Prediction: no William Wallace speeches from Ben

In the next two years — before the memory of this recession fades, but long enough from now that it doesn’t risk unanchoring expectations — Ben Bernanke will begin peppering his speeches and testimony before Congress with references to some form of history contingent policy (e.g. price level or nominal output targeting, state-dependent inflation targets, etc). This will signal a move of policy in this direction.

I give (much) lower odds that there will be a Volker-esque announcement of an explicit move to such a policy.

We watch too many movies if we think the Fed chairman giving heroic speeches would affect people’s expectations of Fed policy ((At least affect them in the way he or she would want. If Ben gave a speech tomorrow announcing a return to the gold standard, people would think he was crazy.)). As Forrest Gump might say, “policy is as policy does”.


The problem with academic macroeconomists is that they’re terrible at telling stories. We say recessions are caused by real and nominal shocks and people snore. And monetary policy is too boring to be the best aggregate demand policy.

“You mean to tell me that buying and selling some debt instruments is the key to solving all of our problems. What, no knight in shining armor riding down from Capital Hill to save us? No brilliant grand plans from genius economic advisors in the White House?”

When I taught the Great Depression this summer, you could see the disappointment on my students’ face when I told them that bad monetary policy was the primary cause of its depth and breadth. They wanted epic stories about Wall Street versus Main Street, evil cabals of foreigners or bumbling Presidents. A student dropped the course when he realized the monetary policy explanation didn’t involve a conspiracy of bankers but just the Fed’s legitimate misunderstanding of the role of money in the economy. He told me “this class isn’t teaching me real economic history”.

Arnold Kling says recessions are caused by Great Recalculations, credit cycles and monetary fluctuations. He talks of great showdowns like “folk-Minsky-ism” v. “folk-Keynesian-ism” or academics v. policy makers. He tells good stories.

As far as I can tell, though, his stories map completely onto what he calls the scholarly consensus in monetary economics. Recessions, including this last one, are caused by real and nominal shocks.

I hate the second best world we live in!

Even if the free banking argument is correct, and the Fed should be abolished, I would continue to advocate the ideas expressed in this essay. As I indicated, we are currently stuck with the system we have, and if it performs poorly (particularly in the direction of deflation), people will almost certainly blame the resulting problems on the failures of capitalism, not monetary policy. (As interest rates are low during deflation.)


Economics and morality

Of course, Oxycodone is legal with a prescription, but that’s a distinction without a difference, as it was illegal for my brother to buy, possess, and presumably sell from time to time. His addiction existed in a curious demimonde wherein the whole treatment and rehab and recovery cultures attempted–I emphasize, attempted–to ignore the plain fact that the disease they were treating, attempting to treat, was a crime, and although making it not a crime might lead to more use, it might also lead to more recovery; it might lead to more regular doses, less adulteration with other substances. It might have meant that my brother didn’t have to die in a cheap roadside motel room after a late-night visit to some dealer’s ramshackle house.


The benefits would outweigh the costs, but drugs are immoral.

UPDATE: People (rather than moral philosophers) don’t have internally consistent and complete belief systems with which they determine what is moral and what is not. Subtracting the costs from the benefits — even if you stick to the costs and benefits that are obvious to everyone, i.e. doing economic analysis, tells you what is right or wrong. Often times, disagreement about morality is just one side or the other ignoring an obvious, at least once its been pointed out, benefit or a cost. You’ll notice that pointing an obvious cost or benefit doesn’t usually end the disagreement. The next move, generally, is to criticize the size of the costs or benefits. In other words, then the argument is no longer over morals, but over empirics. This supports Bryan Caplan’s contention that you don’t need morals to have a normative debate.

I don’t get this (anymore)

Peak Oil is the idea that the economy is heavily dependent on petroleum and we are getting close to pumping all of the stuff out of the ground. Thus, catastrophe.

The typical economist’s response is that the dwindling supplies will increase the price of oil. This will make substitutes more attractive and it will induce innovations, generating new or better substitutes. Then comes the part I don’t get. Then, the economist will say, we shouldn’t worry about Peak Oil.

How, dear economist, do increased prices translate to more innovation? There’s no magical price-to-invention machine that produces these innovations. If people don’t “worry” about higher prices of oil, they won’t be induced to innovate. Telling people “innovation happens” removes the incentive to innovate!

Economists can tell you a simple supply and demand story (supply goes down, prices go up) or a more fancy dynamic resource extraction story. They can even tell you a pretty convincing story for what sort of policies and institutions have created incentives that seemed to have induced innovation in the past. They can tell you what goes in the black box and what comes out. But they can’t tell you a damned thing about how that innovation will actually happen.

Excess demand watch

Being a proper MR drone, I’ve pre-ordered Cowen’s latest book. He had me so worked up that I’m not only anticipating it, but also his next next book.

Apparently, his next next book will be moral philosophy as economics (i.e. done right!). Key words: tragedy and bliss, inframarginal analysis, pragmatic normativity. (I made the last one up.)

The problem with Economists

We have an incomprehensible, to most, outside-in view of the world. David Friedman says something correct but incomprehensible:

Climate aside, we do not live in a static world—consider the changes that have occurred over the past century. The shifts we can expect to occur due to technological progress alone, even without allowing for political and demograpic shifts, are much larger than the shifts required to deal with climate change on the scale I am discussing.

A few months back I was debating a petroleum engineer about peak oil. It occurred to me that if petroleum engineers didn’t get excited about hard problems in energy production, maybe those hard problems wouldn’t get solved. This, I think, is the problem with the assumption of exogenous technology and this is the problem with economists giving policy advice.


The gateway drug:

Moving forward, we need to be less ideological and more empirical in figuring out what works in combating America’s drug problem. One approach would be for a state or two to experiment with legalization of marijuana, allowing it to be sold by licensed pharmacists, while measuring the impact on usage and crime.

and my favorite paragraph:

“I had arrested a 19-year-old, in his own home, for possession of marijuana,” [Norm Stamper, a former police chief of Seattle] recalled. “I literally broke down the door, on the basis of probable cause. I took him to jail on a felony charge.” The arrest and related paperwork took several hours, and Mr. Stamper suddenly had an “aha!” moment: “I could be doing real police work.”

So bad its good?

I think it would be neat if this movie became a cult classic for the same reason most cult classics get their status: its sooo bad its good.

Tyler Cowen:

I can only report that The End of Poverty, narrated throughout by Martin Sheen, puts Ayn Rand back on the map as an accurate and indeed insightful cultural commentator. If you were to take the most overdone and most caricatured cocktail-party scenes from Atlas Shrugged, if you were to put the content of Rand’s “whiners” on the screen, mixed in with at least halfway competent production values, you would get something resembling The End of Poverty. If you ever thought that Rand’s nemeses were pure caricature, this film will show you that they are not (if the stalking presence of Naomi Klein has not already done so). If you are looking to benchmark this judgment, consider this: I would not say anything similar even about the movies of Michael Moore.

To me, this recommends this movie. I’ve got to see something that’s worse than Michael Moore movies!

Justice vs preferences

Those whose bumper stickers read “If you want peace, work for justice” simply take it for granted that there is no question what is just; if you want to find out, just ask them. The problem with the world as they see it is merely that other people are insufficiently virtuous to act accordingly.

David Friedman being his brilliant self (but in the comments he uses that damned “webbed” adjective again!)

Here’s his “amoral and alegal” positive account of rights. The most important sentence: “To a mind of sufficient scope every number is unique.” ((His footnote: “The proof is by induction. If some positive integers are uninteresting, then there must be a smallest positive uninteresting integer. But this unique characteristic makes that number interesting. So there can be no smallest uninteresting positive integer, so there can be no uninteresting positive integers. Similarly, mutatis mutandis, for negative integers.” Awesome.)) and the conclusion: “The social order, to the extent that it is evolved rather than legislated, is a set of rules that exist because it was in the interest of pairs of individuals to abide by them, not because they promote the general good of society.”.