the Fed needed to do was credibly commit to higher inflation in the future by injecting more money into the economy.  Instead, interest rates and inflation stayed low and unemployment soared.

When a negative nominal shock occurs, people contract their spending and aggregate demand falls.  The traditional Keynesian approach is to increase the money supply (monetary policy) or increase the deficit (fiscal policy) to stimulate spending.  But when interest rates are low, people like Paul Krugman and Brad DeLong scream that there is a liquidity trap and that only fiscal policy is an option.   Their arguments are motivated primarily by their love of government spending more than devotion to actual Keynesian arguments, but that is somewhat beside the point.  Sumner argues that there are always monetary options, even in a liquidity trap.  Put simply, creating inflation is easy: just debase the currency.  Anyone can do that.

But isn’t debasing the currency a reckless way to run a country?  As a long-term policy, of course it is.  But this isn’t printing money to fund government expenditures or payoff bad debts.  It is about intentionally creating inflation expectations.  The downfall of Keynesian fiscal policy is that it only works by assuming people are myopic and won’t realize the impact of government policies.  In the real world, government spending restricts private spending because people are not stupid; they realize that government spending today will raise taxes in the future.  Increasing NGDP through expansionary monetary policy not only allows people to realize the impact of government policies, it depends on it.

The recipe is simple: when the economy experiences a negative nominal shock, inject money into the economy.  People will spend more because they know that their money will be worth less in the future because of future inflation.  And (this is important), when nominal growth is too high, the rate of inflation needs to fall.

What is new in NGDP-targetting is not so much the basic macroeconomics, but the policy perspective.  Here are the key points of that perspective:

  • Instead of ignoring the rational expectations revolution, market monetarism embraces it.
  • It also embraces the key insight of the Noe-Keynesians, which is that prices are sticky.
  • It is rule-based and completely transparent, rather than relying on the discretion and hidden agendas of central bankers.
  • It is a short-term perspective on what matters in the short-term: total spending (recessions really suck, after all, and are best avoided).
  • Policy makers don’t dictate market outcomes, they respond to them (hence the “market” in the market monetarism).
  • There is no need for fiscal policy, which at best does nothing and, at worst, is exploited by the worst aspects of redistributive politics

Market monetarism is not an economic panacea.  There will still be business cycles , and real growth still requires all the tough policy choices that are hard to make in a world where politicians care only about the coming electoral cycle.  But it may turn out the a group of economic bloggers in obscure places are pushing a view that will end up making the economists at elite universities cringe with shame when the finally accept its utility and simplicity as an approach to preventing the pain of recessions like the current one.  Time will tell.

Next: the politics of the new macro.


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Romney and His Wealth

There has been a lot of talk – too much in my view – about Mitt Romney’s riches.  Indeed, I half expect Ann Richards to rise from the dead and talk about how Romney was born with a gold spoon in his mouth (since he’s probably too “elitist” for silver) and eats the fruit of the poor’s labor with it to amass even greater wealth.  CNN is suggesting that Republican voters think Romney is “too rich” (which I don’t think is possible to objectively define or cast judgement upon as long as it was legally and morally earned).

I really don’t care how rich politicians are unless their wealth was earned in a way that suggests something problematic about their character which could be reflected in their use of power.  For example, “bad” wealth would be money gained as a product of rent-seeking behavior or other morally dubious or fraudulent acts. 

In Romney’s case, I haven’t heard about anything that suggests this.  Indeed, quite the opposite as he took responsibility for making tough business decisions that affected many people but that were often growth-enhancing.  That suggests something positive about his ability to lead as President. 

What I care about most in a candidate for national office is his/her commitment to the Constitution and the extent to which he/she believes in and will be guided by a political philosophy dedicated to securing individual liberty and a free society.  Unfortunately, there are few (none?) that can fully meet this standard.  But it is a useful standard of judgement.  It tells me I should prefer Barry Goldwater to Lyndon Johnson, Ronald Reagan to Jimmy Carter, Mitch Daniels to Newt Gingrich, and so on and so forth.  Are those men perfect, no.  But there is still a meaningful choice along those dimensions for the American public as a whole.   

More importantly, I think there is something crucial that seems to be escaping public attention through all of this talk of how rich Romney is.  Specifically, former community organizer and current President, Barack Obama is also very, very wealthy.  The Obamas adjusted gross income for 2010 alone was $1,728,096.  Their 2009 AGI was $ 5,505,409.  In 2008, it was $2,656,902.  Not exactly 99% right?  And that is just for a three-year period.  Worse, is that his wealth has largely been the product of his political life (see where he stood – especially before his DNC speech in 2004 – in this 2007 piece).  So if we are going to cast aspersions about someone’s wealth, I’m pretty sure we should pay more attention to the fact that politics pays – just ask Bill Clinton and Newt Gingrich!

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