Tag: Dialogue

Must-read: Tod Kelly: “Broken Elephants, Part I: Donald Trump and the Triumph of the Conservative Media Machine”

Posted on by Brad DeLong

Must-Read: The key question: How is one to attempt to do technocratic politics in the face of a massively dysfunctional Republican primary electorate and legislative right wing?

Tod Kelly: Broken Elephants, Part I: Donald Trump and the Triumph of the Conservative Media Machine: “If the only candidates willing to support rather than disparage their own political party…

…can’t muster a quarter of that party’s potential votes, then that party is broken–period. Not necessarily broken permanently, but broken nonetheless. Arguments to the contrary are some combinations of smoke, mirrors, and wishful thinking.

So how did the country’s most powerful political party transform, in the space of a single decade, from the basis for a presumed ‘permanent majority’ to a state of chaos, its leaders actively conspiring against their own candidates in hopes of said party not permanently imploding? The answer… is that the GOP’s growing reliance on feeding a ratings-driven propaganda machine has led it to this state of disrepair….

Despite the fact that this Presidential campaign has likely already lost the GOP its 2016 White House bid, that defeat will matter little to the principal players…. These calculating rabble-rousers will be lucratively rewarded by the same Media Machine that created them… [and] be more venerated as losers than the past two actual Republican Presidents, and will… hog the Party spotlight…. The GOP’s upcoming 2016 White House loss will not be used as a cautionary tale to future conservative Presidential hopefuls… [but] as a road map…

Must-reads: January 5, 2016

Posted on by Brad DeLong

Must-read: Martin Sandbu: “Free Lunch: On Models and Making Policy”

Posted on by Brad DeLong

Must-Read: Superb from the extremely sharp Martin Sandbu! Only three quibbles:

  1. There are indeed “three great economists” in the mix here, but their names are Summers, Krugman, and Blanchard…
  2. This isn’t really a conversation that would have taken place even in an academic setting. If I have ever been in the same room at the same time with Larry, Paul, and Olivier–let alone all of Olivier’s coauthors, Michael Woodford, Danny Vinit, and Lukasz Rachel and Thomas Smith–I cannot remember it. And discussions and exchanges in scholarly journal articles are formal and rigid in an unhelpful way.
  3. Do note that Keynes was on Summers’s side with respect to the importance of maintaining business confidence: cf.: General Theory, ch. 12, “The State of Long-Term Expectation”

Martin Sandbu: Free Lunch: On Models and Making Policy: “The internet has… open[ed] up to the public…

…discussions… that previously took place mostly in face-to-face gatherings or scholarly journal articles. Neither medium was particularly accessible….

Summers posted a characteristically succinct statement on why he disagreed with the Federal Reserve’s decision to begin tightening… His analysis is well worth reading in full, but the trigger of the ensuing debate was his explanation for why the Fed thinks differently: ‘I suspect it is because of an excessive commitment to existing models and modes of thought. Usually it takes disaster to shatter orthodoxy.’… DeLong expressed doubts that the Fed’s analysis was indeed compatible with existing models; Krugman asserted that conventional models straightforwardly showed the Fed to be in the wrong, and that… policy was driven… by… ‘a conviction that you and your colleagues know more than is in the textbooks’….

Summers then responded… showed a fascinating divergence…. DeLong and Krugman think the Fed erred by ignoring… models…. Summers thinks the Fed erred by ignoring things that such models do not capture…. Summers is also much more comfortable with the notion that policymakers should aim to underpin market confidence. That notion has often been derided by Krugman…. Two quotes rather nicely capture the methodological disagreement here. Summers writes: ‘I think maintaining confidence is an important part of the art of policy…. Paul is certainly correct in his model but I doubt that he is in fact.’ DeLong responds: ‘Larry, however, says: We know things that are not in the model. Those things make Paul’s claim wrong. My problem with Larry is that I am not sure what those things are.’…

What is a policymaker to do if she thinks this is the case in reality, even if no extant model captures it? Surely not wait for 30 years in the hope that new mathematical techniques enable economists to model that reality. In his willingness to listen to those who may have an untheoretical ‘feel’ for the market, and in his intellectual respect for the limits of his own knowledge, Summers comes across as the most Keynesian of these three…

A semi-platonic dialogue about secular stagnation, asymmetric risks, Federal Reserve policy, and the role of model-building in guiding economic policy

Posted on by Brad DeLong
Sanzio 01 jpg 3 820×2 964 pixels

Sokrates: You remember how I used to say that only active dialogue–questions-and-answers, objections-and-replies–could convey true knowledge? That a flat wax tablet covered by written words could only convey an inadequate and pale simulacrum of education?

Aristoteles: Yes. And you remember how I showed you that you were wrong? That conversation is ephemeral, and very quickly becomes too confused to be a proper educational tool? That only something like an organized and coherent lecture can teach? And only something like the textbooks compiled by my lecture notes can make that teaching durable?

Aristokles: But, my Aristoteles, you never mastered my “dialogue” form. My “dialogue” form has all the advantages of permanence and organization of your textbooks, and all the advantages of real dialectic of Sokrates’s conversation.

Sokrates: How very true, wise Aristokles!

Aristokles How am I to take that?

Xanthippe: You now very well: as snark, pure snark. That’s his specialty.

Hypatia: This is all complicated by the fact that in the age of the internet real, written, permanent dialogues can spring up at a moment’s notice:

Sokrates: And with that, let’s roll the tape:

Other things linked to that are highly relevant and worth reading:

Things I did not find and place outbound links to, but should have:

  • Polya
  • Dennis Robertson
  • Donald Patinkin

Looking at the whole thing, I wince at how lazy people–especially me–have been with their weblog post titles. I should find time to go back and retitle everything, perhaps adding an explanatory sentence to each link…

MOAR musings on whether we consciously know more or less than what is in our models…

Posted on by Brad DeLong

Larry Summers presents as an example of his contention that we know more than is in our models–that our models are more a filing system, and more a way of efficiently conveying part of what we know, than they are an idea-generating mechanism–Paul Krugman’s Mundell-Fleming lecture, and its contention that floating exchange-rate countries that can borrow in their own currency should not fear capital flight in a utility trap. He points to Olivier Blanchard et al.’s empirical finding that capital outflows do indeed appear to be not expansionary but contractionary:

Olivier Blanchard et al.: Macro Effects of Capital Inflows: Capital Type Matters: “Some scholars view capital inflows as contractionary…

…but many policymakers view them as expansionary. Evidence supports the policymakers…. Bond inflows lead to currency appreciation and are contractionary, while non-bond inflows lead to an appreciation but also to a decrease in the cost of borrowing, and thus may be expansionary…. How can we reconcile the models and reality? … Capital inflows may… reduce the cost of financial intermediation… be expansionary even for a given policy rate. In emerging markets, with a relatively underdeveloped financial system, the effect of a reduction in the cost of financial intermediation may dominate, leading to a credit boom and an output increase despite the appreciation….

The appropriate policies vis-à-vis capital inflows depend very much on the nature of the inflows. Sterilised foreign exchange (FX) market intervention… used in response to non-bond inflows… increases capital inflows, and thus increases the effects of inflows on credit and the financial system…. If the central bank is worried about both appreciation and unhealthy or excessive credit growth, FX intervention or capital controls are preferable to the use of the policy rate in response to an increase in bond inflows…. In response to non-bond inflows, our framework suggests that if the goal is to maintain exchange rate stability with minimum impact on the return to non-bonds, capital controls do the job best, followed by FX intervention, followed by a move in the policy rate…

If you asked me for a precis of what is going on in Blanchard et al., I would start drawing a graph in which we had:

  1. An IS (“Investment-Savings”) curve, for which the level of production (a) increases when government purchases increase; (b) falls when the long-term risky real interest rate rises, discouraging investment and consumption directly and discouraging exports indirectly by raising the value of the currency; and (c) falls when desired capital inflows rise and thus raise the value of the currency.
  2. An LM (“Liquidity-Money) curve, relating demand for money and thus the short-term safe nominal interest rate as a function of the level of output given the money stock.
  3. A CC (“Credit-Channel) wedge between the two, consisting of (a) the term premium on interest rates, that is how much long-term rates exceed short-term rates; (b) the risk premium on investments; and (c) the expected inflation rate:
Untitled 2

I would point out that, in Blanchard et al.‘s setup, what they call “bond inflows” move the IS curve to the left by raising the value of the currency for any given short-term safe nominal policy interest rate. Thus they are contractionary–for a constant policy interest rate on the LM curve, and a constant double-arrow CC credit-channel wedge.

I would point out that what they call “nonbond inflows” both move the IS curve to the left and shrink the double-arrow CC credit-channel wedge. So–for a constant policy rate–are contractionary if the first and expansionary if the second effect dominates.

And I would point out that Krugman’s Mundell-Fleming lecture deals with this case under the heading of “banking crisis”:

Banking crisis: Several commentators – for example, Rogoff (2013) — have suggested that a sudden stop of capital inflows provoked by concerns over sovereign debt would inevitably lead to a banking crisis, and that this crisis would dominate any positive effects from currency depreciation. If correct, this would certainly undermine the optimism I have expressed about how such a scenario would play out. The question we need to ask here is why, exactly, we should believe that a sudden stop leads to a banking crisis. The argument seems to be that banks would take large losses on their holdings of government bonds. But why, exactly? A country that borrows in its own currency can’t be forced into default, and we’ve just seen that it can’t even be forced to raise interest rates. So there is no reason the domestic-currency value of the country’s bonds should plunge. The foreign-currency value of those bonds may indeed fall sharply thanks to currency depreciation, but this is only a problem for the banks if they have large liabilities denominated in foreign currency…

Krugman is working in a framework in which the risk-premium part of the credit channel–the risk-premium part of the double-headed orange CC arrow–is small in normal times but can discontinuously shift to large in the event of a “banking crisis”. For Blanchard et al. and Summers, the size of the risk-premium part of the CC arrow is not discontinuously 0-1, but rather moves gradually with “confidence”: low when confidence is high and desired capital inflows are large, high when confidence is low and there is a sudden stop. Krugman says that since, in the absence of large foreign currency-denominated debt, there is no reason for there to be fears of a banking crisis in the event of a sudden stop.

Blanchard et al. appear to think that Krugman is largely right about developed economies. In them risk premiums are, they think, relatively small: financial markets work relatively well, and are not all that sensitive to amounts of new investment money flowing in. But, they say, they believe that in developing economies things are different. There, they believe, the risk premium component of the credit channel wedge is sensitive to international market conditions and thus the size the desired capital inflow.

In brief, Blanchard et al appear to think that only developing economies are “Minskyite” in the sense of a strong vulnerability of the CC risk premium to “confidence” even in the absence of fundamental shocks. Summers’s judgment appears to be that all economies are “Minskyite”. If I understand Paul’s thinking, it is more that “confidence” is only likely to matter as an equilibrium-selection device in a model with multiple equilibria like that of Krugman’s (1999b) third-generation financial-crisis model in “Balance Sheets, the Transfer Problem, and Financial Crises”. No multiple equilibrium, no possibility of suddenly jumping to a bad equilibrium, and so little possibility of any sort of pure “confidence” shock causing large amounts of trouble.

Paul here is more on the “financial markets work like they ought to” side of the argument. Olivier and company are more on the side of “developing economies have financial-market vulnerabilities North Atlantic economies do not” side. And Summers is more on the side of Keynes here:

Enterprise only pretends to itself to be mainly actuated by the statements in its own prospectus…. Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come. Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die…. This means, unfortunately, not only that slumps and depressions are exaggerated in degree, but that economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average business man. If the fear of a Labour Government or a New Deal depresses enterprise, this need not be the result either of a reasonable calculation or of a plot with political intent;–it is the mere consequence of upsetting the delicate balance of spontaneous optimism. In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends…

(Early) Monday DeLong Smackdown: Larry Summers on how we know more than we write down in our lowbrow (or highbrow) economic models

Posted on by Brad DeLong

Larry Summers: Thoughts on Delong and Krugman Blogs: “I think the issue is more on the supply side than the demand side…

…If I believed strongly in the vertical long run Phillips curve with a NAIRU around five percent and in inflation expectations responsiveness to a heated up labor market, I would see a reasonable case for the monetary tightening that has taken place. I am sure Paul and Brad are right that a desire to be ‘sound’ also influences policy.  I am not nearly as hostile to this as Paul. I think maintaining confidence is an important part of the art of policy.

A good example of where market thought is, I think, right and simple model based thought is I think dangerously wrong is Paul’s own Mundell-Fleming lecture on confidence crises in countries that have their own currencies.  Paul asserts that a damaging confidence crisis in a liquidity trap country without large foreign debts is impossible, because if one developed the currency would depreciate, generating an export surge.

Paul is certainly correct in his model, but I doubt that he is in fact. Once account is taken of the impact of a currency collapse on consumers’ real incomes, on their expectations, and especially on the risk premium associated with domestic asset values, it is easy to understand how monetary and fiscal policymakers who lose confidence and trust see their real economies deteriorate, as Olivier Blanchard and his colleagues have recently demonstrated.  Paul may be right that we have few examples of crises of this kind, but if so this is, perhaps, because central banks do not in general follow his precepts.

I do not think this is a pressing issue for the US right now. But the idea that policymakers should in general follow the model and not worry about considerations of market confidence seems to me as misguided as the view that they should be governed by market confidence to the exclusion of models.

Larry is taking the side that our economists’ models are primarily filing systems rather than truth-generating mechanisms. As I have already written twice in the past week, the question is: Are models properly idea-generating machines, in which you start from what you think is the case and use the model-building process to generate new insights? Or are models merely filing systems–ways of organizing your beliefs, and whenever you find that your model is leading you to a surprising conclusion that you find distasteful the proper response is to ignore the model, or to tweak it to make the distasteful conclusion go away?

Both can be effectively critiqued. Models-as-discovery-mechanisms suffer from the Polya-Robertson problem: It involves replacing what he calls “plausible reasoning”, where models are there to assist thinking, with what he calls “demonstrative reasoning”. in which the model itself becomes the object of analysis. The box that is the model is well described but, as Dennis Robertson warned,there is no reason to think that the box contains anything real. Models-as-filing-systems are often used like a drunk uses a lamp post: more for support than illumination.

In the real world, it is, of course, the case that models are both: both filing systems and discovery mechanisms. Coherent and productive thought is, as the late John Rawls used to say, always a process of reflective equilibrium–in which the trinity of assumptions, modes of reasoning, and conclusions are all three revised and adjusted under the requirement of coherence until a maximum level of comfort with all three is reached. The question is always one of balance.

The particular fight Larry wants to pick this weekend is over Paul Krugman’s Mundell-Fleming lecture, and Paul’s claim that a floating-rate sovereign that borrows in its own currency and is in a liquidity trap should not worry about maintaining “confidence”. Paul’s argument is that, in the model, pursuing aggressive expansionary policies will eat first to currency depreciation, then to an export boom, then to full employment, and only then will any downsides emerge. Thus the process can be stopped before it begins to generate risks. And it is only after full employment is attained that policy concern should shift to avoiding such risks.

Larry, however, says: We know things that are not in the model. Those things make Paul’s claim wrong.

My problem with Larry is that I am not sure what those things are. Paul notes that in normal times–away from the interest-rate zero lower bound–a loss of “confidence” in a country that floats its and borrows in its own currency an be contractionary:

Now,,, we can examine the effect of a loss of investor confidence… which we can view as a sudden stop… reduction in capital inflows at any given interest and exchange rate…. What would happen to a country with its own currency and a floating rate confronted with a foreign loss of confidence?… The depreciation of the currency at any given interest rate would increase net exports, and hence shift the IS curve out. This might be the end of the story. As I noted… however, the central bank might be concerned about the possible inflationary consequences of depreciation, and would therefore lean against it; in that case the MP schedule would shift up. So interest rates would rise due to rising demand for domestic goods and, possibly, tight money driven by inflation concerns. It is possible, if the latter motive is strong enough, that output could actually fall…

But, Paul says, at the zero lower bound things are different because the central bank has a cushion between what it wants the real interest rate to be and what the zero lower bound forces the real interest rate to be:

Right now the United States, the United Kingdom, and Japan are all stuck in the liquidity trap…. [with] policy… constrained by the zero lower bound…. This in turn means that any shift in the MP schedule, unless very large, won’t lead to a rise in interest rates…. All that matters is the rightward shift in the IS curve…. In short, under current conditions the much-feared loss of confidence by foreign investors would be unambiguously expansionary, raising output and employment in nations like the United States, the United Kingdom, and Japan…

It’s not clear what we know that is not in the model that would reverse this conclusion of Paul’s in the case of a floating exchange rate in a country that borrows in its own currency and happens to be in a liquidity trap. Paul notes that his conclusion goes against market wisdom:

Many people will, I know, object to this conclusion…. [It] seems very counterintuitive… and is very much at odds with what almost every policymaker and influential figure has been saying…. when I have tried laying out this argument to other economists, I have found that in general they recognize the point but argue that real-world complications mean that a sudden stop will nonetheless be contractionary even in countries with independent currencies and floating rates. Why? They offer a variety of reasons….

And Paul goes on:

The short-term/long-term interest rate distinction does not appear to offer any channel through which a nation with an independent currency can suffer a decline in output due to reduced foreign willingness to hold its debt….

Several commentators—for example, Rogoff (2013)—have suggested that a sudden stop of capital inflows provoked by concerns over sovereign debt would inevitably lead to a banking crisis…. [But] why, exactly… should [we] believe that a sudden stop leads to a banking crisis…. [It is] is only a problem for the banks if they have large liabilities denominated in foreign currency…. Inflation—and fear of inflation—is a potential channel through which sudden stops can end up being contractionary even for countries with independent currencies and domestic-currency debt…. Large foreign-currency debt can effectively undermine monetary independence, as can fears of depreciation-led inflation. However, the major nations with large debts but independent currencies don’t have large foreign-currency debt, and are currently quite remote from inflation pressure. So the crisis story remains very hard to tell.

I would say that the major nations with large debts don’t have large foreign-currency debt that we know of…

Over at Project Syndicate: “Piketty vs. Piketty”

Posted on by Brad DeLong

Over at Project Syndicate: Piketty vs. Piketty: BERKELEY – In Capital in the Twenty-First Century, the French economist Thomas Piketty highlights the striking contrasts in North America and Europe between the Gilded Age that preceded World War I and the decades following World War II. In the first period, economic growth was sluggish, wealth was predominantly inherited, the rich dominated politics, and economic (as well as race and gender) inequality was extreme… READ MOAR over at Project Syndicate

Musings on the current episteme of the Federal Reserve

Posted on by Brad DeLong

Larry Summers attributes the Federal Reserve’s decision to tighten policy, in what appears to him and to me to be a weakly-growing and high-slack economy, to four mistakes, which are themselves driven by a fifth, overarching mistake. The four mistakes are:

  1. The Fed has much too much confidence in its models that tell it that the unemployment rate takes the temperature of the labor market and the Phillips Curve now still has the slope it had in the 1970s.
  2. The Fed operates as though FOMC members are tased whenever inflation rises above 2%/year, with no countervailing painful consequences of low inflation, low employment, or low output.
  3. The Fed believes–without empirical support anywhere that I can see–that quick sharp moves up or down in interest rates have larger effects in total than the same interest-rate change made gradually and over a longer term.
  4. The Fed thinks–without theoretical support that I can see–that zero interest rates are not a reflection of an economy in a pathological state, but rather a cause of economic pathology that is dangerous now that the economy is once again “normal”.

And Summers sees the fifth, overarching mistake the Fed is making right now as:

(5) The Fed is excessively committed to “existing models and modes of thought… in the thrall of orthodoxy”:

Larry Summers: My Views and the Fed’s Views on Secular Stagnation: “First, the Fed assigns a much greater chance that we will reach 2 percent core inflation…

…than is suggested by most available data…. Second, the Fed seems to mistakenly regard 2 percent inflation as a ceiling not a target…. Third, the Fed seems to be in the thrall of notions that… do not… have analytic support premised on the idea that the rate of change of interest rates, as distinct from their level, influences aggregate demand…. I know of no model in which demand will be stronger in say 2018 if rates rise and then fall than if they are kept constant at zero. Nor… do I know of a reason why recession is more likely if the changes are backloaded…. The argument… is in the category with the argument that I should starve myself in order to have the pleasure of relieving my hunger pangs. Fourth, the Fed is… overestimating the neutral rate…. The desire to raise rates reflects… a sense that zero rates are a sign of pathology and an economy creating 200,000 jobs a month is not diseased….

Why is the Fed making these mistakes if indeed they are mistakes? It is not because its leaders are not thoughtful or open minded or concerned with growth and employment.  Rather I suspect it is because of an excessive commitment to existing models and modes of thought…

I do think–confidently–that Summers is absolutely 100% correct in his identification of the four component intellectual errors that the Federal Reserve is currently making. And it is certainly true that these are the result of an excessive commitment to some current modes of thought–there are, after all, a lot of people who join the Fed in thinking that zero interest rates are a cause rather than the proper treatment of pathology right now, that the Fed needs to raise rates now to give it the space to lower them if need be later, that it is dangerous for inflation to rise above 2%/year ever, that the Phillips Curve somehow has a steeper slope than the recent evidence of the past generation can justify belief in, and that the unemployment rate rather than the detrended employment-to-population ratio gives the temperature of the labor market.

But do these beliefs on the part of the Fed really reflect an excessive commitment to existing models? There I have my doubts. Or, rather, it depends on what you think the proper function of economic modeling is. Are models properly idea-generating machines, in which you start from what you think is the case and use the model-building process to generate new insights? Or are models merely filing systems–ways of organizing your beliefs, and whenever you find that your model is leading you to a surprising conclusion that you find distasteful the proper response is to ignore the model, or to tweak it to make the distasteful conclusion go away?

Both can be effectively critiqued. Models-as-discovery-mechanisms suffer from the Polya-Robertson problem: It involves replacing what he calls “plausible reasoning”, where models are there to assist thinking, with what he calls “demonstrative reasoning”. in which the model itself becomes the object of analysis. The box that is the model is well described but, as Dennis Robertson warned,there is no reason to think that the box contains anything real. Models-as-filing-systems are often used like a drunk uses a lamp post: more for support than illumination.

In the real world, it is, of course, the case that models are both: both filing systems and discovery mechanisms. Coherent and productive thought is, as the late John Rawls used to say, always a process of reflective equilibrium–in which the trinity of assumptions, modes of reasoning, and conclusions are all three revised and adjusted under the requirement of coherence until a maximum level of comfort with all three is reached. The question is always one of balance.

But it is clear to me that if you give even minor weight to the first–see well-founded models as a way of generating new insights rather than just organizing old beliefs–that the line of work into the economics of the liquidity trap that I see as well-represented by Krugman’s (1999) “Thinking About the Liquidity Trap” tells us, very strongly, that the Federal Reserve is on the wrong track intellectually right now. It tells us that what is out of whack has not been and is not the real money stock, but is instead the expected inflation rate. Or, rather, that because the expected inflation rate is too low, there is no value of the real money stock consistent with full employment equilibrium. If expected inflation were higher, the existing money stock would be ample, or even require shrinking.

This is the conclusion of Krugman (1999): that the economy needs higher expected and actual inflation, and that the free-market economy with full price flexibility would deliver that inflation. But the Fed does not appear to acknowledge either that the economy needs higher inflation, that the flexible-price benchmark would deliver this inflation, or that the job of the Fed is to mimic that full employment-generating price structure as closely as possible.

Moreover, the Fed does not engage in reflective equilibrium. It rejects the conclusions of what I regard as the standard Patinkin-style existing model of Krugman (1999). But it does not propose an alternative model. There seems to me to be no theoretical ground, no model even considered as a filing system, underpinning the “orthodox” modes of thought that the Fed believes. And it does not seem to feel this absence aaa a problem. I find that somewhat disturbing.

Today’s economic history: Did the classical liberals believe in constructive statecraft?

Posted on by Brad DeLong

Today’s Economic History: Abbott Payson Usher (1934): A Liberal Theory of Constructive Statecraft: Presidential address delivered at the Forty-sixth Annual Meeting of the American Economic Association, Philadelphia, Pennsylvania, December 27, 1933:

Classical and neo-classical economic theory is commonly associated with a form of liberalism that was more largely directed toward the repeal of old laws and regulations than to the constructive development of institutions to meet new social problems. In the past the chief emphasis has been laid upon these destructive accomplishments of economic liberalism. It has therefore been easy to overlook the actual constructive accomplishments of the early nineteenth century, and many are disposed to believe that these positive achievements were inconsistent with the primary postulates of classical and neo-classical theory.

It must be confessed that there is confusion of thought in the writings of the early nineteenth century economists; but a positive theory of constructive statecraft is implicit in the basic liberal concepts. The most characteristic features of classical theory lead directly toward a broad concept of the task of the state.

Classical theory was based upon the concept of an orderly and rational system of nature, and the concept of a contractual society. We need not concern ourselves here with the precise forms in which these concepts were held by the economists of the nineteenth century, because it is more important to direct our attention to the full content of these ideas than to the imperfect and incomplete formulations that have prevented liberal views from achieving their full development.

As people probably told my Great-Great-Uncle Abbott, “most characteristic” is in the eye of the beholder. However, he is certainly right as far as Hume, Smith, Ricardo, Tocqueville… even Bastiat are concerned. With Senior and subsequent epigones, however, “most characteristic” becomes debatable: the parody of classical liberalism comes close to reality–and today we have sub-epigones at Heritage and Cato denouncing Bastiat and Hayek, as Ludwig von Mises did Milton Friedman, as “Communists. You’re just Communists…”

Must-read: Jonathan Chait: “Sorry, Conservatives, Obamacare Is Still Working”

Posted on by Brad DeLong

Must-Read: Does Ross Douthat not understand that the “Cadillac Tax” is an essential part of every single Republican ObamaCare replacement plan? That while it is an important part of ObamaCare, it is not an essential part of ObamaCare? Or does he understand that element of the situation, but hope that his readers do not? Jonathan Chait reports. You decide!

Jonathan Chait: Sorry, Conservatives, Obamacare Is Still Working: “Ross Douthat’s Sunday column, as it so often does, offers the least unreasonable iteration…

…of the deranged state of conservative thinking on Obamacare. While no longer collapsing spectacularly, Obamacare is now sadly limping along in disappointing fashion, remaining just healthy enough not to expire…. The worst thing that’s happened to Obamacare is that Democrats have revolted against the Cadillac Tax. President Obama had to agree to delay the tax’s implementation for two years as part of the recent budget deal, in return for lots of good liberal policy (like tax breaks for green energy and low-income families). The Cadillac Tax would be in decent shape if Obama could just use his veto to keep it in place two years from now. The trouble is that Hillary Clinton, pressured by unions, has also come out against the Cadillac Tax. So now you have pro-union Democrats and anti-tax Republicans forming a coalition that looks like it can prevail starting in  2017, regardless of which party wins the election.

So, yes. Bad news for Obamacare, which looks like it has lost one of its many cost-control elements. But as bad as this news is for Obamacare, it’s absolutely catastrophic for Obamacare replacement. Every Republican plan to replace Obamacare relies on the same financing mechanism: limiting or repealing the tax break for employer-sponsored insurance. The Cadillac Tax is a smaller, more painless version of this same policy. If both parties can’t abide a partial rollback of the tax break for the most expensive health plans, they’re never, ever going to go along with eliminating the entire tax break for all health plans. The conservatives cackling over the demise of the Cadillac Tax are delusional — it’s as if they’re watching the backlash against the Iraq War in 2008 with fingers tented, anticipating that this will encourage war-weary Americans to support a land invasion of Russia. The bipartisan support for maintaining the tax break for employer insurance will hurt Obamacare, but it can survive. The Republican plans to replace it would all be wiped out.

The Cadillac Tax debacle illustrates a crucial underlying reality of the politics of health-care reform: Change is incredibly difficult. That is why the United States staggered along for decades with a system that simultaneously spent far more per citizen than any other system in the world and cruelly denied treatment to millions. The compromises in the law are a function of this reality. Obamacare’s drafters could not draw up a blue-sky plan as though they were free to design the system anew. They had to work around an entrenched reality, making the system more humane and efficient without unduly burdening those who feared change. That they managed to pass and implement such a reform in the face of hysterical opposition is a historic triumph, one with which the opposition, five-and-a-half years later, has not come to grips.