Category: Equitablog

David Wessell: “From @macroadvisers Q1-2014 GDP Tracking -2.1%; Q2-2014 GDP Tracking 3.7%…”

Noah Smith: Japan’s Abe Is the World’s Best Leader: “I was a Shinzo Abe skeptic…

…When Abe swept back into power in 2012, I thought he was just going to try to talk down the yen and give a little boost to stocks, increasing his public support just long enough to ram through a revision of Japan’s pacifist constitution. I thought he was going to ignore Japan’s moribund economy and long-festering social problems in order to throw red meat to his right-wing backers. Boy, was I wrong. I was wrong, wrong, wrong…. Shinzo Abe is the most effective national leader in the world right now… the biggest monetarist push in world history. He went the opposite direction of Europe, and–unlike the U.S.–he gave every indication that the shift toward [expansionary] monetarism was permanent. The result: Japan has escaped deflation. The stock market is up, growth is way up and even wages are finally starting to rise…. Unlike everyone else… Abe listened to Milton Friedman, and the results are looking good. As the Fed contemplates not whether to taper its quantitative easing but how fast, it might want to look at what’s happening in Japan. But monetary policy was just the beginning… the role of women… moving to cut Japan’s corporate tax rate… deregulation efforts… suggested bringing in 200,000 immigrants a year…. He has turned his nationalism into something that looks like liberal internationalism, standing up for the various small Asian countries… championing the rule of law and the freedom of the seas…. But where Abe really shines is in comparison with previous Japanese leaders… The rest of the world should be paying attention.

Matt Bruenig: Fertility Rates and Government Intervention: ” I have been writing on the weird conservative tax plan…

…to give money to every parent who isn’t poor (I, II, III). This is not how it was initially sold of course. My favorite in the genre of extreme deception about the plan came from Reihan Salam who wrote an entire piece… as if he wants to assist all parents: it’s costly to raise kids, kids are important for the future, etc. He never lets on that his actual plan is not a natalist policy… but a policy to give more money to all parents who aren’t poor. The exclusion of the poor from this massive welfare state expansion is curious on a number of grounds. The US has the highest child poverty rates in the developed world precisely because we have pathetic levels of family benefits. Excluding the poor from an expansion in family welfare benefits seems particularly cruel in that context….

The argument is that the government distorts incentives to have children by intervening in the economy via creating Social Security and Medicare. And so this plan to give money to every parent except the poor ones will correct that… hold all else equal in society, but then tick SS and Medicare off and guess as to how many more kids that ticking off would result in. But that does not tell us how many children there would be without government intervention. We should hold all else equal in society and then tick off property law, contract law, securities law, corporate law, commercial law, patent law, copyright law, and every single government economic institution. I’d guess that ticking off all of those institutions, and thereby bringing us to the world ‘without government intervention’… would cause national income to plummet and birth rates to massively spike, maybe to seven children per woman…. It’s such an out-of-left-field argument here that it is extremely difficult to imagine anyone started with ‘let’s end child-having distortions’ and then worked their way to this proposal. What’s more likely is they started with this proposal and then worked backwards towards some argument for it…

Markus Bruckner et al.: National Income and Its Distribution: “Does the distribution of income within a country…

…become more equal as it grows richer? This paper uses plausibly exogenous variations in trade-weighted world income and international oil price shocks as instruments for within-country variations in countries’ real GDP per capita to examine this issue for a large sample of advanced and developing countries. Our findings indicate that increases in national income have a significant moderating effect on income inequality: a one percent increase in real GDP per capita, on average, reduces the Gini coefficient by around 0.08 percentage points, a result that is robust across income levels, different time horizons, and alternative estimation techniques. From a policy perspective, our results suggest that education policies that promote equity and help individuals continue on to higher levels of education could help reduce income inequality…

Patrick Iber: In defeating House majority leader Eric Cantor in his Republican Party primary, Tea Party-identified David Brat has surprised the political world—including Eric Cantor, whose pollsters assured him he had a comfortable lead. (It has also done some damage to the no-doubt partly-true thesis that the difference between the Tea Party insurgents and the “mainstream” Republican Party had narrowed to the point of insignificance.) Brat defeated Cantor in spite of having only a fraction of Cantor’s power, a fraction of his spending, and a fraction of his allies. Journalists and poltiicos have since been scrambling to learn more about Brat’s thinking. Because Brat is a professor of economics and business at Randolph-Macon College, he has left a large paper trail. Many Tea Party-aligned works—such as W. Cleon Skousen’s The 5,000 Year Leap, a dreadful “history” of the United States as a Christian nation—have been offensive to professional standards. Does Brat’s work fit into that category? No.

There is, unsurprisingly, no question that Brat is a conservative. He is to the right of Cantor on most issues. He ran against Cantor’s “corruption,” something that seems consonant with a 2011 essay titled “God and Advanced Mammon—Can Theological Types Handle Usury and Capitalism?” There, he warns of both conservative and liberal hypocrisy and calls for a church that coexists with modern capitalism. (He also writes that he has “the sinking feeling” that someone like Hitler could rise again.)

Brat also administers a $500,000 grant from Branch Banking & Trust Company to teach the “moral foundations of capitalism” at Randolph-Macon, a program that teaches the “free market” principles of Ayn Rand. Brat says that he himself is not a “Randian,” though he says he has been influenced by her works and her perspective. (Rand, of course, was an atheist who thought that belief in God was irrational. One reasonable hypothesis would be that Brat shares Rand’s views of capitalism, but doesn’t accept the anti-religious elements of her worldview.) In an interview in 2010, Brat asserted that “[t]he latest in economic research shows that ethical ideas may matter just as much as traditional economic variables in generating long-run economic growth.”

His works make clear that the intersection of religion and capitalism has long been a matter of interest and concern. And though the published work mentioned above shows no signs of meeting high academic standards, he did earn a Ph.D. in economics in 1996 from American University. His dissertation was called “Human Capital, Religion, and Economic Growth,” and situates itself in the large debate about why some countries are rich and some are poor. Like many dissertations in economics, it is split into three semi-related chapters, at least some of which were later published as journal articles.

What ties the dissertation chapters together is an interest in the stock of total social knowledge within nations. Brat believes that this aggregate “research and development” capital does a great deal to explain the differences between rich and poor nations: the more, obviously, the better.

The first chapter of his dissertation is concerned with “[Research & Development] Spillovers and International Convergence,” and focuses on R&D “spillovers” from those that do the research to those that don’t, and finds that these spillovers contribute to the convergence between rich and poor economies. It also argues that the effect of research and development capital is stronger than the effect of human capital, defined in a limited way as investments in secondary education. The second chapter of the dissertation, “Inequality among Nations,” examines changes in inequality between 1960 and 1988. He finds that global inequality worsened over that period, and attributes the differences to R&D investment. In the absence of “spillover” that he explored in Chapter 1, he argues, inequality would be even worse.

But why, he asks at the end of the chapter, are human capital inputs such as scientists so unevenly distributed throughout the world? It’s a question that he addresses in the third chapter of dissertation, which, by appearances within the text and also given his subsequent career, seems like the most personal. (It also takes up about half of the pages of the dissertation.) In chapter 3, “Science and Religion in the 19th Century,” Brat contributes to a debate in historical sociology that stretches back to Max Weber about the role of religion in economic growth. (Weber, though briefly discussed, is shockingly not cited in the dissertation.)

Like Weber, Brat believes that Protestantism shapes other social institutions in a way that leads to economic growth. For Brat, however, it is not so much that Protestantism inculcates personal thrift and hard-work, but, more importantly, that it is most compatible with the rise of science. Brat’s hero of economic growth is not the Calvinist farmer or shopkeeper, but the Protestant scientist.

The chapter examines the rise of scientific education in (Protestant) Germany and England and contrasts it with Catholic France. The basic findings are that Protestantism stimulates scientific production by influencing educational institutions, the organization of the state, and philosophical modes of thinking among scientists. Yet in making the case, Brat is forced to confront the weakness of his own evidence. He catalogues a variety of mild effects attributed to Protestantism on education and the state—and, in particular, in limiting the state in England and allotting a large share of R&D to private industry. (My own view, in my capacity as an historian, is that “Protestantism” is probably not even the right category of analysis for what he is trying to accomplish.)

Nevertheless, his examination of France leads him to conclude that “Protestantism is not a necessary condition for the advancement of science.” State support, such as existed in France, is sufficient in the short-run, he concludes, but only Protestant-derived states provide the right kind of government structure to provide stability over time, as well as the decentralized environment that can produced good science and research. There is, it must be said, much that is dubious and little if anything that is original in this chapter. Everything is based on the work of other historians and economists; there is no real additional contribution. There is a huge amount of hand-waving in the chain of causation from Protestantism leading to constitutional republics leading to educational institutions leading to good environments for research and development leading to economic growth. It is certainly not the dishonest hack-work of a Skousen, but neither is it scholarship worth much consideration. The conclusion that Protestantism was indeed important for economic growth, though the effect was not large compared to other factors, does show some degree of intellectual restraint.

But although the pieces are not connected in the dissertation, it is troubling to place the three chapters together. First, because challenging questions for a self-identified “free-marketer,” such as why the state has been so central to the research and development that he believes drives economic growth, are totally unexamined. But more importantly, the question posed at the end of chapter two, about why some countries lack of research and development capital, is given an implied (but not explicit) answer in the third chapter: they have the wrong religion.

It is easy to see the basis of his interest in the relationship between religious values and ethics and economic growth, even in a nearly twenty-year-old dissertation. But his thinking shows no sign of having grown more complex in the intervening years, and the interview he gave in 2010—in which he states that “ethical ideas may matter just as much as traditional economic variables in generating long-run economic growth” suggests that the modesty of some of the dissertation’s claims has fallen away.

It has left him, perhaps, with the kind of immodesty and conviction that led him to believe that he could challenge an incumbent Majority Leader—and win.

Lars P. Syll sends us to Joseph Stiglitz’s 2009 Minsky Lecture: The ‘Neoclassical Synthesis’–A Religious Belief: “The advocates of free markets in all their versions…

…say that crises are rare events, though they have been happening with increasing frequency as we change the rules to reflect beliefs in perfect markets. I would argue that economists, like doctors, have much to learn from pathology.We see more clearly in these unusual events how the economy really functions. In the aftermath of the Great Depression, a peculiar doctrine came to be accepted, the so-called “neoclassical synthesis.” It argued that once markets were restored to full employment, neoclassical principles would apply. The economy would be efficient. We should be clear: this was not a theorem but a religious belief. The idea was always suspect…

The thing is that the originator of what Joe Stiglitz calls “the neoclassical synthesis”–the *fons et origo of what Stiglitz regards as a major intellectual error–was none other than John Maynard Keynes himself:

In some other respects [my] foregoing theory is moderately conservative…. It is not the ownership of the instruments of production which it is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary…. Our criticism of the accepted classical theory of economics has consisted… in pointing out that its tacit assumptions are seldom or never satisfied…. But if our central controls succeed in establishing an aggregate volume of output corresponding to full employment… the classical theory comes into its own again… then there is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed… there is no objection to be raised against the modern classical theory as to the degree of consilience between private and public advantage in conditions of perfect and imperfect competition respectively… there is no more reason to socialise economic life than there was before….

The result of filling in the gaps in the classical theory is not to dispose of the ‘Manchester System’, but to indicate the nature of the environment which the free play of economic forces requires…. But there will still remain a wide field for the exercise of private initiative and responsibility. Within this field the traditional advantages of individualism will still hold good.

Let us stop for a moment to remind ourselves what these advantages are…. The advantage to efficiency of the decentralisation of decisions and of individual responsibility is even greater, perhaps, than the nineteenth century supposed…. Individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty in the sense that… it greatly widens the field for the exercise of personal choice. It is also the best safeguard of the variety of life… the loss of which is the greatest of all the losses of the homogeneous or totalitarian state. For this variety preserves the traditions which embody the most secure and successful choices… colours the present with the diversification of its fancy; and, being the handmaid of experiment… is the most powerful instrument to better the future.

Whilst, therefore… adjusting to one another the propensitv to consume and the inducement to invest would seem to a nineteenth-century publicist or to a contemporary American financier to be a terrific encroachment on individualism, I defend it, on the contrary, both as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative…

There are, I think two lessons that can be drawn from big depressionz. You can draw the Keynes lesson, which is also the Milton Friedman lesson, that if only you can stabilize the trend of aggregate demand (and compensate for externalities either through clever Pigovian taxes or ingenious Coaseian carving of property rights at the joints) then the competitive market system does absolutely fine. You can draw the Stiglitz lesson–which is that such a gross market failure in the large tells us that every single market everywhere in the world is probably riddled with smaller-scale market failures, and that comprehensive and detailed governmental structuring of institutions at ever level–macro, mess, and micro–is necessary in order to properly promote the general welfare.

In some ways the difference can be overstated. As Ariel Rubenstein and Michele Piccione likes to point out, the “jungle” equilibrium in which the strong do what they can and the weak suffer what they must has as strong a claim to Pareto-optimality as does the market equilibrium, and the frameworks of property, contract, tort, and criminal law that underpin the market equilibrium are all by themselves extraordinary and mighty governmental and societal regulatory interventions vis-a-vis whatever bellum omnium contra omnes one might call the “state of nature” in libertarian theology.

But I, at least, cannot help but interpret the declining intellectual fortunes of Milton Friedman’s doctrine over the past generation as in large part a reflection of the fact that the Friedman-Keynes position is unstable: that one either follows today’s Republican Party and Prescottian Chicago School and becomes a market fundamentalist and thus for consistency deny that the government can do any good, or one moves toward a comprehensive skepticism of markets without an additional clever technocratic layer of regulation imposed in addition to property, contract, tort, criminal, and clever macroeconomic policy to make Say’s Law true in theory even though it is not true in practice.

Why this is the case I do not know. I am trying to think about it…

Sean Trende: What Cantor’s Loss and Graham’s Win Mean: “Watch Dave Brat’s interview on Fox News here…

…He is not Tom Tancredo; immigration reform is not his main focus. He’s hitting a lot of the themes that… in many ways echo the Democratic Netroots’ discontent with “Wall Street Democrats” in the mid-2000s (a discontent that led, in part, to Obama’s victory in the 2008 primaries, to the discomfort of some in the Democratic Leadership Council)…. The GOP base is frustrated over the direction of the country… a large portion of that frustration is directed at the Democratic Party, and Barack Obama in particular.  But it is also directed at the party establishment…. When pundits say that the Tea Party seems like it is more interested in defeating Republicans than Democrats, they aren’t entirely off base. They just miss the reasoning behind that animus toward the GOP establishment…

Should-Reads:

1. Jonathan Chait: Eric Cantor’s Shocking, Richly Deserved DefeatNYMag: “Cantor went out the way he carried himself throughout his career: making comically disingenuous attacks. His television commercials assailed Brat as a tax-loving Democrat–he served on a non-partisan state revenue-estimating commission–and actually ran ads calling him a “liberal college professor”…. It is conceivable that, by preposterously describing a Rand-loving right-wing crank as a liberal, Cantor actually managed to underestimate the intellectual discernment of his voters. In any case, he had ceded all the premises of the argument to his opponent even in the course of smearing him. Cantor was, finally, Cantor’d. He will not be missed.”

2. Danny Vinik: Brookings Survey: Republican Fear Changing Demographics, Immigration: “Hispanics don’t care that much about immigration reform. They care more about finding work and being treated with respect…. Republicans’ Hispanic problem… is a deep-seated fear of the changing demographics in America. While House Republicans do not need to pass immigration reform to woo Hispanic voters, they do need to show compassion for them. In 2012, Mitt Romney was unable to do that: He argued that ‘self-deportation’ was the best strategy for dealing with the 11 million undocumented immigrants in the United States. In the end, he won just 27 percent of the Hispanic vote…”

3. John Aziz: Beware the self-fulfilling prophecies of economic pessimists: “Their prophecies of economic malaise haven’t become self-fulfilling, but there has been several instances in which their predictions have won the argument–to ruinous effect…. Sweden…. It’s highly troubling, then, that one of the arch-pessimists has a prominent spot at the Federal Reserve. Richard Fisher, president of the Dallas Fed, has been warning about economic bubbles throughout the bull market, saying that easy money is stoking up a mania on Wall Street. ‘I fear that we are feeding imbalances similar to those that played a role in the run-up to the financial crisis’, he told the Association of Mexican Banks last week. Fisher’s view is a gross oversimplification. Low interest rates and quantitative easing do encourage investment and spending. But that really says nothing about whether the subsequent growth will be productive growth or bubbly growth. Throughout human history… economic growth has overwhelmingly been productive. Why should we assume that bubbly growth is now the norm?…”

4. Lawrence Ball: The Case for a Long-Run Inflation Target of Four Percent: “Many central banks target an inflation rate near two percent. This essay argues that policymakers would do better to target four percent inflation. A four percent target would ease the constraints on monetary policy arising from the zero bound on interest rates, with the result that economic downturns would be less severe. This benefit would come at minimal cost, because four percent inflation does not harm an economy significantly.”

Should Be Aware of:

• “Open Library is yours to borrow, read & explore…. Over 1,000,000 free ebook titles available…”
• David Leonhardt: “Sydney Nye was a straight-A student with an SAT score high enough to apply to any college in the country…. The notion of attending anything other than a local college seemed too far-fetched…. Her parents… would have a hard time paying the nearly $100 application fee to elite colleges, let alone the tuition…”
• Guinevere Liberty Nell: “Careful study of the theories of Marxists and the real-world experience in the Soviet economy offer important lessons and insight for economic modeling and the ongoing development of theory…. Marxist/Leninist theory and Soviet reality will be studied with an open mind, and with the goal of taking lessons from the case study…”
• Michael Kitces: “Top 50 Financial Advisor Blogs And Bloggers: Barry Ritholtz… Joshua Brown… Cullen Roche… David Merkel… Neal Frankle… Michael Kitces… Robert Seawright… Jonathan Heller… Roger Wohlner… Thomas Brakke… Mebane Faber… Theodore Jenkin…”
• Andrew David Thaler: How to convert a used SodaStream into an ocean acidification simulator, for science
• “”A federal appeals court… upheld the right of universities… [and] Google, to scan millions of library books without the authors’ permission… the institutions were protected by the so-called ‘fair use’ doctrine…”
• Jeremy Lott: “Last month, Tea Partiers in the suburbs of Richmond, Va., kicked out an incumbent chairman of the local Republican Committee…. It put U.S. House Majority Leader Eric Cantor’s future in great peril. Party activists had turned out Cantor’s own ally over his impassioned pleas to keep the guy. This breathed new life into the longshot candidacy of econ prof Dave Brat, who is seeking to oust Cantor…”

And:

1. Paul Glastris and Haley Sweetland Edwards: The Big Lobotomy: How Republicans Made Congress Stupid: “Last September, as they scrambled to decide on one final ultimatum before shutting down the federal government, Republican House leaders came up with what seemed like an odd demand: to strip their own staff of health care benefits. At the time, staffers reacted to the news with a mixture of despair and disbelief. ‘It was like getting sucker-punched by your boss’, one aide told me. ‘Everyone was thinking, “What’s the point? How is screwing us going to help you?”‘…”

2. Andrew Prokop: What is the battle over Medicaid expansion?: “Obamacare’s authors wanted to make more people eligible for Medicaid, and to make the eligibility rules more uniform overall. So the law contained an expansion of Medicaid to everyone making beneath 138 percent of the federal poverty line — more generous coverage than any state had previously offered. But there’s a catch: due to [John Roberts’s] subsequent court ruling, states can now reject the expansion, and many states with Republican governors or legislatures have done just that. Only 26 states have signed on so far…”

3. Robert Waldmann: Consumption, Real Interest Rates, and Habit Formation: “Many macroeconomists use models of aggregate consumption based on utility maximization by a rational representative agent… inter-temporal substitution subject to a lifetime budget constraint… utility function is time separable with a constant inter-temporal elasticity of substitution… stationary distributions around a balanced growth path. All this implies that the expected rate of growth of consumption is a constant (the inter-temporal elasticity of substitution of consumption) times the expected real interest rate…. Estimates of this constant are alarmingly tiny (generally around 0.1)… imply extremely slow growth of consumption given measured real interest rates and even complete patience…. That is estimates based on first differences are inconsistent with estimates based on long term trends. In order to reconcile the model with the data, it is necessary to modify the assumptions…. This was an important impetus for the development of models of rational addiction, that is, of habit formation…. The standard new Keynesian DSGE model due to Smets and Wouters… includes habit formation… to explain the low correlation of the rate of growth of consumption and the expected real interest rate… [and make it] consistent with the… long-term trend of increasing consumption…. Their claim must be that short run fluctuations in real interest rates don’t matter much, because of habit formation, but long run persistent variation matters a lot. This claim suggests… [that] as consumption growth and real interest rates are averaged over longer and longer periods of time, their correlation gets higher until the very strong long run association appears…. [But] there is essentially no sign of a high long-term correlation between real interest rates and consumption growth… no sign that the low quarterly correlation is due to habit formation…. There have been huge and highly-persistent fluctuations in US achieved safe short-term real interest rates, with enormous rates in the 80s and very high rates in the 90s. The fact that the growth rate of aggregate consumption was similar in the 80s to that of other decades should have made it obvious that standard macroeconomic models with habit formation did not fit the data at all…”

4. Steve M.: The Powell Memo Had a Baby Named David Brat: “The BB&T Moral Foundations of Capitalism program is designed to push [Ayn Rand’s] work and her philosophy. In fact, the program — at Randolph-Macon and quite a few other institutions — is an open campaign of proselytization for her worldview as much as it is for capitalism. John Allison explained this in 2012: ‘About twelve years ago we [at BB&T] re-examined our charitable giving and realized that our contributions to universities were not typically being used in our shareholders’ best interest…. The Left had taken over the universities and educated future leaders, including teachers, in statist/collectivist ideas…. BB&T has used the fundamental ethics expressed in Ayn Rand’s philosophy of Objectivism in very successfully growing our business, and we wanted Rand’s ideas to be heard in the academic community…. Typically, Atlas Shrugged is included in the reading list….’ Does this talk remind you of anything? It reminds me of the Powell memo–Lewis Powell’s 1971 memo to the president of the U.S. Chamber of Commerce, which warned that capitalists were losing the war of ideas…. The people who read the Powell memo in 1971 ultimately won–we’ve been living in their world ever since the Reagan presidency. But they’re still fighting…. Dave Brat is one of their propagandists, and tonight he just toppled a giant from the last wave of Republican radicals, who’s now, clearly, not deemed radical–or Randian–enough.”

Already-Noted Must-Reads:

1. Jim Newell (June 10, 2014): Drudge’s new fixation: Eric Cantor and the right’s frenzied paranoia: “As a hobby, scanning the Drudge Report for signals of what rabbit hole the conservative brain has gone down at any given point has lost some of its novelty over the years. Still, it was hard not to notice this morning that Drudge, in the prime upper-left real estate of his site, had listed a full 14 links regarding immigration and a supposed impending push for “amnesty” among the House Republican leadership. (Personal favorite: “Kids Complaining Burritos They’re Being Fed Making Them Sick…”) What gives on this sleepy Tuesday? We learned last week, after all, that the House won’t hold any immigration-related votes in June. That leaves the leadership a few weeks in July to pass the unicorn-like Secret Amnesty that’s not in its interest to pass. Why is it so vital to whip up the conservative base about immigration reform on today of all days? Hmmm … maybe something about Tuesday … primary season … it’s a Tuesday during primary season … Ohhhhhhhh, we get it: House Majority Leader Eric Cantor’s primary is today!”

2. Matthew Zeitlin: Goldman Sachs CEO: “Income Inequality Is A Very Destabilizing Thing In The Country”: “Lloyd Blankfein, in an interview with CBS, said that income inequality is ‘destabilizing’ and ‘responsible for the divisions in the country’. Calling it a ‘very big issue… that has to be dealt with’, Blankfein said that whether or not the economy grows faster, ‘too much of the GDP over the last generation has gone to too few of the people’…”