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January 4, 2008

Economist's View - 5 new articles

Blogger's Block

I can't think of anything to talk about or find anything to post that looks interesting. There's probably plenty out there - I've added 18 links on the sidebar for the next "links for 2008-01-04" post so far and I'm sure there will be more - but for some reason nothing seems quite right. Kind of like opening the refrigerator when there's plenty of good things to eat, but somehow nothing seems appetizing. The other posts today don't seem to have drawn much interest, at least in terms of motivating people to comment, so if you've come across something interesting, or have something pressing to discuss, etc., please feel free to bring up whatever you want in comments. Meanwhile, I'll keep looking...

Update: I'll remove this list later tonight when it posts automatically (I often edit and shorten the list after it posts), but for now, here are quite a few additional links:

links for 2008-01-03

Market Failure in Austrian Business Cycle Theory

Tyler Cowen has been discussing the Austrian theory of the trade cycle:

New money does not have to enter the loanable funds market, by Tyler Cowen: It is one of the standard claims of Austrian business cycle theory that the "new money" enters the economy through the loanable funds market. Yes it usually does, but it is important to recognize that this happens because of decisions by banks, not because government somehow forces the money to go there.

Consider an expansionary open market operation. Banks now hold fewer T-Bills and more cash. Presumably the cash is more liquid (though if you are puzzled by this assumption in the context of a bank, join the club, Brad DeLong is a member too), so the banks will do something liquidity-like with it. That could mean making a loan, but it also could mean spending the money to refit the ATM machines, or for that matter increasing dividends to bank shareholders.

But no, bank managers make an independent judgment that there are loans worth making. Of course sometimes they are wrong. But they know they got this new money through open market operations. And they decided to go ahead and make the loans anyway. They didn't have to. They could have re-routed the new money to some other injection path altogether. But they didn't.

That is another reason why the Austrian theory of the trade cycle is as much a market failure theory as a government failure theory.

[Also, Bryan Caplan follows up with "What's Wrong With Austrian Business Cycle Theory."]

"George Allen's Curse"

Dan Schnur, "the national communications director for John McCain's 2000 presidential campaign," argues that when the racial slur uttering candidate was eliminated from the field, Republicans were left without a clear choice of a candidate to support:

George Allen's curse, by Dan Schnur, Commentary, LA Times: The most important word uttered in the Republican presidential primary has not been "terrorism" or "taxes," not "faith" or "family." Rather, it was "macaca."

Two years ago, conventional Beltway wisdom had Sen. George Allen of Virginia easily winning reelection and becoming the presumptive front-runner for the 2008 GOP presidential nomination. He had been embraced by the Republican business and fundraising establishment, as well as by the social and religious conservative voters who represent the strength of the party's grass roots.

But when he uttered what many considered to be an ethnic slur against an opponent's staffer, Allen's Senate reelection campaign began a downward spiral from which he never recovered. ...

Unlike Democrats, who seem to enjoy the muddle of a free-for-all primary season every four years, we Republicans have generally been much more hierarchical as we choose our presidential standard-bearers. Early in the campaign cycle, we identify the party's establishment candidate, shower him with money and endorsements, and anoint him as the likely nominee months before any primary. It's a very efficient process: Seven of the last 10 GOP nominees have been elected president.

But Allen's premature departure from the field left us without a front-runner. ... The result has been a string of candidates, each not entirely comfortable with either the party establishment or grass roots, each attempting to remake himself to fit the preferences of those two groups. ...

Each of the five leading Republicans has stumbled at some point because of his efforts to position himself as someone other than what his biography would suggest. If Allen had entered the race as the preferred candidate of both the party establishment and religious conservatives -- as George W. Bush did eight years ago -- the nature of the campaign would have been very different. ...

Notice the "what many considered to be" qualification on the slur. Or could that be a dog-whistle saying, in effect, "we stand with the slur utterer and believe he should still be in the race"? Hope not, but I wonder if he - and McCain - are one of the many who thought it was a slur? And I suppose I should note that Allen was "the presumptive front-runner" even though there were incidents in his past such as:

Before he ran for governor in 1993, Allen was criticized for keeping a Confederate flag in a cabin near his Charlottesville home, part of a collection of flags, he has said. He stirred controversy as governor by issuing a proclamation noting the South's celebration of Confederate History Month without mentioning slavery.

This year, the New Republic magazine published a photo of Allen wearing a Confederate flag on his lapel during high school.

"It wasn't a racial statement; it was a statement about his rebellious nature," said John Reid, Allen's communications director.

One of the points Paul Krugman makes in his book, and it's a point I don't think comes through clearly enough in discussions about the book, is that old-fashioned dog-whistle style tactics are no longer as effective and this has changed the political dynamics. From a recent article:

Why does this history matter now? Because it tells why the vision of a permanent conservative majority, so widely accepted a few years ago, is wrong.

The point is that we have become a more diverse and less racist country over time. The "macaca" incident, in which Senator George Allen's use of a racial insult led to his election defeat, epitomized the way in which America has changed for the better.

And because conservative ascendancy has depended so crucially on the racial backlash — a close look at voting data shows that religion and "values" issues have been far less important — I believe that the declining power of that backlash changes everything.

Can anti-immigrant rhetoric replace old-fashioned racial politics? No, because it mobilizes [a] shrinking pool of whites — and alienates the growing number of Latino voters.

Now, maybe I'm wrong about all of this. But we should be able to discuss the role of race in American politics honestly.

I'm curious - what role do you think race will play in this election? Is Krugman right that the potential power of racial politics is diminishing with time?

"Not Remotely the Same as Good at Getting it Right"

Why oh why do I read anything at the NRO and, if I do, why do I ever bother with Jerry Bowyer? He says:

Gas Bags, by Jerry Bowyer, NRO: ...Gas-price hikes will never, ever, ever cut into consumer spending. It's a mathematical impossibility. Here's why: Gas prices are a component of consumer spending.

You see, when gas prices climb from $2 a gallon to $3 a gallon, one of the components of retail spending goes up. ...

Sure, if people spend more money on gas, they may very well spend less on soft drinks. But that's a substitution, not a decrease in overall spending. The spending simply shifts from one retail category to another.

So why don't we ever hear this? Well, with a few notable exceptions, mainstream TV commentators don't know the facts, which often are buried in the details. You can't just read a financial press release from a government organization (or worse yet, the blurb about the press release) and understand what the data are saying. A Larry Kudlow, a Steve Forbes, a Dan Yergin, a John Rutledge, an Art Laffer, a Brian Wesbury — these folks actually read the reports, including the tables in the back. They look at rows of numbers; in the case of a consumer-spending report, they note the row that is devoted to gas stations.

Meanwhile, the ... only numbers they master are the phone numbers of their favorite producers. Good at getting on the air is not remotely the same as good at getting it right.

He is arguing that input costs don't matter, but of course that's wrong. It's just not true that "Gas-price hikes will never, ever, ever cut into consumer spending," see the 1970s for one counterexample. Or do a simple thought experiment. If the price of oil went up to, say, $1,000 a barrel tomorrow, would real GDP stay at its current level, or might you expect a decline in GDP, in the short-run at least? And if GDP falls, then consumer spending will fall along with it.

Maybe the problem is that the people he so admires are simply looking at tables of numbers rather than doing actual econometric investigations solidly grounded in economic theory, something that involves more than, say, two lines drawn on a graph (see the completely uninformative graph he has plotted in this article for his latest along these lines - that graph tells us nothing whatsoever, but Bowyer appears to place great stock in the relationship between the two variables over the last 11 months - it's almost comical to see the graph put forward as serious analysis). Seriously, try doing actual econometric analysis instead of looking at "rows of numbers; in the case of a consumer-spending report, ... the row that is devoted to gas stations." Even when you try to get sophisticated and compare two rows at once, that isn't adequate (hey, both are going up!). Doing so leads to false conclusions like tax cuts pay for themselves because you haven't bothered to consider factors like trend growth in tax receipts (to name just one omitted variable in the typical "analysis").

Anyway, Bowyer - who isn't an economist but plays one at the NRO - should realize that "good at getting an article at the NRO is not remotely the same as good at getting it right," something he has shown time and again.

Update: PGL continues the discussion.

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