The Lucas Critique

One of the most powerful ideas in economics is the Lucas Critique. The notion is that statistical relationships estimated in historical data do not necessarily represent causal relationships manipulable by policymakers. It applied in particular force to the Phillips Curve, a connection that some researchers found between unemployment and inflation. According to this critique; simply observing that unemployment and inflation tend to move opposite one another does not mean that central bankers can push inflation higher at will and gain lower employment.

This was a powerful critique at the time, and has yet to penetrate a lot of economic talk. Here, for instance, is Christina Romer, former Chair of the CEA:

The real division is not about the acceptable level of inflation, but about its causes, and the dispute is limiting the Fed’s aid to the economic recovery. The debate is between what I would describe as empiricists and theorists.

Empiricists, as the name suggests, put most weight on the evidence. Empirical analysis shows that the main determinants of inflation are past inflation and unemployment. Inflation rises when unemployment is below normal and falls when it is above normal.

It seems that Romer is accepting not only the empirical Phillips Curve relationship, but also its causal ability to be used by central bankers. Not only is this her own opinion, but the view that ought to be held by "empiricists" who are rigorous in the way they face data, as opposed to those woolley-headed theorists.

Yet even the empirical relationship between unemployment and inflation has broken down in the past few decades. And even if one such relationship did exist, that would not necessarily provide a guide for monetary policy. I do agree that more monetary easing would be worthwhile, but this is a bad way argument in its favor.

On the other side, you have other individuals arguing against monetary easing on the grounds that higher structural unemployment makes monetary easing futile. Scott Sumner neatly addresses that argument:

For similar reasons there is no hard and fast distinction between cyclical and structural unemployment. For instance, if structural unemployment in American has risen closer to European levels, it may be partly due to the decision to extend unemployment insurance from 26 weeks to 99 weeks, and to increase the minimum wage by over 40% right before the recession. Does that mean that demand stimulus cannot lower unemployment? No, because the maximum length of unemployment insurance is itself an endogenous variable. If stimulus were to sharply boost aggregate demand it is quite likely that Congress would return the UI limit to 26 weeks, as it has during previous recoveries. For similar reasons, the real minimum wage would decline with more rapid growth in demand. Aggregate supply and demand are hopelessly entangled, a problem that many economists haven’t fully recognised.

Once again, some relationship we observe today ("there is more structural unemployment now") doesn't provide an unambiguous guide on what to do in the future.

Finally, here’s a recent example from India’s Economist Prime Minister, Manmohan Singh:

We are committed to a growth rate of 9 to 10 % per annum. Our savings rate is about 34 to 35 % of our GDP with an investment rate of 36 to 37 %. And with a capital output ratio of 4:1 we can manage to have a growth rate of 9%.

On the face of it, this is a reasonable statement. Savings do translate into investment closely enough (give or take foreign direct investment, cash stuffed under the mattress, etc.), and accumulated capital in the form of investment aids in future output growth. And, at any point in time, one can compute the ratio between capital and output as a ratio. That’s all true enough.

What’s disturbing is the manner in which Manmohan Singh apparently relies on the crutch of capital/output as a solid parameter to be manipulable by policy. This has been a consistent factor in his economic thinking for quite some time, and goes back to the assumptions of early Indian planners that the accumulation of capital alone would suffice for growth.

Well that wasn’t necessarily true in Nehru’s time and it's not true now. For instance, note as Yasheng Huang does that China is far less effective than India at translating savings into growth (the country also saves more in general). So this is not some fixed parameter set by immutable laws. Instead the capital/output ratio is highly responsive to the general policy environment and incentives faced by economic actors. In China, presumably what you have going on is a lower degree of allocative efficiency. Yet one might equally have concerns in the Indian context about the role of policy; with microeconomic problems of labor quality, health, land acquisition, general governance, labor laws, taxation, and so on and so forth. It is exactly in order to evade the government’s abysmal failure to tackle these existing and tangible problems that Manmohan Singh suggests that the problem of growth can be reduced to an arithmetic question of savings and investment. Yet that relationship may not hold up in the absence of additional reforms to improve governance and tackle the various other binding constraints that hold back growth. (oh, to be sure he mentions other steps to make sure this will happen; but if his proposals haven't taken off in the last seven years why would they take effect now?).

Let me put it this way — Tim Pawlenty recently received a lot of flack for suggesting that his economic policy would simply demand 5% growth for a decade. What if he had said instead; “I will push savings up to 20%; then since there is a 4:1 relationship between investment and growth we can expect 5% growth.” I think most people would find the idea a little nuts. Many misadventures in development economics have included failures where simply pumping in more capital didn't necessarily get you more growth in an arithmetic fashion. The root problem is that any current relationship between savings and growth doesn’t represent a causal relationship manipulable by policymakers. That’s the Lucas Critique in action.

Europe v America

It's a new decade, and time for another wave of Europe v. America comparisons. I have a few points:

It's often mentioned that Europeans work less than Americans, so of course they are poorer. This is important, but there is also a tradeoff between domestic work and office work. In Germany, to take one example, people actually work as much as Americans when domestic and office work are taken together. Labor market rigidities, on top of their effects on youth unemployment, act as barriers to female employment and encourage greater housework. It's not obvious that Europe is "better" in this regard.

One often hears from Yglesias and company, by way of innuendo and suggestion, that Europe is poorer but due to lower inequality provides a better deal for the poorest. But if one thinks of income distributions as bell curves, America's higher mean basically cancels out its higher variance. In real terms, the bottom 10% of the population in both America and Northern European countries earn comparable amounts. They may receive a bit more in government services in Europe, but they also pay more in taxes there due to regressive taxation. I don't have figures for the rest of the income distribution, but mathematically one suspects that everyone else is better off in America. Which is to say: even the Nodic model of Social Democracy (which, due to its free labor markets and welcoming business climate, is much better off than the Continent) does not unambiguously provide a better standard of living for people at any range of the income distribution.

Swedish-Americans earn more than Swedes; German-Americans more than Germans; and so on and so forth. This is about as clear a test as one can get on the effects of national institutions on individual outcomes, and America destroys the competition.

Take That, Vegans

Meat in a vat seems fairly far along:

Researchers in the Netherlands created what was described as soggy pork and are now investigating ways to improve the muscle tissue in the hope that people will one day want to eat it.

No one has yet tasted their produce, but it is believed the artificial meat could be on sale within five years.

Animal rights group Peta said: “As far as we’re concerned, if meat is no longer a piece of a dead animal there’s no ethical objection.”

However the Vegetarian Society said: “The big question is how could you guarantee you were eating artificial flesh rather than flesh from an animal that had been slaughtered.

Now, if vegetarianism was solely about not eating meat, this would be great news. The last line suggests that isn't the case.

Rather, the environmental/vegan organizations are in large part home to unreconstructed socialists. They still believe that the capitalist system is doomed to fail and something more "sustainable" should take its place, but focus their energy on peak oil and animal cruelty these days.

Thus, I predict two trends. First, a civil war will break out among vegans over whether vat-grown meat is still acceptable. Bullshit side-arguments like concerns over labeling will mask what is really an aversion to meat and desire for self-abnegation.

Then, everyone else will pick up the next masochistic form of denial so they can feel better about themselves. I see local food as best placed to pick up market share. Which is still crazy, since food needs to be grown in Iowa, not Chicago.

As a corollary to Lexington's idea that people have a fixed quantity of intolerance, and merely spread it between people differently, I suggest that people have a fixed amount of guilt, and differ only over what to feel guilty about.

Asheville, NC

In local news, a former North Carolina firefighter, who shot a cyclist in the head here, has just been sentenced to four months in jail and a $1200 fine.

Apparently the guy was upset that the cyclist was biking along Tunnel Road with a child; an offense so troubling to this guy that he fired a warning shot at the guy's head.

So in case you ever want to let out some road rage with minimal legal repercussions, you know where to go. But I wouldn't recommend biking.

Weird Days

I spend far, far too much time following the news cycle of the day. It's toxic and unrewarding, yet I'm addicted to the information fix.

Anyway, it's a little bizarre to see liberals pulling all sorts of sexist stunts with Sarah Palin--she deserves to shown as a sex object, she's obviously stupid and superficial, etc. etc.--while conservatives throw out all sorts of feminist arguments. These positions would be exactly reversed if Hillary Clinton or someone was on stand instead of her.

I actually used to like arguments and the like. You hash things out, and get somewhere. Since then, I've kept seeing how ideas are more like the rationalizations and weapons people use to defend their gut reactions to things for which they feel an emotional affinity. All politics is identity politics, one way or another.

A good way to get over this is to follow politics in some other country, or listen to foreign commentary on the US. When there's less of a sense of who you're supposed to be rooting for, you can get a clearer picture. Or just accept the inevitable and become a partisan hack. Or better yet, turn off the TV.

Going Dutch

All industrialized countries other than the US offer universal health care, but they do in different ways. England has an entirely government-run system. But several countries manage to cover everyone with a more market-oriented system. Here's what the Dutch have to say:

Between meetings, Mr. Klink sat down with The New York Times. The Dutch are in the midst of a significant health overhaul to inject greater competition into the nation’s insurance and hospital markets, but Mr. Klink also offered some pointed observations of the health system in the United States.

His first official visit to the United States as health minister came in 2007, and he came with the usual European preconceptions that this country had a wide open and fiercely competitive health insurance market with a myriad choices.

“And what struck me,” he said, “is actually the lack of competition you have.”

Mr. Klink pointed out that nearly 40 percent of the nation’s population gets care fromMedicare, Medicaid and Veterans Affairs, all of which have significant restrictions on the choices available to patients. “We don’t have these kind of public insurance groups in our country,” he said.

And even among those in the United States who get insurance from their work, he went on, “it’s the employer who is making the choices of the health plans from which you can choose.”

The Swiss have a similar system. Singapore has one that's even more free market--people have health savings accounts to pay for most routine care--and they also spend the least out of any industrialized country on Healthcare as a percent of GDP. What's common across all three is that subsidies are targeted through means-tested vouchers, rather than with a public plan, Medicaid, or Medicare.

Yet somehow we get caught in a debate where one side yells at the other for throwing people at the mercy of markets; and the other refuses to tinker with the system. Ensuring Universal Coverage should be the premise of the health care debate, and there are a range of options both to the left and the right on how to get there. Yelling at John Mackey for expanding health coverage and cutting costs isn't going to help; there are issues here beyond the purely moral.

Kids These Days...

One of my pet peeves is people who complain that we don't read enough books, and how this spells cultural doom. Here's Matt Yglesias on the issue:

Between 1939 and 2009, human ingenuity has invented a lot of new things one can do with one’s time. Human ingenuity has not, however, invented a method for stuffing more hours into the day. Consequently, if you look at just about anything that people could do in 1939—read for pleasure, take care of children, cook, etc.—they do somewhat less of it in 2009. People who are really into books, or cooking, or natalism, or what have you tend to interpret this inevitable crowding of the timespace as a sign of cultural crisis and decline but it’s an inevitable result of heterogeneous preferences and innovation.

I feel that's about right. There's nothing particularly special about "books" or "classical music" or "theatre" that sets these apart from other media or cultural productions. Sure, they all have their strengths, but this means that we're all better off for having tons of options for consuming information and media. Maybe kids can't translate Latin or whatever as well as they used to; but that's inevitable as something has to give way as they pick up other skills and talents suited for today. Instead of worrying about how to force high school students to read things they aren't prepared to understand, schools should instead focus on how to introduce kids to a broad variety of media that they'd find interesting and accessible.

Twitter, however, is one social medium too far. It really is the sign of cultural decadence.

What's Wrong With Chicago?

Casey Mulligan, Professor at Chicago, has apparently taken it upon himself to show that those insane caricatures of Chicago economists do apply to some people.

Here, he thinks that falling unemployment is due to workers being unwilling to work:

Suppose, just for the moment, that people were less willing to work, with no change in the demand for their services. This means that employees would have to be more productive because they have to get by with fewer workers.

Why are people suddenly less willing to work, at exactly the same time that there's a recession going on? That's left unanswered.

Here, he thinks that University endowments function like banks:

The non-financial sectors of our economy will not suffer much from even a prolonged banking crisis, because the general economic importance of banks has been highly exaggerated. Although banks perform an essential economic function — bringing together investors and savers — they are not the only institutions that can do this. Pension funds, university endowments, venture capitalists and corporations all bring money to new investment projects without banks.

You can examine for yourself how little the troubles in the financial system have fed over into other parts of the economy.

Here, he confuses correlation with causation:

The nearby chart shows the results for all of the administrations since Lyndon Johnson (I pool Richard Nixon and Ford). Johnson, Carter and Bill Clinton were all Democrats, yet none of them witnessed much labor market progress for women during their administrations. Essentially all of the labor-market progress for women occurred during Republican administrations: eight years of Reagan, four years of George H.W. Bush, and six years of George W. Bush (I do not yet have the data for the last two years of the current administration).

Women gain in relative income when Republicans are in power, so we should vote Republican.

Here, he says those people warning of a crisis on payrolls were crazy, since payrolls did not drop. He ignores the massive efforts taken to ensure employment. This is a little like saying "We shouldn't have built that levee against the flood, because thing's didn't turn out that bad."

How do these people get tenure, and op-ed spots at the New York Times?

The Worst Part About Graduating Is

Meeting other graduates. You tell them where you went, then you see a spark in their eyes and a lift in their posture. They go, "Oh! Me too. So you got out alive, eh?"

It's not enough that a spirit combining self-deprecation and unbelievable pretentiousness about the nature of their education pervades life at the UofC. Or that this feeling is nurtured throughout graduation (no contingency for rain! That's how hardcore we are). But--this feeling has to apparently dominate every future interaction with other graduates.

I guess I could just avoid such people--but they're everywhere!

Ok--enough Chicago rants, back to regularly scheduled rants.

Memorial Day

Look, I respect fallen American soldiers--just as I respect those killed in action from other countries (every country?).

But, as a sometimes libertarian, it disturbs me a little how Memorial Day has expanded from an activity simply remembering fallen soldiers into one which equates their sacrifice with American freedom. This is the old "liberty comes from the blood of patriots" line. Something like this did happen in the Revolutionary and Civil Wars, and the American military did a lot to preserve the liberty of other countries in World War II.

But these actions, strictly speaking, only established the independence and unification of America. Plenty of countries are independent and whole--acts often achieved from the blood of patriots--but not free. Liberty in America came from something else: The desire of the property-holding class to limit the powers of government, and then from the continual actions of civil society to hold government accountable.

You have a similar situation in other countries. You could say that Britain "fought" to establish its parliamentary system, but really, liberty came when groups within society asserted their rights against Leviathan. Or look at the democratic transitions in East Asia, which generally happened without much bloodshed in response to political activism from the middle class. In India, democracy is boosted by an engaged and energetic professional elite, and sustained by enthusiastic participation by all sections of society. Soldiers weren't even necessary to liberate the country, while in neighboring Bangladesh and Pakistan, the Army constitutes the biggest threat to democracy.

Liberty doesn't, fundamentally, come from soldiers--who fight for a state which may or may not promote freedom. It comes from within, from the selfless actions of activists, journalists, and protestors, as well as from the selfish acts of the bourgeois class.

Populist Outrage

Looks like Goldman Sachs is about to return its bailout money, as a number of other banks are about to do as well.  While Goldman might be doing fine, it points to a general problem: No one thinks that the banks are capitalized.  They're still short of capital, and billions of public dollars are necessary so that people trust the banking system and credit starts flowing again.  This is unpopular, but nothing short of ruining the taxpayer will prevent large-scale economic chaos.  

But that's not what people are focusing on, reflecting a lack of coherence across two administrations.  Paulson and Bernanke ignored the problem as long as they could, then came into Congress with the half-assed TARP plan.  This wasn't a great idea, but at least it did something--and was eventually used to pump in capital at a time after Lehman when people were really afraid about general collapse.  

Then six months passed, and the best government plan is still TARP, plus some private additions.  The ruckus over the AIG bonuses has destroyed whatever credibility that bailouts had in the first place, so Geithner is left cobbling together a solution without additional funds from Congress.  Nobody thinks this will be enough.  Worse, he's doing this while trying to create a new regulation regime, and has for months been working in an office which has been understaffed due to tight ethics standards for appointees.  Everybody else has been working on the stimulus package.

This is exactly the road Japan went down, and they found that nothing will get better until you tackle the banks, no matter how hard it is, or how much you work on rebooting the economy in other ways.  Everything can wait until the banks are fixed.

The Economic Neocons

This stimulus debate has gotten a little out of hand.  Among other things, this is a disgrace for macroeconomists.  Figuring out how to solve problems of this magnitude ought to be the central empirical concern for researchers, rather than cause for ideological trench warfare.  

My own biases are evident here, but I find John Cochrane's writing to be both the best ongoing commentary as well as the best case for relying on monetary policy.  

The arguments on the other side all seem to revolve around fear.  Because of "animal spirits" and fear, drastic measures need to be taken.  The basic model connecting individual fear to the macro level is left uncertain, as is the explanation for why scaring people and spending lots of government money is the best remedy.  If this is your worldview, as Will Wilkinson points out, the best way to achieve your ends is to institute propaganda on a wide scale.

Really though, people are cutting back for perfectly reasonable reasons; that is, their fears are based on accurate expectations about the economy.  A classical Keynsian stimulus doesn't make quite as much sense, as we're coming off a long period of wasteful investment.  It's not as if people suddenly stopped buying things; it's more like the scale of previous growth was unsustainable and people are cutting back.  Propping up demand isn't going to help as much as fixing the problems in the banking and housing sectors that created the problem to begin with. 

Imagine that a group of people has favored a particular set of policies for a very long time, but found it difficult to get their extremist ideas a fair hearing.  Now, suppose something very bad happens, and people become very scared.  This group comes along and claims that their favored positions are best suited to solve the current problem, and the other group is un-American.  That's basically what happened with Iraq, and that's what's going on with the stimulus bill.  It's basically a wish-list of Democratic priorities over the last ten years.  Not to say they all shouldn't happen, but this is not the type of environment to put them in place.

Even from the standpoint of a Democrat policy-maker, this bill is hard to justify.  If they took a bit longer with the fiscal policy/spending side of things, they could actually find some useful projects and invest in some great things.  But the time constraints of the stimulus are forcing a decision now, even though we'll see little of the spending immediately.  Meanwhile, the legacy of spending on this nature will present a significant hurdle to achieving other items on the Democrat agenda, namely Universal Healthcare.  

In the spirit of compromise, I'm willing to support some sort of tax breaks.  The big counter-argument is that people will save rather than spend the money, which has support from classic economic concepts like Friedman's Permanent Income Hypothesis and Ricardian Equivalence.  There's some evidence, however, that even one-time tax cuts can encourage quite a bit of spending from households--it looks like that was the case for the 2001 and 2008 stimulus packages.  

Tax cuts also have a lot going for them once you move away from the "More unsustainable spending will solve the problem" stance.  The government can basically borrow money for nothing, while many families are paying off loans at much higher rates.  Tax cuts used to pay off these loans can serve as a massive interest rate arbitrage, which can create substantial real wealth (The federal government could also loan to the states, which generally don't do deficit spending and cut services during recessions.  It looks like the Senate is cutting State Aid due to Republican pressures; just replace that with a loan and the budget problems disappear).  Also, savings can recapitalize the broken banking system while improving financial security for households heavily in debt.  When the recession is over, tax Carbon and consumption and you're back to normal with no crazy unsustainable government programs.

All of this happens, very quickly, when you shower people with money.  But if you tie tax cuts with permanent decreases in the tax code, you get all of this plus the fact that people have greater incentives to work and invest.  Kill the payroll tax--many people have a bizarre belief that only rich people pay tax, when FICA is killing everybody.  Do Tabarrok's plan of cutting marginal income taxes for incomes in excess of those earned the previous year.  Plenty of people won't take part, but many professionals, entrepreneurs, and part-timers can increase work if they really wanted.  More so than fear-mongering and spending, this would actually generate incentives to work more.  There are plenty of ways to game the system, sure, but how many people are going to hold off getting a job in order to vie for a stimulus job?

Add to all of this that there is virtually no evidence that fiscal policy of this sort can meaningfully improve the economy.  Whatever you think about the merits of government policy or stimulus plans, there's no reason to do all of this in a state of fear--just spend whatever you want on the criteria of rates of return.  Despite all our wealth and prosperity, it looks like a little shock in income drives people as crazy now as it did in the 1930s.  

Some Internet Criticism

The great part about the Internet are the cascading torrents of links which turn the whole thing into an integrated network.  Of course, a small number of important sites do a great deal of the shifting through and highlighting, but it's not entirely a top-down system as the original sources are often spotted by topic specialists.  The entire enterprise remains hugely dependent on the big newspapers to generate things to complain about.  

The process is hugely addictive, certainly for consumers and likely for the intermediaries as well.  Pick up the Outrage of the Day, add a political spin, and send on down the line for supporters to fawn and denigrators to be outraged at your having brought up the subject up, having your view, etc.  It's like a jolt of crack to see the day's information, get pulled into the argument, weight sides, and scribble nonsense at the other side.  Most things people do offer delayed rewards, so it's no surprise to see millions flock somewhere which offers the constant allure of More Stuff To See, more information, more discussion.  That incessant flow disguises the fact that people rarely talk about the thing in itself, almost never have the background or understanding of the topic, and so most things are thinly covered politics.  But behind all the shallowness that comes with discussing even the most serious of topics you can see even broader dynamics of push-and-pull between broader personalities and outlooks, which do change even if no one ever changes their mind.   

One of my personal pet peeves is the autistic understanding of language which happens all around.  When people talk in the real world they bring all sorts of implicit meanings behind gestures, phrases, etc.  The anonymous and toneless nature of the internet grounds everyone in the literal meaning of words, which greatly impoverishes thought.  Take analogies for instance.  People make analogies all the time to compare certain aspects of A to certain aspects of B.  Any random A, B are likely to have something in common, but when people make this connection they generally mean that something in particular is going on.  This is after all how we learn; we link new things to things which we already know.  On the Internet, people will generally take the connection out of context, and mock it on face value.  People care less about how a statement is interesting than about it's truth value, but people also don't care enough to look up the thing's truth value and instead rely on heuristics.  

Broader psychological misunderstandings abound.  The urge for firebrands and activists to hear themselves results in a massive overpopulation of fundamentalists of every stripe.  Nearly everything on the Internet is reductive.  People everywhere search for validation and online they get it through low blows, petty remarks, and swift thrusts.  It's as if the place is run by the Oxford Debate Society.  The particular psychological rut of conspiracy theories, shallow thought, and general angst make the Interet a very motly but, well, a very "male" place.  Despite all the links, it's very antisocial, with very little in the way of relationships or empathy.  These aren't gone, however, but come up in the strangest of places.  

It's very much like a city in that way, with a blizzard of activity covering up a lack of introspection, memory, and history.  What has happened before, what is really going on now, and where things are headed are abandoned as people race to meet the demands of the current cycle.  It's like travelling the world with some smart, but not too smart, argumentative friends who have amnesia.  I don't know what this is doing to our intelligence, but someday the internet will drop the vicious circles and parlor tricks and become the thing it was meant to be.  The problem is not that it's escapist, but that it's not escapist enough and is still bound by the conventions other people set in other media.  I want to stumble upon Dutch's blog, see more passive-agressiveness, maybe some irony and parody.  Things that don't make sense, complex psychological issues, some other prose than dry and without adjectives.  A Russian novel in parts; something jointly written by people across the world.  

Wow, it's tough to talk about things in the abstract.  

Teaching English

High Schools need to teach people few skills.  Give them some degree of numeracy, and teach people how to write.  Math is handled through subfields--Geometry, Algebra, Trigometry--which are fairly well divorced from the quantitative demands of a modern workplace.  Simple estimation, problem solving, data analysis, and computer skills (programming, modeling) seem much more important today, but are generally not taught.  

Writing is handled pretty poorly too.  Many people are very bad at this, even after spending as much as an eight of their total school career in English classes.  How does that happen?

Obviously it's going to be hard to teach people no matter what--especially as they get older, and given the poor quality of American teachers and the state of our knowledge of how people learn.  One thing that doesn't help is conflating "teach people how to write" with "teach people how to analyze literature." 

I've been trying to figure out why we spend thousands of hours on getting kids to understand Shakespeare, when teaching them to write and edit simple prose is so much more useful and also highly underprovided.  As far as I can figure out, this started on the University level in the late 19th century, as the German research model took over.  The justification for keeping disciplines became entirely dependent on research output, so English became a "science" just like any other, focused on textual analysis.  High Schools looked to Colleges for inspiration, and parents figured that as long as kids were reading and writing, they were doing well.  Plus you to satisfy that vague feeling that kids should read some English literature at some point for culture's sake.  

But this English racket doesn't make any sense.  Teaching writing primarily through the lens of literary criticism encourages a particular obscurantic style of writing and focuses on questionable methods of literary analysis at the expense of building basic skills.  If you go around online, you'll find many English teachers frustrated that they can't convey their love of literature to kids.  Tough.  None of them seem to question the whole notion of reading centuries old English literature to teach writing.  Fire the whole lot of them, kill the union, and hire the direct instruction people to improve the writing quality of high schoolers by a few standard deviations.  

The Fundamentals

There's a good bit over at the Center for Global Development on taking the long view with respect to the economic consequences of the financial crisis.  At the end of this post are a bunch of graphs illustrating that point, containing actual and extrapolated GDP per capita for the U.S., Western Europe, China, and India on a logarithmic scale:

Looking at the actual data, it's interesting the extent to which the American real economy basically grows at a steady rate, without reference to bubbles, panics, wars, or economic and financial crises.  So despite this talk from Naomi Klein and others that we're facing a monumental crisis of faith in our economic organization, as far as the economy as a whole is concerned, we will probably just revert back to the hist

orical average.  That's not to say that there won't be distributional issues.  

Another interesting point from the historical data: Recent growth rates are higher for America 

than Europe.  Of course at least some of European growth after WWII reflects capital replacement, but it's still interesting to see that growth rate pivot somewhere in the '70s, while American growth rates continued to rise.  It's not shown here, but England shows no pivot while Ireland pivots up.  There's an argument out there that under conservative governance (but also going back to Kennedy's supply-side tax cuts and Carter's deregulation), England and America made the necessary but painful transition into a more free-market system and so enjoyed hig

her growth rates than their Continental peers.  It's certainly true that while there are many people out there calling for the demise of American economic hegemony, as the graph shows, America has kept its share of world GDP relatively constant over the last few decades while Europe and Japan have plunged and non-island Asia risen.  The American model of relatively free immigration and relatively free markets may lead to a financial crisis every ten years or so, but in the long run it's very good at generating wealth.

Looking at India and China, you really see the growth takeoff in recent years.  While China's pivot is located at the Deng political reforms, India's growth actually took off a bit before the 1991 liberalization.  This is well-known among Indian economists but tends to be overlooked by people elsewhere who prefer the reform narrative.  The growth that did happen in the '80s was unsustainable, related to hesitant reform, and fueled by currency depreciation and excessive government debt.  In fact India did face a balance of payment crisis in 1991, leading to the "shock capitalist" systemic reforms that did, of cour

se, lift millions out of poverty.  

As Easterly notes, the biggest consequences of economic shocks tend not to be in the economy itself--which recovers eventually--but on the world of ideas informing regulatory and economic structures.  So the worst economic consequences of the Great Depression are not actually felt in America--where the country is about as rich as it would be were there no Depression--but in the developing world, where the Depression served as a cautionary tale of the free markets previously dominant and encouraged cataclysmic failures in government planning worldwide.  Due to historical influence, these institutions persist till today and continue to impoverish.  I guess what I'm trying to say is that some sort of Sarkozian arrogant claim of necessity for changing the structure of the economy could end up very very badly.  

As far as the predictions go, I estimated a model and fudged the numbers from there.  In constant 1990 dollars, in the year 2030, I see Europe with a GDP of $29,000 per capita, America with about $45,000, China with $14,000 and India with $6,700.  The Europe/America gap is of course large.  Given the wealth of talent over there, I have to imagine 

that some degree of convergence will bring the two areas closer to each other as they have been historically; but maybe this will only happen for those parts of Europe that improve their institutions and maintain fertility? 

Capital Gains Tax

The CBO has a bit up on the changes in revenues from individual taxes over time. They find that the revenue from taxes went way up in the Clinton years due to events unconnected with Clinton, rather than changes in the tax code, while tax revenues did change in the Bush years due to new laws. Of the non-legislative gain in tax revenue during the Clinton years, capital gains taxes on the sale of investments constitute about half. Clinton also drastically cut capital gains on housing, so the housing bubble resulted in relatively little in the way of capital gains revenue. This change may be responsible for the rise in house prices; more on this later, data willing.

There's some debate over the ideal capital gains tax rate is. Charles Gibson and a WSJ editorial I once read make the supply-side argument that lowering this rate increases revenue. I'm skeptical, but in any case the variation in taxes gives Clinton an undervedly good reputation for managing the economy and Bush a worse reputation than he deserves. In reality, the rate of economic growth and the pace of tax revenues vary more or less randomly and place huge constraints on what Presidents can do. This fact tends to be ignored by people who expect elected officials to both not overstep their Constitutional boundaries and wield absolutist power to revive the economy.

Basically, I want to stop reading pointless articles on how some things are correlated to other things, because the world is basically random and few people have any influence on or understanding of the events that go on. Okay, that's a little extreme, but at least come up with a defense that (though it may raise an interesting point connecting inequality and women's relative wages) justifies blatant political pandering.

The Milton Friedman Institute

Let's just go ahead and get this out of the way. The University of Chicago plans on forming a new research institute on economics with Milton Friedman's name, and many faculty are opposed.

I was excited to see this idea, because Universities are generally such poor stewards of their endowments and intellectual capital. Compare, as Brad DeLong once did, the decisions made by the heads of the University of California system and Harvard during the 1960s. Harvard increased in size, but not by much, becoming essentially a highly profitable hedge fund with some land in Cambridge for tax purposes. The Cal system drastically expanded to cover over a hundred thousand people with high-quality college education. It's hard to imagine that Harvard made the better choice from the point of view of the public, but it's their viewpoint which is universal. If you believe that higher education is worthwhile, then it's bad that top institutions are doing so little to spread knowledge, improve teaching, or jump-start massive research projects (MIT's OCW aside). Are the liberals who run these places so elitist that they believe that knowledge should be restricted? Or are they unable to seriously consider educating more than a few thousand souls a year?

In any case, the MFI was a great way to capitalize on one of the University's core strength's--economics--and dramatically advance the cause of outreach and research (and at low cost to the University, too). You can disagree with the choice of naming it after Friedman, but it was a natural fit given his stature and connection with the University.

This move caused a wave of ill-will and poorly reasoned diatribes. Supposedly the plan would "reinforce among the public a perception that the university’s faculty lacks intellectual and ideological diversity." So the University should not develop one of the few right-of-center departments in economics, let alone academia, out of concerns for perceived intellectual diversity? Set aside for the moment issues of the quality of output (if work is done by University faculty and the charter written by prominent economists--unlike Hoover--then I personally have few concerns). What entitles academics the right to silence the research of others? Have any of the points the critics made justify that?

I don't want to be a scold on this issue. Others do that better than me anyway. I just want to point out the ways in which this employer-run institution fails students, teachers, and the public. Administration is hampered in promoting their key function--research and teaching--by faculty for whom the allocation of power and money between disciplines is more important than agumenting and disseminating knowledge. Expanding college education is essential to reducing inequality, and research is also useful. Unfortunately, we can expect no large initiatives on these goals as long as Administrators cater to the needs of entrenched academic interests. What about Chicago campuses overseas to spread a distinctive form of thinking? The focus could even be on Humanities subjects that are often overlooked elsewhere, or on contructing "Cores" for cultures other than the Western European. Why should it be that expansion and innovation are not even an option for a Chicago-based University, but basically required for a Chicago-based firm? Maybe the people over at the MFI could figure this out.

I am more hopeful for Colleges in the developing world, where hope is more audacious and the do-nothing dons fewer. The Gulf has many proposed institutions and is attracting a lot of interest, there are some interesting Indian proposals, and many Chinese Universities lack the tenure model. And that's not even getting to practices inside the classroom. As Matt Yglesias points out, either lectures are effective at imparting knowledge--in which case we should find the best professors and have them reach the most people --or they're not, in which case we should find a better way.