You may have heard recently about how an obscure graduate student from UMass debunked a very influential paper from very influential professors at very influential Harvard recently. Indeed, it was a takedown.
Empirical economists Carmen Reinhart and Kenneth Rogoff’s oft-cited paper “showed” that governments reaching or exceeding a debt-to-GDP figure of 90% experience comparatively much lower growth. Turns out the whole thing was riddled with errors. I happen to agree that bad things are coming to countries that over-leverage themselves, but there is simply no way that a study like this was going to be correct, from its very inception.
Put aside for the moment the fact that the word austerity seems to have no useful meaning outside of rigid ideological parameters, meaning those who care more about politics than reality (read: 99% of economists) are talking at cross purposes. The real problem here is methodological. There is simply no way a spreadsheet of math problems based on aggregations of trillions of data points can tell you anything useful about whether a very general fiscal policy, with no set definition anyway, will have particular effects. It is all fantasy.
The most important point, though, is that we learn the right lesson from this. On the one hand, fancy math does not have the ability to tell us whether austerity, as a general matter, is correct. Anyone who thinks so is probably an idiot.
On the other hand, anyone who thinks that errors in fancy math prove the opposite position, is an even bigger idiot.
This is because they make a compounding error – on top of assuming that the methodology could give us useful evidence if it didn’t have its errors, they also assume that the absence of this evidence is evidence of their opposing position. This is a logical fallacy: absence of evidence for position A will never be evidence for position B. (If you’re interested in seeing a prime example of such massive idiocy, feel free to click on this link. I warn you, it isn’t for those with fragile stomachs.)
Ultimately, it is critical not to get caught up in the economic flame war without evaluating first principles. Neither side is right. And neither side seems to know why. In the meantime, I suppose we could just stand back and enjoy the show.
Amity Shlaes over at Forbes has published an article in the October 22, 2012 issue called “The End of Behaviorism.” (If you’re unfamiliar, Amity Shlaes is the author of the very good “The Forgotten Man,” a realistic history of the Great Depression. She is also the author of a forthcoming biography of Calvin Coolidge, one of my absolute favorite presidents and a sadly all-too-often-ignored figure.)
In this article, Shlaes lays out the contrast between the economic policies of the two major political parties in simplistic terms:
Get the rat to the cheese.
That’s really what each U.S. political party is promising to do if its candidate is elected President. The rat in this analogy is the enervated American worker. The cheese is his reward. If all rats make their way through the maze and to the cheese faster, the economy will grow faster.
The only way that Democrats and Republicans differ is in the manner in which they animate the rat. Democrats take the Habitrail approach: Give the worker the equivalent of a roomy cage with a deluxe wheel, and he’ll be fit enough to pursue his cheese. Republicans focus on incentives: Double the cheddar, and the rat will navigate his turns more quickly. The rat analogy comes from modern economics, a discipline that classes itself as lab science, precious and pure.
Neither approach works particularly well. The article goes on to probe the deeper depths of the human psyche viz. “getting to the cheese.” What is it that really motivates people? I think Shlaes assertion that freedom in and of itself is the goal of many is right on the dot.
But people aren’t lab rats. They are souls, to use a pre-social-science word. Souls, pious or not, make their choices in complex fashion.
Indeed, freedom itself is what motivates many people who are not currently free. We in this country tend to get so caught up in how much money we have, how many things are available to us, whether our material situation is better now than it was four years ago – that we utterly forget to appreciate the necessary condition to material wealth and comfort.
That is freedom.
And thus, I find Shlaes’s article to be a – perhaps unwitting – explication of the libertarian position, and especially of that position’s superiority over the position of the major political parties in this country.
The cheese is not really what matters, although getting rats to cheese is a nice side benefit. What really, truly matters is whether people are free to live their own lives without coercion.
I followed a link to a ridiculously self-serving article by a one Karen Kornbluh at the Atlantic the other day. Just reading her bio is enough to be able to determine exactly what her agenda is, and I find that overwhelmingly sad.
The article is called: “Why Are So Many Single-Parent Families in Poverty?” and the tagline reads: “Because public policy hasn’t kept up with the massive changes in American family structure.” Yep, you read that right. It’s not that there’s anything about single-parenthood that might lead to this effect. It’s lack of government intervention.
What made me happy, though, is the fact that my little sister was able to quickly and eloquently point out the most glaring logical fallacy. I’m justifiably proud of her. Here is her quote:
Am I just reading this really uncoordinated article incorrectly, or does she imply that the reason the problem exists in the first place is that the government isn’t solving it correctly?
Here I thought that the existence of a problem had to logically precede its non-resolution.
I thought so too, sis. I thought so too.
I have been a resident of several states across the United States, but two in particular stand out. One is California, to which I moved when I was ten, left at fifteen, and returned to for college. The other is Minnesota, where I was born, but to which I did not return until after college.
Just recently, my total time spent as a Minnesota resident surpassed my time as a Californian, capturing a plurality of my life’s years. Many have found it remarkable that I left a tropical paradise like California for the frigid tundra of Minnesota, but if you can look past the weather, California simply isn’t a great place to live. As I have been saying for years, “it’s a nice place to visit, but I don’t want to die there.”
Many of my friends disagree with me. One has spent nearly 70 years (aside from higher education back east) in the same beach community. Another calls himself a California “lifer,” which I find eerily similar to how prisoners with life sentences describe themselves.
In any case, while California has many things acting in its favor, it is nevertheless a failed state that I simply cannot find attractive as a home. To be fair, Minnesota is also heading in the wrong direction, but if California is just about to break the tape, Minnesota is still putting its running shoes on.
Victor Davis Hanson at the City Journal recently attempted to explain why he is a California “lifer,” in an article entitled “California, Here We Stay.” Many reasons he cites make perfect sense. Family heritage is one, and it is perfectly understandable. Indeed, it is the best reason I can think of for why I live in Minnesota and not Texas. There is the weather, of course. And there are certain cultural and educational institutions that are very attractive.
On the other hand, hegemony and inertia cannot prevail forever – just ask Britain, Rome, Greece, even Akkad. The general rule is that it is better to be present for the incline phase than the decline phase, and I can’t help but think that even the best of California has hit its peak. If UC Berkeley were a stock, it’d be Pets.com.
Hanson is honest about California’s shortcomings. Finances built on rainbows-and-unicorns accounting methods; poor primary and secondary education; hostile business climate running the productive out of state; environmental extremism – all of these things are conspiring to choke off the best of what the state has to offer the world.
On the other hand, he makes a point that I simply cannot get behind:
Another reason to feel hopeful about California is that it’s reaching the theoretical limits of statism. To pay for current pensioners, the state simply can’t continue to bestow comparable defined-benefit pension packages on new workers, no matter how stridently the public-sector unions claim otherwise. And as public insolvencies mount—with Stockton, Mammoth Lakes, and San Bernardino seeking bankruptcy protection a year after Vallejo emerged from it—public blame is finally shifting from supposedly heartless state taxpayers to the unions. The liberal unionism of an aging generation is proving untenable, as we saw in recent ballot referenda in which voters in San Diego and San Jose demanded that public-worker compensation plans be renegotiated.
California is reaching the theoretical limits of statism? This strikes me as remarkably naive, and it sounds hauntingly similar to things like “it couldn’t happen here,” or “it can’t get any worse.” Or perhaps “there are no black swans.”
I for one prefer not to underestimate the statist impulses of a polity that has consistently pushed the once-bright beacon of hope that was California back into the dark ages of economic and social thought. And they did it in less than a century and a half to boot.
In my personal opinion, the decay in California is not over, and it is not close to being over. I know that making predictions is the easiest way to be proven wrong, but here goes nothing.
I think that California will continue to be held in a chokehold by statists until the situation becomes completely untenable on a state level. At that point, the citizens of California will become enraged – not at their elected Judas goats, but at the federal government for not bailing them out. Seeing the practical importance of California’s electoral votes to their parties, the statist kindred spirits in Washington will forge a bipartisan grand bargain to bail out California, complete with all the crony capitalism and blatant corruption that entails. California will then double down on its failed policies and things will get worse. Another bailout will happen in quick succession, and while token gestures may be made to restore fiscal sanity, the damage will have been done.
California’s future is not bright. Perhaps California “lifers” have a reason to stay if they are already wealthy or comfortable enough to avoid the worst of the coming catastrophe. But if you’re a common person, your odds are poor. I fully expect to see the middle class, whose livelihoods are far more likely to hinge on the day-to-day health of the economy than the wealthy, to continue to flee.
My only hope is that they don’t bring the politics of old California with them when they go.
Here is a blast from the past. In this .pdf file, economist Robert Barro talks about the Keynesian multiplier in 2009. 2009, as we recall, was the edge of the precipice. This article was published in February of that year, concurrently with the passage of the “American Recovery and Reinvestment Act,” commonly known as the first stimulus, which granted roughly $800 billion of taxpayer money to political cronies.
Here is an excerpt:
If the multiplier is greater than 1.0, as apparently assumed by Team Obama, the process is even more wonderful. In this case, real GDP rises by more than the increase in government purchases. Thus, in addition to the free airplane or bridge, we also have more goods and services left over to raise private consumption or investment. In this scenario, the government spending is a good idea even if the bridge goes to nowhere or if government employees are just uselessly filling holes. This free lunch would make Charles Ponzi proud. If the deal is genuine, why stop with only $1 trillion or so of added government purchases?
It seems as though the best way to judge macroeconomic predictions is with the benefit of hindsight. Indeed, when economists using the same data set come up with estimates that vary by the trillions, one must wonder whether foresight per se exists at all.
With the benefit of hindsight, it is clear that the stimulus did not stimulate. Many excuses have been made for the poor performance of ARRA, but the fact remains that it has failed.
In my view this is not surprising. Most economists, whether classical, monetarist, Keynesian, or whatever else, have been consistently missing the point for decades. They have become so caught up with making their math look legitimate that somewhere along the line they forgot that it should have some connection to the real world.
Perhaps when applied to mainstream macro, “voodoo economics” is a tautology.
Here is a link from the Daily Reckoning of Australia, showing why government debt blows up. It has a liberal dose of Bastiat (pun intended), and it draws some interesting parallels between Japan and the United States.
I suggest that you read the whole thing. (It’s not that long, you whiners!) But here’s an interesting excerpt to pique your interest:
What really happens is this: the private sector gets too deeply in debt (thanks largely to the Fed’s artificially low rates and EZ money policies). Then, it panics. It cuts spending. Lenders – who over-extended credit – should go broke.
Instead, the feds bail them out, shifting the public’s real resources to failed businesses and incompetent managers. The bad debt is transferred to the public. Then, the private sector… attempting to build up savings and improve its financial health… puts its money in the safest possible place - government bonds! Still more debt, in other words.
The government takes the money and gives it to its favourite sectors… its clients… its pets… its campaign contributors and vote-getters. The public would be appalled if it realised how its savings were being thrown around. But it wants safety above all. And it believes the feds will be good for the money; they always have been. After all, if you can’t trust the government, who can you trust?
Who can you trust indeed? I’m not in the business of giving investment advice, but I’d suggest tangible assets. Check out the article to see what the stock market has done relative to tangible assets over the last 15 years or so. It will either shock you or depress you, or possibly both.
I was recently made aware of an interesting phenomenon called the “Zero Stroke” or the “Cipher Stroke.” It has an article on Wikipedia, so it must be a real thing.
Zero stroke or cipher stroke was a mental disorder, reportedly diagnosed by physicians in Germany under the Weimar Republic and said to be caused by hyperinflation of the early 1920s. The disorder was primarily characterized by the desire of patients to write endless rows of zeros, which are also referred to as ciphers.
Now that we’re in for the four more years of the Obamar Republic, with Ben Bernanke getting free rein to dump Benjamins out of his fleet of helicopters, I wonder whether the Zero Stroke will return?
Maybe it’s the next big thing in psychology!
If there’s one thing that gets me, it’s poor argumentation. You should feel free to hold positions that counter my own, but you should have valid reasons for them. Reasons that are not reasons will be savaged.
Which brings us to the “hateful bigots” argument. You know exactly the kind of argument that I’m talking about: “Those who believe in ____ are nothing but hateful bigots.” We’ve seen it with gay marriage, we’ve seen it when people who refuse to vote for Obama, we’ve seen it leveled at people who want to do nothing but spend less.
The problem is that the “hateful bigots” accusation is a monumentally poor argument. For one thing, it’s an exercise in question begging. Follow the steps.
- “You disagree with me, so you must be a hateful bigot.”
- “How do I know that you’re a hateful bigot?”
- “It’s obvious – you disagree with me.”
That is circular reasoning par excellence. The next time you are tempted to call someone hateful, or label them a bigot, take a look at your reasons for doing so and ask yourself whether you’re presuming that they have no reasons themselves. They probably do.
Finally, this “argument” is ironic in the extreme. The presumption that an opponent must have no valid reasons and therefore is necessarily a hateful bigot sounds an awful lot like bigotry, doesn’t it? And it certainly isn’t nice. Dare I say it’s hateful?
…and I saw something that made my jaw drop. I couldn’t help but laugh at the time, but ultimately, it’s not that funny.
It is about 11:20 as I write this, and I was at the store some 10 minutes ago. It is too late to cook, and the nearest grocery store to me that doesn’t charge an arm and a leg has a deli. I went to grab some chicken for a late dinner.
The young men in line in front of me were buying three kinds of soda, Oatmeal Cream Pies, Swiss Rolls, Ho Hos, and Mini Donuts. Before they paid, they waited a few moments for another of their group to come back from the candy aisle. Apparently they forgot Gummi Bears.
Their purchases lined up on the conveyor belt, the clerk checks them out. When the provisions are totaled, what should the young man reach for as payment but a Minnesota EBT card. For the uninitiated, that means he was paying with food stamps.
I feel like I should add the disclaimer that this is real. It sounds so silly, you might think I am embellishing or making the whole thing up. But I assure you, I was just there. And that really happened.
Taking the longer view, it is frankly amazing to me how many people discount the fact that these types of programs are rife with fraud and abuse. Under the guise of helping the poor, we are creating a permanent underclass with no skills save the ability to game the system.
People often accuse those of us who would like to see the end of these types of programs of taking food out of the mouths of poor families. That is simply untrue. Having people take care of themselves and, more importantly, allowing them to do so makes everyone better off, including the very poor. The evidence is clear, and the social welfare state is a failure.
But beyond that, I wouldn’t consider taking the Ho Hos away from a group of twentysomething boys who are clearly about to go smoke weed because none of them has a job to go to tomorrow a violation. That’s not taking food from poor people. That’s preventing the theft of the productive by the useless.
Much ado has been made recently about the AIG bailout, and specifically about whether it has made or lost money for the U.S. Treasury. The latest numbers flying about are from Neil Barofsky, former special inspector general of TARP, and the Treasury Department itself. The New York Times, reporting on the war of words, comes down squarely on the side of Treasury.
The pat explanation is that the bailout of AIG “worked.” It is a cute story, even if it seems to be keyed to the election.
On the other hand, my contention is that is does not matter whose numbers you use, or how you massage the accounting. In point of fact, there is really no way of knowing how much the bailout really cost us; you can add and subtract stock prices and buy-in and sale, but how do you quantify moral hazard for example? Any accounting is bound to be inadequate
But more importantly, the math does not really tell us anything useful. It gives us hindsight bias, and nothing more. Compare the AIG bailout to buying a lottery ticket. (Perhaps an apt comparison, given the level of decisionmaking involved.)
It is a known and accepted fact that buying a lottery ticket is a mistake. The ex ante math tells us that we waste our dollar on the lottery ticket, because the odds are far too long to expect a payoff.
But somebody has to win. If you buy a winning lottery ticket, is it fair to declare that you made the correct decision in buying the ticket after the fact? I contend that it is not. Objectively, buying the ticket in the first place was a poor decision, and since there is no way of knowing ex ante whether you hold a winner, the decision must be deemed poor regardless of what you discover ex post.
It is the same with the AIG bailout. Ex ante, there was really no way of knowing whether Treasury would turn a profit, but we were nevertheless playing terrible odds on a tilted roulette wheel. With all of the negative consequences of this particular course of action, it is unwarranted to highlight a gain in stock price that was, ex ante, completely speculative.
Now if you’ll excuse me, I am going to go complain about how the general manager of my favorite baseball team is an idiot because he did not trade his star player before he got injured.