lso that there is a strong political economy case (which I consider dominant)

From the Economics Of Contempt:

"Wednesday, February 11, 2009

Will Wilkinson's strange theory about Krugman

Will Wilkinson mocks Paul Krugman for not including political factors in his economic thinking:

Perhaps more than any economist of his caliber, Krugman understands that policy is largely determined by the outcome of the public opinion shoutfest. Yet this recognition seems to have no effect on Krugman’s ideas. Rather than bring inside his models disagreement over economic theory and the lack of political incentive to faithfully apply them, which would lead him to radically revise his prescriptions, Krugman leaves his textbook theory untouched and simply tries to win the shoutfest. Krugman’s often unbearable stridency seems to reflect an attempt to overcome the problems of democratic disagreement and incentive compatibility through sheer force of will–as if the deep reality of politics is no match for the rhetorical gifts and gold-plated reputation of Paul Freaking Krugman.

It's strange that Wilkinson espoused this theory just days after Krugman laid out the economic case for including the "Buy American" provision in the stimulus bill, and then rejected the provision for reasons of political economy. Here's how Krugman summarized his views the next day:

First of all: my piece was NOT an endorsement of protectionism — it was an explanation that there is an economic case for it, but also that there is a strong political economy case (which I consider dominant) against acting on that economic case. It was, in short, an attempt to be intellectually honest.

If Wilkinson's theory was right, then Krugman would have tried to "win the shoutfest" on the "Buy American" provision. But he didn't. Instead, Krugman essentially acknowledged that he couldn't win the shoutfest—that is, neither he nor anyone else would be able to stop the cycle of protectionist retaliations. Recognizing this, he concluded that the "political economy case" against the "Buy American" provision was dominant.

It would be hard to come up with a better example of Krugman incorporating politics into his economic thinking. Krugman's treatment of the "Buy American" provision definitely disproves Wilkinson's theory about Krugman sticking to the pure economics and trying to "win the shoutfest." Which makes it all the more amusing that Wilkinson espoused his theory a mere 4 days after Krugman disproved it. "

Me:

Don said...

It's actually wonderful and a step forward having an economist who understands that political economy is more important than economics.

Don the libertarian Democrat

February 11, 2009 3:28 PM

countercyclical macroeconomic policy works largely by manipulating consumer and investor psychology

From Will Wilkinson, two posts:

"In response to my post below, friend and former colleague Ryan Avent writes:

This is just too cute. The paradox of countercyclical macroeconomic politics is only a paradox if you believe that the current recession is the result of equal parts Democratic fear-mongering and facts on the ground. But can any sane person actually believe this? Does anyone really think that Barack Obama’s acknowledgement of economic reality and the op-ed warnings of lefty economists are the things producing this downturn, or perpetuating it, or deepening it?

I don’t think Ryan understands the cute argument. The cause of the recession is irrelevant. I never even intimated that Democratic fear-mongering caused it. (I think normal periodic breakdown of efficient-ish economic coordination + American houselust + democracy + fancypants finance + executive myopia + regulatory failure caused it.) So does anyone think that pants-wetting op-eds by Presidents and Nobel Prize-winning economists can perpetuate or deepen a downturn? Yes! For example, people like the President or Nobel Prize-winning economist Paul Krugman who believe that countercyclical macroeconomic policy works largely by manipulating consumer and investor psychology. If you don’t think Obama and Krugman’s confidence-destroying disaster forecasts hurt, then you probably shouldn’t accept confidence-restoration theories of stimulus, either. Or maybe Ryan knows of some research that shows that badly-targeted tax cuts and infrastructure spending effectively boost confidence and buoy markets while doomsaying from the most powerful man on Earth means squat. That would be interesting to see."

"Paul Zrimsek in the comments below offers us this gem:

Last but perhaps not least among causes of the consumer funk is the administration’s own determined pessimism. Mr. Bush has a bully pulpit, and he is using it to preach economic alarm. This adds powerfully to the chorus of doomsaying. And when it comes to short-term economics, believing can sometimes make it so.

–Paul Krugman, 2/21/01

Oh snap!"

Me:

Take the following two posts for example:

From Paul Kedrosky:

"WTO Calls Emergency Meeting on Trade Barriers

barriers This is worrisome:

Just two weeks after saying protectionism was under control, the World Trade Organization is gathering nations in a special meeting Monday to discuss a fast-rising wave of barriers to commerce.

Dozens of measures have been enacted in country after country since early last month, in a scramble by governments to safeguard key industries -- often by damaging those of their neighbors.

More here.

From John Carney yesterday:

"Why anyone in the world would feel reassured by listening to Dodd is beyond us. You'd be better off asking your cat if Bank of America would survive. To take just one notorious example, Dodd was talking up the financial health of Fannie Mae and Freddie Mac as late as last summer.

"This is not a time to be panicking about this. These are viable, strong institutions," Dodd said at a Capitol Hill press conference in July. Two months later the federal government had to take over both of those "strong institutions."

You today:

"Just two weeks after saying protectionism was under control, the World Trade Organization is gathering nations in a special meeting Monday to discuss a fast-rising wave of barriers to commerce."

Now, the usual explanation of these farcical reassurances, is that the officials cannot speak the truth, since that would cause a run and decline in stocks or bonds, say. In other words, as officials, their words could effect investing because they might reflect government intervention. This seems like a valid concern.

Similarly, if you read financial reportage, good reporters or commentators tell you if they own the stock or are shorting it, etc. The point being that such comments could influence the market. This is also why the FDIC seems to swoop in before speaking about a takeover.

So, all financial commentary can indeed influence the market and, possibly, the economy. The SEC even has rules about this, I believe. It's not Keynesianism, but common sense.

As for Krugman, he's not a public official or trader. If he speaks as an economist, he's supposed to try and be objective. If he speaks as a political partisan, he's supposed to be up front about what his bias is. It's a system based upon transparency, leaving the reader free to draw his conclusion.

These arrangements have problems. Politicians lie, commentators game, and economists aren't objective, but it's a decent arrangement.

Now, I might be unfair here, but your point seems to be that , if you believe that financial commentary can influence markets in any way, then you should only cheer-lead, in the hopes that you can positively influence the market. That seems wrong. It also seems wrong to not acknowledge that commentary influences the market. As I said, we have a whole set of arrangements to deal with this problem.

As for influencing the economy, you seem to be arguing that, since Shiller believes in behavioral explanations for market movements, and he predicted the housing bubble, it follows that, not only should he not be praised for seeing the problem before others, but he should held in contempt for causing it. Were he God I might credit that, but not otherwise. The point about behavior and economics is much more complex than the idea that one man can cause a crisis. However, if Sheila Bair says the wrong thing, don't you believe that she could cause some problems for the market?

reply edit reblog flag

some thoughts on the perils of strong party identification

From Will Wilkinson:

"Parties, Government Capture, and Poverty

by Will Wilkinson on February 3, 2009

Nancy Rosenblum’s apology for partisanship put me in mind of some thoughts on the perils of strong party identification in the section on inequality and democracy in my forthcoming Cato paper.

[T]he danger of “capture” in democratic politics is not primarily a matter of systemic conflicts of economic interest between those occupying different strata of the income distribution. Rather, the problem is that political power in democracies flows to those able to put together winning electoral coalitions, and this ability necessarily involves maintaining the loyalties of special interests whose demands may not be in the public interest.

[...]

[W]e’re unlikely to make real progress in improving the quality of public policy if otherwise sophisticated minds continue to be surprised by the fact that the party promising security may leave us less secure, or that the party promising to lift up the poor may leave them stranded. Strong partisan identification is dangerous because it can pressure even the best and brightest into accepting that the policies best for the electoral success of their favorite party — a fragile and contingent consortium of often conflicting interests — will somehow turn out best for the country.

[...]

It is not enough for the privileged and the powerful to wish with their whole hearts to make ours a society in which all people have a real chance to make the most of their liberties and lives. Our democracy has to deliver the policies that can actually make this happen. But just as special interests can capture democratic coalitions, our coalitional minds can be captured by democratic politics. What the poor need is not party faith, but good faith in the effort to find policies that really deliver.

That “our coalitional minds can be captured by democratic politics” is my main concern about partisanship. Party ID can become a powerful social signal of moral rectitude. But electoral dynamics provide strong reasons to believe that each major party must rule out of bounds some policies that would be best for the poor. Perversely, the more strongly a particular party ID signals care for the poor, the more protected will be large factions within the party whose interests oppose the poor. This is how our coalitional minds reason: Because the success of the party is so important to the welfare of poor, and these factions are so important to the successes of the party, their interests are ipso facto important to the welfare of the poor. And so their actual antagonism to policies in the interests of the poor becomes most invisible to those most eager to communicate their solidarity with the poor through party identification. Our need to signal care can produce viciously careless results."

Me:

Dr. Johnson now said, a certain eminent political friend of ours [Burke] was wrong, in his maxim of sticking to a certain set of men on all occasions. "I can see that a man may do right to stick to a party," said he; "that is to say, he is a Whig, or he is a Tory, and he thinks one of those parties upon the whole the best, and that to make it prevail, it must be generally supported, though, in particulars, it may be wrong. He takes its faggot of principles, in which there are fewer rotten sticks than in the other, though some rotten sticks to be sure; and they cannot be well separated. But, to blind one's self to one man, or one set of men (who may be right to-day and wrong to-morrow), without any general preference of system, I must disapprove."
Boswell: Journal of a Tour to the Hebrides

I used to be more of a Johnson man, although even he is not negating parties entirely. Now I'm a Burke man. The reason is that being in a party habituates one to compromise. Believe me, in order to be a Democrat, I have had to learn to compromise. This can facilitate compromise between the parties in order to ensure the slow and steady movements of political change, as opposed to uneasy lurches. As Burke says:

"All government—indeed, every human benefit and enjoyment, every virtue and every prudent act—is founded on compromise and barter."

Edmund Burke (1729–1797)
Second Speech on Conciliation with America (1775)

I think it would be useful of mathematicians and physicists to look into fresh water macro and express an opinion.

From Robert Waldmann:

"Background on "fresh water" and "salt water" macroeconomics

by Robert

Will Wilkinson asks what’s with the economics profession.

A bit more on the public relations quandary the economics profession ought to be in, if it isn’t already…

When I see DeLong more or less indiscriminately trashing everyone at Chicago, or Krugman trashing Barro, etc., what doesn’t arise in my mind is a sense that some of these guys really know what they’re talking about while some of them are idiots. What arises in my mind is the strong suspicion that economic theory, as it is practiced and taught at the world’s leading institutions, is so far from consensus on certain fundamental questions that it is basically useless for adjudicating many profoundly important debates about economic policy. One implication of this is that it is wrong to extend to economists who advise policymakers, or become policymakers themselves, the respect we rightly extend to the practitioners of mature sciences. There is a reason extremely smart economists are out there playing reputation games instead of trying to settle the matter by doing better science. The reason is that, on the questions that are provoking intramural trashtalk, there is no science.

Sadly, there is no one better to listen to.

Now before going on I note that Wilkinson does not address the merits of DeLong's criticisms or Krugman's. He uses a words to suggest that they are writing unprofessionally but he doesn't present a counter argument to their claims. I have quoted his full post. Nothing on the merits.

Instead he asks if disagreements between economists are so fundamental that there is no professional consensus useful to non economists. My brief answer is “yes.” A longer answer after the jump.

Update: Over at Kling's blog commenter Bill Woolsey hits the nail on the head.

Perhaps part of the problem we face in macroeconomics today is that a substantial part of the "macro" wing of free market economists really think that new classical macroeconomics is "true" because simple and formalistically complete models fit their notion of what is scientific.

After the jump you can read my verbose effort to say that.

By the way, Kling's willingness to criticize the arguments others present to support policy positions with which he agrees is really admirable.


It is like Ricardian equivalence. Because the model people (person) rationally saves to pay future taxes, we are supposed to assume this has a connection to reality?





Arnold Kling has already attempted to explain things to Wilkinson. He obtained a “department of huh?” from Brad DeLong and, for what it’s worth, two extremely intemporate comments from me (one was blocked as suspected spam because I provided to many links to support my claims which suggests something about the intellectual seriousness of comment threads at at least one blog).

While I claim that Kling’s take on the stimulus debate is absolutely inconsistent with facts in the public record which I found with a few minutes of googling, I share his general view on the divisions in the profession. He notes that there is more than one fundamental gulf which means that there isn’t a consensus among economists which would enable the few non economists who respect us to take our advice. I will mention three more just because I want to consider more economists than those discussed by Wilkensen and Kling and not because I think Kling left out anything relevant to his post

Kling discusses the policy advice of macroeconomists (and Fama). Not all economists are macroeconomists who think that it is there job to offer policy advice. He notes two divisioins left and right and fresh water and salt water.

Left and right correspond fairly closely to libertarian vs egalitarian in the US political spectrum, that is, closely to Democratic vs Republican positions on economics (except that there are leading economists well to the left of the Democratic party and well to right of all but the left fringe of the Republican party). It is a fact that, except for general support for free international trade, the range of views of economists is similar to the range of views of congressmen but somewhat broader. This is a wide enough ideological range that the methods of verification used by economists are absolutely unable to force economists on left and right to admit that economists on right and left have a point.

In the field of macroeconomics there is a much deeper division between macroeconomics as practiced at universities closer to the great lakes than to an Ocean (Fresh water economics) and that practiced at universities closer to Oceans (Salt water economics). The geography has shifted some as Fresh water economics has been exported. I’d consider Professor Robert Barro at Harvard to be brackish (with, he reports, noticed salty contamination in the first 6 months after he moved from U. Rochester) and the economics department at the University of Pompeu Fabra (in Barcelona) seems to be distilled. It is a little difficult to explain the disagreement to non economists. Frankly, I think this is because non-economists have difficulty believing that any sane person would take ffresh water economics seriously.

Roughly Fresh water economists consider general equilibrium models with complete markets and symmetric information to be decent approximations to reality. Unless they are specifically studying bounded rationality they assume rational expectations, that everyone knows and has always known every conceivable conditional probability. I’ve only met one economists who claims to believe that people actually do have rational expectations (and I suspect he was joking). However, the fresh water view is that it usually must be assumed that people have rational expectations.

Over near the Great Lakes there is considerable investigation of models in which the market outcome is Pareto efficient, that is, it is asserted that recessions are optimal and that, if they could be prevented, it would be a mistake to prevent them.

Salt water macroeconomics is basically everything else with huge differences between people who attempt to conduct useful empirical research without using formal economic theory and people who note the fundamental theoretical importance of incomplete markets and of asymmetric information and of imperfect competition (as in everything you think you know about general equilibrium theory is known to be false if markets are incomplete or there is asymmetric information or there is imperfect competition – Market outcomes are generically constrained Pareto inefficient which means that everyone can be made better off by regulations imposed by regulators who don’t know anything not known to market participants who also just restrict economic activity and don’t introduce innovations like, say, unemployment insurance).

Leading fresh water macroeconomists include Robert Lucas, Ed Prescott Thomas Sargent, Lars Hansen, John Cochrane, Larry Jones, Robert Barro (mostly), and Kevin Murphy (usually). Leading salt water economists include Paul Samuelson, Edmund Malinvaud, Jacques Dreze, Joseph Stiglitz, Robert Solow, Paul Krugman, Andrei Shliefer, Olivier Blanchard, George Akerlof, Robert Hall, Ben Bernankle, N. Gregory Mankiw, Christina Romer, David Romer and, and Lawrence Summers. Brad DeLong is also a salt water economist and he is very very smart, but last I knew, he was a little too far out there to be really a member of the economists club. I can’t classify Paul Romer.

Notably all of the above have made important contributions to fields other than macroeconomics.

In the US there is a strong correlation between Fresh and Salt and Right and Left. The correlation is not perfect: I understand that Hansen and Sargent are politically left of center. Hall is far right politically, Mankiw is right of center. and I must admit that I have no clue about Bernanke (who I have never actually, you know, seen in the flesh).

An important discrimminant is opinions of John Maynard Keynes. Fresh water macroeconomists generally seem to think that he was not a competent economist. Salt water macroeconomists claim (often implausibly) to be in some way his intellectual followers. Barro for example clearly doesn’t remember what is written in “The General Theory of Employment Interest and Money.” Mankiw, in contrast, advised the students in his macro class (including me) to read it again and again searching for insights.

Interestingly, the fresh water macroeconomists are certain that salt water macro is discredited along the lines of the Ptolomaic model or the Phlogiston hypothesis. For a while they called their models “Modern Business Cycle Theory” stating that all incompatible models were obsolete. In the current debate many have considered it sufficient to say that arguments for the stimulus are nonsense (e.g. Cochrane). The surprisingly low quality of contributions to the debate from the vicinity of Great Lakes has a lot to do with the fact that Fresh Water macroeconomists haven’t thought about fiscal stimulus in decades and sincerely believe that it is an obviously invalid proposal so obvious arguments against it might be valid.

Even more interesting, Fresh water macroeconomists do not claim that their models have not been refuted by the data. Rather they note that all models are, by definition, false. They do test hypotheses from time to time, but don’t explain what the point is. As far as I can understand, they claim that a model *can* be both false and useful and, therefore, their models *are* useful.

I understand that in the 70s and, maybe, the early 80s there was a heated debate between Fresh Water and Salt water macroecnomists. Now, it seems to me that there is a truce of sorts where each school of thought ignores the other – that macroeconomists have specialized not in the questions that they ask but in the answers.

I think that this is a very bad situation. Anyone can see that, when top macroeconomists are asked for policy advice, some support each of the different proposals which are under consideration.

Frankly, this truce seems to me to be unilateral. Many salt water economists claim (in public) to respect the contribution of fresh water economists. I know of no fresh water economist who has expressed anything but contempt for the contributions of salt water economists to the stimulus debate and I haven’t heard one word of praise of a Salt Water economist from a Fresh water macroeconomist other than Arrow, Samuelson or Solow. I added the phrase “in public” because I clearly remember one of the salt water economists on my list refer to the fresh water economists as “the crazies”.

update: The truce is over. There have been continual cease fire offensives violations, but the shrill blitzkreig is here.

As far as I can tell, fresh water economists have some respect for some thinkers other than fresh water economists. I think they have rather a favorable view of mathematicians and Physicists. I think it would be useful of mathematicians and physicists to look into fresh water macro and express an opinion. On the other hand, in principle they have great respect for general equilibrium theory, but they don’t listen to general equilibrium theorists at all. Top general equilibrium theorists are all at least left of center politically, the closest David Cass could come to naming an exception is Ed Prescott who, he said, uses general equilibrium theory and studies examples (snort).

Finally I have a view of how people can devote so much effort to working out the implications of assumptions which almost no ordinary people would find other than nonsensical if they understood them. Fresh water economics uses difficult mathematical tools. Students in fresh water graduate programs have to learn a huge amount of math very fast. It is not possible to do so if one doesn't set aside all doubt as to the validity of the approach. Once the huge investment has been made it is psychologically difficult to decide that it was wasted. Hence the school gets new disciples by forcing students to follow extremely difficult courses. Last I hear very few graduate students at U Minnesota came from the USA. Undergrads over there know what the program is like. If my information is not out of date, innocents from abroad are the new blood of fresh water economics."

Me:

Don the libertarian Democrat says:

Today, 2:40:56 PM

“I believe that there is a difference between Economics and Political Economy. Many FW theorists don't seem to agree with this, while SW ones do. My personal favorite is Alan Blinder. Political Economy necessitates that one cannot rely on math or models. They are of limited use. Some of the FW models are of some use, but they do not decribe laws of nature. At best, they are correlative reasoning dressed up with equations. They describe possible movements among different stats or facts. In our situation, there are good arguments for both trying government spending and tax cuts. While a large stimulus would be nice, we are somewhat constrained by debt. I would probably also use more QE. Wilkinson seems to believe that certainty or agreement is necessary for Economics to be useful. He is wrong. It is useful to Political Economy, which, while not leading to certainty, does lend itself to better and worse arguments.Finally, about science. There is often a lot more disagreement on theories than people believe.

If government policy can help in these circumstances, it’s going to be policy that encourages mobility, not rootedness.

From Will Wilkinson:

"Don’t Wait for a Job to Come to You

by Will Wilkinson on January 28, 2009

That’s my advice in this morning’s Marketplace for the tens of thousands of Americans who have lost, or are about about to lose, their jobs. I knew this wouldn’t be very popular advice, and I was right. A number of commentators ask “What about the house?” Good question. The policies that subsidized homeownership for millions of Americans for whom it might not otherwise have made economic sense are the same ones that led to the massive misallocation of capital that contributed both to this recession and to the meltdown of the financial sector, which has made the recession worse. That is to say, a Fed policy of low interest rates, home mortgage deductions, the positive encouragement of sub-prime loans, etc., etc. have doubly or triply screwed over huge numbers of Americans. Lots of people are now losing their jobs in part because of stupid homeownership subsidies. The sensible thing to do when you can’t find work locally is to pick up and go where you can find a jobs (and, contrary to one commenter, the fact that unemployment is up in every state doesn’t begin to imply that no one is hiring anywhere.) But if you can’t sell the house at all, or if you have to sell it at a huge loss, that’s obviously going to make it hard to move.

That’s one reason why in the commentary I wanted to emphasize just how terrible it is to be unemployed. In terms of psychological well-being, it really is one of the worst things that can happen to a person. And I undrestand that there are lots of forces that hold people in place. But if we’re not even willing to consider painfully abandoning sunk costs, we can put ourselves in the way of even greater pain.

If government policy can help in these circumstances, it’s going to be policy that encourages mobility, not rootedness. The first thing government can do is to stop subsidizing homeownership in a way that anchors people at precisely the times when they most need to set sail."

Me again:

Telling people that packing up and leaving is our solution to employment problems sounds sensible, if you believe that there's no social cost to such a policy. One reason that only property owners could vote at one time was the belief that in order to really care about an area, you needed to be rooted to it. Although I'm not justifying such a policy, there was some truth in it. A society of highly mobile people leads not to less government, but more, as social relations fray and people rely more on government to help them, as opposed to family, friends, and the community. A decent social safety net would, paradoxically, allow people to try and remain in an area that they're rooted to. Some movement is of course inevitable, but easing such a transition is a much better path to follow

Me responding to a post:

Anonymouse,

It's not about renting vs owning. I simply used a historical example that seems interesting to me. I'm now renting. It's about living in a community and being part of it. I simply disagree that most people are like you. I lived in a college town for 33 years. The permanent residents were generally far more committed to the community than the students. I moved last year to a new city. It doesn't quite feel like mine yet. I still feel that I might move on. You yourself say that you cared about some, but not all, of the cities you live in. Communities need permanent residents who are committed to the area and locality, friends and institutions, not just a job. I believe that asking, as you say, poor people or unemployed people, to simply uproot themselves when times are hard isn't likely to lead to people who want less government. My view.
Thanks for the comment,
Don

we should do something that prevents backlash, but nothing that screws up the very institutions we’re trying to preserve by not doing nothing.

Will Wilkinson:

"More Macropsychoeconomics( WE NEED JULIE ANDREWS. )

by Will Wilkinson on January 25, 2009

I certainly do not reject the idea that coordinated, population-wide changes in beliefs and/or preferences have macroeconomic effects. I think herd psychology and fool-in-the-shower-style updates of expectations about lifetime income can and do have big macroeconomic effects. In fact, I think we are seeing some of this now ( YES ). But booms and busts are not only about aggregate demand and animal spirits. Nor are they only about government-induced capital misallocation. I’d like to see somebody with the wherewithal to explain how policy-led misallocation interacts with herdy consumer and investor psychology( WHAT ABOUT FISHER? ). Then I’d have a reason to really believe someone who says we merely need to wait and let all the malinvestment shake out, or someone who says we merely need to prop up the confidence of consumers and creditors.( IT'S BOTH. )

It seems likely that there are in fact a lot of bad bets that need to get squared and that the herd could use some prozac. But what dose? How much is too much; how much leads to just the sort of systemic malinvestment that leads the herd to panic again? This is the sort of thing I feel like no one really knows anything about, though I am more than eager to shown the secret science( THERE ISN'T ONE. ).

Daron Acemoglu’s VoxEU op-ed reminds me of another piece of macropsychoeconomics I’d like to know a hell of lot more about: backlash threat:

Decisive action on the crisis is necessary; not just soften the blow of the recession but also to avoid a backlash that could be deeply harmful to long-run growth. A deep and long recession raises the risk that consumers and policymakers start believing that free markets are responsible for the economic ills of today. If so, we could see a move away from the market economy. The pendulum could swing too far, bypassing properly-regulated free markets, towards heavy government involvement that could threaten future growth prospects of the global economy.

A comprehensive stimulus plan, even with all of its imperfections, is probably the best way of fighting these dangers. Nevertheless, the details of the stimulus plan should be designed so as to cause minimal disruption to the process of reallocation and innovation. Sacrificing growth out of our fear of the present would be as severe a mistake as inaction. The risk that the belief in the capitalist system may collapse should not be dismissed.

OK. I find the backlash hypothesis totally plausible( IT IS ). The idea here is that (1) good economic institutions require sufficient cultural support, (2) the “do nothing” response will erode cultural support and thereby threaten future economic performance, so (3) we should do something that prevents backlash, but nothing that screws up the very institutions we’re trying to preserve by not doing nothing.( YES. SOMETHING LIKE THIS. )

So what’s the actual evidence for (2)? Acemoglu notes that populist, anti-market backlash is big problem in developing economies, and I agree with him. But surely places with durable, high-quality economic institutions already have a lot of both elite and popular buy-in, which should limit the magnitude ofany backlash. If the point of “doing something” is really institution-preserving political theater (like Acemoglu, I’m an institutionalist, and think this does count as “economic policy”), then how much theater do we need? What is the minimum that will suffice to keep the pitchforks in the barn? Over the medium- and long-term how much can upgrades in economic literacy do to reduce backlash threat? Obviously, institution-preserving political theater creates a political opportunity to screw up economic policy, or Acemoglu wouldn’t be warning us against it. So maybe good long-term economic policy involves prioritizing economics education as a prophalyctic against future backlash( GOOD LUCK )."

There's no alternative to politics and political economy. You need a road map. I have one.

I understand the exasperation, but we're just going to have to muddle through.

"This is prefectly consonant with the idea I think liberals ought to favor: the growth-maximizing welfare state."

I took the name libertarian Democrat in order to adumbrate some ideas on what such a beast might sound like. I didn't consider the name particularly controversial or hard to understand. That's because I consider myself a Whig or Classic Liberal. However, I thought that these terms might be too arcane, and since there was already a discussion begun in 2006 about being a libertarian Democrat, I would take that discussion as a starting point. Also, I had decided to become a Democrat. I should have chosen Classic Liberal.

Here's Matt Yglesias:

"Small-Government Egalitarianism

Ed Glaeser has an interesting post on what he terms “the case for small-government egalitarianism” which goes off into a stimulus detour, but which is more interesting on more enduring issues. He observes that “Political divisions have not always pitted big-government egalitarians against small-government conservatives” but today things are different, and not necessarily for good reasons:

Current American political discourse labels people as either anti-government or pro-equality, but wanting to help the poor should not require the abandonment of sensible skepticism about expanding the size of the state. Many of my favorite causes, like fighting land use regulations that make it hard to build affordable housing, aid the poor by reducing the size of government. In the wake of Hurricane Katrina, I also argued that it would be far better to give generous checks to the poor hurt by the storm than to spend billions rebuilding the city, because those rebuilding efforts would inevitably help connected contractors more than ordinary people.

These are well-taken points. And I think it’s both true that people who think of themselves as progressives (the kind of people who think industry shouldn’t just be allowed to pollute willy-nilly, the kind of people who think it would be smart to have a universal health care system) should give more emphasis to these issues and also true that people who think of themselves as conservatives (the kind of people who think income tax rates are too high) should give more emphasis to these issues.

Still, the idea of “small-government egalitarianism” strikes me as a slightly confused concept. The argument seems to go something like this:

1. Egalitarians often favor government programs that boost equality and regulations to reduce harmful externalities.
2. Some government programs and regulations are actually just the rich and powerful further enriching themselves.
3. Underpants gnomes.
4. Egalitarians should really be libertarians!

There’s something fishy happening in step three. Contrast “small-government egalitarianism” with ordinary modern American liberalism. When a modern American liberal thinks a government regulation or public spending endeavor would accomplish an important public purpose, he’s for it. But not otherwise! Dean Baker, for example, is one of our foremost defenders of Social Security but also the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer which you both can and should read for free online.

Baker’s book is full of ideas that a “small-government egalitarian” ought to be able to embrace—it’s all about policy proposals to eliminate or reform government interventions in the economy undertaken on behalf of the rich and powerful. He doesn’t happen to tackle the pet issue I share with Glaeser—land use regulations—but it’s very much in that spirit. At the same time, Baker’s just a regular-old liberal. Nothing about his egalitarian dislike of bad government programs forces him into dislike for good government programs. Modern American liberalism isn’t a mirror-image of modern libertarianism and it doesn’t have an a priori commitment to government intervention in the economy on a particular scale. I think it’s completely fair to charge that people who call themselves liberals are sometimes mistaken about the desirability of particular programs or regulations, but that’s a different issue—lots of people are mistaken about all kinds of things.

All that said, with the Cold War over and the conservative movement tending to take most of its emotional succor from a blend of militarism and homophobia these days, I hope that modern liberals and libertarians can find ways to cooperate on some of these economic issues where our interests may overlap."

Now, I agree with Dean Baker a lot. I think of him as a Classic Liberal. Why? Because he distrusts the power of government. Period. On any issue where I disagree with Baker, it comes down to empirical differences and nuances. My problems with Social Security have to do with how it actually works. In my own plan, with a guaranteed income, I would argue that the poorest seniors would be much better off. Nevertheless, I understand why Baker doesn't want to change this arrangement. From the point of Political Economy and Politics, he might even be correct. But I don't think that he would find my proposals illiberal, though he might raise real pragmatic objections. What about libertarians? My proposal is a lot like Charles Murray's, and I think that it is in the spirit of Hayek( Who loved Burke, who defended compromise and was always a Whig. ) and Friedman. If they would disagree with my particulars that's fine, but they would certainly understand them as similar to theirs.

The differences among Classic Liberals are accounted for in my view on Pragmatic grounds. No one who calls themselves a liberal of any kind should love the power of government. Rather, they should view government as necessary, and demand that it be run efficiently and well. Are there people who call themselves liberals who don't believe this? Yes. So what?

Let's look at the Yglesias list again:

The argument seems to go something like this:

1. Egalitarians often favor government programs that boost ( THIS WORD, "BOOST", IS THE PROBLEM WITH HIS "ARGUMENT". HE SEEMS TO QUALIFY EQUALITY HERE, AS SOMETHING TO BE REDUCED, NOT MANDATED. ) equality and regulations to reduce harmful externalities.( Liberals are willing to sacrifice some economic efficiency in order to reduce inequality and ensure social harmony. )
   
2. Some government programs and regulations are actually just the rich and powerful further enriching themselves.( YES )
   
3. Underpants gnomes.
4. Egalitarians ( WHO MANDATE EQUALITY ) should really be libertarians!

4 should be: Egalitarians who are willing to limit the power of government, even in the pursuit of equality, should be classic liberals.

I'm not much for theory, but I think that I've expanded the argument enough to allow much more discussion and cooperation between liberals and libertarians.

Also, from Will Wilkinson:

"Glaeser’s Libertarian Progressivism

by Will Wilkinson on January 22, 2009

I have no idea how I missed Ed Glaeser’s blog post on “small-government egalitarianism,” which he also dubs “libertarian progressivism.” By “egalitarianism” I don’t think Glaeser intends a view strictly oriented toward the equalization of economic holdings so much as he intends something like “prioritarianism,” as some political philosophers would call it: the view that the welfare of the least advantaged should be given a certain priority in policymaking. If we’re putting the poor first, we’ll want to note that big government generally redounds especially to the benefit of the rich and connected. As Glaeser puts it:

Libertarian progressivism distrusts big increases in government spending because that spending is likely to favor the privileged. Was the Interstate Highway System such a boon for the urban poor? Has rebuilding New Orleans done much for the displaced and disadvantaged of that city? Small-government egalitarianism suggests that direct transfers of federal money to the less fortunate offer a surer path toward a fairer America.

This is prefectly consonant with the idea I think liberals ought to favor: the growth-maximizing welfare state. Arrange our basic economic institutions to maximize productivity, and then directly transfer resources to those who fall below what we (through due democratic consideration) judge the threshold of sufficiency. You don’t need a big government for that( I AGREE ). Glaeser is right that something like this is the missing position in contemporary American politics. But he points out it wasn’t always this way, And it doesn’t have to be now.

Current American political discourse labels people as either anti-government or pro-equality, but wanting to help the poor should not require the abandonment of sensible skepticism about expanding the size of the state. Many of my favorite causes, like fighting land use regulations that make it hard to build affordable housing, aid the poor by reducing the size of government. In the wake of Hurricane Katrina, I also argued that it would be far better to give generous checks to the poor hurt by the storm than to spend billions rebuilding the city, because those rebuilding efforts would inevitably help connected contractors more than ordinary people.

Glaeser goes on to express skepticism about the both the effectiveness as stimulus and the distributive effects of big infrastructure spending, and argues for a means-tested cut in the payroll tax — not far from what I argued on Marketplace last week.

I declare Glaeser a liberaltarian in good standing! Anyway, read the whole, stimulating post."

I've already posted on this.

How Do You Measure Poverty?

Will Wilkinson recommends the following:

"The Uselessness of the “Official Poverty Rate”

by Will Wilkinson on November 20, 2008

Nicholas Ebertstadt is a must-read."

I read it, so here's my comment:

"If the poor are not overspending, is it possible they are underreporting income? There is little doubt. For one thing, the OPR measure of income ignores tens of billions in tax rebates delivered by the Earned Income Tax Credit. By the same token, the poor surely supplement their incomes off the books. But to use the underreporting phenomenon to explain why the gap between spending and income has widened so much, one would also need to explain why underreporting was increasing rapidly. Hence, the explanation for the widening gap more likely lies elsewhere."

The problem is what the figures are used for. If you want to know the actual material situation of poor people in general, his ideas make sense. However, if you're using these figures to determine benefits, it might be a lot less useful.

" Further, the complex (and, for our purposes, crucial) interplay between consumption and income can be much better captured by surveys that track specific households or individuals over time than by "snapshot" measures at a single date. Yet the government's capacity to follow the long-term dynamics of household income and consumption in America is woefully limited--a curious oversight for an information-rich society.'

I think that you have the answer. It's a lot more complicated, more expensive, and needs more upkeep than the old numbers.

"The rate is and always has been a measure of absolute material poverty--one that intentionally ignores changes in the culture and the economy that influence popular perceptions of what constitutes deprivation."

It also ignores having to be constantly checking and adjusting the figures. I could be wrong about this, but some numbers, like ratings agencies for bonds, say, stick around for reasons that don't always have to do with whether they are the most accurate system one can devise.

"The evidence points to the conclusion that people in commercial societies are better, which is one of the best reasons to prefer commercial societies

Recently, Becker and Posner considered if the Free Market corrodes moral character. I inflated myself immediately after they posted, only to be deflated in minutes. Today, Will Wilkinson weighed in, and the same thing happened. Why? I love philosophy. Well, I'm going to tell you why.

Many years ago, I was a student of the philosopher Paul Grice. At the time, he appeared and dressed a little oddly in my opinion. Nowadays, I'm looking and dressing more and more like him. Someday, the resemblance will be uncanny.

Anyway, I used to spend a good part of my time sitting on the steps of the philosophy building. I was called the gargoyle of the philosophy building. The story was that one of my teachers had been known as the gargoyle of Emerson Hall when he was in college and graduate school, because he spent a good part of his time sitting on its steps, and he had made a remark that I reminded him of his younger self, and so I was so named. The truth was probably more like we're both short gnarly guys who look a bit like gargoyles.

So, one day, when I should have been reading Davidson, Quine, or Strawson for class, I was sitting on these steps reading Bradley. Grice walked up to me and almost rolled over, saying something like, " Good Lord, Bradley. Well, every philosopher comes back in vogue someday".

The thing was, I wasn't reading Bradley because of philosophy. As I recall, Eliot had written a book on Bradley which I'd managed to come across, so I'd decided to read Bradley afterwards.

After all these years, I believe that Grice was wrong. My favorite philosopher is J.L. Austin. Even then, Austin had fallen out of favor. One reason I never liked Strawson was because he'd gone head to head against Austin, and most philosophers had given the prize to Strawson. I date the decline of Anglo-American Philosophy to that calamity.

My other favorite philosopher is Wittgenstein, especially in his book called "On Certainty". Years after being dismissed from school, I managed to get to know an incredibly decent and knowledgeable man by the name of Bernard Williams. Even though he found me hard to take, he talked to me a few times.

Once, I told him that I was writing a philosophy book in the style of Austin and Wittgenstein, and what did he think would come of it if I did. He told me go ahead, but only he and a few others would get it, and hardly anyone would read it.

For many years, I assumed that it was because Austin and Wittgenstein are complicated, but now I have a different assumption. I believe that most people find their style of philosophizing annoying. They're both rather like Socrates with the Elenchus. Their mode of analysis tends to make people feel out of sorts and unmoored.

Take "On Certainty". Many people finishing it probably ask themselves if Moore was speaking a foreign language, or maybe speaking in code. "This is my right hand" means arm the bomb, "This is my left hand" means detonate it.

So, when I analyze posts philosophically, my guess is that they will be very annoying. For one thing, I would have spent some energy on the word "corrode", in order to see if their question even made sense, and was capable of being intelligently answered. You get the point.

However, here's some great news. You can read "On Certainty" online here.

Please read the Becker, Posner, and Wilkinson. But ask yourself, what does Wilkinson mean when he uses the word "better"?

"then I’m a libertarian in the sense of the term dominant in contemporary public discourse"

God bless Will Wilkinson for wading into the " Who's A Libertarian?" nonsense. At least he's readable. Nevertheless, and maybe it's age, he spends a hellish amount of time on this issue, as well as on the meaning of the word "coerce". I was thinking of doing an Austinian analysis of "coerce", but didn't last more than five minutes. It's more interesting than who's a libertarian, which is uninteresting to the point of being a soporific. Some people seem to think it's like a brand, say "Coca-Cola" or "Tide", and you can be sued for copyright or trademark infringement, or whatever the hell it is.

Anyway, I think that I agree with Wilkinson, but we have very different ways of expressing our views. I use negative and positive liberty, and, if it interests you, go read Berlin's "Two Concepts Of Liberty", from where I derive these concepts. If not, fine.

"Why don’t I get 100% on economic issues? Because, like noted socialists Milton Friedman and F.A. Hayek, I support a redistributive safety net.

One might be a WSPQ-libertarian for many, many different reasons. I happen to think principled constraints on government power are extremely important for the very same reasons I think rooting out sexism and racism are important: because people need to be free."

I agree here.

Anyway, here's Austin:

"there is no simple and handy appendage of a word called "the meaning of the word (x)"

Definitions of words are messy affairs, and, if you are going to examine them, it's best to come prepared with a decent armory of conceptual and analytical weapons.

"I just took the “World’s Smallest Political Quiz.” It says I am a… libertarian!"

To hell with the quiz. Do you think I'm Raymond Smullyan or Martin Gardner for God's sake?

A Review Of "Nudge"

Will Wilkinson reviews the book "Nudge" on Reason. The conclusion:

"All Nudge really offers is the idea that we should use what we know about how people act in order to design policy that will help them. And we shouldn't take away their choices. Well, I'm for all of it. If some policy makers really are misled by unrealistic economic models of rationality, then they should cut it out and bone up on psychology. Behavioral economics provides valuable new information about what will and won't work, and why. Thaler's work on savings plans is a great example of what can be done by taking into account new findings in psychology.

But it's no source of ideological realignment, no basis for what Thaler and Sunstein call a "Real Third Way." This book offers some whiz-bang behavioral economics that can be used for any ideological end, and it gives us the agreeably banal doctrine of choice-preserving helpfulness. The whiff of paradox in "libertarian paternalism" may have set up hopes for a category-defying revolution, but Nudge is the book where those hopes, and that tiny monster of an idea, prove flightless."

I consider Sunstein and Thaler to be proponents, more or less, of my agenda, so I'm going to have to read the book myself. However, Wilkinson does make some good points.