Monday, May 31, 2010

John Galt is secretly on the dole

One of the enduring fantasies of the "libertarian" ideology is that there is a bright line between private-sector economic activity and the government - that "private" businesspeople work, produce, create stuff for their daily bread, while government workers get theirs by looting it from the private sector. This idea was on display when Rand Paul called Obama's criticism of BP "un-American".

There's just one small problem with this idea: it's utter bullshit. There is almost no company in our economy that succeeds without some sort of government assistance, and very rarely is that assistance limited to the kind of stuff that "libertarians" tolerate (protection of property rights). The government auctions off land to oil companies and mining companies. It auctions off electromagnetic frequencies to broadcasters. It dishes out massive R&D subsidies to tech firms, hires construction firms for infrastructure projects, supports U.S. manufacturing through defense contracts, boosts land prices through zoning laws, protects finance companies with favorable regulation and implicit guarantees of support, protects uncounted businesses from competition via licensing, and gives local monopolies to power companies. And this is by no means an exhaustive list.

Take the case of BP. Ryan Avent:
[I]f there is a greater potential risk at out-of-the-way fields, with greater potential social costs, then [the economically efficient policy is that] that cost should be reflected in the price of oil, ideally by a consumption tax, the proceeds of which could be used in part to finance a clean-up fund.

But the interesting point there is that such a tax would change the economics of drilling risky fields. Say ultra-deepwater wells become profitable with oil at $70 per barrel. An appropriate tax on environmental risk, however, might increase the sale price of the oil to the equivalent of $90 per barrel. But that price increase would reduce the amount of oil demanded, and that reduction in demand would mean that some subset of risky wells would become uneconomical. What we're seeing, in other words, is that some current drilling is only profitable because of the implicit subsidy to industry associated with the fact that oil companies don't have to face the full social, environmental, and economic costs of their accidents.

The fact is, the brilliant gung-ho individualist entrepreneurs that are the hero of Ayn Rand novels are, in practice, critically dependent on that looting, mooching government for their daily bread*. This does not mean that they are not brilliant, gung-ho, or individualist, or that there is nothing about them to admire. But it does mean that the government is an important stakeholder in those "private" businesses. When private businesses accept government largess and then turn around and do things that hurt the people to whom the government itself is beholden - the voters - then it is perfectly just, and even efficient, for the government to punish those private businesses.

This is something that smart libertarians have yet to admit, and Republican voters in general have yet to comprehend.

Sunday, May 30, 2010

The best rap lyric I have ever heard

From the song "Wamp Wamp (What it Do)" by Clipse:
Mildew-ish when I heat it, it turn bluish
It cools to a tight wad, the Pyrex is Jewish
The reason I think this is awesome has nothing to do with the Jew joke, although that in itself is pretty funny. The reason this lyric is awesome is because it reflects scientific curiosity. "When I heat it, it turn[s] bluish." Isn't that amazing? (Of course, he's talking about making drugs, but so what? The founders of chemistry were just trying to turn lead into gold, or whatever.)

Snoop Dogg once declared: "There ain't nothin in life but bitches and money." And for a depressingly large segment of the human race, that statement is sadly true. But there are non-materialistic pleasure out there in the human experience, and one of those is what Richard Feynman called "The Pleasure of Finding Things Out" - the experience of mystery and wonder, the hunting of knowledge and understanding.

It is that elusive, mystic pleasure that drives us to heat things and see if they turn bluish. To test and probe and explore the world and find out "what it do". And in the long run, it is that little-appreciated human drive that has given us the magical world of wealth that we live in, that has allowed Snoop Dogg to have his "bitches and money" instead of being a poor hunter-gatherer in some sweltering tropical forest somewhere.

Pop culture, even smart pop culture, has too little appreciation of the importance of science - by which I mean not scientific facts or the technological fruits of past discoveries, but the process by which science is done. We have They Might Be Giants telling us about all the great things science has discovered in the past, but little about the mysteries that are still out there. We have plenty of our science fiction writers and futurists who assume that technological and scientific progress is a runaway train that will automatically carry us to technological godhood. But we have very little appreciation of all the stuff out there that we don't know, all the mysteries that will remain unexplored until we get off our butts and go after them.

Wednesday, May 26, 2010

And the people are happy too!

Matt Yglesias is in China on a business trip.

Matt Yglesias appears to like China very much.

likes their bike lanes.

likes their intervention in housing markets:
[I]n the past couple of months the Chinese government has taken regulatory steps to try to cool things down including, most notably, requiring a 50% downpayment on any second’s a reminder that it’s not as if it’s impossible for regulators to notice that something funny’s happening and then change the rules in response. It’s just necessary to not have regulators possessed of an a priori belief that systemic market meltdowns are impossible.
He likes their government ownership of firms:
[T]he Chinese economic miracle is really a great deal less of a “free market” miracle than the conventional understanding in the United States would suggest...the really striking facts are things like the one highlighted by Tyler Cowen that “Of the 22 Chinese corporations listed on the Fortune Global 500, 21 are controlled by China’s central government or state-run banks.” The closest analogy it seems to me is probably to France, which I think is the western country to have been least-impacted by the neoliberal turn away from state ownership of firms. And somewhat like in France, the Chinese speak specifically about the idea that over the past thirty years their development has been enhanced by the creation of a better-educated better-trained bureaucracy and their aspirations to continue doing this in the future.

By the lights of the American conventional wisdom, this whole situation seems mostly like a warning sign—beware! you’re violating the terms of The Washington Consensus!—but nobody can doubt that they’ve had a great run for the past 20 years. What’s more, though the prevailing policy consensus in the United States would lead you to believe that a country with France’s policies would necessarily be a basketcase, France is itself a very successful and prosperous nation and society.
He likes their massive infrastructure spending:
It’s impossible to come to China and not be struck by the rapid pace at which infrastructure is advancing. Shanghai is criss-crossed by a series of new looking elevated highways that the city will almost certainly regret in 20 years, as well as by an impressively large Metro system that, as illustrated below, has grown at a pace that’s completely inconceivable for an American city...

The United States simply doesn’t try to invest on this scale. But that’s not because we don’t have the resources to do it. Our overall spending on the military in dollar terms is higher than what China spends on infrastructure, and it’s much higher on a per capita basis. And what we spend on health care for old people dwarfs anything China does in that regard. We, in other words, are perfectly capable of mobilizing major public resources for major public purposes, we just choose to do it for different things.
He is impressed by China's housing construction (but thinks it's less likely to be a bubble than our housing boom).

likes China's "internal ethnic diversity."

He likes China's version of democracy:
China clearly features a great deal of politics happening and a meaningful public sphere exists in which controversies play out and the authorities are responsive to it. This is part of what makes the system work but it also really undercuts the main arguments you hear about why democracy wouldn’t or couldn’t work.
He likes China's industrial mix and growth prospects:
This represents a very efficient use of the land in China, with the country reaping the world’s largest agricultural output out of less arable land than we have in the United States. But as you can see, it’s a very inefficient deployment of people relative to what you see in the other sectors.
So insofar as global demand for Chinese industrial products continues to grow, the Chinese economy will be able to maintain substantial growth simply by shifting people off farms and into factories even without moving up the value chain.
And he likes China's strong, active environmental policy:
These kinds of issues are leading Chinese authorities to get more serious about tackling pollution. Environmental laws have been on the books for years, but according to businesspeople here real action is something that’s only come in the past 18-24 months.
Meanwhile, he is not impressed with the U.S. pavilion at the Shanghai Expo, and declares the U.S. to be a "slowly sinking hegemon" that needs to hand off management of the world's issues to China pronto.


Now, these posts are not the starry-eyed glowing reports that one would expect of a self-hating American being Potemkined by an authoritarian empire. But, laconic and qualified as they are, there is no mistaking the one-sidedness of Yglesias' view of China as a country that can do everything we can't.

There is no mention of, say, the fact that China's housing market interventions have
failed to stop prices from skyrocketing. Or that their "get-tough" environmental policies, supposedly now with local leaders on board, have failed to stop the steady increase in particulate matter in China's air. Or that the people who get the Chinese government to actualy respond to their wishes are fewer in number than the hundreds of millions who get ignored and cheated. When making the infrastructure comparison, he only briefly mentions (and then dismisses) the fact that we already have much more existing infrastructure than China, or the fact that Japan's massive infrastructure boom in the 90s was mostly a waste of money (note: I support strong increases in U.S. infrastructure spending, but not to China levels!). And his optimism that China will eventually see the need to pull its weight on global problems seems as misplaced as his optimism that China would revaluate its currency in response to our entreaties (I remember confident predictions on Yglesias' part that RMB revaluation was just around the corner, followed by deafening silence when nothing happened).

Why does Yglesias give China so much love, especially when he compares it with America? After all, it seems like there's a lot for him to dislike. China's repression (look at how Yglesias has reviled Bush's erosion of civil liberties, and that's nothing compared to China!). Its staggering inequality, the way its currency policy generates inequality in the U.S. Its cynical embrace of capitalism spiked with a hefty dose of government corruption. The fact that all those green policies are a mild and very recent response to decades of growth-at-any-cost.

I don't know the answer to this, but I have several guesses.

One guess is that Yglesias is using praise of China to indirectly express his frustration with the very real political paralysis here in the United States. This is part of a time-honored tradition of liberals shaming their country into action by saying "Hey, look how good they have it over there!"

A second reason might be that Yglesias wants to minimize U.S.-China rivalry. He may believe, as Brad DeLong used to often say, that the U.S. future hinges entirely on how well we convince China that we are their friend (a kind of updated version of "better red than dead"). Or he might think that U.S.-China rivalry is just a big excuse for us to divert spending from domestic uses to military ones; hence, he might be using China praise to score points over U.S. conservatives.

Or it might simply be that Yglesias, like Tom Friedman (whose sweeping, uninformed, "of-course-it's-so-simple" theories Yglesias' posts have come to resemble more and more), is dazzled by displays of massive investment and rapid growth - he is impressed by The Future, and spins a thousand armchair theories based on his awe. The U.S. needs to change course. We need to do everything different. We need to emulate our rival and respect our rival. Everybody drop everything and prepare for the Age of Decline.

Which is probably all to the good. The U.S. as a whole has a tendency to overly freak out about potential rivals who seem to Have It All Figured Out (did anyone really think the Soviet economy could outperform ours, or that Japan could take all our jerbs?), but this tendency probably adds to our biggest advantage, which is adaptability. And liberal over-praise of other countries is probably good in the long run, since it compels us to add a little bit of every world system to our institutional mix.

But given how odious a regime still rules China, and given China's continued and even increasing bad behavior on the world stage, it's a little annoying to see our best journalists with their lips firmly affixed to that nation's rear end.

Update: The China love gets even more over-the-top, as Yglesias declares that China's staggering inequality is actually more equal than Sweden, and that China's housing bubbleboom is really great for poor people, who get two houses for every one they get kicked out of! I am almost willing to take back my statement that Yglesias hasn't been fully Potemkined...this is just getting ludicrous. As if most or even a substantial fraction of dispossessed Chinese homeowners get compensated. As if the threshold for "super-rich" in a country with hundreds of millions of subsistence farmers isn't substantially lower than in Sweden. Sigh.

Monday, May 24, 2010

Government policy, history, and growth

Paul Krugman recently took on the idea, popular in Republican circles, that Reagan's economic policies reversed a trend of stagnation:
Read almost any conservative commentator on economic history, and you’ll find that the era of postwar prosperity — the gigantic rise in living standards after World War II — has been expunged from the record.

You can see why: the facts are embarrassing....Basically, US postwar economic history falls into two parts: an era of high taxes on the rich and extensive regulation, during which living standards experienced extraordinary growth; and an era of low taxes on the rich and deregulation, during which living standards for most Americans rose fitfully at best.


This does not, to say the least, make the case for free-market orthodoxy. So a large part of the right has invented an alternative history in which the good years came after, not before, the Reagan revolution...

Now, here’s what I know I’m going to hear in comments: stagflation! Jimmy Carter! The 70s! You can sort of see the bad years of the late 70s in the figure; it’s that little downward wiggle in the middle.
Scott Sumner disagrees. He raised the point that in the 80s and 90s we performed better than our rich-world counterparts in Europe and Japan:
[From 1980 through 2008,] four countries gained significantly on the US, two were roughly stable (Australia, Japan) and the rest regressed. The four that gained were Chile, Britain, Hong Kong and Singapore. Of course lots of poor countries gained on the US, but that’s to be expected. But I will show that the performance of every single country on the list is consistent with my view that the neoliberal reforms after 1980 helped growth, and inconsistent with Krugman’s view that they did not. Krugman makes the basic mistake of just looking at time series evidence, and only two data points: US growth before and after 1980. Growth has been slower, but that’s true almost everywhere. What is important is that the neoliberal reforms in America have helped arrest our relative decline. The few countries that continued to gain on us were either more aggressive reformers (Chile and Britain), or were developing countries that adopted the world’s most capitalist model.
Krugman issues a rebuttal:
[Sumner's article] it’s not a response to my original point. That was about the claim, quite common on the right, that the US economy was stagnant until Reagan did away with those nasty New Deal policies — a claim that is simply, flatly, false. The era of strong unions, high minimum wages, high top marginal tax rates, etc. was also a period of rapid growth and rising living standards. That doesn’t prove causation; it does disprove the widespread dogma that these things are always economically devastating. And it’s telling that so many on the right have airbrushed the whole postwar generation out of history.
The problem here is that we only have one instance of history to look at. We don't know for sure what would have happened if Reagan hadn't cut taxes and deregulated large sectors of the economy. In economics parlance, we have no "counterfactual". Our "theories" are only educated guesses, and it will stay that way until we figure out some way to do macroeconomic experiments (that is a story for another blog post).

In this particular case, it seems to me that Krugman and Sumner are both basically right, and thus are talking past each other. How can they both be right?

Well, Krugman is absolutely right that history shows that high taxes on the rich do not necessarily cripple an economy. I say "necessarily," because it may be that something changed in the 70s or 80s that made high tax rates much more harmful (that "something" being globalization); hence, high tax rates might not have hurt us much in the 50s, but might have hurt us more had we kept them in the 90s. But conservatives typically make the argument that high tax rates on the rich hurt the economy because discourage people from working, and discourage them from trying to become rich. History clearly shows that that idea is wrong.

And Krugman is also right to deride the GOP's fiction that Reagan saved us from economic doom. He very well may have, but we just don't know if he did or not.

But Sumner is right that the U.S.'s performance post-1980 is not nearly as bad as Krugman makes it out to be. Our GDP growth did indeed exceed that of most rich countries over most of that time period, and our productivity per hour consistently beat those other countries even though we work as much or more hours than anyone on the planet. That is an indication that our performance from 1980-2000 was, in fact, pretty good.

What I personally suspect is that in the postwar years, the U.S. was still in a phase of "Solow catch-up," where we were investing heavily to equip our companies with the slew of new technologies invented before and during WW2 (Japan and Europe were growing faster than us because they had more of this catch-up to do, partly because of WW2 itself). In the 70s, we hit the limits of catch-up growth (as did Japan and Europe); after that, we could only grow by inventing new stuff. When this happened, institutions that we had in place to encourage high saving and rapid investment - which possibly included strong labor unions and a bunch of industrial regulations - became more of a burden and less of an advantage than during the high-investment "catch-up" phase. Those countries that kept their industrial-policy institutions in place (Japan and Europe) lost some ground to those countries that partially scrapped those institutions (the U.S.). So the Reagan/Clinton policies were right for their era, but wouldn't have been good in the postwar era.

But again, that's just my guess.

But both Krugman and Sumner leave out a huge fact: the enormous debt that all rich countries have racked up since the growth slowdown of the 70s. A large part of that debt, in the U.S., is due to tax cuts unsupported by spending cuts; a policy started by Reagan and enthusiastically continued by Bush I and Bush II, and only temporarily reversed by Clinton. Few economists would argue that the rain-or-shine deficit spending embraced by our Republican party since 1980 has been good for our economy. It is the GOP's addiction to deficits, not any issues of tax rates or regulation, that will be the biggest drag on our economy in the decades to come.

Update: Sumner agrees that he didn't address Krugman's central point. He then proceeds to make a number of good points, some of which I shall now quote:
Obviously not every neoliberal reform was a success. Banking deregulation went poorly, and electricity deregulation in California went poorly. But even in the Nordic countries it seems the neoliberal reforms are accepted as being necessary...The European countries have also continually slashed their corporate tax rates, to levels far below the US. How does Krugman feel about that? Some have no capital gains taxes, or inheritance taxes...

My point is that it isn’t obvious that a liberal like Krugman would oppose the general thrust of the neoliberal revolution. I doubt he wants to go back to an era where many western governments owned big manufacturing firms like steel and autos, set airfares, and had 90% tax rates. On the other hand his posts on the topic often suggest that the 1945-80 period was a sort of Golden Age, and we’d be better off trying to recapture that era...

In my last post I argued that the growth of the 1950s and 60s resulted from a technological revolution that began in the 19th century and hit a wall around 1973. At that point growth slowed almost everywhere in the late 1970s and 1980s, even before neoliberal reforms were put into effect. Indeed that’s partly why they were put into effect. And the evidence shows that the faster reforming countries did better than the slower reforming countries...

The Soviet regime produced very rapid growth in living standards between 1945-73. I claim that that record of success doesn’t disprove the assertion that by the 1980s that same system was “economically devastating.” The US system during that period was far better than the Soviet model, but also had features that undermined performance in the long run.
Sumner's story about policy, technology, and growth basically agrees with mine...but that's not why his points were good. His points are good because he points out that the tax and regulatory regimes that are harmless in one era may not be harmless in another era.

Which does not invalidate Krugman's point, which is that conservatives are wrong to believe that taxes and regulation are always bad for the economy. These guys are both making good points, and they think they're arguing with each other...

Update 2: Tom Bozzo and Mark Thoma agree that counterfactuals are important in evaluating history...

Friday, May 21, 2010

Libertarianism - just another bankrupt utopian 20th-century ideology

Rand Paul on Obama's criticism of BP:
"What I don't like from the president's administration is this sort of 'I'll put my boot heel on the throat of BP.' I think that sounds really un-American in his criticism of business," he said. "I've heard nothing from BP about not paying for the spill. And I think it's part of this sort of blame game society in the sense that it's always got to be someone's fault instead of the fact that sometimes accidents happen."
This quote illustrates the fundamental um...for lack of a better word, dumbness...of the libertarian ideology for which Rand Paul is an unthinking foot soldier. Think about his statement for a minute. How did BP get access to the particular piece of the ocean floor that it was drilling when the spill happened? Answer: the government sold it the rights to use that land. Of course, BP bid for the rights to the land. But its bid was not just money; implicit in its bid was that it would work to minimize accidents that would hurt the citizens who elect and employ the government that sold it the land. And yet BP reportedly did just the opposite, using its political clout to minimize safety regulations. If the government had known the true probability of a spill, it very well might not have sold BP the land; thus, BP fleeced the government. And now the government has every right to criticize the company that fleeced it.

But libertarianism does not admit the possibility that natural resources are different from other types of property. The libertarian ideology holds that profit is earned by the effort and the inventiveness of the person who earns it, and therefore deserves to remain in the hands of the earner. But land is not created by the sweat of a man's brow or the ingeniousness of his ideas; it is pre-existent in the world, and its allocation comes about not as a result of efficiency but as a result of power. The land goes not to Jon Galt, but to the guy with the most guns.

Now, in order to make the most efficient use of land, we try to use market mechanisms to sell it to the highest bidder. But due to information asymmetries - like the fact that BP engaged in skullduggery to minimize safety regulations after it had already won the land rights - the market mechanism doesn't always work.

Libertarians crafted their ideology to be simple and internally self-consistent. But in philosophy, consistency always comes at the price of realism. In order to preserve the beautiful simplicity of their worldview, libertarians are forced to deny the existence of persistent information asymmetries, public goods, incomplete markets, and externalities - things that most obviously exist in the real world, and whose existence shows that libertarianism cannot be a blanket answer to the questions of economics. But libertarians are so eager to cry "This is it, boys! Man is saved!" that, like the communists before them, they have become devoted to squelching every piece of scientific evidence that pokes holes in their beautiful facade.

In the 20th century, the United States managed to avoid falling into the ideological pits of communism, fascism, and theocracy - and thank God we did. But at the end of the century, we stumbled halfway into the pothole of libertarianism, an ideology perhaps slightly less pernicious but no less blinkered and ignorant than the others. As a result, we are sliding toward a collapse of the basic functions of government, a nightmare scenario that in other countries has been fertile ground for takeovers by even more baleful ideologies (visit a Tea Party website to see that this is already happening). Ayn Rand and her many fellow-travelers convinced us to close our eyes to inconvenient reality, and close our minds to doubt and questioning, and we (temporarily, at least) lost access to the only advantage Western civilization has ever really had: adaptability.

It is time for libertarianism to follow communism into the intellectual dustbin of history. It has become an empty exercise in self-deception.


Blogger tristero agrees with me.

Salon writer Gabriel Winant agrees with me.

Thursday, May 20, 2010

on Western "civilization"

It is very rare that I entertain feelings of pride regarding my culture and civilization - or even, for that matter, that I even recognize important differences between cultures at all. I'm just not that kind of guy. But, as a 500-year period of Western civilization's dominance draws to a close, I find myself pausing and reflecting on what, if anything other than luck, gave that civilization an edge for those 500 years. I find myself coming back to the following three quotations:

1. "There are more things in heaven and earth, Horatio, than are dreamt of in your philosophy." - Hamlet, William Shakespeare (late 16th century British playwright)

2. "[W]e [scientists] take it for granted that it is perfectly consistent to be unsure - that it is possible to live and not know. But I don't know whether everyone realizes that this is true. Our freedom to doubt was born of a struggle against authority in the early days of science. It was a very deep and strong struggle. Permit us to question -- to doubt, that's all -- and not to be sure.

Through all ages, men have tried to fathom the meaning of life. They have realized that if some direction or meaning could be given to our actions, great human forces would be unleashed. So, very many answers must have been given to to the question of the meaning of it all. But they have been of all different sorts, and the proponents of one answer have looked with horror at the actions of the believers in another. Horror, because from a disagreeing point of view all the great potentialities of the race were being channeled into a false and confining blind alley. ... The dream is to find the open channel.

What, then, is the meaning of it all? What can we say to dispel the mystery of existence ?

If we take everything into account, not only what the ancients knew, but all of what we know today that they didn't know, then I think we must frankly admit that we do not know.

But in admitting this, we have probably found the open channel.

This is not a new idea; this is the idea of the age of reason. This is the philosophy that guided the men who made the democracy that we live under. The idea that no one really knew how to run a government led to the idea that we really should arrange a system by which new ideas could be developed, tried out, tossed out, more new ideas brought in: a trial and error system. This method was a result of the fact that science was already showing itself to be a successful venture at the end of the 18th century. Even then it was clear to socially minded people that the openness of the possibilities was an opportunity, and that doubt and discussion were essential to progress into the unknown. If we want to solve a problem that we have never solved before, we must leave the door to the unknown ajar. ...

It is our responsibility to leave the men of the future with a free hand. In the impetuous youth of humanity, we can make grave errors that can stunt our growth for a long time. This we will do if we, so young and ignorant, say we have the answers now, if we suppress all discussion, all criticism, saying, 'This is it, boys! Man is saved!' Thus we can doom man for a long time to the chains of authority, confined to the limits of our present imagination. It has been done so many times before.

It is our responsibility as scientist, knowing the great progress and great value of a satisfactory philosophy of ignorance, the great progress that is the the fruit of freedom of thought, to proclaim the value of this freedom, to teach how doubt is not to be feared but welcomed and discussed, and to demand this freedom as our duty to all coming generations."

- Richard Feynman (prominent mid-20th-century American physicist)

3. "All that is, was and will be
universe much too big to see

time and space never ending
disturbing thoughts, questions pending
limitations of human understanding
too quick to criticize
obligation to survive
we hunger to be alive


in the dark, see past our eyes
pursuit of truth no matter where it lies

gazing up to the breeze of the heavens
on a quest, meaning, reason
came to be, how it begun
all alone in the family of the sun
curiosity teasing everyone
on our home, third stone from the sun"

- Through the Never, Metallica (cheesy late-20th-century Los Angeles rock band)

It seems to me that over the very, very long term, societies that heed this principle - that recognize and therefore struggle against the limits of human certainty - will reap more benefits than those that ignore it. A piece of advice, if you will, for those who come after us.

Tuesday, May 18, 2010

Oh yeah? Well I cut spending by 25%! :P

Chris Edwards at the Cato Institute has a blog post called "I cut spending 10%". Here's how he does it:
The savings listed here are rough and rounded 2010 outlay amounts from the president’s budget.

1. Community Development Subsidies. The Department of Housing and Urban Development should not be funding local activities such as street repairs and parking lots. Save $10 billion.

2. Homeowner Subsidies. Federal subsidies for home ownership helped to cause the financial meltdown and recession by putting people into homes they could not afford. Save $10 billion

3. Energy Subsidies. Federal energy subsidies have a long record of waste and boondoggle. Private markets will invest in energy technologies when there is a reasonable chance for a return. Save $20 billion.

4. Higher Education Subsidies. Federal student aid contributes to college tuition inflation, and it can be replaced by private borrowing, family savings, and private charity. Save $20 billion.

5. Overpaid Federal Workers. Federal workers earn an average $120,000 a year in wages and benefits—twice what the average American earns. Federal wages should be cut 10 percent. Save $20 billion.

6. Farm Subsidies. More than 70 percent of aid goes to the largest 10 percent of farm businesses. With an average income 28 percent higher than the U.S. average, farm households don’t need federal welfare. Save $30 billion.

7. Public Housing and Rental Subsidies. Federal housing policies have damaged cities and created concentrations of poverty. They are based on a myth that markets can’t provide low-income housing. Save $35 billion.

8. K-12 Education Subsidies. Rising federal funding of the public schools has not improved test scores. It has only created large bureaucracies and stifled local control and innovation. Save $60 billion.

9. Transportation Subsidies. State governments and the private sector can more efficiently fund highways, airports, rail, urban transit, and air traffic control without federal subsidies and regulations. Save $85 billion.

10. Food Subsidies (Food Stamps and School Lunch). Low-income families often suffer from poor food choices and obesity, not a shortage of calories. Food aid for the needy should be left to private charities. Save $90 billion.

Not bad, Chris, but I'll do you one better. I will cut 25% of the budget. I will do this by eliminating the entire Department of Defense and all spending for the Global War on Terror.

But wait! you say. We need an army, a navy, an air force, etc. to guard our liberty! Oh no, sir. Private individuals can easily provide security, by pooling their money to hire companies like Blackwater to carry out anti-terrorism missions around the globe. And security at home can be provided by private security companies and by the militias mentioned in the 2nd Amendment. There is absolutely no need for a government-funded military. Cut this waste out of the budget.

Now, of course, I'm kidding, and everyone immediately and instinctively knows why: defense is a public good, something that will not be provided by private individuals in efficient quantities. That is why it cannot be privatized (though I must say, that doesn't stop Blackwater and its GOP backers from trying!).

But if you look at Chris Edwards' list of proposed cuts, you will find that much of it comes from other public goods, specifically infrastructure, research, and education. These are things that will not be provided in sufficient quantity by the private sector, as both economic theory and centuries of history clearly demonstrate. Edwards only manages to look like he's cutting waste because large numbers of his Republican readers have been fooled into thinking that infrastructure and education are not public goods (on the issue of roads, Edwards recognizes the problem and attempts to weasel out of it by claiming that states will provide roads more efficiently, something that is obviously untrue for interstate roads, and which in any case is just shifting most of the highway tax burden from federal to state taxes).

Even things like food stamps and housing subsidies contain elements of public good-ness. Without this life support, many people would be thrown into absolute poverty. The result? Riots and crime, which hurt everyone. Libertarians don't like to admit this, but food stamps and housing subsidies are the price we pay for the right to bear arms, since absolute-poor people with guns are wont to go on rampages.

The point here is that refusing to recognize the existence of public goods (or, technically, nonrival goods in general) does not equal fiscal austerity. Conservatives have managed to get away with this hackery too long, and it is time to start calling them on this. Econ 101 must triumph over whatever class the Cato people are taking - Econ 0, let's call it.

(PS - It's worth mentioning that I do agree with some of these cuts. #2 I definitely agree with; biasing people away from renting is bad. #5 has some merit, but the specifics are what's important. #6 is absolutely right. So it's not the case that 100% of Edwards' ideas come from ignoring the existence of public goods...just 80 or 90% of them.)

Saturday, May 15, 2010

You have been replaced by a machine

an interesting blog post, which brings up the ominous possibility that our current huge level of unemployment is not "cyclical" (i.e., due to the financial crisis and big recession), but rather "structural" (i.e. due to jobs vanishing permanently). The basic idea is this: over the past 10 years, computers have become good enough to make whole classes of jobs (e.g. travel agents) obsolete. However, it's hard to fire a ton of people when times are good, so companies waited until there was a big recession to get rid of people whose jobs had been rendered obsolete by new technology. Now, those laid-off people can't get new jobs unless they learn an entirely new skill set. But that takes time and money, and many of those people are old already, and meanwhile technology is changing so fast that by the time they learn something new, that new thing might be made obsolete pretty quickly as well.

This is a strong argument for implementing a national-level government policy to help people retrain for new industries.

As a side note, at the bottom of the post is a link to a really excellent paper by my advisor, Miles Kimball, which shows that improvements in technology - which "neoclassical"/"RBC" economists claim are the cause of booms - are actually a cause of recessions. Booyah!!

Monday, May 10, 2010

A futurist post: Noahstradamus predicts The Singularity (and lack thereof)

io9 has a good primer on the notion of the "technological singularity," a futurist favorite:

The term singularity describes the moment when a civilization changes so much that its rules and technologies are incomprehensible to previous generations. Think of it as a point-of-no-return in history.

Most thinkers believe the singularity will be jump-started by extremely rapid technological and scientific changes. These changes will be so fast, and so profound, that every aspect of our society will be transformed, from our bodies and families to our governments and economies...

Science fiction writer Vernor Vinge popularized the idea of the singularity in his 1993 essay "Technological Singularity." There he described the singularity this way:

It is a point where our old models must be discarded and a new reality rules. As we move closer to this point, it will loom vaster and vaster over human affairs till the notion becomes a commonplace. Yet when it finally happens it may still be a great surprise and a greater unknown.

Specifically, Vinge pinned the Singularity to the emergence of artificial intelligence. "We are on the edge of change comparable to the rise of human life on Earth," he wrote. "The precise cause of this change is the imminent creation by technology of entities with greater than human intelligence."...

As we mentioned earlier, artificial intelligence is the technology that most people believe will usher in the singularity...AI will allow us to develop new technologies so much faster than we could before that our civilization will transform rapidly...

Another singularity technology is the self-replicating molecular machine, also called autonomous nanobots...Basically the idea is that if we can build machines that manipulate matter at the atomic level, we can control our world in the most granular way imaginable...

And finally, a lot of singulatarian thought is devoted to the idea that synthetic biology, genetic engineering, and other life sciences will eventually give us control of the human genome...Many futurists, from Kurzweil and Steward Brand, to scientists like Aubrey De Gray, have suggested that extreme human longevity (in the hundreds of years) is a crucial part of the singularity.

A lot of people are skeptical of The Singularity. Exponential change, they argue, always eventually levels off. We drive cars that are not exponentially better than the cars people drove a century ago. Our airplanes have stopped getting faster too. Similarly, they argue, the IT revolution will hit its natural limits, and our progress will slow down until we hit the next brief period of rapid technological change.

I have a lot of sympathy for this skeptical view. But all the same, it does seem like many of the technologies we are now developing (or looking for ways to develop) will cause qualitative changes in human life unrivaled even by the introduction of agriculture.

So which Singularity technologies do I envision living up to their potential? Well, let's run through the short list:

1. Artificial Intelligence - Yes, but not the Vingean kind, and not as soon as people think. We have already succeeded in creating machines that can do many mental tasks much better than we can (play chess, etc.). Eventually machines will be able to create scientific theories and draft business plans. But humans' notion of "intelligence" encompasses more than simply the ability to do difficult mental tasks - it requires independence of action. And this is what there is no guarantee AIs will have. Even if we make machines that can create machines smarter than themselves, why will they be motivated to do so? For a true AI-driven Singularity to happen, AI's must be Autonomous Intelligences.

2. Molecular Assembly - Yes, but not for much longer than many believe. We can make molecule-sized machines that can put other molecule-sized machines together; we are working on ways to give these tiny assemblers the go-ahead to start assembling. But there's a much bigger problem here - the ability to tell large numbers of tiny assemblers what to do all at once. Building, say, a piece of wood from the ground up seems feasible - just make a wood molecule, then make another, then another - but hardly an economic use of nanoassemblers, given that wood already nanoassembles itself. Building a complex machine with nanoassemblers will require a lot of very complex but cheap-to-implement molecular-level quality control, which means solving a lot of difficult IT problems. As for "grey goo," it already exists, and is called "bacteria."

3. Personality Upload - No. Not now, not soon, and possibly not ever. Because here's the rub - suppose someone invents a computer into which you can upload your personality. Suppose that the uploaded you feels exactly the same as the real physical you feels. How could you be certain that it feels the same without uploading yourself? Two ways: A) split yourself into two divergent individuals, or B) kill your physical self. My bet is that almost no one will be willing to do either of those. On top of that, there seem to be so much potential for horrific glitches that the technology will take a ridiculously long time to develop, even if it can be done.

4. Extreme Longevity - Yes. I'm not sure when we discover this, but when we do, it will rapidly change the nature of human life and society. Unless the technology becomes cheap very quickly, it will divide human society into fast-dying haves and seemingly near-immortal have-nots, with all the resulting social disruption.

5. Control of the Human Genome - Yes. This one, in my opinion, has by far the most serious, profound, and far-reaching consequences for our race, because the genome is the race. Forget about making ourselves smarter and stronger; the real posthuman moment will come when we start tinkering with human desires. Imagine if we could make people who love working hard all the time, or people who love having ten kids, or people who never get angry, or people who always take orders, or people who are just happy all the time no matter what. THAT, my friends, will be one bizarre world.

So, to conclude: No, I don't think that a Technological Singularity will soon accelerate technological change to infinite speeds. No, I do not think that we will soon see godlike self-improving AIs or sentient swarms of nanobots eating everything in sight, or people living like virtual gods inside of computer programs. But when we find ways to change what it means to be human, the human race as a basically singular entity will be over, and we will abruptly be left with a number of successor species. That day is coming sooner than we'd probably like.

Saturday, May 08, 2010

Noahstradamus makes a prophecy for 2025

I've written a lot on this blog about how, if a rising China challenges the global political order than has prevailed since WW2, it would entail serious costs for the entire planet. Now I'd like to make this warning a little more concrete, by predicting exactly when such a challenge is most likely to occur.

Specifically, I predict that if it comes, it will come in or around the year 2025.

Why? Well, after the midpoint of the next decade, China will have some serious issues to deal with.

The first of these issues is energy. China, like most countries, uses two main sources of energy: coal for producing electricity, and oil for transportation. Both of these will be in short supply after the mid-2020s. The International Energy Agency predicts that global oil production will hit a plateau in 2020 and start to fall in 2030; various studies put the peak of China's domestic coal production between 2020 and 2030 as well, and coal is difficult and expensive to import. Scarcer energy will seriously erode China's unbeatable competitive advantage in manufacturing (much of which was built on extremely profligate use of energy), and nuclear and renewable energy will even come close to making up the difference.

Now, you may be thinking: won't the increasing scarcity of energy make China more likely to mount a serious challenge to the global order (as Japan did in 1941 when its oil supply was cut off)? Well, yes, but China is not stupid, and will see (actually, has probably already seen) the supply crunch coming. If China wakes up and finds that its coal and oil supplies are dropping fast, it won't be able to do anything, because taking control of a large amount of foreign energy supplies requires using a lot of coal and oil. Wars take lots of fuel, and building a big enough military to supplant the U.S. in its system of global alliances takes a lot of fuel too. China's best move is therefore to take control of as much global fossil fuel supply as it can while it still has enough energy to spare; as many have noted, this is what it is already doing. If China waits til after 2030 or so to make its move, it will be too late.

China's second challenge is its population structure. The country is aging rapidly; the U.S. Census Bureau predicts that the population will begin to decline in absolute terms starting in 2026, and the dependency ratio (the ratio of non-working people to working people) is expected to rise sharply around the same time. Nations that age this fast run into all kinds of natural limits to growth, as children are obliged to spend most of their money supporting their parents and grandparents; in addition, a lack of surplus sons makes it fairly difficult to maintain a big army. Even easing or lifting the one-child rule will not be sufficient to boost China's fertility, so this rapid aging is essentially a foregone conclusion.

China's third challenge is another natural resource: water. China's most important farming region, the North China Plain, is experiencing rapid groundwater depletion, and global warming is playing havoc with the country's rivers and rain patterns. By 2030, these problems will force China to import a lot of food, and will throw a bunch of farmers off their land, causing social disruption.

Finally, China's biggest challenge is simply the dizzying speed of its own economic growth. According to the Solow growth model, the simplest and most widely used model in macroeconomics, countries that invest heavily in physical capital see diminishing returns to scale as their economy becomes saturated with this capital; their growth then slows, no matter how high their savings and investment rates. The experience of countries like Japan, Korea, and various countries in Europe suggests that this slowing happens when a country reaches about half of the per-capita GDP of the richest nations (i.e. the U.S.). If China keeps growing at its current rapid rate, it should reach half of U.S. per capita GDP (in PPP terms) by 2030. The slowing of China's growth will create internal political tensions, as people who had come to expect a permanent gravy train demand a bigger slice of a slower-growing pie. It will also leave less of an economic surplus for China to spend on things like war with other great powers.

So in the late 2020s, China will experience rising energy costs, rising food and water costs, a rapidly aging population, the shrinking of its workforce, and diminishing returns to investment. All of that will not make it impossible for China to challenge the U.S. and its allies for global dominance, but it will make it a much dicier proposition.

But of course, as things stand, China is still not powerful enough to displace the U.S. as global Top Dog. Our military technology is still significantly superior, our economy is still significantly larger, and we and our allies still control a very big chunk of global energy supplies. China's leaders are cautious; if they try to mount a major challenge to U.S. power, they will wait until the last minute to do so. Which brings me to my prediction of 2025.

What would such a "challenge" look like? To be honest, I don't know. In the past, it was usually a war, but nuclear weapons make that seem unlikely in this day and age. China might attack a U.S. ally, I suppose - conquer Taiwan, or seize the territory it still claims in India - but even that seems pretty darn risky to me. Some sort of geopolitical assertion of authority, backed up by the implicit threat of military force, seems more likely. They might simply move to somehow take de facto control of a big chunk of global energy supplies, but not being well-versed in these things, I'm not sure how they'd do it. Or they might stake a unilateral claim to the South China Sea, declaring that the U.S. rule of free ocean transport is over and done.

Or they might do nothing. It may be that in an age of dwindling populations and energy supplies, controlling the geopolitical order is just not worth it for any country, even one with China's oligarchic governmental structure and nationalistic sentiment. I hope that this is the case, and in fact I think it not unlikely that China will decide simply to live within the existing order after all.

But I wouldn't bet the farm on that happy outcome. And neither should the United States and our allies; we should be expanding and strengthening our alliances, maintaining our technological edge, and adopting sensible far-sighted economic policies. If the challenge does come, then the more ready for it we are, the less destructive and dangerous it will be.

Friday, May 07, 2010

Reagan's true legacy

If any publication was the official pamphlet of the Reagan Revolution back in the 1980s and before, that publication would have to be
The National Review. So it's pretty epic that The National Review recently printed a four-page article lambasting the Reagan economic approach and smashing the conventional wisdom that it was good for our country. Williamson writes:
There are two schools of thought about the Reagan tax cuts. The conventional conservative view: They spurred investment, entrepreneurship, and real economic growth, helping to resuscitate the post-Carter economy, and, by doing so, they paid for themselves. The conventional liberal view: They were an ill-considered product of starve-the-beast ideology and produced crippling deficits, inaugurating a new era of fiscal irresponsibility only briefly transcended during the golden years of the Clinton presidency.

Here’s a different take: They never happened.

Properly understood, there were no Reagan tax cuts. In 1980 federal spending was $590 billion and in 1989 it was $1.14 trillion...Looked at from the proper perspective, we haven’t really had any tax cuts to speak of — we’ve had tax deferrals.
This is the concept of "Ricardian Equivalence" (actually invented in its modern form not by David Ricardo, but by Robert Barro). The idea is that cutting taxes without cutting spending makes it necessary to raise taxes (or default on your debt or produce inflation) in the future; and since people, being rational, realize this, they act as if the tax cuts never happened.

Now, I don't believe the theory of Ricardian Equivalence is quite correct. But conservatives do! They use it as the main reason why stimulus spending won't boost the economy. But if stimulus doesn't work, the Reagan tax cuts didn't work either.

Williamson goes on to say that the political success of Reagan's tax cuts caused the Republicans to lose any sense of fiscal responsibility...that the seeds of 2001 were sown in 1981:
Bush and the concurrent Republican majorities in both houses of Congress didn’t manage to cut spending, either. Part of that was circumstances — 9/11, Afghanistan, Iraq, the subprime meltdown — but part of it was the fact that a poorly applied supply-side analysis has infantilized Republicans when it comes to the budget. They love to cut taxes but cannot bring themselves to cut spending: It’s eat dessert first and leave the spinach on the table.
A good point. But in my opinion, the collapse of Republican fiscal responsibility is merely the latest instance of a problem that democracies always face sooner or later: everyone wants government services but no one wants to foot the bill, so they make the kids foot the bill. Williamson concurs:
There is some evidence that [fiscal irresponsibility] is both bad politics and bad policy...the deficit is now truly terrifying, and, fortunately for Republicans, it is owned by Barack Obama and Nancy Pelosi.
So, in order to keep the deficit-fueled electoral gravy train running, the Grand Old Party o' Deficits keeps blaring the lie that tax cuts pay for themselves:
Despite all those pro-growth tax cuts, our deficits continue to grow faster than our economy...even during periods of strong economic growth, there has been nothing to indicate that our economy is going to grow so fast that it will surmount our deficits and debt without serious spending restraint. This should be a shrieking klaxon of alarm for conservatives still falling for happy talk about pro-growth tax cuts and strategic Laffer Curve optimizing.

Some people are more sensible about that Laffer Curve talk. Laffer, for instance. Arthur Laffer, whose famous (and possibly apocryphal) back-of-the-napkin diagram launched supply-side tax policy, readily concedes that the growth effects of tax cuts are oversold in the political debate. “Does every tax cut pay for itself? No."...

[The idea that tax cuts pay for themselves is] a just-so story, a bedtime fairy tale Republicans tell themselves to shake off fear of the deficit bogeyman. It’s whistling past the fiscal graveyard.

The exaggeration of supply-side effects — the belief that tax-rate cuts pay for themselves or more than pay for themselves over some measurable period — is more an article of faith than an economic fact. But it’s a widespread faith: George W. Bush argued that tax cuts would serve to increase tax revenues. So did John McCain. Rush Limbaugh talks this way. Even Steve Forbes has stepped into this rhetorical stinker from time to time. Reagan knew better — his Treasury Department predicted significant revenue losses from his tax-rate cuts — but his epigones preach a different gospel.
In summary:
Nobody votes for Scrooge. Tax cuts give Republicans an opportunity to distribute economic benefits through the tax code the way Democrats distribute them through appropriations, and the exaggeration of the supply-side effect gives them an opportunity to pretend like those benefits are cost-free...

So, what should conservatives do [to become responsible and still win elections]? One, abjure magical thinking about tax cuts. Two, develop a rhetoric in which “spending” and “taxes” are synonyms, so a federal budget with $1 trillion in new spending means $1 trillion in new taxes — levies on Americans today or on our children tomorrow, with interest.
If conservatives did this, that would be great. But why should they? The path of infinite deficit spending is somewhat easier and far more rewarding than the kind of return to responsibility that Williamson urges. sure, it'll end up crashing the country, but the country is rich enough that the real crash won't come until after the current generation of Republican politicians is retired or dead.

In any case, what does this say about Reagan's legacy? History shows that in a democracy, balanced budgets need bipartisan consensus; you just can't stick one party with the job of being fiscally responsible and expect it to do that job. Before Reagan we had a bipartisan consensus in favor of fiscal responsibility; each party agreed not to become "Santa Claus" if the other one wouldn't. Reagan broke that pact. He changed the GOP's political strategy to a Santa Claus strategy, and it's proven impossible for the GOP to change back. And so Reagan condemned America to spiraling deficits and eventual sovereign default.

Thanks a lot, Gipper!