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Hume’s Turkey: A Tale of Thanksgiving.

Hume’s turkey like most turkeys lives on a farm. From the turkey’s perspective life is good. There are bad days: the weather might turn cold, the older turkeys might box him out from the best seeds and grass, a fox might get into the coupe. However, the farmer loves his turkey. The farmer keeps the coup, which protects the turkey from the weather. The farmer defends the turkey from the fox. The farmer makes sure the turkey gets enought to eat. The turkey is happy because the farmer loves him.

So, the turkey lives his life, carefree and without much thought for the future. The turkey has no way of knowing, based on his current experience, that one day he will be dinner. That is the problem with knowledge gained by induction, that is the turkey’s dillema. That is the risk of looking to the past as a predictor of what will be.

Bertrand Russell is credited with the idea of the turkey’s dillema in highlighting the holes in David Humes arguments about knowledge gained by induction.

Adapted from The Black Swan, by Nassim Taleb.

Epic Rap Battle? FDR vs Reagan.

In this entry I articulate my thoughts and feelings on domestic policy relating to the underpinnings of republican economic thought and the quantitative support for policy decisions.  I will discuss FDR’s ideas on the role of government in providing for the general welfare.  I will discuss Regan’s ideas on the same topic.  Finally, I will share a moderate position while reflecting on the ideas of both these men in light of my understanding of their enacted policies.

According to “FDR, A Presidency Revealed”, FDR believed in enabling the American people to contribute to the labor-force and protecting the right to work.  He envisioned government programs would lay a strong foundation for the continuation of capitalism and the free market because he valued the American people’s contribution as a vital input in the means of production.  He redefined liberalism; pushing the limits of constitutional powers granted the federal government.  The judiciary pushed back, declaring the newly created NIRA unconstitutional.  FDR attempted to pack the court with sympathetic judges, but lost public support.  His positions also regularly clashed with conservative businessmen of the time.  As President, FDR felt it was his role to stand up and fight for the underdog, who in his eyes consisted of the professional working class.  In 1943, it was clear from FDR’s GI Bill of Rights that he was interested in shaping the society that American troops would come home to.  He did not want American heroes to come home to bread lines and soup kitchens.

In his 1944 State of the Union Address, FDR makes the argument that to obtain true individual freedom we need the addition of economic rights for the public.  He bases this argument on two assumptions.  First he assumes that “individual freedom cannot exist without economic security and independence.”  He supports this assumption as self-evident: “Necessitous men are not free men”; “people who are hungry and out of a job are the stuff of which dictatorships are made.”  Secondly, he assumes that the assurance of equality in the pursuit of happiness is not guaranteed by political rights.  These two assumptions are the foundation for his conclusion that his economic bill of rights will secure the missing foundations required for freedom and liberty.  He defends this ideology with an appeal to goodness:  “We cannot be content, no matter how high that general standard of living may be, if some fraction of our people—whether it be one-third or one-fifth or one-tenth— is ill-fed, ill-clothed, ill-housed, and insecure.”

Regan also valued the American people’s contribution to the free market.  He believed that people should be free to pursue their private interest and that government’s role is to support this function.  Regan championed the paradigm of supply side economics in the 80’s resulting in the portmanteau reganomics.  His domestic policy can be divided into three parts, each a core tenant of supply side economics: reduce income tax and capital gains tax, reduce government regulation, and reduce the growth of government spending.  Regan’s inaugural speech spoke to each of these tenants.

Lower taxes.  Regan argued that all of us together must bear the tax burden.  He stated that, “those who work are denied a fair return for their labor by a tax system which penalizes successful achievement and keeps us from maintaining full productivity.”  This policy has its basis in the Laffer tax model.  Simply stated, at the extremes of a 0% and 100% tax rate the government would not collect any taxes; Laffer concluded that in-between there would be a positive amount of tax receipts and that mathematically there must be at least one maximum point with an associated optimal tax rate.

Unregulated free trade and free markets.  Regan chided his opponents for their temptation in believing “that society has become too complex to be managed by self-rule.”  He reasoned, “if no one among us is capable of governing himself, then who among us has the capacity to govern someone else?  In this area Regan relies on the principles of supply side economics which encourages individual initiative and entrepreneurship unfettered by government regulation.

Privatization.  Regan argued that government, like a household,  should live within its means: “Why, then, should we think that collectively, as a nation, we are not bound by that same limitation?  He believed in the private sector: “all must share in the productive work . . . and all must share in the bounty.”  Lastly, he channeled Locke’s ideas that our government has no power except that power that we give it.  He reminded the nation, “the Federal government didn’t create the states; the states created the federal government.”

I don’t care much for political rhetoric.  I am more persuaded by quantifiable results.  For example, I am persuaded by the theoretical and social principles of supply-side economics.  The Laffer model makes logical sense.  However, these models simply lack the support of empirical data; attempts to estimate an optimal tax rate vary greatly (Hsing, Pecorino, Stuart).  For all his effort, FDR’s programs did not end the depression.  However, there is anecdotal evidence that they helped people facing difficult choices.[1]

I agree with FDR that there are basic economic rights that need to be universally available.  First, it is my moral imperative.  Second, it is democratic.  Third, it is sound policy for the long term economic strength of the nation; I submit Bernake’s expertise on the Great Depression and his response to the great recession as evidence.  I believe in three of FDR’s economic rights: the right to a good education, the right to adequate medical care, and the right of every family to a decent home.

However, personal development and freedoms would be lost if the remaining rights enumerated in FDR’s Economic Bill of Rights could be demanded as a matter of right.  There is something to be gained in the pursuit of happiness; it is the equal opportunity of this pursuit that must be protected.  Conversely, I challenge his first assumption; there will always be a portion of society that exercises their freedom to be necessitous.  I submit this based on my experience working with the homeless population in New York City.  This idea balks at basic economic assumptions about material goods affect on utility and the nature of choice.

I identify with Republican ideas of fiscal and moral conservatism and I am concerned because the leadership doesn’t support the brand.  This is important because many voters use party affiliation to vet political candidates.  I am troubled by Regan’s deficit spending because it diverges from his political stance and I submit demonstrates a lack of integrity.  Republicans are branded as fiscally responsible but, deficit spending raises questions.  One question that I am now researching is if reganomics has subverted the economic landscape at the expense of small businesses and professionals in order to secure wealth in the hands of the few.  Evidence of this would support the spirit of FDR’s big government policies.

I have touched on two points at the heart of my thoughts and feelings on spectrum of political ideas including those of FDR and Regan.  I would have liked to further explore the empirical evidence for supply-side economics as this is the basis for Regan’s policies.  As such, I have only included a high level summary.   I would also have like to develop a deeper exploration of Bernanke’s ideas on the great depression and how this informed his response to the financial crisis of 2008.  As such, this paper really only serves as a starting point.

Work Cited

FDR: A Presidency Revealed. History Channel. Youtube, 2009. Streaming

Hsing, Y. (1996). “Estimating the Laffer curve and policy implications”. Journal of Socio-Economics 25 (3): 395–401. doi:10.1016/S1053-5357(96)90013-X. Retrieved 2009-04-21

Pecorino, Paul (1995). “Tax rates and tax revenues in a model of growth through human capital accumulation”. Journal of Monetary Economics 36 (3): 527–539. doi:10.1016/0304-3932(95)01224-9

Stuart, C. (1981,October). Swedish tax rates, labor supply and tax revenues. Journal of Political Economy, 89, 1020-38.

Roosevlet, Franklin. “The Economic Bill of Rights.” 1944 State of the Union Addresss.  Congress, Washington D.C. 28 January 11th,  1944.

Regan, Ronald. “First Inaugural Speech.”  1981 Inauguration of the President.  Washington D.C. January 20th, 1981.
[1] The plural of anecdote is not data.

naked economics: UNDRESSING THE DISMAL SCIENCE: “Keeping Score” / “Development Economics”

This essay discusses Mankiw principles seven and eight: governments can sometimes improve market outcomes; a country’s standard of living depends on its ability to produce goods and services.  It illustrates these principles with examples and examines conclusions the author has drawn.  Two are singled out for further thought beyond the author’s scope.

 

KEEPING SCORE: A country’s standard of living depends on its ability to produce.

In Chapter 7, Wheelan’s thesis is that a country’s standard of living depends on its ability to produce goods and services.  This thesis is developed through an explanation and defense of GDP as an indicator of a nation’s prosperity.  He draws several conclusions to support this.

The first is that “any measure of economic progress depends on how you define progress. GDP just adds up the numbers.  All else equal, it is better for a nation to produce more goods and services than less (p. 155).”  He illustrates this with an example of how the real cost of goods decreases with time despite inflation raising the nominal cost.  He does this by measuring the real cost of living in time, the time it takes to earn the money equivalent to the price of the goods.  Thus, in 1900 it cost one hour and forty-one minutes of labor to purchase a pair of stockings. Today, it costs 18 minutes of labor to purchase a pair.

The second conclusion, GDP reflects more than just a number; “When GDP turns negative, the damage is real: jobs lost, businesses closed, productive capacity turned idle (p. 156).”  He illustrates the significance of India’s per capita GDP of $440.  In India there are 500,000 cases of leprosy.  The medication to cure leprosy only costs $3 and is provided for free by the World Health Organization.  However, their health care network is not structured to effectively diagnose and administer the medication.

 

DEVELOPMENT ECONOMICS: Governments can sometimes improve market outcomes.

Why does half the world’s population live on less than $2 a day?  In Chapter 12, Wheelan’s thesis is an answer to this question; “their economies have failed them.”  He goes on to show “that government can sometimes improve market outcomes (Mankiw 7)”, and conversely when economies fail their people so do governments.  Wheelan draws several more conclusions, based on his second thesis.

The first, “Excessive regulation goes hand in glove with corruption (p. 211).”  Harvard economist Robert Barro has found that government consumption, excluding education and defense, is negatively correlated with per capita GDP, (p. 211).  A less benign corollary is that excessive regulation allows for government officers the opportunity to take bribes from those seeking a way around the regulation. Hernando De Soto’s documented study of opening a business in Peru revealed that it was impossible to start a business legally without bribes. The process was exhaustive and posed a significant barrier to entry in the Market. (p. 211)  Governments interference stifles growth in this case.

His second conclusion, informal property rights render real estate property less productive, (p. 210).  This means that real property cannot be collateralized.  This stifles growth.  The Economist tells such a story of a Malawian business that cannot raise capital to grow its business despite their “ownership” of a home that would cover the cost.  De Soto reports that such situations result in $9 trillion in uncollateralized real property. (p. 210)  If government would formalize property rights then citizens would be able to collateralize real property stimulating their economies.  Drawing a parallel between these two conclusions shows that government must balance its role.

 

SUPPORT FOR FORMAL PROPERTY RIGHTS

            De Soto’s argument support reform for formalized property rights.  Wheelan doesn’t directly discuss why this issue persists.  There must be reasons, possibly such as protectionist logic or politics.  At the heart of the issue could be that if property is leveraged to incur debt it would be possible for foreign micro lenders to foreclose on the property in the case of default.  Clearly foreign investors would have an advantage.  Even with formal property rights land still belongs to government.  To illustrate lets assume that an owner of land in the US stops paying taxes on that land.  The property will be seized.  Data that would flesh this out would be valuable to De Soto.  Show the benefits through an analysis comparing the benefit to the risk.  Fundamentally the benefit must outweigh the risk because real property cannot be exported to another country. 

CHALLENGING GDP AS A MEASURE OF OUR COLLECTIVE WELL-BEING

GDP is a good measure of a countries standard of living because it directly measures production.  A country’s standard of living depends on its production, Mankiw 8.  GDP like any statistic has its limits; Wheelan sympathizes with other social scientists, he illustrates GDP’s shortcomings. He explains alternatives to the use of GDP as a measure of our standard of living such as, “Bennett’s index of leading cultural indicators”, the United Nation’s “Human development index” and Miringhoff’s “social health index” (p. 155). He subtly points out that any measure is a statistic and has limitations. He doesn’t however go on to explain that GDP is an actionable statistic as opposed to these other indexes. He could highlight the direct, causal, relationship between production and standard of living. Allso these other measures are direct or causal. They measure symptoms not causes.

In summary, this essay showed that governments can sometimes improve market outcomes and a country’s standard of living depends on its ability to produce goods and services. It illustrated these principles using as examples: the real cost of goods measured in time, India’s per capita GDP, De Soto’s research in real property and his study of corruption in government. It looked at several conclusions that Wheelan drew, specifically: GDP is a good measure of a countries standard of living because it directly measures production, GDP reflects more than just a number, excess government regulation leads to corruption, however, informal property rights hinder development.  It drew parallels between positive and negative government interaction.

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naked economics: UNDRESSING THE DISMAL SCIENCE: “Power of Organized Interests” / “The Federal Reserve.”

This essay discusses Wheelan’s use of Mankiw principles seven and nine: governments can sometimes improve market outcomes (Mankiw 7), and that prices rise when the government prints too much money (Mankiw 9). It illustrates these principles with examples, examining four distinct conclusions the author has drawn. Of these two are singled out for further thought beyond the author’s scope.

THE POWER OF ORGANIZED INTEREST: Government can sometimes improve market outcomes.

In Chapter 8, Wheelan’s thesis is that Government can sometimes improve market outcomes, and sometimes they cannot. This thesis is developed through an exploration of the role of special interest groups and their influence in government. Wheelan draws several conclusions to support this.

His first conclusion is that occupational licensure is a result of special interest groups desire to set up barriers to entry for other seeking to enter the occupation: “The best predictor of whether or not a professional is licensed in Illinois is the size and budget of its professional associations (p. 143).” He cites teacher certification and the teacher’s union. The union is always strongly in favor of teacher certification that enforces rigorous testing and scrutiny for teachers. However, that same policy exempts existing teachers from needing to recertify. This is illogical at best, even disingenuous, as Wheelan states, “If doing certain things is necessary in order to teach, then presumably anyone standing at the front of a classroom should have to do them.” (p. 142)  He argues that the real motive for the licensure is to create a barrier to entry in the teaching profession.  This is good for existing teachers but, not for the education market.

The second conclusion is that we are the special interest groups. He argues that each of us belongs to some group that is unique. Examples of such groups are developed from professions, ethnicities, demographics, or neighborhoods. Wheelan cites an old saying, “Where you stand depends on where you sit (p. 147).” From an economic standpoint it is easier for the countless masses to pay a few extra cents in taxes to be used for the benefit of the relative few. As a result, “the democratic process will always favor small, well organized groups at the expense of large diffuse groups (p. 147).”  This is good for the special interest group but, not for the whole of the governed.

THE FEDERAL RESERVE: Prices rise when the government prints too much money.

Wheelan states point of fact that, “the Federal Reserve controls the money supply and therefore the credit tap for the country (p. 168).” He goes on to illustrate that “prices rise when the government prints too much money. (Mankiw 9)” He shows that if interest rates are too low then prices will rise but, GDP will ‘hit a wall’. (p. 170) This by definition is inflation. Wheelan draws several more conclusions, based on his second thesis.

The first, conclusion is that the great depression was the result of botched monetary policy. The Fed did not intervene as the money supply dried up. Money was hoarded; banks failed and people lost confidence in the banking system. This meant that there were no deposits available for loans. (p. 186) Nobel Prize winner, Robert Mundell, argued that monetary policy in the 1920s led to the great depression, and by extension, the Nazi revolution and World War II. The reason, central banks choose to adhere to gold standard in light of the falling price of gold. They should have chosen a policy emphasizing price stability.  Thus, the severity of the Great Depression could have been reduced.

His second conclusion, is that governments can cut their own debts by purposefully causing inflation. His argument is based on three logical points. First, governments often have large debt particularly when facing difficulties. Second, inflation favors debtors as it erodes that value of money they must pay back. Third, government controls the inflation rate. A small unstable government may deliberately cause inflation as a short term solution to buy time. (p. 182) This is not always the motivation. In 1980, US inflation climbed from 3%, in 1972, to 13.5%. Paul Volcker, lead the Fed to raise interest rates to 16%. This resulted in the recession of 1981-82, GDP shrunk by 3% and unemployment climbed to 10%. By 1983 inflation was back to 3%. (p. 172) So governments can intentionally cause inflation.

SUPPORT FOR SPECIAL INTERESTS

We are the special interest groups: “Where you stand depends on where you sit (p. 147).” In addition to an economic standpoint, from a mathematical standpoint it is easier for the general population to pay a few extra cents in taxes to be used for the benefit of the relative few. As a result, “the democratic process will always favor small, well organized groups at the expense of large diffuse groups (p. 147).” Holding all of these as true, maybe the problem is that there are too few special interests groups. Maybe we needs more. Data that models the effect of larger segments of the population organizing into a variety of burgeoning special interest might be quite informative in demonstrating how democracy would become more democratic from the increase in varied coordinated voices.

CHALLENGING MOTIVATION FOR GOVERNMENT INSTIGATION OF INFLATION

Governments can cut their own debts by purposefully causing inflation for the reasons that Wheelan stated earlier. In Wheelan’s example the government printed money and paid its citizen’s with this money. In this respect Wheelan is right. However, what if this nation owes a debt to the IMF, the World Bank or the US? These loans are likely payable in U.S. dollars. In this instance inflating the local currency would not affect their responsibility to this debt. It is rare that a country could secure a loan payable in their own currency.  Data that would further support this would be a breakdown of government debt and it’s debtors.

In summary, this essay showed that governments can sometimes improve market outcomes (Mankiw 7), and that prices rise when the government prints too much money (Mankiw 9). It illustrated these principles using as examples: occupational licensing as encouraged by the teacher’s union, special interest group, since where we stand depends on where we sit, fouled monetary policy and the great depression, and Paul Volker’s anti inflationary monetary policy that lead to the recession of 1981. It looked at several conclusions that Wheelan drew, specifically: support for the special interests and challenging motivation for government instigation of inflation. It drew parallels between the motives for government to purposefully instigate inflation.

New Ideas from Dead Economists: Milton Friedman

Milton Friedman’s major contributions to economic science.

 

            Friedman’s major contribution to the science of economics is his defense and argument for the quantity theory of money.  This theory argues that the quantity of money available determines the price level and the value of money.  It is a direct cause of inflation.  More money available in the market drives the price level up and the value of money down.  The devaluation of money is inflation. 

Friedman was a passionate debater who fought the Keynesian model.  Friedman had long held philosophical position that the true test of a theory is whether it correctly predicts events.  On this base Friedman argued two main points.  In an analogy, if an economy were a car government is usually a lousy driver.  In direct contrast to the Keynesian position, he argued the economy’s brake and accelerators have little to do a fiscal policy. 

He started an intellectual movement whose beliefs are encapsulated in monetarism.  Monetarism asserts that that changes made to the money supply are most material in the business cycle and in long run.  In the short run money can sway is not just prices but also economic activity. In the long run money supply only changes price.  Monetarists believe the economy’s accelerator is ‘a higher money supply’ and the economy’s brake is ‘lower money supply’.  According to, A Monetary History of the United States, ineffective monetary policy accompanied every severe recession and every significant inflationary period over the past and century (page 242).  The Federal Reserve is responsible for monetary policy.  The Fed affects the money supply through open market operations, the discount rate, and the reserve ratio.  They effectively hold the reigns of the economy.

He also worked on the idea of money velocity or how fast money changes hands in an economy.  The rate at which the money stock turns over each year is called the velocity of money.  Monetarists believe That velocity is stable, Keynesians see is unstable.  Historical data supports the monetarist position; as nominal GDP and the money supply increase velocity has stayed constant.

 

New Ideas from Dead Economists: Maynard Keynes

Maynard Keynes’s major contributions to economic science.

 

Keyenes most significant work, The General Theory of Employment, Interest, and Money, .

Samuelson who introduced generations to Keynesian Economics said, it was, “a work of genius (p 214).”

It was very critical of his economic predecessors and colleagues. He directly attacks Say’s Law which states that producing goods provides workers with enough income for all goods to be purchased. Therefore resulting in zero surplus. If income was saved and not spent on goods then the savings would be utilized for business investment which would make up the difference. In the instance that investment didn’t make up the difference a recession would ensue but, the resulting drop in prices and wages would soon end it. This is the classical school of economics. Keynes did not believe that saving equaled investment. He argued that savers and investors do so for various reasons. He also argued that in a recession workers who are laid off are unable to save and businesses are reluctant to invest.

Keynes provided an alternate school of thought and a solution. Keynes introduced the idea of marginal propensity to consume; a number that indicates a persons likeliness to spend an extra dollar. He used this to develop a formula for his keynesian multiplier. His idea was that any increase or reduction in production will produce a multiplier effect that magnifies the change by a factor of the multiplier which is based on the aggregate MPC. His solution was for government to spend public resources so as to fill the gap left by consumption and investment.

He created an entirely separate school of thought. People who identify with this school are considered Keynesian. This theory is characterized by a belief that private economy may not reach full employment and that public spending by the government can fill the void. (p. 207)

The Economics of Economics Blogs

The Gist:  If you are a professor, the takeaway is that you want to have a department blog that you contribute to unless you are a prolific publisher with a horde of minions to do your bidding.

If you are a consumer of economic literature, you are not alone. Here is a list of econ blogs to start you off (google it).

Development Impact

Freakonomics.com

Chris Blattman

NYT’s Economix

Marginal Revolution

Paul Krugman

The Statistic: Blogging about a paper causes a large increase in the number of abstract views and downloads in the same month: an average impact of an extra 70-95 abstract views in the case of Aid Watch and Blattman, 135 for Economix, 300 for Mararginal Revolution, and 450-470 for Freakonomics and Krugman.

The Article: The Economics of Economics Blogs:

Last week, the World Bank blog Development Impact wrote about the influence of economics blogs on downloads of research papers. It included Freakonomics.com, as well as 5 other blogs — Aid Watch, Chris Blattman, NYT’s Economix, Marginal Revolution, and Paul Krugman. Using stats from Research Papers in Economics, it found spikes after blogs cover a paper. For us, they found that when we blogged a paper, there was an additional 450-470 abstract views and downloads that month. Check out their cool graph:

(Courtesy of Berk Ozler and David McKenzie)

This is part of a series Development Impact is doing on economics blogs. Part Two is on whether a blog increases the blogger’s profile and whether that effects policy. Part Three, just posted on Sunday, measures the causal impact of econ blogs by “using a variety of data sources and empirical techniques, we feel we have provided quantitative evidence that economic blogs are doing more than just providing a new source of procrastination for writers and readers.”

So there you go, from the World Bank itself. Freakonomics.com, changing the world one abstract at a time.