Quartz #20—>Why Austerity Budgets Won't Save Your Economy

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Link to the Column on Quartz

Here is the full text of my 20th Quartz column, Here is a link to my 20th column on Quartz: “Why Austerity Budgets Won’t Save Your Economy.” now brought home to supplysideliberal.com. It was first published on April 1, 2013. Links to all my other columns can be found here.

If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice:

© April 1, 2013: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2014. All rights reserved.

“Austerity” in the title means “Naked Austerity,” in line with the hashtag #nakedausterity that I introduced on Twitter:

Definition for #nakedausterity : Tax increases and/or government spending cuts unaccompanied by other measures to maintain aggregate demand.

The point of the hashtag is this:

When you are worried about debt, #nakedausterity is not the answer.

Don’t miss the discussion of the costs of national debt toward the end of the column.

Austerity is in vogue. For some time now, countries in Europe have been raising taxes and cutting government spending because they are worried about their national debt. They have hit on the word austerity to describe these tax increases and government spending cuts. The US is now following suit.

But the trouble with austerity is that it is contractionary—that is, austerity tends to slow down the economy. In bad economic times, people can’t get jobs because businesses aren’t hiring, and businesses are not hiring because people aren’t spending. So in bad economic times, it adds insult to injury when the government does less spending, less hiring, and taxes more money out of the pockets of those who would otherwise spend.

The contractionary effect of austerity creates a dilemma, not only because a slower economy is painful for the people involved—that is, just about everyone—but also because tax revenue falls when the economy slows down, making it harder to rein in government debt. This dilemma has fueled a big debate.  There are four basic positions:

1. Arguing that austerity can actually stimulate the economy, as long as it is implemented gradually. That is the position John Cogan and John Taylor take in their Wall Street Journal op-ed, “How the House Budget Would Boost the Economy,” which I questioned in my column, “The Stanford economists are so wrong: A tighter budget won’t be accompanied by tighter monetary policy.”

2. Arguing that debt is so terrible that austerity is necessary even if it tanks the economy. This is seldom argued in so many words, but is the implicit position of many government officials, both in Europe and the US.

3. Arguing that the economy is in such terrible shape that we have to be willing to increase spending (and perhaps cut taxes) even if it increases the debt. This is the position taken by economist and New York Times columnist Paul Krugman. Indeed, Krugman is so intent on arguing that the government should spend more, despite the effect on the debt, that in many individual columns he appears to be denying that debt is a serious problem.  A case in point is his reply, “Another Attack of the 90% Zombie,” to my column emphasizing the dangers of Italy’s national debt, “What Paul Krugman got wrong about Italy’s economy.”  (In addition to this column, I responded on my blog.)

4. Arguing that there are ways to stimulate the economy without running up the national debt.  This is what I also argue in my column on Krugman. For the US, the most important point is that using monetary policy to stimulate the economy does not add to the national debt and that even when interest rates are near zero, the full effectiveness of monetary policy can be restored if we are willing to make a legal distinction between paper currency and electronic money in bank accounts—treating electronic money as the real thing, and putting paper currency in a subordinate role. (See my columns, “How paper currency is holding the US recovery back” and “What the heck is happening to the US economy? How to get the recovery back on track.”) As things are now, Ben Bernanke is all too familiar with the limitation on monetary policy that comes from treating paper currency as equivalent to electronic money in bank accounts. He said in his Sept. 13, 2012 press conference:

If the fiscal cliff isn’t addressed, as I’ve said, I don’t think our tools are strong enough to offset the effects of a major fiscal shock, so we’d have to think about what to do in that contingency.

Without the limitations on monetary policy that come from our current paper currency policy, the Fed could lower interest rates enough (even into negative territory for a few quarters if necessary) to offset the effects of even major tax increases and government spending cuts.

The price of debt

Since I see a way to stimulate the economy without adding to the national debt—and even in the face of measures to rein in the national debt—I face no temptation to downplay the costs of high levels of national debt. What are those costs? The most obvious cost of high levels of national debt is that at some point, lenders start worrying about whether a country can ever pay back its debts and raise the interest rates they charge. (This all works through the bond market, giving rise to James Carville’s famous quip: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”) One can disagree with their judgment, but lenders are showing no signs of doubting the ability of the US government to pay its debts. But there can be costs to debt even if no one ever doubts that the US government can pay it back.

To understand the other costs of debt, think of an individual going into debt. There are many appropriate reasons to take on debt, despite the burden of paying off the debt:

  • To deal with an emergency—such as unexpected medical expenses—when it was impossible to be prepared by saving in advance.
  • To invest in an education or tools needed for a better job.
  • To buy an affordable house or car that will provide benefits for many years.

There is one more logically coherent reason to take on debt—logically coherent but seldom seen in the real world:

  • To be able to say with contentment and satisfaction in one’s impoverished old age, “What fun I had when I was young!”

In theory, this could happen if when young, one had a unique opportunity for a wonderful experience—an opportunity that is very rare, worth sacrificing for later on. Another way it could happen is if one simply cared more in general about what happened in one’s youth than about what happened in one’s old age.

Tax increases and government spending cuts are painful. Running up the national debt concentrates and intensifies that pain in the future. Since our budget deficits are not giving us a uniquely wonderful experience now, to justify running up debt, that debt should be either (i) necessary to avoid great pain now, or (ii) necessary to make the future better in a big enough way to make up for the extra debt burden. The idea that running up debt is the only way to stimulate an economic recovery when interest rates are near zero is exactly what I question in my previous column about Italy’s economy. If reforming the way we handle paper currency made it clear that running up the debt is not necessary to stimulate the economy, what else could justify increasing our national debt? In that case, only true investments in the future would justify more debt: things like roads, bridges, and scientific knowledge that would still be there in the future yielding benefits—benefits for which our children and we ourselves in the future will be glad to shoulder the burden of debt.

Should Troubling Arguments Be Kept Away from Those Who Might Be Unduly Swayed by Them?

Past homepage of the controversial MormonThink website.

Past homepage of the controversial MormonThink website.

For Mormonism, the question in my title is the center of an active debate, both among Mormons generally and among high leaders in the Mormon Church. Some Mormon Church leaders have argued “Yes,” while others have argued “No." Here is John Stuart Mill’s answer to this question, in On Liberty, chapter II: 

To abate the force of these considerations, an enemy of free discussion may be supposed to say, that there is no necessity for mankind in general to know and understand all that can be said against or for their opinions by philosophers and theologians. That it is not needful for common men to be able to expose all the misstatements or fallacies of an ingenious opponent. That it is enough if there is always somebody capable of answering them, so that nothing likely to mislead uninstructed persons remains unrefuted. That simple minds, having been taught the obvious grounds of the truths inculcated on them, may trust to authority for the rest, and being aware that they have neither knowledge nor talent to resolve every difficulty which can be raised, may repose in the assurance that all those which have been raised have been or can be answered, by those who are specially trained to the task. 

Conceding to this view of the subject the utmost that can be claimed for it by those most easily satisfied with the amount of understanding of truth which ought to accompany the belief of it; even so, the argument for free discussion is no way weakened. For even this doctrine acknowledges that mankind ought to have a rational assurance that all objections have been satisfactorily answered; and how are they to be answered if that which requires to be answered is not spoken? or how can the answer be known to be satisfactory, if the objectors have no opportunity of showing that it is unsatisfactory? If not the public, at least the philosophers and theologians who are to resolve the difficulties, must make themselves familiar with those difficulties in their most puzzling form; and this cannot be accomplished unless they are freely stated, and placed in the most advantageous light which they admit of. The Catholic Church has its own way of dealing with this embarrassing problem. It makes a broad separation between those who can be permitted to receive its doctrines on conviction, and those who must accept them on trust. Neither, indeed, are allowed any choice as to what they will accept; but the clergy, such at least as can be fully confided in, may admissibly and meritoriously make themselves acquainted with the arguments of opponents, in order to answer them, and may, therefore, read heretical books; the laity, not unless by special permission, hard to be obtained. This discipline recognises a knowledge of the enemy’s case as beneficial to the teachers, but finds means, consistent with this, of denying it to the rest of the world: thus giving to the élite more mental culture, though not more mental freedom, than it allows to the mass. By this device it succeeds in obtaining the kind of mental superiority which its purposes require; for though culture without freedom never made a large and liberal mind, it can make a clever nisi prius advocate of a cause. But in countries professing Protestantism, this resource is denied; since Protestants hold, at least in theory, that the responsibility for the choice of a religion must be borne by each for himself, and cannot be thrown off upon teachers. Besides, in the present state of the world, it is practically impossible that writings which are read by the instructed can be kept from the uninstructed. If the teachers of mankind are to be cognisant of all that they ought to know, everything must be free to be written and published without restraint.

Quartz #19—>Four More Years! The US Economy Needs a Third Term of Ben Bernanke

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Link to the Column on Quartz

Here is the full text of my 19th Quartz column, Here is a link to my 19th column on Quartz: “Four More Years: The US economy needs a third term of Ben Bernanke,” now brought home to supplysideliberal.com. It was first published on March 22, 2013. Links to all my other columns can be found here.

If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice:

© March 22, 2013: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2014. All rights reserved.

Ben Bernanke’s second term as chairman of the US Federal Reserve ends at the end of January 2014. Speculation has begun about whether President Obama leans toward reappointing him and whether Ben Bernanke would accept reappointment. At his March 20 press conference, Bernanke said he had spoken to Obama “a bit” about his own future without directly addressing the question of whether he would be willing to serve a third term if asked. But he emphasized that he did not see himself as indispensable, saying “I don’t think that I’m the only person in the world who can manage the exit [strategy]” from the stimulus the Fed has been providing to the economy. Given Bernanke’s reticence, the Wall Street Journal provides an important tea leafwhen it reports that “Many of [Bernanke’s] friends and associates believe he will want to leave after his current term expires.”

Though the stresses Ben Bernanke has faced during his time as chairman of the Fed—and the princely speaker fees and book advances available to former Fed chiefs—would make a desire to retire at the end of his current term understandable, I hope that Obama will ask him to serve a third term and that Ben Bernanke will accept—and that the Senate will confirm him by a wider margin than it did for his second term. Of these decision-makers, the hardest to persuade might be Ben Bernanke himself.

As Bernanke said, if all goes well, and the economy is firmly on the road to full recovery, many possible Fed chiefs could manage a reasonably graceful exit from quantitative easing and interest rates hovering around zero. But I do not think the economy will be out of the woods by January 2014. Many dangers will remain, particularly dangers to the US economy from troubles in the rest of the world and from the difficulties of reining in the US national debt without bringing the US economy to a halt.

Though not by any means a close confidant, I have known Ben Bernanke for a long time from meetings of the Monetary Economics group in the National Bureau of Economic Research. We economists are quick to take the measure of one another, and I have always had the highest respect for Ben Bernanke’s thoughtful approach to economics. Through the news, and from reading David Wessel’s wonderful book about the Fed’s response to the financial crisis, In Fed We Trust, I have studied with interest each official move that Ben Bernanke has made as chairman of the Fed. Instead of Monday morning quarterbacking, I have asked myself at each point what I thought should be done, given what I knew at the time, and compared it to the decisions that Bernanke made at that time. I know I could not have done better than Bernanke. And Greg Mankiw, former chairman of the Council of Economic Advisors, who was on the same short list for appointment as Fed chairman as Bernanke, has similarly said that “he very much agreed with Bernanke’s policy decisions over his tenure.”

I can say with clarity that Bernanke’s biggest failure—not foreseeing the gravity of the coming financial crisis—was a failure of the entire economics profession and hardly his alone.  Economists did see the housing bubble and worried in advance about a collapse in housing prices. But what we didn’t know—in large part because the needed data was not collected from them—is what huge bets the big banks and other big financial firms had taken on the overall level of house prices in the US. So when housing prices fell all across the US, the big banks and other financial firms got into trouble, and dragged the world economy down with them. Ever since, Ben Bernanke has been laboring mightily to get the US economy and the world economy out of the hole that the financial crisis put them in.

In addition to wielding the emergency powers of the Fed to prevent an even worse financial meltdown, Bernanke has played a central role in adding quantitative easing to the standard toolkit of monetary policy in the US. In other words, Bernanke did a lot to help convince his colleagues in the Fed, and some fraction of the public, that when the interest rate on three-month Treasury bills has fallen to zero, the Fed can and should still stimulate the economy by buying other assets instead of three-month Treasury bills.  Bernanke has acted according to the slogan I use in my blog post “Balance Sheet Monetary Policy: A Primer,”

When below natural output: print money and buy assets!

And when one kind of asset already has a zero interest rate, buy some other type of asset. Bernanke has done so, in the face of often-savage criticism. (It is only in the last few years that “End the Fed!” has become a slogan for a substantial minority of the US population—many of whom reliably show up as energetic commentators on websites.) In all of this, the Bernanke Fed has been significantly more vigorous than other major central banks, and as a result, the US has done better economically than Japan, the UK or the euro zone as a whole. (China is a whole different story.)

Although there are a few other economists who might match Bernanke in their monetary policy judgments, through his years at the helm of the Fed, Bernanke has developed an unparalleled skill in explaining and defending controversial monetary policy measures to Congress and to the public. The most important ways in which US monetary policy has fallen short in the last few years are because of the limits Congress has implicitly and explicitly placed on the Fed. Negative interest rates could be much more powerful than quantitative easing, but require a legal differentiation between paper currency and electronic money in bank accounts to avoid massive currency storage that would short-circuit the intended stimulus to the economy. (See my column: “How Paper Currency is Holding the US Recovery Back.”) That would require legislation. Lending directly to households would require legislation. (See my column: “More Muscle than QE3: With an extra $2,000 in their pockets, could Americans restart the US economy?”) And creating a US Sovereign Wealth Fund as a sister institution to the Fed to give the Fed running room and help stabilize the financial system would require legislation. (See my column: “Why the US needs its own sovereign wealth fund” and also: “How to stabilize the financial system and make money for US taxpayers.”)

If we are to have a hope of adding these tools to the monetary policy toolkit—tools that one way or another, we will need someday—we need a Fed chief who not only has the skill that Bernanke has gained at explaining monetary policy to Congress and the public, but also the prestige that will come when we finally get out of the economic mess we are in and people realize that, in important measure, it was Ben Bernanke who got us out of that mess. But the biggest reason we need a third Bernanke term is that nasty economic shocks may not be through with us yet. And no other potential head of the Fed has as much experience in responding to nasty shocks with solidly creative monetary policy as Ben Bernanke.

I join Greg Mankiw, who happened to be my graduate adviser, in calling Ben Bernanke a hero. Though he might be tempted to cut it short, I don’t see any way that Ben Bernanke can complete the hero’s journey that history has appointed him without a third term.

Diana Kimball: What Happens Next →

This is a reblogged post from my daughter Diana. She makes me very proud.  

dianakimball:

Every now and then, I write a letter about what I’ve learned lately. Today’s letter was a little different.

Over the past year, people have often wondered out loud: what will you do next? What happens after you graduate? For a while now, I’ve had a hunch. But now that it’s official, I wanted to share the news with all of you.

What’s happening next is this: I’m moving to Berlin to work at SoundCloud.

!!!

The most amazing part? Erik is, too. After two years of long distance, we’re reuniting on the other side of the world. I’ll be joining SoundCloud as a Community Manager focused on scaling up their community engagement efforts; Erik will be joining as a Developer Evangelist. I am pretty much over the moon.

I’ve been on the lookout for a way to work with David Noël ever since our first conversation. The day we met, I tweeted in awe: “Too energized to sleep after dinner & ideas with @David, thanks to @eqx1979’s introduction. Future history, left turns & leading by example.” Over the next two years, we talked all the time; every conversation blew my mind. But SoundCloud was still in Berlin, and the rest of my life was still in San Francisco, and neither city would budge. The impasse was undeniable, but so was the draw.

The first turning point came when David invited me to Berlin last November to meet with the rest of the team—just to see. What I wasn’t prepared for was that every conversation would leave me in awe. Back in my teal and orange hotel room after a day of those conversations, I remember telling Erik in disbelief: I think I need to work here. I returned to Boston exhilarated, but perplexed. I stayed that way for weeks.

The second turning point came in December. Erik and I were on FaceTime, just catching up on each other’s lives, when suddenly he brought up an idea:what if I worked at SoundCloud, too? My eyes went wide as the idea sank in; I tried my hardest not to explode with excitement. That would be AMAZING. The next time David and I talked, I mentioned the idea and he broke out one of the biggest smiles I’ve ever seen.

The rest is history…except for what happens next.

image

Quartz #18—>Show Me the Money!

Link to the Column on Quartz

Here is the full text of my 18th Quartz column, “The Stanford economists are so wrong: A tighter budget won’t be accompanied by tighter monetary policy.”I honestly couldn’t think of a good working title of my own before my editor Mitra Kalita gave it the title it has on Quartz. But it finally came to me what I wanted my version of the title to be: the main theme is short-run monetary policy dominance, so my title is “Show Me the Money!”

The heart of this column is a discussion of the paper I wrote with Susanto Basu and John Fernald:“Are Technology Improvements Contractionary?”  It was first published on March 19, 2013. Links to all my other columns can be found here.

If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice:

© March 19, 2013: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2014. All rights reserved.

Until the election last year, Stanford economics professor John Taylor was one of Mitt Romney’s chief campaign economists. This morning, he joins his Stanford colleague John Cogan in a Wall Street Journal opinion piece, “How the House Budget Would Boost the Economy.” Cogan and Taylor write:

According to our research, the spending restraint and balanced-budget parts of the House Budget Committee plan would boost the economy immediately.

Leaving aside the long-run merits of the House Budget, let’s evaluate Cogan and Taylor’s argument about what its short-run effects would be. The key to any hope that cutting spending would stimulate the economy is that the spending cuts are all in the future—hopefully after the economy has already fully recovered:

The House budget plan keeps total federal outlays at their current level for two years. Thereafter, spending would rise each year, but more slowly than if present policies continue.

If government spending doesn’t change for the next two years, why might the budget being put forward by the US House of Representatives boost the economy now?  Put plainly, their argument is that companies sitting on big piles of cash will invest more and individuals who have money to spend because they have funds in stocks, bonds and bank accounts will spend more now because of reduced concerns about higher future business and personal taxes.

The thing that Cogan and Taylor leave obscure in their argument is that the short-run effect of the House Budget would depend critically on the Federal Reserve’s reaction to it. Let me illustrate the importance of what the Fed does by pointing to the short-run effects of technology shocks. All economists agree that, in the long run, technological progress raises GDP—more than anything else. Yet, in our paper “Are Technology Improvements Contractionary?” which appeared in the scholarly journal American Economic Review, Susanto Basu, John Fernald and I showed that, historically, technology improvements have led to short-run reductions in investment and employment that were enough to prevent any short-run boost to GDP, despite improved productivity. (Independently, using very different methods, many other economists, starting with Jordi Gali, had found the negative short-run effect of technology improvements on how much people work.)

How can something that stimulates the economy in the long run lead people to work and invest less? It is all about the monetary policy reaction. Historically, in the wake of technology improvements, the Fed has cut interest rates somewhat, but has failed to do enough to keep the price level on track and accommodate in the short run the higher level of GDP that eventually follows from a technological improvement in the long run.

So what monetary policy do Cogan and Taylor envision to go along with the House Budget’s proposed cuts in future government spending? Arguing that the results of the House Budget would be even better than predicted by the model they are relying on, Cogan and Taylor write:

Nor does the model account for beneficial changes in monetary policy that could accompany enactment of the budget plan. Lower deficits and national debt would reduce pressure on the Federal Reserve to continue buying long-term Treasury bonds.

To translate, Cogan and Taylor are envisioning tighter monetary policy to go along with the House Budget. But, to the extent that their arguments about the stimulative effects of cutting future government spending have any merit, it would be in conjunction with continued—and likely accelerated–Fed purchases of long-term government bonds and mortgage bonds. As I discussed in an earlier column and at much greater length on my blog, John Taylor is so strongly opposed to even what the Fed is currently doing to support the economy that he is willing to resort to specious arguments to argue for Fed tightening. There is no hope that the House Budget will stimulate the economy as Cogan and Taylor claim unless John Taylor gives up his misguided wish for tighter monetary policy.

Top 25 All-Time Posts and All 22 Quartz Columns in Order of Popularity, as of May 5, 2013

The top 25 posts on supplysideliberal.com listed below are based on Google Analytics pageviews from June 3, 2012 through midday, May 5, 2013. The number of pageviews is shown by each post. Not counting Quartz pageviews and pageviews from some forms of subscription, Google Analytics counts 240,923 pageviews during this period but, for example, 79,445 homepage views could not be categorized by post.  

I have to handle my Quartz columns separately because that pageview data is proprietary. My very most popular pieces have been Quartz columns. Since there are only 22, I have listed them all. You might also find other posts you like in this earlier list of top posts, at this link.

I have some musings on this data after the lists.

All 22 Quartz Columns So Far, in Order of Popularity:

  1. An Economist’s Mea Culpa: I Relied on Reinhart and Rogoff
  2. Show Me the Money!
  3. How Italy and the UK Can Stimulate Their Economies Without Further Damaging Their Credit Ratings
  4. Four More Years! The US Economy Needs a Third Term of Ben Bernanke
  5. Why the US Needs Its Own Sovereign Wealth Fund
  6. Could the UK be the First Country to Adopt Electronic Money?
  7. Optimal Monetary Policy: Could the Next Big Idea Come from the Blogosphere?
  8. Read His Lips: Why Ben Bernanke Had to Set Firm Targets for the Economy
  9. More Muscle than QE3: With an Extra $2000 in their Pockets, Could Americans Restart the U.S. Economy?
  10. How Subordinating Paper Money to Electronic Money Can End Recessions and End Inflation
  11. Judging the Nations: Wealth and Happiness Are Not Enough
  12. Yes, There is an Alternative to Austerity Versus Spending: Reinvigorate America’s Nonprofits
  13. John Taylor is Wrong: The Fed is Not Causing Another Recession
  14. Why Austerity Budgets Won’t Save Your Economy
  15. Monetary Policy and Financial Stability
  16. Off the Rails: What the Heck is Happening to the US Economy? How to Get the Recovery Back on Track
  17. Obama Could Really Help the US Economy by Pushing for More Legal Immigration
  18. Does Ben Bernanke Want to Replace GDP with a Happiness Index?
  19. How to Stabilize the Financial System and Make Money for US Taxpayers
  20. How the Electronic Deutsche Mark Can Save Europe
  21. Al Roth’s Nobel Prize is in Economics, but Doctors Can Thank Him, Too
  22. Symbol Wanted: Maybe Europe’s Unity Doesn’t Rest on Its Currency. Joint Mission to Mars, Anyone?
  23. (On The Independent, no pageview data) Why George Osborne Should Give Everyone in Britain a New Credit Card

Top 25 Posts on supplysideliberal.com:

  1. Dr. Smith and the Asset Bubble 6249
  2. Contra John Taylor 6157
  3. Scott Adams’s Finest Hour: How to Tax the Rich 4163
  4. Balance Sheet Monetary Policy: A Primer 3942
  5. Noah Smith Joins My Debate with Paul Krugman: Debt, National Lines of Credit, and Politics 3655
  6. Isaac Sorkin: Don’t Be Too Reassured by Small Short-Run Effects of the Minimum Wage 3482
  7. What is a Supply-Side Liberal? 3076
  8. The Deep Magic of Money and the Deeper Magic of the Supply Side 2433
  9. You Didn’t Build That: America Edition 2177
  10. The Logarithmic Harmony of Percent Changes and Growth Rates 2164
  11. Trillions and Trillions: Getting Used to Balance Sheet Monetary Policy 2130 
  12. The Egocentric Illusion 2072
  13. Two Types of Knowledge: Human Capital and Information 1960
  14. Books on Economics 1839
  15. No Tax Increase Without Recompense 1828
  16. Getting the Biggest Bang for the Buck in Fiscal Policy 1792
  17. Why I am a Macroeconomist: Increasing Returns and Unemployment 1764
  18. Jobs 1661
  19. Scrooge and the Ethical Case for Consumption Taxation 1611
  20. Let the Wrong Come to Me, For They Will Make Me More Right 1602
  21. The Shape of Production: Charles Cobb’s and Paul Douglas’s Boon to Economics 1586
  22. Kevin Hassett, Glenn Hubbard, Greg Mankiw and John Taylor Need to Answer This Post of Brad DeLong’s Point by Point 1558
  23. Three Goals for Ph.D. Courses in Economics 1510
  24. Why Taxes are Bad 1499
  25. Is Taxing Capital OK? 1467

Musings

  • Not surprisingly, controversy breeds pageviews–for both posts and Quartz columns. Also, the titles my editors on Quartz gave to columns likely bring more pageviews than the sometimes tamer, more accurate, permanent titles that I use above. (You can see those titles at the links.) Although I carefully distinguish between my own titles and Quartz’s titles, I do not object to their efforts to bring more pageviews by giving the columns catchier, if less-accurate, titles. 
  • There is a clear time trend in the data. Later columns and posts have an advantage over earlier columns and posts of equal quality.
  • The list of columns and list of posts above is actually quite good at capturing the pieces that I personally think are most important. I also periodically update a list of “save-the-world” posts. There is always a link at my sidebar to the current list. The latest (January 17) list of “save-the-world” posts is given in my posts “The Overton Window” and “Within the Overton Window.” Other than what is in those lists and what is among the posts and columns in the lists above, if you look at “Anat Admati, Martin Hellwig and John Cochrane on Bank Capital Requirements,” Martin Feldstein’s article “It’s Time To Cap Tax Deductions” that I link to, and yesterday’s post “The Ethics of Immigration Reform, Revisited,” you will be up to date on the most important “save-the-world” posts.   
  • I am intrigued by the two older posts that have gained ground in the rankings since the last list. Despite the addition of brand-new popular posts making the competition tougher, “The Logarithmic Harmony of Percent Changes and Growth Rates” moved up from rank 15 in February, to rank 10 now. Less remarkably, “Three Goals for Ph.D. Courses in Economics” didn’t make the list of top 25 that came out five days later, but has managed to slide into the number 23 slot now.  

The Ethics of Immigration Policy, Revisited

For practical policy debates, the most important ethical principle is that the pain and suffering—and the joy—of each human being is of equal importance, without regard to who that person is.  Treating some human beings and their concerns as being of lesser importance is the root of much evil in the world.

For those who cannot manage to approach the well-being of all human beings on an equal footing (and of course, this includes almost all of us in our personal dealings), let me recommend this:

At least for public policy purposes, 
on the way to treating the concerns of all human beings as of equal value,
let us treat the concerns of those human beings we treat as least important
as being at least one-hundredth as important
as the concerns of those we treat as most important.

All of that is an introduction for this link to a robust Twitter discussion on the ethics of immigration policy.

Update: I have added a Twitter discussion sparked by this post at the end of the storified tweets from earlier. In that discussion, I call the rule just above, treating foreigners as at least one-hundredth as important as citizens, the tin rule.

In Praise of Tumblr

I have been worrying about how faithful readers will adapt to the imminent demise of Google Reader. Please share your advice for replacements for Google Reader in the comments. 

For following this blog, one possibility you might want to consider is following it directly on Tumblr. When I started supplysideliberal.com, my tech-savvy daughter, dianakimball recommended that I use Tumblr. I have always been glad for that. Tumblr is a blog site designed for visual and multimedia posts. What that means for me in practice is that it looks good. But there are many word-focused bloggers like me on Tumblr as well.

If you want to follow me directly on Tumblr, just click on the “Join Tumblr” button on the upper right hand of your screen. Tumblr will send you posts it recommends until you follow at least five Tumblogs, but you will find it is easy to find five Tumblogs worth following. I mainly see what is on Tumblr in passing as I write blog posts. I find it a pleasure. Here are the ten I follow, some primarily word-focused and some primarily visual:

  1. dianakimball
  2. isomorphismes
  3. mills
  4. defenestrador
  5. 33arquitectures (high volume)
  6. liucid
  7. newsofthetimes
  8. jackcheng
  9. lisasanchez
  10. bobbieroundstheworld

I would never have seen the accidental architectural frog above if it hadn’t been for the Tumblr reblogging chain that brought it to me through 33arquitectures.

Please share your recommendations for other Tumblogs to follow in the comments.

The Great Sacrifice

Original source here, from Saturday Morning Breakfast Cereal and “Never Forget” version here.

Thanks to Unlearning Economics for flagging this funny and moving poster. When I asked him the source, he tweeted: 

@mileskimball it’s actually a joke comment but I prefer the never forget version, bleeding heart that I am: http://www.smbc-comics.com/index.php?db=comics&id=1535#comic…

By that measure, I may be not just a supply-side liberal, but a bleeding-heart supply-side liberal.

Quartz #17—>How Italy and the UK Can Stimulate Their Economies Without Further Damaging Their Credit Ratings

Link to the Column on Quartz

Here is the full text of my 17th Quartz column, “What Paul Krugman Got Wrong About Italy’s Economy,” now brought home to supplysideliberal.com and given my preferred title. It was first published on February 26, 2013. Links to all my other columns can be found here.

If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice:

© February 26, 2013: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2014. All rights reserved.

The combative title my editor gave this column attracted Paul Krugman’s attention in one of his columns, linked in my reply “Noah Smith Joins My Debate with Paul Krugman: Debt, National Lines of Credit and Politics.”

Note that I have a nuanced position toward national debt, which is also articulated in my columns “Why austerity budgets won’t save your economy” and “An economist’s mea culpa: I relied on Reinhart and Rogoff." On Twitter, I have encapsulated this nuanced view into the hashtag #nakedausterity–

Definition for #nakedausterity : Tax increases and/or government spending cuts unaccompanied by other measures to maintain aggregate demand.

The point of the hashtag is this:

When you are worried about debt, #nakedausterity is not the answer.

Update: More recently, Yichuan Wang and I examined what the Reinhart and Rogoff data set suggests about the effects of debt on growth and found no evidence for such an effect. Links to all our analysis can be found in our Quartz column "Autopsy: Economists looked even closer at Reinhart and Rogoff’s Data–and the results might surprise you.” Our earlier Quartz column “After crunching Reinhart and Rogoff’s data, we’ve concluded that high debt does not slow growth”, my companion post “After Crunching Reinhart and Rogoff’s Data, We Found No Evidence That High Debt Slows Growth,” and my post “Why Austerity Budgets Won’t Save Your Economy” discuss other reasons one might be concerned about high levels of national debt. 

Editor’s note: This post was updated on April 19, 2013, to reflect an error in the referenced study on debt levels by Carmen Reinhart and Ken Rogoff.

In the last few days, while the US political debate centers on ways to deal with burgeoning debt, UK government debt has been downgraded and investors are demanding much higher yields on Italian debt in the wake of the Italian election results (paywall). As concerns about national credit ratings push economies around the world toward austerity–government spending cuts and tax hikes–some commentators are still calling for economic stimulus at any cost. Joe Weisenthal wrote that David Cameron must spend more money in order to save the British economy. Paul Krugman wrote in “Austerity, Italian Style” that austerity policies simply don’t work. The downside of their prescription of more spending—and perhaps lower taxes—is that it would add to the United Kingdom’s and to Italy’s national debt.

And despite the recent revelation of errors in Carmen Reinhart and Ken Rogoff’s famous study of debt levels and economic growth, which I discuss here and which motivated the update you are reading (the original passage can be found here), there are reasons to think that high levels of debt are worth worrying about.

First, for a country like Italy that does not have its own currency (since it shares the euro with many other countries), Paul Krugman’s own graph shows a correlation between national debt as a percentage of GDP and the interest rate that a country pays.

Gross Debt Ratio

Second, the paper by Thomas Herndon, Michael Ash and Robert Pollin that criticizes Reinhart and Rogoff finds that, on average, growth rates do decline with debt levels. Divide debt levels into medium high (60% to 90% of GDP), high (90% to 120% of GDP), and very high (above 120% of GDP). Then the growth rates are 3.2% with medium-high debt, 2.4% with high debt, and 1.4% with very high debt.  (I got these numbers by combining the 4.2% growth rate for countries in the 0 to 30% debt-to-GDP ratio range from Table 3 with the estimates in Table 4 for how things are different at higher debt levels.) Moreover, contrary to the impression one would get from the column here, Herndon, Ash and Pollin’s Table 4 indicates that the differences between low levels of debt and high levels of debt are not just due to chance, though what Herndon, Ash and Pollin emphasize is that very low levels of debt, below 30% of GDP, have a strong association with higher growth rates. Overall, with the data we have, we don’t know what causes what, so there is no definitive answer to how much we should worry about debt, but ample reason not to treat debt as if it were a nothing.

In an environment in which stimulus is needed, but extra debt is a problem, there should be a laser-like focus on the ratio of stimulus any measure provides relative to the amount of debt it adds. In every one of my proposals for stimulating the economy, I have been careful to avoid proposals that would make a large addition to national debt. So I do not follow Joe Weisenthal and Paul Krugman in their recommendations.

First, instead of raising spending or cutting taxes, the Italian and UK governments can directly provide lines of credit to households, as I have proposed for troubled euro-zone countries and for the UK, as well as for the US. Although there would be some loan losses, the better ratio of stimulus to the addition to the national debt would lead to a much better outcome. In particular, after full economic recovery in the short run, there would be much less debt overhang to cause long-run problems after such a national lines of credit policy than under Weisenthal’s or Krugman’s prescriptions.

But for the UK, it is an even more important mistake to think that monetary policy can’t cut short-term interest rates below zero. Weisenthal quotes a post on Barnejek’s blog, “Has Britain Finally Cornered Itself?” that illustrates the faulty thinking I’m talking about:

Before I start, however, I would like to thank the British government for conducting a massive social experiment, which will be used in decades to come as a proof that a tight fiscal/loose monetary policy mix does not work in an environment of a liquidity trap. We sort of knew that from the theory anyway but now we have plenty of data to base that on.

“Liquidity trap” is code for the inability of the Bank of England to lower interest rates below zero. The faulty thinking is to treat the “liquidity trap” or the “Zero Lower Bound,” as modern macroeconomists are more likely to call it, as if it were a law of nature. The Zero Lower Bound is not a law of nature! It is a consequence of treating money in bank accounts and paper currency as interchangeable. As I explain in a series of Quartz columns (1, 2, 3 and 4) and posts on my blog—that is a matter of economic policy and law that can easily be changed. As soon as paper pounds are treated as different creatures from electronic pounds in bank accounts, it is easy to keep paper pounds from interfering with the conduct of monetary policy. In times when the Bank of England needs to lower short-term interest rates below zero, the effective rate of return on paper pounds can be kept below zero by announcing a crawling peg “exchange rate” between paper pounds and electronic pounds that has the paper pounds gradually depreciating relative to electronic pounds.

In his advice for the UK, Weisenthal should either explain why having an exchange rate between paper pounds and pounds in bank accounts is worse than a massive explosion of debt or join me in tilting against a windmill less tilted against. And for those who read Krugman’s columns, it would take a bad memory indeed not to recall that he gives the corresponding advice of stimulus by additional government spending for the US, which faces its own debt problem. I hope Paul Krugman will join me too in attacking the Zero Lower Bound.

In 1896 William Jennings Bryan famously declared: “… you shall not crucify mankind on a cross of gold.”

In our time it is not gold that is crucifying the world economy (though some would return us to the problems that were caused by the gold standard), but the unthinking worldwide policy of treating paper currency as interchangeable with money in bank accounts. So for our era, let us say: You shall not crucify humankind on a paper cross.

Quartz #16—>Monetary Policy and Financial Stability

Link to the Column on Quartz

Here is the full text of my 16th Quartz column, “Queasy Money: We should stop expecting monetary policy alone to save the US economy” now brought home to supplysideliberal.com and given my preferred title. It was first published on February 22, 2013. Links to all my other columns can be found here.

If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice:

© February 22, 2013: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2014. All rights reserved.

Minutes of the US Federal Reserve’s monetary policy committee meeting on Jan. 29  and 30 and other recent statements by Fed officials reveal a vigorous debate within the central bank about the effects of monetary policy stimulus on financial markets. Most strikingly, the minutes indicate that Kansas City Federal Reserve Bank president Esther George “…dissented from the committee’s policy decision, expressing concern that loose credit increased the risks of future economic and financial imbalances….” In the same vein, Cleveland Fed president Sandra Pianalto expressed in a Feb. 15 speech her worry that “… financial stability could be harmed if financial institutions take on excessive credit risk by “reaching for yield” —that is, buying riskier assets, or taking on too much leverage—in order to boost their profitability in this low-interest rate environment.”

These worries are not without some foundation. For example, in a Feb. 20 Wall Street Journal article “Fed Split Over How Long to Keep Cash Spigot Open,” reporters Jon Hilsenrath and Victoria McGrane show graphs of dramatic flows of money into junk bonds, junk loans, and real estate investment trusts. Nevertheless, Boston Fed president Eric Rosengren is quoted as saying:

…that it wasn’t the central bank’s job to halt every episode of financial excess. Individual financial institutions regularly fail without bringing down the economy, and financial bubbles don’t always wreck financial systems. When the tech bubble burst in 2000, for example, the U.S. experienced a relatively brief and shallow recession. It didn’t lead to the same cascade of market collapses and a deep downturn as in 2008.

And they report Dallas Fed president Richard Fisher saying that although he is alert to possible dangers, “These robust markets are part of the Fed’s policy intent.”

In an extended question and answer session at the University of Michigan on Jan. 14, Federal Reserve Board Chairman Ben Bernanke revealed his philosophy about dealing with financial stability:  “… we will, obviously, be working very hard in financial stability. We’ll be using our regulatory and supervisory powers. We’ll try to strengthen the financial system. And if necessary, we will adjust monetary policy as well but I don’t think that’s the first line of defense.” Although Bernanke does not want fears about financial stability to constrain monetary policy too much, he is more concerned about the effects of quantitative easing (buying long-term Treasury bonds and mortgage-backed securities) and forward guidance (making announcements about future short-term interest rates) than he would be if the Fed could just push the current short-term interest rate below the near-zero level it is at now:

… we have to pay very close attention to the costs and the risks and the efficacy of these non-standard policies as well as the potential economic benefits. And to the extent that there are costs or risks associated with non-standard policies which do not appear or at least not to the same degree for standard policies then you would, you know, economics tells you when something is more costly, you do a little bit less of it.

I find wisdom in the words of Rosengren, Fisher and Bernanke. In my view:

  1. It is almost impossible for monetary policy to stimulate the economy except by (a) raising asset prices, (b) causing loans to be made to borrowers who were previously seen as too risky, or (c ) stealing aggregate demand from other countries by causing changes in the exchange rate.
  2. Quantitative easing is likely to have unprecedented effects on financial markets—effects that will look unfamiliar to those used to what the standard monetary policy tool of cutting short-term interest rates does.
  3. It is not risk-taking we should be worried about, but efforts to impose risks on others—including taxpayers—without fully paying for that privilege.

1. Monetary Policy Works Through Raising Asset Prices, Loosening Borrowing Constraints, or Affecting the Exchange Rate.  It doesn’t make sense for firms to produce things no one wants to buy. Aggregate demand is the willingness to buy goods and services that determines how much is produced in the short run. Aggregate demand is the sum of the willingness of households (meaning families and individuals) to spend and build houses, of firms to buy equipment, build factories, office buildings, and stores, and spend on research and development, of government purchases, and of net exports: how much more foreigners buy from us than we buy from them (an area where the US is now in the hole).

To analyze household spending, it is a useful simplification to think of households as divided into two groups: (i) those who either don’t need to borrow or can borrow all they want at reasonable rates, and (ii) those who are borrowing as much as they can already and can’t borrow more. Economic theory suggests that those who don’t need to borrow or can borrow all they want at reasonable rates will look at the value of their wealth—including the asset value of their future paychecks—and spend a small fraction of that full wealth every year. The size of that fraction depends primarily on long-run factors, and is mostly beyond the Fed’s control. So, by and large, the only way the Fed can get those who don’t need to borrow to spend more is by increasing the value of their full wealth. If the full wealth goes up because they expect fatter paychecks in the future, no one gets worried, but otherwise that increase in wealth has to come from an increase in highly visible asset prices.

Those who are already borrowing as much as they can, will only be able to spend more if they can get their hands on more money in the here and now. Tax policy matters here, but the most recent change—the expiration of the Obama payroll tax cut—goes in the wrong way, reducing what people living from paycheck to paycheck have to spend. My proposal of a $2,000 Federal Line of Credit to every taxpayer would be a way to stimulate the spending of this group without adding much to the national debt. But this is beyond the Federal Reserve’s authority under current law. The way monetary policy now affects the spending of those who face limits on their borrowing is by lowering the cost of funds to banks so much that banks start to think about lending to people they were unwilling to lend to before.

A similar division by ability to borrow helps in understanding business investment as well. For firms who have trouble borrowing, additional investment spending will depend on borrowers-previously-deemed-too-risky getting loans. For firms that don’t need to borrow or can borrow all they want at reasonable rates, the key determinant of business investment is how valuable a firm thinks a new factory, office building, store, piece of equipment, or patent will be. But, by and large, the same factors that affect how valuable a new investment will be affect how valuable existing factories, office buildings, stores, equipment, and patents are. So the prices of the stocks and bonds that would allow one to buy a firm outright—with all of its factories, office buildings, stores, equipment and patents—will have to increase if the Fed is to encourage investment. The same logic holds for houses: it is hard to make it more valuable to build a new house without also making existing houses more valuable and pushing up their prices.

Aside from government purchases—which are the job of the president and the warring Democrats and Republicans in Congress rather than the Fed—that leaves net exports. There the problem is that while any one country can increase its aggregate demand by increasing its net exports, this doesn’t work when all countries try to increase net exports at the same time. The reason that monetary expansion isn’t  a zero-sum game across countries is because monetary policy can increase aggregate demand by raising asset prices and encouraging lenders to lend to borrowers they didn’t want to lend to before. The big danger is that those making the decisions within the Federal Reserve will mistake the normal workings of monetary policy—acting through asset prices and risky lending—for financial shenanigans that need to be stamped out by premature monetary tightening.

2. Nonstandard Monetary Policy. That said, nonstandard monetary policy in the form of purchases of long-term Treasury bonds and mortgage-backed securities and “forward guidance” on future short-term interest rates take the economy into uncharted territory. But uncharted territory brings not only the possibility of new monsters but also the near certainty of previously unseen creatures that might look like monsters, but are harmless.

3. Facing the Real Financial Dangers Squarely. So what distinguishes the real monsters from the paper dragons? Eric Rosengren had the key when he pointed to the contrast between the collapse of the internet stock bubble in 2000 and the financial crisis in 2008, that stemmed from the collapse of the housing bubble.  The difference was that, by and large, people invested in the internet stock price boom with their own money, and took the hit themselves when the bubble collapsed; people invested in the house price boom—both directly and indirectly—with borrowed money, and so imposed their losses on those they borrowed from and on taxpayers through bailouts. “High capital requirements” is the name of the policy of forcing big banks to put enough of their own money at risk to be able to absorb financial losses without imposing those losses on others. Capital requirements for banks are akin to down payment requirements for individuals buying houses. The financial crisis we are still suffering from arose from too little of both. Needless to say, banks hate capital requirements, since the secret for all too great a share of financial profits is taking the upside while foisting the downside on others (often taxpayers) who don’t know they are taking the downside, and aren’t being compensated for taking that risk.

Beyond pushing for high capital requirements—especially during booms, when financial shenanigans are most likely—the Fed can do a lot to foster financial stability by continuing to make a list of possible macroeconomic risks to use in subjecting financial firms to “stress tests” as it has done in 2009, 2011, 2012 and 2013. But it can do more with this list of possible macroeconomic risks by requiring financial firms to explicitly insure themselves against these risks and imposing very tough capital requirements on those who purport to provide such insurance. Indeed, for deep pockets, the ideal provider of such insurance would be a sovereign wealth fund, as I proposed in “Why the US Needs Its Own Sovereign Wealth Fund.” The problem is not having taxpayers bear these risks, it is having taxpayers bear these risks without being compensated for doing so. The bedrock principle should be to bring as many macroeconomic risks as possible out of the shadows into the light of day, so that prices can be put on those risks. If risks are out in the open, then those who face them will face them knowingly, and won’t be able to shirk the responsibility they have undertaken when those risks materialize.       

Fostering financial stability by enforcing high capital requirements during booms and working toward the naming and pricing of macroeconomic risks is its own reward. But it also has the extraordinary benefit of freeing up monetary policy to pursue its main mission of protecting the economy from inflation and high unemployment. The more potential evils we face, the more tools we need. Rather than attempting to use the familiar tool of monetary policy for a task to which it is ill-suited, let us fashion new tools to enhance financial stability.

Quartz #15—>How to Stabilize the Financial System and Make Money for US Taxpayers

Here is the full text of my 15th Quartz column, “How to stabilize the financial system and make money for US taxpayers” now brought home to supplysideliberal.com. It was first published on February 8, 2013. Links to all my other columns can be found here.

If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice:

© February 8, 2013: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2014. All rights reserved.

Note: a version of this column is also slated to be published in FS Focus, the financial services magazine of the ICAEW, an organization of accountants in the UK. In that version, the passage from “In brief, …” to the end of its paragraph was replaced with this passage, which I think you will find interesting as well:

At its inception, a US sovereign wealth fund would be established by issuing $1 trillion worth of low-interest safe Treasury bonds and investing those funds in high-expected-return risky assets. That takes those risky assets off the hands of private investors and puts safe assets in the hands of those private investors instead. Having fewer risky assets on their balance sheets overall would make those private investors readier to back private firms in taking on the additional risks involved in buying equipment, building factories, or starting up new businesses. And having more safe assets in the hands of private investors would provide good collateral for the financial arrangements those projects would need. Thus, the establishment of the sovereign wealth fund encourages investment and stimulates the economy. The Fed has plenty of tools for keeping the economy from being stimulated too much. So the mere existence of the sovereign wealth fund gives the Fed a wider range of stimulus levels to choose from. Moreover, any given level of stimulus would requires a less aggressive course of quantitative easing (QE) on the part of the Fed than it would otherwise need to pursue.

Geopolitically, the world still lives in the shadow of Sept. 11, 2001. Economically, the world still lives in the shadow of Sept. 15, 2008, the day Lehman Brothers collapsed and ushered in a deep financial crisis. The fundamental problem: big banks and other financial firms that pretended to take on huge risks without, in fact, being able to shoulder those risks. Under the guise of taking such risks, these financial firms reaped the reward during the good times. But when the risks came home to roost, only US taxpayers—the US government acting on their behalf—had the wherewithal to absorb those risks.

In the future, shouldn’t US taxpayers get some of the reward from taking on the macroeconomic risks that are too big and too pervasive for banks and financial firms to shoulder? Such risk-bearing is richly rewarded. Indeed, as George Mason University professor Tyler Cowen points out in his American Interest article, “The Inequality that Matters,” a shockingly high fraction of the wealth of the super-rich comes from finance. But more importantly, having US taxpayers rewarded for actually taking on macroeconomic risk—risk that US taxpayers end up bearing in large measure anyway—would crowd out the charade of big banks and financial firms pretending to take on that risk. And it is that pretense that brought the world to the dreadful, long-lasting economic quagmire it is in now.

In my Quartz column a little over a month ago I explained “Why the US needs its own sovereign wealth fund” primarily as a way to give the Federal Reserve more running room in monetary policy. In brief, the mere existence of a US sovereign wealth fund, one that issued through the Treasury $1 trillion worth of low-interest safe bonds and invested it in high-expected-return risky assets, would give the Federal Reserve a lot more room to maneuver.  Moreover, it would allow the Fed to pursue a less aggressive course of quantitative easing (QE) than it would otherwise need to pursue. The US fund would draw political controversy to itself, and away from the Fed, thereby preserving the independence of monetary policy that we need in order to avoid inflation in the long run.

But a US sovereign wealth fund can do more if given the independence it needs to focus on (1) making money for the US taxpayer and (2) financial stability, rather than extraneous political objectives. These two goals are consistent, since the same contrarian strategy serves both. Buying assets cheap, relative to their fundamentals, and selling assets that are expensive, relative to their fundamentals, both pushes asset prices toward their fundamentals and, by buying low and selling high, makes profits that we can use to help pay off the national debt. It takes almost inhuman fortitude to withstand the winds of investment fashion. But given appropriate compensation policies, a $1 trillion US sovereign wealth fund would be able to hire the next generation’s Warren Buffett to take care of US taxpayers’ money. They deserve no less.

Update: I discovered in a forgotten email a pdf of a version of this in print (on page 8) and a link to a version on the Economia website. I find those mostly interesting for the visuals:

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Let the Wrong Come to Me, For They Will Make Me More Right

blog.supplysideliberal.com tumblr_inline_mlx8niAdpg1qz4rgp.jpg

My title is a riff on this verse in the Gospel of Luke. The Vogel von Vogelstein painting reproduced above illustrates the scene. Here is a link to this and other paintings of the event. (I don’t see any reason to think that the event described by this Biblical verse is not historical.)

In the blogosphere and in academia, the frustration those who are wrong represent for those who are right is often palpable. It is good to remember that, as long as they do not win, those who are wrong provide an important service to those who are right. For you to understand this post, let’s stipulate that you are absolutely right. Here is what you and those on your side get from those who are wrong, as laid out by John Stuart Mill in On Liberty, chapter II: 

However unwillingly a person who has a strong opinion may admit the possibility that his opinion may be false, he ought to be moved by the consideration that however true it may be, if it is not fully, frequently, and fearlessly discussed, it will be held as a dead dogma, not a living truth.

There is a class of persons (happily not quite so numerous as formerly) who think it enough if a person assents undoubtingly to what they think true, though he has no knowledge whatever of the grounds of the opinion, and could not make a tenable defence of it against the most superficial objections. Such persons, if they can once get their creed taught from authority, naturally think that no good, and some harm, comes of its being allowed to be questioned. Where their influence prevails, they make it nearly impossible for the received opinion to be rejected wisely and considerately, though it may still be rejected rashly and ignorantly; for to shut out discussion entirely is seldom possible, and when it once gets in, beliefs not grounded on conviction are apt to give way before the slightest semblance of an argument. Waving, however, this possibility—assuming that the true opinion abides in the mind, but abides as a prejudice, a belief independent of, and proof against, argument—this is not the way in which truth ought to be held by a rational being. This is not knowing the truth. Truth, thus held, is but one superstition the more, accidentally clinging to the words which enunciate a truth.

… If the cultivation of the understanding consists in one thing more than in another, it is surely in learning the grounds of one’s own opinions. Whatever people believe, on subjects on which it is of the first importance to believe rightly, they ought to be able to defend against at least the common objections. But, some one may say, “Let them be taught the grounds of their opinions. It does not follow that opinions must be merely parroted because they are never heard controverted. Persons who learn geometry do not simply commit the theorems to memory, but understand and learn likewise the demonstrations; and it would be absurd to say that they remain ignorant of the grounds of geometrical truths, because they never hear any one deny, and attempt to disprove them.” Undoubtedly: and such teaching suffices on a subject like mathematics, where there is nothing at all to be said on the wrong side of the question. The peculiarity of the evidence of mathematical truths is, that all the argument is on one side. There are no objections, and no answers to objections. But on every subject on which difference of opinion is possible, the truth depends on a balance to be struck between two sets of conflicting reasons. Even in natural philosophy, there is always some other explanation possible of the same facts; some geocentric theory instead of heliocentric, some phlogiston instead of oxygen; and it has to be shown why that other theory cannot be the true one: and until this is shown, and until we know how it is shown, we do not understand the grounds of our opinion. But when we turn to subjects infinitely more complicated, to morals, religion, politics, social relations, and the business of life, three-fourths of the arguments for every disputed opinion consist in dispelling the appearances which favour some opinion different from it. The greatest orator, save one, of antiquity, has left it on record that he always studied his adversary’s case with as great, if not with still greater, intensity than even his own. What Cicero practised as the means of forensic success, requires to be imitated by all who study any subject in order to arrive at the truth. He who knows only his own side of the case, knows little of that. His reasons may be good, and no one may have been able to refute them. But if he is equally unable to refute the reasons on the opposite side; if he does not so much as know what they are, he has no ground for preferring either opinion. The rational position for him would be suspension of judgment, and unless he contents himself with that, he is either led by authority, or adopts, like the generality of the world, the side to which he feels most inclination. Nor is it enough that he should hear the arguments of adversaries from his own teachers, presented as they state them, and accompanied by what they offer as refutations. That is not the way to do justice to the arguments, or bring them into real contact with his own mind. He must be able to hear them from persons who actually believe them; who defend them in earnest, and do their very utmost for them. He must know them in their most plausible and persuasive form; he must feel the whole force of the difficulty which the true view of the subject has to encounter and dispose of; else he will never really possess himself of the portion of truth which meets and removes that difficulty. Ninety-nine in a hundred of what are called educated men are in this condition; even of those who can argue fluently for their opinions. Their conclusion may be true, but it might be false for anything they know: they have never thrown themselves into the mental position of those who think differently from them, and considered what such persons may have to say; and consequently they do not, in any proper sense of the word, know the doctrine which they themselves profess. They do not know those parts of it which explain and justify the remainder; the considerations which show that a fact which seemingly conflicts with another is reconcilable with it, or that, of two apparently strong reasons, one and not the other ought to be preferred. All that part of the truth which turns the scale, and decides the judgment of a completely informed mind, they are strangers to; nor is it ever really known, but to those who have attended equally and impartially to both sides, and endeavoured to see the reasons of both in the strongest light. So essential is this discipline to a real understanding of moral and human subjects, that if opponents of all important truths do not exist, it is indispensable to imagine them, and supply them with the strongest arguments which the most skilful devil’s advocate can conjure up.

See links to my other John Stuart Mill posts here: