Saturday, January 29, 2011

Cowen's Great Stagnation, von Mises's Great Solution


Tyler Cowen recently wrote a $4 e-book, The Great Stagnation, a book enjoyed by Reihan Salam on the right and Matthew Yglesias on the left. Alas, missives with such broad appeal are like David Broder or board games that are ‘fun for the whole family’: lots of praise, mainly due to ulterior motives. In this case, his even-handed criticism of the right and left allows anyone with a little nuance to claim a well-know objective economist agrees with his particular spin, always useful for pundit who has a daily word quota.

The book is motivated by our current slump, and as von Mises noted in Human Action (p441):
Nothing has harmed the cause of liberalism more than the almost regular return of feverish booms and of the lingering slumps.

That is, most observers focus on the recessions, and try to play these into broader themes. Their magnitudes pale in comparison to the secular growth rates that over generations differentiate us from Ghana and other impoverished countries. They are as relevant to our nation’s long-term growth as a flu is to the growth of a child. They breed counterproductive remedies like the National Industrial Recovery Act of 1933, or the endless extensions of unemployment insurance. The cumulative effect of our remedies is to increase the scope of government in every dimension of the economy and is probably the main reason for our productivity slowdown.

Here’s Cowen’s theme: we live in an unusual era of lower productivity, and the financial crisis was merely a symptom of this broad trend we are just now realizing. Here’s the key graph:
In a figurative sense, the American economy has enjoyed lots of low-hanging fruit since at least the seventeenth century: free land; immigrant labor; and powerful new technologies. Yet during the last forty years, that low-hanging fruit started disappearing and we started pretending it was still there. We have failed to recognize that we are at a technological plateau and the trees are barer than we would like to think. That’s it. That is what has gone wrong.

I think the housing bubble was in many ways a singular event, though a special case of a catastrophic regime collapse as outlined in my Batesian Mimicry model of business cycles. This theory posits that recessions are always different because misallocations can only occur where they are unexpected, and by definition unexpected things are somewhat unique. The housing bubble is not very relevant to the post-1975 slowdown in productivity growth.

Despite Tyler's depressing diagnosis, he notes some good news. A lot of value is being created that isn’t priced, so maybe everyone should take comfort in that. For example, in the mid 70's productivity growth started to decline, but at the same time there started an explosion of free porn created by the VCR and the internet (not his example, but serves his point). Is that a wash? Maybe measured GDP really is rising as fast as ever, we just don’t count it well anymore because so many things are often free. Perhaps, but you could say the same thing in the past, as with pasteurization or radio.

Another bit of good news according to Cowen is that there is some low hanging fruit in those diseased fields of health care and K-12 education. For example, he mentions that:
we now see a critical mass in the American electorate favoring concrete steps to bring greater quality and accountability to K-12 education...Obama has opted for an education policy that, on the whole, the teachers union strongly dislike.

I do not see any big education changes around the corner. Obama’s weak support of merit pay is going nowhere, and would not make a difference if implemented. The only real merit pay structure that works is the one used in the private sector: decentralized, unstructured reviews by a boss who has a financial stake in the employee’s success, and there's a 5%ish chance the reviewed employee actually gets fired because of it. This would be considered unfair by teachers unions so instead we have pure seniority, or merit programs such as in Minnesota where 99.94% of all teachers garnered the carrot. My kids learn more math at their $100/month Kumon program than in public schools and I live in Money Magazine’s Best City in America, so clearly our above-average school system can do better pretty easily. The key is having a curriculum where kids move through a set of exercises that build upon each other, and only if they have mastered the previous material. This maximizes their potential, but everyone moves at different rates. That would lead to massive tracking of students by ability and the demographic inequality exposed would be politically untenable.

As per health care, it is already highly regulated, and becoming more so. Highly regulated sectors are rarely set free again, rather, it’s the whack-a-mole strategy of fixing a problem created by the last fix which then creates a new problem. In Santiago Chile the bus system worked, but it was a private system that operated for profit, and there were the typical problems that seemed wasteful. The solution seemed like a simple two-fer: run it for public interest (lowering cost by getting rid of profit), and regulate it to make it safer and less polluting. The result has been a nightmare, as the average commute immediately goes from 40 minutes to an hour and 40 minutes. Yet there is no general call to go back to privatized busing, rather, rearrange management or add ‘better’ regulations. Similarly, our health care system will be not be improved by adding more mandates and regulations, but we aren’t going back to 1950 when 90% of our health care expenditure was out of pocket and decentralized consumers disciplined providers.

There are lots of little independent comments in the book. For example, there’s Cowen's call to 'raise the social status of scientists,’ presumably, because that leads to more truths, and with more truths, everyone can act in a more consistent fashion. You can’t exogenously raise a profession’s status. It’s like trying to make your kids more popular, at best ineffective. If scientists continue to produce the twaddle like Marxist sociologists, economists who can't agree on whether the minimum wage is a good idea, and our best physicists spend their time elaborating a theory that has no foreseeable testable implications, they get what they deserve.

But back to his theme, that previous higher growth rates were based on low hanging fruit. What were these in our past?

1) Free Land. Great, but, we have same productivity as Liechtenstein, Hong Kong, Japan, Singapore, Iceland, and they didn’t have much land. Free Land would explain the growth rates only if US productivity growth was unique, and it is not.

2) Technologic breakthroughs. Electric lights, the internal combustion engine, the typewriter, radio, fertilizer, transistor, were all big boosts to productivity. No more. Now all we have are Teflon and Tang. Life, he says, is not much different than in 1953. Well, reading Plato, life hasn’t changed all that much since Ancient Greece, but forget the semantics. I would say my job is incomprehensible to someone 30 years ago. Further, while I used to play with plastic army men and play new-fangled 45 records, my 3-year old uses my wife’s iPad to decorate princesses and play music. Her childhood is probably as different to me as me to my dad, and my dad to his dad, etc.

3) Smart uneducated kids. In the past, lots of smart kids did not go to college, and as they did, we generated easy returns to their education. Now, almost everyone smart enough goes to college, so there’s no more easy gain there. I’d say this one is perhaps true, but if you look at its affect on growth, I would say it has been small. Most economic historians start the Industrial Revolution as starting around 1750, for the next century we had this massive, unprecedented rise is productivity without a big, broad increase in formal schooling. Formal education mainly produces imitation and routine, not innovation and growth, when not engaging in pure blather.

Cowen’s way of thinking is rather common, that growth emanates from some limited resource, and like ‘peak oil’ goes through a natural cycle of growth and decline. The Physiocrats in the eighteenth century believed that the wealth of nations was derived solely from the value of things from soil like minerals and agriculture, all the rest—advertising, management, finance—just parasitic. Such thinking influenced Malthus’s idea that we are all doomed by a finite amount of land, which will ultimately constrain our population via starvation. Later the labor theory of value tried to make labor the source of all wealth, where capital was disembodied labor. This too is mistaken, and while no one promotes these theories anymore, their intuition lives on.

I remember working for a broker in the summer of 1989, and the principal of the firm was writing a 'big idea' piece for his clients. He noted that unlike the past, we had no engine of growth like the automobile, so times would be tough--unaware he was at the cusp of the computer revolution, highlighting that it is difficult to see major trends without the benefit of hindsight.


It is important to recognize the essential drivers of economic growth, and much of the following is based on the works of Ludwig von Mises and Frank Knight. Economics is not about mainly about technology or resources, but about people and their actions. The market economy is a social system in which individuals are constantly trying to better their situation. The most enterprising individuals are driven to earn profit by doing something new and different. Most innovation is unplanned, and people outside the industry, especially users, make the majority of significant innovations by revealing their preferences, and this is a theme of Amar Bhide's work on entrepreneurial consumers.

Before the first industrial revolution around 1750, economic life in Europe was unprogressive, and its organization collectivist. The arbitrary administration of rules was not conducive to large-scale accumulation of capital prior to the first industrial revolution. Pre-industrial revolution business was imbued with the inherited spirit of privilege and exclusive monopoly, its philosophy was restriction and the prohibition of competition both foreign and domestic. The establishment of individualism was the result of the desire for improvement, even though it was not a conscious choice of political leaders.

Growth is merely the effect of free people continually improving their situation by finding better ways to solve problems, in the process creating profits, which are then used as capital to invest in greater efficiency. When profits direct economic activity, growth naturally occurs. When we instead try to service needs without regard to profit metrics or consumer preferences--as in pre-college education today in the US--we get stagnation.

Profits appear only in an economy in which the masses standard of living improves, because it is the result of taking inputs and creating products and services more valuable than their inputs. Profits are wealth creation by definition, and they only measure the producer surplus, not the consumer surplus, so they understate value created for society. To forgo them is to reduce aggregate wealth. Aggregate growth is not a result of having an awesome endowment, but rather the incessant urge of individuals towards improving their situation. One only has to look at the oil states (Nigeria?) vs. those economies in Asia without basically any raw materials. The most enterprising entrepreneurs are driven to innovate to earn profits by readjusting again and again the arrangement of productive activities so as to fill in the best possible way the needs of the consumer.

The state does not create much wealth directly--exceptions being public goods like roads and dams--but acting as the agreed-upon social apparatus of compulsion and coercion is essential for codifying and enforcing rules. When it becomes more advantageous for businessmen to rely upon the aid of those in political office than upon the best satisfaction of the needs of consumers, profits are no longer sustainable and productive, but rather their source is the compulsive redistribution of the state. Ethanol mandates and sugar quotas create profits, but only because they coerce consumer choices, as opposed to creating products and services that people actually prefer.

A big problem with modern macroeconomics is the fallacy that underlies the ‘fallacy of composition’, that is, the idea that saving hurts the aggregate savings via the multiplier. This is the hare-brained idea that if we spend 1 billionth of our GDP on bobble-head dolls, then via equilibrium reasoning, if we create $1 dollar in bobble head dolls, this creates $1 billion. As government spending is basically an investment in our future, government equals investment (G=I) to many, and instead of bobble head dolls we use investment (which is the same as government spending, remember), so you have to keep increasing G to avoid a meltdown whenever we are below full employment (which has been ‘always’ in my adult life). Funny how things worked better, in terms of growth rates economists pine for, back in the 19th century when the tools of fiscal policy were imperceptible and monetary policy absent.

Think about the distinction between paying someone welfare, and paying them to dig holes and fill them up. In terms of creating wealth for consumer, they are identical. A Keynesian (eg, Romer-Bernstein 2009) model assumes that a 1% increase in government spending—on just about anything—leads to a permanent 1.5ish percent change in GDP, which makes sense only via the magic of the multiplier, plus the faith that marginal government spending is actually creates wealth if you measured all the spillovers. Most government work does not produce benefits above their cost, and often, in the form of preventing people from freely contracting, destroys wealth (eg, financial regulators encouraged the decline in mortgage underwriting standards via their consistency with Fannie Mae’s ubiquitous underwriting software, and the Community Reinvestment Act’s mandate of lending to historically underserved communities, etc. The whole mass of financial regulators--OTS, OFFHEO, Fed, FDIC, OCC, SEC, CFPA--could surf the internet all day and no one would notice).

The system should be optimized for the whole and for long run, not the parts and the fluctuations. Microstability should be sacrificed for macrostability. The stability of the whole depends on the instability, and resultant resiliency, of the parts. When industries are protected from recessions, the system does not grow as quickly, and the productivity of the whole is sacrificed. The path back to long-run growth rates of the past is a government that was as intrusive as back then. In 1900 it was 3%, in 1950 it was 23%; now it is around 40%. The number of pages added to the Federal Register, which lists all new regulations, reached an all-time high of 82,590 in 2010, up from 9,562 in 1950. These rules create hidden costs often far beyond their direct costs, in the way that medical malpractice lawsuits are insignificant by themselves (1% of health care expenditures), though they significantly affect medical protocols (eg, my wife had Caesarians for each of our three children).

High unemployment is the result of a misallocation exposed, which happens often quite suddenly as in the 2008 housing debacle. It is not a paradox that wisdom of crowds, like the wisdom of individuals, is subject to error, as you can find people with very different purposes pre-2007 thinking that no-money-down housing is just and profitable--even Robert Shiller only could muster the prediction in 2005 that housing in some areas might decline, consistent with the erroneous assumption that a broadly diversified portfolio of mortgages had infinitesimal risk. We invested too much in housing, so that misallocation must be rectified, meaning, lots of people need to get different jobs, and the first step in this process is losing their old jobs. They need a market shove. It's regrettable, but recessions are inevitable given human fallibility (this is a deviation from von Mises).

The economy that grows best has the most freedom, and is built as a by-product of profits. As freedom and wealth are all good things, there must be a catch, and it is a big one: inequality. People hate inequality more than they love wealth, which is why people would prefer to be above average in a poorer world rather than below average in a richer world. Profits accrue to a minority of individuals via their ownership of capital, and the distribution of these profits among demographic groups is highly auto-correlated year after year. Most people are not in this fortunate minority, do not like it, and in a democracy their preferences determine policy. Sure, the German, Irish, Italian, and Jewish immigrants were once relatively poor in the US, and now not, but that took a long time. People want equality now, which means redistribution and patronage jobs (as Shirley Sherrod of the USDA said, ‘Have you heard of anybody in the federal government losing their job?’).

Most politicians see profits as a vice, not a virtue. The idea that profits primarily reflect an unfair system, as opposed to growth, leads us to hinder the source of our growth. Profits are often seen as symptoms of either thievery, or an irrelevance to what really matters, things like global warming or social justice. Recessions and poor growth are correlated with low profits--the 30's and 70's were bad for profits and asset prices--yet solutions often center on having the 'rich sacrifice', as if taxing the source of our productivity improves things. This only makes sense if you see profits not as the source of productivity, but the result of powerful people taking from an exogenous source of income.

Freedom and equal outcomes are incompatible, yet as the socialist economies showed, restricting freedom does not eliminate or even decrease inequality, it merely makes it less conspicuous and more onerous. That John Paulson made billions of dollars last year only bothers someone if 1) they are feeling petty envy or 2) they think this was merely taken from others. Most do not admit to the former, and rationalize using latter. People I do not know who truly annoy me use the force of law, as when they tell me where I can send my kid to school, tell me I am unqualified to invest in hedge funds, determine who can cut my hair, and what my medical insurance must provide.

The economy is like an ecosystem, a complex adaptive system, and the key to sustained growth is letting people with the requisite information and incentives engage in activities that are appreciated so broadly, his service or product will be needed again and again, a sustainable pattern of specialization and trade (see Kling). It is impossible to predict what fields in an economy, or species in an ecosystem, will prosper, but it is a sure bet that it will find its most sustainable, consistent equilibrium if one merely leaves it alone. No one thinks you can improve a rain forest via top-down Federal programs, but those same people find it obvious that more Federal regulations and purchases will improve a market economy, though it is just as complex and natural.

When people interact freely, they are directed by profits, and this creates something out of nothing, productivity. It does not take any specific technological or material endowment, merely liberty. There is a lot of low hanging fruit because leaving people alone is eminently feasible, but it is highly unlikely because our democracy does not trust the market to produce trickle down results sufficiently fast or fairly distributed. 'Trickle down' is referred to derisively, as if advocates are disingenuous about this patently absurd theory. This very nonintuitive idea--the invisible hand, that individual freedom maximizes growth--hatched the field of economics, which unfortunately has lost its way, lured by the hope of becoming a dentist to the economic patient with a cavity; instead, macroeconomists, by focusing on federal stimulus plans, are like modern-day bloodletters, counterproductive. Hopefully, such delusional expert folly won’t last as long.

28 comments:

AHWest said...

Good post. If the US is in decline it will be because seemingly intelligent people in power will put their faulty ideas into practice. It's often the bad ideas of others (in this case, Cowen's) that stimulates the recall of one's own good ideas.

Of course, what I might say to you is that while these bad economic policies will indeed lead to undesirable consequences, an ethical/philsophical counterargument has the much better chance of changing history than the utilitarian one, along with being the more fundamentally correct counterargument.

Eric Falkenstein said...

I don't see winning the ethical argument, given that egalitarianism is simply more popular than those based on liberty.

Anonymous said...

Very good writeup, Eric. I had similar feelings after reading Cowen's book. The "fluffier" arguments especially felt quite contrived.

Two observations:

1. Keynesians don't think that the multiplier is always ~1.5, they think it's ~1.5 during recessions, and <1 outside recessions (there is empirical support for this, see http://www.voxeu.org/index.php?q=node/5462). That's why Keynesians suggest massive deficits during recessions AND massive spending cuts during booms. Naturally, the second part is not politically tractable and is thus typically ignored.

2. I completely agree that the argument about the slower rate of technological innovation are vacuous. However, if we accept that increases in capital (both human and otherwise) have diminishing marginal returns on productivity, "technology" would have to grow at a sufficient (and constantly increasing) pace to keep up. Isn't it reasonable to think that growth should slow over the long term?

As for the ethical argument, Caplan recently had a good post: http://econlog.econlib.org/archives/2011/01/more_liberaltar.html

Todd said...

Anonymous, it seems to me that diminishing marginal returns should only necessitate slower growth if the problems being addressed are static. Given that the "problems" being solved in an economy are human desires, it seems to me that there is more than enough plasticity to sustain significant growth far into the foreseeable future.

Michael Meyers said...

Eric,

One of your better posts... I love that you are not afraid to say what many of us will not say, less we be shunned by our friends. The truth hurts, and thus is often avoided.

Regards,
Michael

Anonymous said...

I'm glad you changed the background and text color of your blog. I would never send anyone links to your posts because it was unreadable except through Google Reader.

Dave said...

"so you have to keep increasing G to avoid a meltdown whenever we are below full employment (which has been ‘always’ in my adult life)."

You don't mean we've never had full employment during your adult life, do you?

"Funny how things worked better, in terms of growth rates economists pine for, back in the 19th century when the tools of fiscal policy were imperceptible and monetary policy absent."

What about during periods like The Long Depression?

"eg, my wife had Caesarians for each of our three children"

If a woman has one Caesarian, SOP is for her subsequent babies to be delivered that way as well.

"The economy that grows best has the most freedom"

China has been growing pretty fast, but ranks poorly on the Index of Economic Freedom.

tc said...

"Economics is not about mainly about technology or resources, but about people and their actions."

I doubt this. Suppose you had a perfect libertarian society that could not have oil or the computer. Would they beat the real world USA in growth? Would a million consumers revealing their preferences enable us to keep only 2% of the population in farming?

Or look at the other side of the ocean, China. Maybe you'd consider them a Hayekian land of liberty, but my view is that their growth is due to them finally being able to start using the technology that the West has had for so long.

Anonymous said...

"When we instead try to service needs without regard to profit metrics or consumer preferences--as in pre-college education today in the US--we get stagnation."

Yeah, college education is such a vibrant business. I mean, aside from the fact that it hasn't changed one bit in hundreds of years.

Gary said...

Excellent post. I always say that it isn't getting what we want that makes us happy (i.e. more equality) but wanting the right things (i.e. more freedom).

Anonymous said...

Excellent post Eric, one of your best. Like another poster I also miss the ethical argument, but as utilitarian arguments go this was a great one.

Now, onto Dave. Dave, you make a bunch of typical dumb "progressive" points, on minor parts of Eric's essay, and think you've proven something. The Krugman style of attack. Find some tiny point you think you win on, and think you discredit the whole. Like Krugman you're not even right about those.

Do you really think legal fear hasn't affected the number of Caesarians performed? Please don't say you believe that because the alternatives are then that you are lying or stupid. So, given you agree, what's your point here again?

China? Seriously? So you think we should be totalitarian? At least that would make you an honest leftist, but I doubt you'll admit it. China is an agrarian poor economy that is rapidly growing because it has ADDED some economic freedom. How idiot leftists use that to discredit economic freedom is beyond me, but apparently not them.

Full employment? Eric was obviously being light hearted, and his point is obviously that economists are almost always telling us we need to spend on their pet projects whatever they are, whatever the situation.

Progressives, idiots or liars? Now that is a question for the ages. I guess it varies by progressive. Some hit the impressive two-for-one.

Robert Johnson said...

This is really a great post. I found myself cheering through much of it.

Regarding inequality, I think that if we can disentangle business and government (just shrinking govt. would help with this) we'll likely see some better outcomes in terms of the welfare of the working class - which is what I think what most of us are worried about more than we care about whether Bill Gates has unimaginable wealth and I don't. Many new technologies effectively grab value from producers and give it to consumers (e.g. the news publishing crisis) - and if the producers didn't get to write legislation to stop this from happening then I think we'd get much improved outcomes, equality-wise.

bjf said...

-I think you’re right to dodge the ethical argument. Your man John Stuart Mill would approve, In order for economics to be somewhat scientific you have to separate it from the ethics. Let the ends be determined by the philosophers and study the means in isolation.

-I'm on board with the fact that rich people do get rich for a reason and do a great service to their countries, themselves, and are generally doing good things, and profits aren't evil. But they might be mispricing their leisure time, and thus not maximizing their utility, even though they are contributing to growth. If thats true theres a good utilitarian reason to dis-incentivize making over $75k per year, if thats the magic number. http://blogs.wsj.com/wealth/2010/09/07/the-perfect-salary-for-happiness-75000-a-year/

-It’s also not trivial to me that the biggest of the big boys are huge lefties, John Paulson, George Soros, Warren Buffet are all on the progressive bandwagon. I’m not sure if they are liars or idiots.

-Stability and quality institutions are needed for economic growth (which is probably why economic growth didn’t take off until 1870, See Douglass North), this could be one of the reasons why short term “stabilizing” and/or redistribution policies are pursued. And even if they aren’t “stabilizing” the idea of a state that “cares for the people” could serve to quell the riotous thirst of the envious lower class and allow the parts of the state that are required for an economically liberal society, property protection and contract enforcement, to work. (You mention Plato. It reminds me of the evolution of the five regimes http://en.wikipedia.org/wiki/Plato's_five_regimes )

Anonymous #5 said...

No one thinks you can improve a rain forest via top-down Federal programs, but those same people find it obvious that more Federal regulations and purchases will improve a market economy, though it is just as complex and natural.

Your use of the word "natural" is interesting. When it comes to human behavior, either everything is natural or nothing is natural. I understand what you are saying -- the idealized market system emerges from voluntary, decentralized interactions and produces Pareto-efficient outcomes, and thus coercive government actions that interfere with it should be regarded as illegitimate -- but that doesn't make anything "natural" or "unnatural."

The most enterprising entrepreneurs are driven to innovate to earn profits by readjusting again and again the arrangement of productive activities so as to fill in the best possible way the needs of the consumer.

Agreed. But this description of economic activity seems to star the heroic individual entrepreneur who is fully invested in the success of his product. In the real world, when I go to the store to extract some consumer surplus for myself, I generally buy products from large corporate entities. Corporations generally have very diffuse ownership, and moreover owners of corporations must hire managers to produce profits for them. These top managers hire other managers, who in turn hire other managers, until eventually we reach an organization layer where actual work is being done. Now this whole situation seems rife with principal-agent problems and information asymmetries, and at the end of the day it seems pretty challenging to figure out who exactly is responsible for success and for failure.

Obviously this works pretty well as a whole because we live in a pretty wealthy society. I'm just saying that the idea that wealth follows directly from freedom may not be as logically simple as you make it seem. Most people try to better their situation in life, but most people are not entrepreneurs who take on great risks in pursuit of great profits. Nor is it clear to me that society's wealth is created purely by such entrepreneurs (as opposed to more ordinary risk-averse people who work at large corporations and who make small incremental improvements in well-established processes).

BTW, one of the most lucrative sectors of our economy over the past few decades has been finance. Do we have any way of measuring how much of the profits in finance are due to wealth-creating products that made consumers happy, and how much are due to wealth-destroying rent-seeking activities (picking up a dollar bill a minute before someone else does)? Is there something magical about freedom that allows it to always deter and never encourage rent-seeking?

How much of our wealth is due to good governance -- where "good governance" is unfortunately something more complicated than "no regulations" or "lower taxes", and something that is not just in the jurisdiction of politicians and voters and government bureaucrats, but is also the responsibility of business leaders?

(Full disclosure: I am a lying idiot progressive, so obviously my comment above has a secret real meaning, which is that I would like the government to own everything after we eat the rich.)

Eric Falkenstein said...

"I am a lying idiot progressive"
are your lying about that? If so, you aren't lying...but then you are. If you aren't lying then you are lying, which means you aren't lying...arghh!

Dave said...

Eric,

Did the blog eat my last comment, or did you delete it?

Eric Falkenstein said...

I didn't delete it...users can delete their own comments, somehow, though not others.

I only delete comments that I consider really rude or offensive.

Dave said...

OK, I'll re-write it and try posting it again in a few. May I suggest, though, that you consider installing Disqus as a comment system here? Much better than Blogger's built-in system.

Dave said...

Anonymous,

"Now, onto Dave. Dave, you make a bunch of typical dumb "progressive" points, on minor parts of Eric's essay, and think you've proven something. The Krugman style of attack."

You must be new here. On this blog, we generally correspond civilly with each other, as gentlemen. The points I brought up were neither "progressive" nor attacks, but genuine attempts to engage Eric in discussion about his post. Sometimes he deigns to do so.

Also, you shouldn't assume that because I raise questions about some of Eric's posts that I'm a leftist. Far from it. Onto the points.

"Do you really think legal fear hasn't affected the number of Caesarians performed?"

It may have, but that wasn't my point. My point was that, once a woman has her first Caesarian, there is a medical reason for subsequent babies to be delivered that way: the first C-Section leaves scar tissue that can increase the chance of a uterine rupture in the event of a subsequent vaginal delivery (because of that, 90% of subsequent deliveries are done by C-Section).

"China? Seriously? So you think we should be totalitarian?"

Yes. Yes. No. I brought up the "tiny point" of China because it's an enormous outlier to the argument Eric (and the editors of the WSJ, and the Heritage Foundation) makes that economic growth is directly correlated with economic freedom. China is the biggest growth story in the world, and yet it ranks #135 on the Heritage Foundation's Index of Economic Freedom. It's worth noting here that the Heritage Foundation's methodology considers only economic freedom and not political freedom, so it's not China's lack of democracy causing it to have such a low ranking on the index.

"Full employment? Eric was obviously being light hearted, and his point is obviously that economists are almost always telling us we need to spend on their pet projects whatever they are, whatever the situation."

That might have been Eric's point, but it wasn't clear to me the way it was written, which is why I asked the question.

By the way, do you consider The Long Depression to be a "tiny point" as well, or is it legitimate to bring that up when someone writes about the benefits of the level of laissez faire we had in the 19th Century? Eric makes some good points about the downsides of government interventions in the economy, but it seems like we had worse downturns when there was less government intervention in the economy.

"Progressives, idiots or liars? Now that is a question for the ages. I guess it varies by progressive. Some hit the impressive two-for-one."

It's puerile to assume that anyone who disagrees with you is either an idiot or a liar. More likely dogmatism is at work. Even smart, honest people can become dogmatic. Eric points out examples of it on the left, but I suspect he is susceptible to it too, on occasion.

Aaron Brown said...

Great post. I have only one quibble with a minor point in the second-to-last paragraph.

I think it's misleading to say that an economy left alone will find its most sustainable, consistent equilibrium. I don't think it will find equilibrium at all, and if it did, I have no idea how you would characterize it at all.

Using your ecosystem example, consider the history of the first National Park, Yellowstone. The federal government tried to leave it alone, to preserve its natural beauty. So they stopped Indians from hunting there. So the buffalo and elk populations exploded, ate all their food, and died. To protect the remaining animals, they government shot all the wolves. Then they figured out the wolves were necessary for population control and imported new wolves. But the new wolves behaved differently and caused new problems. For years all forest fires were suppressed, so the dead brush accumulated and caused massive fires that were far more destructive than the little fires, because they ignited the forest canopy.

If you leave nature alone, things change. Forests become grasslands, grasslands become swamps, swamps become forests. There is no equilibrium, just constant transitions.

If you like things the way they are, a forested Yellowstone with a stable animal population or an economy with steady growth and high employment, you don't get it by doing nothing and trusting to nature. Unfortunately, attempts to do something are usually bad, and always unpredictable. At one extreme you can build a park: a simplified ecosystem with constant intrusive maintenance. At the other you can let things happen and make up your mind to enjoy the results. In between, you can try to make rare, minimally-intrusive changes; being careful to do them gradually and with lots of feedback. The history of these attempts is not encouraging, but it's either that or do nothing.

I think the same is true of the economy. Most interventions are disasters, and all are unpredictable. I'm prepared to believe that some cautious, humble, gradual encouragement can guide things a bit better; but I admit there's no historical proof of that. But I don't believe that leaving things alone leads to a good state, or to the best state. It doesn't lead to anything, it's everything is in constant transition.

Anonymous said...

Dave,

You address none of the real points even though you address them point by point, a real talent.

I think being "rude" upfront is better than using your Krugman-esque selective logic, then never actually defending it when attacked, but deflecting again. That's really rude, but in a cowardly way without bad words.

And, if someone doesn't believe in some combination of freedom by right, or freedom by superior efficacy, then the only explanation I can muster is they are stupid or evil. Krugman is one of the two. He's not a man of good will who simply disagrees with me. Observing the world and saying "yes, we need me in charge to micromanage" only has those two explanations.

Bye Dave.

Anonymous #5 said...

I think being "rude" upfront is better than using your Krugman-esque selective logic, then never actually defending it when attacked, but deflecting again. That's really rude, but in a cowardly way without bad words.

Someone suffers from a bad case of projection.

By the way, given that Eric thinks that government regulations and the legal liability system are both horrible, I wonder how he thinks people should be protected from harm caused by others. I guess the doctor who screws up gets his comeuppance when you don't return two years later for another delivery?

Anonymous said...

"Someone suffers from a bad case of projection" is not an argument, nor does it have a point.

Oh, and the way to deal with your doctor example is called the legal system. I can't speak for Eric but even with law suit reform being needed, the legal system is still the prefered way for free people to settle differences.

Dave said...

"That's really rude, but in a cowardly way without bad words."

If only I had the courage to toss out ad hominems while posting anonymously. We all have our faults, I guess.

Anonymous #5 said...

even with law suit reform being needed, the legal system is still the prefered way for free people to settle differences

So all we need is a legal system with some regulations around it, and then we will live in the best of all possible worlds. Great, I can see why you have to rant angrily about Krugman and freedom; otherwise it might be obvious that you have nothing insightful to say about our society.

Stephen said...

I'd like to put Tyler Cowen in a box with Vernor Vinge and Ray Kurzweil. How does Cowen reconcile Stagnation with the Singularity? How come I can barely keep up with this "stagnation"?

>The economy is like an ecosystem

Exactly, and the organisms within an ecosystem sooner or later acquire parasites, slowing them down. They have lots of strategies for preventing and curing parasites (read your Declaration of Independence and Constitution), but parasites have counter-strategies, and eventually hosts succumb. The United States are developing a high parasite load. One hopes that the immune system will soon recognize and dispose of the parasites, but maybe this is the final infection. No worries--organisms have reproductive strategies to create parasite-free offspring.

paul said...

I think tc's comment was a spectacular mis-hit. tc appears to believe that technology and resources have some existence as valuable independent of human action. Oil was just a hydrocarbon until human ingenuity and action gave it value.

molecule said...

Paulson made billions *because* of government interference in the mortgage market not because he satisfied any customers.

As a result, he doesn't have to work - as in produce something for others to consume. Short selling does not qualify as work.

Yet others have to toil to produce so Paulson can consume. These others feel petty envy because they are doing actual work. They also wish they could stop working and make billions by pushing buttons. Who can blame them?