Brooks’s Recovery Gender Swap

Jul 17, 2013Mike Konczal

How are men doing in our anemic economic recovery? David Brooks, after discussing his favorite Western movie, argues in his latest column, Men on the Threshold, that men are "unable to cross the threshold into the new economy." Though he'd probably argue that he's talking about generational changes, he focuses on a few data points from the current recession, including that "all the private sector jobs lost by women during the Great Recession have been recaptured, but men still have a long way to go."

Is he right? And what are some facts we can put on the current recovery when it comes to men versus women?

Total Employment

Men had a harder crash during the recession, but a much better recovery, when compared with women.

Indeed, during the first two years of the recovery expert analysis was focused on a situation that was completely reversed from Brooks' story. The question in mid-2011 was "why weren't women finding jobs?" Pew Research put out a report in July 2011 finding that "From the end of the recession in June 2009 through May 2011, men gained 768,000 jobs and lowered their unemployment rate by 1.1 percentage points to 9.5%. 1 Women, by contrast, lost 218,000 jobs during the same period, and their unemployment rate increased by 0.2 percentage points to 8.5%."

How does that look two years later? Here's a graph of the actual level of employment by gender from the Great Recession onward:

If you squint you can see how women's employment is flat throughout 2011, when men start gaining jobs. Since the beginning 2011, men have gotten around 65 percent of all new jobs. That rate started at 70 percent, and has declined to around 60 percent now. So it is true, as Brooks notes, that women are approaching their old level of employment. But the idea that the anemic recovery has been biased against men is harder to understand. The issue is just a weak recovery - more jobs would mean more jobs for both men and women, but also especially for men.

Occupations

But maybe the issue is the occupations that men are now working. As Brooks writes, "Now, thanks to a communications economy, [men] find themselves in a world that values expressiveness, interpersonal ease, vulnerability and the cooperative virtues." This is a world where they either can't compete, or won't. The testable hypothesis is that men are doing poorly in occupations that are traditionally female dominated.

However the data shows that men are moving into female-dominated occupations, and taking a large majority of the new jobs there.

How has the gendered division of occupations evolved since 2011? Here is first quarter data from 2011 and 2013 of occupations by gender from the CPS. As a reminder, your occupation is what you do, while your industry is what your employer does. Occupation data is much noiser, hence us moving to quarterly data:

Ok that's a mess of data. What should we be looking for in this?

First off, men are moving into occupations that have been traditionally gender-coded female. Office support jobs, which Bryce Covert and I found were a major driver of overall female employment decline from 2009-2011, are now going to men. Men have taken 95 percent of new jobs in this occupation, one that was only about 26 percent male in 2011. We also see men taking a majority of jobs in the male-minority service occupations. Men are also gaining in sales jobs even while the overall number of jobs are declining. That's a major transformation happening in real-time.

(Meanwhile, it's not all caring work and symbolic analysts out there. There's a massive domestic energy extraction business booming in the United States, and those jobs are going to men as well. If you were to break down into suboccupations this becomes very obvious. Men took around 100 percent of the over 600,000+ new "construction and extraction" jobs, for instance.)

It'll be interesting to see how extensive men moving into traditionally female jobs will be, and to what extent it'll challenge the nature of both them and that work. Much of the structure of service work in the United States comes from the model of Walmart, and that comes from both Southern, Christian values and a model of the role women play in kinship structures and communities.

As Sarah Jaffe notes in her piece A Day Without Care, summarizing the work of Bethany Moreton, "Walmart...built its global empire on the backs of part-time women workers, capitalizing on the skills of white Southern housewives who’d never worked for pay before but who saw the customer service work they did at Walmart as an extension of the Christian service values they held dear. Those women didn’t receive a living wage because they were presumed to be married; today, Walmart’s workforce is much more diverse yet still expected to live on barely more than minimum wage."

How will men react when faced with this? And how will their bosses counter?

Follow or contact the Rortybomb blog:

  

 

How are men doing in our anemic economic recovery? David Brooks, after discussing his favorite Western movie, argues in his latest column, Men on the Threshold, that men are "unable to cross the threshold into the new economy." Though he'd probably argue that he's talking about generational changes, he focuses on a few data points from the current recession, including that "all the private sector jobs lost by women during the Great Recession have been recaptured, but men still have a long way to go."

Is he right? And what are some facts we can put on the current recovery when it comes to men versus women?

Total Employment

Men had a harder crash during the recession, but a much better recovery, when compared with women.

Indeed, during the first two years of the recovery expert analysis was focused on a situation that was completely reversed from Brooks' story. The question in mid-2011 was "why weren't women finding jobs?" Pew Research put out a report in July 2011 finding that "From the end of the recession in June 2009 through May 2011, men gained 768,000 jobs and lowered their unemployment rate by 1.1 percentage points to 9.5%. 1 Women, by contrast, lost 218,000 jobs during the same period, and their unemployment rate increased by 0.2 percentage points to 8.5%."

How does that look two years later? Here's a graph of the actual level of employment by gender from the Great Recession onward:

If you squint you can see how women's employment is flat throughout 2011, when men start gaining jobs. Since the beginning 2011, men have gotten around 65 percent of all new jobs. That rate started at 70 percent, and has declined to around 60 percent now. So it is true, as Brooks notes, that women are approaching their old level of employment. But the idea that the anemic recovery has been biased against men is harder to understand. The issue is just a weak recovery - more jobs would mean more jobs for both men and women, but also especially for men.

Occupations

But maybe the issue is the occupations that men are now working. As Brooks writes, "Now, thanks to a communications economy, [men] find themselves in a world that values expressiveness, interpersonal ease, vulnerability and the cooperative virtues." This is a world where they either can't compete, or won't. The testable hypothesis is that men are doing poorly in occupations that are traditionally female dominated.

However the data shows that men are moving into female-dominated occupations, and taking a large majority of the new jobs there.

How has the gendered division of occupations evolved since 2011? Here is first quarter data from 2011 and 2013 of occupations by gender from the CPS. As a reminder, your occupation is what you do, while your industry is what your employer does. Occupation data is much noiser, hence us moving to quarterly data:

Ok that's a mess of data. What should we be looking for in this?

First off, men are moving into occupations that have been traditionally gender-coded female. Office support jobs, which Bryce Covert and I found were a major driver of overall female employment decline from 2009-2011, are now going to men. Men have taken 95 percent of new jobs in this occupation, one that was only about 26 percent male in 2011. We also see men taking a majority of jobs in the male-minority service occupations. Men are also gaining in sales jobs even while the overall number of jobs are declining. That's a major transformation happening in real-time.

(Meanwhile, it's not all caring work and symbolic analysts out there. There's a massive domestic energy extraction business booming in the United States, and those jobs are going to men as well. If you were to break down into suboccupations this becomes very obvious. Men took around 100 percent of the over 600,000+ new "construction and extraction" jobs, for instance.)

It'll be interesting to see how extensive men moving into traditionally female jobs will be, and to what extent it'll challenge the nature of both them and that work. Much of the structure of service work in the United States comes from the model of Walmart, and that comes from both Southern, Christian values and a model of the role women play in kinship structures and communities.

As Sarah Jaffe notes in her piece A Day Without Care, summarizing the work of Bethany Moreton, "Walmart...built its global empire on the backs of part-time women workers, capitalizing on the skills of white Southern housewives who’d never worked for pay before but who saw the customer service work they did at Walmart as an extension of the Christian service values they held dear. Those women didn’t receive a living wage because they were presumed to be married; today, Walmart’s workforce is much more diverse yet still expected to live on barely more than minimum wage."

How will men react when faced with this? And how will their bosses counter?

Follow or contact the Rortybomb blog:

  

 

Business people armwrestling image via Shutterstock.com.

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Mirowski on the Vacuum and Obscurity of Current Economics

Jul 9, 2013Mike Konczal

I just finished reading Philip Mirowski’s Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown. It’s fantastic, wonderfully dense, packed with ideas running from Foucault through how game theorists botched the TARP auction design. It provides a stunningly detailed summary of topics economic bloggers would be interested in, ranging from the debate on the Efficient Market Hypothesis after the crisis, the structure of the Mont Pelerin Society, to the way conservatives spread the idea that the GSEs caused the financial crisis. If you like Mirowski’s other works, you'll love this. Mirowski is an economist and a historian, and has a knack for showing the evolving arguments and justifications and contexts for economic ideas and approaches. I'm writing a longer review of it, but I'll be bringing up pieces of it here.

I wanted to include this part on the issue of the vacuousness within economics at this moment. Mirowski:

“Third, it would appear that the corporeal solidity of a live intellectual discipline would be indicated by consensus reference text that help define what it means to be an advocate of that discipline. Here, I would insist that undergraduate textbooks should not count, since they merely project the etiolated public face of the discipline to the world. But if we look at contemporary orthodox economics, where is the John Stuart Mill, the Alfred Marshall, the Paul Samuelson, the Tjalling Koopmans, or the David Kreps of the early twenty-first century? The answer is that, in macroeconomics, there is none. And in microeconomics, the supposed gold standard is Andrew Mas-Collel, Michael Whinston, and Jerry Green (Microeconomic Theory), at its birth a baggy compendium lacking clear organizing principles, but now slipping out of data and growing a bit long in the tooth. Although often forced to take econometrics as part of the core, there is no longer any consensus that econometrics is situated at the heart of economic empiricism in the modern world. Beyond the graduate textbooks, the profession is held together by little more than a few journals that are designated indispensable by some rather circular bibliometrics measures, and the dominance of a few highly ranked departments, rather than any clear intellectual standards. Indeed, graduates are socialized and indoctrinated by forcing them to read articles from those journals with a half-life of five years: and so the disciplinary center of gravity wanders aimlessly, without vision or intentionality. The orthodoxy, so violent quarantined and demarcated from outside pretenders, harbors a vacuum within its perimeter.

Fourth, and finally, should one identify specific models as paradigmatic for neoclassical economics, then they are accompanied by formal proofs of impeccable logic which demonstrate that the model does not underwrite the seeming solidity of the textbooks. Neoclassical theory is itself the vector of its own self-abnegation. If one cites the canonical Arrow-Debreu model of general equilibrium, then one can pair it with the Sonnenschein-Mantel-Debreu theorems, which point out that the general Arrow-Debreu model places hardly any restrictions at all on the functions that one deems “basic economics,” such as excess demand functions. Or, alternatively, if one lights on the Nash equilibrium in game theory, you can pair that with the so-called folk theorem, which states that under generic conditions, almost anything can qualify as a Nash equilibrium. Keeping with the wonderful paradoxes of “strategic behavior,” the Milgrom-Stokey “No Trade theorem” suggests that if everyone really were as suspicious and untrusting as the Nash theory makes out, then no one would engage in any market exchange whatsoever in a neoclassical world. The Modigliani-Miller theorem states that the level of debt relative to equity in a bank’s balance sheet should not matter one whit for market purposes, even though finance theory is obsessed with debt. Arrow’s impossibility theorem states that, if one models the polity on the pattern of a neoclassical model, then democratic politics is essentially impotent to achieve political goals. Markets are now assert to be marvelous information processors, but the Grossman-Stiglitz results suggest that there are no incentives for anyone to invest in the development and refinement of information in the first place. The list just goes on and on. It is the fate of the Delphic oracles to deal in obscurity.” (p. 24-26)

Konczal here. The entire book is that intense. A few thoughts:

- To put the first point a different way, the complaint I hear most when it comes to the major graduate textbooks is that they function as cookbooks, or books full of simple recipes each designed to do a single thing. Beyond micro, this is especially true for the major texts in macroeconomics and econometrics. The macroeconomics piece gives the sense that it’s designed to pull attention away from the major visions and towards little puzzle pieces that don’t connect into any kind of bigger picture.

Scanning the "What's New?" part of the new 2012 edition of the standard, entry-level graduate macro text, it seems like there's nothing new for the crisis. (If it is mentioned, I didn't see it.) If you are an energetic, smart graduate student who really wants to dissect the economic crisis, you essentially have to sit out the first half of your macroeconomic coursework before you get to something that has to do with a recession as a regular person would understand it. It's clear what has priority within the education of new economists.

I wonder how much the move to empirical methods and experiments are less about access to computing power and data sets (or, ha, issues of falsification), and more about the fact that the ability to innovate on the theory side has broken and it is now impossible to break new ground. How many enfante terribles in economics are theorists these days? I assume any substantial break from standing theory is immediate exclusion from tenure-setting journals.

- I love this magic trick analogy from Mirowski for frictions within DSGE: “By thrusting the rabbit into the hat, then pulling it back out with a different hand, the economist merely creates a model more awkward, arbitrary, and unprepossessing [that also] violate[] the Lucas critique in a more egregious fashion than the earlier Keynesian models these macroeconomists love to hate” (p. 284).

- The mention of the “excess demand function” reminded me whether stability issues are covered anymore. The book The Assumptions Economists Make makes a big deal about the lack of stability analysis in how economists discuss general equilibrium (also see Alejandro Nadal here).

To clarify in English, have you ever heard of the “Invisible Hand” metaphor? Markets equilibrate supply and demand with prices across the whole economy. Stability is the question of “under what circumstances (if any) does a competitive economy converge to equilibrium, and, if it does, how quickly does this happen?”

Will these concerns come back into graduate education and discussion with the crisis? I got a chance to check out the new 2011 Advanced Microeconomic Theory by Jehle and Reny, which seems to be the new, more mathematically tight, alternative to Mas-Collel (1995) for graduate microeconomics.

One the first page of their chapter for general equilibrium: “These are questions of existence, uniqueness, and stability of general competitive equilibrium. All are deep and important, but we will only address the first.” Wow. That’s a massive forgetting from Mas-Collel, which covers these issues, even if superficially, to give student an understanding that they are there.

Going forward, if you ask a new economist “could the economy just stay this way forever?” or “could more commodity trading push prices further away from a true price?” (pretty important questions!) you will probably get a smug “we’ve proven the Invisible Hand handles this decades ago.” Little will he or she know that a gigantic, inconclusive debate occurred about these issues, but they’ve simply been excised down the memory hole.

Follow or contact the Rortybomb blog:

  

 

I just finished reading Philip Mirowski’s Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown. It’s fantastic, wonderfully dense, packed with ideas running from Foucault through how game theorists botched the TARP auction design. It provides a stunningly detailed summary of topics economic bloggers would be interested in, ranging from the debate on the Efficient Market Hypothesis after the crisis, the structure of the Mont Pelerin Society, to the way conservatives spread the idea that the GSEs caused the financial crisis. If you like Mirowski’s other works, you'll love this. Mirowski is an economist and a historian, and has a knack for showing the evolving arguments and justifications and contexts for economic ideas and approaches. I'm writing a longer review of it, but I'll be bringing up pieces of it here.

I wanted to include this part on the issue of the vacuousness within economics at this moment. Mirowski:

“Third, it would appear that the corporeal solidity of a live intellectual discipline would be indicated by consensus reference text that help define what it means to be an advocate of that discipline. Here, I would insist that undergraduate textbooks should not count, since they merely project the etiolated public face of the discipline to the world. But if we look at contemporary orthodox economics, where is the John Stuart Mill, the Alfred Marshall, the Paul Samuelson, the Tjalling Koopmans, or the David Kreps of the early twenty-first century? The answer is that, in macroeconomics, there is none. And in microeconomics, the supposed gold standard is Andrew Mas-Collel, Michael Whinston, and Jerry Green (Microeconomic Theory), at its birth a baggy compendium lacking clear organizing principles, but now slipping out of data and growing a bit long in the tooth. Although often forced to take econometrics as part of the core, there is no longer any consensus that econometrics is situated at the heart of economic empiricism in the modern world. Beyond the graduate textbooks, the profession is held together by little more than a few journals that are designated indispensable by some rather circular bibliometrics measures, and the dominance of a few highly ranked departments, rather than any clear intellectual standards. Indeed, graduates are socialized and indoctrinated by forcing them to read articles from those journals with a half-life of five years: and so the disciplinary center of gravity wanders aimlessly, without vision or intentionality. The orthodoxy, so violent quarantined and demarcated from outside pretenders, harbors a vacuum within its perimeter.

Fourth, and finally, should one identify specific models as paradigmatic for neoclassical economics, then they are accompanied by formal proofs of impeccable logic which demonstrate that the model does not underwrite the seeming solidity of the textbooks. Neoclassical theory is itself the vector of its own self-abnegation. If one cites the canonical Arrow-Debreu model of general equilibrium, then one can pair it with the Sonnenschein-Mantel-Debreu theorems, which point out that the general Arrow-Debreu model places hardly any restrictions at all on the functions that one deems “basic economics,” such as excess demand functions. Or, alternatively, if one lights on the Nash equilibrium in game theory, you can pair that with the so-called folk theorem, which states that under generic conditions, almost anything can qualify as a Nash equilibrium. Keeping with the wonderful paradoxes of “strategic behavior,” the Milgrom-Stokey “No Trade theorem” suggests that if everyone really were as suspicious and untrusting as the Nash theory makes out, then no one would engage in any market exchange whatsoever in a neoclassical world. The Modigliani-Miller theorem states that the level of debt relative to equity in a bank’s balance sheet should not matter one whit for market purposes, even though finance theory is obsessed with debt. Arrow’s impossibility theorem states that, if one models the polity on the pattern of a neoclassical model, then democratic politics is essentially impotent to achieve political goals. Markets are now assert to be marvelous information processors, but the Grossman-Stiglitz results suggest that there are no incentives for anyone to invest in the development and refinement of information in the first place. The list just goes on and on. It is the fate of the Delphic oracles to deal in obscurity.” (p. 24-26)

Konczal here. The entire book is that intense. A few thoughts:

- To put the first point a different way, the complaint I hear most when it comes to the major graduate textbooks is that they function as cookbooks, or books full of simple recipes each designed to do a single thing. Beyond micro, this is especially true for the major texts in macroeconomics and econometrics. The macroeconomics piece gives the sense that it’s designed to pull attention away from the major visions and towards little puzzle pieces that don’t connect into any kind of bigger picture.

Scanning the "What's New?" part of the new 2012 edition of the standard, entry-level graduate macro text, it seems like there's nothing new for the crisis. (If it is mentioned, I didn't see it.) If you are an energetic, smart graduate student who really wants to dissect the economic crisis, you essentially have to sit out the first half of your macroeconomic coursework before you get to something that has to do with a recession as a regular person would understand it. It's clear what has priority within the education of new economists.

I wonder how much the move to empirical methods and experiments are less about access to computing power and data sets (or, ha, issues of falsification), and more about the fact that the ability to innovate on the theory side has broken and it is now impossible to break new ground. How many enfante terribles in economics are theorists these days? I assume any substantial break from standing theory is immediate exclusion from tenure-setting journals.

- I love this magic trick analogy from Mirowski for frictions within DSGE: “By thrusting the rabbit into the hat, then pulling it back out with a different hand, the economist merely creates a model more awkward, arbitrary, and unprepossessing [that also] violate[] the Lucas critique in a more egregious fashion than the earlier Keynesian models these macroeconomists love to hate” (p. 284).

- The mention of the “excess demand function” reminded me whether stability issues are covered anymore. The book The Assumptions Economists Make makes a big deal about the lack of stability analysis in how economists discuss general equilibrium (also see Alejandro Nadal here).

To clarify in English, have you ever heard of the “Invisible Hand” metaphor? Markets equilibrate supply and demand with prices across the whole economy. Stability is the question of “under what circumstances (if any) does a competitive economy converge to equilibrium, and, if it does, how quickly does this happen?”

Will these concerns come back into graduate education and discussion with the crisis? I got a chance to check out the new 2011 Advanced Microeconomic Theory by Jehle and Reny, which seems to be the new, more mathematically tight, alternative to Mas-Collel (1995) for graduate microeconomics.

One the first page of their chapter for general equilibrium: “These are questions of existence, uniqueness, and stability of general competitive equilibrium. All are deep and important, but we will only address the first.” Wow. That’s a massive forgetting from Mas-Collel, which covers these issues, even if superficially, to give student an understanding that they are there.

Going forward, if you ask a new economist “could the economy just stay this way forever?” or “could more commodity trading push prices further away from a true price?” (pretty important questions!) you will probably get a smug “we’ve proven the Invisible Hand handles this decades ago.” Little will he or she know that a gigantic, inconclusive debate occurred about these issues, but they’ve simply been excised down the memory hole.

Follow or contact the Rortybomb blog:

  

 

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Can the Taper Matter? Revisiting a Wonkish 2012 Debate

Jun 25, 2013Mike Konczal

Last week, Ben Bernanke tested the waters for “tapering,” or cutting back on the rate at which he carries out new asset purchases, and everything is going poorly. As James Bullard, the president of the Federal Reserve Bank of St. Louis, argued in discussing his dovish dissent with Wonkblog, “This was tighter policy. It’s all about tighter policy. You can communicate it one way or another way, but the markets are saying that they’re pulling up the probability we’re going to withdraw from the QE program sooner than they expected, and that’s having a big influence.”

But if you really believe in the expectations channel of monetary policy, can this even matter? Let’s use this to revisit an obscure monetary beef from fall 2012.

Cardiff Garcia had a recent post discussing the fragile alliance between fiscalists and monetarists at the zero lower bound. But one angle he missed was the disagreements between monetarists, or more generally those who believe that the Federal Reserve has a lot of “ammo” at the zero lower bound, over what really matters and how.

For instance, David Becksworth writes, “What is puzzling to me is how anyone could look at the outcome of this experiment and claim the Fed's large scale asset programs (LSAPs) are not helpful.” But one of the most important and influential supporters of expansionary monetary policy, the one who probably helped put the Federal Reserve on its bold course in late 2012, thinks exactly this. And that person is the economist Michael Woodford.

To recap, the Fed took two major steps in 2012. First, it used a communication strategy to say that it would keep interest rates low until certain economic states were hit, such as unemployment hitting 6.5 percent or inflation hitting 2.5 percent. This was the Evans Rule, which used what is called the expectations channel. Second, the Fed started purchasing $85 billion a month in assets until this goal was hit. This was QE3, which used what is called the portfolio channel.

In his major September 2012 paper, Woodford argued that the latter step, the $85 billion in purchases every month, doesn't even matter, because "'portfolio-balance effects' do not exist in a modern, general-equilibrium theory of asset prices." At best, such QE-related purchases "can be helpful as ways of changing expectations about future policy — essentially, as a type of signalling that can usefully supplement purely verbal forms of forward guidance." (He even calls the idea that purchases matter "1950s-vintage," which is as cutting as you can get as a macroeconomist.)

To put it a different way, the Fed's use of the portfolio channel only matters to the extent that the Fed isn't being clear in its written statements about future interest rate policy and other means of setting expectations.

Woodford specifically called out research by the Peterson Institute for International Economics’ (and friend of the blog) Joseph Gagnon. Contra Woodford, Gagnon et al concluded in their research, “[QE] purchases led to economically meaningful and long-lasting reductions in longer-term interest rates on a range of securities [that] reflect lower risk premiums, including term premiums, rather than lower expectations of future short-term interest rates.” (Woodford thinks that expectations of future short-term interest rates are the only thing at play here.)

Woodford's analysis of this research immediately came under attack in the blogosphere. James Hamilton at Econobrowser noted that “Gagnon, et. al.'s finding has also been confirmed by a number of other researchers using very different data sets and methods.” Gagnon himself responded here, defending the research and noting that Woodford’s theoretical assumptions “are violated in clear and obvious ways in the real world.“ (If you are interested in the nitty-gritty of the research agenda, it is worth following the links.)

For our purposes, what can the taper explain for us? Remember, in Woodford’s world of strict expectations, QE purchases don’t matter. Since the purchases don't matter, moving future purchases up or down at the margins, keeping the expected future path of short-term interest rates constant, shouldn't matter either. Raising the $85 billion to $100 billion wouldn't help, and lowering it to $70 billion wouldn't hurt, unless Bernanke also moved the expectations of future policy.

The taper was a test case for this theory. Bernanke meant to keep expectations of future short-term interest rates the same (there was no change to when interest rates would rise) while reducing the flow of QE purchases. But from our first readings, it has been accepted by the market as a major tightening of policy. This strikes me as a major victory for Gagnon and a loss for the strongest versions of the expectations channel.

Of course, the taper could be a signal that Bernanke has lost his coalition or is otherwise going soft on expansionary policy. If that’s the case, then according to the stronger version of the expectations theory, QE3 should never have been started, because it adds no value and is just another thing that could go wrong. Bernanke should just have focused on crafting a more articulate press release instead. This doesn't seem the right lesson when a body of research argues purchases are making a difference.

An objective bystander would say that if the taper is being read as tightening even though future expectations language is the same, it means that we should be throwing everything we have at the problem because everything is in play. That includes fiscal policy. As Woodford writes, “[t]he most obvious source of a boost to current aggregate demand that would not depend solely on expectational channels is fiscal stimulus.” We should be expanding, rather than contracting, the portfolio channel, while also avoiding the sequester and extending the payroll tax cut. Arguments, like Woodford's, about the supremacy of any one approach tend to get knocked down by all the other concerns.

Follow or contact the Rortybomb blog:

  

 

Last week, Ben Bernanke tested the waters for “tapering,” or cutting back on the rate at which he carries out new asset purchases, and everything is going poorly. As James Bullard, the president of the Federal Reserve Bank of St. Louis, argued in discussing his dovish dissent with Wonkblog, “This was tighter policy. It’s all about tighter policy. You can communicate it one way or another way, but the markets are saying that they’re pulling up the probability we’re going to withdraw from the QE program sooner than they expected, and that’s having a big influence.”

But if you really believe in the expectations channel of monetary policy, can this even matter? Let’s use this to revisit an obscure monetary beef from fall 2012.

Cardiff Garcia had a recent post discussing the fragile alliance between fiscalists and monetarists at the zero lower bound. But one angle he missed was the disagreements between monetarists, or more generally those who believe that the Federal Reserve has a lot of “ammo” at the zero lower bound, over what really matters and how.

For instance, David Becksworth writes, “What is puzzling to me is how anyone could look at the outcome of this experiment and claim the Fed's large scale asset programs (LSAPs) are not helpful.” But one of the most important and influential supporters of expansionary monetary policy, the one who probably helped put the Federal Reserve on its bold course in late 2012, thinks exactly this. And that person is the economist Michael Woodford.

To recap, the Fed took two major steps in 2012. First, it used a communication strategy to say that it would keep interest rates low until certain economic states were hit, such as unemployment hitting 6.5 percent or inflation hitting 2.5 percent. This was the Evans Rule, which used what is called the expectations channel. Second, the Fed started purchasing $85 billion a month in assets until this goal was hit. This was QE3, which used what is called the portfolio channel.

In his major September 2012 paper, Woodford argued that the latter step, the $85 billion in purchases every month, doesn't even matter, because "'portfolio-balance effects' do not exist in a modern, general-equilibrium theory of asset prices." At best, such QE-related purchases "can be helpful as ways of changing expectations about future policy — essentially, as a type of signalling that can usefully supplement purely verbal forms of forward guidance." (He even calls the idea that purchases matter "1950s-vintage," which is as cutting as you can get as a macroeconomist.)

To put it a different way, the Fed's use of the portfolio channel only matters to the extent that the Fed isn't being clear in its written statements about future interest rate policy and other means of setting expectations.

Woodford specifically called out research by the Peterson Institute for International Economics’ (and friend of the blog) Joseph Gagnon. Contra Woodford, Gagnon et al concluded in their research, “[QE] purchases led to economically meaningful and long-lasting reductions in longer-term interest rates on a range of securities [that] reflect lower risk premiums, including term premiums, rather than lower expectations of future short-term interest rates.” (Woodford thinks that expectations of future short-term interest rates are the only thing at play here.)

Woodford's analysis of this research immediately came under attack in the blogosphere. James Hamilton at Econobrowser noted that “Gagnon, et. al.'s finding has also been confirmed by a number of other researchers using very different data sets and methods.” Gagnon himself responded here, defending the research and noting that Woodford’s theoretical assumptions “are violated in clear and obvious ways in the real world.“ (If you are interested in the nitty-gritty of the research agenda, it is worth following the links.)

For our purposes, what can the taper explain for us? Remember, in Woodford’s world of strict expectations, QE purchases don’t matter. Since the purchases don't matter, moving future purchases up or down at the margins, keeping the expected future path of short-term interest rates constant, shouldn't matter either. Raising the $85 billion to $100 billion wouldn't help, and lowering it to $70 billion wouldn't hurt, unless Bernanke also moved the expectations of future policy.

The taper was a test case for this theory. Bernanke meant to keep expectations of future short-term interest rates the same (there was no change to when interest rates would rise) while reducing the flow of QE purchases. But from our first readings, it has been accepted by the market as a major tightening of policy. This strikes me as a major victory for Gagnon and a loss for the strongest versions of the expectations channel.

Of course, the taper could be a signal that Bernanke has lost his coalition or is otherwise going soft on expansionary policy. If that’s the case, then according to the stronger version of the expectations theory, QE3 should never have been started, because it adds no value and is just another thing that could go wrong. Bernanke should just have focused on crafting a more articulate press release instead. This doesn't seem the right lesson when a body of research argues purchases are making a difference.

An objective bystander would say that if the taper is being read as tightening even though future expectations language is the same, it means that we should be throwing everything we have at the problem because everything is in play. That includes fiscal policy. As Woodford writes, “[t]he most obvious source of a boost to current aggregate demand that would not depend solely on expectational channels is fiscal stimulus.” We should be expanding, rather than contracting, the portfolio channel, while also avoiding the sequester and extending the payroll tax cut. Arguments, like Woodford's, about the supremacy of any one approach tend to get knocked down by all the other concerns.

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What’s New in the New Surveillance State?

Jun 11, 2013Mike Konczal

I had a post at Wonkblog over the weekend, “Is a democratic surveillance state possible?”

In some sense, the issue of the government spying and collecting data on its citizens isn’t a new problem. One of my favorite tweets of the past week was Brooke Jarvis noting "Collapsing bridges alongside massive spy networks... Ah, the Jeffersonian ideal of government."

The United States has been tracking, observing, and surveilling its citizens for centuries. That includes that long-standing form of communication, the mail. As Senator Lindsey Graham just said, “In World War II... you wrote a letter overseas, it got censored...If I thought censoring the mail was necessary, I would suggest it.”

From the Census in the Constitution to the Cold War spy network (including the NSA, founded in 1952 through the Executive Branch), maybe this should be seen as a continuation of an old issue rather than a brand new one. But I think there are genuinely new and interesting problems with the 21st century Surveillance State and the brand new digital technologies that create the foundations for it. What’s new about the new surveillance state?

1. It’s always on and always has been. Old acts of surveillance had to be triggered and were forward-looking. However, we now spend so much of our lives online, and that is always being recorded. As the leaker Edward Snowden said in his interview, “they can use this system to go back in time and scrutinize every decision you've ever made, every friend you've ever discussed something with. And attack you on that basis to sort to derive suspicion from an innocent life and paint anyone in the context of a wrongdoer."

To the extent that old surveillance was capable of going back, it was by checking old records or interrogating old sources. And there the concept of amnesia comes into play.

2. It will never forget. “Amnesia” is a normal front line of defense. People forget things. Clear memories, stories, and ideas become grey. Photos and documents get lost with time. Trying to piece together history will necessarily involve a lot of missing gaps and poor recollection.

Not with the surveillance state. Cheap digital storage means that clear, easily replicable data will exist for the foreseeable future.

3. It scales easily. If the FBI was keeping records on 100 people in the 1950s, and it then wanted to monitor 1,000 people, it would probably need 10 times as many resources. Certainly it wouldn’t be effortless to scale up that level of surveillance.

As we can see in the age of Big Data and fast computing, this is no longer the case. The resource costs of accessing your phone’s metadata history versus all phones’ metadata history is going to be (somewhat) trivial. And the fact that there’s no amnesia means that you’ll always have access to that extra data.

4. It’s designed to be accessible. As Orin Kerr emphasizes, digital data here isn’t collected or surveilled via the human senses. A person can’t simply “peek” into your email the way they could peek at your physical mail. Instead devices need to be installed to access and make sense of this data. Private sector agents will do this, because it is part of their business model to make this information accessible. These access points will also be accessible to government agents under certain conditions - part of the major debate over the PRISM program is under what conditions the government can actually access these devices.

5. It’s primarily driven by the private sector. Broadly speaking, measures of democratic accountability and constitutional protections do not extend to the private sector. More on this soon, but things like the Freedom of Information Act to the Administrative Procedure Act to our whole regime of transparency laws do not apply to outside businesses. The government has worked with private groups before on surveillance, but here it is in large part driven by private agents, both for contractors and information gathering.

6. It predicts the future for individuals using mass data. Surveillance has generally used mass data to either predict or determine future courses of action on a mass scale. For instance, Census data is used to allocate federal money, or predict population growth. Alternatively, it uses individual data to analyze individual behavior - asking around and snooping to dig up dirt on someone, for instance.

The surveillance state, however, allows for using mass data to predict the actions of individuals and groups of individuals. This is what generates your Netflix and Amazon suggestions, but it is also now providing the basis for government actions. As Kieran Healy notes, this would have been interesting back in the American Revolution.

This is distinct from the normal Seeing Like a State (SLS) critique of how states see their citizens. Some think states produce “a logic of homogenization and the virtual elimination of local knowledge...an agency of homogenization, uniformity, grids and heroic simplification” (SLS 302, 8). But rather than flatten or homogenize its citizens when observed under bulk conditions, it actually creates a remarkably individualized image of what its citizens are up to.

What else is missing, or shouldn't have been listed? You could view these as a technological evolution of what was already in place, and in some ways that would make sense. But the technology has opened a brand new field. This existed before the War on Terror, and will likely exist afterwards; dealing with the laws and institutions behind this new state is crucial. As the technology has changed, so must our laws.

Follow or contact the Rortybomb blog:

  

 

I had a post at Wonkblog over the weekend, “Is a democratic surveillance state possible?”

In some sense, the issue of the government spying and collecting data on its citizens isn’t a new problem. One of my favorite tweets of the past week was Brooke Jarvis noting "Collapsing bridges alongside massive spy networks... Ah, the Jeffersonian ideal of government."

The United States has been tracking, observing, and surveilling its citizens for centuries. That includes that long-standing form of communication, the mail. As Senator Lindsey Graham just said, “In World War II... you wrote a letter overseas, it got censored...If I thought censoring the mail was necessary, I would suggest it.”

From the Census in the Constitution to the Cold War spy network (including the NSA, founded in 1952 through the Executive Branch), maybe this should be seen as a continuation of an old issue rather than a brand new one. But I think there are genuinely new and interesting problems with the 21st century Surveillance State and the brand new digital technologies that create the foundations for it. What’s new about the new surveillance state?

1. It’s always on and always has been. Old acts of surveillance had to be triggered and were forward-looking. However, we now spend so much of our lives online, and that is always being recorded. As the leaker Edward Snowden said in his interview, “they can use this system to go back in time and scrutinize every decision you've ever made, every friend you've ever discussed something with. And attack you on that basis to sort to derive suspicion from an innocent life and paint anyone in the context of a wrongdoer."

To the extent that old surveillance was capable of going back, it was by checking old records or interrogating old sources. And there the concept of amnesia comes into play.

2. It will never forget. “Amnesia” is a normal front line of defense. People forget things. Clear memories, stories, and ideas become grey. Photos and documents get lost with time. Trying to piece together history will necessarily involve a lot of missing gaps and poor recollection.

Not with the surveillance state. Cheap digital storage means that clear, easily replicable data will exist for the foreseeable future.

3. It scales easily. If the FBI was keeping records on 100 people in the 1950s, and it then wanted to monitor 1,000 people, it would probably need 10 times as many resources. Certainly it wouldn’t be effortless to scale up that level of surveillance.

As we can see in the age of Big Data and fast computing, this is no longer the case. The resource costs of accessing your phone’s metadata history versus all phones’ metadata history is going to be (somewhat) trivial. And the fact that there’s no amnesia means that you’ll always have access to that extra data.

4. It’s designed to be accessible. As Orin Kerr emphasizes, digital data here isn’t collected or surveilled via the human senses. A person can’t simply “peek” into your email the way they could peek at your physical mail. Instead devices need to be installed to access and make sense of this data. Private sector agents will do this, because it is part of their business model to make this information accessible. These access points will also be accessible to government agents under certain conditions - part of the major debate over the PRISM program is under what conditions the government can actually access these devices.

5. It’s primarily driven by the private sector. Broadly speaking, measures of democratic accountability and constitutional protections do not extend to the private sector. More on this soon, but things like the Freedom of Information Act to the Administrative Procedure Act to our whole regime of transparency laws do not apply to outside businesses. The government has worked with private groups before on surveillance, but here it is in large part driven by private agents, both for contractors and information gathering.

6. It predicts the future for individuals using mass data. Surveillance has generally used mass data to either predict or determine future courses of action on a mass scale. For instance, Census data is used to allocate federal money, or predict population growth. Alternatively, it uses individual data to analyze individual behavior - asking around and snooping to dig up dirt on someone, for instance.

The surveillance state, however, allows for using mass data to predict the actions of individuals and groups of individuals. This is what generates your Netflix and Amazon suggestions, but it is also now providing the basis for government actions. As Kieran Healy notes, this would have been interesting back in the American Revolution.

This is distinct from the normal Seeing Like a State (SLS) critique of how states see their citizens. Some think states produce “a logic of homogenization and the virtual elimination of local knowledge...an agency of homogenization, uniformity, grids and heroic simplification” (SLS 302, 8). But rather than flatten or homogenize its citizens when observed under bulk conditions, it actually creates a remarkably individualized image of what its citizens are up to.

What else is missing, or shouldn't have been listed? You could view these as a technological evolution of what was already in place, and in some ways that would make sense. But the technology has opened a brand new field. This existed before the War on Terror, and will likely exist afterwards; dealing with the laws and institutions behind this new state is crucial. As the technology has changed, so must our laws.

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We Already Tried Libertarianism - It Was Called Feudalism

Jun 11, 2013Mike Konczal

Bob Dole recently said that neither he nor Ronald Reagan would count as conservatives these days. It’s worth noting that John Locke probably wouldn’t count as a libertarian these days, either.

Michael Lind had a column in Salon in which he asked, “[i]f libertarians are correct in claiming that they understand how best to organize a modern society, how is it that not a single country in the world in the early twenty-first century is organized along libertarian lines?” EJ Dionne agrees. Several libertarians argue that the present is no guide, because the (seasteading?) future belongs to libertarians.

I’d actually go in a different direction and say the past belonged to libertarians. We tried libertarianism for a long time; it was called feudalism. That modern-day libertarianism of the Nozick-Rand-Rothbard variety resembles feudalism, rather than some variety of modern liberalism, is a great point made by Samuel Freeman in his paper "Illiberal Libertarians: Why Libertarianism Is Not a Liberal View." Let’s walk through it.

Freeman notes that there are several key institutional features of liberal political structures shared across a variety of theorists. First, there’s a set of basic rights each person equally shares (speech, association, thought, religion, conscience, voting and holding office, etc.) that are both fundamental and inalienable (more on those terms in a bit). Second, there’s a public political authority which is impartial, institutional, continuous, and held in trust to be acted on in a representative capacity. Third, positions should be open to talented individuals alongside some fairness in equality of opportunity. And last, there’s a role for governments in the market for providing public goods, checking market failure, and providing a social minimum.

The libertarian state, centered solely around ideas of private property, stands in contrast to all of these. I want to stick with the libertarian minimal state laid out by Robert Nozick in Anarchy, State, and Utopia (ASU), as it's a landmark in libertarian thought, and I just re-read it and wanted to write something about it. Let’s look at how it handles each of the political features laid out above.

Rights. Libertarians would say that of course they believe in basic rights, maybe even more than liberals! But there’s a subtle trick here.

For liberals, basic rights are fundamental, in the sense that they can’t be compromised or traded against other, non-basic rights. They are also inalienable; I can’t contractually transfer away or otherwise give up my basic rights. To the extent that I enter contracts that do this, I have an option of exit that restores those rights.

This is different from property rights in specific things. Picture yourself as a person with a basic right to association, who also owns a wooden stick. You can sell your stick, or break it, or set it on fire. Your rights over the stick are alienable - you don’t have the stick anymore once you’ve done those things. Your rights to the stick are also not fundamental. Given justification, the public could regulate its use (say if it were a big stick turned into a bridge, it may need to meet safety requirements), in a way that the liberal state couldn’t regulate freedom of association.

When libertarians say they are for basic rights, what they are really saying is that they are for treating what liberals consider basic rights as property rights. Basic rights receive no more, or less, protection than other property rights. You can easily give them up or bargain them away, and thus alienate yourself from them. (Meanwhile, all property rights are entirely fundamental - they can never be regulated.)

How is that possible? Let’s cut to the chase: Nozick argues you can sell yourself into slavery, a condition under which all basic liberties are extinguished. (“[Would] a free system... allow him to sell himself into slavery[?] I believe that it would.” ASU 331) The minimal libertarian state would be forced to acknowledge and enforce contracts that permanently alienate basic liberties, even if the person in question later wanted out, although the liberal state would not at any point acknowledge such a contract.

If the recession were so bad that millions of people started selling themselves into slavery, or entering contracts that required lifelong feudal oaths to employers and foregoing basic rights, in order to survive, this would raise no important liberty questions for the libertarian minimal state. If this new feudal order were set in such a way that it persisted across generations, again, no problem. As Freeman notes, “what is fundamentally important for libertarians is maintaining a system of historically generated property rights...no attention is given to maintaining the basic rights, liberties, and powers that (according to liberals) are needed to institutionally define a person’s freedom, independence, and status as an equal citizen.”

Government. Which brings us to feudalism. Feudalism, for Freeman, means “the elements of political authority are powers that are held personally by individuals, not by enduring political institutions... subjects’ political obligations and allegiances are voluntary and personal: They arise out of private contractual obligations and are owed to particular persons.”

What is the libertarian government? For Nozick, the minimal state is basically a protection racket (“protection services”) with a certain kind of returns to scale over an area and, after some mental cartwheels, a justification in forcing holdouts in their area to follow their rules.

As such, it is a network of private contracts, arising solely from protection and arbitration services, where political power also remains in private hands and privately exercised. The protection of rights is based on people’s ability to pay, bound through private authority and bilateral, individual contracts. “Protection and enforcement of people’s rights is treated as an economic good to be provided by the market,” (ASU 26) with governments as a for-profit corporate entities.

What doesn’t this have? There is no impartial, public power. There’s no legislative capacity that is answerable to the people in a non-market form. There’s no democracy and universal franchise with equal rights of participation. Political power isn’t to be acted on in a representative capacity toward public benefit, but instead toward private ends. Which is to say, it takes the features we associate with public, liberal government power and replaces them with feudal, private governance.

Opportunity. Liberals believe that positions should be open for all with talent, and that public power should be utilized to ensure disadvantaged groups have access to opportunities. Libertarianism believes that private, feudal systems of exclusion, hierarchy, and domination are perfectly fine, or at least that there is no legitimate public purpose in checking these private relationships. As mentioned above, private property rights are fundamental and cannot be balanced against other concerns like opportunity. Nozick is clear on this (“No one has a right to something whose realization requires certain uses of things and activities that other people have right and entitlements over.” ASU 238).

Do we need more? How about Rand Paul, one of the leading advocates for libertarianism, explaining why he wouldn’t vote for the Civil Rights Act: “I abhor racism. I think it’s a bad business decision to exclude anybody from your restaurant — but, at the same time, I do believe in private ownership.”

Markets. The same goes for markets, where Nozick is pretty clear: no interference. “Taxation of earnings from labor is on a par with forced labor.” (ASU, 169) Nozick thinks it is likely that his entitlement theory will lead to an efficient distribution of resources and avoid market problems, but he doesn’t particularly require it and contrasts himself with end-staters who assume it will. “Distribution according to benefits to others is a major patterned strand in a free capitalist society, as Hayek correctly points out, but it is only a strand and does not constitute the whole pattern of a system of entitlements.” (ASU 158)

I sometimes see arguments about how bringing “markets” into the provision of government services makes it more libertarian. Privatizing Social Security, bringing premium support to Medicare, or having vouchers for public education is more libertarian than the status quo. Again, it’s not clear to me why libertarians would think taxation for public, in-kind provisioning is a form of slavery and forced labor while running these services through private agents is not.

You could argue that introducing markets into government services respects economic liberty as a basic liberty, or does a better job of providing for the worst off, or leaves us all better off overall. But these aren’t libertarian arguments; they are the types of arguments Nozick spends Part II of ASU taunting, trolling, or otherwise bulldozing.

Three last thoughts. (1) Do read Atossa Abrahamian on actually existing seasteading. (2) It’s ironic that liberalism first arose to bury feudal systems of private political power, and now libertarians claim the future of liberalism is in bringing back those very same systems of feudalism. (3) Sometimes libertarians complain that the New Deal took the name liberal, which is something they want to claim for themselves. But looking at their preferred system as it is, I think people like me will be keeping the name “liberal.” We do a better job with it.

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Bob Dole recently said that neither he nor Ronald Reagan would count as conservatives these days. It’s worth noting that John Locke probably wouldn’t count as a libertarian these days, either.

Michael Lind had a column in Salon in which he asked, “[i]f libertarians are correct in claiming that they understand how best to organize a modern society, how is it that not a single country in the world in the early twenty-first century is organized along libertarian lines?” EJ Dionne agrees. Several libertarians argue that the present is no guide, because the (seasteading?) future belongs to libertarians.

I’d actually go in a different direction and say the past belonged to libertarians. We tried libertarianism for a long time; it was called feudalism. That modern-day libertarianism of the Nozick-Rand-Rothbard variety resembles feudalism, rather than some variety of modern liberalism, is a great point made by Samuel Freeman in his paper "Illiberal Libertarians: Why Libertarianism Is Not a Liberal View." Let’s walk through it.

Freeman notes that there are several key institutional features of liberal political structures shared across a variety of theorists. First, there’s a set of basic rights each person equally shares (speech, association, thought, religion, conscience, voting and holding office, etc.) that are both fundamental and inalienable (more on those terms in a bit). Second, there’s a public political authority which is impartial, institutional, continuous, and held in trust to be acted on in a representative capacity. Third, positions should be open to talented individuals alongside some fairness in equality of opportunity. And last, there’s a role for governments in the market for providing public goods, checking market failure, and providing a social minimum.

The libertarian state, centered solely around ideas of private property, stands in contrast to all of these. I want to stick with the libertarian minimal state laid out by Robert Nozick in Anarchy, State, and Utopia (ASU), as it's a landmark in libertarian thought, and I just re-read it and wanted to write something about it. Let’s look at how it handles each of the political features laid out above.

Rights. Libertarians would say that of course they believe in basic rights, maybe even more than liberals! But there’s a subtle trick here.

For liberals, basic rights are fundamental, in the sense that they can’t be compromised or traded against other, non-basic rights. They are also inalienable; I can’t contractually transfer away or otherwise give up my basic rights. To the extent that I enter contracts that do this, I have an option of exit that restores those rights.

This is different from property rights in specific things. Picture yourself as a person with a basic right to association, who also owns a wooden stick. You can sell your stick, or break it, or set it on fire. Your rights over the stick are alienable - you don’t have the stick anymore once you’ve done those things. Your rights to the stick are also not fundamental. Given justification, the public could regulate its use (say if it were a big stick turned into a bridge, it may need to meet safety requirements), in a way that the liberal state couldn’t regulate freedom of association.

When libertarians say they are for basic rights, what they are really saying is that they are for treating what liberals consider basic rights as property rights. Basic rights receive no more, or less, protection than other property rights. You can easily give them up or bargain them away, and thus alienate yourself from them. (Meanwhile, all property rights are entirely fundamental - they can never be regulated.)

How is that possible? Let’s cut to the chase: Nozick argues you can sell yourself into slavery, a condition under which all basic liberties are extinguished. (“[Would] a free system... allow him to sell himself into slavery[?] I believe that it would.” ASU 331) The minimal libertarian state would be forced to acknowledge and enforce contracts that permanently alienate basic liberties, even if the person in question later wanted out, although the liberal state would not at any point acknowledge such a contract.

If the recession were so bad that millions of people started selling themselves into slavery, or entering contracts that required lifelong feudal oaths to employers and foregoing basic rights, in order to survive, this would raise no important liberty questions for the libertarian minimal state. If this new feudal order were set in such a way that it persisted across generations, again, no problem. As Freeman notes, “what is fundamentally important for libertarians is maintaining a system of historically generated property rights...no attention is given to maintaining the basic rights, liberties, and powers that (according to liberals) are needed to institutionally define a person’s freedom, independence, and status as an equal citizen.”

Government. Which brings us to feudalism. Feudalism, for Freeman, means “the elements of political authority are powers that are held personally by individuals, not by enduring political institutions... subjects’ political obligations and allegiances are voluntary and personal: They arise out of private contractual obligations and are owed to particular persons.”

What is the libertarian government? For Nozick, the minimal state is basically a protection racket (“protection services”) with a certain kind of returns to scale over an area and, after some mental cartwheels, a justification in forcing holdouts in their area to follow their rules.

As such, it is a network of private contracts, arising solely from protection and arbitration services, where political power also remains in private hands and privately exercised. The protection of rights is based on people’s ability to pay, bound through private authority and bilateral, individual contracts. “Protection and enforcement of people’s rights is treated as an economic good to be provided by the market,” (ASU 26) with governments as a for-profit corporate entities.

What doesn’t this have? There is no impartial, public power. There’s no legislative capacity that is answerable to the people in a non-market form. There’s no democracy and universal franchise with equal rights of participation. Political power isn’t to be acted on in a representative capacity toward public benefit, but instead toward private ends. Which is to say, it takes the features we associate with public, liberal government power and replaces them with feudal, private governance.

Opportunity. Liberals believe that positions should be open for all with talent, and that public power should be utilized to ensure disadvantaged groups have access to opportunities. Libertarianism believes that private, feudal systems of exclusion, hierarchy, and domination are perfectly fine, or at least that there is no legitimate public purpose in checking these private relationships. As mentioned above, private property rights are fundamental and cannot be balanced against other concerns like opportunity. Nozick is clear on this (“No one has a right to something whose realization requires certain uses of things and activities that other people have right and entitlements over.” ASU 238).

Do we need more? How about Rand Paul, one of the leading advocates for libertarianism, explaining why he wouldn’t vote for the Civil Rights Act: “I abhor racism. I think it’s a bad business decision to exclude anybody from your restaurant — but, at the same time, I do believe in private ownership.”

Markets. The same goes for markets, where Nozick is pretty clear: no interference. “Taxation of earnings from labor is on a par with forced labor.” (ASU, 169) Nozick thinks it is likely that his entitlement theory will lead to an efficient distribution of resources and avoid market problems, but he doesn’t particularly require it and contrasts himself with end-staters who assume it will. “Distribution according to benefits to others is a major patterned strand in a free capitalist society, as Hayek correctly points out, but it is only a strand and does not constitute the whole pattern of a system of entitlements.” (ASU 158)

I sometimes see arguments about how bringing “markets” into the provision of government services makes it more libertarian. Privatizing Social Security, bringing premium support to Medicare, or having vouchers for public education is more libertarian than the status quo. Again, it’s not clear to me why libertarians would think taxation for public, in-kind provisioning is a form of slavery and forced labor while running these services through private agents is not.

You could argue that introducing markets into government services respects economic liberty as a basic liberty, or does a better job of providing for the worst off, or leaves us all better off overall. But these aren’t libertarian arguments; they are the types of arguments Nozick spends Part II of ASU taunting, trolling, or otherwise bulldozing.

Three last thoughts. (1) Do read Atossa Abrahamian on actually existing seasteading. (2) It’s ironic that liberalism first arose to bury feudal systems of private political power, and now libertarians claim the future of liberalism is in bringing back those very same systems of feudalism. (3) Sometimes libertarians complain that the New Deal took the name liberal, which is something they want to claim for themselves. But looking at their preferred system as it is, I think people like me will be keeping the name “liberal.” We do a better job with it.

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We Just Had the Lowest Core Inflation in 50 Years. What Does This Mean for "Expectations" and Monetary Policy?

Jun 5, 2013Mike Konczal

Last Friday, the BEA announced the lowest year-over-year rise in core inflation it has ever recorded. The year-over-year PCE core inflation, or inflation stripped of volatile energy and food prices, was 1.05 percent. As Doug Short notes, the previous all-time low was 1.06, and that is from March 1963. (The records go back to 1959.) Inflation is collapsing in 2013, both for observed values and future expectations. This is noteworthy because, as you may remember, the Federal Reserve took extraordinary actions at the end of last year to hit its inflation target.

Let’s put up a chart from Doug Short:

I had mentioned falling inflation in my Bernanke versus austerity column, but wanted a bit more core information before I flagged it. It’s now here. This is a major issue that isn’t being discussed. It gets to the heart of whether or not the Federal Reserve can manage the economy at the zero lower bound of interest rates through expectations, guidance, and purchases, which is a central issue now and for the future of economic policy.

It’s also worth discussing because the idea that the Fed has a lot of room is expanding into new ranks via conservative reformers. Josh Barro, now at Business Insider, just argued that “market monetarism is the shining success of the conservative reform movement.” Crucially, it is being used by thinkers on the right to justify ignoring fiscal stimulus. Ross Douthat just wrote that reform conservatives believe that “monetary policy [is] an alternative...to further fiscal stimulus,” and Brink Lindsey also mentioned being pro-monetary policy but anti-fiscal stimulus at a recent Roosevelt Institute conference.

Market monetarists can mean a range of things, from the generic observation that the Fed could be “doing more” to the idea of tying our monetary policy to a nonexistent futures market. But the idea that the Federal Reserve can be effective at the zero lower bound by setting expectations of future policies through commitments is an important part of the equation.

As David Becksworth noted (discussing a nominal GDP target, but still applicable to an inflation target), “[k]nowing that the Fed would be willing to buy up trillion of dollars of assets if necessary to hit its target would cause the market itself to do much of the heavy lifting.” And that’s what the Federal Reserve did last year.

Bernanke made clear he was going for 2 percent inflation at the beginning of last year. Instead of pegging low rates to future dates, he tied them to economic conditions, like unemployment being above 6.5 percent and inflation being lower than 2.5 percent. The higher ceiling made sure that inflation could go above 2 percent without tightening. And he then backed that up with new open-ended purchases set to those conditions. The Fed committed to purchasing a lot of assets until unemployment or inflation hit a limit or until they hit their inflation target - and so far inflation has done the exact opposite of what a reasonable person would have expected.

(It’s likely that the Federal Reserve’s actions are working through giving everyone ultra-low mortgage rates. That is boosting the housing market by encouraging new homes, bidding up the value of existing homes, and allowing aggressive refinancing. But, as far as I understand it, this is far away from the expectations channel that most ZLB monetary policy people reference. Indeed government actions like FHA backstopping the market, or HARP 2.0 ignoring the legal underwriting of reps and warranties on underwater refis, are big pieces of this story.)

Maybe everything will change and inflation will increase, but for now what should we conclude? First, the move to lock in 4 trillion dollars in deficit reduction was premature and is putting the recovery at serious risk. But perhaps the problem is that Bernanke is still too timid, and that a “regime change” is needed to wake up the financial markets. A move to 4 percent inflation would force the markets to act.

Whether or not you thought that the moves put into place would necessarily get inflation to 2 percent, certainly they should have provided a floor at last fall’s rates. The fact that inflation is falling even when more action is being taken should have us questioning whether a 4 percent move would have any traction. Also, for better or worse, if there was more disinflation after the 4 percent inflation target was announced, the Federal Reserve would likely see it as a major hit to its credibility.

Others think watching inflation is misguided, and we should instead be watching nominal GDP. That too may be in trouble. The NGDP chart that David Becksworth uses is showing a drop, last week showed a 0.1 percent decline in the Q1 2013 revision (instead of a rally), and with lower expected Q2 growth and disinflation real GDP is likely to fall further.

But my concern is that if the Federal Reserve is incapable of establishing even baseline “expectations” management of its institutional 2 percent inflation target at the zero lower bound, it’s not clear that it can do expectations management for brand new targets like nominal GDP while it is still there.

If zero lower bound monetary policy can’t manage a recovery through managing “expectations,” then ironically having something like a 4 percent inflation target in normal times is even more important. If the zero lower bound is this brutal to "unconventional" monetary policy, then it is even more important that we don't reach it. And we are less likely to reach it with more room. The question is how do we get to a situation where that is possible?

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Last Friday, the BEA announced the lowest year-over-year rise in core inflation it has ever recorded. The year-over-year PCE core inflation, or inflation stripped of volatile energy and food prices, was 1.05 percent. As Doug Short notes, the previous all-time low was 1.06, and that is from March 1963. (The records go back to 1959.) Inflation is collapsing in 2013, both for observed values and future expectations. This is noteworthy because, as you may remember, the Federal Reserve took extraordinary actions at the end of last year to hit its inflation target.

Let’s put up a chart from Doug Short:

I had mentioned falling inflation in my Bernanke versus austerity column, but wanted a bit more core information before I flagged it. It’s now here. This is a major issue that isn’t being discussed. It gets to the heart of whether or not the Federal Reserve can manage the economy at the zero lower bound of interest rates through expectations, guidance, and purchases, which is a central issue now and for the future of economic policy.

It’s also worth discussing because the idea that the Fed has a lot of room is expanding into new ranks via conservative reformers. Josh Barro, now at Business Insider, just argued that “market monetarism is the shining success of the conservative reform movement.” Crucially, it is being used by thinkers on the right to justify ignoring fiscal stimulus. Ross Douthat just wrote that reform conservatives believe that “monetary policy [is] an alternative...to further fiscal stimulus,” and Brink Lindsey also mentioned being pro-monetary policy but anti-fiscal stimulus at a recent Roosevelt Institute conference.

Market monetarists can mean a range of things, from the generic observation that the Fed could be “doing more” to the idea of tying our monetary policy to a nonexistent futures market. But the idea that the Federal Reserve can be effective at the zero lower bound by setting expectations of future policies through commitments is an important part of the equation.

As David Becksworth noted (discussing a nominal GDP target, but still applicable to an inflation target), “[k]nowing that the Fed would be willing to buy up trillion of dollars of assets if necessary to hit its target would cause the market itself to do much of the heavy lifting.” And that’s what the Federal Reserve did last year.

Bernanke made clear he was going for 2 percent inflation at the beginning of last year. Instead of pegging low rates to future dates, he tied them to economic conditions, like unemployment being above 6.5 percent and inflation being lower than 2.5 percent. The higher ceiling made sure that inflation could go above 2 percent without tightening. And he then backed that up with new open-ended purchases set to those conditions. The Fed committed to purchasing a lot of assets until unemployment or inflation hit a limit or until they hit their inflation target - and so far inflation has done the exact opposite of what a reasonable person would have expected.

(It’s likely that the Federal Reserve’s actions are working through giving everyone ultra-low mortgage rates. That is boosting the housing market by encouraging new homes, bidding up the value of existing homes, and allowing aggressive refinancing. But, as far as I understand it, this is far away from the expectations channel that most ZLB monetary policy people reference. Indeed government actions like FHA backstopping the market, or HARP 2.0 ignoring the legal underwriting of reps and warranties on underwater refis, are big pieces of this story.)

Maybe everything will change and inflation will increase, but for now what should we conclude? First, the move to lock in 4 trillion dollars in deficit reduction was premature and is putting the recovery at serious risk. But perhaps the problem is that Bernanke is still too timid, and that a “regime change” is needed to wake up the financial markets. A move to 4 percent inflation would force the markets to act.

Whether or not you thought that the moves put into place would necessarily get inflation to 2 percent, certainly they should have provided a floor at last fall’s rates. The fact that inflation is falling even when more action is being taken should have us questioning whether a 4 percent move would have any traction. Also, for better or worse, if there was more disinflation after the 4 percent inflation target was announced, the Federal Reserve would likely see it as a major hit to its credibility.

Others think watching inflation is misguided, and we should instead be watching nominal GDP. That too may be in trouble. The NGDP chart that David Becksworth uses is showing a drop, last week showed a 0.1 percent decline in the Q1 2013 revision (instead of a rally), and with lower expected Q2 growth and disinflation real GDP is likely to fall further.

But my concern is that if the Federal Reserve is incapable of establishing even baseline “expectations” management of its institutional 2 percent inflation target at the zero lower bound, it’s not clear that it can do expectations management for brand new targets like nominal GDP while it is still there.

If zero lower bound monetary policy can’t manage a recovery through managing “expectations,” then ironically having something like a 4 percent inflation target in normal times is even more important. If the zero lower bound is this brutal to "unconventional" monetary policy, then it is even more important that we don't reach it. And we are less likely to reach it with more room. The question is how do we get to a situation where that is possible?

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Guest Post: Dube on Growth, Debt and Past versus Future Windows

Jun 1, 2013Arindrajit Dube

Windows into the Past and the Future:  A Visual Elaboration

Arindrajit Dube

Recently, we have seen a number of explorations of the timing of growth around episodes of high debt as a way to discern the likely direction of causality in that relationship.  This is important, because we do observe that there is a negative correlation between contemporaneous debt and growth. For instance, this is true when using the corrected data from Reinhart and Rogoff, and equal weighting of country-year observations. Although there is no evidence of tipping points, a negative relationship remains.

In a blog post in April, I showed that the timing of this negative relationship went against an interpretation where high debt caused low growth.  I showed that relationship between contemporaneous debt with future growth is much weaker than that with past growth—which is suggestive of reverse causality.  I used a 3-year window for this exercise. In other words, if we label current year as “0” I took the average growth rates in years 1,2 and 3.  In a more recent column at Quartz, Kimball and Wang’s follow-up analysis showed the relationship using a window between years 5-10.  In a working paper I that I wrote based on my blog post—but posted online after Kimball and Wang’s column—I followed the recent literature in taking a 5-year forward average growth rate, i.e., average growth taken over years 1-5.

The general tenor of these findings is that the further into the future that the window stretches, the more attenuated the debt-growth relationship seems to be. However, the same does not appear to be true when considering windows stretching backwards in time: current debt is indeed strongly associated with past growth. 

But how sensitive are these results to specific window lengths? More generally, as suggested by Evan Soltas, how do these results look when using windows of alternative lengths? That’s exactly what I’ll do here, by plotting the coefficients and confidence bounds for bivariate regressions of growth from alternative windows on contemporaneous debt. For example, the window labeled -2 uses average growth rates from dates -2 and -1. Similarly, the window labeled 3 uses growth rates from dates 1, 2 and 3.

The results are stark, and confirm what we have already seen. The bivariate regression of current growth on current debt is around -0.018, meaning a 10 percentage point higher debt ratio (e.g., 110 versus 100) is associated with a lower growth by 0.18 percentage points.  This relationship is statistically significant at conventional levels using country-clustered standard errors. However, a 10 point higher debt ratio is associated with an even lower average growth 3, 5, or 10 years back, and this apparently spurious relationship appears stronger the further we roll back our window, clocking lower growths by 0.25 points or more in magnitude.

In contrast, the further forward we roll our window, the weaker the relationship appears to be, falling roughly by 1/3 when we merely consider the growth rate in the next year. And it attenuates further when we take future rates: a 10 point higher debt ratio is associated with merely a 0.05 point lower growth in the next 10 years, which is statistically indistinguishable from zero.

There is, however, a complication when doing this type of analysis. Namely, we should be mindful of the following possibility. Perhaps today’s high debt is not negatively correlated with the growth rate averaged over the next 10 years because the average debt level in the next 10 years is also not particularly high as compared to today.  (In statistical parlance, perhaps debt is strongly mean reverting.)  This can be checked: we can current debt on the average debt levels in the past and future windows in an analogous fashion as before.

Reassuringly, a 10 point greater debt ratio today is associated with a 7 point or greater debt ratio over the next 10 years.  So this cannot be an explanation for the  near disappearance of the negative debt-growth relationship when taking forward averaged growth rates.  Similarly, there is a roughly symmetric relationship with past debt ratios which means that the highly asymmetric debt-growth relationship in the future versus past cannot be due to a similarly asymmetric relationship of current debt with future versus past debt.

I mentioned the issues of serial correlation of debt and growth levels in passing in my original blog post, which is why I also showed the results with distributed lags, which explicitly controls for the past and future debt levels in the regression. While those fully account for the issues raised here, I think the analysis here showing the serial correlation in debt visually more informative about the patterns in the data.

Of course, there are numerous ways to account for the reverse causality patterns, besides just considering forward-averaged growth rates. One strategy is to explicitly include past growth rates as a control. I did this in my blog post (see the last figure there), as well as in working paper.  This is also exactly what Kimball and Wang do in showing the “excess growth” over and beyond what is predicted by past growth.  However, I think their graphical approach in actually computing the predicted and excess growth rates based on past growth rates was a very nice way to make the point. At any rate, all these results all suggest effectively no relationship between debt and growth in the post-war sample of advanced industrialized countries that we analyzed.

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Windows into the Past and the Future:  A Visual Elaboration

Arindrajit Dube

Recently, we have seen a number of explorations of the timing of growth around episodes of high debt as a way to discern the likely direction of causality in that relationship.  This is important, because we do observe that there is a negative correlation between contemporaneous debt and growth. For instance, this is true when using the corrected data from Reinhart and Rogoff, and equal weighting of country-year observations. Although there is no evidence of tipping points, a negative relationship remains.

In a blog post in April, I showed that the timing of this negative relationship went against an interpretation where high debt caused low growth.  I showed that relationship between contemporaneous debt with future growth is much weaker than that with past growth—which is suggestive of reverse causality.  I used a 3-year window for this exercise. In other words, if we label current year as “0” I took the average growth rates in years 1,2 and 3.  In a more recent column at Quartz, Kimball and Wang’s follow-up analysis showed the relationship using a window between years 5-10.  In a working paper I that I wrote based on my blog post—but posted online after Kimball and Wang’s column—I followed the recent literature in taking a 5-year forward average growth rate, i.e., average growth taken over years 1-5.

The general tenor of these findings is that the further into the future that the window stretches, the more attenuated the debt-growth relationship seems to be. However, the same does not appear to be true when considering windows stretching backwards in time: current debt is indeed strongly associated with past growth. 

But how sensitive are these results to specific window lengths? More generally, as suggested by Evan Soltas, how do these results look when using windows of alternative lengths? That’s exactly what I’ll do here, by plotting the coefficients and confidence bounds for bivariate regressions of growth from alternative windows on contemporaneous debt. For example, the window labeled -2 uses average growth rates from dates -2 and -1. Similarly, the window labeled 3 uses growth rates from dates 1, 2 and 3.

The results are stark, and confirm what we have already seen. The bivariate regression of current growth on current debt is around -0.018, meaning a 10 percentage point higher debt ratio (e.g., 110 versus 100) is associated with a lower growth by 0.18 percentage points.  This relationship is statistically significant at conventional levels using country-clustered standard errors. However, a 10 point higher debt ratio is associated with an even lower average growth 3, 5, or 10 years back, and this apparently spurious relationship appears stronger the further we roll back our window, clocking lower growths by 0.25 points or more in magnitude.

In contrast, the further forward we roll our window, the weaker the relationship appears to be, falling roughly by 1/3 when we merely consider the growth rate in the next year. And it attenuates further when we take future rates: a 10 point higher debt ratio is associated with merely a 0.05 point lower growth in the next 10 years, which is statistically indistinguishable from zero.

There is, however, a complication when doing this type of analysis. Namely, we should be mindful of the following possibility. Perhaps today’s high debt is not negatively correlated with the growth rate averaged over the next 10 years because the average debt level in the next 10 years is also not particularly high as compared to today.  (In statistical parlance, perhaps debt is strongly mean reverting.)  This can be checked: we can current debt on the average debt levels in the past and future windows in an analogous fashion as before.

Reassuringly, a 10 point greater debt ratio today is associated with a 7 point or greater debt ratio over the next 10 years.  So this cannot be an explanation for the  near disappearance of the negative debt-growth relationship when taking forward averaged growth rates.  Similarly, there is a roughly symmetric relationship with past debt ratios which means that the highly asymmetric debt-growth relationship in the future versus past cannot be due to a similarly asymmetric relationship of current debt with future versus past debt.

I mentioned the issues of serial correlation of debt and growth levels in passing in my original blog post, which is why I also showed the results with distributed lags, which explicitly controls for the past and future debt levels in the regression. While those fully account for the issues raised here, I think the analysis here showing the serial correlation in debt visually more informative about the patterns in the data.

Of course, there are numerous ways to account for the reverse causality patterns, besides just considering forward-averaged growth rates. One strategy is to explicitly include past growth rates as a control. I did this in my blog post (see the last figure there), as well as in working paper.  This is also exactly what Kimball and Wang do in showing the “excess growth” over and beyond what is predicted by past growth.  However, I think their graphical approach in actually computing the predicted and excess growth rates based on past growth rates was a very nice way to make the point. At any rate, all these results all suggest effectively no relationship between debt and growth in the post-war sample of advanced industrialized countries that we analyzed.

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Dube, Kimball, and Wang, All on Reinhart/Rogoff

May 31, 2013Mike Konczal

Two excellent new additions to the debate over what the link is between high debt loads and growth came out in the past 24 hours.

The first is by Arindrajit Dube, "A Note on Debt, Growth and Causality": "This note documents the timing in the relationship between the debt-to-GDP ratio and real GDP growth in advanced economies during the post World War II period using the dataset from Carmen Reinhart and Ken Rogoff. I first show that the debt ratio is more clearly associated with the 5-year past average growth rate, rather than the 5-year forward average growth rate–indicating a problem of reverse causality. Indeed, there is little evidence of a lower growth rate above the 90 percent threshold when using the 5-year forward average growth rate....non- and semi-parametric plots provide visual confirmation that the relationship between debt-to-GDP ratio and growth is essentially flat for debt ratios exceeding 30 percent when we (1) use forward growth rates, (2) control for past GDP growth, or both."

This short paper formalizes a recent post Dube wrote at this blog, extending his semi-parametric analysis out to five years. It also provides all the equations, as well as some of the literature on this debate. It's an important piece, dismantling the arguments that debt leads to lower growth.

The second is by Miles Kimball and Yichuan Wang at Quartz. "Based on economic theory, it would be surprising indeed if high levels of national debt didn’t have at least some slow, corrosive negative effect on economic growth. And we still worry about the effects of debt. But the two of us could not find even a shred of evidence in the Reinhart and Rogoff data for a negative effect of government debt on growth."

Using different ranges (including 5-10 years out) and different techniques, Kimball and Wang can't find any evidence for the Reinhart and Rogoff thesis that high debt loads are correlated with lower growth. It's a remarkable post, where you can read them become surprised at what they are and are not seeing, and how they take pains to make sure they aren't missing something.

Now where are the posts arguing the opposite? The literature hasn't addressed this well at all. Indeed, in their recent letter to Paul Krugman, Reinhart and Rogoff argued that the "repeatedly-expressed view that slow growth causes high debt but not visa-versa, is hardly supported by the recent literature on the subject."  They suggest checking out their appendix to their New York Times piece for more info, which tells us to check out the World Economic Outlook.

But even the Outlook warns us on causation (in the paragraph immediately after the one they cite, no less): "But there are limits to empirical studies on the economic effects of debt overhangs. For example, countries that have high debt levels may have low growth for other reasons that typically are not captured in the econometric models. In fact, some studies find no causal relationship between high debt and lower growth. The October 2012 Global Financial Stability Report finds that countries with debt above 100 percent of GDP experience lower growth, but it also finds that countries with high but falling debt ratios grew faster than countries with lower but increasing debt ratios."

Straightforward checks for casuality are missing from these previous studies. I'm not sure why, but now that people are looking at these issues with fresh eyes, it is suddenly much more difficult to make the statements about high debt leading to low growth with any certainty, much less the one that has dominated the converation during the turn to austerity after 2010.

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Two excellent new additions to the debate over what the link is between high debt loads and growth came out in the past 24 hours.

The first is by Arindrajit Dube, "A Note on Debt, Growth and Causality": "This note documents the timing in the relationship between the debt-to-GDP ratio and real GDP growth in advanced economies during the post World War II period using the dataset from Carmen Reinhart and Ken Rogoff. I first show that the debt ratio is more clearly associated with the 5-year past average growth rate, rather than the 5-year forward average growth rate–indicating a problem of reverse causality. Indeed, there is little evidence of a lower growth rate above the 90 percent threshold when using the 5-year forward average growth rate....non- and semi-parametric plots provide visual confirmation that the relationship between debt-to-GDP ratio and growth is essentially flat for debt ratios exceeding 30 percent when we (1) use forward growth rates, (2) control for past GDP growth, or both."

This short paper formalizes a recent post Dube wrote at this blog, extending his semi-parametric analysis out to five years. It also provides all the equations, as well as some of the literature on this debate. It's an important piece, dismantling the arguments that debt leads to lower growth.

The second is by Miles Kimball and Yichuan Wang at Quartz. "Based on economic theory, it would be surprising indeed if high levels of national debt didn’t have at least some slow, corrosive negative effect on economic growth. And we still worry about the effects of debt. But the two of us could not find even a shred of evidence in the Reinhart and Rogoff data for a negative effect of government debt on growth."

Using different ranges (including 5-10 years out) and different techniques, Kimball and Wang can't find any evidence for the Reinhart and Rogoff thesis that high debt loads are correlated with lower growth. It's a remarkable post, where you can read them become surprised at what they are and are not seeing, and how they take pains to make sure they aren't missing something.

Now where are the posts arguing the opposite? The literature hasn't addressed this well at all. Indeed, in their recent letter to Paul Krugman, Reinhart and Rogoff argued that the "repeatedly-expressed view that slow growth causes high debt but not visa-versa, is hardly supported by the recent literature on the subject."  They suggest checking out their appendix to their New York Times piece for more info, which tells us to check out the World Economic Outlook.

But even the Outlook warns us on causation (in the paragraph immediately after the one they cite, no less): "But there are limits to empirical studies on the economic effects of debt overhangs. For example, countries that have high debt levels may have low growth for other reasons that typically are not captured in the econometric models. In fact, some studies find no causal relationship between high debt and lower growth. The October 2012 Global Financial Stability Report finds that countries with debt above 100 percent of GDP experience lower growth, but it also finds that countries with high but falling debt ratios grew faster than countries with lower but increasing debt ratios."

Straightforward checks for casuality are missing from these previous studies. I'm not sure why, but now that people are looking at these issues with fresh eyes, it is suddenly much more difficult to make the statements about high debt leading to low growth with any certainty, much less the one that has dominated the converation during the turn to austerity after 2010.

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Is There Really a "Conservative Reform" Movement in Policy?

May 23, 2013Mike Konczal

A few years ago, Freddie DeBoer argued that the terms “left” and “liberal” in the political blogosphere were really more descriptive of argument style and political strategy rather than any actual ideological differences. I think there’s a similar issue at play in the wave of articles about conservatives seeking to reform the movement.

As 2013 rolls on, we are seeing more and more articles about conservative reformers. Ryan Cooper had a list of “reformish conservatives” at the Washington Monthly, and now Jonathan Chait has a great profile of Josh Barro at The Atlantic. I understand why these articles are written - they profile interesting conservative writers that people should read more. But I don’t think they actually make their point.

Here’s how Chait sets it up: “conservative reformists... [argue] that the GOP’s product itself, not merely its marketing slogans, needs to change. Writers like David Brooks, Ross Douthat, Reihan Salam, and Ramesh Ponnuru have made versions of this case for several years.”

So there are two elements. First, reformers think that the GOP is currently on the wrong track with its policies, and second, they believe there need to be more “middle-class-friendly solutions” in new policy. This is different than saying that reformers don’t argue that the economy is a giant Randian morality play, or that President Obama is a left-wing radical; it’s about specific policies.

Are either of these things true? I don’t see it. Or, I see it more on the marketing end than on the policy end. I’m going to keep specific individuals vague here and generalize, because the arguments are predicated on a general move rather than any idiosyncratic argument. Here’s what I take to be the current conservative policy consensus:

1. Social Security and Medicare should be privatized. The word privatization is a complicated one with a lot of meanings, but generally competition should come to Medicare and private accounts to Social Security. This is for budgeting reasons, but also ideological ones. As Yuval Levin wrote, “the vision that has dominated our political imagination for a century — the vision of the social-democratic welfare state — is drained and growing bankrupt.”

2. Everything that isn’t nailed to the floor should be block-granted to the states. From there, funding should be slowed, and private agents should be emphasized at all points. Welfare reform, but for everything (especially Medicaid).

3. The tax code is too progressive, and that was true even before the changes in the fiscal cliff. The number of brackets should be reduced, perhaps even to two. Taxes in general should be lower, with some base-broadening to balance it.

4. The way to deal with health care is to allow insurance purchases across state lines while supporting state-level pre-existing condition pools. Ending Obamacare by itself is smart policy, even if something doesn’t “replace” it. And if push comes to shove, universal coverage is not a necessary goal.

5. Inequality is largely a non-issue, manipulated by liberals to justify their programs. The rich work harder in a global market that rewards skills and superstars. The middle class is only stagnating if you ignore health care costs and the fact that you can consume better technology cheaper. The economy works far better for average people than liberals understand.

6. Global warming, to whatever extent it is happening, should not have a government response to try and reduce carbon. Market signals, technology, migration, and adapting are better and cheaper options for even the gloomiest predictions. Or, looking at it in a different way, growth will ultimately solve the problem of global warming, and so any government policy that hurts growth (which they all do) is the wrong option.

I don’t think I’m making a strawman here. (1-3 is directly from Paul Ryan.) So the question is: how many of the reformers disagree with any of those? This is the core of current policy, and I don’t know if any of the reformish crew even disagree with these statements, much less want to spend the energy challenging them.

Now what about disagreements? What are they adding to the table? As far as I read what reformers bring to the table, it consists of:

a. Monetary policy shouldn’t adopt a price stability mandate (or a gold standard, for that matter), and in fact Ben Bernanke could and should be doing more to help the recovery with the powers he has available. (Fiscal policy like the stimulus, however, is a bad idea that largely fails.)

b. Tax credits, particularly the earned income tax credit and the child tax credit, are successful programs which might even be expanded. They’re good even though they mean 47 percent of Americans pay no federal income tax, which conservatives hate. ("Predistribution" means of boosting low-end wages, like a higher minimum wage, should be avoided though.)

c. Financial institutions should hold more capital, and perhaps we should apply a “structural” reform to the sector like a size cap or siloing of functions.

d. The government protects incumbent interests in industry, both with obvious subsidies but also with certain property rights, like copyright.

Am I missing more? These are important things, but it’s really tough to think of this as a general new direction in policy. Much of it is actually a defense and potential extension of already-existing policies against people further to the right. And even here you’ll have major disagreements. (It is amusing to think of Timothy P. Carney writing a column about how Ben Bernanke needs to “commit to being irresponsible.”)

A lot of the reformer articles posit more aggressive conservative reformers like David Frum, Bruce Bartlett, and now Josh Barro. What stands out to me is that these three write as if the Obama administration happened. The rest of the reformers write as if his first term never happened as a baseline, and crucially that they can’t write stuff seen as getting in the way of repeal.

They also understand that the Great Recession destroyed the previous consensus that we had solved the question of the business cycle. It’s tougher to argue that we should have a radically smaller federal government when it looks like the size of the government and automatic stabilizers helped keep the Great Recession from becoming a Great Depression-like collapse. The reformers have bounced around on this topic, but aside from the three mentioned, they haven’t had conversions. Mostly they believe the Great Moderation should have just tried harder.

I’d emphasize one last thing about the policy of conservative reformers: in practice it will likely be more gestural than substantive. I don’t know enough to mediate the health care battles, but I do know financial reform pretty well. And as financial reform is often brought out as an example of new reformers at work, it’s interesting to watch the lack of attention reformers pay to the actual nuts and bolts of the process.

I don’t see reformers call for getting the head of the CFPB appointed. I don’t see them arguing that repealing FDIC’s new resolution authority powers should be taken out of the Ryan Budget. I don’t see them arguing that efforts to repeal derivatives regulations already are premature or bad policy. I don’t see them angry about the mess of the securitization servicing system, which is creating a nightmare of law-breaking in the housing market. I also don’t seem them arguing the opposite either.

It’s focused on “break up the banks!” Crucially, this gets its energy from the idea that We Should Do Something Big about financial reform, rather than how it plays into a larger set of regulations, laws, and markets. It’s to position the Republicans as Doing Something where the Democrats haven’t. It’s sadly less policy and more political strategizing.

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A few years ago, Freddie DeBoer argued that the terms “left” and “liberal” in the political blogosphere were really more descriptive of argument style and political strategy rather than any actual ideological differences. I think there’s a similar issue at play in the wave of articles about conservatives seeking to reform the movement.

As 2013 rolls on, we are seeing more and more articles about conservative reformers. Ryan Cooper had a list of “reformish conservatives” at the Washington Monthly, and now Jonathan Chait has a great profile of Josh Barro at The Atlantic. I understand why these articles are written - they profile interesting conservative writers that people should read more. But I don’t think they actually make their point.

Here’s how Chait sets it up: “conservative reformists... [argue] that the GOP’s product itself, not merely its marketing slogans, needs to change. Writers like David Brooks, Ross Douthat, Reihan Salam, and Ramesh Ponnuru have made versions of this case for several years.”

So there are two elements. First, reformers think that the GOP is currently on the wrong track with its policies, and second, they believe there need to be more “middle-class-friendly solutions” in new policy. This is different than saying that reformers don’t argue that the economy is a giant Randian morality play, or that President Obama is a left-wing radical; it’s about specific policies.

Are either of these things true? I don’t see it. Or, I see it more on the marketing end than on the policy end. I’m going to keep specific individuals vague here and generalize, because the arguments are predicated on a general move rather than any idiosyncratic argument. Here’s what I take to be the current conservative policy consensus:

1. Social Security and Medicare should be privatized. The word privatization is a complicated one with a lot of meanings, but generally competition should come to Medicare and private accounts to Social Security. This is for budgeting reasons, but also ideological ones. As Yuval Levin wrote, “the vision that has dominated our political imagination for a century — the vision of the social-democratic welfare state — is drained and growing bankrupt.”

2. Everything that isn’t nailed to the floor should be block-granted to the states. From there, funding should be slowed, and private agents should be emphasized at all points. Welfare reform, but for everything (especially Medicaid).

3. The tax code is too progressive, and that was true even before the changes in the fiscal cliff. The number of brackets should be reduced, perhaps even to two. Taxes in general should be lower, with some base-broadening to balance it.

4. The way to deal with health care is to allow insurance purchases across state lines while supporting state-level pre-existing condition pools. Ending Obamacare by itself is smart policy, even if something doesn’t “replace” it. And if push comes to shove, universal coverage is not a necessary goal.

5. Inequality is largely a non-issue, manipulated by liberals to justify their programs. The rich work harder in a global market that rewards skills and superstars. The middle class is only stagnating if you ignore health care costs and the fact that you can consume better technology cheaper. The economy works far better for average people than liberals understand.

6. Global warming, to whatever extent it is happening, should not have a government response to try and reduce carbon. Market signals, technology, migration, and adapting are better and cheaper options for even the gloomiest predictions. Or, looking at it in a different way, growth will ultimately solve the problem of global warming, and so any government policy that hurts growth (which they all do) is the wrong option.

I don’t think I’m making a strawman here. (1-3 is directly from Paul Ryan.) So the question is: how many of the reformers disagree with any of those? This is the core of current policy, and I don’t know if any of the reformish crew even disagree with these statements, much less want to spend the energy challenging them.

Now what about disagreements? What are they adding to the table? As far as I read what reformers bring to the table, it consists of:

a. Monetary policy shouldn’t adopt a price stability mandate (or a gold standard, for that matter), and in fact Ben Bernanke could and should be doing more to help the recovery with the powers he has available. (Fiscal policy like the stimulus, however, is a bad idea that largely fails.)

b. Tax credits, particularly the earned income tax credit and the child tax credit, are successful programs which might even be expanded. They’re good even though they mean 47 percent of Americans pay no federal income tax, which conservatives hate. ("Predistribution" means of boosting low-end wages, like a higher minimum wage, should be avoided though.)

c. Financial institutions should hold more capital, and perhaps we should apply a “structural” reform to the sector like a size cap or siloing of functions.

d. The government protects incumbent interests in industry, both with obvious subsidies but also with certain property rights, like copyright.

Am I missing more? These are important things, but it’s really tough to think of this as a general new direction in policy. Much of it is actually a defense and potential extension of already-existing policies against people further to the right. And even here you’ll have major disagreements. (It is amusing to think of Timothy P. Carney writing a column about how Ben Bernanke needs to “commit to being irresponsible.”)

A lot of the reformer articles posit more aggressive conservative reformers like David Frum, Bruce Bartlett, and now Josh Barro. What stands out to me is that these three write as if the Obama administration happened. The rest of the reformers write as if his first term never happened as a baseline, and crucially that they can’t write stuff seen as getting in the way of repeal.

They also understand that the Great Recession destroyed the previous consensus that we had solved the question of the business cycle. It’s tougher to argue that we should have a radically smaller federal government when it looks like the size of the government and automatic stabilizers helped keep the Great Recession from becoming a Great Depression-like collapse. The reformers have bounced around on this topic, but aside from the three mentioned, they haven’t had conversions. Mostly they believe the Great Moderation should have just tried harder.

I’d emphasize one last thing about the policy of conservative reformers: in practice it will likely be more gestural than substantive. I don’t know enough to mediate the health care battles, but I do know financial reform pretty well. And as financial reform is often brought out as an example of new reformers at work, it’s interesting to watch the lack of attention reformers pay to the actual nuts and bolts of the process.

I don’t see reformers call for getting the head of the CFPB appointed. I don’t see them arguing that repealing FDIC’s new resolution authority powers should be taken out of the Ryan Budget. I don’t see them arguing that efforts to repeal derivatives regulations already are premature or bad policy. I don’t see them angry about the mess of the securitization servicing system, which is creating a nightmare of law-breaking in the housing market. I also don’t seem them arguing the opposite either.

It’s focused on “break up the banks!” Crucially, this gets its energy from the idea that We Should Do Something Big about financial reform, rather than how it plays into a larger set of regulations, laws, and markets. It’s to position the Republicans as Doing Something where the Democrats haven’t. It’s sadly less policy and more political strategizing.

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Michael Kinsley Gets It Wrong On "Austerians"

May 23, 2013Mike Konczal

While I was on vacation, the Internet exploded over a column by Michael Kinsley beefing with Paul Krugman and his follow-up response. The biggest problem with his attempt to reclaim the word “austerians” from its detractors is that he doesn’t provide a working definition, an argument, or even specific people or proposals for what he has in mind. He apparently takes “austerian” to mean “anti-Krugman,” and since Kinsley and others feels that they don’t line up with Krugman, they must all be austerians.

This leads into the second biggest problem with Kinsley’s posts: he concludes that everyone is basically on the same page. It’s just a matter of how you weigh your priorities and concerns. Kinsley writes that “Krugman now says that what he is against is ‘premature’ fiscal austerity. So is everybody. They just disagree on what is ‘premature.’” Also that “[y]ou can be a right-wing Austerian, a left-wing Austerian, a right-wing Keynesian, or a left-wing Keynesian. And (as I also noted last week) the differences are not so great.” (My underlines.)

This is wrong. I’ll quickly summarize three different approaches to the deficit, trying hard to not make straw men of them. There’s (1) Team Keynesian, which thinks that the government should increase the short-term deficit, full-stop. Extend the payroll tax cut for two years. Invest in an infrastructure bank. Mail people checks. Get to the point where the Federal Reserve has traction again on the economy before worrying about the debt.

People in this category are all for ways to deal with the long-term deficit. But they realize that: (a) Medicare is the major driver of those costs, Obamacare needs a chance to deal with this, and it may even be working already; (b) reducing the long-term deficit should require a combination of taxes and spending, and the GOP will refuse any and all tax increases, making a deal impossible; and (c) the GOP wants to privatize Social Security and Medicare rather than bring them into a healthy long-term financial situation, so not everyone is even on the same page.

However, people in (2) Team Barbell think that stimulus must be paired with long-term deficit reduction at the same time. For an example, there’s the original Domenici-Rivlin Restoring America's Future plan: "First, we must recover from the deep recession that has thrown millions out of work... Second, we must take immediate steps to reduce the unsustainable debt... These two challenges must be addressed at the same time, not sequentially."

I assume when Kinsley references needing to eat spinach along with dessert as macroeconomic policy he’s referring to a need for both stimulus and deficit reduction to complement each other. Sadly for him, there’s never been a clear economic case for why these should be addressed together, and plenty of evidence that addressing the second will do little for the first.

(Noah Smith started a conversation recently about whether elites want a slower recovery in order to do structural reform. The original Domenici-Rivlin reform quoted above basically said, “We know unemployment is devastating, and we know more upfront stimulus will help. However, we are going to need you to turn Medicare into a giant Groupon system in order to get it.”)

These two approaches are very different than the arguments for (3) Team Austerity. The argument here is that, if done right, austerity will have a negligible effect on the economy and could even increase prosperity by restoring confidence to private capital. This is not a strawman; it’s the economic plan the GOP put forward when they took the House in 2011, which they got from AEI, which they got from Alberto Alesina and Silvia Ardagna of Harvard.

The 2011 GOP plan also noted, “Analyzing 20 developed countries between 1946 and 2009, Reinhart and Rogoff found a distinct threshold for gross government debt equal to 90 percent of GDP.” They believed action was needed to avoid crossing this threshold, even if it might be painful. (Thankfully, it wouldn’t be according this argument.)

No Pain, No Gain?

Kinsley’s misdiagnosis that the policy disagreements are all a matter of relative priorities then leads him to believe that more weight on short-term pain will lead to better long-term conclusions: “I don’t think suffering is good, but I do believe that we have to pay a price for past sins, and the longer we put it off, the higher the price will be...The problem is the great, deluded middle class—subsidized by government and coddled by politicians.”

This set the Internet on fire. I’m genuinely not sure what he’s referencing here when he mentions the middle-class. Is Kinsley at the point where he doesn’t get editors? I’m going to rewrite this for him: “During the 2000s, the middle class borrowed way too much, speculating on housing and using fake home equity to go on a spending spree. Now that this bubble has burst, the middle class needs to spend less and save more. There will be, yes, suffering, but they should have been saving more all along. Americans didn’t save enough, and now they have to save more and work off all the bad debts.”

And here’s how I would have responded to that better argument: “Yes, but two things. The first is that everyone can’t all save at the same time. If everyone is saving, nobody is spending, and we start to hit some major problems. Second, the bad debts to be worked off aren’t set in stone. If unemployment is higher, or wage growth slower, or inflation is under-target, that means the pile of bad debts is even greater. Since they are greater, people save more, and then there are even more problems. So even if you have a strongly moralistic tone about what needs to be done, or read this as a pox on our middle class, stimulus in the short term is crucial.”

Because austerity won’t even do the job Kinsley is proposing it will do. In 1933, John Maynard Keynes said, “You will never balance the Budget through measures which reduce the national income.” He argued this because he was a childless gay hedonist saw that austerity won’t even function to reduce the debt load, because a weaker GDP will eliminate any debt savings. This is precisely what is happening in Europe, and it could happen here if we suffocate the recovery too early.

 

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While I was on vacation, the Internet exploded over a column by Michael Kinsley beefing with Paul Krugman and his follow-up response. The biggest problem with his attempt to reclaim the word “austerians” from its detractors is that he doesn’t provide a working definition, an argument, or even specific people or proposals for what he has in mind. He apparently takes “austerian” to mean “anti-Krugman,” and since Kinsley and others feels that they don’t line up with Krugman, they must all be austerians.

This leads into the second biggest problem with Kinsley’s posts: he concludes that everyone is basically on the same page. It’s just a matter of how you weigh your priorities and concerns. Kinsley writes that “Krugman now says that what he is against is ‘premature’ fiscal austerity. So is everybody. They just disagree on what is ‘premature.’” Also that “[y]ou can be a right-wing Austerian, a left-wing Austerian, a right-wing Keynesian, or a left-wing Keynesian. And (as I also noted last week) the differences are not so great.” (My underlines.)

This is wrong. I’ll quickly summarize three different approaches to the deficit, trying hard to not make straw men of them. There’s (1) Team Keynesian, which thinks that the government should increase the short-term deficit, full-stop. Extend the payroll tax cut for two years. Invest in an infrastructure bank. Mail people checks. Get to the point where the Federal Reserve has traction again on the economy before worrying about the debt.

People in this category are all for ways to deal with the long-term deficit. But they realize that: (a) Medicare is the major driver of those costs, Obamacare needs a chance to deal with this, and it may even be working already; (b) reducing the long-term deficit should require a combination of taxes and spending, and the GOP will refuse any and all tax increases, making a deal impossible; and (c) the GOP wants to privatize Social Security and Medicare rather than bring them into a healthy long-term financial situation, so not everyone is even on the same page.

However, people in (2) Team Barbell think that stimulus must be paired with long-term deficit reduction at the same time. For an example, there’s the original Domenici-Rivlin Restoring America's Future plan: "First, we must recover from the deep recession that has thrown millions out of work... Second, we must take immediate steps to reduce the unsustainable debt... These two challenges must be addressed at the same time, not sequentially."

I assume when Kinsley references needing to eat spinach along with dessert as macroeconomic policy he’s referring to a need for both stimulus and deficit reduction to complement each other. Sadly for him, there’s never been a clear economic case for why these should be addressed together, and plenty of evidence that addressing the second will do little for the first.

(Noah Smith started a conversation recently about whether elites want a slower recovery in order to do structural reform. The original Domenici-Rivlin reform quoted above basically said, “We know unemployment is devastating, and we know more upfront stimulus will help. However, we are going to need you to turn Medicare into a giant Groupon system in order to get it.”)

These two approaches are very different than the arguments for (3) Team Austerity. The argument here is that, if done right, austerity will have a negligible effect on the economy and could even increase prosperity by restoring confidence to private capital. This is not a strawman; it’s the economic plan the GOP put forward when they took the House in 2011, which they got from AEI, which they got from Alberto Alesina and Silvia Ardagna of Harvard.

The 2011 GOP plan also noted, “Analyzing 20 developed countries between 1946 and 2009, Reinhart and Rogoff found a distinct threshold for gross government debt equal to 90 percent of GDP.” They believed action was needed to avoid crossing this threshold, even if it might be painful. (Thankfully, it wouldn’t be according this argument.)

No Pain, No Gain?

Kinsley’s misdiagnosis that the policy disagreements are all a matter of relative priorities then leads him to believe that more weight on short-term pain will lead to better long-term conclusions: “I don’t think suffering is good, but I do believe that we have to pay a price for past sins, and the longer we put it off, the higher the price will be...The problem is the great, deluded middle class—subsidized by government and coddled by politicians.”

This set the Internet on fire. I’m genuinely not sure what he’s referencing here when he mentions the middle-class. Is Kinsley at the point where he doesn’t get editors? I’m going to rewrite this for him: “During the 2000s, the middle class borrowed way too much, speculating on housing and using fake home equity to go on a spending spree. Now that this bubble has burst, the middle class needs to spend less and save more. There will be, yes, suffering, but they should have been saving more all along. Americans didn’t save enough, and now they have to save more and work off all the bad debts.”

And here’s how I would have responded to that better argument: “Yes, but two things. The first is that everyone can’t all save at the same time. If everyone is saving, nobody is spending, and we start to hit some major problems. Second, the bad debts to be worked off aren’t set in stone. If unemployment is higher, or wage growth slower, or inflation is under-target, that means the pile of bad debts is even greater. Since they are greater, people save more, and then there are even more problems. So even if you have a strongly moralistic tone about what needs to be done, or read this as a pox on our middle class, stimulus in the short term is crucial.”

Because austerity won’t even do the job Kinsley is proposing it will do. In 1933, John Maynard Keynes said, “You will never balance the Budget through measures which reduce the national income.” He argued this because he was a childless gay hedonist saw that austerity won’t even function to reduce the debt load, because a weaker GDP will eliminate any debt savings. This is precisely what is happening in Europe, and it could happen here if we suffocate the recovery too early.

 

Follow or contact the Rortybomb blog:

  

 

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