Sunday, October 24, 2010

Romer: We must fix the defict....someday

Conventional macroeconomics failed spectacularly, yet the disciples of Keynes that got us in to this mess (or, at a minimum, failed to see it coming and scoffed, and continue to scoff, at those who did) refuse to go quietly sit in the corner while they try to figure out where they went wrong. To the contrary, they keep coming to us with solutions before they've even come to agreement on what caused the problem.

In such a fashion, we now have Christina Romer explaining to us why spending money we don't have is the best way to solve a crisis that was caused by spending money that we don't have. More to the point, she is pointing out how conventional macroeconomics (you know, because it worked so well last time) clearly explains that any attempts to reduce the deficit would clearly lead to a double dip.

Clearly, she has in mind the disaster that befell the American economy after the U.S. government literally fired millions of federal workers and slashed government spending in the second half of the 1940's. What? The economy rebounded after that? Oh. Well then, she probably means to illustrate how successful the deficit spending of Japan has been over the past 20 years in reviving that country's economy. What? That didn't work either?

Oh, here it is: The IMF says it's true!
"Some advocates of austerity argue that, contrary to the conventional view, fiscal tightening now would lower long-term interest rates and improve confidence so much that the impact could be positive. But an ambitious new study in the World Economic Outlook of the International Monetary Fund confirms that fiscal consolidations — that is, deliberate deficit reductions — typically reduce growth substantially."

First, "contrary to the conventional view" sounds like a good start. I'll keep saying it: the conventional view doesn't have too good of a track record.

Second, I know that the IMF is the first organization I go to when faced with questions of more or less government intervention in pretty much anything. I mean, it's not like an agency problem could exist or anything. I'm sure they'd be the first one to tell us if their prior decisions proved to be failures.

Still, I thought I'd take a glance at the report. This is what jumped out at me:
"Thus, whereas the usual strategy identifies periods of consolidation based on successful (cyclically adjusted) budget outcomes, our approach identifies episodes based on fiscal policy actions motivated by deficit reduction, irrespective of the outcomes."(see Chapter 3)

Catch that? Let me paraphrase: "the traditional approach to identify periods of austerity is based on identifying periods where governments actually spent less than they took in. The IMF’s approach identifies periods of austerity by identifying periods when politicians and bureaucrats publicly stated they were taking deficit reducing actions, even if those actions didn't actually reduce the defict."

That doesn't sound good. Christina Romer's version sounds much better:
It also breaks new ground by looking specifically at times when governments changed taxes or spending with the aim of reducing deficits. Previous studies looked at summary measures of the budget situation, and likely included cases when strong economic performance caused lower deficits, not the other way around.

But wait...she is still saying that the study throws out periods of deficit reductions cases accompanied by strong economic performance. Ummm...isn't that what we want? Not to mention the strategic use of the word "likely". I.e., maybe it did, maybe it didn't, but we threw them out just to be sure because if we didn't, deficit reductions come out looking better than we know they really are. This seems sketchy...back to the IMF report:
Methodologically,our approach is close to that of Romer and
Romer (1989, 2010)

Ah. Never mind. I can't exactly expect her to criticize her own methodology.

Romer's message in the New York Times is simply that deficit spending is the way out of the recession, and deficit reductions will either prolong or exacerbate the recession. Keep in mind two things, though: This Keynesian viewpoint, that capitalism should be "wisely managed" by really, really smart people (like Christina Romer) is what actually got us into this recession to begin with, and secondly, that for every PhD that feels the way Romer does, I can find one that disagrees.

The thing is, Romer may be right. I don't believe that she is, and her little OpEd is too flawed to convince me otherwise. I may suffer from confirmation bias, but I'm pretty sure that Christina Romer, who has built her career on the New Keynsian point of view, and the IMF, which survives off of funding from countries running large deficits, are just as susceptible to such biases as I am. And that's why I won't entrust to them my economic future and my economic decision making.

Saturday, October 23, 2010

The right way to think about taxes

Pick a neighbor (that you like, or a friend, if you hate your neighbors). Let's call that neighbor (or friend) "Steve". Now, pick a government provided service.

Are you comfortable with putting Steve in jail if he refused to help pay for that service?

That is a completely proper way to view taxes and government spending in general because that is precisely how things function. (See why it only works if you like Steve?)

Now, it's easy to say, "sure, I think Steve deserves to go to jail if he doesn't pay his fair share to support local law enforcement". Obviously, there are many legitimate functions of government that make us comfortable with the fact that we fund our government by threat of force (i.e., don't pay your taxes, and you go to jail; tell the police that you refuse to go jail over taxes, and violence is guaranteed to result).

But what about this one? "I think Steve deserves to go to jail if he doesn't pay his fair share to buy 14 copies of Harold & Kumar go to White Castle for the local library."

Of course not. No sane person would ever say that. Yet, the Chicago Public Library has 14 copies of Harold & Kumar go to White Castle on DVD.

Sane people will, however, often respond this way: "well, Steve's fair share for 14 DVDs of a movie that actually makes viewers more stupid as they watch it is only 1% of 1 penny, so it's reasonable to expect him to have to pay it." (this is that whole "distributed costs, concentrated benefits" part of economics that they don't teach in government schools)

My reply: So, you are willing to send police to Steve's house, understanding that violence may ensue, to collect one penny if he refuses to duly support easy public access to Harold & Kumar? You think 1 penny is worth taking away one person's freedom?

Again, no sane person would say they support depriving a person of their basic liberties over one penny. And in the real world, it's not one penny, it's trillions of pennies being spent every year on things the government has no legitimate business funding.

Let's try some more: Would you put Steve in jail if he refused to pay for his share of...

...the poor-kid-down-the-street's Algebra textbook?
...your son's Algebra textbook?
...the rich-guy's-son-next-door's Algebra textbook?
...your school's football team's bus trip to play in the state finals?
...the county park on the other side of the state?
...the state park in another state?
...the local fire department's boat?
...the pension, after 20 years of service, at 90% of a $175,000 a year salary for the captain of the fire department's boat?
...airport security?
...the local NFL team's new stadium?
...a staff of 50 for a county commission on human rights?
...maintenance on the fire department's main fire engine?

This list is endless, of course, and the answers you give will probably vary from "yes", to "no", to, "ooohh, that one's a tough call". Your answers also might depend on whether or not you think Harold & Kumar are hilarious.

The next time you think the government should do something, ask yourself if you are willing to see Steve thrown in jail if he refused to help pay for it. Oh, and you ARE Steve.

Tea Party conservatism explained

Here are three good 10 minute videos on the basic platform of what I'll call "Tea Party Conservatism" in this context (although I think "Libertariansim" is probably more accurate).

In the first, Mr. Wittle explains what would seemingly be a popular concept: those who advocate a limited government believe that you should be able to make your own decisions. It's hard to believe how much resistance there is to that idea.

Next, Mr. Wittle discusses the current state of our elite ruling class and why it's probably a reasonable idea to limit its power. Again, you think this would be an easy sell, yet I'm amazed at how many people simply don't want the responsibility that comes with life and willingly turn control of their lives over to others. (Note: if you don't have time to watch all three, this is the one I'd skip)

And lastly, Mr. Wittle attempts to educate on a topic for which our government school system has spectacularly failed: basic economics.

HT to Taking Hayek Seriously