Yes, actually, we do need massive long-term government intervention in the economy

Fareed Zakaria:

The wide [competitiveness] gap between the United States and the rest of the world is closing...

Beginning in the Great Depression but accelerating dramatically during World War II, the federal government began showering money on research and development, and channeled most of it through universities—a brilliant innovation that has endured as an American model. After World War II, the Cold War drove this funding to new highs, so that by the 1950s, the United States was spending 3 percent of GDP on R&D, which amounted to a majority of the total spending on science on the planet. Government funding of basic research has been astonishingly productive. Over the past five decades it has led to the development of the Internet, lasers, global positioning satellites, magnetic resonance imaging, DNA sequencing, and hundreds of other technologies. Even when government was not the inventor, it was often the facilitator. One example: semiconductors. As a study by the Breakthrough Institute notes, after the microchip was invented in 1958 by an engineer at Texas Instruments, "the federal government bought virtually every microchip firms could produce." This was particularly true of the Air Force, which needed chips to guide the new Minuteman II missiles, and NASA, which required advanced chips for the on-board guidance computers on its Saturn rockets...

With the end of the Cold War, Americans stopped worrying about the Soviet threat and, as a result, R&D funding for applied science plummeted, dropping 40 percent in the 1990s. It has picked up since then, but the government's share of overall R&D spending remains near its all-time low. And while corporations still spend on R&D, they do not fund the kind of basic research that leads to breakthroughs...

American culture is open and innovative. But it was powerfully shaped and enhanced by a series of government policies. Silicon Valley did not arise in a vacuum. It grew in the 1950s in a state that had created the world's best public-education system (from kindergarten through Ph.D. programs), a superb infrastructure, and a business-friendly environment that attracted defense and engineering industries. Today California builds prisons, but not college campuses. In 1976 it spent 18 percent of its budget on education; that figure now is about 10 percent. The state is permanently bankrupt, saved only by massive, continual borrowing. Are these the foundations for future scientific achievement?...

For the past three decades, funding for science research has slipped, the education system has continued to decline, and immigration policy has become less and less rational...

Conservatives often say: All we need for a successful economy is low income tax, low government spending (except on defense), and low regulation. Zakaria gives great examples of why that is a giant stinking load of BS. For a rich country to sustain economic growth, it needs to stay on the cutting edge in terms of both research and human capital. This absolutely requires big government programs, especially basic research, public education, and infrastructure. There are just no two ways about it.

The ideal situation would be if liberals could win conservative support for these government programs in exchange for enacting the (few) conservative policies that really would boost our competitiveness - a cut in the corporate tax rate, tort reform, etc. The problem is that this is not even remotely an even trade. If our nation is going to regain its strength in the long-term, people are going to have to learn that liberal economic ideas are currently far ahead of conservative economic ideas. People are not yet learning this.

If at first you don't suck seed...

The conservative economic ideology that arose in the late 70s and early 80s was a lot bigger than just "tax cuts and more tax cuts." It included a sort of latter-day Protestant work-ethic - rich people were rich because they worked hard, and taxes were bad because they discouraged people from working hard. It was hawkish on inflation - after all, inflation redistributes money from the hard-working responsible rich folk to undeserving profligate borrowers. It despised regulation, which stops the John Galts (in the financial sector and elsewhere) from reaping the full rewards of their inborn genius. And yes, it included an element of racism; black people were poor because they didn't work hard and didn't make smart decisions (if you're sick of hearing me mention this, it's only because you're sick of hearing the truth). All in all, it was a very internally consistent approach.

The policies suggested by this Reaganite paradigm were clear and simple: low taxes, especially on labor and on ownership of capital; low levels of regulation; low inflation; and little or no government redistribution of wealth. Crucially, the Reaganites argued that their approach would not just be "fair," but would actually boost our economic performance. Compared to communism, Reaganism certainly seemed like a safe bet.

The problem was, it didn't work. We can never know exactly why Reaganism failed, but we can know for certain that it was insufficient to produce what we have come to think of as satisfactory economic outcomes. In the Reagan/Bush years, growth, productivity, and the stock market were all OK but unimpressive.

But it wasn't until the Bush II years that the inadequacy of the Reagan approach really made itself apparent. As Daniel Gross explains, we just lived through a "lost decade":

Let's start with the single most important economic number: jobs. Over the past 10 years, job creation has been extraordinarily weak. In September, on a seasonally adjusted basis, there were 108.5 million private (nongovernment) payroll jobs in the united States—almost precisely the number there were in June 1999. (To see the data, go here and then check "nonfarm private.") In the past decade, in other words, the private sector hasn't created a single job. That's awful, especially when you consider that the population grew 9 percent during those years, from 282 million in 2000 to 308 million today.

The stock market performed like somebody running on a treadmill. A lot of energy was expended to travel the tiniest of distances. As this depressing 10-year chart of the S&P 500 shows, stocks went precisely nowhere in the past decade, despite all the efforts to help the market, from slashing capital gains and dividend taxes to keeping interest rates extremely low to bailing out just about everyone...

Meanwhile, Americans seem to have lost their interest in investing. Between 1992 and 2000, the percentage of households owning mutual funds doubled, from 24.4 to 49 percent. And between 1992 and 1999, the percentage of Americans owning equities—either through mutual funds or as individual stocks—rose from 36.7 percent to 47.9 percent. To build on that impressive growth, in this decade, George W. Bush made the "Ownership Society" a theme of his presidency, suggesting that investing in securities could be the solution to everything from Social Security's long-term insolvency to the health care crisis. But Americans largely ignored these calls. According to the securities industry's Equity Ownership in America 2008 report, the proportion of the population that owned stocks or bonds fell from 57 percent in 2001 to 48 percent in 2008. And in 2008, 45 percent of U.S. households owned stocks—inside retirement programs and in brokerage accounts—down from 49 percent in 1998.

Investors may have been turned off by the market's poor performance. Or it may be that Americans didn't have much leftover cash to deploy into the stock market. Incomes were basically stagnant during the decade while the costs of vital goods and services—education, health insurance, energy—spiked. The latest report from the Census Bureau on income, poverty, and health insurance is full of interesting data that show that median household income in 2008, at $50,303, was below where it was in 1998. The same report shows (see Table B-1 on Page 44) that both the number and the percentage of people living below the poverty line rose, from 11.9 percent in 1999 to 13.2 percent in 2009.

Now, defenders of the Reaganite economic philosophy may argue: "External conditions were just so bad during the Reagan/Bush/Bush years that no policy could have made our economy do well; without Reaganism we'd have done even worse." In other words, that luck smiles on Democratic presidents. And I can't argue with that, really.

Or they may say: "Reagan, Bush, and Bush weren't true Reaganites." And I guess I can't argue with that either (hey, there are people who say that Stalin and Mao just implemented communism incorrectly), though it's hard to say how we'll ever get anything closer to true Reaganites than Reagan himself and Bush II.

Or they may say: "Who cares about economic results; what's important is that it's fair to let rich people earn and keep whatever they can." And of course I can't argue with that moral judgment.

But what I can say is: Reaganism is not sufficient to bring about prosperity. Maybe nothing is. But, given the vast array of alternative policies out there, it makes a lot of sense to me to try other stuff. Maybe there's some policy out there that is sufficient to bring about growth.

Conservatives need to stop idolizing Reagan, face the reality of the limitations of the Reagan approach, and start looking for alternatives. Simply pumping up the Glenn Beck crowd with paranoia and dark hints of race-war will not be sufficient to revitalize the conservative movement. In the long run, you need economic results. Even the communists found that out.

Error: bad arguments

Dean Baker, director of the Center for Economic and Policy Research, scoffs at the idea that the U.S. might one day default on its debt:

Yes, with the unemployment rate about to hit 10 percent, Robert Samuelson yet again expresses concern over the country's biggest problem: the prospect of defaulting on its debt. Never mind that investors are prepared to hold U.S. government bonds for an interest rate of just 3.5 percent -- the lowest rate (except for earlier in this crisis) in almost 60 years. There is still nothing more important for Post readers to hear about than the risk that the U.S. government will default on its debt.

So basically, Baker is arguing that a U.S. sovereign default is likely because the Efficient Market Hypothesis is true. I.e., if bond markets today don't expect a default, then one won't happen, because markets are perfectly rational.

Am I really reading this? It's a little hard to believe my eyes, especially when Baker talks about the housing bubble in the same post. In 2007, markets didn't expect investment banks to default on the mortgage-backed CDOs they had issued. Then the defaults started, and expectations changed fast.

If our best argument that a U.S. sovereign default is nothing to worry about is that markets don't currently expect one, well, we're in trouble.

Greed is good sometimes a sign of misaligned incentives

Interesting NYT blog post about banker bonuses:

Wall Street firms have always been famous for their generous bonuses to managers and traders — their so-called rainmakers. The graph above shows that employee bonuses have actually exceeded the estimated pretax profits of United States securities dealers in many years.

What is especially striking is the high level of these bonuses in 2007 and 2008, years in which profits were negative...

Now, we should expect bonuses to be relatively big at financial firms, because human capital (the knowledge and skills of bankers) is most of the capital that financial firms own. And if I'm right that bonuses are counted as costs and not paid out of profits (accountants, correct me if I'm wrong), the direct comparison of bonuses and profits doesn't mean a whole heck of a lot; it's apples and oranges.

But the correlation is extremely interesting. We see that in the 90s, even though bonuses were soaring, profits were soaring right along with them. In the 2000s, profits first stagnated and then collapsed, but bonuses kept on rocketing upward.

There's two ways for an economist to look at this. The first is to say "well, these pay decisions were made by private companies, and so the Invisible Hand must have had a good reason for dishing out huge bonuses to the employees of failing companies." The second is to invoke some basic principle of how pay should be determined - that pay should be related to value creation, for example - and then see if the facts fit the theory. The problem is, these two approaches lead to vastly different conclusions. It's hard to escape the notion that the Invisible Hand has been tied.

The blog post goes on to cite some ways this could have happened:

[But] do market forces determine pay the way most economists assume?

Many arguments to the contrary are effectively mobilized by James Crotty, the University of Massachusetts economist, in a recent working paper.

Top executives of financial firms often choose the very board members who are expected to monitor their pay decisions.

[T]he number of highly qualified graduates from top colleges eager to enter investment banking has typically far exceeded the demand. Why hasn’t the excess of supply over demand failed to drive earnings down?...The importance of personal networks and contacts gives rainmakers leverage...

[H]ighly paid employees in finance earn large premiums compared to their counterparts in other industries — pay differences that persist even when virtually all measurable differences in individual characteristics are taken into account. A recent National Bureau of Economic Research paper by Thomas Philippon and Ariell Reshef describes such premiums as unearned “rents.”

Deregulation made it easier for rainmakers to conceal risks that short-term profits would morph into long-run losses. The oligopolistic structure of the industry — now more concentrated than ever as a result of bank failures and mergers — made it easier for them to collude.

Financial firms are investing heavily in lobbying to block efforts to make the industry more competitive. Their rainmakers are still pretty good at making rain for one another.

Conclusion: There are two forces that subvert the Invisible Hand in this market. The first is that bankers use personal connections to exert pressure on board members (this is a form of "moral hazard"). The second is that bankers are often able to trick shareholders into ignoring the risks that bankers are taking (this is a form of "adverse selection"). Moral hazard and adverse selection are two very well-known, very well-studied forces that lead to a breakdown of market efficiency. We have known about these two forces for decades. There is no great mystery here.

Political lesson: The assumption that all decisions made by actors in the private sector are economically efficient is flat-out wrong. This myth has long been propagated by followers of Ayn Rand-style dogma, but it is as fantastical as any Marxist dogma. Asymmetric information - adverse selection and moral hazard - can cause markets to fail, as can externalities, public goods, and incomplete markets. This is a fact.

The next question is whether (and how) government intervention can push markets back toward efficiency. That is an open question. Randian dogma states - without evidence - that government solutions are doomed to failure. Don't buy it.

The limit of stimulus

The battle over stimulus has shifted. The curmudgeonly neoclassical economists - who think that recessions are caused by us suddenly forgetting how to make cars, etc. - have retreated to their caves, and those who say Obama's stimulus had no effect are looking less credible by the day. The fight is now over future stimulus. The battlefield is divided between those who say "We need more stimulus because we're still not out of the liquidity trap," and those who say "The debt burden of additional stimulus is too high."

Representing the former viewpoint, we have Paul Krugman:

The basic economic logic says that the stimulus should aim to close the output gap. And it’s obviously not remotely large enough to be doing that right now. Nor will it come close in the future....

[W]hile most of the stimulus has yet to be spent, the rate of spending as a percentage of GDP is already fairly high...That means that we’ve already seen much if not most of the impact of the stimulus on growth...

[W]e’ve gotten the big boost, and it’s clearly far short of what we really need.

And yes, we can afford more.

Most standard economic models say: As long as nominal interest rates are 0 (which they still are), stimulus spending boosts GDP. So we CAN boost our GDP more by borrowing and spending more. The question is whether we want to. There are two reasons we might not want to:

Reason 1: We care about the future a lot more than the past. Every $1 of stimulus spending requires us to borrow $x from future generations. When stimulus spending boosts GDP, "x" is less than 1, because boosting GDP boosts tax revenues (note: this is exactly the argument that supply-siders use to argue for tax cuts; the difference is that they don't realize that the trick only works when interest rates are 0). So suppose we can boost today's GDP by $1 by borrowing 50 cents from our children. We still might not want to do that, if we care about our children a lot more than we care about ourselves. Keynes, the original proponent of stimulus, said that "in the long run, we are all dead," but he died childless...

Reason 2: We're worried about a U.S. debt default. Recessions caused by financial-system collapses can last decades. Keeping up stimulus spending for decades can lead to massive levels of debt, as Japan found in the 1990s. Even if all that stimulus spending has its desired effect, the debt burden can be so large that at some point it pushes the country into a sovereign default. In fact, this is almost certain to happen to Japan. Sovereign debt defaults are massive economic crises - GDP usually drops by double digits and never bounces back. Governments fall, poverty soars. We really do NOT want this to happen to us. If we reach the point where continued stimulus spending would push our debt over 100% of GDP, we should think twice about continued spending, even if that spending would still have an effect. To me, this is much stronger than Reason 1.

So there are good arguments out there for reining in stimulus spending. We can't brush these arguments aside just by pointing out the foolishness of the "stimulus can't work" crowd. Our children will have to carry the burdens of peak oil, global warming, and a lower worker/retiree ratio that strains their pension programs. We might want to spare them the added debt burden that more stimulus would create, even if doing so comes at great cost to ourselves. And we certainly do not want to put them - or us - in danger of a U.S. sovereign default.

Exponentially increasing bizzareness of the conservative worldview

Law of the Universe: as conservatism increases, bizarreness approaches infinity...

From Brad DeLong:

I was (as penance for my sins) reading back issues of the American Spectator in the Berkeley library, and I came across a marvelously funny column by its Washington correspondent, Tom Bethell: "Doubting Dada Physics," in the August 1993 issue (pp. 16-17). The column's subject is:

...[a] solitary genius [Petr Beckmann]... publish[ing] his own ideas and discoveries at a time of growing intellectual corruption in the academy... [who] undermined Einstein's theory of relativity, and... show[ed] how physics could be returned to the classical foundation from which it was dislodged at the beginning of the twentieth century.

Now three things make the column funny:

• Relativity was not the most important disruption of "classical" nineteenth-century physics. Quantum mechanics provoked a much bigger and much spookier revision of the classical and common sense world view. From Bethell's perspective--given his ultimate political goal--he is shooting at the wrong target.
  
• Special relativity is one of the best-confirmed theories in history. Every time you run an electric motor, every time a cosmic ray particle falls from the sky, every time physicists fire up a particle accelerator, every time you use the Global Positioning System to figure out where you are, you confirm special relativity. Theories that "disagree" with special relativity do so only around its very edges, by making different predictions about the results of experiments that cannot have been run yet, or that we will never be able to run.
  
• Our intuitions about time and space are derived from our own experience, living as we do on a planet and moving at velocities much, much lower than the speed of light. It makes little sense for Bethell to raise these intuitions to the status of "the most basic precepts of science... the alpha and omega of the material world--the irreducible character of time and space": as little sense as it would for someone living on the great plains to deny the existence of oceans.

It is not clear to me from Bethell's column whether Beckmann understands relativity or not; it is clear that Bethell does not understand what he is attacking--and that he is attacking it because of what he presumes are the moral and political implications of relativity physics. He is thus in the position of saying the opposite of Galileo--instead of "And yet it moves," he is closing his eyes to a huge amount of experimental evidence and saying, earnestly if incoherently, "and yet it stands still."

But there are unfunny parts to the column as well.

First, conservatives who dislike Einstein do so for one of two reasons:

• Because the admission that measurements of time and space depend on the motion of the observer is in their minds' somehow tied up with the erosion of traditional cultural "absolutes," and scientific truth should be sacrificed to cultural order whenever necessary. In Bethell's article is a whiff of the silencing of Galileo Galilei, the burning of Giordano Bruno, or Trofim Lysenko's sending Russian geneticists to the GULAG: you get the sense that Bethell would be opposed to the teaching of relativity even if he believed it was true.
  
• Because Einstein was a Jew: the meme of anti-Einstein thought in modern conservatism is a legacy of anti-semitism.
  

Opposition to relativity for politico-cultural reasons and opposition to relativity as a legacy of anti-semitism are usually inextricably mixed. Neither is attractive. In Bethell's article, you can see: (i) the hint that Einstein's purpose in proposing his obviously absurd theory was to attack traditional cultural and aesthetic forms; (ii) the hint of a conspiracy of silence among physicists to prop up Einstein's reputation for sinister purposes; (iii) the claim that relativity's attraction to "intellectuals" arises because it is "abstruse... deliciously disrespectful... marvelously baffling to the bourgeoisie." All three of these have roots in anti-semitic visons of the secret conspiracy of over-clever but deceptive Jews--"rootless cosmopolitans" who lack the earthy common sense and grounding in the soil of the Volk--out to undermine the faith and social order of the simple Christian folk.

If DeLong's interpretation is right, then the conservative worldview is even more bizarre than I could have possibly imagined. So conservatives dislike Special Relativity because A) the word "relativity" sounds liberal, and B) Einstein was a Jew? So would they love the theory if it was called "Absolutivity [of the speed of light]", and if someone pointed out to them that the theory was invented by the non-Jewish Heinrik Lorentz and Henri Poincare (with Einstein merely extending it to the E=MC^2 idea)? And why don't they hate quantum mechanics, which holds that a particle's position and momentum aren't even well-defined, and which actually was largely invented by Jews? (Actually, scratch that, they probably would hate quantum mechanics if they knew the first thing about it.)

(Random note: "relativity" exists in classical mechanics too; velocity and momentum and energy are all relative to your "frame of reference". "Special Relativity" is just a modification of classical relativity to include a constant speed of light, which requires that distance, time, and mass also be relative to the frame of reference. )

The larger point is how modern American conservatism has become a lot like Marxism - an all-pervading ideological worldview that comes up with canonized positions on everything from phonics education to basic physics. In the modern American conservative movement (MACM), the personal is political, and every single argument or issue on the planet is a cosmic struggle between the forces of conservatism and liberalism. They have their own special vocabulary (when I used the word "Islamism" at my sister's wedding, a conservative wedding guest sternly rebuked me: "Islamofascism!" he thundered, as if I had used a taboo term by not saying "Islamofascism").

Increasingly, the intellectual dialogue of conservatives, like that of Marxists, is in code words, whispered back and forth between people who only know what the code means because they've spent a lifetime steeped in the doctrine. Non-conservatives just kind of blankly stare, as the self-enclosed universe of conservative ideology retreats further and further into the cosmos. Somewhere, at the far ends of infinity, that micro-universe will collide with the Marxist one in an ecstasy of absolutism, and Rand and Reagan will line-dance with Marx and Lenin, with Lyndon LaRouche calling the steps.

Are conservatives dum-dums?

As far back as I can remember, I wanted to be a Goodfeather I've argued against the notion that "conservatism = stupidity." This notion is surprisingly common among liberals. Take one look at a Sarah Palin rally or a Tea Party protest, and then contrast them with any academic department at any major university, and you'll see why it's so common.

And when you look at the evidence, statistical correlations support the "conservatives are teh st00pid" conclusion:

Conservatism and cognitive ability are negatively correlated. The evidence is based on 1254 community college students and 1600 foreign students seeking entry to United States’ universities. At the individual level of analysis, conservatism scores correlate negatively with SAT, Vocabulary, and Analogy test scores. At the national level of analysis, conservatism scores correlate negatively with measures of education (e.g., gross enrollment at primary, secondary, and tertiary levels) and performance on mathematics and reading assessments from the PISA (Programme for International Student Assessment) project. They also correlate with components of the Failed States Index and several other measures of economic and political development of nations. Conservatism scores have higher correlations with economic and political measures than estimated IQ scores.

Of course, as the American Enterprise Institute is quick to point out, there is a caveat. The conservatives studied in the paper are social conservatives:

The Conservative syndrome describes a person who attaches particular importance to the respect of tradition, humility, devoutness and moderation; as well as to obedience, self-discipline and politeness, social order, family, and national security; and has a sense of belonging to and a pride in a group with which he or she identifies. A Conservative person also subscribes to conventional religious beliefs and accepts the mystical, including paranormal, experiences.

Still, this pretty much fits with the standard liberal narrative. Dum-dum social-conservative hicks are easily swindled by rich plutocrats, who lure the dum-dums with talk of restoring traditional values, but then once in power focus on handing out money to their buddies.

The AEI article goes on to make a pretty weak attack on the liberal narrative:

Just a minute. Let’s critique that logic. For one thing, the smartest people do not necessarily make the best political choices. William F. Buckley once famously declared that he would rather give control of our government to “the first 400 people listed in the Boston telephone directory than to the faculty of Harvard University.”...Conservative writer John Derbyshire has also observed that political naivety exists at both extremes of the IQ distribution, not just the lower one.

Ah. So conservative writers say that smart people make bad decisions, hence conservatives aren't stupid! You're not helping your case, guys.

But even if we concede that more intelligence generally means better political choices, the conservatism-is-stupid argument still does not follow from Stankov’s research. Consider that social conservatism is about following traditions. It is intellectually easier, in some sense, to follow the crowd. Iconoclasts face a cognitive hurdle—they have to justify to themselves and others why they feel differently. Probably for that reason, non-traditionalists tend to be smarter than the average person.

But, crucially, this does not mean most intelligent people oppose tradition. As long as smarter people are more likely to be skeptical of tradition, then full-blown rejection of tradition will almost inevitably be correlated with higher IQ, even if a majority of smart people still favor traditionalism.

This would be a good argument...IF conservatives still formed a majority at every level of intelligence. People with graduate degrees are, on average, liberal. The fact that, among communities of mostly smart people, liberalism is the norm and not iconoclastic at all kind of puts paid to the idea that liberals are just the nerds who didn't get laid in high school.

Oh yeah, this post was about to be about how conservatism doesn't equal stupidity. Right. I was having too much fun slapping down some stupid (or, more likely, simply disingenuous) conservatives. But here's my counterargument:

Correlation doesn't equal causation. The AEI article is quite right to point this out. Social conservatives, on average, are less intelligent than social liberals, but that doesn't mean that people accept conservative ideas because they are less intelligent.

When you think about it, most social issues - gay marriage, racial integration, religion in schools, drug prohibition, etc. - aren't questions where you can think your way to the answer. There's no set of partial differential equations that will tell you whether Adam and Steve should be allowed to get married. These are questions of values. If you realize that, then the correlation between intelligence and liberal values is actually quite surprising. What could cause smart people and not-so-smart people to have such different opinions on questions where intelligence is nearly useless?

Consider this: many smart people have high income. Because of the economic force of "agglomeration", high-income people tend to live in the centers of big cities, where they can work in finance or high-tech or whatever. Living in the middle of a big city forces you to interact with people of many different races, religions, and sexual orientations on a daily basis. It's damn hard to be a social conservative in the middle of a big urban area. That's one reason why the correlation between urbanization and liberalism is strong (much stronger than the correlation between intelligence and liberalism). Many smart people also work at universities, which have a similar cosmopolitan dynamic.

Now consider this: many less-intelligent people have very few ways of meeting people socially (because they have less money and/or live in rural areas). The obvious place to meet friends and lovers is church. Church, of course, makes you socially conservative. And socially liberal policies often threaten (or seem to threaten) the church-centered social dynamic.

A third consideration: Smart people often have valuable personal job skills, and skills = economic mobility. If you've got the goods, it's easy to find another job if you get laid off. Less intelligent people are forced to rely more on connections and social networks for their economic security, and that means tribalism. A smart Jewish guy finds himself unemployed when his investment bank goes under, and he probably thinks: "I'll just get another job, I've got obvious skills." A not-so-smart Jewish guy gets laid off from his job at a construction company, and he might think: "What Jewish people do I know who can get me a new job?" My guess is that this economic value of tribalism is the main driver of racism. And racism, as you'll know if you haven't been living in a sealed fallout shelter for the past 30 years, is one of the main drivers of modern social conservatism.

To sum up, social conservatism and social liberalism could easily result from the social necessities of educated vs. uneducated people. To liberals who say "Conservatives are just dum-dums," I say: "Would you be so liberal if you had to live in a small town, meet people at church, and rely on ethnic ties for your job?"

It's worth thinking about.

Can't Can, and often do can argue with results!

Conservatives before the stimulus: It can't work.

Conservatives after the stimulus: Sure, the economy improved, but we can't know it was the stimulus that did it.

Well, in a certain sense, that's true. Correlation does not imply causation, and since we can't do controlled experiments on the whole economy, we'll never know if anything works. Very scientifically minded of you, conservatives; please keep this in mind when you claim that "tax cuts stimulate growth" or "tax cuts increase tax revenue" or whatever.

But for the rest of us, the evidence is as clear as economic evidence gets. To elaborate, I'll play my Summon Krugman card:

Josh Bivens at EPI has a good overview of the evidence that the stimulus is working. As he says,

A serious look at the evidence argues that this debate should be closed: ARRA has played a starring role in pushing the economy into positive growth.

In another piece, Bivens notes that the usual suspects are now moving the goalposts, conceding that the stimulus is producing growth but saying that it’s not “genuine” growth because … it was caused by the stimulus. Ahem...there’s no distinction between genuine and artificial employment...

[W]hile most of the stimulus has yet to be spent, the rate of spending as a percentage of GDP is already fairly high (take that, Richard Posner), close to the maximum it will reach over the whole course of the plan. That means that we’ve already seen much if not most of the impact of the stimulus on growth.

My 9th-level Krugman defeats your 5th-level Posner!

At any rate, this is why I give Obama a "B" for halting our slide into economic depression. I agree with Krugman that more should have been done (and I also think that stimulus should have contained more infrastructure spending and fewer tax cuts). But the correlation is as clear as correlations get.

The bigger question in my mind is: When will conservatives stop taking economics on faith? The economy went bust during Bush I, boomed under Clinton, stagnated and then went bust under Bush II, and then is recovering under Obama. That isn't hard evidence for anything. But conservatives seem to take it as evidence that Republican economic policies are healthy for the economy, and Democratic policies disastrous. If that isn't a leap of faith, I don't know what is.

Weren't Republicans supposed to be the hard-headed realists in this country? Maybe Democrats are so divided because they have to carry the burden of being our utopian idealists and our pragmatists at the same time, while the Republicans spend their time wringing their hands and worrying feverishly that, somewhere out there, a black person has taken some of their money.

Update: Brad DeLong shows how to do stimulus cost/benefit analysis.

Punishing our friends because our enemies are beyond our reach

Via Ry, Andrew Sullivan discusses the Goldstone Report on Israel's Gaza incursion. Goldstone writes:

In Gaza, I was surprised and shocked by the destruction and misery there. I had not expected it. I did not anticipate that the IDF would have targeted civilians and civilian objects. I did not anticipate seeing the vast destruction of the economic infrastructure of Gaza including its agricultural lands, industrial factories, water supply and sanitation works. These are not military targets. I have not heard or read any government justification for this destruction.

Sullivan adds:

The laws of war are the laws of war...The notion of collective punishment, of deterrence by civilian attrition and suffering, is as repugnant as assuming that every prisoner seized in the chaos of war is "the worst of the worst" and torturing them.

[Obeying the laws of war] is not easy against a ruthless, asymmetric enemy, whose war crimes are a first rather than a last resort. But it is necessary. It is necessary.

I'm trying to think of a wittier, more intellectual response than "This is fugging retarded." I'm failing (although "Someone call the Waaaaaaaambulance" was a strong contender).

So, this is fugging retarded.

So attacking civilian targets is a "war crime?" In that case, we've committed massive war crimes in every war we've fought, since we bombed cities in Germany, Japan, North Korea, etc. And all someone has to do in order to make the enemy a war criminal is to put every missile launcher right between a hospital and a school. Which is, in practice, what modern urban guerrilla forces always do.

Apparently, total war (taking out the enemy's infrastructure) is now considered a war crime. Which means that if someone decides to wage total war on you, it's quite likely that you'll face a choice between A) winning, and B) not being a war criminal. This is like saying that if you are in a street fight, and someone fishhooks you, you are not allowed to bite his finger.

And yes, there is a difference between torture and strategic bombing. Torture causes much less suffering than strategic bombing, but it is not necessary to win wars. Hence torture is a "law of war" that we can safely chooseto follow even if our enemy does not.

In any case, here's the upshot. The laws of war should only apply to countries whose opponents obey the laws of war; otherwise, the system is biased in favor of nations that don't care about the laws of war. If we structure our international system to punish only those who choose to operate within the system (i.e. our friends), we're creating a massive incentive for everyone to leave the system. This is one reason Israel takes a lot of flack from human rights organizations; nobody expects their enemies, Arab countries, to respond to human rights criticism at all.

To sum up: flogging only those within our reach to flog, we're just making it clear that "within our reach" is a bad place to be.

John Derbyshire on race - nibbling at the edges of stale ideas

It all started when I clicked on Matt Yglesias' link to this blog post, which quotes the following line from John Derbyshire's new book, We Are Doomed: Reclaiming Conservative Pessimism:

Sun People [black and Hispanic] kids are, in the broad generality, unacademic and unruly.

This seems, upon first glance, to reflect the 18th-century theory that white people (and Asians) evolved in cold climates that required them to organize and cooperate, making them more inclined to follow rules and better able to work in groups. Although it's been around for hundreds of years, this theory of race is still conventional wisdom for many, and today usually includes the corollary belief that "Sun People" have lower natural intelligence than white and Asian "Ice People." It is regarded as a bedrock of truth by a number of contemporary "paleoconservative" writers, most notably Steve Sailer. Normally, upon reading a statement like this, I would snort and click on another link.

But this statement came from John Derbyshire. John Derbyshire is a man I respect, not least for delivering the all-time best takedown of "intelligent design" and expounding on the difference between urban and rural conservatives. He is also a man of great intelligence, a mathematician by trade. We have corresponded a number of times. So I decided to write him and explore why his thinking on race appeared, at first blush, to follow a line that was so much more conventional than his usual approach. I wrote:

In your new book you state that "Sun People kids are, in the broad generality, unacademic and unruly." I was wondering if you knew that Indian-Americans are, on average, the American ethnic group with the highest academic achievement and (by far) the highest median personal income.

And, assuming that you do in fact know this, I was wondering if you would classify Indians as "Sun People," given that they come from a hot sunny subtropical country and have very dark skin.

Derbyshire was kind enough to post a reply on his blog:

The precise terms of the Arctic Alliance are still in draft stage, and subcontinental Asians are giving us a lot of trouble.

IQ-wise, the population is multimodal, with low overall means. India, Pakistan, Bangladesh, and Sri Lanka are listed here with mean IQs of 82, 84, 82, and 79 respectively, ranking them at 123rd, 104th, 121st, and 135th out of 190. Some of the subpopulations in this area seem to show much better statistics, though, and among Hindus the caste system adds complications. In the matter of heredity, there are both European (from the Aryan invasions) and East Asian (from the Moghuls, who were a Turko-Mongolian blend) ancestries mixed in with a confusion of aboriginal stocks. See Chapter 36 of Michael Hart's Understanding Human History for a fuller account of subcontinental ancestry.

The general opinion on the Alliance drafting committee is that subcontinental immigration into Arctopia should be generous but highly selective, focused on the professional and entrepreneurial classes …

… just as it currently is for the U.S.A.

That didn't seem to really get at the question I was asking. The unresolved contradiction of the "Sun People/Ice People" theory remained - either Indians haven't yet had time to (d)evolve from their "Ice People" ancestors (which begs the question of why Hispanics are supposedly so different from both whites and Asiatics), or there is a lot more going on than the "Sun People" idea can explain.

So I responded with an even more long-winded email:

If the alleged unruliness of "Sun People" is genetically determined, then another problem presents itself: namely, the fact that Hispanics are a genetic mix of whites ("Ice People") and Native Americans (a racial group renowned for being taciturn and restrained). How do two non-unruly groups mix to make an unruly group? A related issue is that Native Americans are thought to be descended from Asiatic peoples, who migrated south from very cold climes as recently as 10,000 years ago — meaning that their ancestors were probably "Ice People" just as recently as the ancestors of the South Asians or the Vietnamese

(And if the unruliness of "Sun People" is culturally determined, then surely Indians have been living in the sun long enough to have become unruly — not to mention the Cantonese, who are generally above-average in business and academics among the Chinese.)

And regarding your proposal for "generous but selective" Indian immigration, why should a different standard hold for Africans and Latin Americans? Surely it is only to our advantage to recruit smart blacks and Hispanics for our population. In other words, it seems unclear to me why the existence of aggregate racial disparities in the U.S. population (which itself may be due in part to selection effects, e.g. slaves being selected for economic poverty and physical strength) should have any implication whatsoever for our immigration policy, since a method exists to evaluate individual intellectual abilities quite easily (i.e. look at their job skills).

And again, Derb was gracious enough to reply at length:

There is nothing "alleged" about Sun People unruliness. Violent street gangs in the U.S.A. are almost exclusively black and Hispanic. When Ice People form criminal fraternities (the Mafia, the Triads) they have an utterly different character, and mostly stay off the streets. U.S. prison life is dominated by Crips and Aztecas, not by wiseguys and hung gwan jai. For the situation in schools, which is what I was actually writing about, ask a teacher, or conduct the experiment I recommend at 128.2.

On the ancestry point, the ancestry of Hispanics in most parts of the US is 60 to 70 percent European, though for immigrants since the 1980s, the proportion is more like 40 to 50 percent. The overall average is around 65 percent European ancestry. Razib at Gene Expression has some good diagrams & comments here. For a detailed academic study, with lots of cool charts and state-by-state analyses, see here.

I am not a genetic determinist [144.4]. At the individual level, any large population includes great variation: fat and thin, extrovert and introvert; short and tall; smart and dumb. At the group level, overall population characteristics revealed by statistics — supplemented, increasingly, by population-genetic studies like the HapMap — give clues as to the limits within which that population, as a population, can be expected to achieve on the various indices of civilized social behavior.

I don't believe we know enough about population genetics to make predictions about mixed populations. Mixtures can deliver results that defy simple arithmetic, as Mark Steyn's well-worn analogy involving ice cream and dog poop illustrates. Unruliness in any case seems to be strongly influenced by social environment: in particular, by mismatches between (a) the skill set distributions among young people, especially young men (those distributions obviously having some connection to the distributions of innate capability), and (b) the opportunities for useful, non-unruly employment in the surrounding society. A surplus of young men relative to opportunities in trade and farming gave us the Vikings and the terrifying Magyar Horde … who then settled down to be polite, pacifistic — in fact, "taciturn and restrained" — Scandinavia and the Christian Kingdom of Hungary. In the Magyars' case, the settling down took less than a century, suggesting that no genetic changes were involved.

If all that is right, then the thing to avoid is lots of young people with low cognitive ability in a society with a small and diminishing supply of low-cognitive-ability employments. In a different society, with different employments, those young men might indeed be "taciturn and restrained": in the society they actually find themselves in, not. (And by the way, I am not sure that the inhabitants of Wolstenholme Towne, Swansea, Mound City, Fort Dearborn, etc., etc. would concur with your "taciturn and restrained.")

As to your "as recently as 10,000 years ago," that span of time is quite sufficient for significant genetic changes. Here is a recent book on the subject. Living in the sun doesn't do it (apologies to Prof. Jeffries here); what seems to do it is agriculture, a late arrival in the Americas.

Your last paragraph seems to suggest an immigration policy based on job skills. Lots of luck getting that through Congress! Current policy favors (a) persons with relatives already settled here, and (b) persons able and willing to cross an international border without permission. [201.7] Would your policy be a better one? For sure! Where do I sign?

There are other factors to be considered, though. Morality, for example. IQ studies suggest that at least part of the problem in big under-achieving populations like sub-Saharan Africans or Native Americans is that these populations don't contain enough smart people. Now you want to lure away the few smart people they have? And then there are those results from psychology telling us that at a deep level, great numbers of us can't be comfortable around persons of obviously different deep ancestry. [16.5] It may be that, even if you take job skills and IQ out of the equation, multiethnic societies can't be stable. Perhaps we should postpone further experiments in multiethnicity until we understand more about this.

In any case I am an immigration restrictionist and so can blithely finesse the issue. I'd like to see immigration cut dramatically — to a few ten thousands a year. At that level we could take the people we want from absolutely everywhere, without any possibility of dire effects, to us or them.

It's how you salt your stew. [212.7] Or, as the great English immigration restrictionist Enoch Powell used to say, and say, and say: Numbers are of the essence. Indeed they are, always and everywhere.

After this, I was a bit confused. If the Magyars (Hungarians) achieved civilized "Ice People" status a mere century after settling down and adopting agriculture (a thesis I find extremely plausible), then why haven't Hispanics (who have had agriculture for centuries) or blacks (who have had it for millennia) become "Ice People"?

And if Derbyshire is "not a genetic determinist," then why is it at all significant that "[genetic m]ixtures can deliver results that defy simple arithmetic"?

And why would someone who is not a "genetic determinist" make a statement like "IQ studies suggest that at least part of the problem in big under-achieving populations like sub-Saharan Africans or Native Americans is that these populations don't contain enough smart people"? (Note: it does not seem to me that it is within the power of IQ studies to demonstrate any such thing; what they "suggest" is of course completely dependent on one's personal supposition.)

My guess is that Derbyshire doesn't really know what he thinks about race and genetics. He sees group differences but doesn't have the data to explain them (because no one does); this makes him susceptible to the siren song of the "scientific racists," who are some of the only people talking openly about black-white differences in terms of group characteristics. Deep down, Derbyshire has a lot of doubt about the "black and Hispanic people are just a bunch of dum-dums" argument, but he can't resist the urge to - as F. Scott Fitzgerald so memorably put it - "nibble at the edges of stale ideas."

But when Derbyshire attempts to form his own, non-stale explanation for the alleged "unruliness" of the people he labels "Sun People," he comes up with something a lot better than Sailer-ism:

Unruliness in any case seems to be strongly influenced by social environment: in particular, by mismatches between (a) the skill set distributions among young people, especially young men (those distributions obviously having some connection to the distributions of innate capability), and (b) the opportunities for useful, non-unruly employment in the surrounding society. A surplus of young men relative to opportunities in trade and farming gave us the Vikings and the terrifying Magyar Horde … who then settled down to be polite, pacifistic — in fact, "taciturn and restrained" — Scandinavia and the Christian Kingdom of Hungary...If all that is right, then the thing to avoid is lots of young people with low cognitive ability in a society with a small and diminishing supply of low-cognitive-ability employments. In a different society, with different employments, those young men might indeed be "taciturn and restrained": in the society they actually find themselves in, not.

This strikes me as exactly the classic liberal explanation for the social ills of the urban underclass - the dissolution of the Rooseveltian political economy, with its paternalistic corporations and strong unions, threw the lower classes out of their guaranteed jobs, which resulted in family breakdown and increased crime. That is exactly the reason why the liberal solution to so many social ills is to (partially) re-establish government and non-government institutions that help low-skilled individuals maintain stable, productive employment.

Judging from the fact that he mostly scorns this kind of liberal solution, Derbyshire seems to think it's just not going to work; our only chance at maintaining a stable society is to throw up the ramparts, install the automated machine-gun turrets, and put up a big sign that says "Only the demonstrably smart may enter." Naturally, such a "solution" is a non-starter in a country that is already 13% black, 14.5% Hispanic, and 5% Asian, which might explain why Derbyshire's book is titled "We Are Doomed."

Maybe it's because I'm (somewhat) young, but I just don't see the point of sitting around saying "We Are Doomed." Even if you believe that the "smart people only" American fortress state would be the optimum (which I do not, since the idea of math geniuses working as janitors does not particularly appeal to me), you must admit that it's not in the cards. Why, then, not at least try the liberal solution? Why not try expanded public education, government job-finding services, stronger domestic-service-sector unions, national health care, etc.? Why not try teaching the Vikings to farm?

Unless, of course, you are a Steve Sailer, in which case you believe that our ghetto-dwelling black and Hispanic Vikings are too dum-dum to ever learn to be productive upwardly-mobile citizens. Unless you believe that "Sun People" and "Ice People" are truly two different races of man, fundamentally different in capability and potential. In which case we really are utterly doomed.

But something tells me John Derbyshire, pessimist that he is, is too smart by half to believe that.

(Additional notes/quibbles: the racial composition of American street gangs no more proves that blacks and Hispanics are inherently unruly than the sky-high Russian murder rate proves that whites are inherently unruly. And historical evidence of marauding Native American tribes is no more informative of group racial characteristics than the history of the Japanese Wako pirates, Swedish Vikings, etc., as Derbyshire himself points out in his own preceding paragraph...)

A long Nobel line

Congratulations to Elinor Ostrom and Oliver Williamson for winning the pseudo-Nobel Prize in Economics. Ostrom (a political scientist by trade) studies cooperative management of resources (which is one way to manage public goods and exernalities without the aid of a government), and Williamson studies the internal decision-making processes of firms.

This was a big surprise to all those who thought the prize would go to Eugene Fama, who was favored to win at an astounding 2/1 odds in prediction markets. Fama, of course, is known for the Efficient Markets Hypothesis and the now-discredited Capital Asset Pricing Model, as well as other asset-pricing models. Other favorites included Fama's co-author French, as well as Robert Barro, one of the biggest critics of fiscal stimulus spending.

Some, of course, will interpret the decision as a direct political snub to Fama and French (who look pretty silly arguing that last year's crash was a result of "efficient markets") and to Barro (who looks pretty silly arguing that Obama's stimulus had no effect on the economy). Felix Salmon, ever the voice of reason, points out that this isn't necessarily the case - because economics is such a broad field, it's always pretty likely that the winner will be a dark-horse. This, he says, is the "long tail" in action.

But although Salmon is right, he might be missing a more subtle implication of this year's prize. Yes, economics is a diverse field, but even so, the kind of work done by Ostrom and Williamson is not in any of the big shots' definitions of the mainstream. Work on the internal institutions of the firm, for example, has been out of fashion for many decades. The fact that this kind of work is getting recognized, even as many of the founding fathers of neoclassical econ (Fama, Barro, Cochrane, etc.) have yet to receive "their" prizes, means that the "long tail" is getting longer.

Neoclassical economists - the kind of people who argue that people form rational expectations, markets price assets correctly, and recessions are just the economy's optimal response to bad news - have long promoted their outlook as a canon that forms the core of econ, much as Newtonian, relativistic, and quantum mechanics form the core of physics. To the neoclassical crowd, ideas like Rational Expectations and the Efficient Markets Hypothesis (EMH) are as basic, fundamental, and well-established as Newton's Laws.

The problem is, that's a load of BS. Newton's laws are proven and re-proven in a thousand high school physics classes; not one shred of evidence has been found in support of Rational Expectations or the EMH, or RBC models or whatever. The foundations of the neoclassical paradigm are not laws, they are assumptions. The whole thing was, as Richard Feynman would put it, a bit of "Cargo Cult Science."

And yet the neoclassical guys routinely expect us - the rest of the econ world, along with undergrad econ majors and the general public - to believe that their particular set of assumptions forms the indelible core of the discipline, the foundation upon which others must build. I won't go into how and why they've largely succeeded (as illustrated by the prizes given to Robert Lucas and Edward Prescott), but what is apparent is that their whole edifice is starting to crumble. It is becoming increasingly apparent to everyone involved that neoclassical econ, as often as not, is a shackle that prevents us from coming up with accurate descriptions of economic phenomena, from market crashes to unemployment to the very real and obvious effect of stimulus spending.

And so Fama, Barro, and company suddenly find themselves smaller fish in a much much larger pond. Although econ is still not a rigorous science - and the pseudo-Nobel still doesn't require theories to be tested in order to win the prize - at least the neoclassicists are now forced to compete with people who don't accept their premises. That is a start. Instead of counting time until their "canonical" work is feted with inevitable recognition, Fama, Barro, and the rest will have to stand around in the same line as everybody else.

Short Grumps

Short but biting blasts of grumpitude direct from my bed:

1. I like Obama as much as the next guy, but I have to conclude that the Nobel Peace Prize is at this point being given out as an encouragement rather than as an award...

2. Greg Mankiw reports that the betting favorite for the "Nobel" Prize in economics is Eugene Fama, the inventor of the Efficient Markets Hypothesis. I think I just snorted rooibos tea right out my f-ing nose. Really, world? Seriously?

(For the record, I'm predicting that the prize goes to Mortensen & Pissarides for their model of unemployment...)

3. Second Star Trek movie "steering clear of political message-mongering"? Didn't J.J. Abrams watch the original Star Trek? Doesn't he know that political allegory and Star Trek go together like Klingons and batleths? Is his head made of "red matter"?

4. Speaking of Nobel prizes, has anyone noticed that the physics prize is being given to inventors again? That hasn't been common since the 1920s. The winners this year invented CCD (digital camera sensors) and clean fiber-optic cable. I don't begrudge these folks their award, but it does show how we're running out of groundbreaking theorists and experimentalists to give the prize to.

5. Why "neoclassical" economics is like postmodernism. Now that's a grump I can get behind.

6. "CEO of major bank" = "liar for hire." Now we know what justifies those bazillion-dollar salaries.

More grumps soon to come, you can be sure of that...

Mercy vs. Irreversibility

Via Ry, Ta-Nehisi Coats slams the Texas death-penalty system:

Texas justice is essentially sorcery, and there will be people who say that we can perfect it, that we can close the loop-holes. They're wrong. The problem isn't with loopholes--it's with us. We are fallible.

This gives me a good opportunity to explain one of my biggest policy mind-changes: why I now oppose the death penalty, when I used to support it.

My support for the death penalty was based on my rejection of the most common argument against it - that it's cruel. To me, life in prison without the possibility of parole - the punishment most often put forward by anti-death-penalty activists as the alternative to execution - is a horror much worse than death. To be consigned to hellish bondage for your entire life, with zero hope of redemption or release, is a nightmare; it's just the death penalty plus extra years of misery. It is also pointless, for unless we want to punish people simply for retribution's sake, there's absolutely no social benefit to keeping someone alive in prison for decades. If I were the criminal, I would crave the mercy of death.

But of course, I was ignoring the possibility of executing the innocent, which was damn stupid of me. The problem with the death penalty is not that it's cruel, it's that it's irreversible. Executing one innocent man is a far greater crime than forcing 1000 serial killers to endure life in prison. And, as Coates points out, humans are fallible. We have executed the innocent, and we will again. The only solution is not to execute anyone.

Of course, conservatives probably disagree with me. They might say that the sense of closure that execution gives to the families of victims outweighs the lives of the few people who are mistakenly killed. I just don't identify with that perspective.

Earth to Johnson & Kwak: People kill people more easily with guns.

Simon Johnson and James Kwak attempt to rebut the notion that massive Chinese reserve accumulation was a (the?) major cause of the U.S. housing bubble. They do an extremely poor job of it. Their arguments are a collection of straw men, internal contradictions, and questionable economics.

Johnson and Kwak write:

According to [the "blame China"] story, the global financial crisis was caused by hardworking Chinese factory workers who committed the sin of over-saving, which created a glut of money that needed to be invested, conceptualized in a great episode of public radio's "This American Life" as the "giant pool of money."

This is a totalstraw man. Nobody ever claimed that the fault lay with frugal Chinese households. The problem was that the Chinese government took those savings - deposited almost entirely in state-controlled banks - and used them to buy massive amounts of U.S. Treasuries.

(Japan and the oil exporters also had large surpluses, but for political reasons, the finger generally gets pointed at China.)

There is a good reason the finger doesn't get pointed at Japan: Japan has a floating currency. It is not pegged. China's currency peg forces it to buy tons of Treasuries to keep its currency cheaper than the market wants. Japan used to do this, but it hasn't recently. The oil exporters do share some of the blame for global financial imbalances, but the reason they are rarely mentioned is that their conribution was just much smaller, in absolute terms, than China's.

This beast from the East, seeking higher yields than it could find in Treasury bonds, flooded into the housing market, pushing down interest rates and pushing up housing prices, and creating a bubble that finally collapsed, with the results we all know.

That is an absurd characterization of the "imbalances" story. Everyone knows that China's purchase of U.S. assets was primarily the People's Bank of China buying U.S. Treasury bonds and bills. China was not a major direct player in the U.S. housing market, and nobody is saying it was. This is like a straw man without the straw.

Now here comes the jaw-dropping self-contradiction:

More nuanced proponents of this theory hold, in a "fair and balanced" sort of way, that over-savers in China and under-savers in the United States -- and other countries, like Spain, Britain and Ireland -- are equally to blame; in any case, it's the imbalance that's the problem...

Like most errors, this story contains an element of truth. In general, it is not a good thing for a country to consume more than it produces indefinitely because to pay for its excess consumption it must borrow money from the rest of the world, and that country can consume more than it produces only if some other country produces more than it consumes. In particular, the U.S.-China imbalance is due in part to the Chinese policy of keeping its the value of its currency artificially low -- encouraging Americans (and other foreigners) to buy Chinese exports and discouraging its citizens from buying imported goods.

But the "blame China" story (or the "half-blame China" variant) suffers from serious problems. First, it takes two to tango. No one put a gun to the American consumer's head and forced him to buy a new flat-screen TV or to do so by taking out more debt.

So, 1) proponents of the "imbalances" theory think that the U.S. financial system and China's exchange rate peg were both to blame for global imbalances, and 2) China's exchange rate peg was indeed partially to blame for global imbalances, but 3) this somehow makes the "half-blame China" story wrong? Unless my eyes deceive me, Johnson and Kwak just explicitly made the case for the "more nuanced" version of the theory that they then reject...

Now here comes the bad economics:

Third, there is no particular reason why a "giant pool of money" should produce a bubble. A savings glut should lower interest rates, which should increase the value of housing; a bubble occurs when prices go up more than dictated by fundamentals like as interest rates. If the run-up in housing prices was a direct result of over-saving in China, then housing prices should have fallen only if China stopped over-saving -- which has not happened.

So, suppose you accept - as Johnson and Kwak seem to do - that people are irrational (so bubbles can easily exist). Now suppose you have a government policy (Chinese exchange rate peg and American financial deregulation) that makes it much easier for irrational agents to form a bubble. Johnson and Kwak are saying we shouldn't blame the government policy - we should blame the people themselves for being irrational in the first place! This is the international-finance equivalent of saying "Guns don't kill people; people kill people."

Can we (i.e. a few smart people in a room, arguing about how to improve the world) change mass consumer behavior? Maybe, but only slowly, and only by long-term media pressure. Can we change government policy? Yes, rather easily, if we can get politicians to listen to us. So why do Johnson and Kwak want to shift the blame for the crisis onto the segment of society that is the hardest to change?

No one is arguing (at least, no one serious is arguing) that the U.S. financial system, enabled by deregulation, a permissive culture, and bad finance theories, is absent of blame for the housing bubble; of course it was a culprit. But to argue that therefore China' government is blameless is just disingenuous. Without that flood of Chinese government money into U.S. Treasury bonds, the risk-shifting wizards of Wall Street would have had lot less extra leverage to play with, which would have meant less demand for subprime mortgages to securitize, which would have meant fewer NINJA loans. To say that a government can't dump a trillion dollars into financial markets and not end up radically distorting private incentives is either intellectually dishonest or silly.

Conservatives: If you're serious about putting our guns down, you go first

In an email titled "Libs only care about the environment when it's not inconvenient to them part 4,938,824," Chris notes that companies like Nike and Apple (which are leaving the U.S. Chamber of Commerce due to that group's stand against CO2 emission restrictions) happen to make most of their stuff in China (which has no emission restrictions and is generally an environmental nightmare). Assuming that by "libs" he refers to "liberals" instead of "Mad Libs" the word game, I conclude that he thinks liberal groups are being hypocritical on environmental issues.

Now, even if that were true, it wouldn't change the issue one bit, because the messenger is not the message. If a murderer says "don't kill people," does the fact that he's a hypocrite make murder OK? Didn't think so.

But even more importantly, Chris seems to be misunderstanding the nature of externalities in this case. Companies don't pollute because they like it; they pollute because they have to turn a profit in order to survive, and polluting cuts costs. If a company voluntarily restricts its own emissions, it'll be quickly under-sold by all the other companies that aren't so scrupulous.

Now some companies may not like this state of affairs. They may recognize that global warming will hurt their businesses in the long run. But no one company, acting on its own, can change things. The only solution is to make a rule that all companies, everywhere, have to limit emissions. Such a rule would allow Nike and Apple - and everyone else - to cut emissions without being undersold. (Note that China wouldn't have to be include in such a rule for it to have an effect; we could just impose a carbon tariff on all Chinese goods.)

Sadly, some conservatives don't seem to intuitively grasp this idea of externalities - the idea that things that individuals do can have side effects on other individuals. The seductive Big Lie of the Ayn Rand ideology is that you, and you alone, are in full control of your life and destiny. No interdependence, no side effects, and no synergy. I kind of wish that we did live in an Ayn Rand world, but the fact is we don't.

In the world we actually do live in, people in a Mexican standoff aren't going to put down their guns one by one. Calling them hypocrites doesn't help the situation.

Once more unto the breach

Eric Falkenstein blogs:

I note many of today's full-time intellectuals, those writing about ideas, have no such humility. They think everything they believe is simply true; there is no legitimate argument against their beliefs...

In Chris Mooney's book The Republican War on Science (discounted to $3.99 at my local Barnes and Noble), the book jacket lists several examples of 'war' on science...Is it really a huge problem that the US federal government does not fund all stem cell research, given that several states have earmarked hundreds of millions towards these select lines, and several other countries are massively funding this unproven thread?

Two points in rebuttal:

1. When assessing these seemingly self-assured public intellectuals, Falkenstein might want to consider the Hegelian dialectical issue. There are a lot of people getting paid to loudly put forth certain viewpoints (e.g. the oil-industry hacks who get paid to deny anthropogenic global warming). When writing about global warming, one must ask oneself the question: "Should I write a nuanced, self-reflective piece, or should I make some attempt to balance out the uni-directional noise of the mercenary opposition?"

Some pundits surely think every word they write is true. But others are simply frightened that being fair will hand the battle to the enemy. Such is the lamentable nature of mass media; in a shouting match, it's hard to yell something fair and balanced and still be heard.

2. As for stem cell research, the actual funding is not the point; it's the precedent. We don't want to become one of those countries where state deference to religion really does stifle science in a big way (currently, all of those are Islamic countries, but not historically). We are not yet close to becoming one of those countries. Good. It's worth fighting to keep us from getting any closer.

What's a "Darwinist"?

A reader at Andrew Sullivan's blog asks:

What is evil for the Darwinist? Simply an externality of the struggle of the fittest? For all the pretensions of science, and all their discounting of the mythical understanding of man, do they really expect us to believe that thousands upon thousands of years of evolution -- that is, making us fit for this world, adapting to this world -- ends in Hiroshima and Nagasaki (or Auschwitz)?

I love answering stupid questions. It makes me feel so much smarter than I really am.

The answer to that reader's question is: Many people do not assume that good always wins. If you think that history is a story where good has to win in the end, then it makes no sense that evolution could be true, because evil is obviously still with us. But maybe, in the real world we live in, good doesn't always win. Maybe evil will destroy the world someday. The reader doesn't want to acknowledge that as a possibility; fine. He wants to believe things that are pleasant. Fine. But he should understand that there are people for whom believing in pleasant things is not the top priority.

Now here's my question: What is a "Darwinist"? Are there some people running around saying that "survival of the fittest" is the way the world ought to be? If so, I would personally view such people as cranks. You don't see anyone going around espousing the moral rightness of Newton's Laws of Motion, or the germ theory of disease. There are no priests giving sermons on the rightness of the Schroedinger Equation. I hope.

By using the term "Darwinists," this reader (along with many others who use the term) is implying that scientists who promote a certain theory are asserting the moral rightness of that theory. That, in general, is not the case. But even if there were such scientist/preachers, it would not make science and religion equivalent. It would just mean that some people were making a religion that made reference to scientific results. If I'm a wallpaper-hanger who happens to commit genocide, that doesn't mean that wallpaper-hanging is genocide.

Now here's my next question, to anyone who feels like answering: Suppose God really did create humanity exactly as it's described in the Bible. Suppose (and I don't discount the possibility) that that was an incontrovertible fact. What would that tell us about good and evil?

(Now while you think about that, I'll go back to thinking about what to write for my third-year paper...)

Exports, currencies, and credible threats

I went to see Paul Krugman's lecture on globalization yesterday (part of a "festschrift" conference honoring a U of M professor, Alan Deardorff). I was surprised by what a good speaker he was, given the tendency of some professors to descend into jargon when facing a crowd. Those years of punditry have served Dr. Krugman well.

In any case, one of the most interesting - and ominous - parts of the lecture was Dr. Krugman's prediction on the end of America's current economic slump. Recessions caused by banking crises, he said, last a long, long time (since banks become institutionally wary about making new loans). Every country that has experienced a banking crisis-driven recession in recent decades - Sweden, Japan, Argentina, Mexico - has, he noted, exported its way out of the slump.

Having made this point, he paused, and said "Well, unless we find another planet to export to..."

Most people in the audience, hearing that remark, probably took it to mean that global demand is so anemic there's no one to buy our exports. That may have been true at the beginning of this year, when global trade collapsed. But if you look at the headlines now, you'll notice that our top trading partner, China - which also happens to be the world's second-largest economy - has shaken off the slump like a bear shaking off a pesky chihuahua. China is forecast to grow 8.5% this year and 9% next year.

But Krugman discounted the possibility that China will buy our exports, and with good reason. As long as China keeps its currency, the yuan, de-facto pegged to the dollar (a peg that was lifted for about two years and then reinstated as soon as the crisis hit), they will continue to run a big trade surplus with us. This is why Willem Buiter says that dollar depreciation is necessary to get the U.S. growing again - but, like Krugman, is extremely skeptical that China will allow this to happen. Hence, our economy will limp along for a lot longer than Sweden's did after its banking crisis.

What do we do about this? Well, we could do what Britain did to us in the Great Depression, when we tried to do what China is doing now: raise massive trade barriers, and force the over-eager exporting behemoth into a sharp vicious slump. That would help no one, of course. But if we could use the credible threat of protectionist measures to force China to revaluate its currency, both the U.S. and China - and the rest of the world - would benefit enormously, the U.S. from increased growth, China from increased purchasing power for its consumers.

Can we make a credible threat? China has been a source of cheap labor for U.S.-based producers and retailers, and those big businesses will be the first to oppose any proposed trade barrier. (Note that those are the same businesses that often wax eloquent about the value of "free markets" and the evil of "government intervention," except when massive anti-market intervention by the Chinese government boosts those companies' profits at the expense of low-end American workers). And a trade war, though it would hurt China the most, would hurt us a bit as well.

But when the alternative to a Chinese currency revaluation is a "lost decade" for the American economy, our course should be clear. If the threat of trade barriers is necessary to give millions of Americans a shot at re-entering the labor market, then so be it. Even Krugman, once one of the biggest advocates of free trade, mentioned in his speech that we shouldn't be inordinately scared of protectionism. Sometimes the disease really is worse than the cure.

Spouting a lot of pomo nonsense does little to lessen the power of science...

They Might Be Giants has a new song out called "Science is Real." Lyrics:

Science is real
From the Big Bang to DNA
Science is real
From evolution to the Milky Way
I like the stories
About angels, unicorns and elves
Now I like those stories
As much as anybody else
But when I'm seeking knowledge
Either simple or abstract
The facts are with science

Matt Yglesias doesn't think much of this idea. He harumphs:

it’s disappointing to see TMBG embracing [the] discredited view that “science is a system of statements based on direct experience and controlled by experimental verification.” That’s just not the case.

Oh no? Why not, Matt?

Nothing is ever observed that admits of a definitive, theory-independent observation nor does anything ever happen that can verify or falsify a single proposition in isolation. Obviously, observation and experimentation are integral to the work of scientists, but it’s a lot murkier and more complicated than that.

To quote Alex Trebek: I don't get it. (Actually, I kind of do, but it's just so poorly written that I don't feel like first explaining it and then writing a careful, detailed response. Suffice it to say that it's a pretty piss-poor straw-man argument).

I think it’s unfortunate that people trying to enhance the social prestige of science and scientists (which is basically what the TMBG song is about) have this tendency to want to fall back on this kind of naive realism and positivism as their means for doing so. To understand why science is so impressive what I think you really need to do is not talk about how it’s “real” (whatever that means) but put it as a social practice alongside other social practices aimed at explaining the world. You’ll see that science is impressively progressive—when old theories get overturned by newer ones, our capabilities as a society and as a species are enhanced in really noteworthy ways. There’s no better set of ideas or practices out there.

Ah, yes. Naive realism and positivism. Because if you label people's beliefs with the suffix "-ism," that automatically makes the beliefs less credible and more risible. Because, you know, don't you remember fascISM and communISM? Those belief systems didn't work out, and they had "ism" on the end of their names. Hence, saying "science is real" is stupid. Got it?

OK, OK, I'll explain why Yglesias is being full of shitism.

If Yglesias thinks TMBG is touting science because scientific theorems true in some abstract ontological formal-logical sense, well, he's just not giving them enough credit. We know that science does not equal logic. We know that theories require assumptions. That is called the problem of induction. I learned it at "philosophy camp" at age 13. Duh. And scientists will be the first to remind you that theories can only be disproven, never proven, by experiment. Duh.

The point of science is not that it is self-improving over time (though that is a nice feature). The point is that it works. Science is useful to us. Attempting to gauge the mood of Zeus will not tell us when it is going to rain; meteorology will. That is why we use meteorology to predict the weather now, instead of Zeus. Usefulness is a far better measure of "reality" than some cosmic ontological truth or formal logical axiomatic consistency. TMBG, I am assuming, understand this perfectly well and are not trying to claim otherwise when they say that "science is real."

So to leftist critics of scientific thought, I say: Stop making us sift through increasingly dense thickets of jargon to point out why your stale arguments are stale. We know all you care about is shifting university funding from engineering to the humanities.

(And to rightist critics of science, I of course say: Go ahead and wait for Zeus to make it rain or for Yahweh to cure your Parkinson's disease. It's your funeral...)

Shadow of the Lack of a Hegemon

Christopher Layne, a professor of government at Texas A&M, and his co-author Benjamin Schwarz have written an excellent column detailing exactly what I think is the main danger facing the world today:

The international order that emerged after World War II has rightly been termed the Pax Americana; it's a Washington-led arrangement that has maintained political stability and promoted an open global economic system. Today, however, the Pax Americana is withering, thanks to what the National Intelligence Council in a recent report described as a "global shift in relative wealth and economic power without precedent in modern history"...

At the heart of this geopolitical sea change is China's robust economic growth. Not because Beijing will necessarily threaten American interests but because a newly powerful China by necessity means a relative decline in American power, the very foundation of the postwar international order...

The Obama administration and the Federal Reserve have adopted policies that have dramatically increased boththe supply of dollars circulating in the U.S. economy and the federal budget deficit, which both the Brookings Institution and the Congressional Budget Office estimate will exceed $1 trillion every year for at least the next decade. In the short run, these policies were no doubt necessary; nevertheless, in the long term, they will almost certainly boomerang. Add that to the persistent U.S. current account deficit, the enormous unfunded liabilities for entitlement programs and the cost of two ongoing wars, and you can see that America's long-term fiscal stability is in jeopardy...

Going forward, to defend the dollar, Washington will need to control inflation through some combination of budget cuts, tax increases and interest rate hikes. Given that the last two options would choke off renewed growth, the least unpalatable choice is to reduce federal spending. This will mean radically scaling back defense expenditures, because discretionary nondefense spending accounts for only about 20% of annual federal outlays. This in turn will mean a radical diminution of America's overseas military commitments, transforming both geopolitics and the international economy...

Since 1945, the Pax Americana has made international economic interdependence and globalization possible. Whereas all states benefit absolutely in an open international economy, some states benefit more than others. In the normal course of world politics, the relative distribution of power, not the pursuit of absolute economic gains, is a country's principal concern, and this discourages economic interdependence. In their efforts to ensure a distribution of power in their favor and at the expense of their actual or potential rivals, states pursue autarkic policies -- those designed to maximize national self-sufficiency -- practicing capitalism only within their borders or among countries in a trading bloc.

Thus a truly global economy is extraordinarily difficult to achieve. Historically, the only way to secure international integration and interdependence has been for a dominant power to guarantee the security of other states so that they need not pursue autarkic policies or form trading blocs to improve their relative positions. This suspension of international politics through hegemony has been the fundamental aim of U.S. foreign policy since the 1940s...

The entire fabric of world order that the United States established after 1945 -- the Pax Americana -- rested on the foundation of U.S. military and economic preponderance. Remove the foundation and the structure crumbles...The result will be profound changes in world politics. Emerging powers will seek to establish spheres of influence, control lines of communication, engage in arms races and compete for control over key natural resources...

The coming era of de-globalization will be defined by rising nationalism and mercantilism, geopolitical instability and great power competition. In other words, having enjoyed a long holiday from history under the Pax Americana, international politics will be headed back to the future.

Quite right. A few points here:

1. Layne and Schwarz are not interested in assigning blame for this situation (and neither am I). Obama's stimulus spending was necessary to keep the economy from heading off a cliff. Cutbacks in military spending will simply be necessary to balance the budget. And though they don't mention it, Bush's folly in Iraq only accelerated America's relative decline, it didn't cause it. Or relative decline was the result of a force outside our control - the economic opening and modernization of China.

2. I think Layne and Schwarz overstate the effectiveness of the global Pax Americana in the latter 20th Century. America was only ever powerful enough to police half the world, while the other half slumbered in the grip of communism. And even then, we had the considerable help of our allies - Japan, the UK, Germany, and France - in keeping the peace.

I think that Layne and Schwarz are absolutely right about the danger to the world economic system posed by national rivalries in the wake of the end of U.S. hegemony. But they don't ask the next question: What will put a stop to the new "age of great power competition"? Remember, last time it took the utter devastation of all but one of the world's great powers to bring the world back to a stable hegemonic situation. This time around, that could only happen via nuclear holocaust - a high price to pay for stability and free trade.

The only answer has to be that a coalition of nation-states must re-establish hegemony. This coalition will have to be more broad-based and more equal than the U.S.-led "West" that kept order in the Cold War. I propose a combination of the old "West" gang (U.S. + Europe + Japan + Korea) with the major new populous developing democracies - India, Brazil, Indonesia, and South Africa (the "South"). These new powers have an interest in keeping trade lanes open and avoiding wars as their populations make the slow climb to wealthy status. Their presence in our coalition will gain us more legitimacy among developing and undeveloped nations than our club of mostly former imperialists enjoyed during the Cold War. The economic growth and young populations will assure the world that the new hegemonic grouping s here to stay. And, perhaps, most importantly, they will share our democratic values.

My idea is in some ways similar to John McCain's proposed "League of Democracies," but where he proposed a formal military alliance, I propose a loose coalition that regularly comes together to take multi-lateral actions in arenas like finance, trade, peacekeeping, and the environment. Challengers to the international order - i.e. China and potentially Russia - will get the message that this loosely affiliated gang is ready to back each other up if push comes to shove. The loose coalition can be bolstered by official and unofficial diplomatic ties, free trade agreements, military ties, arms sales, etc.

Meanwhile, fiscal consolidation, infrastructure revitalization, education reform, alternative energy, socialized health care, and a long-term political truce between liberals and conservatives could keep America's absolute power from waning.

The alternative is to step back, let the world descend back into economic nationalism and great-power rivalry, and hope that our distance from the Eurasian fray keeps us as safe as it did the last time around.