Open Question to the Macroeconomic Community

By now, everyone is talking about Scott Sumner's NGDP targeting idea for central banking.

Here's an open question to macroeconomists: Can you provide a compelling reason why the expenditure levels in an economy "should" grow at any particular rate?

Don't brush me off just yet. I understand that in good times, people will have more money and want to consume more stuff - and they'll be able to buy much of that stuff despite scarcity. This points to growth. I understand that in bad times, people will save for that hypothetical "rainy day" in the future rather than spending their money today; this points to slow growth or no growth.

But aren't the motives behind these spending decisions the real economic story here? Sure, you can target economic growth and screw with the money supply, but doesn't that just gloss over the fact that economic conditions have caused people to change their spending behavior? Isn't that what economists should be focusing on, rather than just skipping that step altogether and going straight to a "solution?"

How would you feel if a doctor treated you that way? "Well, Sam, the thing of it is, no one really knows why you cough up blood every night. We just know that for whatever reason, your body does this. So what we're proposing is to inject a tranquilizer into your lungs to stop the coughing..."

Big difference between attempted symptom-alleviation and an actual cure.

Definition of a Bubble

This question has been floating around the economics blogosphere recently. My consideration of the topic came after reading Arnold Kling's What is a Bubble? I started this as a blog comment, but ultimately realized I had typed too much and decided to cut-and-paste it here:

All popular definitions of a bubble come down to this: "Bubbles occur when most people get the future price of an investment incorrect."

When a minority of investors do this, however, we don't call it a bubble. We call it poor market savvy.

For me, it's difficult to understand asset bubbles in any context other than Austrian theory. Bubbles occur when investments in a given asset exceeds the economy's ability to realistically make use of that asset for its intended purpose.

It should be obvious that the problem with most bubble definitions provided is that they provide no reference to the actual economic use of a good. They speak only to esoteric figures for price, interest, and expectations as though the numbers themselves were ultimate abstract unquestionable concepts like the set of All Real Numbers.

So maybe bubbles occur when a critical mass of investors forget that the price of an asset reflects its price as a utilizable product, and instead come to believe that the price is a reflection of expectations about future prices, i.e., when perhaps the majority of investors plan to sell the asset to someone else later, rather than consume the asset themselves.

Rationalization

Making an even better case that Theory and History should be my next purchase from the Ludwig von Mises Institute, Mises Daily produces another gem, an excerpt from said book. Here's a highlight:

Rationalization is the name psychoanalysis gives to the construction of a pretext to justify conduct in the actor's own mind. Either the actor is loath to admit the real motive to himself or he is not aware of the repressed urge directing him. He disguises the subconscious impulse by attaching to his actions reasons acceptable to his superego. He is not consciously cheating and lying. He is himself a victim of his illusions and wishful thinking. He lacks the courage to look squarely at reality. As he dimly surmises that the cognition of the true state of affairs would be unpleasant, undermine his self-esteem, and weaken his resolution, he shrinks from analyzing the problems beyond a certain point. This is of course a rather dangerous attitude, a retreat from an unwelcome reality into an imaginary world of fancy that pleases better. A few steps further in the same direction may lead to insanity.

However, in the lives of individuals there are checks that prevent such rationalizations from becoming rampant and wreaking havoc. Precisely because rationalization is a type of behavior common to many, people are watchful and even often suspect it where it is absent. Some are always ready to unmask their neighbors' sly attempts to bolster their own self-respect. The most cleverly constructed legends of rationalization cannot in the long run withstand the repeated attacks of debunkers.

It is quite another thing with rationalization developed for the benefit of social groups. That can thrive luxuriantly because it encounters no criticism from the members of the group and because the criticism of outsiders is dismissed as obviously biased. One of the main tasks of historical analysis is to study the various manifestations of rationalization in all fields of political ideologies.

More here.

Sumner Addresses the Conservatives

Today Scott Sumner takes on some conservative objections to QEII. He provides seven refutations for seven conservative arguments. I'm not a conservative, but I think Sumner would consider me one. Here I will address his points:

1. The Fed isn’t really trying to create inflation.

The Fed doesn’t directly control inflation; they influence total nominal spending, which is roughly what Keynesians call aggregate demand. Whether higher nominal spending results in higher inflation depends on a number of factors, such as whether the economy has a lot of underutilized resources. But it’s certainly true that for any given increase in NGDP, the Fed would prefer more RGDP growth and less inflation.

I am getting more familiar now with Sumner's style of argumentation, so I am understanding his blog posts much better these days. Here he is being a little tricky by saying that the Fed controls something called "nominal spending." But what is "nominal" spending as opposed to "real" spending? If you spend $5 on a block of cheese, is that $5 nominal or real? If the full $5 is real, then you have engaged in "real" spending. If part of that $5 (say, $1 of it) is unreflective of the true value of the cheese, then $1 is "nominal" spending and $4 is "real." How exactly does this differ from inflation?

This is an obvious ruse. People know that the money supply is increasing. They see prices rising, and they see their purchasing power disappearing. The only exceptions to this are the inside bankers hoarding the Fed monopoly money. People are not stupid.

2. “But doesn’t economic theory teach us that printing lots of money creates high inflation?”

In general that is true. But there are three important exceptions:

Rather than respond to Sumner's three scenarios, I will simply re-post the following quote from Human Action:

The boom-creating tendency of credit expansion can fail to come only if another factor simultaneously counterbalances its growth. If, for instance, while the banks expand credit, it is expected that the government will completely tax away the businessmen’s “excess” profits or that it will stop the further progress of credit expansion as soon as “pump-priming” will have resulted in rising prices, no boom can develop. The entrepreneurs will abstain from expanding their ventures with the aid of the cheap credits offered by the banks because they cannot expect to increase their gains.

Alright, on to point #3:

3. “But isn’t the gold market signaling high inflation?”

Possibly, but the indexed bond market is superior to gold prices for two reasons. First, gold is trading in a global market, and we are interested in US inflation. More importantly, gold prices reflect all sorts of factors (industrial demand in Asia, central bank demand, a recent drop-off in new discoveries, a hedge against all sorts of financial risks, including eurozone turmoil.) Furthermore the indexed bond market (TIPS spreads) has recently been more accurate than gold—correctly predicting low inflation in the US since late 2008.

I don't believe in cherry-picking inflation indicators to get the desired result. We know that the Fed increased the money supply with QEI, and we know that the reason we haven't yet seen inflation is because banks are hoarding the cash and making easy money off of risk-free investments. The spike in commodities reflects a surging lack of faith in fiat currency.

4. “Doesn’t printing money just paper over real (structural) problems in the economy?”

There are structural problems, but there is also a shortfall of nominal GDP. The structural problems showed up when growth slowed in late 2007 and early 2008 as a result of sharply lower housing construction. This is necessary re-allocation of resources and should not be resisted. But even Friedrich Hayek suggested that we needed to avoid a “secondary deflation”, which would show up as falling NGDP, and would depress output in even those healthy industries that had not over-expanded... Furthermore, more nominal spending would boost employment, which would speed up the time when Congress eliminates the 99 week extended UI benefits–which is one of the structural problems.

Sumner has been waving this Hayek quote at Austrians for a few days now. I'm not convinced.

First of all, just because someone subscribes to ABCT doesn't mean they must necessarily agree with everything Hayek ever said. That would be as stupid as constantly speculating about what Milton Friedman would do (Sumner and DeLong, I'm looking at both of you).
Second of all, boosting employment by printing money is precisely what ABCT-adherents are warning about: malinvestment fed by the printing press. How does this in any way address our objections?

5. “Isn’t this just hubris—the idea that money can be centrally planned?”

Most right wing economists are not comfortable with the idea of giving discretion to the central bank. I am no exception.

Sumner should have stopped there. He goes on to rationalize that Friedman was okay with this kind of hubris in certain cases, so what's the problem? The problem is that Friedman - like everyone else - was fallible. Just because X million people do stupid things does not mean it is okay for one person to do stupid things. This is a silly bandwagon fallacy.

6. The conservative critique of stimulus is incoherent

Sumner is right on this one - Conservatives who say what he says they say (ha ha) are wrong. But it's still not an argument for QEII.

7. “Won’t monetary stimulus just paper over the failures of the Obama administration, allowing him to get re-elected?”


That’s an argument unworthy of principled conservatives.

Similarly, Sumner is right on this point. But it's still not an argument for QEII.

Alan Blinder's Embarrassing Defense of Ben Bernanke

Alan Blinder argues in a recent Wall Street Journal op-ed (gated) that The Federal Reserve is making the right moves to help the economy. Here is his fool-proof argument:

I know Ben Bernanke. Ben Bernanke is a friend of mine. And critics ranging from Mr. Schauble to Ms. Palin are no Ben Bernankes.

Well, QED.

If all it takes to exonerate reprehensible fiscal policy is the personal voucher of Alan Blinder, then macroeconomics has come a long way indeed! You know, they used to demonstrate this stuff with models and assumptions and diagrams and such. Gone are the days. Blinder's embarrassing column has two main thesis statements:

1. Current Fed policy is no different than past Fed policy.
2. Bernanke is smart and Sarah Palin isn't.

The really embarrassing thing about this article is that it is simultaneously economically weak and dismissive of all criticism. It is a classic straw-man fallacy, where all critics are dismissed as "the economic equivalent of the Flat Earth Society" if they disagree with Blinder's buddy.

Get real.

No, I mean it, Alan Blinder. Get real. If you want to defend your friend's policies, then try engaging the opposition in genuine and open debate, rather than dismissing them all as a bunch of Sarah Palins. You ought to be ashamed of yourself.

I expect this article will cause a lot of controversy in the economics blogosphere, and rightly so.

This is Excellent

Hat tip: Mises Economics Blog.

Sweetliberty on Freedom of Speech

Blogger sweetliberty brings us an excellent blog post on the essence of the freedom of speech. Here's a sample:

"Freedom of speech" in this country is a given in the minds of many, but when it's explained by liberty-minded folks -- even folks like Michael Bednarik -- there are always exceptions. You have total freedom of speech... except you can't yell "Fire!" in a crowded theater. You have total freedom of speech... except you can't say certain words on the radio or on TV during certain hours or without a paid subscription. You can say anything you want about the government... except you can't say you want to kill the President.

Guess what, guys. That ain't freedom!

Excellent. I agree.

The way I tell it is: Freedom of speech in inalienable. So long as you are capable of speech, you can say anything you please. The only way to take it away is to kill the speaker. That's how you know something is truly a human right. The "exception" is not really an exception: When people talk of "exceptions" to freedom of speech, what they really mean is that you are free to speak, but not free to escape responsibility for your words. So if your words defraud someone or send an innocent man to jail, then you can and should be held liable for having engaged in fraud or perjury.

...But not for speech. Speech is an inalienable right. And yes, that should include the ol' death threat to the president thing... Words don't kill people. But it's probably not smart to announce criminal intent in a public forum, either (you may be held responsible later.

Economic Fallacies in the Popular Press

Today, I bring what I hope to be the first of a recurring blog feature: Economic Fallacies in the Popular Press.

Here's a quote from Matt Yglesias:

In a normal year, government employment goes up. After all, the population is growing so providing the same quantity of public services requires more personnel.

That's the opening sentence of the blog post. This very crude, two-sentence logic suggests that production can only increase by increasing the quantity of labor. To accept this view of the world, we must ignore the role of capital, technology, and productivity (i.e. the quality of labor).

I hardly think Yglesias would stick to this line of reasoning if pressed, but it's worth pointing out how quickly the politically motivated will do away with cogent economic reasoning for the sake of making a political point.

Three jeers.

Count Down to Expiration of the Term "Tea Party"

How much longer do you give it, now that it has served its purpose?

Personally, I don't think it will be around much longer. We have to wait until at least March 2011, so that the so-called "Tea Party Candidates" who were elected can make a few PR errors. After that, both Democrats and Republicans will have a vested interest in burying the phrase "Tea Party."

I just want to see a few less government agencies, myself.

Social Security - I'll Be Brief

Every American citizen and policy-maker agrees that the current Social Security situation is unsustainable. There are not enough revenues to sustain current expenditures, and the problem is getting worse.

Virtually everyone in the country also agrees that current Social Security benefits are inadequate for any senior citizen to live on.

So, if a government pension plan is both financially unsustainable and financially inadequate, then we would be better off eliminating it.

QED

Take Your Pick

Which seems more plausible to you – (1) or (2)?

(1):

[A] liquidity trap resulted when demand for money becomes infinitely elastic (i.e. where the demand curve for money is horizontal) so that further injections of money into the economy will not serve to further lower interest rates. Under the narrow version of Keynesian theory in which this arises, it is specified that monetary policy affects the economy only through its effect on interest rates. Thus, if an economy enters a liquidity trap, further increases in the money stock will fail to further lower interest rates and, therefore, fail to stimulate.

(2):

The boom-creating tendency of credit expansion can fail to come only if another factor simultaneously counterbalances its growth. If, for instance, while the banks expand credit, it is expected that the government will completely tax away the businessmen’s “excess” profits or that it will stop the further progress of credit expansion as soon as “pump-priming” will have resulted in rising prices, no boom can develop. The entrepreneurs will abstain from expanding their ventures with the aid of the cheap credits offered by the banks because they cannot expect to increase their gains.

Robert Murphy on Legal Anarchism

Robert Murphy has a good article in today's Mises Daily. He attempts to explain how legal appeals might occur in a stateless society. It is a good effort.

But anarchy is impossible.

In Murphy's world, whenever there are disputes, we could simply present our adversaries to choose from a list of local private-sector judges and make our cases evenly. The problem I have with anarchy is that this assumes everyone wants to comply with the ongoing dispute. What if someone refuses to participate? Well, here's Murphy's answer to that question:

But what if Thad didn't agree to any of the judges on my list? Suppose he recommended instead that we use his brother-in-law, who was actually a car mechanic but, according to Thad, "is a really stand-up guy"? Obviously every reasonable person in the community would see that Thad almost certainly was a thief, and that I was telling the truth. If I went to a reputable judge and presented my case against Thad in his absence, and if the judge agreed with me, then the community would have little sympathy for Thad if I went with professional repo men to retrieve my laptop from Thad's house.

This sounds peaceful enough, except that it is quite a grand euphemism for hiring a gang and stealing back the disputed laptop. Rand often criticized anarchy by reasoning that as soon as there was a legal dispute between what she called "two competing governments," the result was war. In the above quote, however nicely he phrases it, Murphy reiterates her point.

Anarchy would never fall apart as a result of people who can't cooperate with each other. The world is full of people who are happy and willing to cooperate. People are inherently good, or so I believe.

No, the reason anarchy is impossible is because as soon as someone engages in abhorrent behavior, the inevitable result is war. The state exists as a means to prevent this kind of state-of-nature warfare. It surprises me that so many modern "anarcho-capitalists" have forgotten the hard-learned lessons of the Enlightenment.

Mr. Yglesias, Have You No Shame?

I don't want to make this "pick on Matt Yglesias day," but his latest writing on why people arrive at political conclusions is really beyond the pale. Quoting the New York Times, which is quoting a couple of poorly designed psychological studies, Yglesias reasons that "people aren’t making up their minds about political issues based purely on judicious consideration of the evidence."

And by people, he means those outside his sphere of influence. And by "making up their minds," he means "coming to the same conclusion as Matt Yglesias."

I'm really getting tired of this. The pervasive left-wing condescension to all those who disagree is now completely out in the open. To disagree with the left is to reject all reason and science and evidence.

Can anyone really hold that belief in earnest? How can a whole group of leftists political class members have forgotten that political opinions are just that - opinions?

The only explanation can be that these jokers are in their political death throes. We're on the cusp of something big and important. Politics as we know it is about to change drastically, significantly, and permenantly. You heard it here first.

Classic!

Matt Yglesias hilariously tries to rebuke Charles Murray's recent Washington Post article, but only manages to demonstrate the very obliviousness Murray describes. See if you can spot the error:

For example, what is one to make of this?

Talk to [the New Elite] about sports, and you may get an animated discussion of yoga, pilates, skiing or mountain biking, but they are unlikely to know who Jimmie Johnson is (the really famous Jimmie Johnson, not the former Dallas Cowboys coach), and the acronym MMA means nothing to them.

Of course this paragraph doesn’t make sense to publish unless you assume that a large proportion of Washington Post readers know that “MMA” stands for “mixed martial arts.” And the non-NASCAR Jimmie Johnson isn’t just some former coach, he’s familiar to 100 percent of NFL fans thanks to his ubiquity on Fox’s Sunday broadcasts. And pro football is hardly a pursuit of the narrow elite—it’s the most popular sport in America and one of the relatively few endeavors that, in this era of media fragmentation, united people (or men at a minimum) across race and class lines.