Michael Huemer on Moral Progress

Michael Huemer (from a University of Colorado Boulder website)

Michael Huemer (from a University of Colorado Boulder website)

Michael Huemer is one of my favorite philosophers. His arguments are powerful, cogent, and well-written. In his book The Problem of Political Authority (pp. 331-332), he makes this case that there is a "general tendency for correct ideas to win out in the long run":

At any moment in history, it will be tempting to look around at all the people with bad ideas and conclude that humanity is too irrational and ignorant ever to grasp the important truths. But this is historical myopia. The most salient and important trend that stands out in any study of the intellectual history of the past 2000 years must surely be the gradual accretion of knowledge and the corresponding move from worse ideas to better ideas. The process is of course not monotonic–there are cases of stagnation and regression–but the undeniable difference between humanity’s knowledge today and its knowledge 2000 years ago is staggering. In the short run, the forces of prejudice may outweigh those of rationality. But prejudices can be worn down over time, while the basic truth of a given idea remains intact over the centuries, exerting whatever force it has on the human mind.

Sometimes it is said that, unlike the sciences, fields such as philosophy, ethics, and politics have made little or no progress in the last 2000 years. While the natural sciences have made the most impressive intellectual progress, the dramatic progress that has occurred in philosophical, moral, and political matters can be missed only through a modern lens that filters out all those issues that we no longer consider worth discussing because we have already resolved them. Throughout most of human history, slavery was widely accepted as just. The mass slaughter of foreigners for purposes of capturing land and resources, forcing conformity to one’s own religion, or exacting vengeance for perceived wrongs against one’s ancestors was often viewed with approval, if not glorified. Alexander ‘the Great’ was so called because of his prowess at waging what nearly anyone today would unhesitatingly judge to be unjust and vicious wars. Judicial torture and execution for minor offences was widely accepted. 'Witches’ were burned at stake or drowned. Despotism was the standard form of government, under which people were granted no right to participate in the political process. Even when democracy was at last accepted in some countries, half the adult population was denied any rights of political participation because they were deemed inferior.

When people today say that there is little agreement in ethics and politics, they are ignoring all the issues in the preceding paragraph. For us, none of those issues is worth discussing, since the correct evaluation is intellectually trivial. 'Should we torture someone to extract a confession of witchcraft and then execute her for being a witch?’ This question merits no more than a laugh. But practically speaking, these questions are far from trivial. Slow though it may have been in coming, the current consensus on all these questions represents and enormous advancement from terrible ideas to not-so-terrible ideas.

Michael Huemer's Immigration Parable

Image Source

Image Source

At Bryan Caplan’s recommendation, I have been reading Michael Huemer’s book The Problem of Political Authority. Michael tells this parable on pages 142-143:

Marvin is in need of food, without which he will suffer from malnutrition or starvation. He plans to travel to a nearby marketplace, where he will be able to trade for food. But before he can reach the marketplace, he is accosted by Sam, who does not want Marvin to trade in the marketplace, for two reasons. First, Sam’s daughter is going to be shopping in the marketplace, and Sam fears that Marvin might bid up the price of food. Some vendors might even run out of bread if too many people come to the marketplace. Second, Marvin comes from a different culture from most people presently at the marketplace, and Sam fears that Marvin might influence other people and thus alter the culture of the marketplace. Sam decides to solve the problem by force. He points his gun at Marvin and orders Marvin to turn around. The starving Marvin is thus forced to return home empty-handed. 

Sam’s reasons for coercing Marvin in this story are clearly inadequate. Furthermore, Sam will be culpable for whatever harms Marvin suffers as a result of being unable to reach the marketplace; they will be harms that Sam inflicted upon Marvin. If Marvin starves to death, then Sam will have killed him. This is true even though Sam was not responsible for Marvin’s initial situation of being hungry and out of food; it is true because Sam actively prevented Marvin from obtaining more food. If a person is starving, and you refuse to give him food, then you allow him to starve. But if you take the extra step of coercively interfering with his obtaining food from someone else, then you do no merely allow him to starve; you starve him. The same point applies to lesser harms: If, for example, Marvin merely suffers malnutrition as a result of being unable to reach the marketplace, Sam will have inflicted this harm upon him. 

The behavior of Sam in the story is analogous to that of the government of any modern country that excludes poor immigrants. Potential immigrants from developing nations come to participate in the marketplaces of wealthier countries. The governments of the wealthier countries routinely forcibly exclude these potential immigrants. As a result, many suffer greatly diminished life prospects. The government does not merely allow harms to befall these would-be immigrants. If the government merely stood by passively and refused to give aid to potential immigrants, then it would be allowing harms to occur. But it does not stand by passively; the government of every wealthy country in the world deliberately hires armed guards to forcibly exclude or expel unwanted persons. This coercive intervention constitutes an active infliction of harm upon them, just as Sam inflicts harm on Marvin in the story above. 

The most common reasons given for immigration restrictions are twofold. First, that new immigrants compete with existing Americans in the labor market, thus driving down wages for unskilled labor and making it more difficult for American workers to find jobs. Second, that if too many immigrants enter the country, they will alter the country’s culture. The first concern is analogous to Sam’s concern about Marvin’s competing with Sam’s daughter in the marketplace. It is not permissible to use force against another person simply to prevent a third party from suffering economic disadvantage through normal marketplace competition. The second concern is analogous to Sam’s concern about the culture of the marketplace. It is not permissible to use force against another person simply to prevent that person from influencing the culture of one’s society in undesired ways.

Franklin Roosevelt: The Hard Road to Democracy

In the address he gave to the Commonwealth Club of San Francisco, not long before he was elected President of the United States for the first time, Franklin Delano Roosevelt gave this account of the history of popular government: 

When we look about us, we are likely to forget how hard people have worked to win the privilege of government. The growth of the national Governments of Europe was a struggle for the development of a centralized force in the Nation, strong enough to impose peace upon ruling barons. In many instances the victory of the central Government, the creation of a strong central Government, was a haven of refuge to the individual. The people preferred the master far away to the exploitation and cruelty of the smaller master near at hand.

But the creators of national Government were perforce ruthless men. They were often cruel in their methods, but they did strive steadily toward something that society needed and very much wanted, a strong central State able to keep the peace, to stamp out civil war, to put the unruly nobleman in his place, and to permit the bulk of individuals to live safely. The man of ruthless force had his place in developing a pioneer country, just as he did in fixing the power of the central Government in the development of Nations. Society paid him well for his services and its development. When the development among the Nations of Europe, however, had been completed, ambition and ruthlessness, having served their term, tended to overstep their mark.

There came a growing feeling that Government was conducted for the benefit of a few who thrived unduly at the expense of all. The people sought a balancing-a limiting force. There came gradually, through town councils, trade guilds, national parliaments, by constitution and by popular participation and control, limitations on arbitrary power.

Noah Smith Joins My Debate with Paul Krugman: Debt, National Lines of Credit, and Politics

Paul Krugman’s graph of the debt/GDP ratio against interest rates

Paul Krugman’s graph of the debt/GDP ratio against interest rates

Update: You can see what I have to say in the wake of Thomas Herndon, Michael Ash and Robert Pollin’s critique of Carmen Reinhart and Ken Rogoff's work on national debt and growth in my column “An economists mea culpa: I relied on Reinhart and Rogoff.” (You can see my same-day reaction here.) Also, on the substance, see Owen Zidar’s nice graph in his post “Debt to GDP & Future Economic Growth.” I sent a query to Carmen Reinhart and Ken Rogoff about whether any adjustments are needed to the two figures from the paper with Vincent Reinhart that I display below, but have not yet received a reply to that query. I think that covers most of the issues that recent revelations raise.

Note that I have revised “What Paul Krugman got wrong about Italy’s economy.” This post is now the go-to source for what I originally said there, relying on “Debt Overhangs, Past and Present” (which has Vincent Reinhart as a coauthor along with Carmen Reinhart and Ken Rogoff). My original passage is in an indented block a little above the colorful pictures your eye will be drawn to below.

In a world where people wrote frankly, Noah Smith has written the response to my Quartz column “What Paul Krugman got wrong about Italy’s economy” that Paul Krugman should have written: 

instead of what Paul actually wrote in response to my column:

(The brief summary of my column is that electronic money could help the UK and the Federal Lines of Credit could help both Italy and the UK stimulate their economies without the problems that might arise from adding substantially to their debt by a simple increase in government spending, as indicated by my original title: “How Italy and the UK Can Stimulate Their Economies Without Further Damaging Their Credit Ratings.”)

Noah follows an earlier Paul Krugman column “Debt, Spreads and Mysterious Omissions,” in using the graph above to distinguish between Italian debt and US or UK or Japanese debt by pointing out that individual euro-zone countries are not able to borrow in their own currency in the same way the US, the UK or Japan can. Paul used this distinction to minimize the danger to the US of high debt levels; here is the first sentence of “Debt, Spreads and Mysterious Omissions”: 

Binyamin Applebaum reports on a new paper by Greenlaw et al alleging that bad things will happen to America, because debt over 80 percent of GDP leads to high interest rates, and is skeptical – but not skeptical enough. 

Paul explains that an important argument that the US may be OK revolves around the suggestion that Japan can get away with the debt levels at the rightmost extreme of the graph above because: 

…what really matters is borrowing in your own currency – in which case the US and the UK are, in terms of borrowing costs, like Japan rather than Greece. That’s certainly what the De Grauwe (pdf) analysis suggests.

Even the quickest look at the data suggests that there’s something to this argument; for example, taking data from the paper itself, and dividing the countries into euro and non-euro, we get a scatterplot like this:

There is no hint in Paul’s earlier piece, “Debt, Spreads and Mysterious Omissions” of a claim that we should not worry about high debt levels for euro-zone countries, and even less reason to worry about US debt. A reader could be forgiven for coming away from “Debt, Spreads and Mysterious Omissions” thinking Paul thought that maybe high debt levels might be worrisome for countries that cannot borrow in their own national currency (such as Greece and Italy), but not for countries that can borrow in their own currency.  

Noah joins Paul in taking me to task for relying too much on Carmen Reinhart, Vincent Reinhart and Ken Rogoff’s paper  “Debt Overhangs, Past and Present”:

Krugman has a good point: The “90%” thing is not well established; it is obviously just Reinhart and Rogoff eyeballing some sparse uncontrolled cross-country data and throwing out an off-the-cuff figure that got big play precisely because it was simple and (to deficit scolds) appealing. The 90% number alone is not a justification for worrying about debt.

But unlike Paul, Noah notes that all I need to argue for the main point of my column is that less debt is better than more debt:

But I feel that this argument over debt levels is mostly a distraction. The important thing, which is being overlooked, is that Miles has come up with a really interesting policy tool to increase the amount of stimulus per unit of debt incurred. That tool is Federal Lines of Credit, or FLOCs - basically, the idea that government should lend people money directly.

Paul is so used to–and intent on–arguing that getting out of recessions is so important that it is worth incurring additional debt to do so, that he seems to miss my point that it is possible to stimulate economies to escape recessions while incurring much less debt than a straight increase in government spending would incur.

I am actually on record agreeing with Paul (and Noah) that the Great Recession was so serious that it was worth a massive increase in debt to escape it if that were the only available way to stimulate the economy. In “What Should the Historical Pattern of Slow Recoveries after Financial Crises Mean for Our Judgment of Barack Obama’s Economic Stewardship”:

So the fact that Barack did not push for a bigger stimulus package really is an indictment of his economic leadership. According to the reported statement by Larry Summers, it was a political judgement that a bigger stimulus was not politically feasible. I am not at all convinced that a bigger stimulus was politically impossible. It would not have been easy, I’ll grant that, but I was amazed that Barack managed to get Obamacare through. If, instead, Barack had used his political capital and the control the Democrats had over both branches of Congress during his first two years for a bigger stimulus, couldn’t he have done more? …

Notice that in all of this, I am treating a larger stimulus of a conventional kind as the best among well-discussed policy options when Barack took office in 2009. So I am backing up Paul Krugman’s criticisms of Barack’s policies at the time. However, given what we know now we could do even better, as I discuss in my post “About Paul Krugman: Having the Right Diagnosis Does Not Mean He Has the Right Cure.”

 A similar judgment might well hold for Italy, as Paul argued in “Austerity, Italian Style” (the piece that kicked off this current debate with Paul), except: 

  1. We all agree that Italy’s debt problem is worse than the debt problem for the US. 
  2. Much more importantly, a policy option (National Lines of Credit) is now on the table (at least for discussion in the op/ed pages) that could stimulate the Italian economy with much less addition to debt than a straight increase in spending–a policy option that was not on the table for the US in 2009.

Astute readers will have noticed that in “What Should the Historical Pattern of Slow Recoveries after Financial Crises Mean for Our Judgment of Barack Obama’s Economic Stewardship” I relied on a stylized fact from Carmen Reinhart and Ken Rogoff’s book This Time is Different: Eight Centuries of Financial Folly. If I am led astray, it is because of my enormous respect for Ken Rogoff’s judgment, but in this case, I would be very surprised if Paul had not at some point in his New York Times columns relied on the Reinhart and Rogoff stylized fact that recessions have tended to last a long time after financial crises in more or less the same way I did. (Though I know Ken Rogoff, I don’t think I have ever been fortunate enough to meet either Carmen or Vincent Reinhart yet.) But of course, the meaning of the Reinhart and Rogoff stylized fact that across many countries recessions have historically lasted a long time after financial crises is just as much up for grabs as the meaning of the Reinhart, Reinhart and Rogoff stylized fact that across many countries GDP growth has been low during periods when debt to GDP ratios have been high.

For the record, despite, Paul’s title “Another Attack of the 90% Zombie,” I do not think I unduly emphasized the 90% figure itself. Here is what I actually wrote: 

And national debt beyond a certain point can be very costly in terms of economic growth, as renowned economists Carmen Reinhart, Vincent Reinhart, and Kenneth Rogoff convincingly show in their National Bureau of Economic Research Working Paper “Debt Overhangs, Past and Present.”

Where do the United Kingdom and Italy stand in relation to the 90% debt to GDP ratio Reinhart, Reinhart and Rogoff identify as a threshold for trouble? (It is important to realize that their 90% threshold is in terms of gross government debt. That is, it does not net out holdings by other government agencies. )

In context in relation to Italy, this means “Surely, in practice, some level of the existing debt to GDP ratio for Italy should make us worry about adding to Italy’s national debt. Can we get some idea of whether we should worry about Italian debt or not?”

Let’s look at Reinhart, Reinhart and Rogoff’s stylized fact about debt to GDP ratios and realized economic growth in a little more detail to see if there is enough suggestive evidence that we should be concerned about adding to Italy’s national debt. Here is Diagram 1 from “Debt Overhangs, Past and Present”:  

In this sample of 26 high-debt episodes, there has never been a case when a country had both a debt/GDP ratio higher than 90% and high real interest rates beat its own national GDP growth rate average during that period of time. Figure 4 gives more detail for specific episodes:

Niklas Blanchard writes this about “Debt Overhangs, Past and Present” in his post in this debate with Krugman (see this full account of my discussion with Niklas):

There is a lot not to like about the Reinhart, Reinhart, and Rogoff study, and Krugman nails much of it; it doesn’t deal with causation. I’m actually kind of confused as to why Miles mentions the study (although he may enlighten me in the comments). However; more importantly, it doesn’t specify 90% debt: GDP as a regime change to a new steady state, or as a transitory experience resulting from something like a recession, or a war. In normal times, the regime change itself is the cause of the turbulence, not the subsequent destination (like going over a waterfall). There is ample evidence that suggests that countries with high transitory debt loads are able to deal with them without incident — provided they return to robust nominal growth. Japan deals with it’s sky-high debt load through financial repression and ultra-tight monetary policy. The cost of this type of action is that the government steals wealth from households.

In retrospect, I should have avoided the word “threshold,” with its suggestion of a sudden change. I never intended to suggest there was a sudden regime shift. Of course, the 90% debt/GDP ratio is a somewhat arbitrary level that Carmen, Vincent and Ken use to cut their data. But, looking at the whole set of 26 historical episodes above that debt/GDP ratio, there seems ample grounds to be worried about the effects additional national debt might have on Italy’s situation–and I don’t think it is amiss to be worried about the effects additional national debt might have on the situation in the UK or the US. There is no evidence from a randomized controlled trial available for the effects of national debt. So I don’t know how to judge whether we should be worried about the effects of national debt for countries in various situations other than from theory–which I will leave for other posts and columns–or by trying to glean what insights we can from case studies (which is what attempts to find natural experiments would be in terms of sample size), from exercises like the one Carmen, Vincent and Ken conducted in “Debt Overhangs, Past and Present,” or from correlations such as those shown in Paul’s graph above, which suggests that we should be more worried about high debt/GDP ratios for countries that cannot borrow in their own national currency.

Unlike Paul, Noah grapples with my National Lines of Credit proposal–or “Federal Lines of Credit” for the US. (You can see my posts on Federal Lines of Credit collected in my Short-Run Fiscal Policy sub-blog: http://blog.supplysideliberal.com/tagged/shortrunfiscal.) Noah writes:

However, I do have some skepticism about FLOCs. First of all, there is the idea that much of the “deleveraging” we see in “balance sheet recessions” may be due to behavioral effects, not to rational responses to a debt-deflation situation. People may just switch between “borrow mode” and “save mode”. In that case, offering them the chance to take on extra debt is not going to do much. Second, and more importantly, I worry that FLOCs might draw money away from infrastructure spending and other government investment, which I think is an even more potent method of stimulus; govt. investment, like FLOC money, is guaranteed to be spent at least once, but unlike FLOCs it can increase public good provision, which is a supply-side benefit.

In answer to Noah’s first bit of skepticism, the main point of National Lines of Credit is to encourage more spending by that fraction of the population that will spend as a result of being able to borrow more, without adding to the national debt by sending checks to people like those in “save mode” who won’t spend any more. If people don’t draw on their lines of credit from the government, it doesn’t add to the national debt. And even if people draw on their lines of credit from the government to pay off more onerous debt, this is likely to both (a) make them better credit risks–that is, more likely to have the means to pay the government back and so not add to the national debt and (b) make them feel more secure, and so possibly get them to switch at least a little bit from “save mode” to “spend mode.”

On infrastructure spending, I should say more clearly than I have in the past that spending more on fixing roads and bridges would likely be an excellent idea for the US on its own terms, because of the supply-side benefits. But if it crowded out a Federal Lines of Credit program, one has to consider that Federal Lines of Credit can get more than a dollar’s worth of first-round addition to aggregate demand (which is then multiplied by whatever Keynesian multiplier is out there) per dollar budgeted for loan losses, while spending on infrastructure gives exactly one dollar worth of first-round addition to aggregate demand (which is then multiplied by whatever Keynesian multiplier is out there) per dollar budgeted for that spending. The spending on roads and bridges has to have enough of a positive effect on later productivity and tax revenue to outweigh its less potent stimulus per dollar budgeted. The other big problem with additional infrastructure spending is that, alas, it cannot be turned on and off quickly. The legal, administrative and regulatory process for spending on roads and bridges is just too slow to be of much help in short recessions, or if one wants to hasten a recovery that has already built up a good head of steam. So our current situation is one of the few in which spending on roads and bridges would be a fast enough mode of stimulus. Most of the time, roads and bridges should be seen primarily as a valuable supply-side measure when infrastructure is in the state of disrepair seen in the US.  

I said that Noah, unlike Paul, grapples with my National Lines of Credit proposal. Indeed, Paul shows no evidence of having read the second half of my article. One theory is that he really didn’t read the second half. Most favorably, Paul could be saving discussion of Federal Lines of Credit (and electronic money, which I also discuss in “What Paul Krugman got wrong about Italy’s economy”) for other posts. The most intriguing theory (that is not as positive as the idea that Krugman posts on FLOC’s and electronic money are coming, and one that I would not give all that high a probability to) is that Paul likes my proposals enough that he wanted to point people to those proposals, and too much to criticize them, but thinks they are too controversial to implicitly endorse by discussing them without criticizing them. If so, I am grateful to Paul for that backhanded support. Noah has a theory (that does does not preclude this theory that Paul is intentionally flagging my proposals while keeping some distance): 

That said, I think the FLOC idea is an interesting one. Why have most stimulus advocates ignored it? My guess is that this is about politics. In an ideal world, pure technocrats (like Miles) would advise politicians in an honest, forthright fashion as to what was best for the country, and the politicians would take the technocrats’ advice. In the real world, it rarely works that way. For every technocrat who just wants to increase efficiency, there’s a hundred hacks and politicos who are only thinking about distributional issues - grabbing a bigger slice of the pie. These hacks are very willing to use oversimplified narratives and dubious sound bytes to embed their ideas in the public mind. And that kind of thing really seems to be effective.

This means that politics’ response to policy is highly nonlinear - give the enemy an inch, and they take a mile. It also means the response is highly path-dependent; precedent matters.

So Krugman et al. may be ignoring FLOCs and other stimulus engineering tricks because of political concerns. If they concede for a moment that debt is scary, it will just shift the Overton Window toward Republican types who are deeply opposed to any sort of stimulus, and would oppose Miles’ FLOCs just as lustily as they opposed the ARRA.

In other words, finding optimal, first-best technocratic solutions might be far less important than simply embedding “AUSTERITY = BAD!!!” in the public consciousness.

My own politics are more centrist (to the extent they fit within the US political debate at all. (See my post “What is a Partisan Nonpartisan Blog?” as well as the mini-bio at my sidebar and Noah’s early review of my blog, “Miles Kimball, the Supply-Side Liberal.”) From that point of view, I have argued in “Preventing Recession-Fighting from Becoming a Political Football” (my response to the Mike Konczal post criticizing Federal Lines of Credit that Noah mentions) that Federal Lines of Credit have substantial political virtues in providing a way out of the current political deadlock between the Republican and Democratic parties over economic policy.

Many thanks to Noah for clarifying this debate with Paul, as well as to Niklas Blanchard, whose two bits I discussed in my post a few days ago, and to Paul himself for engaging with me in debate, at least at one level.

Update: With Noah’s permission, let me share an email exchange about the post above:

Miles: Did you like my response? 

Noah: I did! It was quite thorough.

I think the criticisms of FLOCs are still basically three:
Criticism 1 (mine): There is a limited amount of political will for increased spending. And because of the supply-side benefits of infrastructure, that finite will is better spent on infrastructure even than on the most cost-effective pure stimulus.
Criticism 2 (Mike Konczal’s): FLOCs have different distributionary consequences than other stimulus approaches, since FLOC borrowers will be responsible for repaying the stimulus borrowing, not taxpayers.
Criticism 3 (Mike Konczal’s): It will be very difficult to handle the inevitable FLOC defaults. Whether they are forgiven or collected aggressively, it will make some people very angry.
Criticism 4 (everyone else’s): FLOCs may get good “bang for the buck”, but they won’t get much bang in total, because people are in “deleveraging” (or “balance sheet rebuilding”) mode.
I think that these are not inconsiderable obstacles to the FLOC idea…
Miles: I don’t understand 4. Here is what I think it means. FLOC’s can be scaled up to get more impact, but they will have decreasing returns since people have consumption that is concave in amount of credit provision. Even though the costs are also concave in the headline amount of credit provision, this means that a FLOC program can only be so big. So ideally we want other things as well–infrastructure and electronic money.  Sounds good.  
On 1, I would be glad if the debate were between FLOC’s and infrastructure spending.  
On 2 and 3, Mike only gets one of these at a time at full force: making the amount of credit provision proportional to last-years adjusted gross income dramatically reduces the repayment problem (and the size of the program can be adjusted to compensate for the lower MPC), but this makes it distributionally less favorable.  
Noah: No, I think you may be misunderstanding 3. No matter how much FLOC lending is done, x% of people will default on their FLOC loans. What the government then does to that x% - cancels their debt, sues them, or refers them to collections agencies - is going to be a political bone of contention. It’s an image problem (evil govt. suckering people into borrowing money they can’t afford to pay back), not an efficiency problem.

Miles: I agree. That is why FLOC’s need to be paired with National Rainy Day Accounts that most likely make it unnecessary to ever use FLOC’s again after the first time.

I added the link about National Rainy Day Accounts just now. As a conceptually similar idea to FLOC’s and National Rainy Day Accounts for individuals, see what I have to say about helping the states spend more now (to stimulate the economy) and less later in “Leading States in the Fiscal Two Step.”

Whither the GOP?

I am very interested in how the Republican Party will respond to losing the presidential election. In this post, I have collected some links addressing that question. I see three possibilities.

1. More Pro-immigration. As I see it, the adjustment that maintains competitiveness in presidential elections but keeps the Republican Party’s values as close as possible to what they are now would be to become more pro-immigration. The key issue this would address is clear in the title of one of my recent posts: “Central Political Fact: Mitt Lost Despite Getting Almost 60% of the White Vote.” To be specific about how to change perceptions of the GOP without changing core Republican values, the approach I recommended to Barack in my post “Obama Could Really Help the US Economy by Pushing for More Legal Immigration” would work even better for the Republican Party if they initiated it. I predict that, if the Republican Party were willing to put up with serious grumbling from their base, outflanking the Democratic Party in being pro-immigration, while continuing to make a strong distinction between legal and illegal immigration would dramatically improve the fortunes of the GOP. Noah Smith’s post “Asian-Americans Destroy the Maker-Taker Narrative” is in the same spirit, saying that the Republican Party is in trouble if it continues to be primarily a White party.  

2. More Libertarian. Matthew Yglesias, in “The Central Tension of the GOP Coalition,” in addition to recommending less ethnocentrism, adds another possibility: becoming more libertarian (at least on gay rights) in order to appeal to the young. He writes:

… one option would be to stay committed to the idea of dismantling the welfare state and try to ditch the existing coalition in favor of some different, younger, less-white, less-ethnocentric coalition that’s more likely to want to cut retirement security programs.

3. More Populist. A final possibility is for the Republican Party to become more populist–for example, by attacking the rich and “big business.” That seems to be the direction Bobby Jindal has in mind, based on his recent interview with Jonathan Martin: “Jindal: End ‘dumbed-down’ conservatism.” Bobby also calls for less anti-intellectualism in the GOP. 

Central Political Fact: Mitt Lost Despite Getting Almost 60% of the White Vote

I wanted to back up some of the claims I made in my Quartz article yesterday (“Second Act: Obama Could Really Help the US Economy by Pushing for More Legal Immigration”) about the political feasibility for Barack to dramatically change America’s approach to immigration.  

In Wednesday morning’s Wall Street Journal, Gerald Seib had an interesting analysis of the situation now for the Republicans: “Tough Loss Leaves GOP at a Crossroads.” Gerald poses the question from the Republican points of view “What went wrong?” Here is his answer:

But the most significant critique will be the one that says the party simply failed to catch up with the changing face of America. Exit polls showed that Mr. Romney won handily among white Americans—almost six in 10 of them—but lost by breathtaking margins among the nation’s increasingly important ethnic groups: By almost 40 percentage points among Hispanics, by almost 50 points among Asians, and by more than 80 points among African-Americans.

The groups Barack did well among are groups that are becoming a bigger and bigger fraction of voters. 

Neil Irwin’s note “Republicans’ immigration problem in two numbers” on Wonkblog, ties the big margin for Barack among Hispanic voters to Barack’s advantage on immigration policy:

Asked how U.S. immigration policy should deal with illegal immigrants, 74 percent of Republican voters said that they should be deported to the country from which they came. But only 29 percent of voters overall shared that view. (Some 64 percent of all voters favored giving illegal immigrants a chance to apply for legal status).

My argument is that by focusing first on reform of legal immigration, Barack can get support for that from a bigger fraction of the Republican coalition than the 26% or so who are somewhat tolerant of illegal immigration. What I don’t know is how support for an expansion of legal immigration shifts as the size of the expansion increases.

Democracy in Action

We traditionally celebrate our nation on July 4. But in a very real sense, Election Day best symbolizes what America is all about. Most of us care deeply about the outcome of the election, though not all with the same hopes. But the greatest value of free elections is in all of the out-of-equilibrium outcomes that, because of the regularity of free elections, never come close to happening. Abraham Lincoln had it right in what he said about the importance of our democratic experiment:

Four score and seven years ago our fathers brought forth, on this continent, a new nation, conceived in Liberty, and dedicated to the proposition that all men are created equal.

Now we are engaged in a great civil war, testing whether that nation, or any nation so conceived and so dedicated, can long endure. We are met on a great battle-field of that war. We have come to dedicate a portion of that field, as a final resting place for those who here gave their lives that that nation might live. It is altogether fitting and proper that we should do this.

But, in a larger sense, we can not dedicate—we can not consecrate—we can not hallow—this ground. The brave men, living and dead, who struggled here, have consecrated it, far above our poor power to add or detract. The world will little note, nor long remember what we say here, but it can never forget what they did here. It is for us the living, rather, to be dedicated here to the unfinished work which they who fought here have thus far so nobly advanced. It is rather for us to be here dedicated to the great task remaining before us—that from these honored dead we take increased devotion to that cause for which they here gave the last full measure of devotion—that we here highly resolve that these dead shall not have died in vain—that this nation, under God, shall have a new birth of freedom—and that government of the people, by the people, for the people, shall not perish from the earth.

Divided Government Likely to Win Again

As an independent, I am a fan of divided government. Since Democrats have lately been doing better in their Senate races, while the Republicans are quite unlikely to lose the House of Representatives, there is an excellent chance that the winner in the presidential election will not have a majority in both houses of Congress. Brian Beutler somewhat overstates the case that divided government will win in his post “Why the GOP Agenda is Likely Dead Even If Romney Wins.” Mitt is more likely to win in a situation where the Republicans also do will in their Senate races, than in a situation in which the Democrats hold the Senate. So the folks betting on Intrade are today giving an 18.4% chance that Mitt will win along with the Republicans getting both houses of Congress, while Mitt has a 13.8% chance of winning but facing a Democratic Senate, and quite small chances of winning but facing a Democratic House. (Mitt’s overall probability of winning is 33% according to Intrade.) So conditional on Mitt winning, Intrade suggests he is more likely than not to have both houses of Congress with him, but there is a substantial chance he will be checked by a Democratic Senate.

On the other side, Intrade gives only a 2% chance that Obama will be elected along with both houses of Congress being in Democratic hands. So an Obama victory has a very high chance of also being a victory for divided government. Overall, Intrade gives divided government an 80% chance of winning, with the bulk of the 20% chance of divided government losing falling on Mitt’s side.

Let me make the prediction that, even if Mitt wins the presidency and the Republicans win the Senate as well as the House, Republican control of both houses of Congress would last no more than two years. The President’s party often loses seats at the first midterm election– and the Republicans seem eager to try enough bitter medicine for the body politic–that I suspect an all-Republican government would suffer somewhat larger than usual losses at the elections in 2014.

What all this boils down to is that anyone who fears truly extreme results from the presidential election is unlikely to see those fears realized. We are likely to continue to experience the blessings of divided government bestowed upon us abundantly by the framers of the Constitution through their ingenious design of checks and balances.

David Leonhardt on How the Coming Economic Recovery Will Give Whoever is Elected the Power to Reshape Long-Run Economic Policy →

This New York Times op/ed by David Leonhardt, “Who Gets Credit for the Recovery” is excellent in its discussion both of politics and of the long-run economic policy issues at stake in this election. Notice the prominence David gives in the article to the pattern Carmen Reinhart and Ken Rogoff found of especially long slumps after serious financial crises in guessing that a full recovery is on the way in the next few years. I wrote about how the Reinhart and Rogoff finding should affect our judgment of Barack Obama’s performance in short-run fiscal policy in an earlier post. David makes a good case for the importance of Barack’s long-run economic policies.

Martin Feldstein on the "Fiscal Cliff" →

I don’t want to endorse his slant as an advocate, but Martin Feldstein gives a useful description of the “fiscal cliff" in his new Financial Times column "The US is unlikely to avoid ‘fiscal cliff.’” Here is his opening line:

The United States is rapidly approaching the “fiscal cliff,” a dangerous combination of increased taxes and decreased government spending scheduled for January 1 that would reduce the budget deficit by five percent of GDP between 2012 and 2013.

5% of GDP is a huge change.  

Quartz has made the fiscal cliff one of their “obsessions.” You can see Quartz’s articles on the fiscal cliff here.

What Should the Historical Pattern of Slow Recoveries after Financial Crises Mean for Our Judgment of Barack Obama's Economic Stewardship?

Photo of Kenneth Rogoff and Carmen Reinhart from the New York Times

Photo of Kenneth Rogoff and Carmen Reinhart from the New York Times

In 2003, Carmen Reinhart and Kenneth Rogoff started writing a book about the aftermath of financial crises: This Time is Different: Eight Centuries of Financial Folly. Their book’s finding that returning to the previous level of per capita GDP takes a long time after serious financial crises has become part of the political debate. In both the Democratic Convention and in the debates, part of the argument that Barack has done a good job, under the circumstances, has relied on the idea that recoveries should be expected to be especially slow after serious financial crises. Noah Smith ably discusses the merits of the  Republican counterattack on the Reinhart-Rogoff finding in his post Reinhart-Rogoff vs. Bordo-Haubrich (with grandstanding by John Taylor). Carmen Reinhart and Ken Rogoff’s own defense of their finding is very useful, especially if you haven’t read their book. They are focused only on the historical evidence in their response. They do not directly engage in the political debate.    

I take the Reinhart-Rogoff finding very seriously, and will treat it as a good historical generalization in this post. But I want to point that–even stipulating that returning to the previous level of per capita GDP has historically taken a long time after serious financial crises–the implications of this Reinhart-Rogoff finding for the political debate are much more less clear than the Democratic argument would suggest. In particular, as Carmen and Ken acknowledge in their recent defense of their finding, what happens after a serious financial crisis is not some immutable law of nature, but depends on the policy response. And the key question for the political debate is not if the policy response of the Obama administration’s policy response was better than the policy response to serious financial crises has been historically, but whether the Obama administration’s policy response was as good as it should have been given what was known at the time. The very existence of This Time is Different: Eight Centuries of Financial Folly (published in September 2009 and surely existing in draft form quite a bit earlier)within a time period relevant for Obama Administration policy making should set the bar higher. 

In particular, in the light of the Reinhart-Rogoff finding that he should have had access to, one can make the argument that Barack should have known he needed to do more than the policies he chose in order to get a robust recovery. Indeed, (as I also cited in my post “Why George Osborne Should Give Everyone in Britain a New Credit Card”) in his excellent Atlantic article, “Obama Explained,” James Fallows wrote:

If keeping the economy growing was so central for Obama, why was the initial stimulus “only” $800 billion? “The case is quite compelling that if more fiscal and monetary expansion had been done at the beginning, things would have been better,” Lawrence Summers told me late last year. “That is my reading of the economic evidence. My understanding of the judgment of political experts is that it wasn’t feasible to do.” Rahm Emanuel told me that within a month of Obama’s election, but still another month before he took office, “the respectable range for how much stimulus you would need jumped from $400 billion to $800 billion.” In retrospect it should have been larger—but, Emanuel says, “in the Congress and the opinion pages, the line between ‘prudent’ and ‘crazy spendthrift’ was $800 billion. A dollar less, and you were a statesman. A dollar more, you were irresponsible.”

Barack certainly had access to Larry Summers’s advice. And I would be surprised if Larry Summers’s advice at the time didn’t incorporate Larry’s awareness of what Carmen and Ken had found. So the fact that Barack did not push for a bigger stimulus package really is an indictment of his economic leadership. According to the reported statement by Larry Summers, it was a political judgement that a bigger stimulus was not politically feasible. I am not at all convinced that a bigger stimulus was politically impossible. It would not have been easy, I’ll grant that, but I was amazed that Barack managed to get Obamacare through. If, instead, Barack had used his political capital and the control the Democrats had over both branches of Congress during his first two years for a bigger stimulus, couldn’t he have done more? 

The bottom line is that (asking a lot of Mitt’s protean ability to shapeshift) if Mitt were willing to distance himself far enough from the Republicans in Congress and the Republican orthodoxy, it would be quite possible to use the Reinhart-Rogoff finding to attack Barack’s economic stewardship. Barack should have known the economy needed more stimulus, and in fact his closest economic advisor knew that the economy needed more stimulus! Mitt could then claim that Barack was so set on forcing through health care reform that he took his eye off the more urgent task of ensuring economic recovery. (I remember Peggy Noonan, without specifying what economic policy should have been taken, forcefully making the argument at the time that Barack was putting too high a priority on health care reform relative to fostering economic recovery.) It is a tricky argument for a Republican to make, saying that with the Republicans dead set against both an adequate stimulus and Obamacare, Barack should have focused on the fight for an adequate stimulus rather than for health care reform, but it is a logically cogent one. (I have to confess to my own ignorance about the extent to which Mitt’s own statements about the stimulus package in 2009 would also cause him trouble in making this argument. Given Mitt’s willingness to emphasize at different times a different one of his contradictory statements over others, did he ever say anything then that could be spun as having warned that the stimulus wasn’t big enough–or should have been the same size but focused on things that most economists would agree would have been more effective at raising aggregate demand?)

Aside from the political argument itself, the issues I raise should be part of history’s judgement of Barack Obama. In particular, I take exception to Joe Biden’s claim in the vice presidential debate with Paul Ryan that “no president could have done better” than Barack has done. I suspect, in fact, that Bill Clinton would have done better if he could have been president again. It is quite possible that Hillary Clinton would have done better–in part because she might have been more gun-shy about health care reform and so have focused more intensely on the more immediate economic issue. And Mitt might well have done better had he won the presidency in 2008 (in part because he would have faced less intense Republican opposition to needed stimulus)–though it is hard to know if he would have taken the right policy direction.

Notice that in all of this, I am treating a larger stimulus of a conventional kind as the best among well-discussed policy options when Barack took office in 2009. So I am backing up Paul Krugman’s criticisms of Barack’s policies at the time. However, given what we know now we could do even better, as I discuss in my post “About Paul Krugman: Having the Right Diagnosis Does Not Mean He Has the Right Cure.”

Update:

About Paul Krugman: Having the Right Diagnosis Does Not Mean He Has the Right Cure

An illustration from the Paul Krugman bio on the site “NNDB: Tracking the Entire World”

An illustration from the Paul Krugman bio on the site “NNDB: Tracking the Entire World”

This is the second time in less than a month that Paul Krugman’s picture has headed one of my posts. (The other time is here.) That is no accident. Paul is the true monster of the economics blogosphere–as well as in the beleagured redoubts of non-electronic economic journalism that remain.  I use the word “monster” in the positive and enviable sense of having a large reach and influence with the words that he writes. (Please, may I some day grow up to be a monster? See the illustration from Where the Wild Things Are.) 

In his recent post, “Smuggish Thoughts (Self-Indulgent),” Paul writes this:

I got obsessed with Japan in the 1990s, and I think can fairly claim to have started the whole modern liquidity-trap literature. I approached the Japan problem the way I approach just about all economic problems, building a stylized, minimalist model (big pdf) that seemed to make sense of the available facts and yielded strong conclusions. But does this style of analysis work in the real world?

Well, events provided an acid test. If you believed in the little models I and others were using, you made some very striking predictions about how the world would work post-crisis–predictions that were very much at odds with what other people were saying. You predicted that trillion-dollar deficits would not drive up interest rates; that tripling the monetary base would not be inflationary; that cuts in government spending, rather than helping the economy by increasing confidence, would hurt by depressing demand, with bigger effects than in normal, non-liquidity trap times.

And the people on the other side of these issues weren’t just academics, they were major-league policy makers and famous investors.

And guess what: the models seem to work. It appears that I wasn’t just a successful self-marketer, that I really did and do know something.

Basically, I agree with Paul’s assessments here–his diagnosis of what happened. But I do not agree with his prescription. As near as I can make out (and I am happy to be corrected on this), his number one recommendation has been a large increase in government spending to provide Keynesian stimulus, and his number two recommendation has been for the Fed to promise future inflation above its normal 2% target.

That secondary recommendation I discussed in my earlier post on Paul Krugman. I will not repeat everything I said there, but let me say a few words about the relevant scientific issue. The issue I have with Paul’s analysis there is that he seems to approach the approximate Wallace neutrality that is likely in the real world–which can account for the facts he mentions above–for the perfect Wallace neutrality of his simple model, which would imply that large scale asset purchases by the Fed (as in QE1, QE2, QE3 and Operation Twist) will not work in any direct way, so that the Fed’s only option for stimulating the economy is to promise (or hint at) inflation above 2% in the future.

In relation to Paul’s primary recommendation of a massive increase in government spending in the short run, my main objection is that (assuming we are not willing to contemplate national bankruptcy), every dollar the Federal government ultimately adds to the national debt is a dollar that has to be paid for by taxes further down the road, or by cuts in government spending further down the road that will be hard to bear, given the aging of the population. Except in the case of spending now that can genuinely serve instead of spending in the future, we have to be very concerned about the cost of stimulative spending.

Let me give a simple numerical example to make the point. After the economy gets fully back on its feet, I expect the interest rate to be something like 4% per year in real terms. Suppose we added $2 trillion more to the debt to stimulate the economy and then wanted to keep that extra debt from growing further in real terms so that the growth of GDP could gradually reduce the debt-to-GDP ratio. To do that, we would have to pay the real interest on that extra debt: $2 trillion * 4% per year = $80 billion per year. If GDP by then is a little higher than now, at $16 trillion per year, that is a ½ % addition to the spending to GDP ratio. A lot of the big arguments between Republicans and Democrats are about differences in government spending on the order of about 3% of GDP. So ½ % of GDP difference in government spending due to extra interest payments is actually a very big deal.

So it is a great advantage to simulate the economy by measures that add less to the national debt, the Federal Lines of Credit which I lay out in my second post “Getting the Biggest Bang for the Buck in Fiscal Policy” and have discussed at great length in the other short-run fiscal policy posts on this blog.

(It seems plausible to me that large scale asset purchases by the Fed also have this property of stimulating the economy while adding relatively little to the national debt in the end. I would be glad to see a careful analysis of the likely round-trip financial costs to the Fed of pushing interest rates down and asset values up by buying long-term government bonds and mortgage-backed securities now to stimulate the economy, and pulling interest rates up and asset values down later by selling them to rein the economy in–or alternatively raising interest on excess reserves later.) 

It matters how we approach the problems that we face. Paul Krugman deserves a lot of credit for getting the basic diagnosis of our problems right, but he needs to be just as serious about identifying the best possible solutions. Traditional Keynesian remedies or promises of inflation may work to stimulate the economy, but what if there is a better remedy, with fewer undesirable side effects? It is my contention that there is a better remedy, that would have the same effectiveness at lower cost: Federal Lines of Credit. And that is in addition to the possibility that the Fed has already found a better approach in large scale asset purchases, if only it pushes hard enough on its string.  

Update: A commenter on Twitter (I’ve lost track of the tweet) points out that the government can stabilize the debt to GDP ratio if it pays only the interest rate minus the growth rate of the economy on the debt each year, rolling over the rest, including rolling over the part of interest payments equal to the growth rate. That makes the long-run picture look less stark than the calculation I make if the interest rate is less than 3% above the growth rate of the economy. For example, approached that way, if the interest rate is only 1.5% above the growth rate of the economy, then the $2 trillion in extra debt would mean a permanent ¼ % of GDP less spending or a permanent ¼% of GDP less taxes.

A New Engine for Discovery in Economics and Other Social Sciences: RAND's American Life Panel

The American Life Panel’s election forecast webpage, updated daily

The American Life Panel’s election forecast webpage, updated daily

A few years back, economists and other social scientists and technical experts at RAND and the University of Michigan put together a grant proposal focused on seeing what can be done with web surveys. Thanks to funding provided by the National Institute on Aging (part of the National Institute of Health), we were able to find out the answer. Leaving out many details, the basic answer is that, except for a few things that have to be done in person, web surveys are at least as good, and usually better, than other survey methods. RAND’s American Life Panel arose out of that collaboration (though it is now an independent RAND survey that has a wide range of clients other than government research agencies). I can’t pretend to be objective about the American Life Panel. As part of a large team, I have been involved in it from the beginning and I love it. 

An important distinction has to be made between commercial web surveys, which use samples of convenience (often trying to match certain broad demographic frequencies to the population as a whole) and scientific web surveys that make great efforts to get as close to a representative sample as possible–even on characteristics that are unmeasured. The American Life Panel is just such a scientific web survey. Every effort is made not only to draw respondents randomly from the population as a whole, but also to give web access to those randomly chosen who don’t already have web access.

By contrast to most surveys, which fairly soon became calcified under the weight of a standard set of questions that are asked again and again, taking up most of the available survey time, under Arie Kapteyn’s leadership, the American Life Panel (ALP) has grown in power and reach under a unique philosophy of experimental modules initiated in a relatively decentralized way that over time add up to much more than the sum of the parts. At this point, data from a huge variety of experimental modules can now be compared to data on ALP respondents that duplicates most of what is collected from respondents to Michigan’s Health and Retirement Study and data that duplicates a big subset of what is collected from respondents to Michigan's Cognitive Economics Study. Arie’s commitment to supporting “bold, persistent experimentation” in surveys augurs well for the future of the American Life Panel.

Because the American Life Panel has only recently come into its own, most economists don’t realize what is there, what can be done with the existing data on the ALP, and what can be done by collecting new experimental data to combine with the ALP’s existing data. For young economists in particular, I am confident there are many, many dissertations hiding in the data already collected, aside from everything that is coming.    

Just for fun, I have put a link under the illustration to the ALP’s election forecast webpage, based on survey questions that probe for probabilities as opposed to discrete answers–a style of survey question that has been advocated most forcefully by Chuck Manski and his coauthors. Also, unlike typical election polls, the results you see above and at the election forecast webpage are based on panel data: the same people are asked the questions repeatedly, so that the changes you see are more likely to be genuine changes in opinion, instead of random  fluctuations in the set of people surveyed. (Note: the election polling behind the picture above is not supported by any government agency.) 

Update: Brad DeLong tweeted to me this interesting comment:

RAND’s reinterview method is a treatment that over time turns low-info voters into high info voters. That’s a powerful bias…

My reaction is that if Brad is right, the views of a high-information sample of otherwise typical voters from a representative sample is itself very interesting. The question that Brad raises is a good example of the value of an experimental survey–to be able to discover and investigate, or rule out, effects such as that.

Greg Ip on Barack Obama's Performance as Steward of the Economy →

This is an excellent discussion by Greg Ip of how Barack has done in his economic policy choices and the economic role of presidents in general.

Note: The appropriate judgment of Barack’s performance would be much different if the many ways to stimulate aggregate demand

  1. without adding too much to the national debt and
  2. in an environment where short-term interest rates are already down to zero

had been better understood when he faced the economic challenges of the last few years.

On the many ways to stimulate aggregate demand without adding too much to the debt and in a low-interest rate environment, see my blog posts on short-run fiscal policy and monetary policy, which are nicely laid out in these two “sub-blogs” of tagged posts:

These sub-blogs of tagged posts automatically update as I add more posts with the relevant tags. I put links to these sub-blogs on my sidebar. (I will add links to other sub-blogs soon.)

Nicholas Kristof: "Where Sweatshops are a Dream"

This op/ed by Nicholas Kristof is a classic that Greg Mankiw links to. I use it in my class to make two points:

  1. The value of an extra dollar (or an extra Cambodian riel) can be extraordinarily high for someone who is very poor. (See my post “Inequality Aversion Utility Functions,” where I emphasize that almost all the benefits from redistribution are from helping the poor, not from transferring money from the rich to the middle class.)
  2. Caring about helping the poor does not always mean one should support policies recommended by activists who say they care about the poor.

A number of policies recommended by those who say they care about the poor have the common element of saying, in effect:

If you can’t or won’t create a good job, don’t create a job at all.

For some people, a “bad job” is a lifeline. And if we insist that only good jobs should exist, they will have no job.

I think there is another element behind opposition to sweatshops. When people in poor countries are suffering before the arrival of an American company in their backyard, that hideous suffering from poverty is out of sight for us in America. But as soon as the American company arrives to give the opportunity of taking what look like bad jobs to us, if they choose to, the somewhat lesser suffering of their poverty after taking the “bad job” seems like the fault of the American company for not making the jobs nicer. In fact the company has helped them, but we only see the suffering from poverty after, not the hideous suffering from worse poverty before.

One factor that can make it easier to blame the American company for the suffering left after providing the job is that some of the corporate executives involved in setting up and running the new factory in a poor country may, in fact, be uncaring, unfeeling people (though I doubt this is true anywhere near as often as people suppose). But even if many of the corporate executives involved in setting up and running the new factory are uncaring, unfeeling people, it doesn’t change the fact that, by their actions of setting up and running the factory, they have made people’s lives better. They could have made people’s lives better still if they had taken a bigger fraction of their personal earnings and donated it to helping the poor than they actually did, but that is something that can be said for almost every American.

One policy change that could increase what Americans do to help the desperately poor in other countries is the program of “public contributions” I recommend in my post “No Tax Increase Without Recompense.” That program of public contributions would dramatically increase the amount of assistance American give to the desperately poor in other countries. Government-funded foreign aid is very unpopular–and often is relatively ineffective because much of it is channeled through corrupt foreign governments. But many individuals (with whatever money they have set aside to donate to good causes) are attracted by the idea of helping the desperately poor.

Holman Jenkins on the Role of Organized Labor in Blocking Policy Initiatives in the Democratic Party

Mancur Olson, an economist who studied The Rise and Decline of Nations

Mancur Olson, an economist who studied The Rise and Decline of Nations

Last Saturday, Holman Jenkins had a very interesting op/ed in the Wall Street Journal: “Hey Mitt, Voters Aren’t the Obstacle.” What is the obstacle in Holman’s view? The political influence of organized labor.  The theory Holman bases his analysis on is from the brilliant economist Mancur Olson, who focused on the forces that change institutions over time. Holman:

Mancur Olson, the late and admired social thinker, described the lobbying incentives created by policies that concentrate benefits on the few and disperse the costs to the many. Recipients of federal entitlements aren’t highly motivated to oppose the kind of long-term reforms actually required by our fiscal dilemma. Organized labor is.

I encountered Mancur Olson through his book The Rise and Decline of Nations. Here is wikipedia’s summary of The Rise and Decline of Nations in its article on Mancur Olson:  

In 1982, [Mancur Olson] expanded the scope of his earlier work in an attempt to explain The Rise and Decline of Nations. The idea is that small distributional coalitions tend to form over time in countries. Groups like cotton-farmers, steel-producers, and labor unions will have the incentives to form lobby groups and influence policies in their favor. These policies will tend to be protectionist and anti-technology, and will therefore hurt economic growth; but since the benefits of these policies are selective incentives concentrated amongst the few coalitions members, while the costs are diffused throughout the whole population, the “Logic” dictates that there will be little public resistance to them. Hence as time goes on, and these distributional coalitions accumulate in greater and greater numbers, the nation burdened by them will fall into economic decline. 

The most interesting thing in Holman’s piece is his list of bipartisan and Democratic initiatives that were thwarted by union lobbying. I have added bullets and combined three different quotation blocks here, but the words are Holman’s:

  • When a flurry of bipartisan health-insurance proposals failed in the Nixon and Ford administrations, including a stillborn Kennedy-Nixon compromise and 1974’s promising Long-Ribicoff bill, all were defeated because labor rejected anything that wasn’t single-payer. (Ted Kennedy later called it his greatest legislative regret.)
  • When liberals like Rep. Jerrold Nadler proposed investing the 1990s Social Security surpluses in the stock market so the money wouldn’t be squandered on unrelated federal spending, labor killed the idea.
  • When Dick Gephardt, Tom Daschle and Rick Santorum voiced support for Social Security supplemental accounts, and when President Clinton said a bipartisan reform would be his No. 1 priority in 1999, labor snuffed the burgeoning consensus.
  • When Democrats gathered to nominate Al Gore in 2000, public-employee unions contributed a record number of delegates—at least 20% of the total. One of labor’s biggest aims, according to a lobbyist for the union-backed Fund for Assuring an Independent Retirement, was throwing cold water on any Democratic enthusiasm for Social Security and Medicare reform.
  • Think uninsured voters had any hand in designing ObamaCare? ObamaCare was largely designed by organized labor. Labor beat back attempts to curb the regressive tax subsidy for employer-provided insurance. Labor plumped for the incentives that will soon cause many employers to shift their health-care costs to taxpayers.
  • [Michelle Rhee, a Democrat] was the break-the-crockery D.C. schools chancellor, whose mission came to an end when Mayor Adrian Fenty was booted by a local electorate straight out of the latest Romney gaffe. To put it bluntly, voters in D.C. sided with the teachers union that Ms. Rhee was fighting over the students she was trying to help.

Holman summarizes as follows:

We don’t dismiss the power of AARP, but organized labor dominates the Democratic Party on Capitol Hill. Organized labor has been the force, decade after decade, carefully tending the creation of the many liabilities and excesses that now threaten the Republic.

Let me say this on my own behalf. No one should blithely assume that unions will support liberal policies, if by liberal policies one means policies to help the poor and the suffering. Most unions are middle-class organizations that in their political activities are ready and willing to sacrifice the interests of the poor to benefit their members and their leaders. (Here I am distinguishing the political activities of unions from the wage-and-benefit-raising and worker-voice activities of unions that I discuss in my post “Adam Ozimek on Worker Voice.”)

My Platform, as of September 24, 2012

Detroit Metro Times mockup of the card for my Federal Lines of Credit Proposal

This is an update of my post “Miles’s Best 7 “Save-the-World” Posts, as of July 7, 2012”– a title with a bit of gentle self-mockery at my own presumption. This time, inspired by the U.S. presidential campaign, I want to think of my most important policy recommendations as a kind of shadow political platform. I have neither the odd talents, the drive, nor the sheer stamina required to be a political candidate. But if I were a political candidate, this is the platform I would run on. 

Let me organize some key posts for each policy area. Within each policy area, I have arranged them in a recommended reading order. Many of the proposals are the proposals of others, but if I put a post in this list, it is something I have signed on to, with whatever caveats are in my post.

There are three areas where I don’t have as much in the way of specific proposals (with the one exception of Charter Cities), but the posts hint at an approach. I have signaled these by using the word “perspectives” in the area heading.

Until I do another update, you will be able to access this post at any time by the “‘Save the world’ posts” link at my sidebar. Or you should be able to reach it by using the searchbox further down on the sidebar.

Short Run Fiscal Policy

Long Run Fiscal Policy

Monetary Policy

Immigration Policy and Helping the Poor

Perspectives on Long Run Economic Growth and Human Progress

Global Warming

Labor Market and Education Policy

Health Care

Perspectives on Finance

Bipartisanship in Governing and Proper Conduct During Political Campaigns

Foreign Policy, etc.

General Perspectives

Let's Have an End to "End the Fed!"

Question. Professor Kimball - Former student here. Question. With QE3 recently announced, conversation about monetary policy and the Federal Reserve is picking up once again. I just got done watching one of those Institute for Humane Studies LearnLiberty videos explaining why we should end the Fed. It seems like most mainstream economists don’t take this view. Could you tell us your thoughts?

Answer. It is good to have a stable track of prices and output at its natural level. The Fed’s adjustments of the money supply make that possible. Without the Fed we would be at the mercy of other monetary winds–which could be anything from gold supply and demand to the vagaries of free banking. We would be particularly vulnerable to financial crises like the one we suffered in 2008. Without the Fed’s decisive action, the Great Recession would have been much worse. David Wessel’s book “In Fed We Trust: Ben Bernanke’s War on the Great Panic” is a good account.  Unfortunately, that decisive action had to include bailing out big banks, which is a big part of why the Fed is unpopular now.

Economists have emphasized for some time now how important it is to have an independent central bank such as the Fed when inflation is too high to be able in order to be able to do the unpopular things necessary to bring inflation down. In the last few years, we have seen how important it is to have an independent central bank such as the Fed when inflation is too low in order to be able to do the unpopular things (such as bank bailouts and quantitative easing) necessary to bring inflation up–and in particular to avoid getting too close to negative territory. The Fed doesn’t always make the right decisions, but in general it is responsive to good economics in a way that other institutions often are not.