The Captured Economy: Book Talk at U.C. Berkeley | Tu Apr 10 @ 2 PM | Blum Hall Plaza Level

https://www.icloud.com/pages/0o9LLDvrhW-xkx2N_NL7x-hVw | 2018-04-10

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“The best attempt so far at a social democratic–libertarian synthesis of the origins and cure of our current political-economic ills…”—Brad DeLong

The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality

Brink Lindsey and Steve Teles

Niskanen Center: https://niskanencenter.org


“A compelling and original argument about one of the most pressing issues of our time, The Captured Economy challenges readers to break out of traditional ideological and partisan silos and confront the hidden forces that are strangling opportunity in the contemporary United States.”—Matthew Yglesias http://vox.com

“Are you looking for how to get out of our current mess? The Captured Economy is perhaps the very best place to start.”—Tyler Cowen, Professor of Economics, George Mason University

“American politics is mired in endless arguments about how much downward redistribution we want and how to provide it. But as Brink Lindsey and Steven Teles point out in this engaging, powerfully argued book, the reality of our political economy often looks much more like upward redistribution. In one arena after another, public policy enriches the already rich and advantages the already advantaged.”—Yuval Levin, editor of National Affairs

“Steven Teles and Brink Lindsey ask one of the most important questions of our times: What are the political reforms we need to reduce the ability of the wealthy to maintain their capture of our government? Combining the analytic forces of liberalism and libertarianism, they provide a much-needed investigation into why the U.S. government works on behalf of the powerful and the steps we can take to address rising inequality and regressive regulation so that it instead acts in the public interest.”—Heather Boushey, Democratic Economic Policy Director, 2016

Available at Powell’s: https://tinyurl.com/dl20180402a

Available at Google Books: https://tinyurl.com/dl20180402b

Takeaways:

  • Today: a stagnating economy and sky-high inequality
  • Breakdowns in democratic governance: wealthy special interests capture the policymaking process
  • Regressive regulations that redistribute wealth and income up the economic scale
  • Stifling entrepreneurship and innovation
  • New regulatory barriers shield the powerful from competition inflating their incomes extravagantly:
    1. Subsidies for finance’s excessive risk taking
    2. Overprotection of copyrights and patents
    3. Favoritism toward incumbents through occupational licensing schemes
    4. The NIMBY-led escalation of land use controls that drive up rents for everyone else.
  • Needed: improve democratic deliberation to open pathways for meaningful change

Synopsis

For years, America has been plagued by slow economic growth and increasing inequality. Yet economists have long taught that there is a tradeoff between equity and efficiency-that is, between making a bigger pie and dividing it more fairly. That is why our current predicament is so puzzling: today, we are faced with both a stagnating economy and sky-high inequality.

In The Captured Economy , Brink Lindsey and Steven M. Teles identify a common factor behind these twin ills: breakdowns in democratic governance that allow wealthy special interests to capture the policymaking process for their own benefit. They document the proliferation of regressive regulations that redistribute wealth and income up the economic scale while stifling entrepreneurship and innovation. When the state entrenches privilege by subverting market competition, the tradeoff between equity and efficiency no longer holds.

Over the past four decades, new regulatory barriers have worked to shield the powerful from the rigors of competition, thereby inflating their incomes-sometimes to an extravagant degree. Lindsey and Teles detail four of the most important cases: subsidies for the financial sector’s excessive risk taking, overprotection of copyrights and patents, favoritism toward incumbent businesses through occupational licensing schemes, and the NIMBY-led escalation of land use controls that drive up rents for everyone else.

Freeing the economy from regressive regulatory capture will be difficult. Lindsey and Teles are realistic about the chances for reform, but they offer a set of promising strategies to improve democratic deliberation and open pathways for meaningful policy change. An original and counterintuitive interpretation of the forces driving inequality and stagnation, The Captured Economy will be necessary reading for anyone concerned about America’s mounting economic problems and the social tensions they are sparking.

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A Question I Asked a Much Shorter Version of…

A Question I Asked a Much Shorter Version of at the Berkeley “How Did Tax Reform Happen?” Symposium: I have a question for Alan Auerbach: a question hinted at in his slide that contrasted the analyses of the tax cuts from economists from those from “economists“. It was also hinted at in David Kamin’s slide the one that contrasted:

  1. the analyses of policy shops with models—including the highly unreliable Tax Foundation (yes, crowding out is a thing; no, the long run does not come in ten years)
  2. that found very small growth effects with the unmotivated and unjustified claims of the Trump administration.

There are two problems:

  1. David’s slide omitted a number of estimates of the effect that were even higher
  2. Alan’s slide omitted the fact that the most absurd estimates I saw came not from “economists” but from economists—Ph.D. economists with tenured appointments at places like Princeton, Harvard, Columbia and Stanford.

We had:

  1. The claim by Stanford’s John Taylor, Mike Boskin, John Cogan, and George Schultz; Columbia’s Glenn Hubbard, Princeton’s Harvey Rosen; Harvard’s Robert Barro; plus Larry Lindsey and Douglas Holtz-Eakin that the tax cuts would boost GDP by 3% in the long run and that it was possible the long run might come in as few as 10 years.

  2. The claim by 100-odd economists led by James C. Miller III, Douglas Holtz-Eakin, Charles W. Calomiris, and Jagdish Bhagwati (who backtracked, saying he thought it was standard practice to sign letters that contained claims with which one did not agree) claiming not just such rapid growth but that the tax cuts would pay for themselves: “Sophisticated economic models show the macroeconomic feedback generated by the TCJA will… [be] more than enough to compensate for the static revenue loss…”

  3. Three of the nine—Douglas Holtz-Eakin, Larry Lindsay, and Glenn Hubbard of Columbia—whom Sen Susan Collins (R-ME) believes assured her that the tax cut was likely to pay for itself. (They claim that they did not say that, and are not responsible for Susan Collins’s misapprehension; NEWSFLASH: when you talk to a senator, you are responsible for what the senator hears, not for the loopholes you preserve so you can sleep better at night.)

  4. One of the nine, Robert Barro of Harvard, doubling down and saying that the long-run boost to GDP is not 3% but 7%—and Michael Boskin of Stanford then endorsing his analysis.

(Robert Barro has since cut his estimate of the effects of the law-as-written from 7% to 0.4%. See Barro and Furman (2018). Michael Boskin has not, to my knowledge, backed off of the 7% number.)

The net effect of all of these “analyses” by not “economists” but by economists of note and reputation was to put the Trump administration estimates in the middle of the distribution, rather than way far out on the fringe. And this mattered for the debate in the public sphere. It led, among other things, to this outraged cry from Binyamin Applebaum:

I am not sure there is a defensible case for the discipline of macroeconomics if they can’t at least agree on the ground rules for evaluating tax policy. What does it mean to produce the signatures of 100 economists in favor of a given proposition when another 100 will sign their names to the opposite statement? How does Harvard, for example, justify granting tenure to people who purport to work in the same discipline and publicly condemn each other as charlatans? How are ordinary people, let alone members of Congress, supposed to figure out which tenured professors are the serious economists?…

I agree with Alan Auerbach that it would be wonderful if we had strong nonpartisan analytical institutions. But I want to ask Alan: What marching orders do you give us to get there? How can we get there when we see such egregious behavior not just from “economists” who serve political masters and do not know how to do analyses that get the incidence right, but from economists who know well how to do analyses that get the incidence right?


Symposium: How Did Tax Reform Happen?

Monday March 12, 2:00–3:30pm, 648 Evans Hall

In late December, less than two months after its initial introduction in Congress, the Tax Cuts and Jobs Act became law. Full of complex and controversial provisions, this major change in the U.S. tax system occurred more than three decades after the last significant change, the Tax Reform Act of 1986, and followed a very different process in a starkly different political environment.

This coming Monday, the Robert D. Burch Center on Tax Policy and Public Finance will sponsor a special panel on how institutions shaped, or failed to shape, the new law of the land.

The panel will discuss:

  • Basics of the new tax law
  • What the Joint Committee on Taxation and Congressional Budget Office [staff] actually do
  • How the Executive and Legislative branches interact
  • The role of budget rules and the minority party
  • How 2017 differed from 1986 and with what consequences

Our panel comprises three academics with direct experience in the tax policy process:

  • Edward Kleinbard, Robert C. Packard Trustee Chair in Law, USC Gould School of Law; former Chief of Staff, U.S. Joint Committee on Taxation
  • David Kamin, Professor of Law, NYU School of Law; former Special Assistant to the President for Economic Policy
  • Alan Auerbach, Robert D. Burch Professor of Economics and Law, UC Berkeley; former Deputy Chief of Staff, U.S. Joint Committee on Taxation; current member, Panel of Economic Advisers, Congressional Budget Office
  • Moderator: Danny Yagan, Assistant Professor of Economics, UC Berkeley

Three Books for 2017: Economics for the Common Good, Janesville, Economism

3 books

Ken Murphy asked me for three books for 2017. Mine are: Amy Goldstein: Janesville: An American Story, Jean Tirole: Economics for the Common Good, and James Kwak: Economism: Bad Economics and the Rise of Inequality:

  • Amy Goldstein: Janesville: An American Story (9781501102233): The best of the very large and very uneven crop of ground-level books attempting to explain why those parts of America that are treading water or losing ground have been unable to adapt to changing technology and organization in the global economy…

  • Jean Tirole: Economics for the Common Good (9780691175164): A very wise book on what high-quality economics is and is not, from the guy who was truly the smartest guy in the room back when I spent a year as a young lecturer in the MIT economics department…

  • James Kwak: Economism: Bad Economics and the Rise of Inequality (9781101871195): How a very large part of the economics profession has failed to get the true message of economics through its own biases and the political and ideological filters…


Amy Goldstein: Janesville: An American Story (9781501102233): This is the best of the very large and very uneven crop of ground-level books attempting to explain why those parts of America that are treading water or losing ground have been unable to adapt to changing technology and organization in the global economy. General Motors closed its Janesville plant in 2008 as it teetered on the edge of bankruptcy. Students began showing up at the local high school hungry and dirty. Teachers and others started social service organizations to supply them with supplies and food. Contributions to local charities fell off just when the need spiked. The closing of the GM plant triggered the closing of its nearby supplier plants as well.

The GM assembly-line workers had earned \$30 an hour at the plant. Some—a few—maintain their paychecks by becoming “birds of passage” working at still-open GM plants in other states. Others see their paychecks collapse: settle at jobs paying half as much, and with minimal benefits. For nobody was willing to pay anywhere near \$30 an hour for the skills and the energy of ex-GM workers. And the ex-workers could not use their skills and energy themselves to find a retraining path to anywhere near the pay levels that GM had offered them.

The big flaw, of course, is Amy Goldstein’s ignorance of and unwillingness to learn about the macro picture that makes the closing of the GM plant so devastating for Janesville. Plants, after all, close all the time because the money being spent on the products they had made is diverted to purchase other commodities made more efficiently that promote greater prosperity. Why weren’t the Janesville ex-workers able to benefit from spillovers from that greater efficiency and greater prosperity? Goldstein has no clue.


Jean Tirole: Economics for the Common Good (9780691175164): This is a very wise book on what high-quality economics is and is not, from the guy who was truly the smartest guy in the room back when I spent a year as a young lecturer in the MIT economics department. “The distinctive characteristic of academics”, Tirole writes, “their DNA, is doubt”. This creates a substantial tension: economists need to teach what they know not just to their peers and their students but to the public sphere; but the public sphere today—did it ever?—does not want nuanced arguments from two-handed economists. Cable TV and Twitter do not like to be told: “It is difficult to tell”. Yet, often, that is what Tirole has to say. Nevertheless, Tirole thinks—and I agree—that we have no alternative but to try: we must imagine Sisyphus happy.

In its thoughtful discussions of market-state interactions, boundaries, and synergies; in its focus on the government’s role not in prescribing actions but remedying information and other externalities; in its pleas for a diversified portfolio of institutional forms; in its speculations about the long-run impact of information and communications technology revolutions; in its use of the economics of information as an organizing principle; in its rich institutional detail; in its application of theory to real-world examples; and in its (much appreciated) boosterism for behavioral economics—this is the best book I read in 2017.


James Kwak: Economism: Bad Economics and the Rise of Inequality (9781101871195): This is a very good book about how a very large part of the economics profession has failed to get the true message of economics through its own biases and the political and ideological filters.

First of all, I think the book is mistitled. It is not economics that becomes a misleading and destructive ideological “-ism”. Rather, it is, as my friend Noah Smith puts it, it is Econ 101—supply and demand, and where the curves cross is always the bet place to be—that became a misleading and destructive ideological “-ism”.

Second, as James Kwak writes, Econ 101 became a misleading and destructive ideological “-ism” because it suited the interest of powerful groups with megaphones that it become so: neoclassical economics badly done via those who learned little economics simplistically applying the most basic supply-and-demand models. Our large upward leap in inequality, the financial crash, and the large holes in our safety net are some of the current flaws in America that Kwak traces to 101-ism. And he is in large part correct do so. 101-ism makes people think that whatever inequality there is in the current market is natural and just, and that government policies will always reduce wealth by generating Harberger triangles. And these are very convenient beliefs for plutocrats—not for plutocrats to hold them, but for those who pay rents to plutocrats to hold in order to make plutocrats richer.

Noah Smith hopes that empirical evidence will disrupt and dismantle 101-ism:

The economics discipline itself has been shifting from theory to data for years now, and the world is taking notice. Every time studies show that tax cuts don’t do much to encourage investment, or that the impact of minimum wage hikes is modest, the public loses a little faith in the power of traditional Econ 101. The cure… is more and better economics…. Americans are now starting to question economism because of declining median income, spiraling inequality and a huge financial and economic crisis…

I think Noah is wrong here: 101-ism provides a simple and powerful intellectual framework easily grasped that makes sense of a complicated world and also works to the advantage of people with a great deal of money who benefit from its spread. Thought is vulnerable to simplistic theories which then gain an unshakeable hold. Simplistic theories are easily propagated because they are, well, simplistic. When it is in the interest of someone with resources that others believe a doctrine, they will devote their resources to spreading it. And it is very difficult to convince somebody of anything when their pocketbook or their sense of self-worth depends on their thinking otherwise. 101-ism thus has powerful material and cognitive advantages over alternatives. And the only thing that the alternatives have going for them is that they are the truth.

I think that James Kwak is showing us here both how much and how little arguments based on the truth can do in the modern public sphere.

But, as I said in talking about Jean Tirole’s Economics for the Common Good: we must imagine Sisyphus happy…

Keeping US Policymaking Honest

Project Syndicate: Keeping US Policymaking Honest: This week here at Berkeley I heard great optimism from the illustrious Alice Rivlin. What “technocracy” in the good sense the United States has–what respect is paid to sound analysis and empirical evidence in the making of policy–is due more to Alice Rivlin than to any other living human…. Her founding of the Congressional Budget Office is only one, albeit the most important one, of the times that Alice Rivlin has indeed eaten from and forced the rest of us to eat from the tree of knowledge. And we are all massively better for it… Read more at Project Syndicate

Public Spheres for the Trump Age: Fresh at Project Syndicate

Fresh at Project Syndicate: Public Spheres for the Trump Age https://www.project-syndicate.org/commentary/universities-in-the-age-of-trump-by-j–bradford-delong-2017-07: BERKELEY – In many societies, universities are the main bastions of ideological and intellectual independence. We count on them to transmit our values to the young, and to support short- and long-run inquiries into the human condition. In Donald Trump’s America, they are more important than ever.

Unlike universities, for-profit media enterprises have never been up to the task of nurturing a robust “public sphere.” Inevitably, their coverage reflects enormous pressure to please the base – their advertisers or investors – or at least to avoid giving offense. That is why the American writer and political commentator Walter Lippmann – no stranger to journalism – ultimately put his trust in public intellectuals working in universities, think tanks, or other niches. Read MOAR at Project Syndicate

Hoisted from Ten Years Ago: Back When I Was Much More Optimistic About New Media and the Public Sphere…

Hoisted from June 4, 2007: Neil Henry vs. Jay Rosen Future-of-Journalism Smackdown! http://www.bradford-delong.com/2007/06/neil_henry_vs_j_1.html: “Excuse me, I need to worship my idol a bit more… There… That’s better…

Karl Marx said somewhere that the hand-loom gives you the feudal lord and the power-loom gives you the industrial capitalist. So in 1884 Ottmar Mergenthaler gave us the traditional American twentieth-century newspaper journalism of Charles Foster Kane (and the broadcast TV spectrum allocation gave us Edward R. Murrow and Walter Cronkhite). The Mergenthaler gives you the power to deliver advertisements–classified advertisements, department store advertisements, movie advertisements, new car advertisements–to every household metro-wide for pennies.

But how do you get people to read the advertisements rather than simply throw them away or use them, unread, for birdcage liner? You mix the advertisements with news, and reviews, and sports, and opinion, and entertainment. You make the twentieth-century American newspaper.

Because the ads that are mixed with the best news (and reviews, and sports, and opinion, and entertainment) get read the most, there is pressure on the then new-media moguls–because daily newspapers were once new media in their day–to employ lots of good people and to pay them well.

Over time the business consolidates: papers fold or find their niches, and establish stable competitive positions. Now there are monopoly profits to be distributed–and some of them go to the people who write the news (and reviews, and sports, and opinion, and entertainment). Now there is often an owner who is a big wheel in at least local politics and celebrity, and is willing to pay some out of his pocket to buy a better newspaper to increase his relative status vis-a-vis his or her other power-elite peers. It is a golden age. And, indeed the public sphere, the civic discourse, the informed citizenry created by journalism is well worth its price in terms of the subsidy from advertising profits that high-quality journalism needs.

But without sufficient competition, people and organizations get lazy. William Greider has his off-the-record breakfasts with Reaganite OMB Director David Stockman, who tells Greider that the Reagan administration is lying through all thirty-two of its teeth. William Greider doesn’t tell the reporters working for him “you can sharpen that criticism of the administration and it will still be accurate” or “that defense of the administration is substantively misleading” or “you’ve buried the lead.”

And he’s not alone: think of Clay Chandler or Jonathan Weisman or Sebastian Mallaby or Deborah Howell. All Washington Post reporters with temporary monopolies who have forgotten that their job is to inform their readers, and instead have fallen on their knees before their sources, their editors, their bosses, or the flacks leaving message after message on their answering machines.

And then, one day, the Mergenthaler’s descendants are obsolete, and the necessary link between the ads and the news (and reviews, and sports, and opinion, and entertainment) delivered via the morning paper vanishes. And the pool of money that had subsidized the news dries up.

And then (to be continued)…

Some Notes on Eric Miller’s Review of “Public Intellectuals in the Global Arena”…

Eric Miller: The Unnamed Behemoth: Review of “Public Intellectuals in the Global Arena” http://amzn.to/2pSZyVd: “Deep learning eloquently brought to bear on the contemporary moment has, quite evidently, not been enough to shore up the aging foundations of our republic… https://www.commonwealmagazine.org/unnamed-behemoth

…And a live-from-the-West-Wing Twitter feed is not likely to advance our fortunes, either…. Is the liberal democratic tradition up to the challenge—the challenge of disciplining an economic order that exists not to prosper democracy but itself? On such crucial questions this volume sounds an uncertain note—and a rather quiet uncertain note at that…. No thoroughgoing leftists (seemingly) number among the contributors—none, that is, disposed to warn of enlarging catastrophic conflict between democracy and capital…

(1) But I thought I had done so! Was I too elliptical? “Wealth imbalances alone produce a situation in which… market systems go horribly, dreadfully, diabolically wrong. Consider the Bengal famine…. And what of the British state that ruled India, and was responsible for checking to see whether the incentives the market system was providing really were the incentives that we wanted people to responding to? Prime Minister Winston Churchill sent a telegram, asking: if it were really true that there was famine in India, why was Mohandas Gandhi still alive?…”

(2) The problem, of course, is that the old leftist shibboleth is no longer something anybody can believe in:

The proletariat will use its political supremacy to wrest… centralise all instruments of production in the hands of the State, i.e., of the proletariat organised as the ruling class; and to increase the total productive forces as rapidly as possible…. When… class distinctions have disappeared, and… production has been concentrated in the hands of a vast association of the whole nation… public power will lose its political character… [as] merely the organised power of one class for oppressing another…. In place of… society with its classes and class antagonisms, we shall have an association, in which the free development of each is the condition for the free development of all…

(3) And as Keynes wrote about Trotsky back in 1926:

Granted his assumptions, much of Trotsky’s argument is, I think, unanswerable…. But what are his assumptions?… That a plan exists… that… [that] the proletariat… are converted to the plan… the rest who for purely selfish reasons oppose it…. If we pressed him, I suppose he would mention Marx. And there we will leave him with an echo of his own words–“together with theological literature, perhaps the most useless, and in any case the most boring form of verbal creation.”

Trotsky’s book must confirm us in our conviction of the uselessness, the empty-headedness of Force at the present stage…. All the political parties alike have their origins in past ideas and not in new ideas–and none more conspicuously so than the Marxists. It is not necessary to debate the subtleties of what justifies a man in promoting his gospel by force; for no one has a gospel. The next move is with the head, and fists must wait…

(4) So what is the new gospel—or, rather, what is the public-sphere intellectual-sociological process that we ought to have to discern the new gospel? And do we have that process? And since we do not, how should we go about trying to build it? Those are, I think, the big questions that our book was trying to address, fitfully and unsatisfactorily as we did so.

Back to Eric:

Willy Lam… on… China… places his hope in… “universal norms,” “universal-style democratic institutions,” and “the values enshrined in the charters of the United Nations.”… [Michael] Zuckert too finds the “liberal-democratic tradition” to be “the indispensable ground for our common moral and political life.” But is the liberal democratic tradition up to the challenge—the challenge of disciplining an economic order that exists not to prosper democracy but itself?…

(5) The answer was supposed to be “social democracy”—or, if you preferred, “liberal democratic socialism”, although the S-ism word has, in my view, been too deeply poisoned by the really existing socialisms that existed behind the Iron Curtain for it to be of any positive discursive use. In Polanyian terms, social democracy was supposed to ensure that people had the rights they thought they deserved and expected to see instantiated even though they were not property rights properly—their rights to stable communities, anticipated income levels, and stability of life and economic organization that Polanyi argued a market society undermined by its “fictitious” transformation of land, labor, and finance into “commodities”. Yet somehow there is now not a Polanyian revolt of “society” against the market economy, but rather of some elements of “society” against social democracy—it is not the market economy, but rather social democracy that is seen as illegitimately taxing and regulating the “productive” and giving to the “unproductive”. The question of the breakdown of the social democratic order in the face of first a hard neoliberalist and now a neo-fascist challenge remains poorly understood.

Back to Eric:

Tellingly, many of the book’s authors find themselves preoccupied with structural-functionalist questions regarding the evolving place of public intellectuals… taking for granted… integrity and stability (or… the impossibility of an alternative)… [and] musings on the “role” of intellectuals in it…. Lilla… contends that “the era of liberal idealism that began in the 1980s and spread in the 1990s is over,” and that we now find ourselves illiberally bound to a global behemoth that is yet unnamed—or not named properly: “We have no idea how this system really works, or even what to call it”…

(6) I see those two currents not in opposition but as instead in mutual support: we do not understand the social and societal world in which we are embedded, and yet we must understand—and fulfill—our role in order to even have a chance of creating a society that can make its important choices. “Tradition” is not an alternative—and it never was. There never were societies based on the “traditional” in the sense that what is old is what is good, and the older the better. There were societies in which change came only slowly, so that what had worked for some people in the relatively recent past was likely to work (of only for today’s analogues of those same people) today. There were societies that turned antiquity and habit into an advantageous Burkean judo move: instead buying all new furniture, find a creative, clever, and beneficial way to utilize the furniture you have inherited, no matter how differently you are using it from what its original purchasers used it for. There were societies that pretended that what was convenient to the powerful—even if a rank innovation—was “tradition” because they could not or dared not enunciate any other reason for it.

Well, in our world change does not come slowly. In our world, the Burkean judo move move is of limited use—especially as it tends to slide into the mendacious and destructive third use of “traditional “. Thus when Eric Miller and Michael Zuckert counterpose “tradition” to “public intellectuals” as ways of collectively thinking about who we shall be, he poses a choice that must be false for us. And, to tell the truth, the choice was overwhelmingly false for all of our predecessors as well, back to the Toba volcanic supereruption and the coming of language to the East African Plains Ape. Time scales and mendacity in the context of limited access to documents and history may have masked that for long periods of time. But it was so.

It is public intellectualism or nothing.

Moreover, I think Eric misdiagnoses the current problem:

Today, thanks to the internet, we may have enlarging “public intellectual” presence, but only—and not coincidentally—in the face of an absent public, a public that, having been educated in a fragmented disciplinary and social order, has given itself over to “jobs and private affairs”: Economics 101. We citizens need a new core curriculum… the active presence of that ancient Augustinian city, portending… a civil society founded upon the bedrock of institutions that store up treasure capital cannot see. And we need teachers—intellectuals, if you will—who can help us to see and seize that treasure. Now.

(7) It is not an absent public that is the problem, but a #fakenews and a Fox News public. Most importantly right now, Mike Pence and Teresa May do not seem to have had their conversations with James and Lachlan Murdoch—and with Rupert—on the importance of preparing the way for the #Amendment25 remedies that are now necessary. I mean, making money by terrifying your elderly viewers and so keeping their eyeballs glued so you can sell them overpriced gold and weapons is all fun and games. But somebody is going to lose an eye—indeed, Mossad has in all likelihood already lost assets.

(8) Not, note well, that I understand the public sphere of the early twenty-first century, or how to improve it…


Must-Read: Eric Miller: The Unnamed Behemoth: “In his 2011 book Reading Obama, the historian James Kloppenberg called the president ‘a man of ideas’… https://www.commonwealmagazine.org/unnamed-behemoth

…an “intellectual” who had long “showed the capacity and inclination to mobilize America’s intellectual traditions to bolster democratic political action.” Indeed, in a recent New York Times interview Obama revealed that even during his years in the White House he dedicated himself to reading—in an effort, as he put it, to “slow down and get perspective,” to “get in somebody else’s shoes,” to “maintain my balance.” Unlike many high-profile politicians, he wrote many of his own speeches, trying, as he says future political leaders must, “to tell a better story about what binds us together as a people.”

If Barack Obama embodies the promise of public intellectualism, his own record also reveals its shaky prospects. Deep learning eloquently brought to bear on the contemporary moment has, quite evidently, not been enough to shore up the aging foundations of our republic—much less bind us together as a people. And a live-from-the-West-Wing Twitter feed is not likely to advance our fortunes, either. “The evolving edifice of public intellectualism,” to use the term of Public Intellectuals in the Global Arena’s editor Michael C. Desch, rests on a foundation whose cement seems to be returning to sand. We have it on good information what comes next.

“Once human societies stop being essentially grounded in tradition, something like public intellectualism becomes constitutive,” observes the political scientist Michael Zuckert in his chapter of this volume. And herein lies the challenge these authors—fifteen in all, from a range of disciplines and nationalities—glimpse and name in diverging ways. If our grounding in tradition is gone, and if the enlightened replacement yet continues its deconstructing course, what have the intellectual avatars of the contemporary order to offer?

Economics, apparently. Desch names the discipline “the preeminent home of public intellectuals” in today’s academy; Mark Lilla drily notes that “Economics 101” is now “the world’s de facto core curriculum.”

The economist J. Bradford DeLong agrees, announcing that “Economists are here to tell you what’s what and how to do it”—teachers in the authoritarian mold, it seems. He follows this pronouncement with the observation that, given the triumph of global capital and subsequent failure of any other organizing principle, mere citizens have no choice but to “listen” to economists. “But you have nearly no ability to evaluate what you hear,” he warns. “When we don’t reach a near consensus, then heaven help you.” As DeLong goes to lengths to show, the country—the world—is in the hands of a field that is nowhere close to such consensus. Such news does not reassure the democratic soul.

DeLong baldly states that “a market economy’s underlying calculus is a calculus of doing what wealth wants rather than what people need.” Several contributors are intent on finding a way to thwart that desire and explore alternatives. Willy Lam, writing on the fate of public intellectuals in China—where, he says, their “toughest challenge” is mere “survival”—places his hope in the triumph of what he calls, variously, “universal norms,” “universal-style democratic institutions,” and “the values enshrined in the charters of the United Nations.” Writing from the United States, Zuckert too finds the “liberal-democratic tradition” to be “the indispensable ground for our common moral and political life.”

But is the liberal democratic tradition up to the challenge—the challenge of disciplining an economic order that exists not to prosper democracy but itself?

On such crucial questions this volume sounds an uncertain note—and a rather quiet uncertain note at that. This may have something to do with the fact that on the whole its contributors lean right; indeed, Desch dedicates the book to Allan Bloom and Samuel Huntington. Remarkably, given their incontestably central place in the history of public intellectuals, no thoroughgoing leftists (seemingly) number among the contributors—none, that is, disposed to warn of enlarging catastrophic conflict between democracy and capital.

Tellingly, many of the book’s authors find themselves preoccupied with structural-functionalist questions regarding the evolving place of public intellectuals in contemporary society, taking for granted that society’s integrity and stability (or, just as concerning, the impossibility of an alternative to the current order). The actual “global arena” of the book’s title is often (again, tellingly) lost from view, replaced by musings on the “role” of intellectuals in it. These portions of the book read like a tired update of mid-twentieth-century sociological theory.

But at key moments urgency breaks through. Lilla in fact goes so far as to conjure the ghost of Marx. “Returning to the baroque edifice Marx’s Capital would be a step backward,” he writes. “But acquiring some of Marx’s ambition simply to describe the reality of contemporary capitalism and its political repercussions would be a genuine advance.” He contends that “the era of liberal idealism that began in the 1980s and spread in the 1990s is over,” and that we now find ourselves illiberally bound to a global behemoth that is yet unnamed—or not named properly: “We have no idea how this system really works, or even what to call it.”

Andrew Bacevich—not one to take stability of any kind for granted—writes in a similar register. In his examination of Cold War American intellectuals Bacevich discovers an earlier version of the same analytic deficit Lilla points up, warning that these influential intellectuals, when “faced with a dire threat defined in oversimplified ideological terms,” broadcast “a faux ideological response.” Their tendency to miss the actual historical circumstances for the Big Idea proved costly: they helped leverage “a state-centered militarized version of liberalism.” The result? “Gaping inequality and a culture that has made gods of choice, consumption, and an absence of self-restraint”— a “shallow and insipid definition of freedom,” he none too delicately calls it.

Definitions of freedom may be hammered out in the intellectual sphere, but they begin as social practices in the realm of civil society—that pricey terrain that Lam, for instance, has his eyes on when he thinks hopefully about the prospect of serious, independent intellectuals in China. Even the Communist Party, in its own malign way, grasps this: it has “been reviving Confucianism with gusto,” writes Lam, “so as to fill the spiritual vacuum within citizens who have lost faith in socialism.”

Ahmad S. Moussalli (from the American University of Beirut) senses the same spiritual need in the Middle East. He criticizes “Arab renaissance intellectuals” whose embrace of a liberal, secular vision choked out “an intellectual Muslim modernist and reformist trend,” paving the way for “the authoritarian nationalist state.” Moussalli understands that public order—whether in liberal or authoritarian societies—is bound up in religious vision, ideals, and practices. Political wisdom requires an embrace of this inalienable human reality, however socially complicated such an embrace may be.

But the West has tried, of course, to lead the way in the other direction, a trajectory assessed with acuity by the political theorist Patrick Deneen, who turns our attention to the secularizing currents in the history of higher education. Earlier in our past, he writes, the task of the college teacher was to achieve “the integration of various forms of knowledge,” guided by a “theory of human flourishing” that imagined education’s end to be the cultivation of the “free citizen.” “The structure of the college,” he notes, “reflected the deeper commitment to a universum.”

Today, thanks to the internet, we may have enlarging “public intellectual” presence, but only—and not coincidentally—in the face of an absent public, a public that, having been educated in a fragmented disciplinary and social order, has given itself over to “jobs and private affairs”: Economics 101.

We citizens need a new core curriculum: that much this volume makes clear (even when it’s not trying to). And we need the active presence of that ancient Augustinian city, portending a new one. We need a civil society founded upon the bedrock of institutions that store up treasure capital cannot see. And we need teachers—intellectuals, if you will—who can help us to see and seize that treasure. Now.

The Need for a Reformation of Authority and Hierarchy Among Economists in the Public Sphere

I find that I have much more to say (or, rather, largely, republish), relevant to the current debate between Simon Wren-Lewis and Unlearning Economics.

Let me start by saying that I think Unlearning Economics is almost entirely wrong in his proposed solutions.

Indeed, they does not seem especially knowledgeable about their cases. For example:

  1. the trashing of the Grameen Bank is undeserved;

  2. the blanket denunciation of RCTs as having “benefited global and local elites at the expensive of the poorest” is just bonkers;

  3. Merton and Scholes’s financial math was correct, and the crash of their hedge fund did not require any public-money bailout;

  4. Janine Wedel is not a reliable source on Russian privatization, which I saw and see as the only practical chance to try to head off the oligarchic plutocracy that has grown up in Russia under Yeltsin and Putin (and, no, my freshman roommate Andrei was not prosecuted for “fraud in Russia”, but rather the Boston U.S. Attorney’s office overreached and was unwilling to admit it);

  5. Unlearning Economics confuses the more-sinister Friedrich von Hayek (who welcomed Pinochet’s political “excesses” as a necessary Lykurgan moment) with the truly-libertarian Milton Friedman, who throughout his whole life was dedicated to not telling people what to do, and who saw Pinochet as another oppressive authoritarian who might be induced to choose better rather than worse economic policies;

  6. and then there is Reinhart and Rogoff, where I think Unlearning Economics is right.

So Unlearning Economics is batting 0.170 in their examples of “mainstream economics considered harmful”. But there is that one case. And I do not think that Simon Wren-Lewis handles that one case well. And he needs to–I need to. And, since neither he nor I have, this is a big problem.

Let me put it this way: Carmen Reinhart and Ken Rogoff are mainstream economists.

The fact is that Carmen Reinhart and Ken Rogoff were wrong in 2009-2013. Yet they had much more influence on economic policy in 2009-2013 than did Simon Wren-Lewis and me. They had influence. And their influence was aggressively pro-austerity. And their influence almost entirely destructive.

Simon needs to face that fact squarely, rather than to dodge it. The fact is that the “mainstream economists, and most mainstream economists” who were heard in the public sphere were not against austerity, but rather split, with, if anything, louder and larger voices on the pro-austerity side. (IMHO, Simon Wren-Lewis half admits this with his denunciations of “City economists”.) When Unlearning Economics seeks the destruction of “mainstream economics”, he seeks the end of an intellectual hegemony that gives Reinhart and Rogoff’s very shaky arguments a much more powerful institutional intellectual voice by virtue of their authors’ tenured posts at Harvard than the arguments in fact deserve. Simon Wren-Lewis, in response, wants to claim that strengthening the “mainstream” would somehow diminish the influence of future Reinharts and Rogoffs in analogous situations. But the arguments for austerity that turned out to be powerful and persuasive in the public sphere came from inside the house!

Simon Wren-Lewis: On Criticising the Existence of Mainstream Economics: “I’m very grateful to Unlearning Economics (UE) for writing in a clear and forceful way a defence of the idea that attacking mainstream economics is a progressive endeavor…

…I think such attacks are far from progressive…. Devoting a lot of time to exposing students to contrasting economic frameworks (feminist, Austrian, post-Keynesian)… means cutting time spent on learning the essential tools that any economist needs…. Let me start at the end of the UE piece:

The case against austerity does not depend on whether it is ‘good economics’, but on its human impact. Nor does the case for combating climate change depend on the present discounted value of future costs to GDP. Reclaiming political debate from the grip of economics will make the human side of politics more central, and so can only serve a progressive purpose…

Austerity did not arise because people forgot about its human impact. It arose because politicians, with help from City economists, started scare mongering about the deficit…. Every UK household knew that your income largely dictates what you can spend, and as long as the analogy between that and austerity remained unchallenged, talk about human impact would have little effect…. The only way to beat austerity is to question the economics on which it is based…. Having mainstream economics, and most mainstream economists, on your side in the debate on austerity is surely a big advantage….

Where UE is on stronger ground is where they question the responsibility of economists…. Politicians grabbed hold of the Rogoff and Reinhart argument about a 90% threshold for government debt:

Where was the formal, institutional denunciation of such a glaring error from the economics profession, and of the politicians who used it to justify their regressive policies? Why are R & R still allowed to comment on the matter with even an ounce of credibility? The case for austerity undoubtedly didn’t hinge on this research alone, but imagine if a politician cited faulty medical research to approve their policies—would institutions like the BMA not feel a responsibility to condemn it?”

I want to avoid getting bogged down in the specifics of this example, but instead just talk about generalities…. If some professional body started ruling on what the consensus among economists was… [that] would go in completely the opposite direction from what most heterodox economists wish…. There is plenty wrong with mainstream economics, but replacing it with schools of thought is not the progressive endeavor that some believe. It would just give you more idiotic policies like Brexit.

What did Reinhart and Rogoff say? What Let me turn the mike over to Tom Cotton:

Reinhart and Rogoff had… dismantl[ed] the mistaken belief… that this particular group of [Democratic] policymakers in this moment in history was somehow smarter than all the others and could run up debt forever without catastrophic consequences…. They wrote:

We have been here before. No matter how different the latest financial frenzy or crisis always appears, there are usually remarkable similarities with past experience from other countries and from history. Recognizing these analogies and precedents is an essential step toward improving our global financial system, both to reduce the risk of future crisis and to better handle catastrophes when they happen…

The student senators began asking questions with a sincere curiosity cynics would find disarming. Johnny Isakson, a Republican from Georgia and always a gentleman, stood up to ask his question: “Do we need to act this year? Is it better to act quickly?” “Absolutely,” Rogoff said: “Not acting moves the risk closer,” he explained, because every year of not acting adds another year of debt accumulation. “You have very few levers at this point….” Neither Reinhart nor Rogoff said we could fix our debt problem with just tax increases. Both emphasized the need for comprehensive tax reform and tax code simplification…. “I don’t want to be fire and brimstone,” Rogoff said. “No one knows when this will happen.” Yet, he added, “It takes more than two years to turn the ship around…. Once you’ve waited too long, it’s too hard to take radical steps”…

Plus there are things like Rogoff’s:

Debt levels of 90% of GDP are a long-term secular drag on economic growth that often lasts for two decades or more…. There is two-way feedback between debt and growth, but normal recessions last only a year and cannot explain a two-decade period of malaise. The drag on growth is more likely to come from the eventual need for the government to raise taxes, as well as from lower investment spending. So, yes, government spending provides a short-term boost, but there is a trade-off with long-run secular decline…

Simon Wren-Lewis wants to say:

  • mainstream economists good
  • City economists bad
  • Feminist, Austrian, post-Keynesian economists unhelpful because they distract focus from the powerful mainstream arguments that austerity is bad.

And the problem is that Carmen Reinhart and Ken Rogoff are not “City” but mainstream economists—as are Martin Feldstein, John Taylor, Greg Mankiw, Glenn Hubbard, Eugene Fame, Robert Lucas, Robert Barro, and a huge host of others pro-austerity throughout 2008-2017. That is the elephant in the room that Simon needs to face. And when he writes that he wants to “avoid getting bogged down in the specifics of this example”, he evades UE’s big question and fails to make the argument he needs to make.


Background:

Why Are Reinhart and Rogoff—and Other Mainstream Economists—so Wrong?

On a psychological level—for an explanation of why they said and wrote what they said and wrote—I have no explanation. On the technocratic level, there is a lot to say:

When Carmen Reinhart and Kenneth Rogoff wrote their “Growth in a Time of Debt”, they asked the question:

Outsized deficits and epic bank bailouts may be useful in fighting a downturn, but what is the long run macroeconomic impact or higher levels of government debt, especially against the backdrop of graying populations and rising social insurance costs?

They concluded that over the past 200 years:

[T]he relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of [annual] GDP. Above 90 percent, median growth rates fall by one percent, and average growth… more… in [both] advanced and emerging economies…. [In] emerging markets… [w]hen external debt reaches 60 percent of GDP, annual growth declines by about two percent…. [T]here is no apparent contemporaneous link between inflation and public debt levels for the advanced countries…. The story is entirely different for emerging markets, where inflation rises sharply as debt increases.

And the graph that caught the world’s imagination was:

NewImage

The principal mistake Reinhart and Rogoff committed in their analysis and paper–indeed, the only significant mistake in the paper itself–was their use of the word “threshold”.

It and the graph led very many astray.

For example, it led the almost-always-unreliable Washington Post editorial board to condemn the:

new school of thought about the deficit…. ‘Don’t worry, be happy. We’ve made a lot of progress’, says an array of liberal pundits… [including] Martin Wolf of the Financial Times… their analysis assumes steady economic growth and no war. If that’s even slightly off, debt-to-GDP could… stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth…

(Admittedly, experience since the start of the millennium gives abundant evidence that the Washington Post needs no empirical backup from anybody in order to lie and mislead in whatever way the wind blows.)

It misled European Commissioner Olli Rehn to claim that:

When [government] debt reaches 80-90% of GDP, it starts to crowd out activity in the private sector and other parts of the economy…

Both of these–and a host of others–think that if debt-to-annual-GDP is less than 90% (or, in Rehn’s case, 80%, and I have no idea where the 80% comes from) an economy is safe, and that only if it is above 90% is the economy’s growth in danger. And in their enthusiasm when they entered congressional briefing mode it led Reinhart and Rogoff themselves astray.

Yet the threshold at 90% is not there. In no sense is there empirical evidence that a 90% ratio of debt-to-annual-GDP is in any sense an “important marker”, a red line. That it appears to be in Reinhart and Rogoff’s paper is an artifact of Reinhart and Rogoff’s non-parametric method: throw the data into four bins, with 90% the bottom of the top bin. There is, instead, a gradual and smooth decline in growth rates as debt-to-annual-GDP increases. 80% looks only trivially different than 100%.
Owen Zidar provides what seems to me at least to be a much more informative cut at the data:

NewImage

and he writes:

I took all countries with Public Debt to GDP ratios above 50… evenly divided them into 50 equalized sized bins of Debt to GDP… plot the mean of the outcome of interest for each bin…. [This] would show clean breaks at a Debt to GDP ratio of 90 if they actually exist…

There is no 90% threshold. Making policy under the belief that risks at 100% are very different than risks at 80% is in no way supported by any of the data.

Moreover, there is the big question of how much of this decline in growth as debt rises is cause for fear? Correlation, after all, is only sometimes causation. Ken Rogoff claims that this is one of those cases. Is he write?

First, a good deal of this high-debt-to-GDP growth-decline correlation comes from countries where interest rates tend to be higher and the stock market tends to be lower where government debt is higher. That is simply not relevant to the U.S. today.

Second, a good deal of this correlation comes from countries where inflation rates are higher when government debt is higher. That is not relevant to the U.S. today.

Third, a good deal more of this correlation comes from countries where growth was already slow, and high government debt relative to GDP is, as Larry Summers constantly says, a result not of the numerator but of previous trends in the denominator. That is not relevant to the U.S. today.

How much of this correlation is left for a country with low interest rates, low inflation rates, buoyant stock prices, and healthy prior growth? We need to know that before we can even begin to analyze causation.

And the answer is: not much, if any. Until interest and inflation rates begin to rise above normal levels or the stock market tanks, there is little risk to accumulating more government debt here in the United States. And there are large potential benefits from solving our real low employment and slack capacity problems right now

What did I mean by “not much”? Let me highlight a passage from the “Understanding Our Adversaries” evolution-of-economists’-views talk that I have been giving for several months now, a passage based on work by Owen Zidar summarized by the graph above:

The argument [for fiscal contraction and against fiscal expansion in the short run] is now: never mind why, the costs of debt accumulation are very high. This is the argument made by Reinhart, Reinhart, and Rogoff: when your debt to annual GDP ratio rises above 90%, your growth tends to be slow. This is the most live argument today. So let me nibble away at it:

  1. Note well: no cliff at 90%.

  2. RRR present a correlation–not a causal mechanism, and not a properly-instrumented regression. There argument is a claim that high debt-to-GDP and slow subsequent growth go together, without answering the question of which way causation runs. Let us answer that question. And the answer is that the bulk of causation is not there, and provides no reason for the U.S. to fear.

  3. Note is how small the correlation is.

Suppose that all of the correlation is causation from higher debt to slower growth. Let us then consider two cases: a multiplier of 1.5 and a multiplier of 2.5, both with a marginal tax share of 1/3. Suppose the growth-depressing effect lasts for 10 years. And suppose that we boost government spending by 2% of GDP.

Let us boost government spending for this year only in the first case. Output this year then goes up by 3% of GDP. Debt goes up by 1% of GDP taking account of higher tax collections. This higher debt then reduces growth by… wait for it… 0.006% points per year. After 10 years GDP is lower than it would otherwise have been by 0.06%. 3% higher GDP this year and slower growth that leads to GDP lower by 0.06% in a decade. And this is supposed to be an argument against expansionary fiscal policy right now?

The 2.5 multiplier case is more so. Spend an extra 2% of GDP over each of the next three years. Collect 15% of a year’s extra output as a plus in the short run. Taking account of higher tax revenues, debt goes up by 1% of GDP, and we have the same ten-year depressing effect of 0.06% of GDP.

15% now. -0.06% in a decade.

The first would be temporary, the second is permanent, but even so the costs are much less than the benefits as long as the economy is still at the zero lower bound.

And this isn’t the graph that you were looking for. You want the causal graph. That, worldwide, growth is slow for other reasons when debt is high for other reasons or where debt is high for other reasons is in this graph, and should not be. Control for country and era effects and Owen reports that the -0.06% becomes -0.03%. As Larry Summers never tires of pointing out, (a) debt-to-annual-GDP ratio has a numerator and a denominator, and (b) sometimes high-debt comes with high interest rates and we expect that to slow growth but that is not relevant to the North Atlantic right now. If the ratio is high because of the denominator, causation is already running the other way. We want to focus on cases of high debt and low interest rates. Do those two things and we are down to a -0.01% coefficient.

We are supposed to be scared of a government-spending program of between 2% and 6% of a year’s GDP because we see a causal mechanism at work that would also lower GDP in a decade by 0.01% of GDP?

That does not seem to me to compute.

As a very smart old Washington hand wrote me:

True, but the 90% red line seemed to say there is nothing more important than moving debt down relative to GDP (though Ken and Carmen would probably acknowledge that faster growth, say through some even more forceful unconventional monetary policy, was a legitimate means to do that).


And why not add more? From my Notre Dame Paper:

IV. We Dwell Not in the Republic of Plato But in the Sewer of Romulus

In the last days before the coming of the Roman Empire, Marcus Tullius Cicero in Rome wrote to his best correspondent Titus Pomponius Atticus in Athens:

You cannot love our dear [Marcus Porcius] Cato any more than I do; but the man – although employing the finest mind and possessing the greatest trustworthiness – sometimes harms the Republic. He speaks as if we were in the Republic of Plato, and not in the sewer of Romulus…

Whatever you may think about economists’ desires to use their technical and technocratic expertise to reduce the influence of both the Trotskys and the St. Benedicts in the public square, there is the prior question of whether here and now – in this fallen sublunary sphere, among the filth of Romulus – they have and deploy any proper technical and technocratic expertise at all. And we seem to gain a new example of this every week.

The most salient relatively-recent example was provided by Carmen Reinhart and Kenneth Rogoff[39][39] – brilliant, hard-working economists both, from whom I have learned immense amounts. Rogoff’s depth of thought and breadth of knowledge about how countries act and how economies respond in the arena of the international monetary system is a global treasure. Reinhart’s breadth and depth of knowledge about how governments have issued, financed, amortized, paid off, or not paid off their debts over the past two centuries is the greatest in the world.

Debt to GDP Ratio and Future Economic Growth pdf page 5 of 6

However, they believed that the best path forward for the developed economies – the U.S., Germany, Britain, and Japan – was for them to shrink their government deficits quickly and quickly halt the accumulation of and begin to pay down government debt. My faction, by contrast, believed that the best path forward for these economies was for them to expand their government deficits now and let the debt grow until either economies recover to normal levels of employment or until interest rates begin to rise significantly.

Why does my faction disagree with them? Let me, first, rely on the graph above that is the product of work by Berkeley graduate student Owen Zidar, plotting how economic growth in different industrialized countries in different eras has varied along with the amount of government debt that they had previously accumulated. And let me give the explanation of why I disagree with Reinhart and Rogoff that I was giving at seminars around the country in the early 2010s:

The argument [for fiscal contraction and against fiscal expansion in the short run] is now: never mind why, the costs of debt accumulation are very high. This is the argument made by Reinhart and Rogoff: when your debt to annual GDP ratio rises above 90%, your growth tends to be slow.

This is the most live argument today. So let me nibble away at it. And let me start by presenting the RRR case in the form of Owen Zidar’s graph.

First: note well: no cliff at 90%.

Second, RRR present a correlation – not a causal mechanism, and not a properly-instrumented regression. Their argument is a claim that high debt-to-GDP and slow subsequent growth go together, without answering the question of which way causation runs. Let us answer that question.

The third thing to note is how small the correlation is. Suppose that we consider two cases: a multiplier of 1.5 and a multiplier of 2.5, both with a marginal tax share of 1/3. Suppose the growth-depressing effect lasts for 10 years. Suppose that all of the correlation is causation running from high debt to slower future growth. And suppose that we boost government spending by 2% of GDP this year in the first case. Output this year then goes up by 3% of GDP. Debt goes up by 1% of GDP taking account of higher tax collections. This higher debt then reduces growth by… wait for it… 0.006% points per year. After 10 years GDP is lower than it would otherwise have been by 0.06%. 3% higher GDP this year and slower growth that leads to GDP lower by 0.06% in a decade. And this is supposed to be an argument against expansionary fiscal policy right now?

The 2.5 multiplier case is more so. Spend 2% of GDP over each of the next three years. Collect 15% of a year’s extra output in the short run. Taking account of higher tax revenues, debt goes up by 1% of GDP and we have the same ten-year depressing effect of 0.06% of GDP. 15% now. -0.06% in a decade. The first would be temporary, the second is permanent, but even so the costs are much less than the benefits as long as the economy is still at the zero lower bound.

And this isn’t the graph that you were looking for. You want the causal graph. That, worldwide, growth is slow for other reasons when debt is high for other reasons or where debt is high for other reasons is in this graph, and should not be. Control for country and era effects and Owen reports that the -0.06% becomes -0.03%. As Larry Summers never tires of pointing out, (a) debt-to-annual-GDP ratio has a numerator and a denominator, and (b) sometimes high-debt comes with high interest rates and we expect that to slow growth but that is not relevant to the North Atlantic right now. If the ratio is high because of the denominator, causation is already running the other way. We want to focus on cases of high debt and low interest rates. Do those two things and we are down to a -0.01% coefficient.

We are supposed to be scared of a government-spending program of between 2% and 6% of a year’s GDP because we see a causal mechanism at work that would also lower GDP in a decade by 0.01% of GDP? That does not seem to me to compute.

Now I have been nibbling the RRR result down. Presumably they are trying to see if it can legitimately be pushed up. This will be interesting to watch over the next several years, because RRR is the heart of the pro-austerity case right now.

That ends what I would typically try to say.

And that is as concise and simple an explanation of why I disagree with Reinhart and Rogoff as I can give.

If you are not a professional economist and have managed to understand that, I salute you.

They disagree with me, first, they started with different prior beliefs – different assumptions about the relative weight to be given to different scenarios and the relative risks of different courses of action that lead them to read the evidence differently. Second, they made some data processing errors – although those are a relatively minor component of our differences – and are now dug in, anchored to the positions they originally took, and rationalizing that the data processing errors do not change the qualitative shape of the picture. Third, they have made different weighting decisions as to how to handle the data. Is Owen Zidar putting his thumb on the scales, and weighting the data because he knows that the effects of high debt in reducing growth are small? I don’t think so: his weighting scheme is simple, and he is too young to be dug in and have a dog in this fight. But I am, perhaps, not the best judge.

But when we venture out of data collection and statistics and the academy into policy advocacy in the public square the differences become very large indeed. Matthew O’Brien quotes Senator Tom Coburn’s report on Reinhart and Rogoff’s briefing of the Republican Congressional Caucus in April 2011:

Johnny Isakson, a Republican from Georgia and always a gentleman, stood up to ask his question: “Do we need to act this year? Is it better to act quickly?”

“Absolutely,” Rogoff said. “Not acting moves the risk closer,” he explained, because every year of not acting adds another year of debt accumulation. “You have very few levers at this point,” he warned us.

Reinhart echoed Conrad’s point and explained that countries rarely pass the 90 percent debt-to-GDP tipping point precisely because it is dangerous to let that much debt accumulate. She said, “If it is not risky to hit the 90 percent threshold, we would expect a higher incidence.”

I think we have by far the better of the argument. Yet it is very clear that even today Reinhart and Rogoff – and allied points by economists like Alberto Alesina, Francesco Giavazzi, et al., where I also think we have the better of the argument by far – have had a much greater impact on the public debate than my side has.

Thus, the key problem of knowledge: Since technical details matter, conclusions must be taken by non-economists on faith in economists’ expertise, by watching the development of a near-consensus of economists, and by consonance with observers’ overall world-view. But because political and moral commitments shape how we economists view the evidence, we economists will never reach conclusions with a near-consensus – even putting to one side those economists who trim their sails out of an unwarranted and excessive lust for high federal office. And note that neither Carmen Reinhart nor Kenneth Rogoff have such a lust.

We do not live in the Republic of Plato. We live in the Sewer of Romulus. In this fallen sublunary sphere, the gap between what economists should do and be and what they actually are and do is distressingly large, and uncloseable.

And this leaves you – those of you who must listen to we economists when we speak as public intellectuals in the public square – with a substantial problem.


V. Should You Pay Attention to Economists as Public Intellectuals in the Public Square?

You have to.

You have no choice.

You all have to listen.

But you have nearly no ability to evaluate what you hear. When we don’t reach a near-consensus, then Heaven help you. Unless you are willing make me intellectual dictator and philosopher-king, I cannot.

Weekend Reading: George Orwell (1946): In Front of Your Nose

George Orwell (1946): In Front of Your Nose: “Many recent statements in the press have declared…

…that it is almost, if not quite, impossible for us to mine as much coal as we need for home and export purposes, because of the impossibility of inducing a sufficient number of miners to remain in the pits. One set of figures which I saw last week estimated the annual ‘wastage’ of mine workers at 60,000 and the annual intake of new workers at 10,000. Simultaneously with this—and sometimes in the same column of the same paper—there have been statements that it would be undesirable to make use of Poles or Germans because this might lead to unemployment in the coal industry. The two utterances do not always come from the same sources, but there must certainly be many people who are capable of holding these totally contradictory ideas in their heads at a single moment.

This is merely one example of a habit of mind which is extremely widespread, and perhaps always has been.

Bernard Shaw, in the preface to “Androcles and the Lion”, cites as another example the first chapter of the Gospel of Matthew, which starts off by establishing the descent of Joseph, father of Jesus, from Abraham. In the first verse, Jesus is described as ‘the son of David, the son of Abraham’, and the genealogy is then followed up through fifteen verses: then, in the next verse but one, it is explained that as a matter of fact Jesus was not descended from Abraham, since he was not the son of Joseph.

This, says Shaw, presents no difficulty to a religious believer, and he names as a parallel case the rioting in the East End of London by the partisans of the Tichborne Claimant, who declared that a British working man was being done out of his rights.

Medically, I believe, this manner thinking is called schizophrenia: at any rate, it is the power of holding simultaneously two beliefs which cancel out. Closely allied to it is the power of igniting facts which are obvious and unalterable, and which will have to be faced sooner or later. It is especially in our political thinking that these vices flourish. Let me take a few sample subjects out of the hat. They have no organic connexion with each other: they are merely cased, taken almost at random, of plain, unmistakable facts being shirked by people who in another part of their mind are aware to those facts.

  1. Hong Kong: For years before the war everyone with knowledge of Far Eastern conditions knew that our position in Hong Kong was untenable and that we should lose it as soon as a major war started. This knowledge, however, was intolerable, and government after government continued to cling to Hong Kong instead of giving it back to the Chinese. Fresh troops were even pushed into it, with the certainty that they would be uselessly taken prisoner, a few weeks before the Japanese attack began. The war came, and Hong Kong promptly fell — as everyone had known all along that it would do.

  2. Conscription: For years before the war, nearly all enlightened people were in favour of standing up to Germany: the majority of them were also against having enough armaments to make such a stand effective. I know very well the arguments that are put forward in defence of this attitude; some of them are justified, but in the main they are simply forensic excuses. As late as 1939, the Labour Party voted against conscription, a step which probably played its part in bringing about the Russo-German Pact and certainly had a disastrous effect on morale in France. Then came 1940 and we nearly perished for lack of a large, efficient army, which we could only have had if we had introduced conscription at least three years earlier.

  3. The Birthrate: Twenty or twenty-five years ago, contraception and enlightenment were held to be almost synonymous. To this day, the majority of people argue—the argument is variously expressed, but always boils down to more or less the same thing—that large families are impossible for economic reasons. At the same time, it is widely known that the birthrate is highest among the low-standard nations, and, in our population, highest among the worst-paid groups. It is also argued that a smaller population would mean less unemployment and more comfort for everybody, while on the other hand it is well established that a dwindling and ageing population is faced with calamitous and perhaps insoluble economic problems. Necessarily the figures are uncertain, but it is quite possible that in only seventy years our population will amount to about eleven millions, over half of whom will be Old Age Pensioners. Since, for complex reasons, most people don’t want large families, the frightening facts can exist some where or other in their consciousness, simultaneously known and not known.

  4. U.N.O.: In order to have any efficacy whatever, a world organization must be able to override big states as well as small ones. It must have power to inspect and limit armaments, which means that its officials must have access to every square inch of every country. It must also have at its disposal an armed force bigger than any other armed force and responsible only to the organization itself. The two or three great states that really matter have never even pretended to agree to any of these conditions, and they have so arranged the constitution of U.N.O. that their own actions cannot even be discussed. In other words, U.N.O.’s usefulness as an instrument of world peace is nil. This was just as obvious before it began functioning as it is now. Yet only a few months ago millions of well-informed people believed that it was going to be a success.

There is no use in multiplying examples. The point is that we are all capable of believing things which we know to be untrue, and then, when we are finally proved wrong, impudently twisting the facts so as to show that we were right. Intellectually, it is possible to carry on this process for an indefinite time: the only check on it is that sooner or later a false belief bumps up against solid reality, usually on a battlefield.

When one looks at the all-prevailing schizophrenia of democratic societies, the lies that have to be told for vote-catching purposes, the silence about major issues, the distortions of the press, it is tempting to believe that in totalitarian countries there is less humbug, more facing of the facts. There, at least, the ruling groups are not dependent on popular favour and can utter the truth crudely and brutally. Goering could say ‘Guns before butter’, while his democratic opposite numbers had to wrap the same sentiment up in hundreds of hypocritical words.

Actually, however, the avoidance of reality is much the same everywhere, and has much the same consequences. The Russian people were taught for years that they were better off than everybody else, and propaganda posters showed Russian families sitting down to abundant meal while the proletariat of other countries starved in the gutter. Meanwhile the workers in the western countries were so much better off than those of the U.S.S.R. that non-contact between Soviet citizens and outsiders had to be a guiding principle of policy. Then, as a result of the war, millions of ordinary Russians penetrated far into Europe, and when they return home the original avoidance of reality will inevitably be paid for in frictions of various kinds. The Germans and the Japanese lost the war quite largely because their rulers were unable to see facts which were plain to any dispassionate eye.

To see what is in front of one’s nose needs a constant struggle. One thing that helps toward it is to keep a diary, or, at any rate, to keep some kind of record of one’s opinions about important events. Otherwise, when some particularly absurd belief is exploded by events, one may simply forget that one ever held it. Political predictions are usually wrong. But even when one makes a correct one, to discover why one was right can be very illuminating. In general, one is only right when either wish or fear coincides with reality. If one recognizes this, one cannot, of course, get rid of one’s subjective feelings, but one can to some extent insulate them from one’s thinking and make predictions cold-bloodedly, by the book of arithmetic.

In private life most people are fairly realistic. When one is making out one’s weekly budget, two and two invariably make four. Politics, on the other hand, is a sort of sub-atomic or non-Euclidean word where it is quite easy for the part to be greater than the whole or for two objects to be in the same place simultaneously. Hence the contradictions and absurdities I have chronicled above, all finally traceable to a secret belief that one’s political opinions, unlike the weekly budget, will not have to be tested against solid reality.

Must-read: Brian Feldman: “A Bunch of Websites Migrate to Medium–Following: How We Live Online”

Must-Read: Brian Feldman: A Bunch of Websites Migrate to Medium–Following: How We Live Online: “Medium has now placed its bets firmly on the ‘platform’ side of its bipolar business…

…It makes sense. Of the many reasons given for the decline of the media establishment, one of the most compelling has been the technological blind spot of many publishing companies, which operate at a slower pace than the portals and social networks that dictate how much traffic they receive. Part of the reason that BuzzFeed–to name the most prominent example–ate everyone else’s lunch so quickly is due to their substantial in-house tech department. Many others outsource development of new features to contractors. Medium wants to be everyone’s tech department (and, eventually, their ad department as well). In return for bearing the brunt of that work, Medium gets a bunch of publications to publish good stuff on their platform. And for a small website in particular, the pitch is good….

The dream of the internet, with its low overhead and near-infinite user base, is that a smart publication can find a large audience whose attention and traffic can sustain it. But it’s increasingly clear that the demands of the web economy are squeezing out the already-small middle class of independent content creators — even those with audiences in the hundreds of thousands. If Medium can help small and self-sustaining publishers like the Awl and Pacific Standard be better, for longer, that’s something to celebrate. But it also feels like the latest in a series of increasingly clear signals that the display-ad model, relying as it does on irritating and cheap programmatic ad networks, and competition with much larger publications (not to mention social networks), is not a sustainable business model even for the smart and popular.