Monday, June 09, 2014

Undeniable Macroeconomic Truths?

Bryan Caplan has a great description of how most people think of macroeconomic issues in starkly political terms:
If you had to classify everyone with a position on the subject, you'd end up with a Pyramid of Macroeconomic Insight and Virtue that looks something like this: 
Tier 1...Partisans...who loudly support..."their side"...See all the Democrats who supported Clinton's austerity, and all the Republicans who supported Bush II's profligacy. 
Tier 2...Ideologues who are sure that "active government policy" will work well/poorly, even though they can't even explain ... 
Tier 3...People who can parrot some basic textbook macroeconomics to support "their side," but who can't answer basic objections - or even accurately parrot the parts of the textbook that conflict with their views. 
Tier 4...People who understand a few Undeniable Macroeconomic Truths.  For Keynesians, these include: "Nominal wages are sticky," "A lot of unemployment is involuntary," and "Aggregate Demand matters."  For anti-Keynesians, these include: "The safety net discourages job search and sustains unrealistic worker expectations," "99 weeks of unemployment insurance makes nominal wages stickier," and "Regular government spending is wasteful, and stimulus spending is worse."... 
Tier 5...People who freely acknowledge the whole list of Undeniable Macroeconomic Truths[.]
I really like the first three tiers of the pyramid. It's an accurate description of how most people in the world think about macroeconomic issues. We're used to thinking in terms of "sides", of morals and tribes instead of technocratic efficiency. Even Caplan doesn't really question that the divide is all about redistribution, government intervention, social safety nets, rather than about technocratic questions of how to smooth out the business cycle.

But I'm a little uneasy about these "Undeniable Macroeconomic Truths". I'm very leery whenever the word "undeniable" comes up. Let's check em out.

"Nominal wages are sticky": Well, every piece of research I've seen on this subject (for example, this or this) agrees that nominal wages are sticky, at least in the downward direction. But the kind of exogenous stickiness in most "New Keynesian" models doesn't make a lot of sense. So this "undeniable truth" gets only a provisional pass, since the real "stickiness" might not affect the economy in the way "Keynesians" think.
Verdict: True.

"A lot of unemployment is involuntary": The more you think about models of labor and unemployment, the more you realize that "voluntary" is not a well-defined term. But since many unemployed people definitely seem to think (correctly or incorrectly!) that they can't find any sort of job, I'll give this one a provisional pass as well, with the caveat that "involuntary" is defined in the mind of the unemployed person.
Verdict: True.

"Aggregate Demand matters": Well, in most recessions, inflation falls. If the economy is described by an AD-AS graph, then yep, that means that AD matters. But if the economy is some more complicated thing, then the whole concept of "aggregate demand" and "aggregate supply" becomes inapplicable. So this "undeniable truth" doesn't hold up; we need to scale this down to "most big recessions are disinflationary", or something like that.
Verdict: Not well-defined.

"The safety net discourages job search and sustains unrealistic worker expectations": What is "the safety net"? Isn't it a bunch of different things? Do all parts of "the safety net" discourage job search and sustain unrealistic expectations, or only some? There may be some "safety net" programs that encourage job search (for example, if the govt. takes care of your invalid mother, you might have more time to look for work). So this "undeniable truth" also gets only a provisional pass, since there are too many elements of the "safety net". If you're just talking about unemployment benefits, then you might want to look at North Carolina, where revocation of the benefits mostly just pushed so-called "unemployed" people to stop pretending to be part of the "labor force". But there really do seem to be some people who start looking for work more seriously as their benefits near expiration (see here and here for evidence). The effect is real but small.
Verdict: True.

"99 weeks of unemployment insurance makes nominal wages stickier": I have no idea if this is true or not, and I can't find any evidence for or against it. If this is an "undeniable truth", I'd like to know how Caplan discovered it.
Verdict: Unproven.

"Regular government spending is wasteful, and stimulus spending is worse": What does "wasteful" mean? Not 100% efficient? Well that's probably true of any spending, including spending by a private household (I know I've wasted plenty of money in my life!). How wasteful is "wasteful"? This is not well-defined. As for stimulus spending being more wasteful, this clearly seems not to be an undeniable truth. First of all, if stimulus spending is effective at fighting recessions, shouldn't that effect be counted in the "efficiency" of the spending? And also, it seems plausible that stimulus spending is sometimes more efficient than normal-time spending, even not counting the demand boost! We don't understand how government decision-making works, so it seems possible that in normal times government waste a lot of money on pork, but in recessions, they come under increasing scrutiny, and are forced (or galvanized) into spending money on things that will actually boost the economy. In fact, that would fit with the finding of Rudi Bachmann and Eric Sims (2011), who find that government spending in recessions - and only in recessions - boosts people's confidence. So this "undeniable fact" seems to me to be quite deniable.
Verdict: Deniable.

So of Caplan's six "undeniable facts", I can only bring myself to endorse three of them, and then only provisionally. At which level of the Pyramid of Macroeconomic Insight and Virtue does this place me, I wonder?

In fact, I kind of want to be off of the pyramid entirely. I hope there's a place for people who just don't see business-cycle debates in ideological terms at all, and who try to separate moral issues, distributional issues, and efficiency issues. I hope there's a technocratic Moses out there, who can lead us away from the land of the pyramids. Let my people go!


  1. Anonymous3:07 AM

    RE: Unemployment, finding "any" job, pretending etc... sometimes you let your glibertarian/nerd impulses lead you into douche territory.

    1. What do you mean?

    2. Prof. Smith, I think he's implying that your SUNY tenure, pension, and low level of accountability relative to the private sector in your at-will employment home state is making you a bit insensitive to just how difficult life is for people who can't get a sustainable living wage.

    3. I'm not insensitive to it.

      I just considered Caplan's statements in a narrow way, as opposed to part of a larger moral/cultural clash of ideologies.

      If that annoys people, too bad. There's a time for ideology and a time for logic.

    4. Anonymous5:29 AM

      I wasn't annoyed (maybe a little disappointed), nor was I trying to be ideological.

      Your treatment of unemployment is too narrow. In my inexpert opinion if you added up the substantial emotional stresses of being unemployed, permanent loss of output when someone is forced into some crap job when it might really benefit them with something better. I think the answer to #4 starts looking like "if you fix a bunch of phrasing in Caplan's truthitude, you end up with something with a small and ambiguous effect and how can this be fundamental anything". This isn't logic in a useful sense.

    5. Noah, as Anonymous points out, you aren't being logical; you're being glib. I'd also add insensitive in the typical STEM vein (yes, I know you're not STEM, but econ tries to be).

      This statement: "revocation of the benefits mostly just pushed so-called "unemployed" people to stop pretending to be part of the "labor force"" is the problem. You're assuming a fixed boundary between being in and out of the labor force; you're assuming people say they're looking for a job just to get UI. Yes, that happens, but what also happens is people desperately look, people desperately want a job, but after years and years of trying, realize the job they once held and loved has vanished forever. So then they finally say they've retired.

      They didn't pretend to be in the labor force. They really really wanted to be in the labor force. And after trying to be, and failing, they gave up.

      What horrifies me is you're considered a left-wing economist. Is this really as progressive as economics can get these days? I shudder to think.

    6. To Michael Foster, to expect Noah Smith to be anything but glib about unemployment is unrealistic, given that he has a stable, full-time job in a field with relatively high demand (see his post on "If you get a PhD, get a PhD in economics" post), and comes from a middle or upper-middle class family background.

      The only way that someone can truly empathize (rather than just understand) about the plight about the unemployed is to experience a serious bout of unemployment.

  2. I think by "Undeniable Macroeconomic Truths" he means things that knowledgeable people sincerely believe are true. The list would include many contradictory statements, since economics is like that. If macroeconomists limited themselves to things that were truly undeniable, they wouldn't have much to say.

  3. "99 weeks of unemployment insurance makes nominal wages stickier":

    This should be pretty obvious. Longer benefits means employers have to offer higher wages to entice people to work instead of live off unemploymet

    1. This comment has been removed by the author.

    2. "live off unemployment"

      Ha! I love it!

      Do you mean "living" in the sense that the only entertainment one is allowed is the adventure of trying to figure out how to feed, clothe, and house three people on $200 a week?

    3. If employers have to offer higher wages because prospective employees are in a better bargaining position, this does not make wages 'stickier', this just creates a reason to make them higher. It could equally be argued that benefits reduce wage stickiness because employers need to throw more of their enhanced profitability into wage increases so as to attract staff.

    4. urban legend2:32 PM

      Jonas, yes. People who say shit like this have no concept of the desirability of having at least some discretionary income. On unemployment benefits, the discretionary income is zero, or more likely, below zero. It is a pure either-or thing. At best, there is no money whatsoever left over after necessities, and most likely debt is being increased. With a job, a person may have at least a pittance of discretionary income, and most at middle-class wage levels will have enough to make a meaningful difference in enjoyment of life.

      It is a logical fact: unemployment benefits, in a time of high unemployment at least, have no effect whatsoever discouraging people from finding a job. When there are few jobs, withdrawing the benefits does absolutely nothing to increase the number of jobs available. All that has happened when they are withdrawn is a decrease in total demand because the people who spend every penny they get no longer have anything to spend.

      Because of the either-or difference in having some discretionary income or none at all, the discouragement effect of temporary benefits is infinitesimal even in times of low unemployment. But in time of high unemployment, the so-called incentive to seek work is completely irrelevant.Taking them away only deceases total consumer demand while doing nothing to add to the number of jobs available.

  4. Anonymous7:49 AM

    How does he get that Clinton was austere and Bush profligate? Clinton collected higher tax rates and more revenue from rich peoples. Bush collected much less revenue from the wealthy. Clinton cut back on military spending, but expanded "workfare" programs such as EITC and child care. Clinton wanted to spend a bundle on universal health care but he was blocked.

    Bush gave a lot of tax cuts to the wealthy but did not share revenue with the states as an antidote to recession. His tax cuts policy was way profligate, but his domestic spending was austere. He spent a lot of money on foreign wars and Bush expanded Medicare prescription drugs his one instance of profligate domestic spending. I don't remember much cheering from conservatives about Medicare Prescription drugs. I don't remember profligate spending to rebuild New Orleans.

    Most of the difference between Clinton and Bush was not how much they spent, but what they spent it on and how much revenue they collected. Collecting more revenue during an economic boom and less during a bust is generally a good thing known as countercyclical policy. It is not a flip flop to change policy to fit economic conditions.
    - jonny bakho

  5. There seems an assumption that without welfare there is no unemployment. Not true. See a interesting blog post by Chris Dillow on unemployment in Britain from 1855-1914 - average about 4% and went as high as 10%. Not a lot of regulation then. As he puts it:

    " In the 19th C, though, the only state support the unemployed got was in the Workhouse - and even as late as in my lifetime, this was spoken of with terror."

    See also the following for evidence that unemployment was higher in the pre-welfare era.

  6. Piketty challenges one of the "Undeniable Macroeconomic Truths" for academics: the idea that the shares of capital and labor respectively in total income are highly stable over time.

    Hence all of the glibertarian policy ideas to help capital and hurt labor don't encourage growth and good job creation and make society better off. They make society more unequal to the extent that we'll head towards a society dominated by dynastic families and their wealth. It won't be very fair. These are the important truths which Piketty's data laid out.

    So how will the glibertarians react? Will they ignore the issue and go on droning about how government spending is wasteful and how Krugman is a big meanie? Will some argue that the coming of high levels of inequality and dynastic domination isn't a bad thing? Some will no doubt argue that capital needs to be redistributed democratically (via government intervention?) but I doubt that policy would significantly alter the underlying trends.

  7. What does "wasteful" mean? Not 100% efficient? Well that's probably true of any spending, including spending by a private household (I know I've wasted plenty of money in my life!). How wasteful is "wasteful"? This is not well-defined.

    Actually, yes it is. "Wasteful spending" is spending that occurs when government consumes resources with taxpayer money that the taxpayers themselves would've rather spent on something else. It's foolish for me, or anyone else, to say you "wasted" your money when you spent it on, say, pet rocks, if that's what you wanted to spend it on. That is an indefensible position. But when I take your money and spend it on something that you don't value at the price I purchased it at, that sends distorted market signals.

    Caplan is right in this situation, most government spending is wasteful, but not all. Its true that stimulus can be very effective at fighting recessions, but standard NK models cannot tell you whether or not stimulus spending to fight the recession is worth the cost.

    Well, in most recessions, inflation falls

    No it doesn't. FRED database, seasonally adjusted, measuring both just core and non-core inflation, shows steady increase in the rate of inflation even during recessions. Even in the 2008 recession, inflation increased for some time before it diminished.

    1. There are at least two problems with your definition of wasteful government spending. First, measurement. If the government spends on a public park or national defense, then how do I know how much park or defense people want to consume? Second, aggregating preferences. What is your social welfare function? Suppose I can measure each individual's preferences, but there is no clear consensus on how much the government should spend on defense?

    2. Joshua W.

      Neither one of your "problems" is relevant to debunking the definition of wasteful spending. Both are essentially saying the same thing; because there is difficulty in measuring consumer's revealed preferences, finding the optimal amount of government spending on a public good is difficult to ascertain. But this doesn't change the logic of what constitutes wasteful spending one iota.

      In any case, the answer to both your problems is you equalize marginal costs and marginal benefits.

    3. What are marginal costs and marginal benefits when talking about social welfare? Under some conditions, an individual's preferences have a differentiable utility function. But, when do society's preferences have a differentiable utility function? When can we say, even if we know everyone's preferences, that taxpayers would have preferred spending money on something else over building a bridge? If there is no consensus one way or the other, then how can we decide that the spending was wasteful?

    4. Marginal benefits are the additional benefits one receives when consuming one more unit of a given good or service. Marginal cost is the additional cost one incurs when providing one more unit of a given good or service. In terms of social welfare, its all the private costs and benefits plus any external cost and benefit.

      The utility function for society, or social welfare function, is by definition be the sum of everyone's own personal utility function.

      You can say taxpayers would have preferred spending money on something else over building a bridge by finding out the cost of the bridge and what taxpayers would be willing to pay for it. For example, let's say there are two individuals, Alice and Bob, who petition politician Carl to build a bridge. In this case, Carl must find out how many units of the bridge to build and what value Alice and Bob place on the bridge in order to tax them appropriately. Lets say Alice values the a 10 mile bridge at $100, while Bob values it at $150. Market demand for a 10 mile bridge is therefore $250. If the bridge costs more to make than this, then there would be a misallocation of resources and the wasteful spending would be the total cost to build the bridge minus what Alice and Bob value it at.

      You can decide whether or not spending is wasteful by doing a cost-benefit analysis, which is pretty much one job government economists are meant to do.

    5. The social welfare function is not, by definition, the sum of everyone's own personal utility functions. That is a utilitarian social welfare function. Indeed, it only makes sense when we have cardinal utility functions, as opposed to just ordinal preferences.

      Just because I have preferences that I can represent with a utility function for each individual, doesn't mean their utilities are comparable to each other. Differentiable utility functions means each individual equates the marginal utility per dollar of consuming each good (that she consumes in a positive amount, assuming she cannot consume a negative amount). But, I can multiply one individual's marginal utilities by 10 and have the same preference relation. I can also add 300 utils to each decision and not change the marginal utilities (these are positive affine transformations of the utility function).

      Why is the amount of dollars I'm willing to pay for something necessarily relevant? Suppose John has $0. Then, he is willing to pay $0 for everything. That doesn't mean paying for a park that he will use and get utility from is wasteful; it may even maximize the sum of everyone's utilities.

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    7. *Editing note: My first post had a mistake that I wished to correct.


      First off, yes, that is what the social welfare function is.

      Secondly, I never stated nor implied that different people's utilities are comparable.

      Third, you're confusing ability to pay and willingness to pay. So in John's case, if he ever obtained money, it would be a waste to spend it on a park if he's not willing to spend any money on it.

      Finally, we're not concerned with maximizing utility, we're concerned with maximizing welfare.

    8. So, the social welfare function is the sum of individuals' utilities, but that somehow doesn't imply that individuals' utilities are comparable, and we are concerned with maximizing welfare, which apparently is not utility? I see at least two contradictions. First, if the social welfare function is the sum of utilities, then how is maximizing welfare not maximizing utility? Second, if we want to maximize the sum of utilities, then individuals' utilities must be comparable. If we want to maximize the sum of John's and Jane's utilities, then we will do something that takes away 1 util from John and gives 2 utils to Jane. Hence, we are saying that 1 util from John is worth the same amount to social welfare as 1 util from Jane. Unless we have person-specific weights. But, then, how do you decide on those weights?

      Finally, how can you separate ability to pay and willingness to pay? If I have $10,000, then I am willing to pay more for a steak than if I have $100. In the latter case, I am willing to pay less for a steak because I want to save my money for other things.

    9. Josh,

      I never stated the social welfare function is the sum of individual utilities, I said it was the sum of (or aggregation of) everyone's personal utility functions. There are different ways of measuring utility depending on the economists' initial premises when using them, but all social welfare functions are some sort of aggregation of individual utility functions, whether the utility is weighted, counted equally, measuring only disutility, etc. (For the sake of completeness, I'm aware there are others that aggregate things other than utility, but was only speaking about the former because of your fixation on utility.)

      However, all this is mostly irrelevant, because maximizing utility and maximizing welfare are not the same and you don't need the concept of utils to reach certain important conclusions concerning consumer behavior.

      Here's an example, suppose John and Jane are neighbors, John is very rich and Jane is poor. John likes to play loud music that he values at $50,000 dollars but is worth very little in utility to him and Jane just wants to sleep, which she's willing but only able to pay $100 dollars for because that's all she can afford but her utility from sleep is more than John playing loud music. If we're maximizing utility, John should turn his music off. Welfare criterion, however, dictates that we should let John play his music. The reason for this is because if we turn off John's music, the opportunity cost for Jane's $100 is $50,000 from John. It would be welfare maximizing to let John and Jane negotiate a deal to where John pays a portion of that $50,000 to Jane that would compensate her for her lack of sleep.

      Ability to pay has to do with an individuals budget, willingness to pay has to do with desire to have one good in lieu of the other. Economists model the two with indifference curves and budget constraints. The slope of the indifference curve explains what a consumer is willing to trade one good for the other. The slope of the budget constraint gives the rate at which a consumer is able to pay. Thus, graphically speaking, optimal consumption is when a persons indifference curve is tangent to the budget constraint. With regards to your steak dinner scenario, your willingness to pay more for a steak when you have a higher income versus a lower income has to do with what's called the income effect with regards to normal and inferior goods.

      I'm not trying to sound snarky, but you keep tossing around advanced concepts such as social welfare function, cardinal versus ordinal, and utility when you obviously don't have a solid grasp of the basics. Everything I've told you up to this post is standard introductory microeconomic textbook material and accepted amongst most economists. I suggest you rent one from your local library and invest in the material because our discussion has gotten to the point where in order to explain to you what constitutes waste I have to take several steps back and explain standard consumer choice theory. I'd be happy to clarify confusions, but I'm not spending a semesters worth of time explaining ECON 101.

    10. If the social welfare function is the sum of individual utility functions, then how is it not the sum of utilities? Utilities are the output of utility functions.

      Anyway, I am aware that you are using introductory microeconomics. That is why you don't understand the assumptions you are making, which is what I'm addressing. I see from your third paragraph that you are talking about waste in the framework of Pareto optimality. Are you aware that the first welfare theorem does not hold when we do not have complete markets, i.e. market outcomes are not Pareto efficient?

      That aside, there is a key difference between Pareto improvements and potential Pareto improvements. For example, it is well-known that, under standard intro level assumptions, opening up to trade is a Pareto improvement. If some workers lose their jobs from competing with workers in other countries, then, since the whole pie is bigger, we can compensate them and everyone can be better or at least as well off as before. But, what if we don't compensate them? Indeed, once you take moral hazard issues into account, it may be impossible to efficiently compensate them. Then, we have made the pie bigger, but some people are worse off. We no longer have a Pareto improvement.

      Back to your example in your third paragraph. Suppose John and Jane cannot negotiate a deal because communication costs are prohibitively high. Then, you can go with the market outcome which says that John gets to play his music, but, unless you take at least $100 from John (or someone else) and give it to Jane, we don't have a Pareto improvement over John not playing his music.

      This leads us back to the build a park example in which someone with $0 really badly wants to have a public park. He may be willing to take $1000 instead of the park, but, if you don't build the park, are you going to give him $1000? If you don't want the government to choose whether or not to build the park (because the government is wasteful), then who will choose? Will you auction off the right to choose? If you are familiar with mechanism design (which they don't teach in intro micro), then you know this is a difficult question.

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    12. This debate is getting long, so I'll try to summarize and hopefully we can conclude. Maybe you will disagree.

      We seem to agree that by 'government spending is wasteful' we mean it is not Pareto efficient. But, I think there is another necessary qualification. We must have that the Pareto improvement is achievable. National defense is a non-excludable service that the government provides. A private citizen would undersupply it because he is unable to charge those who use it. As such, the government is probably more efficient than the private market at supplying defense. This is just one example in which deviations from standard assumptions about markets allows for the government to be more efficient than the market. If this is the case sometimes, then how can we say that all government spending is wasteful?

      I think Noah's point that he has wasted lots of money in his own life is saying that, sometimes, had the government taken his money and spent it on something else for him, then maybe he would be better off. Or suppose the government takes on our money and invests in scientific research that corporations do not care about because its benefits will occur so far into the future? Is it wasteful to spend for the sake of people not alive yet just because alive individuals do not care about them?

    13. Josh,

      If I were to rehearse to a group of children the Aesop fable "The Hawk and the Nightingale" that ends with the morale "A bird int he hand is worth two in the bush.", you'd be the one standing on the sidelines telling the kids "That may not always be the case. What if the pigeon was poisonous? Or what if the hawk went to another forest and ended up catching something bigger instead? Ha! See? It doesn't apply all the time!" Yes, it doesn't, but as a general rule its correct and it ignores all the blather associated with consideration for every and any exception. This is what you've done throughout our discussion. It doesn't make you sound smarter or more articulate, it just makes you annoying as hell.

      The social welfare function is not relevant! Neither is utility, communication costs, mechanism design, etc.

      What is relevant is willingness to pay. If the government taxes you to pay for something that is beyond the price you were willing to pay for it, that is waste because resources are misallocated. This is not a hard concept and differentiates between mistaking willingness with ability.

      This leads us back to the build a park example in which someone with $0 really badly wants to have a public park. He may be willing to take $1000 instead of the park, but, if you don't build the park, are you going to give him $1000? If you don't want the government to choose whether or not to build the park (because the government is wasteful), then who will choose?

      The "park" (or land) will go to someone else and this no income person (I'm assuming it's John) will be no worse off than before.

    14. The no income person would be worse off than if they built the park.

      For your third paragraph, you missed my point about the qualification beyond Pareto optimality. If the government lowers spending and taxing, then we will not necessarily have an improvement. An improvement may exist if we could use some all-knowing benevolent Pareto planner. But, we cannot. The market is not perfect. The relevant question is if the government is wasteful relative to the market. When it comes to the majority of government spending, I would say no. If you disagree, then do you think the government should reduce spending and taxing to 0?

      Finally, it seems we disagree about how often intro level assumptions hold. I think they almost never hold. You seem to think they almost always hold. In reality, I cannot buy a piece of an army because I sort of want one, and then exclude everyone else from using it. National defense must be undertaken as a group project. Maybe each person, knowing that everyone else will want to buy an army, will claim that he/she doesn't want to pay for it. How will you overcome this asymmetric information issue? The alternative to a tax-funded army, that may be more or less than the ideal size, is no army. Relative to the private market, the government doesn't seem particularly wasteful here. And, considering that national defense is a large portion of government spending, I don't see why this is just me pointing out some small exception to your rule.

    15. The no income person would be worse off than if they built the park.

      NO! This isn't correct.

      In order for John, who has no income, to get his park, the government must tax someone else and use it to build the park. This is basically a pure transfer of resources from taxpayers to John, making them worse off. It cannot make John worse off because you're not taking anything away from him, you're essentially just giving him land that someone else would've used. However, land used for a public park is land that cannot be used for a parking lot, an oil refinery, a coffee shop, a swimming pool, a house, etc.

      The relevant question is if the government is wasteful relative to the market. When it comes to the majority of government spending, I would say no.

      This is wrong, both logically and empirically. For one, markets have the price mechanism while governments face the economic calculation problem. Secondly, government spending involves the principle-agent problem; its the same reason why gift-giving is inefficient, because the person buying the gift often doesn't know the preferences of the person they're buying for. Finally, the market, though it may create temporary inefficiency, will in the long run often correct itself because competition provides the mechanism for weeding out inefficient producers. Government doesn't have this similar auto-correcting mechanism.

      There are things that the government provides better than the market, such as national defense, basic infrastructure, courts of law, etc. In each of these cases, there is some sort of market failure present. Where there is not, spending often results in waste.

  8. You are, as always, polite. I am not.

    On the safety net. I think the idea is that, aside from the direct benefits of helping the poor, there are indirect effects and the alleged truth is that these partially counter the benefits. There is quite strong evidence on the question of whether the safety net tends to create dependency by encouraging the inter generational transmission of the culture of poverty. The evidence is that the safety net does the opposite. One source of data was the gradual adoption of food stamps county by county over the 60s. The evidence is that food stamps reduce dependency
    This is micro not macro (as you can tell from the reference to evidence) but it is a statistically significant result from a natural experiment.

    It has been demonstrated that welfare reform killed people (note no hedging this is an overwhelmingly significant result of a true experiment)

    Finally it is clear that Medicaid (the largest safety net program by far) causes higher educational attainment which is, of course, associated with lower dependency

    The recent evidence is quite strong that, in addition to the direct benefits, the safety net has indirect benefits tending to cause higher total GDP. The "truth" is a pure expression of some ideology. It might be right wing. It might be the faith that economics 101 has something to teach people which they didn't guess already. My guess is that it is radical centrism and ballance. That Caplan felt the need to find three right of center truths which are controversial. He clearly forgot the meaning of "macroeconomic" when searching.

    On "wasteful" there is another problem. The actual ARRA stimulus consisted of cutting government spending (especially government investment) a little not a lot (really a huge amount not a gigantic amount). The simple guess that marginal products are decreasing would imply that ARRA spending was more efficient than 2006 spending, because it was reducing the high rate of layoffs. I think that Caplan disdains as mere news the fact that in reality the recent stimulus spending was bringing spending part of the way up to normal not extra spending.

    On what is wasteful, I think the logic is that in the real world government spending isn't 100% optimally efficient (this is true. Also the words "government spending" can be replaced with any other words). If the statement is changed so it has meaning it becomes "government spending is wasteful so lower government spending would improve efficiency". This is a logical statement for an anarchist to make, but must be rejected by libertarians and everyone else. I think this is achieving balance by assuming a straw leftist who thinks that government is perfect or something.

    A side issue.
    Tier 1 Cllinton's austerity ? I assume this refers to Clinton's 1993 tax increase which I supported (why oppose higher taxes on high incomes and a higher EITC?). Or is Clinton's austerity the austerity from 95 on when Republicans had a majority in the congress which actually writes the budget ? I think there are partisans who also give the President credit and blame for everything. But they are confused about more than macro.

  9. "business-cycle debates"

    Any system with stocks, flows, momentum and negative feedback will vibrate when disturbed by some external influence (in economics those can be political, scientific, technological etc).

  10. Anonymous2:38 PM

    "We don't understand how government decision-making works"

    And with once sentence you disregard the entire Public Choice literature. The government is made up of people. And people's behavior is what economists study. Maybe, instead of saying, rather definitively, "we don't know," you could start to think about the incentives that people in government face, it could end up being quite fun! You could start here:

    And if that doesn't satisfy your desires, you could think about how our federal institutions that have troubles keeping roads maintained is supposed to become a rather efficient tool for recovery when there's a recession. And why would this be so? Because they're under more scrutiny? What does that mean? Does that mean voters all of the sudden, during economic downturns become super-informed about which types of govt spending will boost the economy? If so, that sounds like a publication opportunity.

    1. And with once sentence you disregard the entire Public Choice literature.

      I didn't say no one had ever studied it. But I know that that literature has barely scratched the surface of the possible, and is in its infancy.

  11. Caplan's Tier 1 complaint against Democrats doesn't make any sense. If we assume most Democrats listen to New-Keynesians then applauding Clinton's austerity while chiding Bush's profligacy is completely consistent with NK models.

  12. "Undeniable truths" or 'Truths' can only exist if everyone agrees on all the assumptions and definitions, and I have not seen such universal agreement with regards to macroeconomics.

  13. Problem is there are many facts that are true but of little consequence while there are others that are true and of much importance. The safety net tends towards the former.

  14. All Hot Current Affairs, Bollywood News updates, funny and lol pictures

  15. Phil Koop9:10 PM

    Send us another Brother Moses!
    From across the Red Sea
    Movement of Jah people ...

  16. Real economists always add the conditional, "except when they're not", in order to make these truths truly undeniable.

  17. Stimulus spending is wasteful of what?

    1. Is the answer perhaps resources that would be wasted anyway?

  18. Besides which my usual complaint is the way economists use the word "efficiency" is near enough to useless.

  19. Anonymous6:58 AM

    "I hope there's a place for people who just don't see business-cycle debates in ideological terms at all, and who try to separate moral issues, distributional issues, and efficiency issues.

    Yes, there it is :

    Hume's Law Violation Squad HQ
    Department of Post Mortem Retribution Enforcement
    Pit 39876
    Inferno of Logical Errors

    Policy design rests on normative assumptions, which cannot be derived from economic theory, and thus is not scientific. Deal with it.

  20. 1) Nominal wages aren't sticky. Employers cut wages all the time. The typical pattern since the 90s has been a firing followed by an offer to come back as a consultant on a lower hourly scale. The alternative has been a firing followed by being offered a job at a service providing organization doing the same work for lower pay. I know dozens of people who've been kicked by one, the other or both of these types of wage cutting, and this doesn't cover things like higher copays, reduced vacation time, longer expected hours, reduced benefits and the like. Anyone who says nominal wages are sticky is in cloud cuckoo land.

    2) If aggregate demand doesn't matter, what happens when it reaches the zero bound? Remember, aggregate demand is limited by wages, revenues and taxes. There is a fantasy generally accepted in economics that rich people will spend money for stupid reasons, but one doesn't stay rich if one does stupid things.

  21. "the kind of exogenous stickiness in most "New Keynesian" models doesn't make a lot of sense."

    There's probably a good reason for that: the supposed microfoundations of New Keynesianism were debunked -- by Keynes.

    “It is widely recognized that the assumption that wages are rigid is central to Keynes’ explanation of the persistence of unemployment.” Joseph E. Stiglitz 1984.

    “[T]he Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on an assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment…. In its crudest form, this is tantamount to assuming that the reduction in money-wages will leave demand unaffected.… It is from this type of analysis that I fundamentally differ…” John Maynard Keynes 1936.

    O. F. Hamouda writes:

    “Given the enormous literature on Keynes and Keynesianism and the flippant way in economics in which consensuses are formed to become the truth, there is need for a concordance to be undertaken to compare, in the light of this book, what was said at the source, what was ascribed first-hand as having been said, and then what was made second-hand of those accounts, multiplied over and over. There is a delightful abundance of aberrations… …it is not claimed that everyone, everytime, everywhere should always run back to the sources nor, as Hicks once said, that the source should be taken as divine, but when a claim is made, it must be able to stand, as few presently do.”

    One of the aberrations Hamouda cites is:

    “It is widely recognized that the assumption that wages are rigid is central to Keynes’ explanation of the persistence of unemployment.” Joseph E. Stiglitz 1984.

    Paul Davidson also pointed out the New Keynesian reversal of Keynes’s position in “Would Keynes be a New Keynesian?” Eastern Economic Journal, Vol. 18, No. 4 (Fall, 1992), pp. 449-463.

    “The principle of a truth in labeling law that protects consumers from false and misleading claims is often violated by economics textbooks. Under the truth in labeling law, a minimum quantity of beef is required in a patty before society permits anyone to sell it as a hamburger. Similarly some minimum quantity of Keynes’s logical analysis should be an essential ingredient in any theory sold as Keynesian, especially in textbooks to yet uneducated consumers.

    “…Keynes specifically denied that fixed nominal wages and prices were a necessary condition for underemployment equilibrium. One complete chapter of The General Theory demonstrates why the existence of instantaneously flexible money wages can not assure full employment – even if no coordination failures exist. ‘For the Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on the assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment …My difference from this theory is primarily a difference of analysis’.


    “Consequently, anyone selling New Keynesian theoretical patties, in which the fixity of nominal wages or prices is the main ingredient, to students (or uneducated policy makers) would not get a franchise to use his name from the originator of Keynesian economics.”

  22. "Tier 5...People who freely acknowledge the whole list of Undeniable Macroeconomic Truths[.]"

    He forgot Tier 6 ... People who understand that the vulgar economic apologists of the 19th century had their lists of "Undeniable Macroeconomic Truths" which proved to be a "magazine of untruth."

    "The complaint one makes against that anti-social jargon, which so easily passes for economic science, is that it is in ludicrous opposition to the common observation of facts. Political economy professes to be a science based on observation. But the bitter pedantry which often usurps that name usually assumes its facts, after it has rounded off dogmas to suit its clients. In practice this magazine of untruth escapes detection for two reasons. One is that the facts relating to labour are invariably seen through the spectacles of capital. The employing class is virtually in possession of the whole machinery of information; and all judgments are tinged with the tone current among them. Thus we see the very newspapers which celebrate the amusements of the rich in a hundred different forms, scandalized at the coal miners objecting to grub in the pits every day in the week. Laziness, ingratitude, and extortion, seem the proper terms for sportsmen and fine ladies to apply to the men and children who swelter half their lives underground. The second reason which obscures the truth about industry is, that the facts about capital are almost never honestly disclosed."... -- Frederic Harrison (1872)

  23. Wages are flexible for job stayers and certainly new starters.

    See What can wages and employment tell us about the UK’s productivity puzzle? by Richard Blundell et. al. showing that in the UK recession 12% of employees in the same job as 12 months ago experienced wage freezes and 21% of workers in the same job as 12 months ago experienced wage cuts.

    Their data covered 80% of workers in the New Earnings Survey Panel Dataset and shows widespread wage cuts dated back to the 1980s. Recent Irish data also shows extensive wage cuts among many job stayers.

    See too Pissarides, C (2009), The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer? Econometrica who argues the wage stickiness is not the answer since wages in new job matches are highly flexible:
    1. Wages of job changers are always substantially more procyclical than the wages of job stayers.
    2. The wages of job stayers, and even of those who remain in the same job with the same employer are still mildly procyclical.
    3. There is more procyclicality in the wages of stayers in Europe than in the United States.
    4. The procyclicality of job stayers’ wages is sometimes due to bonuses, and overtime pay but it still reflects a rise in the hourly cost of labour to the firm in cyclical peaks
    How do existing firms survive in competition with new firms who can start workers on lower wages? Industries with many short term jobs and seasonal jobs would suffer less from wage inflexibility.

    Alchian and Woodward’s 1987 'Reflections on a theory of the firm' says:
    “… the notion of a quickly equilibrating market price is baffling save in a very few markets. Imagine an employer and an employee. Will they renegotiate price every hour, or with every perceived change in circumstances?

    If the employee is a waiter in a restaurant, would the waiter’s wage be renegotiated with every new customer? Would it be renegotiated to zero when no customers are present, and then back to a high level that would extract the entire customer value when a queue appears?

    … But what is the right interval for renegotiation or change in price? The usual answer ‘as soon as demand or supply changes’ is uninformative.”

    Alchian and Woodward then go on to a long discussion of the role of protecting composite quasi-rents from dependent resources as the decider of the timing of wage and price revisions.

    Alchian and Woodward explain unemployment as a side-effect of the purpose of wage and price rigidity, which is the prevention of hold-ups over dependent assets.

    They note that unemployment cannot be understood until an adequate theory of the firm explains the type of contracts the members of a firm make with one another.

    How can downward wage rigidity be a scientific hypothesis if extensive international evidence of widespread wage cuts since the 1980s and 30%+ of the workforce on performance bonuses is not enough to refute it?

    Robert Barro (1977) pointed out that variations in the intensity of work effort within the context of a long-term contract can offset any allocative consequences of not adjusting wages every week.