...Archive for January 2011

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.)