Reversion to Trend

John Cochran’s Wall Street Journal op-ed complaining about the “Johnny One-Note” prescription of some Keynesians (particularly folk Keynesians) opens with this paragraph:

Output per capita fell almost 10 percentage points below trend in the 2008 recession. It has since grown at less than 1.5%, and lost more ground relative to trend. Cumulative losses are many trillions of dollars, and growing. And the latest GDP report disappoints again, declining in the first quarter.

Now let’s stop right there. I’m broadly sympathetic to what comes next—that when your model fails you need to adjust your model, that the assumptions in the model which lead to the inadequate stimulus package of 2009 were absurdly wrong, and more measures based on the same assumptions will be just as inadequate—but I’d go farther. What makes him think that trend prior to 2008 was anything but an illusion? I think that our persistent (and IMO endemic) slow growth has been the case since 1992-1993 when China pegged the yuan to the dollar, we received an enormous flood of low-priced Chinese goods, the American economy was hollowed out, and every sector but those that were in bubbles (technology, housing) or directly subsidized by the government, e.g. education and healthcare, languished.

IMO the last six years haven’t been bucking the trend. They’ve been a reversion to trend.

Onwards:

If you look hard at New-Keynesian models, however, this diagnosis and these policy predictions are fragile. There are many ways to generate the models’ predictions for GDP, employment and inflation from their underlying assumptions about how people behave. Some predict outsize multipliers and revive the broken-window fallacy. Others generate normal policy predictions—small multipliers and costly broken windows. None produces our steady low-inflation slump as a “demand” failure.

These problems are recognized, and now academics such as Brown University’s Gauti Eggertsson and Neil Mehrotra are busy tweaking the models to address them. Good. But models that someone might get to work in the future are not ready to drive trillions of dollars of public expenditure.

I think that’s obviously right but, sadly, while correctly characterizing the past it doesn’t show a way forward. He goes on to critique Brad DeLong, Lawrence Summers, etc. for wanting to return to Keynes’s actual policy prescriptions. In my view their basic mistake is in not wanting to return to them enough since they continue to long for a federal government that’s a consumer of last resort rather than Keynes’s view of the central government as the employer of last resort.

His prescription:

In the alternative view, a lack of “demand” is no longer the problem. Financial observers now worry about “reach for yield” and “asset bubbles.” House prices are up. Inflation is steady. The Federal Reserve evidently agrees, since it is talking about taper and exit, not more stimulus. Even super-Keynesians note that five years of slump have let physical and human capital decay, which “demand” will not quickly reverse. But we are stuck in low gear. Though unemployment rates are returning to normal, many people are not even looking for work.

Where, instead, are the problems? John Taylor, Stanford’s Nick Bloom and Chicago Booth’s Steve Davis see the uncertainty induced by seat-of-the-pants policy at fault. Who wants to hire, lend or invest when the next stroke of the presidential pen or Justice Department witch hunt can undo all the hard work? Ed Prescott emphasizes large distorting taxes and intrusive regulations. The University of Chicago’s Casey Mulligan deconstructs the unintended disincentives of social programs. And so forth. These problems did not cause the recession. But they are worse now, and they can impede recovery and retard growth.

I agree with that as far as it goes but, again sadly, it doesn’t go far enough. Even if by some miracle all of the issues complained about above were remedied, we’d still be left with the fundamental problems that we import too much, export too little, and don’t produce enough of what we consume.

But even getting to that point will be insurmountably difficult. Those who have become accustomed to subsidies including bankers, teachers, doctors, consumers of healthcare, and consumers of cheap imported goods will not relinquish their subsidies cheerfully.

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The Failure of the Hybrids

Judging from its slug, “‘Hobby Lobby’ and ‘Harris’ offer the same lessons”, I was prepared to disagree vehemently with Charles Lane’s latest column but after reading it I found I was in broad agreement with his basic point:

Conservatives are hailing the Supreme Court’s 5 to 4 rulings in Burwell v. Hobby Lobby and Harris v. Quinn as victories for liberty, religious in the former case and associational in the latter. Liberals say what the decisions have in common is the obliteration of worker rights.

I agree that the cases teach a similar lesson but would summarize it differently: Oh, what a tangled web we weave when first we channel government-subsidized social benefits through corporations and unions.

I think I would go farther. From Fannie Mae to Freddie Mac to the Federal Reserve to employer-provided healthcare insurance, an overarching theme of the last half dozen or so years has been the failure of public/private hybrids in fulfilling their basic mandates. That’s not to say they haven’t served any purposes whatever. They’ve enriched a few in the process of satisfying portions of their mandates. But they’ve sacrificed other portions of their mandates to the parts that most clearly bolster the continued enrichment of the few. In the Federal Reserve’s case under their care the largest banks have survived along with the enormous wages they pay while the smaller banks and employment (the ignored half of the Federal Reserve’s mandate) have been sacrificed.

There’s nothing wrong with ensuring that people have healthcare insurance or home loans or that banks are underwritten. Doing so with institutions that are part public and part private has been revealed to be inherently corrupting.

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The Breeding Ground

Michael Malone muses over why technological innovation is slowing:

For more than a half-century, big technology companies have led the way in inventing revolutionary products and services, from calculators to smartphones. Startups, meanwhile, have built upon those creations with innovations like peripheral devices and software applications. This was as true for the IBM 360 computer as it was for the Apple
iPhone.

But something fundamental has shifted in Silicon Valley. The emblematic event was Facebook’s February acquisition of the mobile messaging startup
WhatsApp for an astounding $19 billion. WhatsApp was barely five years old and had 55 employees. The question from one end of Silicon Valley to the other was: What possessed Facebook to spend that kind of money?

Surely there must be a method to Facebook CEO Mark Zuckerberg’s apparent madness. In fact, a strategy is emerging: In 2012, the social media giant bought Instagram for $1 billion. The number of Facebook users grew less than 4% last year, but the number of Instagram users jumped 23%. Millennials are getting bored with the website and abandoning the platform in far greater numbers than their parents—the kiss of death—are joining.

So Mr. Zuckerberg has two options: radically transform his current product (no small matter with the drag of 1.3 billion users), or buy the Next Big Thing. And the next one. Then the one after that.

It may prove a brilliant strategy. But it also means that Facebook, one of the most innovative companies of the past decade, now depends on purchasing the inventiveness of others.

If you want the volume of innovation that existed when Apple and Microsoft were founded, you should think about what’s changed since Apple and Microsoft were founded. We’re not subsidizing technology the way we used to. We’re importing most of the technological products that people buy. We’re importing numbers of foreign technology workers to push wages here down.

We’ve broadened intellectual property law considerably, giving established firms the weapons to crush upstarts and creating industries of intellectual property pirates.

Capital investment and the willingness to wait for it to bear fruit aren’t what they were then.

And, most of all, there are technology giants like Microsoft and Apple, ready to strangle start-ups in their cribs and people like Larry Ellison who buys companies just for the products, firing all of their employees.

The breeding ground for technological innovation is gone. Why are we surprised?

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Not Kidding

I think this is a point not mentioned frequently enough. Many of us are sufficiently secularist that we think that people having religious objections to something is just a pose.

But that’s not the case. There are many, many people in the world who have actual religious principles and religious scruples. It doesn’t matter if they’re wrong, ignorant, misinformed, etc. They’re not kidding and that’s the reality on the ground.

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Bouncing Back

You might want to check out this interview with Singapore’s prime minister at Politico. I wish more Americans and, especially, American politicians were as optimistic about America’s prospects as he is. Here’s the conclusion:

SG: When you go around to Beijing and the other capitals in the region, what are they misunderstanding about the United States? I think there is a question about whether China is betting on American decline, for example.

PM: Many of them don’t realize how resilient the United States is, and they think that after the global financial crisis, you are done for, and well, suitable obsequies will be spoken, and then a new power will rise. But I’ve told them that is not so and it’s a very resilient country and it has tremendous energy and creativity and drive, and it’s going to bounce back. It may be now tired of wars and battles, but it will come back; it has done so before. I think there’s also a perception in China particularly that America is trying to circumscribe it, restrict it, even contain it from taking its rightful place in the world. I don’t think any American leader wants to do that.

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What Do You Want Judges to Do?

The outrage du jour is over the Supreme Court’s decision in the Hobby Lobby case which James Taranto summarizes here:

The majority, in a decision by Justice Samuel Alito held that Hobby Lobby and two other companies need not comply with the ObamaCare birth-control mandate, to which their owners object on religious grounds.

The plaintiffs in these cases did not claim their First Amendment rights had been violated; such a claim, as we noted in March, would almost certainly have been precluded by the 1990 case of Employment Division v. Smith. But Congress responded to that case by enacting RFRA, which mandates the courts apply “strict scrutiny” to government policies as enforced against litigants who object on religious grounds.

In order to meet strict scrutiny, the government must show both that the policy is justified by a “compelling” interest and that it is the “least restrictive means” of furthering that interest. At least five justices seemed to agree that the interest in assuring cost-free access to the abortifacient contraceptives in question is “compelling”: the four dissenters and Justice Anthony Kennedy, who in a concurring opinion wrote: “It is important to confirm that a premise of the Court’s opinion is its assumption that the HHS regulation at issue here furthers a legitimate and compelling interest in the health of female employees.”

In their acerbic response the editors of the New York Times get the law and the facts wrong from the first sentence:

The Supreme Court’s deeply dismaying decision on Monday in the Hobby Lobby case swept aside accepted principles of corporate law and religious liberty to grant owners of closely held, for-profit companies an unprecedented right to impose their religious views on employees.

As I mentioned when the case was first accepted by the Court, that closely-held private corporations serve as alter egos of their owners is the prevailing view in corporate law and this case is only controversial in its subject matter rather than its outcome.

I have read the majority decision and Justice Ruth Bader Ginsburg’s dissent. If I understand Justice Ginsburg’s position, it hinges on corporations not being mentioned in the Religious Freedom Restoration Act of 1993 (which I’ve also read). Justice Ginsburg’s view strikes me as novel. If it were applied, say, to the First Amendment, it would mean that freedom of the press does not apply to the New York Times Company, the Tribune Company, or News Corp., all for-profit corporations. I think that RFRA, enacted by a Democratic House and Senate and signed into law by a Democratic president, means what its plain language says: it’s a limitation on the power of legislatures and executives to craft laws or regulations that limit the free exercise of religion without a compelling interest and only then by the least restrictive means. Since there are plenty of approaches the Obama Administration could exercise to achieve the same goal including compelling insurance companies to include contraceptives at no additional charge, clearly compelling employers is not the least restrictive means.

In my view any ire should be directed, as usual, against the Congress rather than against the Court and the remedy that foes of the Hobby Lobby decision should be seeking should be revisions in RFRA. The editors of the Washington Post come closer to that stance:

If this is the sort of balancing that the Supreme Court will conduct, Congress should change the law. The Constitution generally does not require religious exceptions to generally applicable laws. The ruling relied on the Religious Freedom Restoration Act, a statute that does not mention corporations and that lawmakers could easily narrow. They should not only guarantee contraception coverage but also repair the federal government’s ability to provide for wholly legitimate common goods such as public health and marketplace regulation.

Eugene Volokh defends the decision:

Likewise, the Hobby Lobby owners drew a line: Providing health insurance — including through their closely held corporation — that covers what they see as tools for homicide is sinful complicity with sin. Providing salaries that employees may use to buy the same tools or hiring employees who use those tools is not.

Many of us might draw the line elsewhere (even if we agreed with the judgment that the potentially implantation-preventing contraceptives are sinful). But it is for the owners of Hobby Lobby to draw the line and not for the courts to second-guess it. Perhaps there is a compelling interest that justifies the substantial burden that the law imposes on the owners — more on that later — but courts cannot say that the burden is insubstantial simply because they think the complicity is too attenuated.

And this position should look especially sensible, I think, given how wide an array of judgments our own American legal system has on the subject of complicity.

As might be expected the bitter argument in the blogosphere has revolved around the policy rather than the law. I don’t want to get into the policy here. The deeper questions are about the nature of law and what we expect judges to do.

If laws are the minimum standards of acceptable behavior and limited in their scope and applicability to their plain language, precedent, and the common law, then we should want judges who will try to discern that. If, on the other hand, laws are blank canvases on which our policy preferences are to be written, we want judges who will pursue those preferences zealously and are able to mask their advocacy as justicion.

The question that underpins the deeper questions is how can people with different beliefs, values, and preferences live together? There are two competing strategies. Either we can learn tolerance and forbearance or we can use compulsion.

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How and How Not to Redistribute Wealth

I wasn’t nearly as outraged by Casey Mulligan’s Wall Street Journal op-ed characterizing the late recession as the “Redistribution Recession” as I expected to be:

There were new mortgage-assistance programs. People who owed more on their mortgage than their house was worth could have their mortgage payments set at a so-called affordable level—in government-speak, that means that you pay full price for your house only if you have a job and earn money.

There were new rules for consumer bankruptcy, with special emphasis on the amount that consumers were earning after their debts were cleared.

All of these programs have in common that they, like taxes, reduce incentives to work and earn. The cornerstone of “The Redistribution Recession” is to quantify the sum total of these incentives and their changes over time. That’s what I call the marginal tax rate, by which I mean the extra taxes paid, and subsidies forgone, as the result of working. Waves of new programs increased the typical marginal tax rate from 40% to 48% in two years.

There is a real demand for this kind of redistribution. Helping people who are unemployed or with low incomes is intrinsically valuable. We like doing it, and we like knowing that a system of help is there if we need it.

I have a great deal of sympathy with the redistribution of income. However, I have the old-fashioned idea that we should redistribute from the rich to the poor rather than from the rich and almost rich to other people who are rich or almost rich or, worse, redistribution from the poor to the rich or almost rich which together form the bulk of the redistribution we have today.

That’s always been one of the conundrums of indebtedness relief, for example. It would redistribute from one group of the rich and almost rich to a different group of the rich and almost rich.

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Cycles

Robert Samuelson urges us to change the focus of our attention from the business cycle to the financial cycle:

The Great Recession has inflicted enduring economic damage. Business investment has lagged; many workers have dropped out of the labor force. By early 2014, calculates the BIS, U.S. gross domestic product — the economy’s output — was 13 percent below where it would have been if pre-crisis growth trends had continued. In Britain, the gap was 19 percent; in France, 12 percent; even Germany had a shortfall, 3 percent.

Conventional business-cycle analysis didn’t anticipate these steep losses. It also missed other features of the post-crisis economy. Unlike earlier recessions, countercyclical policies — especially low interest rates by the Fed and other government central banks — have only modestly helped recovery. Low rates fail if borrowers don’t want to borrow or lenders don’t want to lend.

It is flabbergasting to me that we could adopt a whole set of policies including housing and transportation policies, immigration policies, trade policies, and inheritance policies, all of which tend to benefit the upper middle class and wealthiest at the expense of the poor and struggling working people and be surprised when incomes are increasingly concentrated in fewer hands. A century ago the poor and the rich lived side by side, inheritance taxes made it harder for the rich to transfer their wealth to their children, imported goods were a tiny fraction of what we consumed, and poorly run or profligate businesses were allowed to fail.

Nowadays the upper middle class rarely see the poor, people with advanced degrees almost invariably marry other people with advanced degrees, and we subsidize banks and large companies. How far we’ve advanced@!

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Don’t Know Much About History

While I’m in a historical frame of mind, I should mention that I don’t think you can understand the early Baby Boomers very well if you don’t pick up some knowledge of the student radicalism of the 1960s. I find Hillary Clinton’s rather humorous scramble to be a “woman of the people” despite being a member of the top .5% of income earners is most easily understandable in that light.

If you’re not familiar with the phrase the “vanguard of the proletariat”, it refers to an idea from Marxist theory that the most class conscious and politically advanced members of the working class would form a vanguard that would lead the way to world revolution. We don’t just wear blue jeans today because they’re comfortable or because they look nice. We wear them to show solidarity with the workers and identify with them and, coincidentally, so that middle class college students could establish their bona fides as the vanguard of the proletariat.

That’s not to say that I think that Hillary Clinton is a Marxist. Far from it. She’s no more a Marxist than any of the rest of us are (I’ve got a post around here somewhere titled “We Are All Marxists Now”—all industrial or post-industrial economies are mixed economies and objectivists’ imaginings not withstanding I don’t think you can have a modern economy that’s not a mixed economy). But she came of age during a period in which a sort of romantic Marxism was the dominant strain thought among the young smart set, an attitude that’s come right down to today in the form of the image of Che Guevara you still see everywhere.

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Country, Identity, and Language

We don’t know very much about classical antiquity despite living in its ruins. Most of what we think we know is from romantic reconstructions dating from the early modern era.

However, I don’t think we can know even that if we don’t recognize the interrelationships amoung country, identity, and language in antiquity. “Egypt” is where Egyptian was spoken and it was spoken by Egyptians. “Rome” is where Latin was spoken and it was spoken by Romans. “Gaul” is where Gaulish was spoken and it was spoken by Gauls.

We can be pretty confident that Picts and Scots spoke different languages because the Romans distinguished between them and they would have made that distinction based on the language they spoke. My guess would be that the ancient Scots spoken a Goidelic language (like Irish or Scots Gaelic) while the Picts spoken a Brythonic language (like Welsh or Cornish) but that’s just a guess since we have no attestations of the Pictish language. It might have been a linguistic isolate (like Basque).

Now go back and read the Hebrew Bible. You’ll get a very different impression about stories, like say the “captivity in Egypt”. Just as a side note to the best of my knowledge the earliest attestation we have of Hebrew is that it was apparently spoken in a Persian fort about 2,500 years ago in Upper Egypt.

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