27 February 2013

American Conservatism’s Crisis of Ideas: Project Syndicate Monarchy, Patriarchy, Orthodoxy Weblogging

Brad DeLong
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Let me note three things:
  1. Most of what I have to say is highly, highly derivative from Mike Konczal and Mark Schmitt (and others);
  2. The problem is not just that today's crop of AEI-conservative ideas is not politically sustainable, but that it is simply wrong--Cahn and Carbone's Red Families, Blue Families has convinced me that contra Murray America's (Blue) families are actually in pretty good shape (Red families that try to keep their daughters ignorant about family planning not so much), my take on Eberstadt is coming out in Democracy Journal later this month; and
  3. Arthur Brooks seems to me at bottom simply lamenting that Democratic policies work and make people's lives better--that Republicans are losing their campaign to try to make America a worse-off place does not strike me as a minus.
And we are live at Project Syndicate:
American Conservatism's Crisis of Ideas: BERKELEY – On the back left corner of my desk right now are three recent books: Arthur Brooks' The Battle, Charles Murray's Coming Apart, and Nicholas Eberstadt's A Nation of Takers. Together, they constitute an important intellectual movement, which also happens to be a large part of the reason that American conservatism today has little that is constructive to say about managing the economy – and little purchase on the center of the American electorate.
But let's back up historically, to the founding of what we might call modern conservatism in early nineteenth-century Britain and France. There were some – Frédéric Bastiat and Jean-Baptiste Say come to mind – who believed that government should put the unemployed to work building infrastructure when markets or production were temporarily disrupted. But they were balanced by those like Nassau Senior, who spoke out against even famine relief: Although a million people would die in the Irish Potato Famine, "that would scarcely be enough."
The main thrust of early conservatism was root-and-branch opposition to every form of social insurance: make the poor richer, and they would become more fertile. As a result, farm sizes would drop (as land was divided among ever more children), labor productivity would fall, and the poor would become even poorer. Social insurance was not just pointless; it was counterproductive.
The proper policy was to teach people to venerate the royal throne (so that they would respect property), the paternal hearth (so that they would not marry imprudently young), and the religious altar (so that they would fear pre-marital sex). Then, perhaps, with women chaste for half or more of their childbearing years, the surplus population would diminish and conditions for the poor would be as good as they could be.
Fast-forward 150 years to post-World War II America, and to the original Chicago School critique of the New Deal version of social insurance – that it created "notches" that perverted economic incentives. The government, Milton Friedman and others argued, told the poor: make more money and we will take away your free housing, food stamps, and income support. People are rational, Friedman said, so they will not work for long if they get nothing or next to nothing for it.
The big difference between the Malthusian conservative critics of social insurance in the early nineteenth century and the Chicago critics of the 1970's is that the Chicago critics had a point: Providing public support to the "worthy" poor, and then removing it when they began to stand on their own feet, poisoned incentives and was unlikely to lead to good outcomes.
And so, from 1970 to 2000, a broad coalition of conservatives (who wanted to see the government stop encouraging immorality), centrists (who wanted government money spent effectively), and leftists (who wanted poverty alleviated) removed the "notches" from the social-insurance system. Presidents Jimmy Carter, Ronald Reagan, George H. W. Bush, Bill Clinton, and even George W. Bush and their supporters created the current system, in which tax rates and eligibility thresholds are not punitive disincentives to enterprise.
So what is the problem that America's new generation of conservative critics of social insurance sees? It is not that raising poor people's standard of living above bare subsistence produces Malthusian catastrophe, or that taxes and withdrawal of welfare benefits make people work, at the margin, for nothing and so provide massive incentives to slack off.
For Eberstadt, the problem is that dependence on government is emasculating, and that too many people are dependent on government. For Brooks, it is that knowing that public programs make one's life easier causes one to vote for non-Republican candidates. For Murray, it is that social insurance means that behaving badly does not lead to catastrophe – and we need bad behavior to lead to catastrophe in order to keep people from behaving badly.
The crucial point is that America's conservative elites today believe Brooks, Eberstadt, and Murray. To this day, Mitt Romney is convinced that he lost the presidency in 2012 because Barack Obama unfairly gave Latino-Americans subsidized health insurance; gave women free reproductive health coverage (excluding abortion); and gave other groups similar "gifts." He could "never convince them that they should take personal responsibility and care for their lives."
In fact, it would be a tough sell for any candidate to convince Americans who receive government benefits that they are dependent rather than empowered; that it is bad for people to vote for politicians who make their lives better; and that good public policy seeks to create human catastrophe rather than to avert it. The problem for American conservatives is not their choice of candidates or the tone of their rhetoric. It is that their ideas are not politically sustainable.
Sent with Reeder

Economists on the Minimum Wage

IGM Forum:
Question A: Raising the federal minimum wage to $9 per hour would make it noticeably harder for low-skilled workers to find employment. 
Agree: 34% 
Disagree: 32%
Question B: The distortionary costs of raising the federal minimum wage to $9 per hour and indexing it to inflation are sufficiently small compared with the benefits to low-skilled workers who can find employment that this would be a desirable policy. 
Agree: 42% 
Disagree: 8%

Full story here.

Yes, Thoughtful Economists Think Raising the Minimum Wage Right Now Is a Goo...

via Brad DeLong by J. Bradford DeLong on 2/27/13

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I would point out that the EITC and the minimum wage have different weak points--too high a minimum wage will have a substantial disemployment effect, and too high an EITC does create incentives to pad your hours. A mixed strategy helps attenuate both these flaws.
Steve Roth:
Leading Economists Vote on Raising the Minimum Wage: I'm delighted to see the U Chicago IGM Forum ask a really useful, non-softball question.
The panelists are evenly split on whether an increase to $9 would make it "noticeably harder for low-skilled workers to find employment."
A 4:1 majority thinks that weighing the costs and benefits, "this would be a desirable policy."
I note how many who commented bring up the EITC, suggesting that an increase in that support might be better than a minimum-wage increase. I note further that they apparently haven't read the very good reasoning and research suggesting that the two together very effectively address the problems of each. But Paul Krugman has. And his surprise helps explain why the others haven't thought about this:
Second — and this is news to me — the usual notion that minimum wages and the Earned Income Tax Credit are competing ways to help low-wage workers is wrong. On the contrary, raising the minimum wage is a way to make the EITC work better, ensuring that its benefits go to workers rather than getting shared with employers. This actually is Econ 101, but done right.
Disappointing to see Caroline Hoxby believing that our unemployment right now is structural:
Question A: Raising the federal minimum wage to $9 per hour would make it noticeably harder for low-skilled workers to find employment.
Unemployment among low-skilled workers is already high by historic standards, indicating that wages are already too high for market-clearing.
Richard Schmalensee puts my view concisely:
Question A: Raising the federal minimum wage to $9 per hour would make it noticeably harder for low-skilled workers to find employment.
There would surely be some [disemployment] effect, but "noticeably" seems a reach.
As does Richard Thaler:
Question A: Raising the federal minimum wage to $9 per hour would make it noticeably harder for low-skilled workers to find employment.
Yes, I know the Econ 101 answer but the evidence suggests the effect on employment is between small and 0.
Question B: The distortionary costs of raising the federal minimum wage to $9 per hour and indexing it to inflation are sufficiently small compared with the benefits to low-skilled workers who can find employment that this would be a desirable policy.
All methods of helping the poor cause distortions. This one not bad.
Paul Krugman:
Minimum Wage Economics: what should you know? First, as John Schmitt (pdf) documents at length, there just isn't any evidence that raising the minimum wage near current levels would reduce employment. And this is a really solid result, because there have been a lot of studies. We can argue about exactly why the simple Econ 101 story doesn't seem to work, but it clearly doesn't — which means that the supposed cost in terms of employment from seeking to raise low-wage workers' earnings is a myth.
Second — and this is news to me — the usual notion that minimum wages and the Earned Income Tax Credit are competing ways to help low-wage workers is wrong. On the contrary, raising the minimum wage is a way to make the EITC work better, ensuring that its benefits go to workers rather than getting shared with employers. This actually is Econ 101, but done right: given a second-best world in which you use imperfect tools to help deserving workers, two tools together can produce a better outcome than either one on its own.
So a minimum wage increase isn't some kind of counsel-of-despair way to help workers a bit in a dysfunctional political scene (although there's that too); it's actually good policy.
And Mike Konczal:
Interview with Dube; EITC and Minimum Wage as Complements: I still notice many people arguing that we should just raise the earned income tax credit (EITC) for the working poor rather than raising the minimum wage…. The EITC partially subsidizes employers, and as such the minimum wage is an excellent way to combat this. So it complements, rather than substitutes, for an EITC. Economists love to tell people that who pays a tax is independent of who Congress wants to pay it. The "Tax These Evil Corporations Act" might fall entirely on people buying stuff from those firms instead of their shareholders…. Jesse Rothstein did an estimate finding that for every dollar of EITC, a worker's wage only goes up 73 cents. That's a big capture by employers…. David Lee and Emmanuel Saez have a paper arguing that when this is the case (and if the EITC works primarily by bringing people into working, via an extensive margin, which it does), the minimum wage is an excellent complement to low-wage government transfers tied to work. Or as Dube says:
We have different polices designed for different distributional goals. We need to think not in terms of a single policy, but instead think in terms of what is the right portfolio of policies given the range of objectives you have.
The minimum wage is an excellent tool to boost the efficacy of government transfers, and it should be raised and tied to a cost of living raise. There's no magic bullet - there's just a variety of tools that reinforce each other.

Things you can do from here:

25 February 2013

Stand Back

via Conscience Warrior by Jonas Feit on 2/25/13

Inspired, or course, by this.


23 February 2013

The Spending Problem

Jonathan B. Wight

Some critics of government would like services and regulations to be cut to the minimum—keeping modest defense and justice, but allowing everything else to devolve to the market.

That's a wonderful utopian ideal. But we shouldn't let the best become the enemy of the good. That utopian ideal did not work in the time of Adam Smith, who favored reasonable regulations and expenditures for public goods like education. And it makes even less sense today.

Since that time, strong forces have pushed us toward more government. Here are two reasons, both relating to wealth:

Population density. The world's population has doubled, and doubled, and doubled again. That growth has now slowed, but we have far higher population density and it will continue to increase in cities. People living on top of each other produce both positive and negative externalities. Since Pigou, economists have demonstrated how government intervention can deal with negative externalities through taxes, regulations, and so on.

Ronald Coase is often credited with discovering that the market, left to its own self-interest, could solve the problem of negative externalities without government—assuming property rights and low transactions costs for defending those rights. But Coase explicitly rejected this notion, writing: "The world of zero transactions costs has often been described as a Coasean world. Nothing could be further from the truth." -- Ronald H. Coase, The Firm, the Market, and the Law (Chicago: University of Chicago Press, 1988, p. 174).

Let us imagine we could magically bestow property rights and other human rights on the citizens of Beijing, as well as an impartial judicial system. One fundamental human right is the right not to be injured by others without cause. Beijing residents currently experience terrible health injuries from car and truck pollution. Even with rights and a reliable legal system for defending them, who is the citizen of Beijing going to sue? No single car or truck is the cause of the injury, but only in combination. The transactions costs for suing all the drivers would be enormous. The market cannot solve this particular negative externality. There is a need for government regulation or taxing to discourage activities that produce negative externalities when no property rights exist (the atmosphere) or where transactions costs are high.

Enlarging moral sentiments. The rise of wealth also enhances our abilities to connect with other human beings, as shown by Benjamin Friedman's, The Moral Consequences of Economic Growth (2006). Rising wealth led to the fall of slavery, the rise of women's rights, and the invention of the safety net. The old, the sick, and the unemployed are not forgotten or shuffled aside. There are always significant moral hazards, of course, leading to the notion of "welfare queens," and the backlash against the state.

The reality, however, is that most Americans strongly favor environmental and safety nets. Rather than spending cuts, most Americans want spending increases in these areas, as shown in this recent Pew survey:

It is not a moral failing that the American people should want to clean the environment and help others. The key problem is that people want such benefits without being able to pay for them. The PEW questionnaire doesn't help. The question should be: "How much additional tax would you be willing to pay to increase X spending?"

Another key problem is that the total effects of all these incremental increases in spending or regulation are rarely considered.  Like a frog in the pot of water, a little more heat doesn't matter, but the overall effect of incremental increases in heat could be destructive.

22 February 2013

Why Does the Minimum Wage Have No Discernible Effect on Employment?

Center for Economic and Policy Research:
The employment effect of the minimum wage is one of the most studied topics in all of economics. This report examines the most recent wave of this research – roughly since 2000 – to determine the best current estimates of the impact of increases in the minimum wage on the employment prospects of low-wage workers. The weight of that evidence points to little or no employment response to modest increases in the minimum wage. [emphasis added]

Why Does the Minimum Wage Have No Discernible Effect on Employment?

20 February 2013

Omitted Variable Bias: Slovenly Men Edition

Free exchange
STEPHEN DUBNER publishes a reader question:
I live with four guys in a house. We had no cleaning schedule until about a month ago, but the house was never cluttered, and was more than clean enough for actual women to feel comfortable visiting. Even the bathroom was clean enough for the girls to freely use it without vomiting. However since we have implemented our cleaning schedule the house has gotten into worse and worse shape. The toilet downstairs is even looking so bad I don't want to use it. What gives?
Mr Dubner comments:
Okay, everybody, let's hear what you have to say about private vs. public incentives, moral hazard, and the general cleanliness of men.
Incentives, right!? Beware unintended consequences! Only, I suspect omitted variable bias. If the house was previously neat and clean, why did the roommates feel the need to adopt a cleaning schedule? I suspect that an unobserved factor led the roommates to introduce a schedule and contributed to a deterioration in the neatness of the house. Perhaps one of the roommates, a neat freak, began a serious relationship and started spending lots of of time away from the house. Or perhaps he simply grew tired of doing all the cleaning and resolved to let the others do their share or live in filth. Or he sustained an injury. One must always be wary of spurious correlation!

19 February 2013

Macroeconomic Models of Heterogeneous Agents


Mississippi Takes a Bold Step into the 1870s

By KEVIN ROBILLARD | 2/19/13 7:28 AM EST

A hundred and forty-eight years after it became law, and 18 years after passing it, Mississippi officially ratified the 13th Amendment banning slavery.

The cause of the delay? A clerical error, according to The Jackson Clarion-Ledger.

In 1995, Mississippi was the only state not to have passed the 13th Amendment. While it passed unanimously, the resolution was never sent to the Office of the Federal Register at the National Archives, a required step.

Two University of Mississippi employees — Ranjan Bantra, a doctor who became a U.S. citizen in 2008 and Ken Sullivan, who works for the university’s body donation program — started researching after seeing “Lincoln,” about the 16th president’s efforts to pass the amendment through Congress. Sullivan eventually contacted the Mississippi Secretary of State’s office, which was able to fix the error. On Feb. 7, the Archives wrote back that Mississippi’s ratification was official.

“Now it’s officially filed and recorded,” Sullivan told the paper over the weekend. “There’s no asterisk by Mississippi anymore.”


Ron Paul's Money Illusion (Sequel)

Eighteen months after its original publication, this post is still apropos.  -Ed.

Ron Paul's Money Illusion (Sequel), by David Andolfatto

As I promised to do here, I am posting a sequel to my original column: Ron Paul's Money Illusion. I want to thank everyone who took the time to comment and criticize the views expressed there because it has led to me to sharpen my thinking on the matter. I doubt that what I have to say here will sway opinion one way or the other, but I at least hope that the nature of my criticism will be more clearly understood. 

18 February 2013

Peter Temin: Macroeconomics Has Lost Its Way

Via Mark Thoma:

Here are a few passages from a much longer interview of Peter Temin:

Peter Temin in Conversation with The Straddler: ...In my opinion, macroeconomics has lost its way. The kind of models that many people use—general equilibrium models—start from assumptions of ... omniscient consumers, and various like things which give rise to an efficient economy. As far as I know, there has never been an economy that actually looked like that—it's an intellectual construct. But many people claim that the outcomes of that economy are natural outcomes. When you say "natural," you already have an emotionally laden term. Deviations from the "natural"—say, like, minimum wage laws, or unions, or governments that give food stamps, or earned income tax credits—are interferences with the natural order and are therefore "unnatural." ...
The general equilibirum view tends to lend support to those who want to make the economy more efficient in the sense of having fewer "distortions"—you know, all of these neutral economic words—from taxes, from labor unions, from minimum wages, and so on. Now, what has happened in the last thirty years—and this is what Hacker and Pearson note in their book [Winner-Take-All Politics]—is we have gotten ourselves into a feedback situation. As people have gotten richer, conservative people have funded organizations which generate economic research promoting their political views.
I recently reviewed a book [published by the Federal Reserve Bank of Minneapolis and] edited by Timothy Kehoe and Edward Prescott—a Nobel Prize winner in Economics—which had a very distinguished group of people writing about macroeconomics and depressions using the currently fashionable general equilibrium analysis. In my review, I argued that the answers that they got were terrible, that the model—however useful it is for other things—is not useful to analyze the conditions like the conditions today. And I even suggested [here Temin read from the review]:
Lurking behind these presumed inefficiencies appears to be a campaign for minimal government. Minimal government would not require many taxes as it would not have large expenditures; it would not interfere in labor markets, letting individual workers deal with large business firms as ordinary people deal with the grocery store. This is not an attractive place to live for some people, and this book appears to be supporting such an arrangement by stealth, rather than by direct argument. If this is an intended subtext, it would be appropriate for the authors and the Federal Reserve Bank of Minneapolis to bring it out into the open.[3]
The authors of the book deny that that's what they were doing, but I think it is implicit that current economics has a political stance, or at least political implications.[4] But these guys working at the Minneapolis Fed can say, well, you know, we're not partial, we're neutral scientists. ...
A real problem is that a lot of people don't know enough economic history. I'm an economic historian, which is a kind of endangered species. When I think about macroeconomics, I think about the Great Depression a lot because I worked on it and taught about it and so on. But, look, a lot of people in the 90s didn't have personal experience of the Depression. They didn't think it was terribly relevant. ...
To give you an idea about the state of the profession, here's a key piece of advice for getting published in top journals:
1. You always need to think carefully about the journal you submit to, and you need to research the kinds of papers that have been published there; whether the journal seems to be open to your type of work; who the editor is and what his or her orientation is; and who the associate editors are, because they are likely to be referees for your paper. 
This is basically saying that if your "orientation" is different from the editors, freshwater instead of saltwater for example, you can forget about publishing in that journal. Yet we hear about open-mindedness, and that "we're not partial, we're neutral scientists."
Posted by  on Wednesday, May 4, 2011

15 February 2013

Demand Side Economics

via Conscience Warrior by Jonas Feit on 2/15/13

Conscience Warrior has a new reader in the person of Alan Harvey, chief cook and bottlewasher over at Demand Side Economics. He very generously mentioned us in the most recent episode of his podcast. While I don't subscribe to every last detail of his views, I think we are in broad agreement on the way in which the world works, and as to what the best solutions are to the problems we face.

He published Demand Side: The Book last year, which compiles the ideas of some of the great minds of economics past and present into a sort of field guide to modern markets and the macroeconomy.

Mr Harvey also maintains the excellent forecasting site re: Macro Baseline.

13 February 2013

No, Marco Rubio, government did not cause the housing crisis

via Wonkblog by Ezra Klein on 2/13/13

In his response to the State of the Union, Sen. Marco Rubio said: "This idea – that our problems were caused by a government that was too small – it's just not true. In fact, a major cause of our recent downturn was a housing crisis created by reckless government policies."

11 February 2013

Multiple-Peaked Papal Preferences and Arrow's Impossibility Theorem

Dylan Matthews:
NYU political scientist Joshua Tucker and PM at Duck of Minerva have compiled a good set of political science research into papal elections. It’s a sensitive subject because, as GWU professors Forrest Maltzman, Melissa Schwartzberg and the late Lee Sigelman put it in their paper on Benedict’s election, “Officially, Ratzinger’s selection was attributed to the will of God, a force not amenable to any empirical test that is in our power to conduct.”
...a funny thing happened in 1996. John Paul II issued Universi Dominici Gregis, a document revising the two-thirds requirement. In filibuster parlance, he went nuclear.
[emphasis added]
Read the post; there's plenty more where that came from...

10 February 2013

Still Say's Law After All These Years

Economics and Politics by Paul Krugman - The Conscience of a ...
When John Maynard Keynes wrote The General Theory, three generations ago, he structured his argument as a refutation of what he called "classical economics", and in particular of Say's Law, the proposition that income must be spent and hence that there can never be an overall deficiency of demand. Ever since, historians of thought have argued about whether this was a fair characterization of what the classical economists, or at any rate his own intellectual opponents, really believed.
Not being an intellectual historian myself, I won't venture an opinion on that subject. What I will say, however, is that Say's Law (Say's false law? Say's fallacy?) is something that opponents of Keynesian economics consistently invoke to this day, falling into exactly the same fallacies Keynes identified back in 1936.
In the past I've caught Brian Riedl and John Cochrane doing it; now Peter Dorman finds Tyler Cowen in their company.
Cowen can't see why corporate hoarding is a problem. Like Riedl and Cochrane, he concedes that there might be some problem if corporations literally piled up stacks of green paper; but he argues that it's completely different if they put the money in a bank, which will lend it out, or use it to buy securities, which can be used to finance someone else's spending.
But of course there isn't any difference. If you put money in a bank, the bank might just accumulate excess reserves. If you buy securities from someone else, the seller might put the cash in his mattress, or put it in a bank that just adds it to its reserves, etc., etc.. The point is that buying goods and services is one thing, adding directly to aggregate demand; buying assets isn't at all the same thing, especially when we're at the zero lower bound.
What's depressing about all this is that Say's Law is a primitive fallacy – so primitive that Keynes has been accused of attacking a straw man. Yet this primitive fallacy, decisively refuted three quarters of a century ago, continues to play a central role in distorting economic discussion and crippling our policy response to depression.

04 February 2013

Richard III, Part Deux

NYT: Bones Under Parking Lot Belonged to Richard III

Charley James, from the PK blog post:
"It just occurred to me that it must have cost a fortune to get Richard III out of the lot after all this time. At £1.60 for the first half-hour and £1.10 for each additional half hour, it was probably enough to fund national health and the BBC forever."

No One Makes You Shop at Wal-Mart

Tom Slee: No One Makes You Shop at Wal-Mart: The Surprising Deceptions of Individual Choice: Chapter 1 — A World Of Choice:

We live in a world of choice.

We make choices every day. We choose the clothes we wear, the way we travel, the movies we watch, and the places we shop. From time to time we make bigger choices as well: the neighbourhoods we live in, the jobs or universities or schools we go to, and even the cultures we identify with. These choices give us a measure of control over our lives, and it seems natural to believe that individual choice is, almost by definition, a good thing.