Two followups, in way too many words

1. Asymmetry of information about information

In the previous post, I identified government, health care, education, and finance as the “asymmetric information industry”. Arnold Kling makes an important point:

[I]nformation asymmetry is that the sellers know what they are selling much better than the buyers know what they are buying. However, I do not think this is what distinguishes those four industries. There are plenty of other situations of information asymmetry, including buying a house, buying a car, or buying a piece of electronic equipment.

I think what distinguishes these four industries is that the sellers themselves know less than what people expect. Educators do not know what, if anything, actually adds value. For all we know, test scores are determined by the backgrounds (mostly genetic) of the students, with remaining differences that are random and irreproducible.

Kling is right, of course. When writing the previous post, I considered switching to the term “uncertainty industries”, as both buyers and sellers of government, healthcare, education, and financial services are often in the dark about the degree to which transactions will provide value. But “uncertainty industries” suggests a similarity of confusion between buyers and sellers, which isn’t right. Sellers still have substantially better information. First, there is plenty of old-style information asymmetry in all of these industries: Politicians sometimes do know they are favoring or overpaying financially supportive suppliers. Health care providers sometimes do recommend tests and procedures that from a distance they would recognize as superfluous (even accounting for defensive medicine concerns). Educational institutions notoriously play up successes among graduates they know to be outliers. And, of course, the Wall Street tradition of “putting lipstick on a pig” is denied before every jury but widely and even fondly acknowledged when the context is nonspecific.

Still, as Kling observes, this kind of thing goes on in almost all industries. Sellers know more than buyers, salesman overstate benefits and downplay weaknesses of which they are aware, etc. So what makes these four industries different? Two things:

  1. Information asymmetries are unusually difficult to resolve in these industries. A substantial fraction of people who buy a low quality house, car, or stereo eventually come to notice that. This makes it possible for new purchasers of these goods to manage their information problem by researching others’ experience and seller reputations. But in the four industries I’ve described, even after we have purchased services, we are often unable to evaluate their quality.

    • Lots of Harvard grads do well, so reputation “yay!”. But people accepted to Harvard probably would have done well regardless of their choice of college. To the degree Harvard grads do unusually well, it’s hard to disentangle socialization and signaling effects from the benefits of education.
    • In finance, if a merger destroys value or an investment performs poorly, it is rare that the loss can be traced back to poor work by an intermediary. It’s clear that a lot of RMBS were constructed shoddily, even criminally. Yet impeccably produced RMBS of a 2006 vintage would also have performed poorly. Ex post, with full benefit of hindsight, most investors can’t easily tell the difference. Investment banks that put shoddy deals together have not taken reputational hits relative to their peers.
    • Government programs work well or poorly, perhaps provide some value but not as much as we hope. We rarely have apples-to-apples benchmarks by which to evaluate them.
    • Health care outcomes are jointly determined by health care services and often unobservable aspects of patient health. These are hard to disentangle just to evaluate effectiveness. Ranking health-care services in terms of value-for-money, while stakeholders with diverse interests necessarily participate in the research, is very challenging.

    In fact, despite ostentatious use of high technology and sometimes desperate fetishization of metrics, one might describe all four of these industries as premodern.

  2. More interesting is Kling’s point: “sellers themselves know less than what people expect”. That is, service providers in these industries are themselves uncertain of the value they are able to provide. Yet providers work hard to hide and downplay their uncertainty. Politicians pushing new programs offer authoritative projections of brilliant outcomes, although many initiatives fail once the lights of the bill-signing fade. Healthcare, finance, and education are built around credentials and prestige, despite questionable correlations between these tokens and value provided. Healthcare, finance, and educational institutions market themselves hard, portraying themselves as professional, competent, and above all, effective. These claims are not certain to be lies: High competence might sit within the wide confidence intervals that would surround a fair evaluation. But successful institutions do, and must, misrepresent those confidence intervals (to others, and sometimes to themselves). After all, would you go under the knife of a surgeon who told you that he thinks he might be competent? In all of these industries, there is an information asymmetry surrounding the degree of certainty that the services provided will in fact provide value. Providers have reason to be far less confident of their ability to deliver than they lead their customers to believe.

Note that these problems are not just a matter of bad actors. These industries face intrinsically difficult information problems. We can condemn a used car salesman who finesses odometers, but we can’t condemn the surgeon who thinks he is a god. We need him to think he is a god, despite the evidence, so that he is willing to come to work and we are willing to permit the violence he will do to us. Absent reliable markers of quality, we imagine that unreliable self-evaluations are probably better than nothing. “At least he his willing to put his reputation on the line,” we say of the confident doctor when we choose him over his modest colleague, although an egotist’s reputation may not suffer more than anyone else’s when things fail to work out. If our heuristic is to take self-evaluations as informative, competitive forces demand that providers offer “aggressive” self-evaluations. And so they do, in all four industries.

That doesn’t mean politicians, doctors, teachers, and bankers should get a free pass for all the ways they mislead us. There are corrupt practices in these professions that we can detect, that we should condemn and sometimes criminalize. But as long as these are fields in which providers themselves can’t reliably evaluate the quality of the services provided, the rest of us will have a very hard time distinguishing between corrupt practices and natural variability of outcomes. Moreover, these industries are likely to foster particularly insidious forms of corruption. Human beings want both to do well and to do good. Uncertainty leaves insiders ample room to persuade themselves, genuinely, that practices they find remunerative are in fact “best practices”. Under most circumstances, corrupt actors try not to be discovered, and when they are discovered, they are ashamed. When corrupt practices are discovered among bankers, lobbyists, health insurers, pharmaceutical companies, and teachers, our op-ed pages overflow with explanations of how activities that may smell questionable to the uninformed nose are in fact in the public interest. The columnists may be quite sincere. In fact, if you had the sort of detailed understanding available only to industry insiders, you would surely agree with them.

Which brings us back to the original point: We need the “information asymmetry industry”. One way or another, we’ll have bankers, health care providers, educators, politicians, and other sorts of professionals the quality of whose work is difficult to evaluate, by practitioners or by outsiders, ex ante or ex post. But we should acknowledge these are problematic industries for a capitalist economy and a democratic polity. Forecasts that they will dominate, or prescriptions that we should specialize in these sectors to exploit alleged comparative advantage, should be greeted unenthusiastically. I hope that Timothy Geithner takes note.

2. You know that you are getting old when explaining how Marx was wrong now makes you a Marxist

Okay. This is kind of trivial, but it made me giggle.

In response to the previous post, commenter john c. halasz writes:

Your Tyrone has lots of hair on his head and a gray bushy beard.

Matt Yglesias makes the reference more explicit:

[S]ome recent posts from Steve Randy Waldman and Ryan Avent that seemed to me to be walking up toward a Marx-style theory of overproduction, crisis, and the collapse of capitalism.

John Halasz is a good commenter, but I don’t know how old he is. Wikipedia tells me that Matt Yglesias is just over a decade younger than I am. What made me laugh is that the story he describes as “walking up toward a Marx-style theory of overproduction, crisis, and the collapse of capitalism” is basically a retread of the story my parents and high school history teacher told me about why Marx was wrong. That led me to wonder — were Halasz and Yglesias ever told the same story?

Specifically, the story I was told in my impressionable youth was this: Karl Marx had been a sharp analyst, but he was a terrible futurist. He did a good job of describing the dynamic of capital accumulation and the near-term stresses that dynamic would put on the 19th and early 20th century societies. But his prescriptions about how societies would and should respond to those stresses were catastrophically mistaken. In particular, Marx thought that capitalists were trapped in an unstable dynamic of capital accumulation from which they benefited, on the one hand, but which led inevitably to collapse and from which they could not, as a class, escape. Individual capitalists who tried to be “enlightened” in some sense would simply be sloughed off by competitive forces and join the ranks of masses. In modern economic lingo, there was a collective action problem. Capitalists would not, could not, surrender their privilege voluntary, therefore violent revolution by the working classes was the only possible way forward.

I remember pride in my businessman father’s voice when he explained to me that this was wrong. Marx had underestimated the ingenuity and flexibility of capitalist societies, and particularly of the United States during the New Deal. Government intervened to solve Marx’s collective action problem, enabling capitalists secure their enlightened self-interest by keeping a distribution of prosperity sufficiently broad that the predicted collapse could be avoided. My parents were (and still are) center-left, but staunchly anti-Communist. My mother had “escaped” — that was always the word — Communist Romania; she was (and remains) deeply grateful to the countries (Israel and the United States) into which she was rescued. To my father, American capitalism’s adaptability and ingenuity had proved Marx definitively wrong, in the best possible way — by producing a stable society that served the vast majority of its citizens, while countries whose politicians had followed Marx’s prescriptions grew into monsters.

I am not a particularly original thinker. Most of my posts are mutations of ideas that people better than me have whispered in my ears. I used Tyrone, in the previous post, as an exaggeratedly arrogant mouthpiece for my father’s story, with the minor twist of letting technology rather than capital dynamics be the force that would lead to collapse, but for the ability of the system to adapt via new institutions. Having heard essentially the same explanation in high school history class, I took this story to be widely shared conventional wisdom, at least within the mainstream, slightly center-left milieu in which I adolesced.

That would have been 1985 or 1986, Ronald Reagan’s America. Communism was a living rival then. Stories of our relative material success, of our system’s ability to deliver far better lives, even to the “working classes”, than the Communists, were a matter of national security. Matt Yglesias lived his 16th year in a very different world. America was triumphant and forging the “Washington consensus”. “Right-sizing” had already been invented as a euphemism for firing people. The project that Reagan had begun by “standing up to” the nation’s air traffic controllers was well underway. If a young Matt Yglesias had the misfortune of chatting with me in, say 1997, I would have had little good to say to him about labor unions but would have enthused about the transformative power of free markets and technology. I like to think of myself as unconventional, but I like to think a lot of things. I think it fair to say that the conventional wisdom that surrounded a curious, very bright teenager in 1997 would have been different from what I experienced a decade earlier, for better and for worse. I think this matters, it affects us all a lot more than we think it does.

Anyway, I really did giggle when I realized that an argument I thought of as conventional wisdom about how America proved Marx wrong sounded, perhaps because my audience was of a different generation, vaguely Marxist.

I’m not taking issue at all with the substance of Yglesias’ post, which I think is smart and quite right. Health care costs are millions of people’s livelihood, and inefficient health care costs are a big part of that. Much of how modern economies survive is by protecting information problems and barriers to competition that sustain overpayments. This broadens the wealth distribution while permitting recipients the fiction that flows of purchasing power involve no transfers (“welfare”), only proud, self-reliant income. The theory of labor unions and the theory of an inefficient health sector are identical, except one is more transparent and the other has proved more capable of buying political protection. The problem, in both cases, is not that there are transfers, but whether the distribution of transfers — to whom, from whom — is wise and fair. By forcing ourselves to pretend there are no transfers, we prevent ourselves from even posing the question.

Perhaps I am a creature of the conventional wisdom of my day, but I want to tell it strong. It is not those who advocate, but those who prevent, stabilizing transfers of purchasing power, who are the true Marxists. These self-styled capitalists do not espouse Marx’s theories, but they do something much worse: They perform them. They behave in precisely the way that Marx expected capitalists to behave. They cripple the American system’s greatest strength — its ingenuity, flexibility, adaptability. They prevent the sort of collective action through which earlier generations proved that capitalism could made be consonant with decent, stable, and broadly prosperous societies. In doing so, they risk proving Marx right.

Update: Not unusually, commenters have had much more interesting things to say than I’ve said. Nicholas Gruen @ Club Troppo has made a full post of an excellent comment by Indy. Also, Arnold Kling has responded.

Update History:

  • 21-February-2011, 7:45 a.m. EST: Added bold up about Nicholas Gruen hoising Indy’s post, and noting Arnold Kling’s response

On Tyler Cowen’s “Great Stagnation”

I’m late to this party, but I’m late to every party. Tyler Cowen’s recent microepic, The Great Stagnation, has been pretty throughly chewed over by the blogosphere. The essay is a quick read, thought-provoking, and getting to give Cowen a couple of bucks for the privilege only adds to the pleasure. The quick summary, for those who’ve been living in a cave, is that since 1973, we’ve been living in a “great stagnation”, during which the pace of growth experienced by the median American household slowed relative to expectations set in the period preceding. Cowen suggests that the explanation for this is a slowdown in the rate of technological change combined with an exhaustion of “low hanging fruit” afforded us by earlier advantages and innovations. Cowen simultaneously disputes both conventional measures of economic performance (we do not observe a “great stagnation” in headline GDP) and left-ish arguments that economic unhappiness stems primarily from maldistribution. We suffer instead from an absence of anticipated wealth. As Cowen puts it, we’re simply “poorer than we thought”.

  • I think the deepest issue Cowen brings out has less to do with technology than with problems in what economists measure (and people perceive) as “revenue” or “production”. In particular Cowen makes two related points:

    1. Many activities that generate apparent revenue are detached from reliable judgments of value. Using revenue as a measure of production requires, at a minimum, that discriminating, budget-constrained actors determine that whatever is “paid-for” offers real-economic value superior or at least comparable to activities that could be inspired by alternative expenditures of the funds.

      Cowen is appropriately general with this critique. Expenditures by government may not meet this “market test” because political actors may direct expenditures for reasons other than inspiring high-value economic activity, or because, for informational or organizational reasons, government may be unable to discern relative value. But the private sector is not immune. In spheres such as health care and education, the benefits of private sector as well as public sector expenditures are difficult to evaluate relative to alternative uses of resources. Cowen reminds us that health care and education are widely viewed as “growth” sectors, but to the degree we collectively overpay for them, “revenue” overstates economic value. A substantial portion of these expenditures should probably be accounted for as transfers and excluded from measures of aggregate production. But of course, we have no means of estimating the size of the appropriate haircut.

      I’d add another important industry to government, health care, and education: financial services. Like with health care and education, we simply are unable to evaluate the degree to which payments to financial service providers represent wise use of resources and to what degree they represent transfers to financial industry stakeholders. Inherent informational problems associated with investment quality, combined with the temptation by service providers to exploit these difficulties to extract transfers, render financial sector revenue highly suspect as a marker of value. Also, financial services are intimately involved in the other problematic sectors: One thing that binds government, health-care, and education is that all are financed in roundabout and sometimes opaque ways that soften near-term budget constraints and that shift costs and risks, both across time and onto people other than the purchasing decisionmaker. The means by which government, health-care, and education are financed help keep them vulnerable to agency and information problems.

      I think of government, education, health care, and finance collectively as the “information asymmetry industry”, and I find it terrifying that many people presume that they are the future growth industries for the United States. Dani Rodrik has pointed out that tradable goods are special, in terms of engendering development in often corrupt emerging markets. Cowen offers an astute explantion: tradables that compete in international markets are usually low-information-asymmetry goods. Apparent value (revenue from trade) and real value are likely to be closely aligned and hard to fake. I worry that specialization in the information asymmetry industry could be an antidevelopment strategy for developed countries.

    2. Conversely, Cowen points out that many new technologies generate value without generating commensurate revenue. It is clear that we would collectively pay a lot more for recorded music or news, for example, because we did in the past (and it’s likely that our reduced payments have more to do with technology and industry changes than with changes in our preferences). Cowen suggests that many of the current era’s technologies are like this, which is nice from a certain perspective (yay! free stuff!) but can cause a kind of sclerosis in an economy that nourishes itself via flows of monetary exchange.

    I think that Cowen is right on both counts. And note that these two factors, in and of themselves, go some way towards explaining “The Great Stagnation”, even before we get to the headline argument about a slowdown in technological change. I’m not referring to an argument Cowen addresses (but cannot entirely dispose of) that there is no great stagnation at all, once we account for measurement error. Instead, I wonder whether, rather than a paucity of new technologies, we might be experiencing a breakdown of an older gizmo that economists refer to as “markets”. As our economy tilts away from sectors in which value (however defined) and financial revenue are reliably cojoined, our primary means of orienting our behavior towards valuable activity, individually and collectively, become less and less effective. We simply don’t know what we ought to do. So we err. If the quality of economic decisionmaking is poorer than it was in past, that has consequences for welfare.

  • An interesting corollary of Cowen’s argument is that a substantial fraction of notional savings are in fact empty claims — no meaningful real economic activity accompanied the generation of that income, so no real investment could have attended its non-consumption. This suggests that any attempt to mobilize savings in aggregate — any net dissaving — is likely to result in either inflation or displacement of consumption by current earners. I think that this is true, that it is now and increasingly will be a source of social and political problems.

  • Despite the evidence that Cowen is able to muster (and lively internet debates about kitchen appliances and time travel), I remain agnostic on the question of whether a slowdown in the pace of technological change is largely to blame for whatever it is that ails us. I wouldn’t rule it out, but like Kevin Drum and others, I see a lot of very real “low hanging fruit” arising enhanced capabilities to coordinate and collaborate via internet and information technologies. These benefits go well beyond “cognitive surplus” and bemused infovoria. [1] Coordination technologies, ranging from assembly lines to the limited-liability joint-stock corporation, contributed mightily to past golden ages of advancement and growth.

    Cowen is clearly right that, with the exception of the internet, recent years have offered few technologies that radically and visibly altered how people live. But I think we need to think carefully about an “extensive” and “intensive” margin for technological change. The early industrial revolution largely streamlined manufacture of existing categories of goods (think textile factories rather than spinning wheels and molded products replacing hand-smithed metal). Producers saw their world turned upside-down, but consumers mostly found themselves with recognizable stuff, just more and cheaper. Still, one wouldn’t characterize it as a low-growth era.

    Cowen seems really focused on the “extensive margin” — the development of qualitatively new goods. I don’t think “growth”, in aggregate or as experienced by the median family, really captures what Cowen thinks we are missing. Instead, I think that Cowen is lamenting a scarcity of breathtaking resets. Developments like electrification and the widespread adoption of automobiles didn’t make people richer as much as they completely changed the circumstances of everyday life. Indirectly, they also made the production and marketing of previously extant goods much more efficient: Electricity helped make bread cheaper. But I don’t think cheap bread impresses Cowen as much as the fact that, post-electricity, humans colonized the night and Presidents colonized living rooms. Income statistics do end up capturing these sorts of changes, but in a manner that is arbitrary and formal. Ultimately, different technological regimes are incommensurable in welfare terms. While most of us would choose more food over inadequate nutrition and better health over worse, adoption of new technology is less a matter of individual choice than social evolution. One must adopt an automobile-centric lifestyle if workplaces move far from available housing. One must become internet proficient if current modes of employment are contingent upon it. The fact that the gas we are forced to purchase is factored into computations of real income and GDP doesn’t really imply that our preferences have been satisfied more completely than they would have been in a different-technology alternative. [2] It might be the case that the big changes whose absence troubles Cowen are welfare-destructive in and of themselves, but occurred only because they came bundled with large improvements in the productivity of prior goods, or simply because new possibilities rendered unstable earlier equilibria that were superior outright. If this is the case, we should celebrate rather than fret if recent modes of innovation have succeeded at increasing productivity without reseting the technological terms of our existence. [3] Ultimately, society is a game and big technological changes rescramble both the available strategies and payouts, leading to changes that are unpredictable both in form and in terms of welfare (under almost any welfare criterion that you might choose).

  • Suppose that it is true that we’re poorer than we’d anticipated, that past growth trends have eased. It’s not at all clear that what people conventionally think of as technology is the growth-limiting factor. Cowen looks to emerging markets for examples of how the availability of low-hanging fruit — technology and institutions already prevalent in developed economies — can hypercharge growth. But the less-developed world offers a different set of examples as well. There are many many economies where despite free and full availability of scientific information and plenty of institutions to emulate, low-hanging fruit is left to wither on the vine. We have (usually cartoonish and patronizing) explanations for other economies’ failures — “they” are corrupt and their cronies keep them down; they were scarred because of colonization by Belgians rather than Brits; (in whispers) they are culturally or even genetically inadequate to the task of development; they simply fail to make good choices. Whatever your just-so story, it’s pretty clear that from the inside, intelligent people struggle unsuccessfully to find means to overcome barriers that prevent them from picking delicacies that are hanging in front of their noses. We might be in a similar situation, with plenty of technological fruit ripe for the picking, but invisible barriers — political, cultural, whatever — that prevent us from doing so.

  • A few nights ago, a gentleman accosted me in a dream and declared himself to be “Tyrone”, Tyler Cowen’s evil twin. Tyrone told me that his brother had “as usual” got it all backwards. In fact, he told me, we’ve been in the Great Stagnation for a century as a result of, rather than for the lack of, technological progress. The median household is experiencing wealth stagnation caused by technological change. Households are feeling the pain now more than in the past, even despite a relatively modest pace of change, because over the past few decades we have managed to avoid employing the sort of durable and effective countermeasures to stagnation that have succeeded in the past.

    For the most part, Tyrone pointed out, technological progress is labor displacing. It simultaneously creates valuable new techniques for reconfiguring real resources while diminishing the number of people who are required to participate in those transformations, and who can therefore trade their participation for spending power. There is a myth among neoliberal economists that labor markets have always “adjusted” sua sponte: that when laborers were displaced from farms, “higher value” factories arose to employ them; that when the factories were downsized and offshored, a more pleasant, higher-value service economy came to be; etc. That narrative is wrong, he told me. At best it is criminally incomplete. With each technological change, new social institutions had to arise to sustain dispersed purchasing power despite a reduction of numbers and bargaining power of workers in old industries. Displaced workers ultimately did find new work, but only because the new social institutions “artificially” created buyers for all the things displaced workers reinvented themselves to sell. Without this institutional innovation, Tyrone tells me, something like the Great Depression would have been the new normal. Historically, institutions that have arisen to sustain purchasing power despite increasingly labor-efficient core production include direct government transfers and expenditures, labor unions, monetary policy interventions, financial bubbles and financial fraud.

    Cowen (Tyler, that is) argues that technological development creates opportunities for “bigger”, more extensive and intrusive government than existed during earlier periods. As Tyler tells the story, there is a progressive expansionary impulse to government, for which technological change creates opportunities, so government expands until those opportunities are fully exploited. Tyrone says his brother has the story backwards. Why, asks Tyrone, does government not only expand in absolute terms as a response to technological change, but also in relative terms? After all, as Tyler points out, private enterprise also has a natural expansionary impulse. With technological change, Tyler writes, “Everything was growing larger.” Yet, to the degree that we can measure it, government has grown dramatically in its share of the overall economy. Why does government win? Tyrone says government is a reluctant adopter of new technology (“Have you been to a government office?”), but that government outgrows the private sector despite this, because the concentration of economic power that attends technological changes demands countervailing state action if any semblance of broad-based affluence and democratic government is to be sustained. Tyrone (who is much more arrogant and less pleasant than his brother) proclaims this to be his “iron silicon law”: In (non-terminal) democratic societies, technological change must always and everywhere be accompanied by the growth of institutions that engender economic transfers from the relatively few who remain attached to older productive enterprises to the many who require purchasing power not only to live as they did before, but also to employ one another in novel or more marginal activities that were not pursued before. Inevitably those institutions develop in state or quasi-state sectors (which include the state-guaranteed financial sector and labor unions whose “collective bargaining” rights are enforced by the power of the state). Tyrone tells me that the only thing the post-Reagan “small government” schtick has accomplished is to push this process underground, so that covert transfers have been engineered by a “private” financial sector in ways that are inefficient, nontransparent, and often fraudulent according to traditional laws and norms. Some of these weak institutions upon which we relied to conduct transfers broke in 2008, so now we’re really feeling the pain. We’ll continue to feel the pain until we restore the ability of the financial system to hide widespread transfers, or until we employ some other sort of institution to provide a sustainable dispersion of purchasing power.

    Having met both brothers Cowen, I can state with some confidence that Tyler is smarter, better-looking, and much more engaging company over lunch. Tyrone is kind of icky, hygienically speaking, and he strikes me as gratuitously mean. But I think he has a point.


  • [1] Cowen does acknowledge the possibility the internet is generating low-hanging fruit, but that there are lags in the indirect process by which a communication and coordination technology translates into consumer visible improvements.

    [2] Even a thought experiment that holds health and nutrition constant but contemplates switching technologicolifestyles doesn’t cut it, because preferences are history-dependent. Emigration is a painful option even when better health and more food await on the other side of the border. We love the world that makes us. We’d really need to ask people in 1900 whether they’d prefer to move to our strange, televised world or to stay where they are but with 21st century health and wealth in terms of then-extant goods. If we allowed cross-migration between the 1900 and 2011 on those terms, giving people of both eras ample time to sample both eras, it’s not clear to me in which direction net migration would flow. To run this experiment, we’d have to correct for population differences and exclude groups that were plainly oppressed in 1900. (We’d want to exclude those groups from the sample, if what we are interested in is the welfare associated with technological, rather than social, change. It’s not obvious that the civil rights movement could not have happened independently of electricity or automobiles, although one could make a case that relaxation for the need for exploitative labor was a precondition for that movement.) Also, there’s the difficulty of simultaneously allowing both ample information for comparison and the sublime pleasure associated with not knowing what you are missing with respect to life in the other era.

    [3] I hasten to add that I, personally, am a technophile, and curious enthusiasm for technological resets is much of what I live for. But I don’t think that’s a very general or even common preference.

    Update History:

    • 14-Apr-2012, 10:00 p.m. EDT: More than a year later, Tyler Cowen and Scott Sumner have said nice things and relinked this piece. I gave it a reread, and though I remain happy with the substance, I found some textual and grammatical embarrassments. So no substantive changes, but I’ve made some small edits:
      • “…renders render financial sector revenue highly suspect as a marker of value.”
      • “it’s more likely that our reduced payments have more to do with technology”
      • “any attempt to mobilize savings in aggregate — any net dissaving — is likely to be attended by result in either inflation or displacement of consumption” (eliminated repetitive use of “attended by”)

Alison Snow Jones

Maxine Udall, “girl economist”, has been one of my favorite bloggers, a person who combines the power of economic thinking with a deep appreciation for moral and social concerns, all expressed in a very human, very charming, voice.

Today we learn that her name in real life was Alison Snow Jones, and that she is with us no more. Wow. This is an awful loss.

I don’t really know what to say. But Maxine Udall had plenty to say, so I’ll just excerpt.


From ‘Tis the season, by Maxine Udall:

I grew up in a family business and have become increasingly appalled over the last 10 years or so by what seems to me to be a very limited view of the duties, obligations, and responsibilities of business… You see, in our business we were not profit maximizers. We were business men and women, embedded in a community, our fate intertwined with that of the community. We had to make enough money to stay in business for the long-haul. That meant that our customers had to keep coming back, we had to provide value, and we had to work, to sell. No one who walked into our business was greeted with “Let me know if I can help you.” The customer was like a sacred guest. Our job was to find out what she needed, to tell him as much as we could about the merits of our merchandise, to help them identify and purchase the best match for their preferences and their pocketbook, or to send them to a competitor, with directions on how to get there, if we didn’t have and couldn’t get what they were looking for.

Our long-term survival depended on some amount of profits, but equally important were reputation and civic responsibility. These three are what we optimized over, not profits alone. We viewed all of these as interdependent. That meant that sometimes reputation and civic obligation were a constraint on profits.

I can understand that someone who has managed to capture a privileged economic and political position, one where they are backed by US taxpayers as they gamble for personal gain in financial casinos, will do whatever they must to maintain it. And I expect that over time, if unchecked and unchastized, they will take on increasing amounts of risk, underwritten by the rest of us. What I didn’t expect was the magnitude of the moral failure: that financiers would help to create securities designed to fail, sell them to clients, and then bet against them.

What I can’t understand is the willingness of the citizenry to protect and reward someone who has harmed or is continung to harm them. I do not understand voting for politicians who support tax cuts for and neutered regulation of these same destructive speculators. Nor do I understand voters’ apparent willingness to eviscerate all of the social programs and safety nets that are all that stand between them and what can only be regarded as neo-feudalism. I conjecture that the reason for this counterintuitive behavior is that the moral narrative that accompanies a technocratic tax cut for the wealthy is more compelling that the moral narrative that accompanies a technocratic stimulus of aggregate demand or support for families harmed by the financial sector’s market and moral failures.

If you had told me 10 years ago that I would become a critic of investment bankers and an advocate for labor, I would have said that you were crazy. I was weaned on horror stories about the New Deal, the WPA and CCC, wage and price controls, and the horror of unions. (And, if we ever return to a point where unions become so powerful that they impede business, I will blog against them.)

I got into this conversation because I felt I might be able to contribute clarity for those not trained in economics and a different perspective. It has been an exciting and stimulating conversation. I’ve thought and read more about macroeconomics than I ever did in grad school. I have developed a real fondness and respect for my readers and their very thoughtful comments and for my fellow economics, anthropology, sociology, and biology bloggers, especially Mark Thoma, without whom only five people would ever have read this blog.


From Sensible Deficit and Debt Reduction Will Require Investment, by Maxine Udall:

[Y]ou have to spend money now in order to reduce expenditures or increase revenues in the future. Remember that government debt in and of itself is not necessarily a bad thing, nor is personal or corporate debt. The judgement of “good” or “bad” will depend on many things, including the expected returns from any investment made with the borrowed funds, the terms under which funds must be repaid, and the financial health of the borrower, which will influence the likelihood of repayment and (I suspect) the quality of the investment.

After all, leadership of a thriving, growing business that did not borrow to fuel continued growth would be judged incompetent. By the same token, leadership of a hard-hit business in the middle of a economic downturn that focused only on debt reduction without some thought and investment (at record low costs) devoted to building a solid platform for recovery and future growth would also be judged incompetent.

The leadership of a hard-hit country in the middle of an economic downturn has additional economic and moral obligations. One economic obligation is to compensate for contractions in consumer demand by stabilizing and (in the case of a severe downturn) stimulating aggregate demand. A government stabilizes demand by providing and extending unemployment benefits and by enacting programs like Medicaid, Medicare, social security as well as other safety net programs like food stamps and Temporary Assistance to Needy Families. Cuts to any of these takes money out of the pockets of poor, working class, and middle class Americans and is likely to contract demand further.

A government can stimulate aggregate demand by accelerating investments in infrastructure, research, and defense. By borrowing at record low rates, it can bring those necessary investments that it would have made in the future forward to the present, thereby maintaining and also creating jobs that otherwise would be lost because of the current downturn. Such investment has the effect of stimulating demand now and keeps the economy from sinking deeper into recession or depression. It has the added advantage, if done wisely, of creating better health, education, and economic infrastructure that benefits our grandchildren and their grandchildren. The historically low cost of borrowing means that the cost to our grandchildren of repaying the loans for these investments are likely to be lower than the benefits they will realize from the investments, if they are made wisely.


From What’s Wrong with This Picture?, by Maxine Udall:

It’s a tribute to the GOP’s ability to engineer a morality play that plays out in politics, but is mostly about economics. If debt were all that was morally wrong, we could be purely technocratic and raise taxes. Since taxes are morally wrong, we can only cut spending. And as we decide how to cut spending, the morality play will provide us with a narrative where the least and last will benefit most from a good, swift kick to get them jump started and if they don’t “jump,” well then it’s their own fault if their kid dies of (untreated or too-late-treated) leukemia while they were unemployed and without health insurance.

It remains to be seen whether we can persuade the middle class to cut their own future safety net or that of their parents, but I’m pretty sure that a grossly distorted moral narrative can make that happen, too. Unless, of course, we come up with a compelling moral counter-narrative in support of the technocratic solutions to these moral dilemmas.

If we do, it had better be quickly and in ways that are easily expressed in 25 words or less.


From Another Conversation about Health Care Costs, by Maxine Udall:

Always a quick study, dad got it.

“So what you’re saying, Maxine, is that to reduce health care costs, I would have to run my business in a way that ultimately puts me out of business. If I do a good job of preventing illness and making my customers healthier, they won’t come see me as often or buy as much from me. Eventually, I’ll have to close my doors or figure out some other way to make money.”

“Yes, dad. That’s exactly what you would have to do, if you were serious about reducing health care costs. Or you would have to change your business so that you make money from healthy people. Now what market forces would produce that result? (And don’t say: convince healthy people that they’re in reality sick. The pharmaceutical industry already does that and you see where it’s gotten us.)”

I’m still waiting for his answer.


From On Why Sound Macro Policies Are Political Losers, by Maxine Udall:

Joan Robinson (girl economist) said something in her Richard T. Ely Lecture to the American Economic Association in 1972 during another economic crisis that I believe accounts for some of the “political loser” characteristics of good macro policies:

“A sure sign of a crisis is the prevalence of cranks. It is characteristic of a crisis in theory that cranks get a hearing from the public which orthodoxy if failing to satisfy. … The cranks are to be preferred to the orthodox because they see that there is a problem.”

I believe that the failure of “good macro policies” to be political winners is that they “fail to satisfy” on the dimension that matters most and is most visible and understandable to the public: fairness or justice.


From Company Store Redux, by Maxine Udall:

Our current situation in which 5% of the population captures and owns a disproportionate share of national output, which it then lends to the teeming masses whose share of output has been stagnant or dwindling, is really just a new variant of the company store.

Miners worked in company mines with company tools and equipment, which they were required to lease. The rent for company housing and cost of items from the company store were deducted from their pay. The stores themselves charged over-inflated prices, since there was no alternative for purchasing goods. To ensure that miners spent their wages at the store, coal companies developed their own monetary system. Miners were paid by scrip, in the form of tokens, currency, or credit, which could be used only at the company store. Therefore, even when wages were increased, coal companies simply increased prices at the company store to balance what they lost in pay.

And just in case you’re thinking that this doesn’t seem too unfair, consider that:

Miners were also denied their proper pay through a system known as cribbing. Workers were paid based on tons of coal mined. Each car brought from the mines supposedly held a specific amount of coal, such as 2,000 pounds. However, cars were altered to hold more coal than the specified amount, so miners would be paid for 2,000 pounds when they actually had brought in 2,500. In addition, workers were docked pay for slate and rock mixed in with the coal. Since docking was a judgment on the part of the checkweighman, miners were frequently cheated.

I first wrote about company stores last summer:

In Kumhof and Ranciere’s model, increasing concentration of wealth in a small “investor” class leads to higher demand for investment assets, such as securitized pools of loans made to wage earners who must borrow to maintain consumption as their real income declines. This sets up the same type of dynamic as a company store. Over time and as wage-earner bargaining power weakens, the investor class is able to capture greater proportions of workers’ declining or stagnant real wages. The effect is that an increasing portion of middle-class wages circulate back to the financial sector as interest and fees instead of into the larger economy (except, of course, as it occasionally “trickles down” from the investor class to what over time is likely to become the equivalent of a servant class).

For the last 30 years, the government has been part of the problem in this trend to increasing income inequality. It’s time for government to become part of the solution in reining in financial sector excesses and restoring workers to something that approximates a fair share of national output. Otherwise, most of us will eventually find out what its like to “owe our soul to the company store.”


From Bang per (Borrowed) Stimulus Buck, by Maxine Udall:

So here’s the question my mundane, raised-in-Appalachia, offspring-of-simple-business-men-and-women, forget-the-PhD-in-economics brain keeps asking: What does the financial sector produce, besides economic chaos? Where’s the benefit for most of us or for most of the US? And if the financial sector isn’t going to provide the service of deploying capital to support investments that benefit the rest of us, who will?

In an ideal world, the US government would. In an ideal world, where most of the populace who would benefit from such investment do not respond to the dog-whistle term “socialist” by forming political groups funded by plutonomists to protect plutonomists, US taxpayer dollars would support investment in infrastructure and human capital that would prepare us all, not just the top 1%, to be productive participants in a 21st century global economy. Instead, our tax dollars have been deployed to no-pain, no-downside bailouts of guys who turned around and awarded themselves bonuses for running us into the ditch. Now, finance and US politics seem committed to sustaining and feeding a casino and fostering an increasingly unstable and unfair plutonomy, instead of rebuilding a nation dominated by a productive, hard-working, ambitious middle class.

This is the most unsatisfying morality play I have ever watched.


From Freedom Is Not Just Another Word for Nothing Left to Lose, by Maxine Udall:

You see, in a capitalist economy, wealth and well-being are supposed to redistribute to everyone. As capital is allocated and risk managed more efficiently, more opportunities are created for all. Wealth and well-being are supposed to become less concentrated in the hands of a few and more dispersed to the hands of the (often more and increasingly) productive many. Much of Wealth of Nations is devoted to describing the instances and the conditions under which this seemed to be occurring as the economy of Great Britain transitioned from feudalism to one of commercial exchange, industrial production, and small business owners.

Some of you will point out that elected US lawmakers of both parties appear to be wholly owned by corporations and finance. Even if you believe this, it hardly argues for shrinking government, thereby giving corporate and other interests even more unfettered power. It argues for a political philosophy that believes government serves an essential purpose in an advanced, complex capitalist society: that of countervailing force against those interests when they are harmful to the rest of us and helpful to those interests when they are beneficial to us. That philosophy requires government to be as large as it needs to be to countervail. And it requires that government be viewed as capable of being efficient and that the culture and norms of government be those of public service, not public pillage.


From The Death of Capitalism?, by Maxine Udall:

[C]redit is the quintessential American capitalist thing most frequently experienced directly by consumers (IMO). I remember in grad school when one year my adjusted gross income was around $6000. Bloomingdales offered me a credit card and I took it. Never used it, but I took it. I remember feeling secretly pleased and amazed that someone so poor could carry around a credit card from an upscale, overpriced retail outlet at which one could not possibly afford to shop. I think I acquired a Neiman-Marcus card the same year. I did eventually use N-M once to buy a wedding gift for someone (after I graduated).

By my last couple years of grad school I was earning enough working part-time to qualify for an FHA mortgage on a small townhouse in the city where I was working and attending school. I cobbled together some small amount for the down payment and the closing costs and I was a homeowner.

I hit one rough patch about 8 years into my 10 year residence in the house. I was non-tenure track faculty, required to fund 100% of my salary from grants. I was about to be down 50% in salary support if a grant or two didn’t come through in time. There was a real possibility that I would lose my job (or more likely drop to part-time while I looked for a new job).

Under the misguided notion that the corporation holding my mortgage was my partner (the loan had been sold several times), I thought I should probably phone them to find out what my (our) options might be. I was thinking I could make interest payments for 3-6 months and then structure some sort of “make up” payment once I was employed full-time again. It took me 3 weeks to track down a phone number for the company that owned the loan. No 800 number. Every time I was put on hold or phoned the wrong department, I paid for it. I finally got to someone who seemed responsible, laid out my situation, explained that there was a good chance I would not lose my job, that even if I did, I was a PhD economist and most likely would have a job rather quickly, that all I wanted to know was what my options might be if I did lose my job. The person on the other end of the line very kindly informed me that there were no options, that he was putting a flag on the account that if I missed one payment they should start foreclosure proceedings immediately. He thanked me for letting him know and saving them some time.

Well, there you are. Doesn’t that make you feel better? I know it evoked some interesting feelings in me.

As luck would have it, a fairly large grant on which I was principal investigator came through, my job was saved and my house with it. Being no slouch at spotting losing propositions, I did two things…well, three things actually. I got married. I went on the job market and took a tenure-track position. And I (we) bought another house.

But this time, I knew what to avoid mortgage-wise. We found a local bank that holds all of the mortgages that it originates. We paid an extra half percentage point for this. Well worth it in my opinion. When I had cancer (and thanks to an extremely supportive employer) there was no worry that I would lose my job (at least not right away), but it helped immensely to know that if I had and we had to sell the house, the bank would have worked with us. And they did work with us in non-predatory ways on refinancing, home equity loans, and anything else we needed for the 10 years we owned the home.

Look. This is the heart of capitalism. I want to borrow money to own property. The bank wants to lend money for which it receives a return that reflects risk and the opportunity cost of what it lends. This is a marvelous arrangement for a lot of reasons. Not least, my ownership of said property is a near guarantee that it will be maintained and mowed, improved, and the loan paid off. The fact that all my neighbors face the same incentives to maintain and mow, improve, and pay off creates a web of interlinked well-being. As the neighborhood goes, so go we all.

No good can come from neighborhoods populated by home-owners who have devolved into squatters. Nor can any good come from neighborhoods wholly or mostly owned by banks, particularly large banks with no vested interest in the community. Moreover, capitalism, as experienced and lived by a population whose ancestors started out as squatters with “tomahawk rights,” that evolved over time to homesteaders and, eventually, homeowners, is getting a very deserved bad name.

If capitalism has held a special place in the hearts of US citizens, it is almost certainly because most of the working and middle class have been able over time to acquire a little bit of heaven on earth: their own home, bought and paid for by them. Their homes are tangible evidence of their hard work, their prudence, their temperance, and their perseverance. Those homes and the loans that made them possible were also tangible evidence of the partnership between labor and capital; between homeowner and banker; between mini-capitalist and serious-capitalist.

I will say it again. They are tangible evidence of a partnership, a mutually beneficial contract between banker and home buyer. Not adversaries. Partners.

What makes this worse IMHO is that the current mortgage morass appears to be the result of capital’s failure to observe and adhere to the rudiments of property rights: the proper and legal transfer and holding of a title and a promissory note; the proper and legal processing of said documents to initiate foreclosure; and a level of outright cruel and confiscatory behavior that until lately I had only associated with totalitarian governments. (If you doubt me, see here).

So this is a message to bankers and anyone else who at least putatively cares about capitalism and commercial exchange. I am probably among the most sympathetic to both and to the institutions that support them. I am losing sympathy. Nay, I have lost it. This is the stuff from which revolutions are born and you will have brought it on yourselves. The problem is that capitalism when done right yields real value, real benefits to us all. So when it dies, when you have killed it, as with all of your other financial chicanery, we will all pay the price.


p.s. Excerpts, of course, do not do justice. There is tons of wonderful writing, in long form and carefully argued, on the Maxine Udall blog. I scan and read so many blog posts every day, even great writing often fades into the background. Going through the last few months of her work makes me terribly sad that this is a person I will never meet.

Belated write-up of AEA/AFA meeting, Part I

Update: I accidentally posted an earlier draft of this post rather than the intended final draft. I’ve restored the intended final draft. Changes are listed at the end of the post.


Two weeks ago I had great fun in Denver spending three-days attending seminars and lectures given by the great and good of academic economics. Since then, I’ve been holding it all in my head precariously, until I write some things up. (Writing is the process whereby I permit myself the pleasure of forgetting.) I expect that what follows these words will be long, sprawling, and disorganized. But for what it’s worth.

A note — The AFA gave me a $1500 grant to attend. That was kind of them. Thanks.

General Impressions

This was the first time I’d attended an economics conference. But in my early adolescence, I did frequent another sort of hotel-bound gathering, and the resemblance was uncanny. The AEA is basically a Star Trek convention in suits. It’s a gathering of the same sort of geeks. The same combination of earnestness and awkwardness marks off and distinguishes the attendees from normal business travelers. Star Trek conventions have their celebrities, here’s George Takei, there’s Nichelle Nichols. The AEA has its celebrities as well: the Nobelists, the famous economists from Chicago, Harvard, and MIT whose papers you have read (or you pretend to have read). Like a kid at a Star Trek convention, I had great fun at the meetings. Still, there were undercurrents that made this affair feel less innocent — so many PhD students nervously interviewing for jobs; the networking and earnest introductions; the faint, polite stench of status competition. At a Star Trek convention, everyone wants to meet George Takei. No one is trying to become him.

The Highlight

For me, the highlight of the meeting by far was lunch with Scott Sumner and Scott Wentland. We had a grand conversation. Readers of both blogs might imagine the authors of The Money Illusion and interfluidity to be on opposite sides of a great divide, but it didn’t feel like that at all. The quality of mind I value in other people and strive for in myself is a kind of nimbleness, a fluidity of mind. The world is too complex for any particular narrative to be perfect. Good judgment, I think, comes from the ability to slip between and among stories, to understand the ways different accounts might be true, to marshall evidence and reasoning on both sides and then assign weights to a superposition of competing, sometimes contradictory ideas, all of which play a role in ones choices. Sumner and I understood our different perspectives very quickly, and took one another seriously, though we’d probably weight accounts very differently. Further, though I suspect he will bristle a bit at the characterization, within the economics profession I view Sumner as an ideologue in the very best sense. There’s both a moral and a methodological component to that. Sumner is driven, scandalized even, by what he sees as a profound and preventable failure of monetary policy. He’s shocked that the rest of his profession (which he’d previously considered himself to be in the middle of) has shrugged this off, that economists don’t get in their guts how awful an abdication of policy has occurred. So Sumner has made it his full-time preoccupation for two years to communicate and persuade, working to change his colleagues’ intuitions about what is acceptable and what is not. He has a reasonable (though not unassailable) model of how the economy works, and a coherent vision of a policy regime that would be wise under that model. Recent experience suggests that implementing Sumner’s policy regime, under which the monetary authority both commits to and is able to target NGDP, would be eased by tools that are institutionally or politically unavailable under current arrangements (e.g. NGDP futures markets, negative interest on reserves, perhaps more flexibility with respect to asset purchases). Rather than working within existing constraints, he has made lobbying to alter them part and parcel of his campaign to shift the intuitions of his colleagues with respect to the conduct and duties of monetary policy.

I’m not entirely on board with Sumner’s project. I have longstanding concerns about status quo monetary policy. I’m not sure NGDP is a sufficient statistic for a decent economy. I share some of Arnold Kling’s concerns that monetary policy may be unable to solve information problems with respect to patterns of production, consumption, and income, along with old Austrian-ish concerns that monetary expansion can lead to counterproductive distortions towards “dumb” interest-rate sensitive investment. I’m not sure that the Fed credibly could target NGDP, even with the expanded toolkit Sumner proposes, and I worry about the fiscal costs and economic consequences if markets test and manage to break a drifting NGDP peg. Sumner offered some interesting rejoinders. He pointed out that the worst distributional effects of crisis policy — the various bailouts and subsidies intended to put a floor under outcomes for “systematically important” financial institutions, the panicked money-flows post-Lehman — might have been avoided if NGDP-targeting monetary policy were sufficiently credible. If the path of NGDP is certain, it is possible that no institution would be too big to fail. The idea is that, whatever micro-level complications and litigations and reorganizations the failure of a major bank might provoke, if at a macro-level real GDP and employment remain sufficiently OK, nonintervention would become politically and morally thinkable. (Of course, you can argue this is wrong, that big bank failures cascade so disruptively that pegging NGDP would be insufficient to prevent a collapse of real production, so policymakers would continue to intervene. But note the congruence of Sumner’s view and Rajiv Sethi’s.) Sumner dislikes and generally opposed bank rescues, but he pointed out that one way to look at the subsidies to banks is government undoing costs inflicted by bad policy. Nominal debt is contracted around expectations about nominal growth, and by failing in its duty to ratify those expectations, monetary policy failure was responsible for the increased debt burdens and reduced asset values that harmed banks. Therefore, some compensation might be justified. That’s an interesting argument, but it turns on what expectations we deem reasonable ex ante. The Fed has never committed to NGDP level-targeting, so perhaps banks ought to have been expected to manage leverage cautiously and to be tolerant of fluctuations. Moreover, the argument can’t explain or justify the distribution of intervention during the crisis. If government is responsible for changes in the real debt burden associated with failure to stabilize NGDP, then there ought to have been compensation for indebted households and nonfinancial firms. But subsidies and interventions went disproportionately to banks, and disproportionately to just a few banks.

Despite some misgivings, I think Sumner’s project is serious and interesting, and we could do a lot worse. It’s not exactly what I would push, but there’s plenty of overlap and I wish him well. At a high level of abstraction, I find Sumner’s “center right” views to resemble the “far left” post-Keynesian Chartalists, or “MMT-ers”. Both Sumner and the MMT-ers choose a macro target and a policy instrument, and suggest that micro problems will work themselves out if the consolidated government/central-bank is vigilant about supporting the target. MMT-ers choose (net) fiscal spending as their instrument, while Sumner chooses monetary policy under an unconventionally expansive definition. Some MMT-ers would target unemployment (often at zero, via a direct government jobs guarantee). But others argue that the government should deficit-spend at the level that supports GDP without provoking inflation, which is not too different from Sumner’s NGDP target. (Sumner argues that, at reasonable growth rates, NGDP targets are likely to be met by sustaining real GDP rather than by inflation.) Am I alone in seeing the similarities?

Like Andy Harless (but see Sumner’s rejoinder), I think the distinction between fiscal and monetary policy has grown very blurry. Monetary reserves are now interest-bearing obligations, ultimately paid for by the state. Some Fed “liquidity facilities” involved issuing interest-bearing obligations to buy up private sector assets (at prices above those offered in private markets). That sounds like fiscal policy to me. While it can be argued that conventional open-market operations only transform the maturity of government obligations, by anchoring the yield curve and increasing the fraction of debt that can be used directly as a medium of exchange, conventional monetary policy may increase the willingness of private agents to hold US debt, reducing constraints on spending and enabling expansionary fiscal policy. Fiscal policy and monetary policy are intertwined, and it’s not clear to me that either dominates the other. (There’s an aphorism, I think Tyler Cowen’s originally, that “the monetary authority moves last”. That doesn’t persuade me. Timing of endogenous phenomena tells one very little about causality. Timing of moves in a game tells us very little about which player has the advantage.) Ultimately, I’ve come to think that the main differences between fiscal and monetary policy are institutional. Decisions about what we call “fiscal” and “monetary” policy decisions are made in different ways by dissimilar entities. Those decisions can reinforce one another, or they can offset and check one another. Some people prefer to emphasize the role of fiscal authorities for “democratic legitimacy”, while others champion action by an “independent central bank”, on the theory that isolation from overt politics will yield technocratically superior choices. You can accept these preferences on face, or more cynically argue that some groups expect one or the other decisionmaking body to execute policy in ways that that favor preferred interests. Regardless, at a macro level, Sumner’s NGDP targeting monetary policy and MMT-ers’ GDP-supporting fiscal policy look similar to me. Both perspectives arouse my sympathies but provoke misgivings. First, I’m not sure either instrument is up to the task of stabilizing the target over a long horizon, and worry that attempting but failing to stabilize may prove riskier than conventional muddling through. Second, I think the micro-level stuff really does matter. In order to ensure both high quality resource allocation and distributional legitimacy, I think it matters very much what is paid for with fiscal expansion, and precisely how monetary policy is to be conducted. (I offered a proposal a while back that now looks like a bizarre hybrid of Sumnerism and Chartalism, which tries to address micro-level concerns.)

I’ve been remiss in not saying much about Scott Wentland, who was actively engaged in our conversation but is less clearly identifiable with a position. Wentland describes himself as a devil’s advocate, but I’d characterize him more as a satanic Socrates — he’d listen, carefully reinterpret a comment, then politely punctuate his review with a challenging question. Still, for all the finance and economics I encountered at the conference, Wentland is the only person whose work suggested a way to actually turn a profit. Wentland presented a paper at the conference. I missed the presentation, but read the paper after the fact. It is empirical work very nicely done, and it tweaked the antennae of my inner, amoral arbitrageur. I now think of registered sex offenders as roving Groupons for home flippers. Wentland and his coauthors provide strong evidence that you could make a lot of money persuading an ex-cellmate to move near a nice, four bedroom home in rural Virginia, and then to move away after you’ve bought the home.

[Update: Wentland et al simply documented the effect on home prices and liquidity of nearby registered sex offenders, in a careful and empirically sophisticated way. The “arbitrage” is my poor attempt to say something clever about it. However, commenters inform me that the scheme I’m implying mirrors an old and well-known strategy with racial overtones, a parallel which I did not intend to draw. Thanks to commenters Kindred Winecoff and TGGP for pointing this out.]

Anyway, those are my musings on lunch. I’ll take a breather and leave my comments on the lectures and seminars I attended to future posts.

Update History:

  • 23-January-2011, 6:50 p.m. EST: Restored intended final draft — somehow I mistakenly posted an earlier draft! This draft differs from the previously posted draft:
    • The current draft makes clear that Scott Sumner generally opposes bank resucues, despite the argument that some bank subsidies can be viewed as compensation for bad policy
    • The current draft adds a line re Scott W’s “devil’s advocacy”
    • The current draft omits a gratuitous joke re fraud at banks;
    • The current draft adds a comparison between Sumner’s views and those of Rajiv Sethi
    • The current draft includes more links in general
    • Probably some other minor differences
  • 23-January-2011, 7:20 p.m. EST: Added update re “blockbusting”, Thanks to commenters Kindred Winecoff and TGGP.
  • 25-January-2011, 7:10 p.m. EST: Corrected mssplling of “Chartalists”, many thanks to supercommenter JKH for pointing out the error!

Endogenize ideology

Paul Krugman has a nice column on how moral issues now constrain and complicate economic policymaking [italics mine in both quotes]:

One side of American politics considers the modern welfare state — a private-enterprise economy, but one in which society’s winners are taxed to pay for a social safety net — morally superior to the capitalism red in tooth and claw we had before the New Deal. It’s only right, this side believes, for the affluent to help the less fortunate.

The other side believes that people have a right to keep what they earn, and that taxing them to support others, no matter how needy, amounts to theft. That’s what lies behind the modern right’s fondness for violent rhetoric: many activists on the right really do see taxes and regulation as tyrannical impositions on their liberty.

There’s no middle ground between these views. One side saw health reform, with its subsidized extension of coverage to the uninsured, as fulfilling a moral imperative: wealthy nations, it believed, have an obligation to provide all their citizens with essential care. The other side saw the same reform as a moral outrage, an assault on the right of Americans to spend their money as they choose.

This deep divide in American political morality — for that’s what it amounts to — is a relatively recent development.

I think he’s right about this. Here’s where I think he is wrong:

But the question for now is what we can agree on given this deep national divide.

I am going to put things into econogeek terms, because it is technocratic economists like Krugman, whom I admire and respect, that I am trying to persuade.

Krugman is treating morality as a problem of comparative statics. In the 1990s and before, there was one ideological environment, an environment under which decent economic ideas (from Krugman’s perspective and from my own) had a reasonable shot of being enacted into policy. In 2010, we have a different environment. An ideology that treats all taxation as theft — as illegitimate, coercive, perhaps even morally equivalent to violence — is now sufficiently prominent that it effectively renders policy ideas that involve use of resources by government and potentially even redistribution impractical. In both cases, we treat the ideological environment as exogenous and try to characterize the space of feasible policy options. We then choose the best available.

That’s the wrong approach, I think. Rather than treating ideology as fixed and given, we should treat it as dynamic, as a consequence rather than a constraint of policy choices. Choosing the apparent best available policy in 2008, given prevailing views of mainstream technocrats, helped generate an ideological environment much more challenging to those who support activist government than might otherwise have ensued, because the “least-bad” policies involved deploying taxpayer resources in a manner widely viewed as corrupt and illegitimate. At the margin, people (like me) who had previously accepted that the beneficial actions of government more than justify the costs and coercion of taxation shifted towards viewing taxation as theft on behalf of well-connected insiders. (Ironically, that shift may be helpful to many of those same insiders, who, having already “got theirs”, now have more to lose than to gain from government activism.) Going forward, we oughtn’t confine ourselves to making the best of a terrible ideological environment. We should be considering how we might alter that environment to be more conducive of good policy.

Paul Krugman understands this stuff. He is in general very sensitive to the political and ideological ramifications of policy choices. Throughout the Bush administration, he highlighted some of the dynamic that brought us from prickly consensus to nasty division. For example, there was the fabulously successful strategy of governing incompetently while using each failure as evidence that government action cannot help but be corrupt and inept. Heckuva job, Brownie!

However, many of Krugman’s professional colleagues really do treat ideology or “political constraints” as given, and perform the exercise that economists perform reflexively, starting with their first grad school exam: constrained optimization. Constrained optimization is a mechanical procedure. The outcome is fully determined by the objective function and the constraints. A party that understands the objective function and can shape constraints controls the outcome.

Let’s play a game. There are two players, a space of hypothetical moves, and a set of constraints that limits acceptable moves in each round. The two players in general have different objectives: high payoff states for Player 1 are sometimes (though not always) low payoff states for Player 2. Player 1 assumes the constraint set is exogenous. Player 1 knows that the constraint set is not fixed — she has observed changes over time — but her working hypothesis is that the constraints form a martingale, which is a fancy way of saying that her best guess with respect to the shape of future constraints are present constraints. Importantly, Player 1 does not believe that future constraints are a function of present moves. Player 2, on the other hand, correctly understands the distribution of future constraints to be a function of present moves, and is also aware that Player 1 erroneously believes constraints to be exogenous. Both players choose strategies to optimize an intertemporal payoff function. How will this game work out? The answer is obvious: Given any initial conditions, Player 2 always performs better than Player 1 would have under the same conditions (in expectation). Further, Player 1 may frequently observe Player 2 acting in ways that seem irrational, sometimes mutually destructive, when Player 2 chooses a strategy that yields jointly low payoffs when strategies with jointly high payoffs are available, holding the constraint set fixed in expectation. Player 1 will compute strategies that yield an acceptable Nash equilibrium, only to watch that equilibrium fail to hold as Player 2 makes choices that are apparently suboptimal given Player 1’s available responses. Meanwhile, Player 2 will not be surprised by Player 1’s choices and will correctly optimize her unilateral welfare in a manner that is potentially costly to Player 1.

So this is a dumb example, right? We have allowed Player 2 rational expectations (unconditional and conditional), but left Player 1 ill-informed. We have stacked the deck. And so we have, in my example and in the real world. It does only a little injustice christen Player 1 “Team Obama” and Player 2 “Team Bush”. The technocratic team, the people who are constantly exasperated about the perfidy and sheer irrationality of the other side, is the team that is in fact ill-informed. Team Obama diligently and correctly optimizes at each point in time, making use of the best expertise available subject to existing political constraints, not interested “scoring points” but instead focused on “getting things done”. Meanwhile Team Bush makes choices that seem bizarre and blatantly ill-conceived, if we take the constraint set as given. Yet the ecosystem of constraints, the ideology, moves ineluctably in Team Bush’s favor.

I do not think I have been unfair in my description of Team Obama. But I have been overgenerous in my description of Team Bush. In our hypothetical game, Player 2 strictly dominates Player 1. Player 2 simultaneously optimizes the future constraint set and choice under expected future constraints, while Player 1 only performs the latter optimization. I don’t think Team Bush, or “the Right”, or whatever moniker you choose, has been very attentive or skilled in technocratic terms given any moment’s set of constraints. Rather than two optimizers one of which has strictly less information than the other, in the real world we’ve seen two satisficers, one of which has adopted the strategy of optimizing subject to fixed constraints and the other of which has neglected pursuit of optimal present policy in favor of action intended to reshape the constraint set. [*] A priori, we would not be able state with certainty which of the satisficers would outperform the other. If the constraint set were, in fact, strongly resistant to change Team Obama’s strategy would dominate. But if the constraint set is malleable (and constraints frequently bind), then Team Bush outperforms.

We are not a priori. In the course of my lifetime, we have gone from a polity in which President Nixon publicly flirted with guaranteed income proposals to a polity in which there is a bipartisan tidal wave to bail out bankers but redistribution is beyond the pale. Throughout the period, every Democratic presidency has been technocratically superior to any Republican presidency, in terms of its reliance on expertise rather than, um, ideology in policymaking. Yet both parties have moved inexorably rightward, so that the center right of 1970 would be viewed as Communist today. The empirical evidence is clear. Ideology is malleable, over years and decades rather than generations and centuries. If you have to choose one — smart policy and indifference to ideology or sloppy policy and careful ideological work — you are better off choosing the latter.

Obviously, there’s a reductio ad absurdum here: If your policy is so bad we blow up the planet, your ideological work will be for naught. And one might argue we will experience something like that, extrapolating trends of the last 40 years. But that doesn’t counter the point that ideologues are more successful in shaping policy than wonks, and that therefore smart wonks will become ideologues too if they want to actually prevent the planet from exploding.

Note that, at least ideally, ideological work and technocratic policy are complements, not substitutes. That is to say, ideally we want to be Player 2, who simultaneously optimizes both the expected future constraint set and policy under current and expected constraints, rather than a Team Bush that largely ignores the quality of policy. (Hey, democracy is messy.) Although it’s difficult to know (given that ideological concerns sometimes can justify apparently bizarre policy), I think in practice we’ve had (since the late 1970s) two political groups in the United States that have pursued one strategy to the exclusion of the other, so it feels natural to imagine we have to choose either ideology or technocracy. We don’t. We want smart technocrats, but we want technocrats who treat ideology as endogenous, who assign a very high value to the dynamism of moral ideas and political constraints when considering alternatives.

Further, we want critical ideologues. Shifting the polity towards an idée fixe, some ideology chosen a priori from first principles, or from reading the Bible, Mises, or Marx, is likely to be unwise. We ought to do our best to explore the full space of potentially achievable ideologies and consider which are likely to promote good outcomes, especially given the “trembling hand” of policymakers. That is, we want to choose an ideologies under which the polity is unlikely to make terrible choices even when it makes erroneous choices. But ideology is path-dependent, and ideological change is never instantaneous. Not all collections of constraints and biases, heuristics and intuitions, can “take” as ideology on human wetware. In choosing ideologies, individually and collectively, we face a lot of constraints and trade-offs. But one way or another, we will choose ideologies. Ideologies are consequential. To whatever degree we can affect ideological change, we should do so with great care.

I expect this essay will arouse objections. We have all been made allergic to terms like “ideological work” for the very good reason that we associate that sort of thing with propaganda by evil and repressive regimes. But that we don’t use the words doesn’t mean the work isn’t done. It just means ideological work isn’t done as overtly, that the people who do it don’t think about it in such explicit terms. The ickiness of “ideological work” is consequential, for sociological reasons. People who are verbal, broadly educated, and self-critical notice when what they are doing is, in some sense, ideological work, and (under the prevailing ideology about ideology) shy away from it. But that just cedes the practice to those who think they are doing “God’s work”, or who are so suffused in their own ideology that the pursuit of its enlargement is second nature to them. There is more ideological work done in the United States than ever was done in Mao’s China. But most of the workers are smart enough not to call it that, or usually even to perceive it in those terms. Economists in particular are disdainful of ideology, on the theory that ideology implies bias and constraint, while optimality requires unconstrained choice. But that is misguided on multiple levels: 1) Supposing the economist could (counterfactually) be non-ideological, the human agents that she studies are subject to ideological biases and constraints, and our non-ideological economist will fail to be a good scientist if she fails to take those into account; 2) The economist is human, and ought to grapple explicitly with her own biases and instinctual constraints, if she is to have any hope of countering them and approximating “unconstrained” choice among available hypotheses and policies; 3) Despite an economist’s best efforts, the true, unconstrained space of models and hypotheses plausibly consistent with evidence is always too large to be exhaustively searched and sorted. Ideology, individual and institutional, will always shape economic conclusions to some extent, and economists ought take responsibility for that and think critically about the effect of their ideology on the polity whose choices they help to shape.

It is childish, and wrong, to imagine that acknowledging the ideological aspects of ones work and self makes one less trustworthy or more dangerous than those whose work is equally ideological, but who mistake their ideology for objectivity or truth and who therefore deny any role for ideology. Many of history’s most dangerous ideologues have been “true believers”, and others have pretended a “scientific” perspective while advancing claims we now recognize as ideological. Being acted upon by, and acting upon, prevailing ideology are part of what it means to be human. It is not just the province of economists or policymakers, or a fabrication of Svengalis in the propaganda ministry. Nevertheless, politicians and economists and other “opinion leaders” probably do have disproportionate influence over ideological change. As far as I’m concerned, they (we) ought to be doing a better, more careful, and more conscious, job of it.


[*] Team Bush was not unconscious of the ideological dimension of their labors. Remember this famous passage?

[Probably Karl Rove, talking to Ron Suskind] said that guys like me were ”in what we call the reality-based community,” which he defined as people who ”believe that solutions emerge from your judicious study of discernible reality.” I nodded and murmured something about enlightenment principles and empiricism. He cut me off. ”That’s not the way the world really works anymore,” he continued. ”We’re an empire now, and when we act, we create our own reality. And while you’re studying that reality — judiciously, as you will — we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors . . . and you, all of you, will be left to just study what we do.”

For all the manifest failures of the Bush Administration, look at where the United States is today, politically and ideologically, compared to where it was ten years ago and ask yourself whether Karl Rove was wrong. Self-styled members of the “reality-based community” have very little to crow about. They studied — “judiciously”, even — while their America, my America disappeared beneath our feet. Perhaps it is some consolation that they felt superior and scientific all the while. (I, by the way, am not an innocent. I was something of a fellow traveller to the Bush Administration for much of its first term.)

Hangover theory and morality plays

My recent fit over the technocratic style in American economics was the excrescence of a long-standing complaint. The very first time I made that complaint was in a piece arguing that Paul Krugman’s dismissal of Austrian-ish “hangover theory” was overhasty. What goes around comes around. Karl Smith offers a new dismissal of “overconsumption theory”, which Matt Yglesias echoes. Smith, like Krugman, is mistaken and overhasty in dismissing “hangover theory” on technocratic terms, perhaps because he is quite rightly upset at how the theory is sometimes portrayed in moral terms. A better approach would be to understand the way in which the theory might in fact be true and useful, and to craft a morality tale that both captures what is accurate in the story and leads to more productive and just intuitions about how we should behave.

First, a technocratic issue. Here’s Smith:

[T]he overconsumption theory of recessions makes no sense… people are confusing cyclical prosperity with personal luxury. In your personal life you might feel like you are doing well because you have a new house or a new car, etc. However, this is not how we measure the cyclical wealth of nations. We measure it by employment and production. We say the economy is “doing well” when a lot of people are going to work and making stuff. For example, we say that Germany’s economy seems to be recovering. However, consumption in Germany is not rising. Consumption is flat. Working is rising. Employment is rising. That is what it means to be doing well. It means that more people are doing more work.

That last sentence is mistaken.

Smith is very right that we do not measure prosperity by consumption, but by production. We get wealthy by producing what someone values to consume. Our wealth takes either the form of current consumption or (more importantly in a deeply uncertain world) claims on others’ production whenever we might want or need it. We should never, ever measure prosperity in terms of consumption, but always in terms of production, weighted, importantly, by the strength of financial arrangements that allow us to convert unconsumed production into credible options to consume later. [*]

However, we do not measure prosperity in terms of how much work people are doing. That is a terrible error and the most vulgar form of Keynesianism. Make-work is not a path to prosperity, and effort is not production. Prosperity is a matter of the rate at which goods and services that are highly valued can be produced, whether the production is labor intensive or capital intensive, however much or little people are working. Employment is a more complicated issue than output. Under current (foolish) institutional and ideological arrangements, for most people, employment is our main source of claims on current or future production, and also a measure of our respectability and value as human beings. Holding institution and ideology constant, unemployment is harmful far beyond its effect on output. But let’s not confuse objectives. Employment and output are historically correlated, because it takes work to produce output, and also because the measured value of output is dollar weighted and there are few consumers to confer value without widespread employment. But the degree to which the production of any given thing is tethered to traditional employment is variable and technology dependent, and the ability to confer value through purchase could be distributed via means other than employment. Employment and prosperity are different things. (Please don’t confuse average and marginal values or invite ridiculous linear extrapolations by pointing to measured labor productivity. That statistic tells us nothing about the output we would get from further employment.)

We measure prosperity by production, not by work, and we measure production by value, by what people are willing to pay for what is produced.

Austrian-ish “hangover theory” claims, plausibly, that if for some reason the economy has been geared to production that was feasible and highly valued in previous periods, but which now is no longer feasible or highly valued, there will be a slump in production. It wisely asks us to consider not only the prosperity we measure today, but the sustainability of that prosperity going forward. I am not “Austrian”, and have no interest in defending specific claims regarding the roundaboutness of activity or the role of central banks in causing bursts of quasiprosperity. But as Brad DeLong wisely reminds us, it is good to be somewhat catholic in our evaluation of macroeconomic schools, and to take what is useful from each. I consider myself Keynesian at least as much as I am Austrian, but I recognize good and not-so-good offshoots of both schools. (Austrian and Keynesian ideas are more complementary than most people acknowledge. The Austrians focus on unsustainable arrangements of real capital, while the Keynesians focus on unsustainable arrangements with respect to money, debt, savings, and income. I think both approaches are fruitful.)

Smith is a brilliant guy. He gets this:

Because we bought too much it is now inevitable that we work less? Why does that make fundamental sense? Surely something is going wrong. Shouldn’t we be working more to pay for all the stuff we bought.

Some people might say that the “something” is structural readjustment. We have to move towards an investment based economy and there are frictions… Recessions in that story are not a punishment for overconsumption, they are a result of suddenly realizing that you have to shift paths. There are still problems here but they are on a deeper level about more subtle things.

That’s the “hangover” story right there. Those more “subtle things” — wealth-destroying misuse of real capital, dependency on skewed and misguided claims to production — are the source of the hangover, not high consumption per se. There is no school of economic thought I know of that suggests increased prosperity and consumption in and of themselves require a painful purge. The claim is that some patterns of economic activity create the appearance of prosperity and enable temporary consumption that cannot be sustained, and that moving from a period during which such patterns obtain to a more “sustainable pattern of specialization and trade” involves adjustments that are difficult. Recovery is hard, both because there is uncertainty about what is to be done, and because powerful incumbents resist changes and block useful action. Only critics of “hangover theory” claim the theory implies that idleness is just desserts. Proponents do claim that poverty in the sense of diminished consumption, painful financial losses, and “creative destruction” of cherished institutions usually attend the adjustment process, and they recognize all this is usually associated with unemployment. But hangover theorists argue that adjustment is worth doing despite the cost in employment, consumption, and disruption, not because those costs are good things. When they do argue that “pain is good”, it is along very conventional lines of moral hazard. It is not that the macroeconomy “deserves” to suffer, but that foolish lenders and borrowers, specific misallocators of capital and overconsumers, ought to suffer disproportionately pour encourager les autres. Hangover theorists, like smart Keynesians, promote policies intended to shorten depressions when they occur. Austrians ask that bad claims quickly be recognized and devalued, so that economic activity can go forward without a debt overhang. Keynesians urge government action that conjures financial income from thin air, risking devaluation of old claims by inflation. There are different tradeoffs between moral hazard, sharp incentives, and political feasibility among the two approaches, but both seek to repair balance sheets and create a clean slate going forward. Hangover theorists are suspicious of booms that might not be sustainable. They are quick to urge that we “take away the punch bowl” — defined as any macroscale stimulus to economic activity that cannot last — not because they dislike a party, but because they prefer a party that might go on indefinitely to one they expect will be punctuated by agony. Rather than ridiculing hangover theory, we ought to apologize to hangover theorists like Dean Baker, who warned against an obvious housing bubble and predicted catastrophe while his betters partied on oblivious.

So back to that morality play. Smith again:

The overconsumption theory by contrast says that the recession is natural because we bought too much stuff during the 2000s. Too many houses. Too many big screens. That’s why you are not working now. Its balance.

Steve Waldman says I shouldn’t tell people that economics is not a morality play. How about this then — that morality play is completely F-ed up. That morality play says that we should sit on the couch and rest our backs because that way we’ll learn not to drink so much. You bought too much so now you have to work less. How does that balance anything?

On what planet is it your just desert that after partying all night you are forced to sit on the couch rather than get the rest of your work done. Maybe in some perverse Brewster’s Millions kind of way. But, I don’t think that what the universe has in mind.

If suddenly everyone stopped buying big screen TVs and started building factories, investing in the future and laying the path for the next generation then there would be no recession.

Steve Waldman agrees entirely. The problem isn’t that there is a morality play, but that the morality play Smith describes is a bad, stupid, dumb, even evil morality play that needs to be challenged on moral terms. (As Smith is doing, by the way.) No one claims what Smith is ridiculing, that on an individual level overconsumption should be punished with unemployment. But people do claim that in aggregate “we” deserve and must endure a period of recession because “we” overconsumed and invested poorly. The right response to that story is, “Who the fuck are this ‘we’ of which you speak, kemosabe?”

At an individual level the correlation between past consumption and recent unemployment is obviously negative. The people who have sinned are not by and large the people being punished. Some people overconsumed relative to their income, and some people invested poorly. Those who overconsumed have mostly faced consequences for their misbehavior — they are either deeply in debt, or they have endured foreclosure or bankruptcy. But the people who invested absurdly, especially “savers” who lent money but permitted themselves ignorance and indifference to how their wealth would be mismanaged, have not suffered the costs of their recklessness. Instead, they have been almost entirely bailed out. It is lenders and investors more than any other group who determine the patterns of our macroeconomy. There are always people willing to overconsume or gamble on foolish enterprises. We do and must rely upon those with resources to steward to ensure those resources are used wisely. They did not, and their recklessness has brought us to catastrophe. But rather than condemn them for negligence and permit their claims to be appropriately devalued, we applaud them for “prudence” and let government action be bound by commitments to sustain their destructive and ridiculous claims. You don’t counter that sort of villainy with technocratic arguments about liquidity traps. You point out that the motherfuckers who are calling themselves prudent, who are blocking both writedowns and government action that might risk inflation, are hypocrites and thieves. You state clearly that their claims are illegitimate and will be written down one way or another, unless we can generate sufficient growth to ratify them ex post, which would require claimants to behave less like indignant creditors and more like constructive equityholders. It is not technocratic economists who will win the day and pull us out of our cul-de-sac, but angry Irishmen and Spaniards who challenge, on moral terms, the right of German bankers to impose vast deadweight costs on current activity because they lent greedily into what might easily have been recognized as a property and credit bubble.


[*] The caveat about financial arrangements is important with respect to Germany’s apparent prosperity. Germany, like China, is less prosperous than it seems, because its surplus production is geared to sale for claims that cannot credibly be redeemed for what the country’s citizens would want should they exercise their option to consume.

Moral heuristics, public policy, and self-defeating tribalism

Both commenters and Brad DeLong respond wonderfully to my previous piece. DeLong didn’t quite get what I was trying to say, which is very much my fault and not his. His recent piece pushed my one neuron past its activation threshold, triggering an ejaculation of pent up griping and theorizing. Let me put a bit of order to things.

  1. I am not taking issue with DeLong’s position on, for example, the advisability of pulling government spending forward, despite conventional virtue that suggests a cash constrained family ought to “tighten its belt” in difficult times. On the contrary, DeLong and Krugman aroused my pique because I largely agree with them on the substantive issues.

  2. Basically, I am upset about the manner in which “my side” is making its arguments. Not because our approach is mean or uncivil (it’s not especially), but because it is ultimately self-defeating.

  3. My evaluation is based on a view of how human beings regulate social conduct. I think we do so primarily via moral heuristics. Those heuristics both shape and are shaped by reason. But our moral intuitions are more durable than reasoned conjectures, and more pervasive in guiding how we actually behave. Importantly, I think that moral heuristics are socially determined and malleable. I think we all become very different people when we immerse ourselves in different communities, and that individually and collectively our moral heuristics do change over time.

  4. I think that “my side” fetishizes certain modes of reasoned thought, and is (unconsciously) disdainful of moral heuristics. Ironically, but very humanly, our own behavior is overwhelmingly determined by moral heuristics that include tribalism and unexamined conventions about the bounds of legitimate choice.

  5. Our biases and blindspots lead us to reason and communicate with one another in a very specific way, and to ignore and ridicule those who cannot do so or who express ideas beyond our conventional limits. That’s bad for a few reasons. First, it can lead us substantively astray: we are subject to groupthink. Secondly, even when we arrive at good conclusions, we forget that converting those conclusions into durable policy requires that moral intuitions consistent with our views become widely distributed and socially reinforced.

  6. We are in competition with other groups who have their own biases and blindspots, and their own cherished modes of reasoning. Some of that reasoning may be inferior to our own in terms, for example, of describing and predicting empirical phenomena. However, some of our competitors do not disdain moral heuristics, but habitually devote themselves to promoting moral intuitions that become stable and self-reinforcing.

  7. “My side” consequentially errs by turning its particular mode of reasoning into an exclusionary totem of affiliation and ignoring the disconnect between its own conclusions and widely held intuitions of the polity. We win in our own estimation of course, and sometimes we win political battles. But our victories are unstable and must be endlessly refought when they are not reinforced by widely shared moral views. Sometimes winning itself reshapes the moral landscape. But sometimes it does not. And very often we cannot win at all, because we fail to communicate with those outside our tribe.

  8. We are not as smart as we think we are. Our disdain for moral intuition can lead us to behave in ways that are actively harmful, for example when we impose “reasoned” policy but fail to address moral concerns or reconcile moral intuitions. That gets experienced as a form of violence. Often our elaborate reasoning is cartoonishly simple compared to rich contingency of moral heuristics. Conversely, we frequently trumpet as reason what are really parochial moral ideas dressed in symbols. Outcomes are better when we allow moral intuition and reasoned argument to percolate together and influence policy.

  9. It would be possible for “my side” to successfully contest the sphere of widely held moral intuitions, especially when our ideas are actually good. Human beings are capable of moral ideas that are fine-grained and context dependent. Subtle and complex policy can be made morally intuitive, with some effort and attention.

  10. But often we don’t even try. We shoot ourselves in the foot by lampooning moral intuition and elevating reason, by reveling in cleverness and using our mastery of the counterintuitive as a status marker and badge of authority.

  11. We thus cede the realm of moral intuition to those we disparage as cretins and demagogues. And we whine about that, with self-righteous superiority. Our lamentations become another token of status and affiliation.

  12. I view this as counterproductive. I think we should behave differently.

I hope this helps to clarify my previous piece. Again, I want to emphasize that I like DeLong and Krugman and very often agree with them. To the degree that I went off on them personally, I apologize. But I hope readers will understand why, in light of the points above, I dislike phrases that signal affiliation with policy elites (“bipartisan technocrats of the center”, “reality-based community”) and arguments that disparage moral intuition while inviting the clever to delight in mastery of the counterintuitive. (p.s. I am sure I am a hypocrite, and have done all the things I claim to dislike. oh well!)

Tragedy of the technocrats

The good guys will always lose if they don’t have the courage to be the good guys.

Brad DeLong writes

Why Are the Technocrats of the Center Missing in Action? Robert Rubin disappoints… And it is not just Rubin: all the bipartisan technocrats of the center appear to be wringing their hands and calling for a plan without saying what it should be.

DeLong tries to remedy this with a list of specific proposals. As advertised, they constitute a “platform for the bipartisan technocrats of the center”. In a seven point memorandum, the vexing issues of the day are simply fixed. The arithmetic is made to work. “[T]he best policy to provide American businesses with the incentives they need” is declared. No matters of controversy are noted. Why then, as Felix Salmon points out, does it have “exactly zero probability of ever being enacted”?

Paul Krugman laments that we have been “mugged by the moralizers” and admonishes us that “economics is not a morality play“.

But the thing is, human affairs are a morality play, and economics, if it is to be useful at all, must be an account of human affairs. I have my share of disagreements with both Krugman and DeLong, but on balance I view them as smart, well-meaning people who would do more good than harm if they had greater influence over policy. But they won’t, and they can’t, and they shouldn’t, if they exempt themselves from the moral fray. One of the stereotyped insults economists throw at one another is that a piece of analysis is “partial equilibrium”. The phrase is shorthand for coming to a conclusion based on assumptions that could not survive the circumstances under which the conclusion would obtain. I don’t want to single out Krugman and DeLong, but technocratic economists in general engage in partial equilibrium social science when they ignore moral concerns and the constraints “legitimacy” places on feasible policy.

It should be no surprise that human collectives choose policies destructive of GDP or employment growth when they deem those policies to be wrong or unjust. Individual human beings act against their material interests all the time, providing full employment for economists who endlessly study the “ultimatum game“. Political choice combines diffuse personal costs with powerful moral signifiers. We should expect politics, including the politics that determines economic policy, to be dripping with moralism. And sure enough, it is! This doesn’t mean that policy outcomes are actually moral. (There’s a hypothesis we can falsify quickly.) But exhortations to policy that cannot survive in terms of moral framing are nullities. They are no less absurd than proposals to “whip inflation” by demanding increased production while simultaneously imposing price ceilings.

My inner DeLong objects at this point. After all, we have had a technocratic central bank, apparently independent of politics at least since the early 1980s. The market itself is a famously amoral creature, yet the outcomes it imposes have become widely regarded as legitimate. That’s all true! But it is a mistake to interpret those facts as evidence for the unconditional feasibility of technocratic management, or of unfettered markets. Our deference both to market outcomes and central bank management did not derive from some overwhelming scientific consensus to which the common man wisely deferred. They were the result of an immensely successful ideological campaign that conflated markets with liberty and democracy, and claimed central banks would deliver fair outcomes by virtue of predictably valued money. There is a reason why people are asking What Would Milton Friedman Do? in the same way a Christian might ask what Jesus would do. The technocratic interlude for which Brad DeLong yearns was built upon scripture that Milton Friedman both penned and evangelized.

We are in a period of Reformation now, with all the turmoil that suggests, and the outcome is not predetermined. Simply assuming the parishioners will remain faithful, or lamenting that they ought to remain faithful, is no way to win the argument. There is something poignant, but also a little blind, in the fact that DeLong’s agitation was aroused by Robert Rubin, who, when elevated to speak ex cathedra from the pages of the Financial Times, had nothing worthwhile to say. To DeLong, Robert Rubin remains a pontiff of the “bipartisan technocrats”. To the rest of us, Rubin has become an icon of self-delusion, corruption, and arrogance. Rubin was arguably the most influential member of a technocracy whose conduct now seems deeply unwise. He accepted handsome compensation to cheerlead risktaking at a bank that then held taxpayers for ransom when those risks went sour. Despite all this, he retains his wealth and influence, and has never much apologized. Heretics of all stripes chafe that his protégés are overepresented in the halls of power. Rubin is undoubtedly a compelling figure in person. People who have worked with him are bedazzled; they enthuse about his brilliance and public-spiritedness. The rest of us never met him. We just saw the smartest guy in the room walk away, rich and smug, and then the room exploded.

Krugman is the oddest technocrat, because he is also one of America’s great moralists. On so many subjects, his voice booms like thunder from astride the New York Times. When Krugman is at his best, and he is often at his best, no one mixes authority, moral outrage, and smart argument as effectively. But on the core economic questions of the moment — fiscal and monetary policy, national investment policy, employment — Krugman explicitly cedes recognizable morality to the other side, and in doing so, he cedes the argument. To be fair, moralizing Krugman’s positions might not be easy. Krugman’s views are inconsistent with some common moral frames. It is easy, in the context of prevailing norms, to argue that governments should be prudent in the same way as households, or that debtors have a sacred duty to repay creditors, or that good times must be paid for with bad. The most obvious moral counterplays, appeals to altruism in the face of misery, are vulnerable to vilification of the “undeserving poor” — people whose lack of diligence left them without “skills”, deadbeats who partied on debt they cannot now repay. These accusations are often inaccurate, hypocritical. and self-serving. But they are effective. The landscape of morality plays is challenging for someone with Krugman’s views.

But even in a challenging landscape it is better to fight than to preemptively surrender. There are ways to address, in explicitly moralistic terms, the arguments of the other side. It is not so effective to claim, for reasons described as “wonky”, that what’s bad is good in a liquidity trap and economics is not a morality play and in a better world policy would be driven by the models that one very smart economist prefers. Rather than eschewing moralism, Krugman could turn the table on “debt moralizers” and talk about the responsibilities of creditors, the evils of bad lending. In our personal lives, we understand that making loans to friends and family can be dangerous, that lenders and borrowers have a joint responsibility to ensure the money will be put to good use. We know that incautious lending to relatives can destroy families, and is best not done at all if the lender can’t afford to forgive the loan. Ethical lending always involves paternalism on the part of the lender, although self-interest often enforces paternalism even where ethics will not. Further, ethical lending for yield always involves risk-sharing: lenders must understand if the enterprise to which they lend fails badly, costs will be borne by both borrower and lender. Ordinary people get this stuff. A family member who continually lends money to the cousin everyone knows is alcoholic will not be considered virtuous. If the same family member suddenly demands repayment, provoking shouting matches at holiday dinners and making himself out a martyr for having lent so generously, the rest of the family is unlikely to be sympathetic. If he had lent to the alcoholic for interest and then caused such a scandal, he would probably be no longer welcome at holiday meals.

Accounts of destructive, reckless creditors may not fit a bumper sticker as easily as “deadbeat borrower”. But they are true, compelling, and moral. And they will not tell themselves. My point is not to criticize DeLong or Krugman, both of whom I admire. But the lament of the technocrats is self-defeating, counterproductive, and ultimately poor social science. Policy ideas that cannot survive in equilibrium with achievable social mores are useless. This needn’t rule out good policy. But it does mean that a good policy economist will be a political economist, and a moral economist. Ex post, the “good” in good policy will be a double entendre. Policy will be both effective and right. Ex ante, both policy and morality are contested and undetermined. The policymaker’s challenge is to negotiate a space where morality and policy are mutually reinforcing, and where the results of that coherence are in fact good.


Afterthought: The technocracy is suddenly up in arms over World Bank President Robert Zoellick’s suggestion that a new monetary system might involve some role for gold. Gold is a great heresy in the church of the technocrat. Zoellick’s remarks were mild and unspecific, and it amuses me the degree to which they have aroused the now embattled mainstream. For the record, though I have profited from gold’s rise, I do not think a gold standard is a good idea. But I also think that remetallization of money is much more likely than many economists, who brim with accounts of transition costs and unworkabilities, believe. The case for gold as money is fundamentally moral. The moral foundation of the old technocracy — that monetary and financial dynamics would be managed, but in a manner both stable and fair — has been discredited. Gold may have its flaws as a putative currency. But at least it doesn’t conspire to steal pennies from paupers in order to pay off well-situated cronies. As existing monetary authorities most certainly have done, on multiple occasions.

The Karmic Truth

Karl Smith wrote a rather beautiful piece today, called “The Karmic Lie“:

Karma is bullshit — the greatest lie ever told. In truth, the arc of the moral universe is long but it bends towards death and destruction. The universe is either utterly indifferent to your suffering or it actively seeks to destroy you and repurpose your molecules for other uses. In no way, shape or form is it your friend. In no way, shape or form is it balanced or just. If there is evil in the world then it is nature. If there is a God then he is a demon. If there is fate then ours is doom.

[N]othing ends well. In the end, the universe, like the house, always wins. Yet, we do not have to tolerate agony and pain all the way up until our inevitable demise. We live. We love. We laugh in defiance of that inevitability. If we have our heads on straight we’ll do it right up until the cold, bitter, utterly unjust and utterly unavoidable end. We are mortals — those who die. That fact should infuse our every value and animate our every action.

When my loved ones take ill they sometimes ask me — with hope in their eyes — “Am I going to die?” Yes, I answer, I cannot change that. But not today.

Not today.

I agree with almost everything Karl says here. And yet I’m a big fan of Karma. Not as anything supernatural or mystical. Karma, to me, is a characteristic of a healthy community. It is almost definitional: A good community is a community in which Karma obtains.

Niklas Blanchard, in the delightfully autistic manner of an economist, rephrases Karma in terms of game theory and inferred probability distributions following repeated interactions. And that’s great. The Bayesian maximizer of individual utility is an important aspect of what we all are. Conceptions of human affairs that are violently inconsistent with homo economicus are unlikely to be useful, and Niklas performs a service by pointing out how Karma and self-interest can reinforce one another in the game we play called everyday life.

But Karma is more than that. Karma is a practice, something we do, something we create. And not individually. Karma is as an emergent property of the collectives in which we entangle ourselves — if we are lucky, if we are good. Like temperature, Karma has no meaning when attached to a single atom, alone. We have no sure recipe for Karma. Many human communities, perhaps most human communities, are hypokarmic, which is a fancy way of saying toxic, bad, perhaps even evil. But we strive for Karma, because as atoms we are machines that shit and sleep and waste, and in collectives we steal and brutalize and manipulate, unless. Unless we inspire one another, unless the magic we do — when we help, when we smile, when we “produce” what others require, or perform what others will enjoy — causes others to do the same for us. We invent economics in the service of Karma, and Karma (Niklas reminds us) can be a consequence of economics.

Paul Krugman is fond of saying that “economics is not a morality play“. He’s right. We can’t expect economic outcomes map neatly onto notions of justice, especially when we cannot even agree on what outcomes would be just. But nor can economics be ignorant of morality plays or garishly antithetical to notions of justice, without destroying the communities it was invented to serve. Karma should constrain economics. Not every good act must be rewarded or every bad act is punished. Karma eschews detailed accounting. Demanding specific recompense for each particular virtue is bad Karma. Karma implies that people who are generally virtuous do okay and that people who are shitty to others do maybe less okay, over time. Karma prescribes no ranking of people. Karma is not about final judgments, but continual invitations to join the dance. Karma tolerates many conceptions of virtue, and embraces inconsistencies. It’s fine that asshole businessmen succeed, because they organize useful production, and that sanctimonious scolds do not so well, no matter how ostentatiously they slave. But beneath all the fuzz and noise of human events, Karma should emerge as a central tendency, a rough but real correlation linking virtue and reward in their myriad and conflicting guises. An economics that scrambles even so loose and gentle a linkage cannot be a good economics, whatever it does for GDP.

Karma has been injected into political discussions thanks to a nice Wall Street Journal column by Jonathan Haidt, trying to explain the “tea partiers” of all things. I think his application in overly narrow. A lot of the angst I feel, about politics, about my country, has to do with a sense that we are losing the preconditions of Karma in the United States. I think that most of us feel this, whether we call ourselves “progressives” or “conservatives” or whatever. It’s easy to romanticize the past, and I don’t think that Karma is or ever was very meaningful at the level of a nation-state. But “locally”, whether defined in geographical terms, or professional terms, or in terms of communities of acquaintanceship, Karma is getting harder to sustain. We are suffering from a kind of social pollution, our Karmic habitat is threatened. We are like magnetic particles trying to self-organize on a platter, but a gigantic magnet is forcing us into brutal lines, disrupting the patterns of interrelationship we’d like to form.

I’d answer Karl by echoing him, with just a bit of a twist. The universe is cold and empty. We will suffer and die. But today we live. And not alone. We live in the warmth of one another’s company. Ideas like “kindness” or “justice” are alien in this universe. The laws of physics, are enforced cruelly, relentlessly. A falling object is indifferent to who is crushed beneath. But if I see you, I will smile, and hold the door open while you pass. And perhaps you will smile back and say hello. That, my friend, is Karma, and it is all that keeps this terrible universe in its place and at bay. For a while.

Using multiple price indexes to measure changes in inequality is not a good idea

Although I often disagree with him, I very much enjoy Will Wilkinson as a writer. But I really have to object when he claims in desperate italics that

the use of multiple price indexes to measure trends in inequality…is the correct thing to do.

It is not at all the correct thing to do.

Wilkinson’s post is called “The Indeterminacy of Income Growth”. Putting aside measurement error in tracking nominal income (not Wilkinson’s point), the current distribution of income and its relative growth in different quantiles is not at all indeterminate. Many consequences of inequality follow from nominal disparities in income, independently of how changes alter consumption. Kevin Drum makes this point very well.

“Consumption inequality” is in general the wrong way to think about the consequences of inequality. As Mark Thoma recently pointed out, wealth is largely not about what one consumes, but about the time and freedom one has to sacrifice to sustain “normal” consumption. The price of freedom is nowhere in ones “consumption basket”. It is related to the gap between income and ordinary consumption, and also to the price of what one does not ordinarily consume, the cost of deviation. Indebtedness also entails a cost in freedom that we miss if we focus on consumption. In my view, freedom, not consumption, is the central distinction between rich and poor. It is odd that I should argue this point with libertarian Wilkinson.

But, let’s put that question aside and focus on consumption inequality. Here’s a thought experiment that I think captures Wilkinson’s view of why we should “use multiple price indexes” when thinking about changes in inequality.

Suppose that two gentleman, Richie Rich and Peter Poor have incomes respectively of $1,000,000 and $10,000 in the year 2000. There are four goods in our economy, caviar, opera, hot dogs, and sit-coms. Each month, Rich purchases 73 servings of caviar, 24 operas, two hot dogs, and a sit-com. Poor purchases 38 hot dogs and 15 sit-coms. Since we are focusing in consumption inequality alone, we’ll say both Rich and Poor spend their entire incomes each month on these goods. They are both budget constrained: they would consume more if they had more cash.

Now suppose that, between 2000 and 2010 Rich’s income doubles while Poor’s income increases by 10%. Further, suppose that the price of caviar and opera both double, while the price of hot dogs and soap operas increase by 10%. What Wilkinson wants us to conclude from this experiment is that inequality has not, in fact increased. Ignoring rounding errors, Rich can still consume basically what he could consume in 2000, as can Poor. They are both in the same situation they were in 2000, no?

No, they are not. Wilkinson is ignoring substitution effects. As the price difference between caviar and hot dogs expands, Rich will shift his consumption basket, foregoing some caviar for hot dogs. Doing so will make Rich strictly better off than he was in 2000: he could have maintained his old consumption basket, but the opportunity presented by cheap hot dogs gave him a better deal. Poor, on the other hand, will not shift any of his consumption towards caviar and opera, and he cannot shift away, since he was already consuming none of the now more expensive luxuries. Poor’s consumption basket will have gone nowhere over the aughts, while Rich’s will have improved. If we use multiple price indices to claim that the two groups’ “real incomes” stayed the same over the period, we will have missed this change. It is an error of elementary microeconomics.

It would be an error to claim that consumption inequality does not change with a changing price level even if incomes are fixed and prices move uniformly. This is easy to see when inflation outpaces income. Suppose there is no income growth in our economy, but the price of all goods double. Using price indices to measure “real income”, there will appear to have been no change in inequality. But Poor would have been forced to cut his consumption of sit-coms entirely and to carefully ration hot dog calories. Rich will have partially substituted from caviar to hot dogs and from opera to sit-coms, but his nutritional needs will remain met. In “utility” terms, the change in the price level will have impacted Poor far more than Rich, both because the marginal utility of consumption diminishes with wealth and because Rich can cushion the loss of real income with substitutions unavailable to Poor.

For a reductio ad absurdam, assume that incomes remain constant while the price of rich goods increases 100 fold, but that of poor goods increases only 50 fold. “Real income inequality” will appear to have fallen by half, but Poor will have starved to death while Rich gorges on hot dogs. I’d say inequality had in fact increased.

In his initial piece, Wilkinson frequently alludes to the conventional inflation rate, suggesting by analogy that if using a consumption-basket-based price index is sensible at a national level, it ought to be sensible for smaller groups too, and perhaps we should even imagine different inflation rates for each individual. But the basic problem with price indices, that they ignore substitution, gets more pronounced the more finely you slice and dice the population. Patterns of national consumption over the short-term are much less sensitive to changes in relative price than an individual’s or a subgroup’s consumption. An individual will switch to hot dogs when caviar prices skyrocket, but the economy as a whole will consume what the economy produces, while prices adjust to ensure equilibrium. Over longer terms, national consumption baskets change, and BLS has to account for shifts in the overall consumption basket with unempirical estimates of changes in value (“hedonics”). These questionable fudges would have to be used at a very high frequency for subgroup CPIs to track lived experience.

Usually the substitution problem leads to overstatements of inflation or understatements of real income growth. Rich people and poor people have different abilities to make substitutions in their consumption basket. Suppose I’m rich and I work in New York, so I commute by taxi. If taxi fares rise, I can substitute subway commutes. But if I’m poor, my “consumption basket” was already all subway for the trip to work. I can’t substitute when the cost of my cheapest feasible option rises. This asymmetry means that a rich-person CPI will be overstated due to neglected substitutions much more than the poor person’s CPI. Measurement error will bias us against perceiving inequality.

In general, trying to capture changes in “real income inequality” via price indices, single or multiple, will fail to track a big source of inequality, the differential ability of the wealthy to respond to price and income changes via substitution. This mismeasurement can go both ways: the approach can understate the relative gains of the poor as their incomes increase relative to the price of “rich goods”, creating new substitution options for the poor without much changing the consumption options of the rich. (Note that the poor are harmed, always in absolute terms and sometimes in relative terms, when the price of “rich goods” increases, unless we take their income as permanently fixed. The multiple price index approach assumes the poor should be indifferent to the price of goods outside their typical basket.)

It is basically a bad idea to try to measure “real income inequality” with price indices, because the consumption-related welfare of the poor is so much more sensitive to changes in income than that of the rich. Variations in consumption or spending that generate small changes in quality of life among the wealthy generate large variations in nutrition, health, education, and shelter among the poor. If you think consumption inequality is all that matters, you should just not pay any attention to what’s going on with the rich and focus on increasing real consumption among the poor. If that’s what you think, then the multiple price index stuff is just a fancy way of persuading us to ignore the burgeoning nominal incomes of the rich. But it’s not “correct”, and not helpful except as smart-sounding obfuscation. If we should concentrate on the absolute consumption of the poor, just make a simple case based on decreasing marginal utility. I won’t be persuaded, because I think the benefits of relative wealth are much larger than what is visible in consumption. But messing around with price indexes won’t help us resolve that argument.

Wilkinson’s bottom line, I think, is this:

[T]here is no fact of the matter about real income growth. And this means that there is no fact of the matter about the trend in income inequality.

I’ve ultimately supported Wilkinson’s case, in a sense. He talks up multiple price indices as the “correct” tool to measure inequality ultimately to persuade us that it is too hard to do properly. I agree that it is hard to do properly, and think claims based on income-level specific price-indices should be taken with boulders of salt. Wilkinson then continues

[I]f you’re committed to a story about American political economy that requires a great deal of confidence about how much median income or income inequality has or hasn’t risen since the 1970s, you should know that no such confidence is warranted.

That’s a step too far. Most social phenomena lack precise measures. We build social theories on differences along dimensions of freedom, individualism, racism, “happiness”, quality of institutions, trust, relationship-strength, formal versus familial affiliations, etc. etc. etc. We’ve made up measures for all of these things, but they are all poor. We do empirical work with our measures anyway. Smart readers aren’t snowed by the false precision of a regression and a t-statistic. We should require a lot of evidence to take seriously results whose fancy math obscures messy data. Nevertheless, I’m pretty sure that “quality of institutions” has had something to do with economic growth and that cross-sectional differences in freedom have important implications for welfare.

We always observe qualitative differences first, and then try to quantify those with our measures. (If you don’t believe me, look at the tendentious manner by which measures of social phenomena are actually constructed). Qualitatively, I’m as certain that income inequality has increased in meaningful ways as I am certain that the United States has better institutions than post-Communist Eastern Europe or that the character of racism in America has changed since the 1970s. I can come up with quantitative measures that would capture some aspects of those changes. (If I couldn’t come up with anything, I might revisit my qualitative certainty.) But I can’t come up with a definitive measure, something objective that I can use as uncontroversially as a chemist uses temperature. Wilkinson tries simultaneously to anoint one true measure and then trash it as too noisy to be reliable. He is right that his measure is bad. We have better measures, and our evidence that inequality has consequentially increased in America is at least as good as our evidence for many other social phenomena that we widely assume are real.


Note: See Karl Smith for an excellent discussion of the ambiguous line between price inflation and quality distinctions, and how that can contributes to mismeasurements of inflation even using conventional, national price indexes. If rich people are paying more and getting more value for their money, then an inflation measure that saw the price change but ignored the increase value would understate rich-person income growth.

Update History:

  • 28-September-2010, 12:15 p.m. EDT: Cleaned up some embarrassing repeated phrases and grammatical mistakes. No substantive changes.
  • 28-September-2010, 2:50 p.m. EDT: Fixed a couple of typos pointed out by gappy in the comments. Thanks gappy!