Friday, May 04, 2012

Riled by the wrongness of Raghuram Rajan


Once more, it's time for me to take advantage of the large number of R's in Raghuram Rajan's name to create a catchy blog post title, for once more, the eminent finance professor has written an article that I believe to contain a substantial quantity of Wrong. Rajan's article in Foreign Affairs, titled "The True Lessons of the Recession," is a call for austerity, pro-growth structural reforms, and other Stuff Conservatives Like. The piece has already sparked controversy in the econ blogosphere - Tyler Cowen says "every paragraph of [the] piece is excellent", while Karl Smith calls it "nonsense on stilts". As you may guess, I agree more with the other Smith. Though Rajan gets some things right and some things wrong, I have three major problems with his analysis: 1. His reading of economic history appears to fall victim to several common misconceptions, 2. His focus on structural reform doesn't make a lot of sense for the U.S., and 3. His conclusion that "the West can't borrow and spend its way to recovery" seems to just come out of nowhere.

Much of Rajan's article is devoted to a sort of folk history of the global economy since World War 2. Most of this I have no problem with. But some of it is appallingly false. For example, how many times has this narrative been dissected and rejected?
[S]tarting in the early 1990s, U.S. leaders encouraged the financial sector to lend more to households, especially lower-middle class ones...Such policies helped money flow to lower-middle-class households and raised their spending...
Cynical as it may seem, easy credit was used as a palliative by successive administrations unable or unwilling to directly address the deeper problems with the economy or the anxieties of the middle class...
Bankers obviously deserve a large share of the blame for the crisis. Some of the financial sector’s activities were clearly predatory, if not outright criminal. But the role that the politically induced expansion of credit played cannot be ignored; it is the main reason the usual checks and balances on financial risk taking broke down. (emphasis mine)
The idea that U.S. housing policies caused the housing bubble and the financial crisis remains a part of the conventional wisdom only because Republicans keep saying it over and over. The evidence is strongly against this interpretation of events. I could rattle off a million links to back this up, but why bother? Everyone with two eyes can see that the rise in securitization, not any federal policy, is what increased the demand for risky housing loans. Rajan does not even mention securitization.

Or take this nugget of bad CW:
Some countries focused on making themselves more competitive. Fiscally conservative Germany, for example, reduced unemployment benefits even while reducing worker protections....[O]ther European countries, such as Greece and Italy, had little incentive to reform[.]
"Fiscally conservative" Germany? But Germany's government debt is 83% of GDP; for most of the period Rajan is discussing, Germany ran deficits as big or bigger than the countries Rajan castigates.

To sum up, it seems to me that ideological conservatives, Republican partisans, and European "austerians" have managed to repeat certain fictions long enough and vehemently enough that these fictions have seeped into the worldviews of conservative-leaning economists like Rajan. But fictions they are.

Now on to Rajan's prescriptions for improving the economic situation. Rajan says that "pro-growth" structural reforms are the answer for the South European states:
[T]he best short term policy response is to focus on long-term sustainable growth...Countries that don’t have the option of running higher deficits, such as Greece, Italy, and Spain,should shrink the size of their governments and improve their tax collection. They must allow freer entry into such professions as accounting, law, and pharmaceuticals, while exposing sectors such as transportation to more competition, and they should reduce employment protections...
OK, assume for the moment that Rajan is right - suppose these countries "don't have the option of running higher deficits", and suppose that these structural reforms are obviously good ideas, and that these reforms would make a big difference.

Now, what about the United States?

The United States, not being part of the EU or the euro, has plenty of scope to both borrow money and engage in looser monetary policy. But Rajan takes his prescription for South Europe and applies it to the United States in an almost cut-and-paste fashion:
The United States must improve the capabilities of its work force, preserve an environment for innovation, and regulate finance better so as to prevent excess.
He then lists a number of reforms that he thinks would benefit the U.S. Actually, I agree with most of these ideas! What I don't agree with is Rajan's conviction that such reforms would make a big difference.

See, back in the 80s, the U.S. already did a lot of the reforms that Rajan recommends for Europe. Rajan himself points this out. Therefore, the U.S., though it is now facing the same high unemployment levels suffered by Europe, has far less scope for easy reform. That's the problem with trying to use structural reform as countercyclical recession-fighting policy; eventually you run out of reforms!

Karl Smith puts this rather more colorfully:
Is this some kind of sick joke? 
Is there an area in which our policy initiatives have more consistently failed than in producing long term sustainable growth? Do we even have a consensus on how long term growth got started in the first place? Do we have a solid story to explain growth differentials today?... 
[E]fforts to increase TFP or educational effectiveness...[are] what folks have been desperate for my entire life. If we knew how to get it, we would.
Finally, let's talk about Rajan's big conclusion. The subheading of Rajan's article is "The West Can’t Borrow and Spend Its Way to Recovery". But Rajan seems to draw this conclusion out of thin air. He offers no reason why fiscal stimulus won't work in the United States. Maybe such reasons exist. Maybe Rajan has them in his head. But he doesn't say what they are; he just asserts this claim as if it follows from the rest of his article, when in fact he never makes the case. Even when talking about Europe, he just states that countries like Spain "don't have the option of running higher deficits", when in fact Spain has considerably less debt than Germany.

To sum up, this article is full of dubious or unsubstantiated claims. The claim that U.S. government housing policy caused the financial crisis is highly dubious. The claim that Germany is "fiscally conservative" is highly dubious. The claim that structural reform is the key to a U.S. recovery is highly dubious. And the claim that fiscal stimulus will not benefit the United States is unsubstantiated.

I don't like this. When well-respected people like Raghuram Rajan repeat these claims over and over in the popular press, they become a part of the conventional wisdom, and give ammunition to vested political groups (e.g. Republicans) looking for intellectual cover for their narrow interests.

And I just generally dislike this trend of substituting conservative harrumph-ing for thoughtful economic analysis. Harrumph, austerity is healthy and stimulus is waste! Harrumph, government attempts to help the poor must be at the root of any market failure! Harrumph, North Europeans work harder and save more than South Europeans! Etc. etc. Yes, I realize that macroeconomics is really hard, and that we just don't understand the vast majority of what is going on. But I think that makes it all the more important to ignore the sweet seductive siren song of one's own politico-cultural biases.

59 comments:

  1. Rajan's article is not about economic analysis - it is about the marshaling of political power. He is a precinct captain of the right getting out the voters on election day. He is giving the right just enough cover to allow the wavering to pull the lever in November. Stop subjecting this stuff to learned criticism and start marshaling political power for the good guys.

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    1. Anonymous2:05 PM

      well said

      The piece, btw, is just a fraud. The totally false claim is made that the United States had frenetic deregulation in the 1980s. What BS. Little, if anything has changed, with the exception that RR did utter the words "savings and loan" for eight years, leaving it to George Bush to close several thousand bankrupt s & ls and banks. If that is deregulation, it beats me.

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    2. Anonymous8:50 PM

      "the United States had frenetic deregulation in the 1980s"

      No, in the 80s the US had union busting and tax cuts for the rich -- but some people see unions and taxes "regulation"--and perhaps they are, since they work to regulate the unmitigated greed and destructiveness of powerful people and corporations (or is that last word redundant?).

      --EC

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  2. Anonymous8:46 PM

    genauer:

    I ll do suggest that folks here read a little bit about "debt sustainability analysis"" along the lines of the IMF and try to think a little bit like an investor, at least for a moment, before making very weird Spain / Germany comparisons.

    The interest rate differentials / CDS default rates are decided by professional people who understand economics quantitatively and do that for a living.

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    1. Anonymous4:12 PM

      "The interest rate differentials / CDS default rates are decided by professional people who understand economics quantitatively and do that for a living."

      Yeah, the same "pros" that brought you the AIG debacle. These people who priced tranches of junk mortgages at 50bps over Treasuries and the priced Greek debt at 50bps or less over Bunds for YEARS...despite the fact Greece has had a foot in and out of bankruptcy for the past 150years. I'm just glad to hear people as naive as you are still out there..more dummies for me to fleece again in the market place.

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    2. derrida derider5:39 AM

      genauer, it is thinking like INDIVIDUAL investors that is the cause of this crisis. Individual cattle rationally pursuing their self-interest can result in a small stimulus leading to a stampede. Rational individual investors can stampede too.

      Greece can't pay its debts. Why? Because it has no growth prospects. Why? Not because they're a feckless lot - they are, but that hasn't stopped them growing before. No, it's because no rational investor will give it capital. Why not? Well, because it can't pay its debts.

      The point is that Greece's debts are perfectly sustainable at "normal" interest rates along with their historic growth rate. Instead there's a vicious circle resulting from the perfectly rational behaviour of individual investors. Macro is NOT a simple aggregate of micro behaviour.

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  3. Economics is the study of scarcity. You know what's scarce? Your time. Your time is a limited resource. You only have a finite amount of grains of sand in your hourglass.

    Yet...here you are spending your limited time writing a blog entry that criticizes giving people the freedom to choose how they spend their limited resources.

    Please tell me...did you climb to the top of the mountain to consult the oracles? Did you call congress on the phone and ask them if this was the best use of your limited time?

    If so, please tell me which congressperson spent their own limited time personally talking with you. Please tell me so that I can know which oracle I should consult when deciding how to sacrifice my own limited time.

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    1. Errr...what are you doing wasting your time commenting on someone 'spending their limited time writing a blog entry...'?

      Do we really have to debate whether taking the time to disagree with someone who gets their opinion published in a national magazine is worthwhile?

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    2. LOL...my argument is that people should have the freedom to choose whether something is worth their time or a waste of their time. Noah, on the other hand, chooses to spend his time arguing that people should not have the freedom to choose how they spend their time.

      Guess what? His actions speak louder than his words. Every single second he chooses to spend blogging disproves the very words he writes. Oh the economic irony.

      If you can figure out why you should have the freedom to choose how you spend your limited resources in the private sector...then perhaps you'll understand why taxpayers should have the freedom to choose how they spend their taxes in the public sector.

      How do I benefit from your freedom? How do you benefit from my freedom? Why should I tolerate your value seeking behavior? Why should you tolerate my value seeking behavior?

      You're going to read this and then you're going to ask yourself whether it's worthwhile to reply. You'll have a choice to make. Therefore, you'll be confronted with a dilemma. As dilemmas go...it will be a small one. But is it a moral dilemma or an economic dilemma? What's the difference? Whether you choose to reply or not...either way you'll prove my point. Your freedom tastes good to me...which is why I want you to have more of it.

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    3. I'm sorry are you suggesting that advocating government stimulus is the same as saying people shouldn't have free speech?

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    4. What stimulates you? What stimulates me? What stimulates Noah? Are we all stimulated by the same things? Shall we come up with lists and then compare them?

      What is the government trying to stimulate? Is the government trying to stimulate us? Does the government truly know how to stimulate us?

      If congresspeople know how to stimulate you then great! Give them your taxes! Maybe the government knows how to stimulate most people? No worries then! The majority of people would give congresspeople their taxes. So why worry about us small minority of people that are not stimulated by congresspeople? Why not just allow us to directly give our taxes to the government organizations that stimulate us? Why do you want to engage in tyranny of the majority? Is it really hard to understand that perhaps the majority isn't always right? Why can't you appreciate the economic value of tolerance? Why is it so difficult for me to convey the economic value of tolerance? Maybe I'm wrong? Maybe tolerance has no economic value? Maybe your perspective does not matter? Maybe your opportunity cost decisions are irrelevant to anything important in this world?

      I see you standing at a crossroad...considering which path you take. Where do you want to go? Does it matter to you which path you choose? Why should you have the freedom to choose your paths in life? Why can't I choose your paths for you? Don't we both just want to go to heaven? Perhaps we want to go to different heavens? Is your heaven better than my heaven? One thing I'm certain of is that scarcity is not an issue in either of our heavens. Another thing I'm certain of is that we all want more for less. Therefore, "heaven" is simply allowing taxpayers to seek more for less in the public sector. How could that concept not stimulate you?

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    5. Anonymous10:24 AM

      What a crank

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    6. Clearly the only possible choices are minarchy and totalitarianism.

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    7. What about pragmatarianism?

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    8. Is that where you only want the state to perform the functions you want it to perform, like everyone else?

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    9. Anonymous7:59 PM

      Pragmatic? That would be "democratic socialism", the system which has created the greatest happiness as measured by surveys. Which is, you know, something rather to the left of what Noah proposes.

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  4. Noah: "And I just generally dislike this trend of substituting conservative harrumph-ing for thoughtful economic analysis."

    Please note that this is a trend on the f*cking right.
    You don't see prominent liberal economists doing this.

    There are no honest right-wing economists at all.

    BTW - Foreign Policy Magazine should have been shut down after the Iraq War (forcibly); an article by a Booth School professor in that magazine is 100% likely to be a pack of lies.

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    1. Anonymous1:14 PM

      "You don't see prominent liberal economists doing this."

      lol

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  5. For goodness sake, what did you expect?

    Rajan is on the not-so-short list of persons made famous by an insult from Larry Summers. Everyone knows that Foreign Policy magazine prefers fame over competence. People magazine gets the photogenic celebs, Foreign Policy all the rest.

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    1. Anonymous4:55 AM

      "Rajan is on the not-so-short list of persons made famous by an insult from Larry Summers"

      Yes, an insult that was an anxious retort to Rajan's paper on how people like Summers were riding US economy to the fucking ground. Which they eventually almost succeeded in doing.

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  6. Anonymous6:59 AM

    Is this mistatement of the European fiscal situation in the early paragraphs Rajan sets the tone for the entire article

    "...And the massive fiscal deficits in Europe,
    as well as the European Central Bank’s tremendous increase in lending
    to banks, suggest that it is not for want of government stimulus that
    growth is still fragile there."

    It would seem obvious to me the "massive fiscal deficits" are primarily due to plummeting revenues and soaring social safety net costs which have resulted in exactly the great "want of government stimulus" that might shore up the "fragile" growth Rajan observes.

    Where does he get this stuff?

    lff

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  7. We can also observe that Tyler Cowen is also puffing his own right-wing nonsense, The Great Stagnation, at the same time he endorses Rajan. A beautiful example of the right-wing echo chamber.

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    1. Actually, I've become (mostly) a believer in the Great Stagnation idea. Tyler has managed to convince me.

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    2. Steve2:47 PM

      Noah,

      Care to elaborate on that? We did hit a sweet spot with both internal combustion engines and electrical motors in the early 1900s that allowed us to greatly change the way we use machines. I haven't examined his ideas too closely because at first glance it seems he is complaining that we aren't finding the equivalent of the wheel or printing press every 50 years.

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    3. Well, two points really seem to me to favor the stagnation hypothesis:

      1. Educational attainment and land usage increased a lot in the past and are unlikely to increase more in the near future. These are non-technological sources of growth that are at least temporarily exhausted.

      2. Although energy technology has not stagnated, the energy sources available to humanity have definitely stagnated. First of all, fossil fuel extraction costs have increased while renewable energy has not yet become cheaper than fossil fuels. Second of all, no higher energy density fuel than gasoline and kerosene has been found (except for nuclear-powered ships). Lots of things depend on electricity, and lots of things depend on fuel.

      I think the stagnation of energy and the exhausting of "low-hanging fruit" in education and land use have been enough to reduce our trend rate of growth, at least for the time being.

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    4. every generation has its version of the stagnation hypothesis or imminent malthusian catashrope. recessions make people believe they are imminent because the pie is smaller. back before Al Gore invented the internet we had this think called Bitnet for email, we had no idea about ipads tracking gps on equipment globally. of course, Cold Fusion turned out to be a bust, oh well.

      back in 2008 we were on the verge of building a whole fleet of new nuclear reactors due to high fuel prices. All but a handfull got cancelled due to the Great Recession. If (ever) we get back to full employment, prices will rise, and we'll build more generation.

      history strongly suggests that just because you cannot forecast what novel productivity-enhancing technology is out there, does not mean its *not* out there (absence of evidence is not evidence of absence inda thing). its been a poor bet to take the producivity-is-slowing-down side of the trade, for a long time.

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    5. Steve4:45 PM

      Noah,

      Thanks for the answer. Hard to argue with either of those points. I guess I need to read the book ;-)

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    6. Anonymous8:14 PM

      The high school graduate rate in the US has dropped quite a bit. There is actually a good amount of room for growth in educational attainment.

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    7. dwb has the right idea: every generation has its doomsayers of all sorts: stagnation, end of the world, foreign perils, religious and social collapse, you name it.

      Tyler is bullshitting. There is no overall pattern of stagnation: he pretends there is with the old statistical trick of using the median income rather than the mean income. His only intention is to be contrarian enough to attract attention for another repetition of Koch-advocated policies.

      If Tyler was not bullshitting, he would publish in a peer-reviewed journal.

      We can find hundreds of things that have peaked or stagnated in various ways, but that has no bearing on overall prosperity because improvements are made in other things. Land usage for agriculture has DECLINED greatly in the USA (particularly here in the northeast), yet agriculture has grown enormously in productivity per acre.

      We are going to find enormous gains in efficiency of use of energy, enormous gains in bioengineering, enormous gains in organizational efficiency as tools similar to Siri empower even the stupid to collaborate effectively in social enterprises. There are still enormous populations that need to make the gains that peace, commerce, education and women in the workforce provide. They will provide enormous increases in demand that of course will spill over to the first world.

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    8. I wouldn't bother reading the book. The great stagnation is an interesting idea, but the book is a really shallow look at the evidence, and the conclusion (of course) is that the Bush era status quo is the only option going forward.

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    9. Mike Huben,

      I won't comment on Cowen's book because I haven't read it yet (I don't want to buy any more physical books until I finish the pile I have, and I don't want to spend money on an iPad or something similar just yet; I've also been wrapped up in trying to switch careers for several months), but if he is more right than wrong, what's the end game? How do we deal with the people that are, for whatever reason, being locked out of the normal working environment? I don't recall him--or, to be fair, many others--discussing this sort of thing, which is kind of bizarre. He might not be correct, but his argument appears reasonable enough. And if it is more on the mark, is the really scary thing that a longer-term solution--say, figuring out some sort of modern day WPA--is in no way a politically feasible option?

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    10. Larry Headlund10:44 AM

      I don't want to spend money on an iPad or something similar just yet
      If your using Google Chrome, Safari or Firefox as your browser you can get the Cloud Reader app for Amazon and read their ebooks without purchasing any hardware. There are also apps for reading nook (B&N) ebooks.

      Delete
  8. Lulz4l1f311:42 AM

    "The idea that U.S. housing policies caused the housing bubble and the financial crisis remains a part of the conventional wisdom only because Republicans keep saying it over and over. The evidence is strongly against this interpretation of events. I could rattle off a million links to back this up, but why bother? Everyone with two eyes can see that the rise in securitization, not any federal policy,"

    While you are patting yourself on the back for not blindly subscribing to this article of faith, you might want to think about the end-game:

    Republicans keep repeating this narrative for the following reasons:

    1. It exonerates them from being responsible for regulating the financial markets.

    2. It salvages the laissez faire political narrative.

    3. Most imporantly, it plays to the hopes of large financial institutions to divy up GSE debt and get the same Government backing for those securities, so instead of two GSEs, we wind up with 5 or 6 large GSEs/Bank Holding Companies/Investment Banks backed by the full faith and credit of the US Federal Government.

    Number 3 is probably most important because who really cares about numbers 1 & 2 which are essentially ideologue butt-covering.

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  9. Considering the R man's credentials this was a very shoddy piece of work. If this is the best Republicans/Conservatives can come up with then they have long term governance problems. Put simply they don't have an economic theory of government that works and that isn't going to result in a reprise of the 2008 disaster. So either they flip flop once in power (unlikely, although force majeure might do it as happened with Paulsen) or we have deja vu all over again.

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  10. Anonymous2:45 PM

    Would love to get your take on the differences between mortgage and credit card securitization, and wh one blew up magnificently and the other has been humming along for a few decades.

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    1. Steve2:55 PM

      Is credit card debt being "traded" the same way mortgages are? Also keep in mind credit card debt does not have anything (like a house) backing it. It does not seem like the markets are equivalent.

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    2. Most people don't expect to be able to pay off their credit card debt by refinancing based on the rising value of their credit card real estate.

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    3. Anonymous8:02 PM

      (1) Credit card securitization was priced *expecting* large losses;
      (2) Credit card interest rates are obscenely usurious, so they can take large losses and still make money;
      (3) They didn't slap AAA ratings on securitized subprime credit cards.

      Therefore it takes a bigger crash to do in the market. Given the idiocy of our people in power, we may yet get that bigger crash.

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  11. My latest exploration of Keynes' General Theory: "Are workers employed for nominal or real wages?

    http://socialmacro.blogspot.com/2012/05/are-workers-employed-for-nominal-or.html

    Criticism is appreciated.

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  12. Congratulations Noah, your blog now gets enough views to have trolls, apparently.

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  13. Rajan's apparentconviction thatItaly and Spain have not reduced employment protection the Germany has is another pure fantasy. I think he is sure that this is true because their economies are not doing well. In fact Spain radically reduced employment protection under Suarez (prime minister soon after Franco died then for a long time). Italy did so under the first Prodigy gov. . Spain in particular had by far the largest proportion of workers with precarious jobs in Europe 35% IIRC. A rigid laborious market is simply inconsistent with the rapid decline in employment observed in Spain (it was consistent with years and years of slowly declining oboveground employment before the reform).

    Notably the same Prodigy gov vastly reduced the Italian budget deficit. The result is that Italy satisfied the conditions of the Maastricht treaty while Germany absolutely unambiguously did not. The Italian center left also radically eased licensing barriers to the entry of new small firms in Italy. As you argue and in ways you don't mention Ragan's alleged facts are dictated by ideology and prejudice and are inconsistent with the actual facts.

    Nonsense on telephone poles.

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  14. Johanes11:50 PM

    Noah, Your grand-advisor thinks it is a wise essay.

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  15. ^-- is this Greg Mankiw's alter ego?

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  16. Rajan doesn't mention Australia--which has done lots of supply-side reforms and sailed through the GFC and Great Recession with barely a ripple--because it doesn't fit the story he wants to tell.

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    1. Anonymous4:00 AM

      Surely not everyone can be China's raw materials input provider, but for those who can its a pretty sweet gig. And housing bubbles dont have to all burst at once, look at Canada. Unlike Australia, Canada runs both a trade deficit and a budget deficit yet its grinding on and on.

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  17. The right wing position is simple:
    1) the standard of living of the poor, the middle class and the elderly is too high and has to fall;
    2) the standard of living of the rich is too low and has to rise.

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  18. As a Greek economist I am truly bothered that Greece is beeing used to draw general conclusions about borrowing, socialism, whatever... There is no doubt that Greece could benefit from certain "liberal" (in the classical sense) reforms. A more flexible labor market, less government bureaucracy, more competition, much less corruption. At the same time people ignore that Greece ranks at the bottom when it comes to public spending on primary and secondary education, and R&D, which are determinants of productivity. As with any private entity the isssue is not borrowing itself, but rather how the borrowed funds are used. No serious economist would advise a private company to never borrow, that borrowing would not help it grow even when the return on an investment opportunity exceeds the cost of funds. What is different then about the public sector?

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    1. One difference is the absence of consumers. When a company borrows, spends and grows...it only "grows" because you're choosing to purchase its goods/services. There is no growth without individual consumers deciding that they need/value/want whatever a company is supplying.

      Does this make sense? If you have an idea for a business...maybe, from my perspective, it sounds like a "bad" idea...but if you use your home as collateral and the bank gives you a loan to start your business...then the merit of your idea will be determined by whether consumers are willing to sacrifice for your good/service. What happens if consumers are not willing to spend their money on your product? Do I lose my home? Does Noah lose his home? No...you lose your home.

      When the government borrows...and the money is not spent productively...then who loses their homes? Do congresspeople lose their homes?

      So here are the two related problems with the public sector...

      1. There are no consumers
      2. There are no personal risks to borrowing

      The solution is simple. Allow taxpayers to choose how their taxes are spent in the public sector. Individual government organizations would be able to borrow as much as they wanted. If taxpayers were willing to use their own individual taxes to pay off the loans then we'd be able to say that the government organization spent the borrowed funds productively. If, on the other hand, taxpayers were not willing to pay off the loans then the government organization would go bankrupt.

      Everybody wants the most bang for their buck. Everybody wants more for less. The definition of sacrifice is to give up something you value...in exchange for something that you value even more. Everybody gives to gain...nobody wants to suffer loses. So by allowing taxpayers to choose which government organizations they give their taxes to...we can maximize productivity in the public sector.

      Back in the old days...why did your people make sacrifices to the Greek Gods? Why would they give up something they value? They did so because they believed that their Gods would reciprocate. Now the political economy has replaced the divine economy. Rather than famines we deal with recessions. We have religious tolerance so the next step is to promote political tolerance. We need to allow taxpayers to make sacrifices to the Gods that they think can solve the problem.

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    2. There are no consumers for publicly-funded educational services or the products of scientific research? Which planet are you talking about?

      Moreover, when Citygroup's CEO decides to buy a whole bunch of morgage-backed securities and they go bust does he lose his home? Contrary to your claims he does not, he gets a nice severance pay and moves on. Instead you lose your retirement (if Citybank is in the portfolio of your IRA). And if the CEOs of many banks act the same way and the financial system collapses you lose your job if the company you work for cannot obtain the financing it needs.

      In the end it is all about choosing your managers wisely and monitoring what they do. But this is true for the public sector just as much as it is true for a private corporation. The market is no longer dominated by Adam Smith's butcher or brewer. Production takes place in bureaucratic entities owned by millions of stockholders and managed by bureaucrats who plan the use of the resources owned by the stockholders with limited liability.

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    3. Do I benefit when you have the freedom to choose how you spend your money in the private sector?

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    4. A toddler with a plastic bat strays onto a major league ballfield...

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    5. Some people pay to attend baseball games...not me though. I would have to be paid in order to attend a baseball game. I don't know why you have such a hard time applying such a straightforward concept to the public sector. You'd pay for the public goods that you value and I'd pay for the public goods that I value. Why are you so intolerant of other people's values? Why are you so blind to the economic value of tolerance?

      Neither of us wants America to fail...we just disagree on what it will take for America to succeed. It's a given that we'll debate the merits of various ideas but at the end of the day you should have the freedom to put your taxes where your heart is and I should have the freedom to put my taxes where my mind is. Then we'll compare the results. May the best ideas win.

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  19. From my experience the best investors are mature in their thinking and have realistic investment expectations. They measure their personal investment horizon in months and years - rather than weeks or days.

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  20. Anonymous12:35 PM

    this is a horrible blog post. "there are hundreds of cites to prove him wrong. but i wont bother because its so obvious." what kind of analysis is this? If there is a dispute, provide analysis shooting it down. The problem of course is that you have no smoking gun, so resort to "Its obvious". The reality is that neither side has a smoking gun -- is the solution to just write no articles? NO, it is to make some points and have a legitimate discussion. Saying that securitization was the only problem is naive, and convenient. The world is complicated, and i'm not sure you wholly understand securitization, one of the most ingenious ideas our economy has created. without securitization, you're paying 15% for a mortgage. do you not realize that? is securitizaiton part of the problem? yes, the manner it which the diligence process for passed over, yes. Are there other issues here? YES, but you avoid them because its difficult.

    Your arguments are fair. the way you go about presenting them is pathetic. The problem of course is there is just enough uncertainty to NOT allow you to definitely prove your case. The right has the same problem. Rather than poke holes because the other sides argument is not complete, appreciate that your argument also has holes and have a discussion.

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    1. If there is a dispute, provide analysis shooting it down.

      A cursory Google search finds:

      http://www.ritholtz.com/blog/2011/12/fannie-and-freddie-fantasies/

      http://rortybomb.wordpress.com/2011/07/14/the-fcic-investigation-wallison-on-the-gses-and-the-conservative-echo-chamber/

      http://www.ritholtz.com/blog/2011/07/why-wallison-is-wrong-about-the-genesis-of-the-u-s-housing-crisis/

      http://krugman.blogs.nytimes.com/2010/06/03/things-everyone-in-chicago-knows/

      http://www.mcclatchydc.com/2008/10/12/53802/private-sector-loans-not-fannie.html


      The world is complicated, and i'm not sure you wholly understand securitization, one of the most ingenious ideas our economy has created. without securitization, you're paying 15% for a mortgage. do you not realize that?

      So you're telling me that...without securitization...homeownership rates would go back to their long-run averages??? :-O (cue dramatic music)


      Your arguments are fair. the way you go about presenting them is pathetic.

      YER MOM!!!

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    2. Anonymous8:09 PM

      i don't dispute there are articles and commentary and viewpoints that disagree with Rajan's (or anyone else's), and i do not dispute that those viewpoints could be correct.

      "So you're telling me that...without securitization...homeownership rates would go back to their long-run averages??? :-O (cue dramatic music)"

      This is my problem with your posts -- everything is conclusory -- black and white. you either believe in Keynes, or you don't. thats it -- please, the world is not that easy. it may make writing your blog easy and score you some brownie points with fellow liberals, but it alienates all those that disagree because you never actually approach their viewpoints seriously! To be clear, i dont care that you sign on to liberal economic thought...because well, the arguments are clearly plausible. I just don't understand how you can be so sure of things that you cannot prove.

      without seriously questioning your own inherent beliefs about the economy, regardless of what they are, your blog simply assists the world in spinning its wheels and solving nothing. You are proud of yourself that you have a blog with a clever title and some people that will comment and join in your intellectual masturbation. but you're ultimately not willing to entertain the possibility that you are wrong, and thus will never be taken seriously by your ideological counterparts.

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    3. The other day I considered buying Peter Boettke's newest book...Living Economics. Then I wondered if it would be better idea to buy the book for Noah. What do you think? Do you think that Noah would read the book if I purchased it for him?

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    4. i don't dispute there are articles and commentary and viewpoints that disagree with Rajan's (or anyone else's), and i do not dispute that those viewpoints could be correct.

      I don't want to engage in "opinions on the shape of the earth differ" blogging here. Yes, both sides have made arguments. If they hadn't we wouldn't be talking about this. But as I see it, one side has won this debate convincingly. And I did not want to get sidetracked explaining why I think that that side has won convincingly. This blog post was not for that purpose.


      This is my problem with your posts -- everything is conclusory -- black and white. you either believe in Keynes, or you don't.

      Really? Because that's not what I think. In fact I have never even read Keynes. And I'm pretty sure that what is called "Keynesian economics" today is not congruent to what Keynes said. Furthermore, I am pretty publicly agnostic on lots of important questions; for example, I don't know whether fiscal stimulus works or not (or when it works, or how much).

      I mean, there's a reason I called this blog "Noahpinion"...beyond just the pun, I mean.


      it may make writing your blog easy and score you some brownie points with fellow liberals, but it alienates all those that disagree because you never actually approach their viewpoints seriously!

      Well, it is true that sometimes I don't take certain viewpoints or statements seriously. But I often do! What about these posts?

      http://noahpinionblog.blogspot.com/2012/05/what-is-financial-crisis-reply-to-john.html
      http://noahpinionblog.blogspot.com/2012/02/on-john-cochranes-thoughts-on-consumer.html
      http://noahpinionblog.blogspot.com/2012/03/why-macro-is-hard-taylorkrugman-edition.html
      http://noahpinionblog.blogspot.com/2012/01/filling-hole-or-priming-pump.html
      http://noahpinionblog.blogspot.com/2012/02/why-rational-expectations-models-can-be.html
      http://noahpinionblog.blogspot.com/2012/03/why-bother-with-microfoundations.html
      http://noahpinionblog.blogspot.com/2012/02/jim-bullard-chucks-solow-growth-model.html
      http://noahpinionblog.blogspot.com/2012/03/what-do-inflation-hawks-know-that-we.html

      And that is not even counting the times I've linked uncritically to blog posts by people like Steve Williamson, John Cochrane, David Andolfatto, etc.

      Also, I am sometimes convinced of positions with which I initially disagree. For example, Tyler Cowen convinced me that there is a Great Stagnation, where I was extremely skeptical at first.


      without seriously questioning your own inherent beliefs about the economy

      But I do question my beliefs, all the time...Maybe it doesn't seem so to you, because when I sit there questioning my beliefs, I don't always write down my internal dialogue as a blog post...I often wait until I've made up my mind about something and then post. But I've done enough posts where I simply ask questions and wonder about things that I thought it was clear that I am not just speaking out of political bias or forming opinions in a knee-jerk or tribalist fashion.

      You are proud of yourself that you have a blog with a clever title and some people that will comment and join in your intellectual masturbation

      And you're a guy who likes to go onto the blog of someone you disagree with and be aggressive and insulting while hiding behind a veil of anonymity. Do you think your jerkiness makes me take you more seriously, or less seriously? I mean, I used to do the same kind of thing all the time in my younger days, and I doubt I got taken seriously very often.

      Feel free to email me at any time if you want to discuss this more... nquixote@umich.edu

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    5. Anonymous10:30 AM

      I don't disagree with your opinions, i sign on to many of them, i disagree with you being so sure you are correct, and others are wrong. it hurts the learning process. Rajan is accomplished and respected -- he predicted the crisis and riled up every economist before 2008. And even he may be wrong. because economics is not a perfect science. I think its more valuable to acknowledge differences and accept shortcomings so that the understanding is better. Economics has become a team game, and it simply doesn't work that way.

      Sorry for being aggressive! I will try to review the posts you cited. I might even take you up on your email offer.

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