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Will Wilkinson has a must-read post on libertarianism, why he’s more of a liberal than a libertarian, and how he’d rather argue more with liberals than libertarians. He also condemns Ron Paul about as well as anyone could in a paragraph of his usual rhetorical genius:
Somebody’s going to ask “Isn’t Ron Paul making a difference?” So I’m going to say, “Yes.” None of this is to say that right-fusionism of the Ron Paul variety isn’t now having an influence, or that none of it is good. I’m glad to see Paul spreading a few profoundly important ideas about foreign policy. But that doesn’t mean Paul’s decades of bilking paranoid bigots with bullshit prophesies of hyperinflationary race war was really a stroke of strategic genius after all. Or maybe it means it was. But that doesn’t make it right. I don’t think Paul would be where he is today without all those years of vile fear-mongering. And I don’t think anyone ought to get away with climbing up that evil ladder, kicking it away, then pretending he was born a thousand feet off the ground in the pure mountain air right there next to heaven. He knew what he was doing, chose to do it, and none of it can be justified by a little TV-time for salutary anti-imperialist and free-market ideas. I’d rather not be affiliated with a “movement” that includes him in even a conflicted way.
I am not quite persuaded by Will’s rejection of the term libertarian to describe himself. Or rather I am not persuaded by his rejection of the term to describe ourselves, since I share a lot of the beliefs he says differentiate him from libertarians. Will appeals to the prevailing public understanding of “libertarianism”, but I think that this is more about the relative importance of a high level of economic freedom to both freedom overall and general welfare than about which rights and liberties are “off the table”.
Maybe I am biased because I don’t want to surrender libertarianism to those I see as the radicals among us. But then again maybe Will is biased because it’s easier to persuade liberals when you call yourself a liberal.
Two graphs on how fast the economy is producing jobs relative to workers.
First, we use the over 16 non-institutionalized population. This is basically everyone legally allowed to work.
Rates above zero indicates jobs created at a faster rate than workers, below zero the opposite.
As you can see we are closing in on rates achieved in the mid 2000s and much sooner than after the dot-com bust. The V shaped nature of this recovery in terms of labor soakage is much more pronounced than after 2001.
Second, we’ll compare to the civilian labor force. These are folks who tell us they are looking for a job.
By this metric we are currently beating anything achieved during the naughts and in the ballpark of the late 90s.
Notedly the recovery was actually faster than decline so that the V is skewed backwards.
John Cochrane is blogging, something I take complete credit for since I introduced Cochrane’s ideas to HTML here.
He writes in a lengthy internally dependent style reminiscent of my own. Nonetheless I will try to excerpt the key points
We all agree that "Ricardian Equivalence" is how the economy would and should work, if there were no "frictions," or other problems.
I am not so sure about that. From what comes later it is clear that Cochrane means something different by Ricardian Equivalence than I do.
When I use the term Ricardian Equivalence I mean that when the government borrows money the fact that future taxes will have to rise induces folks in the economy to save more money.
What’s absolutely key here – and I will show later – is that this means that ceteris paribus interest rates do not rise from an increase in government borrowing.
This claim I believe is false and I think many other people do as well.
Now, I’ll try to quote enough to show Cochrane’s meaning of the term.
So according to Paul, the prediction of a properly functioning economy is that people who take out a $100,000 mortgage consume $100,000 less in the first year; that they do not do so is proof stimulus works.
. . .
But what about the extra $100,000 of "spending"? Doesn’t the new house contribute to "aggregate demand?" What, in the classic view, goes down by $100,000?
. . .
The question is not the family’s spending, but where did the $100,000 come from, and what were they going to do with the money?
. . .
Most likely, someone was saving money, and put it in a bank. If this family didn’t take out the loan, another family would have (perhaps at an infinitesimally lower interest rate) done so, and the economy would have built a different house.
. . .
To me, this example illustrates beautifully how Krugman "got this wrong." He never asked where the $100,000 loan came from! In his analysis of government borrowing and spending, he does not ask, who lent the money to the government, and what were they planning to do with it otherwise. People "with an economics training" are supposed to remember lesson one — follow the money and pay attention to budget constraints.
What Cochrane is invoking here is what I would call adding-up constraints. In this version of the world the government borrows money. This means that there are fewer savings available for non-government borrowers. Those fewer savings must be rationed and in a free market economy this is done with the price mechanism.
Interest rates in the economy rise so that fewer people want to borrow and so that more people want to save. Once, interest rates have adjusted the increase in private savings and the decrease in private borrowing exactly match the increase in public borrowing.
Thus, there is no increase in aggregate demand.
However, very importantly, in this mechanism interest rates rose to clear the market for loanable funds.
Now, what about government stimulus?
If the first mechanism is at work then certain types of stimulus will never be effective. For example, simply rebating taxes to families will have no effect. People know that this simply means more taxes later and so they save exactly the amount of the stimulus.
If the government buys stuff rather than rebating taxes then this can only work if the stuff the government buys is not a direct substitute for what people would have bought themselves. If it is then people will simply refrain from buying stuff and save instead.
If it is not then people will save some but not completely because otherwise they would have suffer extraordinarily in this year. They would rather spread the pain of paying for this government purchase over several years.
So, that’s what I think of as Ricardian Equivalence.
Now, what about adding up?
Remember that key in the adding up mechanism was that the interest rate cleared the market for loanable funds. However, real life baseline interest rates are controlled by the Federal Reserve.
Now, suppose the Federal Reserve holds interest rates constant even if the government is borrowing more money. This means that now the total amount of public plus private borrowing exceeds the amount of savings.
How does the market clear?
The market clears because the Fed prints money in order to fund the desired amount of borrowing.
Or, to more accurately represent the world we live in today: in the face of extra demand for borrowing banks turn excess reserves into required reserves by making creating more checking accounts which are in turn the basis of loans to consumers and businesses.
The answer to where does the money come from is that it is created out of thin air, either by the printing press or switching reserves from excess to required status.
Nick Rowe discusses public debt using apples
The government borrows 100 apples from each of cohort A, then gives each person in cohort A a transfer payment of 100 apples. It is exactly as if the government had simply given each person in cohort A an IOU for 100 apples. That IOU is a bond.
So far there is no change in cohort A’s consumption of apples.
Cohort A then sells the bonds to the younger members of cohort B. So each person in cohort A gets an extra 110 apples (assume 10% interest per generation), which he eats. Cohort A then dies.
Cohort A is better off. Each member of cohort A eats an extra 110 apples. In present value terms, those extra 110 apples are worth 100 apples at the time the transfer payment is made.
Cohort B eats 110 fewer apples when young, but 121 extra apples when old, and they sell their bonds to cohort C. Although cohort B eats 11 more apples in their lifetimes, the present value of their total consumption of apples is the same. The rate of interest must be high enough to persuade them to eat fewer apples when young and more apples when old, otherwise they wouldn’t have bought the bonds from cohort A. So cohort B is not worse off.
. . the government decides to pay off the debt by imposing a tax of 121 apples on each young person in cohort C, which it uses to buy back the bonds from cohort C.
Each member of cohort C eats 121 fewer apples.
Cohort A eats more apples, and cohort C eats fewer apples. It is exactly as if apples travelled back in time, out of the mouths of cohort C into the mouths of cohort A. (With interest subtracted as they travel back in time through the time machine.)
This is the type of example I love. However, I think his starting point obscures what is happening. In reality the government sells bonds members of cohort A. So, the bondholders in cohort A eat 100 fewer apples.
The travel through the bond markets is always a wash.
What happens is what always happens. Resources are transferred from taxpayers to the beneficiaries of government programs. Where these people exist in space and time is of no relevance to this mechanism.
The raw experience is that the affairs of members of society are rearranged under threat of death. That you do the rearranging is what it means to be the state. That you are under threat of death is what it means to be a taxpayer.
Whether you are young or old; born or unborn; purple or plaid it is always better to be the state and to not be a taxpayer. Thus if our grandchildren are taxpayers and we are not, then all else equal it is better to be us than to be them.
Yet, importantly, this is always the case. Even if the government runs a surplus it is better not to be the taxpayer.
However, an entirely different macro question arises. That is, can the state acquire liabilities in excess of its ability to pay them. Can we bankrupt our grandchildren?
In this case the answer depends solely on the state’s ability re-arrange claims on resources, which in practice is limited by Marshallian deadweight loss. In a closed economy with lump-sum transfer the state can never exhaust its ability to transfer resources and can never go bankrupt. How much debt the state acquires is utterly irrelevant.
This is because the solvency of the state depends everywhere and always on its ability to re-arrange claims on resources to suit its goals. This always happens in the current period and is limited only by the power the state can exercise in the current period relative to the power it desires to exercise.
It does not need to “come up with the money.” It needs to be able to kill you if you refuse to comply. This is always where the power of the state comes from. Again, that is what it means to be the state.
If you cannot do this, if you rely on consent and hence payment to induce action, you are not a state. You are a firm.
James Wimberley nominates one my posts as the dumbest of 2011.
Read the whole thing as a fine example of yahoo values, data-free scaremongering and reckless optimism, and an indifference to economic reasoning.
Whether my values are yahoo or not I cannot say. I wasn’t aware of any scaremongering on my part, and certainly not of the data-free kind.
I am tickled, and at this point intrigued, by the repeated references to my position as optimistic, reckless or otherwise. My general philosophical disposition is black-on-black existential nihilism, which most people take and I accept to be a sternly pessimistic disposition.
Lastly, of all things one might say about my positions, that they are indifferent to economic reasoning is among the least likely to be true.
It´s very likely to Smith that humans will stop needing food, transport, consumer durables, heating and cooling, and shelter because of an unspecified information singularity, as in Charles Stross´ SF romp Accelerando. On the other hand, the risk of population losses on a genocidal scale as a result of well understood and carefully modelled climatic processes can be ignored.
I have not read Accelerando, so I don’t know exactly what Wimberley is referring to but I certainly don’t think that humans will stop needing any of those things. The issue, of course, is the cost of production.
The second paragraph at least reflects an actual argument. Future generations will very probably be richer and better able than us to afford the costs of adaptation and mitigation. However, this depends on how much. Faced with a trend in damage and adaptation costs rising to infinity, there is some point at which we should spend the money to mitigate. The equilibrium depends on the cost curves and the discount rate. You need a model to work it all out and infer whether the date is in the future (Nordhaus) or has already passed (Stern).
A few things. First, damages and adaptation and mitigation costs refer to real things. For reasons alluded to in previous posts I am an infinite set skeptic. That is, I am doubtful that real things can take on infinite values. Yet, let’s set that aside for now.
Its simply not the case that if trend damages and adaptation costs rise to infinity that there is some point at which you should mitigate. Suppose that we simply mean that damages grow without bound. If mitigation costs grow without bound but faster then it will never be worth your while.
Suppose that we mean there is a vertical asymptote such that damages take on an infinite value in finite time. Then if mitigation costs start higher, grow faster and there is vertical asymptote of mitigation costs which occurs before the damages asymptote then there does not exist a time T such that damages > mitigation costs.
All of that being said, Wimberely is correct that the key question is what are in fact the damages, adaptation and mitigation costs. This is the conversation that I want to have.
Amazingly, there have actually been attempts by economists to think about this: Stern, Quiggin (eg here), Weitzman, Nordhaus. Professor Smith is a professional economist. It´s very curious that he does not think it worthwhile to use the tools of economic analysis to address the most important question of public policy of our generation.
For example, one key issue in the debate. The use of high rates of time preference, rather than Stern´s and Quiggin´s near-zero, leads to discount rates of 5% or so. These imply a morally unacceptable indifference to the fate of our grandchildren, many of whom will still be alive in 2100 – their incomes and costs valued today at 1.04c on the dollar if we accept 5%.
I find it very worthwhile to use economic analysis though I don’t always write in economic language. My main point is that we are overestimating the costs of adaptation, but underneath it all is an assumption of a relatively high rate of time preference.
The fundamental logic being that irrespective of how we think we ought to treat our grandchildren, we do not in fact treat them as if their future happiness is worth that much to us.
In the late 90s the US Treasury was selling I-Bonds for real 3.4% return. Before the Global Financial Crisis long term TIPS were trading at roughly 2.25%. Yet, these products weren’t hit with trillions of dollars in demand as grandparents recognized the ability to establish large guaranteed gifts to their grandchildren.
Even more directly New York Life is currently offering a 5% inflation protected annuity specially marketed towards grandparents.
The later example is especially illuminating because New York Life is in the business of convincing you to do this. Rationality issues might cloud your decision to buy I-Bonds, but if it was possible to frame the issue in such a way to get you to invest in your grandchildren’s future the New York Life has an interest in finding that way and exploiting it. Yet, they have not succeeded on a mass scale.
A form of reasoning that allows an avoidable catastrophe is unsound, however much it´s embedded in human nature. The duty of scholars is to fight our cognitive illusions, not to parrot them.
I agree that scholars should work to fight our cognitive illusions but I would count the first sentence above among them. Given any event chain that we can lay out there are all sorts bad things that can happen. Whatever path you choose lowers the probability of some catastrophes and raises the probability of others.
Simply saying that we should restrict ourselves to some subset of event chains because a particular catastrophe takes on probability zero within that subset is not sensible.
You might want to argue that we should lower the probability of all potential catastrophes. Though, I doubt that is a position people would actually want to take if faced with the option.
I’ve argued before that the most significant near term tech will be the integration of 3D displays, head tracking, cheap screens and high bandwidth communication.
My contention is that it will change what it means to “be somewhere” and will usher in a revolution as significant as the first telecom and more significant than 2D internet.
Most of my readers by now have probably seen some of the modern high-def 3D movies. There is good chance as well, that you came away underwhelmed.
I don’t want to go far off on a tangent on brain science, but the main issue here is that stereoscopic vision is only a minor part of how your brain constructs its 3D-ish model of what you are seeing.
If you put your hand over one eye you can see that the world is a bit flatter and you can mistakenly think certain things are closer or further than they are but its not like any sense of depth is destroyed.
Lots of things are important, light, shadow, knowledge of the size and likely position of things, etc. However, one of the principle tricks your brain exploits is monocular parallax. That is, not two different images in two eyes, but different images as the head moves. This makes head tracking a must for true 3D.
Here is an example of the difference head tracking makes
What’s also equally important though are really big screens. I know that lots of people think glasses based Virtual Reality will come first, but my sense right now is that wall sized screens are what’s going to do it. There are lots of reasons for that, mostly focusing around how the end user is going to view the tech.
I think entering an infinite room will make it easier to foster a suspension of disbelief for the business user than putting on a visor or glasses.
Screen size matters because the more integrated the virtual perspective is into the rest of your visual frame the more real it will seem. Here is an example of the power of integrating a virtual projection using chalk.
This exploits neither stereoscopic vision or monocular parallax. Its simply brilliantly integrated into the rest of the visual frame. The brain assumes that its part of the frame and uses the perspective to generate a 3D image.
So, we image that we walk into a room where one wall is a screen. The edge of the screen’s image blends perfectly into the edges of the adjacent walls, the ceiling and the floor. The image inside the screen moves as you move around the room and the image is displayed stereoscopically.
It will look like this room opens up to where ever you want. Even more importantly we can put someone on “your” side of the screen. In other words you don’t have to be looking at them through what seems like a mirror. They can be projected to be standing in the center of your room.
They will disappear if you walk to far around them but in the type of interaction that goes on normally between two people standing or sitting and talking they should appear to be right there.
Of course, the more screens the more complete the illusion will be and in a room of all screens will appear to be exactly like somewhere else accept that if walk to far you will hit the screen.
This is a big deal because interacting with other people is the heart of our economy and our civilization. Currently our technology makes verbal communication cheap and easy. However, much of communication is non-verbal.
For that reason people spend enormous amounts of resources to be in the same room together. And, even still you can’t be in the same room with anyone in the world at any time because of sheer time limits on even jet travel.
Infinite rooms get us past that. As costs fall any two people can be in the same room at any time. Indeed, though we need an infinite room for each person in theory we can put in any number of people in the same virtual room.