The (kids) gloves are coming off?

Russ Roberts and Don Boudreaux, of Cafe Hayek, don’t know what to call their recent posts about Paul Krugman. I have a suggestion: It’s about time.

Economist Russ Roberts criticizes Krugman for his treatment of intellectual opponents, like economist Robert Barro, in this case. Roberts quotes two passages from Krugman’s own economics textbooks that support an argument that Barro makes:

Additional transfers to people with earnings below designated levels motivate less work effort by reducing the reward from working.

Yet, while Krugman said as much in his text books, in his blog post, Krugman does a poor job of characterizing this incentives-driven view of what Barro calls “regular economics”:

But if you follow right-wing talk — by which I mean not Rush Limbaugh but the Wall Street Journal and famous economists like Robert Barro — you see the notion that aid to the unemployed can create jobs dismissed as self-evidently absurd. You think that you can reduce unemployment by paying people not to work? Hahahaha!

And:

If you read Barro’s piece, what you see is a blithe dismissal of the whole notion that economies can ever suffer from am inadequate level of “aggregate demand” — the scare quotes are his, not mine, meant to suggest that this is a silly, bizarre notion, in conflict with “regular economics.”

Not exactly. I did read Barro’s piece. He sets a good example of how to characterize opposing views, accurately and without straw-manning it like a 9-year-old who just put gum in her sister’s hair because “she deserved it”:

Keynesian economics argues that incentives and other forces in regular economics are overwhelmed, at least in recessions, by effects involving “aggregate demand.” Recipients of food stamps use their transfers to consume more. Compared to this urge, the negative effects on consumption and investment by taxpayers are viewed as weaker in magnitude, particularly when the transfers are deficit-financed.

Thus, the aggregate demand for goods rises, and businesses respond by selling more goods and then by raising production and employment. The additional wage and profit income leads to further expansions of demand and, hence, to more production and employment.

And, it wasn’t quite a ‘blithe dismissal’. It was an argument that Krugman chose to blithely dismiss himself, instead of addressing it.

So, why did Krugman describe Barro’s argument as he did? Why not simply state the argument. For example, Barro believes that the unemployment creates incentives for people not to work, something I also believe and have written in my textbooks. Where I disagree with him is that I believe during recessions, those incentive effects are overwhelmed because there are fewer jobs a lot more people who want them.

Don Boudreaux goes one further and criticizes the people who seem to relish in their own intellectual capacity to deal with Krugman’s nuances (by using bigger words than I used in the previous paragraph), while missing a larger point, that economics shouldn’t be used to justify stealing.

I did something that I rarely do. I read Krugman’s whole piece, and was reminded of why I choose not do so. Not only do I agree with the points made by Roberts and Boudreaux above, but there are other things that bug me.

Here’s a couple of those things.

1. He says of Keynes’ “discovery” of aggregate demand:

…while I’m generally against scientific pretensions, it amounted to a scientific revolution, something like plate tectonics in geology.

First, I don’t put much stock in anyone who compares economics to science. I think they will be prone to be more confident in their views than they should be, which can lead to disastrous results.

Second, why make this analogy if he really is “generally against scientific pretensions.” Just not in this case? Aggregate demand is lone example in economics where scientific pretensions is warranted?

Something else bugs me. Krugman writes:

Think, for example, about the Great Recession and its aftermath. Regular economics says that economies should normally get richer each year, as their work force and capital stock grow, and technology advances. But after 2007 the United States and other advanced countries suddenly went into reverse, becoming poorer instead of richer, and for an extended period too [pointing to a chart of declining GDP in the recession].

Does regular economics say that economies should get richer every year? Maybe. I haven’t heard that one.

Is GDP a measure of wealth? I thought it was a measure of economic activity. Can’t GDP decline and wealth still go up? If Bill makes $100,000 a year and has $1 million in Apple stock, does his wealth go down if his salary declines to $90,000? Not necessarily. It depends on how much he spends, doesn’t it? If he spends $80,000 a year, his wealth can still grow after the decline in his salary, no?

Perhaps I’m mistaken in my understanding of GDP. If so, please correct me. But, if not, it seems that Krugman’s language is unnecessarily sloppy here for a Nobel economist.

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Minimum wage links

Don Boudreaux has had several great posts about the minimum wage lately, but a couple are exceptional. In this one, he does a great job of giving illustrative analogies to make the economics easier to understand. In this one he writes a letter to the New York Times to dispute the left’s favorite Nobel-laureate, Paul Krugman.

In this one, Greg Mankiw, also responding to Krugman, points to research that found a link between jobs and the minimum wage. Mankiw also points to a great post from Steve Landsburg, that introduces some interesting and different points. Steve edits that post here.

Mankiw also disagrees with the President about research on minimum wage.

Of course, there’s one single point that most of these economist, except Don Boudreaux, misses: What business is it of your’s?

If we can get a living wage for flipping burgers, why do we need to graduate 12th grade?

Don Boudreaux points to a comment from Maureen on Steven Landsburg’s blog post about the minimum wage.

Here’s some of her comment:

The bigger issue that I have is the assumption that somehow minimum wage is the start and end to a career. Minimum wage is a start, but if it is seen as an end, then we can revise a bunch of government budget items that will no longer be needed – starting first with money for the k-12 education system and the post secondary education systems. If unskilled labour is all that, as a society, we are willing to support with higher and higher minimum/living wages, then no one needs to graduate high school and we can stop at Grade 10 (or even maybe Grade 8). We can shrink that whole system down and get rid of vast amounts of government departments and the costs that go with them.

Good points.

Why is there no Milton Friedman today?

This question was put to economists recently. Tyler Cowen, of Marginal Revolution, responded here.

Here’s an excerpt of his response:

In some respects, if there is a Milton Friedman of today, it is Paul Krugman, who both has a Nobel Prize and has a very large popular audience and considerable skills as a communicator. Of course Friedman’s contributions as an economist were far more fundamental. Arguably Friedman deserves three or four distinct Nobel Prizes, while no one would say the same about Krugman, even though most of his serious critics readily would grant he deserves the one.

What about the differences in political orientation? The great policy battles of Friedman’s day were defeating communism and planning, moving away from naive Keynesianism, privatizing, and overcoming an excessive belief in regulation. And today what goals are perceived (correctly or not) as comparably important? Improving income inequality, fixing health care, and reining in the banks. The cynic might toss in ‘fighting austerity and returning to naive Keynesianism.’ It should be no surprise that today’s closest equivalent to Milton Friedman—in terms of being an iconic, popular, Nobel Prize-winning economist—should come from the left rather than from a conservative or a libertarian viewpoint.

I agree, but I would add a few observations. The differences between Friedman and Krugman run deeper than political orientation.

Friedman encouraged and facilitated productive discussion. He didn’t (at least to my knowledge) personally attack his critics. He engaged them and made his points on merit. Friedman got people to think and changed minds.

Krugman muddies the discussion with personal attacks and straw men representations of his opponents’ positions. He doesn’t encourage or facilitate productive discussion. Rather, he polarizes.

As a lad, I saw Friedman on the Phil Donahue show. I had no idea who he was. In fact, I had no cognizant recollection of seeing him on Donahue until I watched Youtube videos of those appearances in the last few years.

But, when I re-watched them, I was taken back to my pre-AC and pre-cable TV days. On a hot summer afternoon, with five channels on TV, Donahue was a last resort from boredom…usually coming after watching Beverly Hillbilly and I Love Lucy re-runs for the umpteenth time.

While I didn’t have much idea what he was talking about, I found his style refreshing. He didn’t get sidetracked with fallacies or caught up with noise making. He simply presented his case. When challenged, he addressed the challenge instead of avoiding it, which stood out to me.

He also struck me as someone, if given a challenge that he had handled a hundred times before, would stop and think about it and give it due consideration.

 

Even at that young age I seemed to notice that productive discussion was rare. That when challenged, folks just repeated their talking points (perhaps with more fervor), but thought it best to not acknowledge the challenge.

So, while Krugman may be today’s Friedman when applying a simple filter (an economist, with a Nobel Prize and a large popular audience that matches with the political trends of the day), he doesn’t have Friedman’s penchant for productive discussion. I don’t get the sense that Krugman changes minds to his way of thinking. Rather, he provides cover for people who already think his way.

What is ‘modest’?

Bob Murphy makes a good point while responding to Elizabeth Warren’s discussion of a $22 minimum wage:

We’re not talking about a “modest” change that Krugman et al. hide behind when we free-marketeers go nuts on this stuff. (Even here, I’m still waiting for someone to show me why going from $7.25 to $9/hour–which is a 24 percent increase–is “modest.” If the government cut the deficit by 24 percent in a year, I doubt Krugman would dismiss it as “modest.”)

…or cut government spending by 24%, lowered tax rates by 24% or increased tax rates on the poor by 24%.

 

BINGO

I agree with Randall Holcombe on the JP Morgan loss (HT: Don Boudreaux of Cafe Hayek). He had me at:

The correct argument, which Krugman acknowledges, is that the loss was entirely borne by JPM and their shareholders. They took the risk; they took the loss. That’s how markets are supposed to work.

He goes on…

…to add that unless people take risks, economic progress will come to a halt. So the fact that people are willing to take risks is good for the economy, and the fact that in this case the bad outcome for the risk takers involved only their loss sends a signal to others to weigh carefully the risk against the return. The bottom line is that risk-taking is beneficial to the economy, and the incentives are correct in cases like this when losses are borne entirely by those who took on the risk.

As Milton Friedman said, capitalism is a system of profit and loss. Profits encourage risk-taking (and that’s risk-taking to find things that improve our lives, by the way). Losses encourage prudence.

A private company losing money because of a boneheaded decision that is entirely borne by the shareholders of that company should not be an example for more regulation. That is foolish because it will only lead to less prudence.

And what of the big government experiments that have led to the disasters?

In the past few days, Russ Roberts, of Cafe Hayek has posted on his blog asking John Cassidy and Paul Krugman to back up their claims that European governments have cut spending. Both claim that “cuts” in government spending are making these economies worse.  For example, Cassidy wrote:

Republicans say they want to slash government spending and focus on the deficit regardless of the immediate economic situation. The Europeans have carried out that experiment, and, to say the least, it hasn’t turned out very well.

Roberts asks a good question. If you want to claim that government spending has been cut, show your work so we can know what meaning of ‘cut’ you are using. Is that cut in absolute amounts? Cuts in growth rates of spending? Cut as a percent of GDP? Or just talks about cuts?

I’d also like to ask Cassidy why he focuses only on what he believes to be the spending “cut” experiments, while completely ignoring the big government experiments that have led these European countries to the brink of financial disaster.

Let’s assume the spending cuts are real. Saying they’re not working while ignoring all that came before is a bit like observing a drug addict going into withdrawal and concluding that quitting the drugs is causing the problem and everything would be fine if he were just to resume taking drugs and, maybe, up his dose.

“We owe it to ourselves”

Economists/bloggers have been having an Internet debate over whether government debt has any true impact on an economy.

I know to us laypeople that sounds kind of crazy.  Of course it would.  But, us laypeople also give a lot of rope to economists — especially ones who have been adorned with Nobel prizes and write columns in newspapers — assuming they know their stuff, so I thought the topic might be worth addressing and might further my understanding of the topic as well.

Unfortunately, I don’t feel like many of the economists have done a good job of making the debate palatable for the general public.

I’ll try to lay it out the two key positions, as best as I understand, and would love to know if I got any of this wrong.

Position 1:  Government debt has no impact on the economy.  Since the government debt is borrowed from citizens (much of it, at least) and paid back by citizens, then it really “costs” nothing because we owe it to ourselves.

Position 2:  Government debt does create a burden, but it’s not what us rube laypeople think.  It’s not the debt that’s the burden.  Rather, it’s our reaction to the debt.  Because I know that my grandkids will have to pay back this debt, I save a more to pass on to them. That additional savings now is the true burden (which I think is actually equivalent to what us laypeople think too, but I’ll leave that one alone for now).

Here’s my take and I’d love to hear what I’m missing, because I’ll admit that I’m sure I’m missing something.

I believe Position 1 is wrong because it has one key flaw.  It’s the word “ourselves.”  What’s wrong with this line of thinking is what’s wrong with the field of macroeconomics, in general.

“Ourselves” is fiction.  It’s an aggregate, or sum, that means nothing.  Add up mine and Bill Gates’ wealth and you’ll find that our average wealth per person is around $20 billion.  The problem is that $20 billion exists nowhere in our reality.  I don’t have anywhere close to that wealth and Gates has all of it.  So, saying that Bill and I have $20 billion on average means nothing.

Let’s give a closer look to the fiction in Position #1.  I get a loan from Joe and force you to pay him back.  In macroeconomics, I would lump me, you and Joe, together and try to make you feel better about saddling you with the debt by telling you “We owe it to ourselves, so in net, we‘re not worse off.”

The only problem is that “in net” doesn’t exist anywhere except in my head.

You obviously are not better off.

Even if I did something spectacular with Joe’s loan that somehow benefited you, that doesn’t mean that Joe couldn’t have done something just as spectacular if he hadn’t loaned it to me.

So, what am I missing?

I’ve been working on this draft for a while.  I came across Don Boudreaux’s column on the subject and found that he makes the same argument here, which makes me feel  better that I’m on the right track.

I’d love to hear if I am missing something.  But, please do not use any examples that includes pizza deliveries from the future.

We have high tolerance for disatrous gambles

In his column this week, Walter Williams discusses a Ron Paul/Wolf Blitzer debate moment and NY Times columnist Paul Krugman’s reaction to it.

He [Krugman] was referring to a GOP presidential debate in which Rep. Ron Paul was asked what should be done if a 30-year-old man who chose not to purchase health insurance found himself in need of six months of intensive care. Paul correctly, but politically incorrectly, replied, “That’s what freedom is all about — taking your own risks.” CNN moderator Wolf Blitzer pressed his question further, asking whether “society should just let him die.” The crowd erupted with cheers and shouts of “Yeah!”, which led Krugman to conclude that “American politics is fundamentally about different moral visions.”

This is a good example of why I don’t care to watch election debates.  This topic deserves more in depth exploration, but the debate format only allows for sound bite responses.

I agree with Williams and Ron Paul.  But, I doubt those answers will do much for people who disagree with us. I’m not sure if my responses will either, but here are some other things to consider.

First, I’d like Wolf to clarify what he means by “society.”  Members of society are free to do what they like for this hypothetical 30-year-old.  Who’s stopping them?  Why do they need to be forced through government?

Medical practitioners could donate their time for his benefit.  Individuals can choose to donate their money to cover his costs.  People can form organizations that raise funds to help folks like him.

But, I think what Wolf really means by “society” is “government”.

It’s a pet peeve of mine when folks use “society” in place of “government”.  The underlying assumption is that there are only two options — either the 30-year-old buys insurance or the government comes to the rescue.  When you say “society” and really mean “government”, just say “government.”

Second, I’d ask why the 30-year-old decided to not buy insurance?  This is rarely discussed, but the answer is important.

Certainly, we could just say the 30-year-old made a bad gamble, but that doesn’t give the root cause.  It’s not only a bad gamble, it’s a disastrous gamble. Why he would make such a disastrous gamble?   Running red lights is a disastrous gamble also and very few people intentionally make this gamble.  Why not?

What if he made his health insurance gamble because he knew government would back him up?  That’s called a moral hazard and we find ourselves in a bad position when what is believed to be compassionate government policy actually causes more people to make disastrous gambles.  That also drives up the cost of insurance, medical care and government for everyone, as they are left paying for those disastrous gambles (which is exactly one of the key underlying problems driving medical costs in the U.S.).

Third, I’d ask for more information about this 30-year-old.  What’s his income?  What kind of car does he drive?  What phone plan does he have?  Where does he live?  How much did his TV cost?  Which TV service does he have?  How much would a catastrophic insurance policy cost him?  Enter your zip code on this website to find out.  In my zip code, a $5,000 deductible policy for a 30-year-old single male with Blue Cross Blue Shield is quoted at $53 per month.

I wonder, if “society” would have less compassion for him if it found out that he could afford the $50 / month insurance insurance policy, but chose not to buy it so he could have the best data plan for his smartphone.

Apparently, “society” didn’t think much of this woman’s efforts to raise money for her cancer treatments with yard sales, since the local government shut her down.  But, it appears that individuals in society have privately and voluntarily taken it upon themselves to help her out.  Good for them.

Third, I might ask why “society” should value the 30-year-old’s life more than he valued it himself, as demonstrated by his own unwillingness to insure himself?

I can’t imagine “society” having much sympathy for a driver who died in a car accident because he recklessly chose to run red lights.

This is just another example of where we let poor logic lead us to make bad decisions.

Poor logic: That guy made a disastrous gamble, let’s help him.

Better logic:  Let’s encourage that guy to not make disastrous gambles and let’s, through our private actions, help the truly needy.

So, I can well imagine someone like Blitzer saying, “so what do we do when we have a 30-year-old male dying who didn’t buy insurance?”

First, “we” do like the people did for the lady having yard sales.  We take private actions to help him, because we are good people.

Then, if he recovers, we take him by the ear and let him know that he should be ashamed of himself for making such poor choices that others had to come to his aid and take away resources for the truly needy.

We let him know that he will be expected to make responsible choices, because next time there are no guarantees of help.  He played us for fools once.

Maybe he goes on a speaking tour or gets interviewed by the local news and sends the message to other able-bodied and able-minded folks to not take disastrous gambles because it’s selfish and not worth it.

And, maybe one day he will come across someone who took a disastrous gamble and lost and will do the same for her that others did for him.

Maybe, in the process, he picks up some dignity and reinforces it others.

McJobs Revisited

Krugman asserts.

Kevin Williamson does an apt job at responding.

I personally don’t spend much time on Krugman’s columns. I find his lapses in logic laughable and the fact that he gets so much attention as evidence of a nation lacking in critical thinking skills.

Just as an example, first Kruman writes (emphasis-added):

Several factors underlie this rapid population growth: a high birth rate, immigration from Mexico, and inward migration of Americans from other states, who are attracted to Texas by its warm weather and low cost of living, low housing costs in particular.

A few paragraphs later he writes:

What Texas shows is that a state offering cheap labor and, less important, weak regulation can attract jobs from other states.

The point is that arguing from this experience that depressing wages and dismantling regulation in America as a whole would create more jobs…involves a fallacy of composition: every state can’t lure jobs away from every other state.

Wouldn’t you think it plausible that a state with a lower cost of living, and ‘low housing costs in particular’, would also have lower wages?  Just sayin…

And as far as the McJobs argument goes, I’ve never understood it.

If folks are willing to work, let them.  They may learn something. They may acquire skills and get a chance to earn more as they get better. That’s much more productive than waiting.

I started out for less than minimum wage.  I learned a great deal and built experience that I still draw on today.   That was much more valuable than watching reruns of the Beverly Hillbillies.

Though, Williamson’s response casts doubt on the accuracy of Krugman’s claim in that regard as well.