Tuesday, June 30, 2015

13 distinguished economists (including one Nobel Prize winner) say Greece needs free market reforms

See What Greece needs by Scott Sumner.
"Yes, Greece should never have joined the euro.  But what about today?  What is their best option?  A letter written by 13 distinguished (Greek?) economists (including one Nobel Prize winner) is highly critical of the Syriza approach, and instead calls for neoliberal policy reforms.  Here’s an excerpt:
A Grexit and move to a new drachma would be a complete disaster for Greece. The banks would collapse as depositors would withdraw their euros not knowing whether they would be able to withdraw them later and at what exchange rate.
.  .  .
What would be crucial elements of a good agreement? Besides the fiscal issues of balancing the budget and making pensions proportional to contributions, a good agreement should emphasize microeconomic reforms. It should greatly simplify the procedures for running a business in Greece and reduce business taxes, in order to attract investment and create a productive, export-oriented sector, new jobs, and debt-repayment potential. It should reduce the huge and inefficient state sector that weighs down on the private sector and the taxpayers. The procurement mechanisms of the state should become competitive. Greece should proceed with privatization of trains, airports, ports, and the energy sector. The “closed sectors” of the economy (such as pharmacies and transportation) should be opened to competition. The labor market should be liberalized and the state should crack down on the underground economy that pays no taxes and no pension contributions.
Finally, an agreement must restructure the Greek sovereign debt to European countries and the European Stability Mechanism. Keeping the nominal value constant, the best way to restructure the debt is to elongate its maturities. If maturities are moved to 75 years and the presently variable interest rates are converted to fixed ones and slightly reduced, the net present value of the debt will be reduced by 50 percent. A 10-year grace period (during which interest is not paid but recapitalized) with the money saved invested would promote growth.
Growth is, in fact, the only guarantee that Greece will pay its debts.
Written by:
Marios Angeletos, MIT
George Constantinides, University of Chicago
Haris Dellas, Universitat Bern
Nicholas Economides, New York University
Michael Haliassos, Goethe University Frankfurt
Yannis Ioannides, Tufts University
Costas Meghir, Yale University
Stylianos Perrakis, Concordia University
Manolis Petrakis, University of Crete
Chris Pissarides, Nobel Laureate, London School of Economics and University of Cyprus
Thanasis Stengos, University of Guelph
Dimitris Vayanos, London School of Economics
Nikos Vettas, Foundation for Economic and Industrial Research; Athens University for Economics and Business
My own view is that Greeks should vote yes on Sunday to get rid of Syriza.  The new government should implement aggressive neoliberal reforms.  If that’s not possible, then perhaps they should leave the euro.  But only after attempting a supply-side solution first."

Technology, consumerism and the pope

From Matt Ridley. Excerpt:
"Compared with 50 years ago, people now live 30 per cent longer; have 30 per cent more food to eat; spend longer in school; have better housing; bury 70 per cent fewer of their children; travel more; give more to charity as a proportion of income; are less likely to be murdered, raped or robbed; are much less likely to die in war; are less likely to die in a drought, flood or storm.

The data show a correlation between wealth and happiness both within and between countries and within lifetimes. Global inequality has been plummeting for years as people in poor countries get rich faster than people in rich countries. The vast preponderance of these improvements has come about as a result of innovation in technology and society.

So what precisely is the problem with technology that the Pope is complaining about? He cannot really think that life’s got worse for most people. He cannot surely believe that the dreadful suffering that still exists is caused by too much technology rather than too little, because surely he can see most of the suffering is in the countries with least technology, least energy, least economic growth, and most focus on ideology and superstition. Do Syria, North Korea, Congo and Venezuela have too much consumerism?

“Obsession with a consumerist lifestyle . . . can only lead to violence and mutual destruction,” says the encyclical. Really? Only? If you hear of an atrocity in a shopping mall, do you immediately think of consumerism or religious fanaticism as the more likely cause? There is no mention in the encyclical of the suffering caused by fanaticism, totalitarianism or lack of technological progress — of the four million who die of indoor smoke from cooking over wood fires, for example.

Yet the Pope is exercised about the dangers of genetically modified food, for although he admits, “no conclusive proof exists that GM cereals may be harmful to human beings”, he thinks “difficulties should not be underestimated”. This in a world where golden rice, a genetically modified cereal fortified with vitamin A, could be preventing millions of deaths and disabilities every year, but has been prevented from doing so entirely by fierce opposition from the environmentalists the Pope has now allied himself so closely with."

Monday, June 29, 2015

In NY City, “homes are expensive in high-cost areas primarily because of government regulation” that imposes “artificial limits on construction.”

See This Is the Housing Market You Wanted, Hillary Clinton Staffers By David Boaz of Cato. 
"The New York Times reports:
For decades, idealistic twenty-somethings have shunned higher-paying and more permanent jobs for the altruism and adrenaline rush of working to get a candidate to the White House. But the staffers who have signed up for the Clinton campaign face a daunting obstacle: the New York City real estate market….
Mrs. Clinton’s campaign prides itself on living on the cheap and keeping salaries low, which is good for its own bottom line, but difficult for those who need to pay New York City rents….
When the campaign’s finance director, Dennis Cheng, reached out to New York donors [to put up staffers in their apartments], some of them seemed concerned with the prospective maze of campaign finance laws and with how providing upscale housing in New York City might be interpreted.
Here are some words that don’t appear in the article: rent control, regulation, zoning. But those are among the reasons that housing is expensive in New York. As a Manhattan Institute report noted in 2002:
  • New York City and State have instituted policies that severely distort the dynamics of housing supply and demand. Only 30 percent of the city’s rental units, for instance, are subject to market prices. These distortions—coupled with Rube-Goldbergian environmental and zoning regulations—have denied New York the kind of healthy housing market enjoyed by most other major cities.
And a report by Edward Glaeser and Joseph Gyourko for the Federal Reserve Board of New York Economic Policy Review suggests that “homes are expensive in high-cost areas primarily because of government regulation” that imposes “artificial limits on construction.”

As I’ve said in other contexts: This is the business you have chosen. If you want the government to control rents and impose regulatory costs on the building of housing, then you can expect to see less housing and thus more expensive housing. Welcome to your world, Hillary Clinton staffers."

For many decades, Italy has been doing the things that American progressives would recommend, pouring lots of fiscal stimulus into the south, to build up the economy. But nothing seems to work.

See Europe's soft underbelly by Scott Sumner of EconLog.
"When Americans think about inequality, it is often linked to ethnic differences. Sometimes that's also true in Europe (as with the Roma), but more often the inequality is regional. Perhaps the starkest example lies in Italy, where even in 2007 the south lagged far behind the north. Since then, things have only gotten worse:
Screen Shot 2015-06-28 at 2.31.03 PM.png

According to the Economist, in some respects the mezzogiorno is doing worse than Greece:
The country is, in effect, made up of two economies. Take that 2001-13 stagnation. In that period northern and central Italy grew by a slightly less miserable 2%. The economy of the south, meanwhile, atrophied by 7%. 
This is partly because the south grew more slowly than the north before the financial crisis. But the main source of the divergence has been the south's disastrous performance since then: its economy contracted almost twice as fast as the north's in 2008-13--by 13% compared with 7%. The mezzogiorno--eight southern regions including the islands of Sardinia and Sicily--has suffered sustained economic contraction for the past seven years. Unicredit, Italy's biggest bank, expects it to continue this year. The Italian economy is both weaker and stronger than it appears, depending on the part of the country in question.
Of the 943,000 Italians who became unemployed between 2007 and 2014, 70% were southerners. Italy's aggregate workforce contracted by 4% over that time; the south's, by 10.7%. Employment in the south is lower than in any country in the European Union, at 40%; in the north, it is 64%. Female employment in southern Italy is just 33%, compared with 50% nationally; that makes Greece, at 43%, look good. Unemployment last year was 21.7% in the south, compared with 13.6% nationally. The share of northern and southern families living in absolute poverty grew from 3.3% and 5.8% respectively in 2007, to 5.8% and 12.6% in 2013.
Downward pressure on demand is exacerbated by the south's lower birth rate and emigration northward and abroad. The average southern woman has 1.4 children, down from 2.2 in 1980. In the north, fertility has actually increased, from 1.4 in 1980 to 1.5 now. Net migration from south to north between 2001 and 2013 was more than 700,000 people, 70% of whom were aged between 15 and 34; more than a quarter were graduates. Marco Zigon of Getra, a Neapolitan manufacturer of electric transformers, says finding engineers in Naples, or ones willing to move there, is becoming ever harder. According to Istat, Italy's statistical body, over the next 50 years the south could lose 4.2m residents, a fifth of its population, to the north or abroad.
In one important respect southern Italy is different from Greece. Like eastern Germany, southern Italy is part of a larger and more prosperous fiscal union. For many decades, Italy has been doing the things that American progressives would recommend, pouring lots of fiscal stimulus into the south, to build up the economy. But nothing seems to work. Indeed from Greece to Italy to southern Iberia, the entire southern tier of Europe is doing quite poorly. But why? And what can America learn from the failure of Italian policies aimed at boosting the mezzogiorno?
American progressives will sometimes argue that we have much to learn from the successful welfare states in northern Europe. Perhaps that's true. But I'd have a bit more confidence in that claim if they could explain what we have to learn from the failed welfare states in southern Europe. Indeed I'd have more confidence in progressive ideas if they even had an explanation for the failed welfare states of southern Europe. But I don't ever recall reading a progressive explanation. Indeed the only explanations I've ever read are conservative explanations, tied to cultural differences.

PS. The mezzogiorno has roughly 1/3 of Italy's 60 million people, making it almost twice as populous as Greece. In absolute terms, incomes there (17,200 euros GDP per person in 2014) are far lower than among American blacks or Hispanics. In contrast, GDP per person in northern Italy was about 31,500 euros in 2014. And while the gap between eastern and western Germany is narrowing, the gap in Italy is widening. Why?"

Why are market-based wages superior to government-mandated minimum wages? There are many reasons, here are three

From Mark Perry.
"Here are three reasons that market-determined wages for unskilled, low-skilled and limited-experienced workers are superior to government-mandated minimum wages.

Market-determined wages: 1) are based on the unique market forces of supply and demand for entry-level workers that prevail in an individual geographical location and for a specific industry, 2) can easily be adjusted up or down dynamically in response to changes in market conditions for a given geographical area or for a given industry, and 3) require no costly bureaucratic enforcement mechanism. In contrast, government-mandated minimum wages: 1) are set arbitrarily based on political considerations, 2) remain fixed and static for long periods of time, and 3) require a costly enforcement bureaucracy. Here are more details of those three important differences that help us understand why market wages should be preferred to government-mandated minimum wages:

1a. Market Wages Reflect Economic Reality: When the Walmart in Williston, North Dakota advertises starting wages of $17 per hour (see photo above that I took on my recent Bakken trip), those wages are offered based on the market conditions for unskilled, limited-experience workers in that unique labor market. As an employer, Walmart is competing against dozens of other retailers who also seek to hire unskilled workers. In a competitive labor market like Williston, wages of $17 per hour emerge as competitive, market-determined wages based on the interaction of the demand for low-skilled workers and the supply of low-skilled workers for those labor markets at a given point in time. In other words, those wages, which are more than double the state minimum of $7.25 per hour in North Dakota and higher than the recently passed $15 minimum wages in Seattle, San Francisco and Los Angeles, have emerged to reflect unique local labor market conditions and market forces, and were not determined arbitrarily or randomly.

b. Government Wages Ignore Economic Realities and Instead Reflect Politics. I am not aware of any case of a new city minimum wage law being enacted (for example, $15 per hour in Seattle, San Francisco or LA), or a case of the federal minimum wage being increased, when the new government-mandated wage was determined based on any economic, scientific, or logical basis, or when some rigorous cost-benefit analysis was used to conclude that a $10.10 per hour or $15 per hour minimum wages generates the most benefits with the least costs. In almost every case, a minimum wage by government fiat is determined arbitrarily using the PFA method: “plucked from the air.”

For example, why a $10.10 per hour minimum wage as proposed by the Democrats and Obama with the Fair Minimum Wage Act? Well, according to Obama, one reason for a $10.10 an hour minimum wage is because he tells us that “ten-ten” is easy to remember (and that’s even in the name of bill – H.R. 1010). No economic or cost-benefit analysis, no economic logic, no economic reasoning, no empirical evidence; in other words, no systematic process of analysis that tells us that $10.10 per hour is somehow optimal or ideal, and is superior in some convincing way to a $9.10 or $11.10 per hour government-mandated minimum wage.

Why a $15 per hour minimum wage as advocated by former labor secretary Robert Reich in this video, and the new minimum wage that was recently adopted in West Coast cities like Seattle, San Francisco and Los Angeles? Again, there’s no economic analysis, economic logic or economic reasoning that supports $15 per hour, as the optimal or ideal wage for those cities, it’s another number that was apparently arbitrarily chosen politically using the PFA method, probably again because it’s another nice, round number that’s “easy to remember.”

Conclusion: The $17 starting wage at the Williston Walmart is a market-determined wage that accurately reflect the specific and unique market forces for limited-experience workers in that labor market, and is based on sound economic and business analysis and decision-making, probably some dynamic trial-and-error experimentation to determine the optimal wage for the local labor market; in other words that $17 per hour market wage is grounded in reason, logic, market forces and sound economics. In contrast, minimum wages by government fiat are grounded in politics and wishful thinking, not economic reality. Further, market-determined wages reflect the unique labor market conditions that might vary significantly both by geographical region and by industry, whereas the government typically imposes a “one-size-fits-all” minimum wage on all industries and all geographical regions (in the case of the federal minimum wage).

2a. Market Wages are Dynamic. It’s also important to remember that the current wage of $17 per hour at the Williston Walmart is much higher than it was before the oil boom in the Bakken area raised the demand for workers, both skilled and unskilled. In most areas of the country, Walmart has been paying starting wages of below $9 per hour and its average wage for associates was below $13 per hour until this year. But in a boom town like Williston, the local Walmart might have quickly learned that offering those wages in the Bakken area would have resulted in a significant shortage of workers, and it therefore had to roughly double its starting wages there to $17 per hour to attract enough workers. And because Walmart is in competition for workers in Williston with other retailers and restaurants there like McDonald’s, Home Depot, Menards, Buffalo Wild Wings, Famous Dave’s, and KFC, it’s likely that $17 per hour is the prevailing, market-determined entry-level starting wage for the entire Williston area. Higher even than $15 per hour in Seattle, with no legislation required – the market was responsible.

And that’s the important lesson here about a market-determined wage: It’s completely flexible, and can easily be adjusted up or down in response to changes in the market. If there’s a slowdown in the Williston area because of low oil prices, wages will likely fall at Walmart and other local retailers; if there’s a resurgence in the oil boom later this year from a rebound in oil prices, there could be upward pressure on Walmart’s starting wages (see my addition to the Walmart photo above).

b. Government Wages are Static. Minimum wages imposed by government fiat are fixed and static for long periods of time, and cannot easily be adjusted to respond quickly to unique or changing market conditions, or be adjusted upward for inflation in most cases. The federal minimum wage can also not be adjusted downward to reflect the market conditions in small towns where the cost of living is very low to account for the fact that a new $10.10 minimum wage (if passed) is too high for some local labor markets. In contrast, a major retailer like Walmart can easily customize its starting wages at thousands of locations nationwide to reflect the differences in labor market conditions and cost of living.

3a. Market Wages Require No Enforcement Mechanism. It obvious that when wages are market-determined by the forces of supply and demand, there is no enforcement mechanism or costly government bureaucracy required. In that sense, market wages are “free” since they impose no regulatory cost on taxpayers.

b. Government Wages Require a Costly Enforcement Mechanism. When a minimum wage is mandated by government fiat, a costly government bureaucracy is required to monitor and enforce the government wage mandate, respond to complaints, and impose penalties and fines on offenders. For example, after Seattle passed a $15 per hour minimum wage ordinance, the city had to next establish and fund a new Office of Labor Standards to oversee the city’s newly established minimum wage law. Earlier this month, the city appointed its new “Minimum Wage Czar” to head the new office. San Francisco has an Office of Labor Standards Enforcement (19 staff members and an annual budget of $3.7 million, of which about half goes to enforce the city’s minimum wage law), and the state of California has a Division of Labor Standards Enforcement to enforce the state minimum wage. An Office of Wage and Hour enforces the minimum wage law in Washington, D.C. at an annual cost of about $1.5 million for 11 full-time employees. San Diego estimates an annual cost to the city of $1.2 million during the first year to monitor and enforce a proposed hike in the city’s minimum wage above the state level (not yet finalized, a public vote may take place next year). Although it might be hard to estimate the exact cost to taxpayers for enforcement of city, state and federal minimum wage laws, it’s likely that the cost to taxpayers runs into the billions of dollars every year, and it’s a cost that can’t be ignored when comparing market wages to government-mandated minimum wages.

Bottom Line: Market wages for entry-level workers are: 1) determined by market forces and reflect regional and industry differences, 2) can easily and dynamically adjust on a continual basis to reflect changes in local labor market conditions, and 3) require no costly monitoring and enforcement bureaucracy. On the other hand, government-mandated minimum wages are: 1) determined arbitrarily by a politically-driven process that is divorced from economic reality, 2) based on a “one-size-fits-all” approach that can’t easily be adjusted for regional and industry differences, and can’t adjust dynamically to changing market conditions, and 3) costly to monitor and enforce. For those three reasons (along with many other important reasons), we can conclude that market-determined wages for unskilled and low-skilled workers when compared to government mandated minimum wages are far superior because they are more efficient and realistic, can be changed dynamically and don’t require costly bureaucratic enforcement."

Sunday, June 28, 2015

King Cotton and Deadweight Loss (and the large water subsidies paid to cotton farmers)

By Alex Tabarrok of Marginal Revolution.
"In our textbook, Tyler and I write:
Farmers use the subsidized water to transform desert into prime agricultural land. But turning a California desert into cropland makes about as much sense as building greenhouses in Alaska! America already has plenty of land on which cotton can be grown cheaply.  Spending billions of dollars to dam rivers and transport water hundreds of miles to grow a crop which can be grown more cheaply in Georgia is a waste of resources, a deadweight loss. The water used to grow California cotton, for example, has much higher value producing silicon chips in San Jose or as drinking water in Los Angeles than it does as irrigation water.
In Holy Crop, part of Pro-Publica’s excellent, in-depth series on the water crisis the authors concur:
Getting plants to grow in the Sonoran Desert is made possible by importing billions of gallons of water each year. Cotton is one of the thirstiest crops in existence, and each acre cultivated here demands six times as much water as lettuce, 60 percent more than wheat. That precious liquid is pulled from a nearby federal reservoir, siphoned from beleaguered underground aquifers and pumped in from the Colorado River hundreds of miles away.
Over the last 20 years, Arizona’s farmers have collected more than $1.1 billion in cotton subsidies, nine times more than the amount paid out for the next highest subsidized crop. In California, where cotton also gets more support than most other crops, farmers received more than $3 billion in cotton aid.
If Arizona’s cotton farmers switched to wheat but didn’t fallow a single field, it would save some 207,000 acre-feet of water — enough to supply as many as 1.4 million people for a year.
…The government is willing to consider spending huge amounts to get new water supplies, including building billion-dollar desalinization plants to purify ocean water. It would cost a tiny fraction of that to pay farmers in Arizona and California more to grow wheat rather than cotton, and for the cost of converting their fields. The billions of dollars of existing subsidies already allocated by Congress could be redirected to support those goals, or spent, as the Congressional Budget Office suggested, on equipment and infrastructure that helps farmers use less water.
“There is enough water in the West. There isn’t any pressing need for more water, period,” Babbitt said. “There are all kinds of agriculture efficiencies that have not been put into place.”"

New Gun Study Misses the Point on Self-Defense, and Uses Bad Data to Boot

By Adam Bates of Cato.
"A recent report from Violence Policy Center purports to show that private gun possession results in many more criminal firearm homicides than justified killings, a conclusion that was quickly picked up by several media outlets.   But it isn’t so much a report as it is a handful of woefully incomplete data sets thrown together with a few conclusory remarks.
The essential thrust of the report is that, according to FBI homicide reporting figures, there were only 259 justified firearm homicides in 2012 compared with 8,342 criminal homicides by firearm.  Ergo, the authors posit, it’s clear that private gun possession does much more harm than good, and that the claims of self-defense and Second Amendment advocates of thousands of defensive gun uses annually are wildly false.
Readers should first acquaint themselves with Brian Doherty’s excellent work over at Reason surveying the long-running debate regarding how we should conceive of defensive gun uses.  Contrary to the implications of gun control advocates, the positive utility of a firearm for self-defense should not be limited to the bad guy body count:
Believe it or not, guns can and do help ensure personal safety or at least provide an insurance policy of sorts toward the time one might want or need to ensure your or your family’s personal safety even if you don’t actually plug some human varmint dead.
Certain anti-gun folk seem to sincerely believe that the only reason Second Amendment advocates want to have a gun, or want other people to have the right to have a gun, is because guns are so great at killing people; that a gun not used to kill someone isn’t really worth having. But it isn’t true.
But we have plenty of reason to believe that Americans use a gun in the service of deterring a crime or potential crime over 2 million times a year. That does not require killing someone with the gun—about three-fourths of the time the gun does not need to be fired much less kill to deter. That should be blindingly obvious to anyone not looking for some new “scientific” excuse to disarm Americans. 
Even accepting the scope of the study, there are still problems. First and foremost, the study uses unreliable data.  The FBI’s Supplementary Homicide Reports, from which the number of justified homicides was tabulated by the VPC, are voluntary submissions from state and local law enforcement agencies.  The vast majority of law enforcement agencies do not participate, and the data that does come in is often unreliable. For example, several instances of justified homicides were reported to the FBI as criminal homicides. 
For more than a dozen states, the FBI received no data at all on justified firearm homicides by civilians between 2008 and 2012, while only four states (Texas, California, Michigan, and Tennessee) account for nearly half (44%) of the reported justifiable gun deaths. Instead of deciding that the dearth of reliable data should breed hesitation, the authors arrive at a figure that implies there were no justified firearm homicides in non-reporting states during the study period. 
A quick glance at Cato’s map of defensive gun uses would have shown the authors several justified firearm homicides in those states.
Lastly, theVPC study makes absolutely no effort to distinguish the legality of the firearm possession that led to the homicide.  Insofar as these figures are being used to advocate for additional gun control regulations, isn’t it pretty important to distinguish the guns that are illegally-owned and thus not subject to regulation in the first place?  The VPC’s own website reports fewer than 200 criminal homicides by licensed firearm carriers over the entire eight year period between 2007 and 2015.  That’s a far cry from 8,234 per year, and yet that data point didn’t make it into the study.
All that said, it’s important not to get lost in a statistics war over a fundamental right.  As Brian Doherty notes:
The opposing armies in the [defensive gun use] war are roughly staked out with these dueling positions: 1) “There are a really large number of defensive gun uses, so many that any reasonable person would have to admit that private gun ownership is some kind of social good” and 2) “While there may be a fair number of DGUs, the number is dwarfed by the number of violent crimes committed with guns, so never mind the people who save themselves with guns, we should let politicians concentrate not on speculative and uncertain defensive uses, but on the crimes and loss of life and limb that we can see and count which accompanies gun possession and use.”
Left out of any policy decision based on these sorts of macrostatistics, as always, is how much having a gun mattered to the specific individual person able to defend himself.
However large the number of DGUs, or how small; and however large the number of accidents or tragedies caused by guns, or how small, the right and ability to choose for yourself how to defend yourself and your family—at home or away from it—remains, and that numerical debate should have no particular bearing on it."

Our lives depend on a stable energy supply

See Henderson on Epstein on Fossil Fuels by David Henderson of EconLog.
"How can a practical case also be a moral case? Simple: if one's standard of value is human life, as Epstein says his is, then whatever enhances human life is moral. There are some problems around the edges of his argument, but in a big-picture sense it holds up. 
The best way to see that is to consider a true story he retells about Gambia, a tiny country in West Africa. In 2006, Kathryn Hall, founder of the energy charity Power Up Gambia, observed an emergency cesarean section in that country. The baby died only minutes after birth. The doctor explained that if he had had enough electric power, he would have been able to use an ultrasound machine and plan the C-section rather than do it as an emergency surgery. Hall also observed the birth of a full-term baby weighing only 3.5 pounds. In the United States, the infant would have been put in an incubator. But the hospital managers, knowing they did not have a reliable energy supply, did not bother wasting money on an incubator. The baby died.
This story drives home the importance of a stable energy supply. Our lives literally depend on it.
Of course, we could still live our lives with much less energy. It's just that our lives would be less full, we would be able to do fewer things, and we would be less wealthy. So it's not just our lives that are Epstein's standard, but a certain kind of life. Unfortunately he never makes that point explicit.
This is an excerpt from "Ethics and Energy," my basically positive review of Alex Epstein's book, The Moral Case for Fossil Fuels. Co-blogger Bryan Caplan was the person who first piqued my interest in the book with his posts here, here, here, here, and here.

Another excerpt from my review:

He reminds us that we need to judge various energy sources by the cost of all the resources used to produce energy. Sure, rays from the sun are free, but the various materials used to convert those rays into a usable energy form are very expensive, requiring many other materials per unit of energy produced. Referencing a U.S. Department of Energy report, he notes that such materials "can include highly purified silicon, phosphorus, boron, and compounds like titanium dioxide, cadmium telluride, and copper indium gallium selenide." The story for wind power is similar. He points out that generating one megawatt of electricity with wind power requires 542.3 tons of iron and steel, compared to only 5.2 tons to get the same amount of electricity using coal. 
Moreover, both wind and solar energy are unreliable, for what should be obvious reasons: try getting solar energy at 8 PM in the winter or wind energy on a windless day. Epstein's critique is more devastating than this, but at least you get the flavor.
Final excerpt:
I'll close on a positive note. Epstein's last chapter is his best and should have been his first chapter. In it, he tells how he paid famous environmentalist Bill McKibben $10,000 to debate him. That alone impressed me. Epstein tells the story in such a dramatic way that it almost gave me chills. I recommend reading it first; you will likely then be motivated to read the rest of the book."

Saturday, June 27, 2015

Don Boudreaux Questions The Idea Of Victims Of Free Trade Agreements

See No Special Privileges.
"Here’s a letter to Fortune:
A lone error mars Roger Lowenstein’s marvelous essay on the connection between TPP and the classical economist David Ricardo, who was a principled advocate of free trade (“TPP and fast track: Why Congress should listen to the world’s richest economist,” June 22).  That error is Mr. Lowenstein’s endorsement of Pres. Obama’s insistence that “that the [freer-trade] legislation also include retraining and support for the victims of trade.”
First, the word “victims” is inappropriate. Every producer – including every worker – is in business to satisfy consumers, and not vice-versa.  So when consumers choose to buy fewer units of whatever some producer offers for sale, that producer is not in any way victimized.  (If you doubt this claim, ask yourself if you regard people who switch to buying Priuses and other more fuel-efficient cars as being wrong-doers whose actions “victimize” Exxon and its fellow oil companies.)
Second, international trade is not unique in destroying particular jobs.  All economic change does so.  Chemical fertilizers, refrigeration, and motorized farm equipment destroyed lots of agricultural jobs.  Inexpensive kerosene destroyed most whaling jobs.  The telephone destroyed the jobs of telegraph operators.  Personal computers destroyed jobs in typing pools.  The Atkins diet destroyed some jobs in breweries and bakeries.  The polio vaccine destroyed the jobs of many workers who made wheelchairs, crutches, and iron-lung machines.
Because all economic change – including change in the patterns of purely domestic trade – destroys some jobs and creates others, there’s no sound economic reason to accord special treatment to workers and other producers who lose jobs and profits to those economic changes that happen to be sparked by foreigners rather by fellow citizens.
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030"

Today’s new homes are 1,000 square feet larger than in 1973, and average living space per person has doubled

From Mark Perry.
"The Census Bureau recently released its annual report on “Characteristics of New Housing” for 2014, which includes data on the average and median size of new homes and those data are displayed in the top chart above.

houses1 housing4

Here are some details:

1. In 2014, the average size of new houses built increased to an all-time high of 2,690 square feet (see dark blue line in top chart), and the median size new home set a new record of 2,506 square feet (see light blue line in chart). Over the last 40 years, the average home has increased in size by more than 1,000 square feet, from an average size of 1,660 square feet in 1973 (earliest year available from Census) to 2,690 square feet last year. Likewise, the median-size home has increased in size by almost 1,000 square feet, from 1,525 square feet in 1973 to 2,506 last year. In percentage terms, the average home size has increased by 62% since 1973, while the median home size increased by 64%.

2. While the average size of a new US home has increased over the last 40 years, the average household size has been declining over that period, from 3.01 persons per household on average in 1973 to a new record low of 2.54 persons per household in the last two years (2013 and 2014), a reduction of almost one-half person per household over the last 40 years (see brown line in top chart).
With the average new house in the US getting larger in size at the same time that American households are getting smaller, the square footage of living space per person in a new home has increased from 507 to 987 square feet using the median size home, and from 551 to 1,059 square feet using the average size home. In percentage terms, that’s a 95% increase using the median home size and a 92% increase using the average home size. In either case, the average amount of living space per person in a new home has almost doubled in just the last 41 years – that’s pretty amazing.

3. What about the cost of new homes over the last 41 years? On a per square foot basis using median home prices and median square footage, the inflation-adjusted price of new homes (in 2014 dollars) has been relatively stable since 1973 in a range between about $104 and $130 per square foot (see bottom chart above). And the price of just under $113 per square foot for new homes sold in 2014 was almost 14% below the peak of $130.67 per square foot for a new home in 2005, and was also below the cost per square foot in most years during the 1970s and 1980s, and below the cost per square foot in every year from 2004 to 2008.

4. The National Association of Realtors’s monthly measure of housing affordability (based on the median price for existing-homes, median family income, and the current fixed rate for 30-year mortgages) displayed in the chart above also shows that purchasing a home today (new or existing) is more affordable today than the average affordability measure of 124 over the last 34 years. The current affordability index for April was 165, which means that a family earning the median annual income of $66,483 would have 165% of the qualifying income of $40,320 required to purchase the median-price home of $221,200 with a 20% down payment and a mortgage for the $176,960 balance, financed for 30-years at the 3.95% current mortgage rate. Housing affordability has averaged 124 over the last 41 years (median income was 124% of qualifying income), and was below 100 in the first part of the 1980s. Americans enjoy housing affordability today that is well above average for the post-1980 period, and twice as affordable as in the early 1980s.

Bottom Line: We hear all the time about stagnating household incomes, the decline of the middle class, rising income inequality, and lots of other narratives of gloom and doom for Americans. But when it comes to the new homes that Americans are buying and living in, we see a much brighter picture of life in the US. The new homes that today’s generation of homeowners are buying are larger by 1,000 square feet compared to the average new homes our parents or grandparents might have purchased in 1973, and have almost double the living space today adjusted for household size compared to 40 years ago.

And of course today’s new homes, compared to those built in the past, are much more energy-efficient; they come with better, bigger and more bathrooms, closets, and garages; they’re equipped with better and more home appliances; and they almost all include modern features like central air conditioning today that might have been expensive options in previous decades like the 1970s. Americans are paying about 62% more today for a median-priced new home on an inflation-adjusted basis compared to 1973, largely because the size of the median home has increased by more than 64%. So on an inflation-adjusted basis, we’re actually paying slightly less today for a new home on a per square-foot basis than in 1973. Overall, the increasing size, improving quality, and relative affordability of new (and existing) homes today means that living standards continue to gradually, but consistently, improve year after year for most Americans."

Friday, June 26, 2015

Are Keynesians and non-Keynesians moving toward a consensus on deficit reduction?

From Scott Sumner.
"Recently I see some positive signs of consensus.  Back in 2012 there seemed to be a huge split between the “deficit scolds” who insisted that we shrink the budget deficit, and Keynesians who suggested that it was a nutty idea.  At the time, I was under the misapprehension that many Keynesians thought a massive and sudden reduction in the federal budget deficit would constitute “austerity” and hence would slow growth.  Now that the dust has settled, we can calmly look at the data:

Calendar 2012:  Budget deficit = $1061 billion
Calendar 2013:  Budget deficit = $561 billion

A reduction of $500 billion in one year.  I used to be under the impression that Keynesians thought this would be a disastrous policy that sharply slowed growth. I’m now happy to report that I was wrong. (Who says I never admit I was wrong?) The new, new, new Keynesian consensus seems to be that the deficit reduction shown above does not constitute the sort of austerity that would be expected to slow growth.

I was under the impression that massive tax increases and cuts in transfer spending were contractionary.  Now I’m happy to report than only cuts in government consumption seem to count.  (Has Christina Romer been informed yet?)

So we have a new consensus, which spans the ideological spectrum.  Yes, Federal government officials, go ahead and slash the budget deficit by $500 billion in a single year by raising taxes and cutting spending.  Just don’t touch government consumption.  It’s OK, it won’t slow growth.  Who says economists can never agree on anything?

PS.  This post could be interpreted straightforwardly or sarcastically.  You might be surprised to know that even though I wrote the post, I don’t know which interpretation is correct.  Really.  I honestly don’t know what Keynesians think of the $500 billion in deficit reduction, mostly accomplished through taxes and transfers.  I welcome Keynesian commenters who will educate me on this point.  (I.e., if they really don’t think 2013 was austerity that would slow growth, then we really are achieving a consensus, no sarcasm intended.  It makes deficit reduction much easier.)"

Finance and Growth

From Alex Tabarrok of Marginal Revolution.
"The rough consensus until recent years has been that finance increases growth. The great recession has led a number of researchers to revisit that result and several papers now report that finance increases growth just up until a point and then turns negative. William Cline, however, has a short but elegant rebuttal. Using the same basic methods, Cline finds that doctors per capita, R&D technicians per capita, and fixed telephone lines per capita all show a positive effect on growth when GDP is low but a negative effect when GDP is high.

Before you turn on your thinking hats to “explain” these results consider that growth tends to slow as GDP increases (moving from catching up to cutting edge growth) and some of the growth slowdown is inevitably picked up by a quadratic term in some other variable that is increasing.
Cline summarizes:
The recent studies’ finding that “too much finance” reduces growth should be viewed with considerable caution. The reason is that there is an inherent bias toward a negative quadratic term in a regression that incorporates financial depth, or any other variable that tends to rise with per capita income, along with the usual convergence variable (logarithm of per capita income) in explaining growth. That the results may well be unreliable is demonstrated here by finding a statistically significant negative quadratic term in equations that “explain” growth by spurious influences: doctors per capita, R&D technicians per capita, and fixed telephone lines per capita. In some situations, finance can become excessive; the crises of Iceland and Ireland come to mind. But it is highly premature to adopt as a new stylized fact the recent studies’ supposed thresholds beyond which more finance reduces growth."


Trans Fat Ban Just a Swing in the Dark

By Richard Williams of the Mercatus Center.
"When in doubt, throw it out. That philosophy seems to be what’s driving the FDA’s policy on trans fatty acids, and, in all likelihood, it’s just wrong. Let’s untangle what has transpired and see why.

First, the FDA probably should have left a big win alone. When the FDA required trans fatty acids to appear on the Nutrition Facts Panel, the food industry reacted immediately – those who could find substitute fats did so, which caused consumption to drop by 80 percent. At the previous levels, there was pretty good evidence that consumption of trans fatty acids at high levels (4 grams) was associated with heart disease.

But what about current consumption at lower levels? The evidence is missing. One might wonder: If it’s bad for you in larger amounts, why isn’t it bad for you in smaller amounts? Well, water is obviously good for you in small amounts, but if you drink too much too quickly, you die.

It turns out that most of the things we eat are like that. Small amounts either pass harmlessly through your body or are good for you. Eat too much, too quickly, and it’s bad or lethal. Drugs are the same way: They may cure you in small amounts but kill you if you take too many of them. Radiation is also the same way; a lot will give you cancer or kill you, but a little bit (it turns out) is good for you. Even some very nasty things like dioxin and arsenic can be good for you at extremely low levels. Salt is necessary for life, but consuming too much is unhealthy.

Even though trans fatty acids likely follow the same pattern – being benign or helpful at low levels – we don’t know that, and we don’t know at what level that may be.

So, shouldn’t we just get rid of it? Probably not, for a couple of reasons.

First, it sets a bad precedent. It takes a nutrition issue and turns it into a safety issue. That’s what the Generally Recognized as Safe or GRAS law is about: safety. If we start doing that for other ingredients – particularly when we don’t have the science to back it up – we are opening up a huge can of worms. Apparently, there are lawyers out there who see this kind of thing as a golden opportunity.

The other reason goes back to missing science. What’s going to take the place of trans fatty acids when you ban it? The FDA doesn’t know, but it moved ahead anyway.

Ironically, this is how we got into this particular mess in the first place.

When food activists became concerned about saturated fat in animal fats in the 1970s, the industry went to vegetable oil but, to make it work, they had to use the hydrogenated variety. No one knew that’s what they were going to do, and no one tried to find out. The same people pushed the FDA to enact the current policy, and they don’t know what the replacement will be either. The good news is that after the labeling came out, the industry generally found better fats to replace trans. It’s not clear what the remaining firms are going to do since, if they could have easily replaced trans, they already would have. Will the replacement be better or worse? No one knows.

This is regulating in the dark. We don’t know if there are levels of trans fatty acids that are benign or perhaps even good for you – but the odds are that they exist. We don’t know what’s going to replace trans fatty acids. We don’t know how many wasteful lawsuits may drive food companies in other, potentially worse, directions. We don’t know how morphing what should be a nutrition policy into a safety policy will entice activists to agitate for more policies that move way ahead of science.
What we do know is that the moment we leave the necessary science and sound policy behind, it’s a crapshoot. If that’s what we are going to do, why we do we need “expert” science agencies?"

Thursday, June 25, 2015

Washington’s army nearly starved at Valley Forge largely due to what John Adams called “That improvident Act for limiting prices..."

From Cafe Hayek.
"from page 147 of the Robert Schuettinger’s and Eamonn Butler’s classic 1979 study, Forty Centuries of Wage & Price Controls (footnote omitted); here, Schuettinger and Butler discuss the consequences of a Pennsylvania statute that capped the prices of many domestically produced items, including food, that were thought to be vital for the American revolutionary-war effort:
During the American War of Independence, Washington’s army nearly starved at Valley Forge largely due to what John Adams called “That improvident Act for limiting prices [which] has done great injury, and [which] in my sincere opinion, if not repealed will ruin the state and introduce a civil war.”  As one economic historian explained, “The regulation of prices by law had precisely the opposite effect to that intended; for prices were increased rather than diminished by the adoption of the measure.”  The same historian concluded that “Tried by facts, the measure was a total failure in achieving the end proposed by its authors and ultimately had not a defender.”
The economic historian quoted here by Schuettinger and Butler is Albert Sidney Bolles; the quotations are from pages 165 through 173 of volume one (1896) of Bolles’s three volume The Financial History of the United States.  The Adams quotation is from this September 8, 1777 letter to his wife, Abigail.
Among the great achievements of supply-and-demand analysis is its clear demonstration that government edicts that force the monetary price of a good or service down cause the actual price of that good or service – the value of the actual bundles of resources spent by buyers in their efforts to obtain each available unit of the price-ceilinged good or service – to rise."

Energy-Efficiency Programs ‘Nudge’ Consumers in the Wrong Direction

Study challenges idea that consumers are irrational when they pass up federal subsidies to weatherize their homes.

By Greg Ip of the WSJ. Excerpts:
"The study of households who received federal subsidies to “weatherize” their homes found the efficiency investments cost far more than they save. So consumers may not be irrational when they pass up such investments: the programs simply aren’t as beneficial as their promoters think.

The paper has important implications for current efforts to reduce planet-warming emissions of carbon dioxide. Energy efficiency programs are politically popular but may be far more expensive than mechanisms that rely on price signals. These include carbon taxes (admittedly, a political non-starter) or tradable emissions allowances, one of the options available to states for meeting proposed new federal limits on greenhouse-gas emissions."

"Michael Greenstone of the University of Chicago, and a former chief economist in the Obama administration’s Council of Economic Advisers, and Meredith Fowlie and Catherine Wolfram of the University of California at Berkeley used a randomized control trial to determine whether the savings for WAP (Weatherization Assistance Program) predicted by engineering models were borne out in reality.

The authors focused on a sample of more than 30,000 WAP-eligible households in Michigan. Of these, a quarter were encouraged to apply for the program via home visits by field workers hired for the study, and via phone calls. Households were reluctant to sign up, though it cost them nothing.

The authors then compared the energy consumption and thermostat settings of households who signed up for the program with those who didn’t. The energy consumption of program participants dropped by 10% to 20%, barely 40% of what engineering models predicted. The savings equated to $2,400, less than half the $5,000 spent on the energy efficiency investments. The authors put the annual return on the investment at minus 2.2% over 16 years, much worse than the historical returns on bonds or stocks.

Of course, energy efficiency subsidies can be justified by the fact that all of society benefits from reduced carbon-dioxide emissions. But the study’s authors reckon that WAP spent a whopping $329 to eliminate one metric ton of carbon emissions. That’s 10 times the $38 that the White House reckons is the all-in cost to society of a ton of carbon, meaning WAP flunks the cost-benefit test by a wide margin.

In fact, in some ways the program left others worse off. Natural-gas and electricity distribution entail high fixed costs, which are shared among all customers. When some customers consume less, others must shoulder more of those fixed costs. Incorporating all social costs and benefits dropped the program’s return to minus 9.5%."

Wednesday, June 24, 2015

Bob Murphy takes apart both the morality and economics of Robert Reich’s case for a $15-per-hour minimum wage

From Cafe Hayek.
"Reich addresses the obvious objection that raising the minimum wage to $15/hour will reduce employment among low-skilled workers. Reich dismisses this as fear-mongering and claims, “More money in people’s pockets means more demand for goods and services, which means more jobs.”
This proves too much. Notice that Reich doesn’t make a nuanced argument, balancing certain quantitative factors where the increased demand for goods and services offset the disemployment effect of more expensive labor up until $15/hour, but then flips if the wage rate were pushed to, say, $16/hour. Given the arguments Reich has presented, it’s a mystery why we are settling for $15/hour. Why not push for a $20/hour minimum wage? It can’t be that such a move would cause disemployment–Reich just told us, with no caveats, that more money in people’s pockets means more demand for goods and services.
Indeed, Reich ends his video saying, “It’s the least we can do.” Okay then, Mr. Reich, what’s the most we can do, according to your worldview? Once you admit that, we can at least see how there are downsides to your proposal, and the viewer can start wondering whether $15/hour–the alleged “least we can do”–is such an unambiguously “moral” proposal after all."

Who’d a-thunk it? Unintended consequences from a bottled water ban on a college campus?

From Mark Perry.
"Here’s the abstract of the research article “The Unintended Consequences of Changes in Beverage Options and the Removal of Bottled Water on a University Campus,” which was just published in the July 2015 issue of the American Journal of Public Health (emphasis added):
Objectives. We investigated how the removal of bottled water along with a minimum healthy beverage requirement affected the purchasing behavior, healthiness of beverage choices, and consumption of calories and added sugars of university campus consumers.
Methods. With shipment data as a proxy, we estimated bottled beverage consumption over 3 consecutive semesters: baseline (spring 2012), when a 30% healthy beverage ratio was enacted (fall 2012), and when bottled water was removed (spring 2013) at the University of Vermont. We assessed changes in number and type of beverages and per capita calories, total sugars, and added sugars shipped.
Results. Per capita shipments of bottles, calories, sugars, and added sugars increased significantly when bottled water was removed. Shipments of healthy beverages declined significantly, whereas shipments of less healthy beverages increased significantly. As bottled water sales dropped to zero, sales of sugar-free beverages and sugar-sweetened beverages increased.
Conclusions. The bottled water ban did not reduce the number of bottles entering the waste stream from the university campus, the ultimate goal of the ban. With the removal of bottled water, consumers increased their consumption of less healthy bottled beverages.
And here is part of the paper’s conclusion:
The number of bottles per capita shipped to the university campus did not change significantly between spring 2012 (baseline) and fall 2012, when the minimum healthy beverage requirement was put in place. However, between fall 2012 and spring 2013, when bottled water was banned, the per capita number of bottles shipped to campus increased significantly. Thus, the bottled water ban did not reduce the number of bottles entering the waste stream from the university campus, which was the ultimate goal of the ban. Furthermore, with the removal of bottled water, people in the university community increased their consumption of other, less healthy bottled beverages.
The significant decrease in the percentage of beverages shipped to campus that received a green (healthy) NEMS-V rating and the significant increase in beverages receiving a red (unhealthy) NEMS-V rating when bottled water was removed in spring 2013 as well as the increase in calories per bottle suggest that consumers not only continued to buy bottled beverages but also made less healthy beverage choices after the ban was in place.
The comparison of the percentage of bottles shipped by beverage category helps to explain the changes in NEMS-V grades. As the shipments of water decreased to zero, most of the beverage categories remained relatively constant as a percentage of total shipments. However, the percentage of sugar-free beverages and SSBs increased, closely matching the decrease in water. This, paired with the finding that overall shipments increased each semester, suggests that many consumers who previously drank bottled water replaced bottled water with sugar-free or sugar-sweetened bottled beverages.
Ideally, when bottled water was removed, those who previously purchased bottled water would have adjusted their behavior and started carrying reusable water bottles. The university made several efforts to encourage consumers to carry reusable beverage containers. Sixty-eight water fountains on campus were retrofitted with spouts to fill reusable bottles, educational campaigns were used to inform consumers about the changes in policy, and free reusable bottles and stickers promoting the use of reusable bottles were given out at campus events. Although these efforts may have influenced some consumers, the ban does not appear to have achieved its goal of decreasing the number of plastic bottles entering the waste stream from the university campus.
Because it appears that many bottled water consumers instead decided to purchase other bottled beverages, the best result, nutritionally, would have been for them to select calorie- and sugar-free options, such as seltzer, unsweetened tea, or diet soda. However, the data suggest that some consumers increased their consumption of calorically sweetened drinks, such as soda and sports drinks, which could add to their liquid calorie and added sugars consumption, thus increasing the risk of weight gain.
MP: Wow, nothing worked out as expected by the college administrators at the University of Vermont: a) the per capita number of bottles shipped to the University of Vermont increased significantly following the bottled water ban, and b) students, faculty and staff increased their consumption of less healthy bottled beverages following the bottled water ban. Another great example of the Law of Unintended Consequences. And the bottled water ban was not costless – the university paid to modify 68 drinking fountains, they paid for a publicity campaign, and they paid for lots of “free” reusable water bottles; and what they got was more plastic bottles on campus of less healthy beverages!"

Tuesday, June 23, 2015

Edward Lazear Says States With Free Market Policies Have Been Doing Better

See Why the Recovery Still Limps Along: A state-by-state analysis shows that market-oriented policies work. Too bad more states aren’t using them from the WSJ. Excerpts:
"Politics aside, cross-state comparisons provide a real-world experiment that helps show which economic policies work and which don’t.

Employment, state GDP, labor-law and tax data from 2000 to the present yield two strong lessons. First, a business-friendly climate—market-oriented labor policies and lower taxes—is effective in raising the growth in a state’s gross domestic product and employment. Second, states that suffered the worst employment shocks in the 2007-09 recession had the most rapid postrecession employment growth. This suggests that the weak national recovery cannot be explained by the depth of the recession."

"employment growth is twice as high in states that have a right-to-work law and minimum wages that are below average across states, and the difference is “statistically significant”—meaning that it is unlikely to have occurred by chance. GDP grows about 11/2 times faster over this period in those states."

"Nevada, Utah, Texas, Arizona and North Dakota enjoyed the highest growth. All have market-oriented labor policies and all but one (Utah) have tax rates that are below average. The poorest performers: Michigan, West Virginia, Mississippi, Illinois and Ohio. Only Mississippi has market-oriented labor policies and four out of five (again excepting Mississippi) have tax rates that are above average. These results do not diverge greatly from a 2014 report for the American Legislative Exchange Council by Arthur Laffer, Stephen Moore and Jonathan Williams, “Rich States, Poor States.”

Indiana, Michigan and Wisconsin changed their right-to-work status during the past three years, although Wisconsin did so too recently to have much of an effect. The before-after comparison is striking. Before the recession, without right-to-work laws, these states averaged slightly negative employment growth that was well below the national average. After right-to-work, growth in these states was 11/2 times the national average."

"The second result of my cross-state comparison: States that had the most severe recessions on average enjoyed the most rapid comebacks. For example, Florida’s employment growth declined 1.9 times the national average, but its employment growth in the postrecession years was 1.8 times national average. By contrast, Kansas’ employment growth declined by only 45% the national average, but its postrecession employment growth was only 41% the national average. For the nation as a whole, the correlation between the state’s loss in employment and its subsequent growth during recovery is strong. The bigger the hit, the larger the rebound."

"But as the University of Chicago’s Victor Zarnowitz pointed out decades ago, the deeper the recession the steeper the recovery. More recently, Michael Bordo and Joseph Haubrich (National Bureau of Economic Research, 2012) also found steep recoveries after financial crises."

More Scott Sumner On Austerity

See The "other things." Excerpt:
"While I don't agree with Krugman's revisionist view that there really wasn't much austerity, I'd like to accept it as a working assumption for the rest of this post. And I'd like to analyze its implications.

1. First of all, it's worth pointing out that the same sort of mistake seems to have been made in Britain, for unrelated reasons. (S&L is less important over there.) At roughly the same time as the US misjudgment, many Keynesian economists were warning that austerity in Britain was a disastrous policy that would slow the recovery. But then Britain suddenly started doing much better, especially in the employment area. (Recall that British productivity was weak, but the Keynesian model says more AD will create jobs, it does not include a magic wand to make those new jobs more productive.) Once the strength of the labor market became apparent, many Keynesian economists decided that the austerity was actually much less than they had been assuming. Including during the period when they were loudly complaining about austerity.

So let's say there was nothing disingenuous about all these flip-flops. I've made similar mistakes at various times in my life. Even so, doesn't this call into question the effectiveness of fiscal policy? It's already a pretty blunt instrument; requiring politicians of different stripes to come together in a timely fashion to set the appropriate cyclically adjusted budget balance. If we are now to believe that even in real time it's extremely hard for the world's leading Keynesian economists to tell whether policy is contractionary or not, then how likely is it that this tool will be used effectively?

2. And if we have not one but two major misdiagnosis of the stance of fiscal policy in key economies, in just the past few years, how many others have occurred that we don't know about? How many posts by Krugman can you find that say "I claimed fiscal austerity in country X would lead to recession, and recession did occur as I predicted? But new data shows that there really wasn't any fiscal austerity. I now think the recession was due to other stuff." Can someone point me to these posts? Indeed how likely is it that Paul Krugman would have done the post I am commenting on, if the US and Britain had fallen into a euro-style double-dip recession in 2013? "Oops, no austerity, my mistake." In other words, using a legal analogy, is Krugman more like an impartial judge, or an attorney that advocates for his client, and only feels a need to present evidence that supports his case?

Now before commenters start claiming that everyone does this, let me admit that this is normal behavior in the blogosphere (with a few exceptions such as Tyler Cowen.) So then are we just left with a "he said she said"? Just a series of anecdotes that are open to interpretation? I'd make a couple observations here:

1. We do have some systematic evidence. The early cross-sectional regressions supported the Keynesian model. Later work by Mark Sadowski and others found this result only applied to countries that lacked an independent monetary policy. (And I'd add that there are some tricky causality issues for even those countries.) As of this moment, I know of no systematic evidence for the effectiveness of monetary policy under the current inflation-targeting regime used by most countries. BTW, I've acknowledged that fiscal stimulus is effective under other regimes, and have cited the boost to GDP provided by war spending in the 1940s. That spending did not boost welfare (consumption fell) but it undeniably reduced the unemployment rate. And certain types of fiscal stimulus can be effective even under inflation targeting; such as employer-side payroll tax cuts and VAT cuts.

2. In a sense this entire debate is an artifact of a flawed stabilization policy regime, with unclear lines of authority. As I just indicated, fiscal policy would be effective (i.e. effect GDP) in certain types of clearly defined monetary regimes. And Paul Krugman has agreed that fiscal policy would not be effective if interest rates were above zero. Indeed he has advocated a 4% inflation target precisely because that would eliminate the need for fiscal stimulus. If the precise role of the Fed at the zero bound were made explicit, then this debate would go away.

There are very few debates in economics that could be resolved by Congress, but this is one of them. In this post I explain how."