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January 2009

Republican Judd Gregg (R-NH) Is a Liar

So Justin Fox says:

The Curious Capitalist: Judd Gregg’s dubious tax math: Republican New Hampshire Senator Judd Gregg (or one of his staffers) writes:

The growth in tax revenues from 2002 through 2007 were some of the largest in history. The tax system became much more progressive, with the top 20% of income earners paying 85% of the taxes -- a rate much higher than during the Clinton years -- all while keeping capital-gains rates low.

I'll blame the WSJ opinion editors for the verb-subject disagreement in the first sentence. But I'm assuming the facts came from Gregg. Except they're not quite facts—and since this sort of tax disinformation is pretty common, I couldn't resist wasting an hour digging up the data to refute them.

Non-fact No. 1: The tax revenue gains from 2002 through 2007 weren't "some of the largest in history," unless you define "some" extremely broadly. Adjusted for inflation, U.S. government revenue rose 20% from 2002 to 2007. That ranks 24th among the 58 rolling five-year periods between the end of World War II and 2007. Just barely above average.... Over the full eight years of the Bush administration, it appears likely that federal revenue growth will be just about zero. Over the eight Clinton years it was 58%.

Non-fact No. 2: The percentage of federal taxes paid by the top 20% of the income distribution in 2005 (the most recent year covered by the Congressional Budget Office's annual examination of tax rates and the income distribution) was 69%. The percentage of federal income taxes was 86%....

The cuts in tax rates on capital gains and dividends during the Bush years accentuated this kink, so on the whole a fair-minded observer would have to say the tax system became somewhat less progressive. Which isn't what Judd Gregg said.

Chris Blattman Worries About the Emergence of Yet Another Profession

It seems to me that one should be an economist (or sociologist, or whatever) who evaluates the impact, rather than an impact evaluator. Chris Blattman worries about overspecialization:

Chris Blattman's Blog: So you want to be an impact evaluator? A cautionary tale: Several aspiring graduate students have written me about becoming an impact evaluator. 'What degree to get and where?' is the most common question. I think the best advice is: don't get a PhD to do evaluations. The randomized evaluation is just one tool in the knowledge toolbox. It's currently the rage, but that means it will probably be old news by the time you finish your PhD.

Yes, the randomized evaluation remains the "gold standard" for important (albeit narrow) questions. Social science, however, has a much bigger toolbox for a much broader (and often more interesting) realm of inquiry. If you want to know the effects of small binary treatments, you are in business. If you find any other question in the world interesting, you have some more work to do.... The best advice I can give to aspiring researchers: apply to PhD programs that will give you the best all-round training in as many different tools and pools of knowledge as possible.

Also: use your schooling time to tech up in formal theory and statistics (plus qualitative and comparative methods if you are a political scientist). Once you are finished, you won't have time to acquire these skills. From the day you finish your PhD, it is a slow but steady descent into technical obsolescence.

If you're interested in becoming a professional evaluator, rather than an academic, my advice changes little. It is now possible to be an evaluation consultant in much the same way that you can be an accountant or a lawyer--a highly specialized professional, with interesting and rewarding work. A PhD helps, but I don't think it's requisite. Yet I would still make the same case: you will be a better consultant, manager, and professional if you have a broad range of skills and knowledge...

If your goal is to improve the delivery of aid, and truly advance development, many more skills and knowledge are involved than the randomized evaluation. See here for more. But in short: a well-identified causal impact that arrives two years after the program does not performance management make.

For aspiring professionals, a masters in statistics with an MBA or MPA may be preferable, along with plenty of experience on the ground--preferably working inside a developing country government, not an aid agency. If nothing else, you may need a different set of skills if the fad ever fades.

Translating "Shangri-La" into Chinese

Every time I visit a hotel called "Shangri-La" in Asia, I am disturbed.

"Shangri-La" is, of course, a nonsense syllable name--made up on the shores of the North Atlantic in the 1930s to sound Chinese (or perhaps Tibetan), but it is not a Chinese (or Tibetan) name.

So how do you translate "Shangri-La" into Chinese?

What do the Chinese characters written alongside "Shangri-La Hotel" mean?

And why did Asia never invent the teacup handle? Saucer, yes. Teacup cover to keep the tea warm, yes. But no handle. Why not?

The answer to the second question in unknown. The answer to the first question is that the Chinese for "Shangri-La" (a) sounds somewhat like "Shangri-La" and (b) means something like, "refuge of relaxation and pleasant fragrances."

The Financial Crisis of 2007-2009: Causes, Consequences--and Possible Cures

The Financial Crisis of 2007-2009: Understanding Its Causes, Consequences—and Its Possible Cures

J. Bradford DeLong

University of California at Berkeley and NBER

[email protected]
+1 925 708 0467#####

MTI-CSC Economics Speaker Series Lecture

Civil Service College Auditorium
31 North Buona Vista Rd.
January 5, 2009 3:30PM#####

DeLong: The Financial Crisis of 2007-2009: Causes, Consequences--and Possible Cures [Slides]

DeLong: The Financial Crisis of 2007-2009: Causes, Consequences--and Possible Cures [Text]

Martin Wolf Puts It Better than Anyone Else I Have Seen

Martin Wolf on our current magneto trouble: / Columnists / Martin Wolf - Keynes offers us the best way to think about the financial crisis: We are all Keynesians now. When Barack Obama takes office he will propose a gigantic fiscal stimulus package. Such packages are being offered by many other governments. Even Germany is being dragged, kicking and screaming, into this race.

The ghost of John Maynard Keynes, the father of macroeconomics, has returned.... Like all prophets, Keynes offered ambiguous lessons to his followers. Few still believe in the fiscal fine-tuning that his disciples propounded in the decades after the second world war. But nobody believes in the monetary targeting proposed by his celebrated intellectual adversary, Milton Friedman.... Now... it is easier for us to understand what remains relevant in his teaching....

Minsky... we should not take the pretensions of financiers seriously. “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.” Not for him, then, was the notion of “efficient markets”....

[T]he economy cannot be analysed in the same way as an individual business. For an individual company, it makes sense to cut costs. If the world tries to do so, it will merely shrink demand....

The third and most important lesson is that one should not treat the economy as a morality tale. In the 1930s, two opposing ideological visions were on offer: the Austrian; and the socialist. The Austrians – Ludwig von Mises and Friedrich von Hayek – argued that a purging of the excesses of the 1920s was required. Socialists argued that socialism needed to replace failed capitalism, outright. These views were grounded in alternative secular religions.... Keynes’s genius – a very English one – was to insist we should approach an economic system not as a morality play but as a technical challenge. He wished to preserve as much liberty as possible, while recognising that the minimum state was unacceptable to a democratic society with an urbanised economy. He wished to preserve a market economy, without believing that laisser faire makes everything for the best in the best of all possible worlds.

This same moralistic debate is with us, once again. Contemporary “liquidationists” insist that a collapse would lead to rebirth of a purified economy. Their leftwing opponents argue that the era of markets is over. And even I wish to see the punishment of financial alchemists who claimed that ever more debt turns economic lead into gold. Yet Keynes would have insisted that such approaches are foolish. Markets are neither infallible nor dispensable.... [T]he task for this new administration is to lead the US and the world towards a pragmatic resolution of the global economic crisis we all now confront....

The shorter-term challenge is to sustain aggregate demand, as Keynes would have recommended.... [T]he load will fall on the US, largely because the Europeans, Japanese and even the Chinese are too inert, too complacent, or too weak.... [T]his period of high government spending is, alas, likely to last for years....

No less pragmatic must be the attempt to construct a new system of global financial regulation and an approach to monetary policy that curbs credit booms and asset bubbles. As Minsky made clear, no permanent answer exists. But recognition of the systemic frailty of a complex financial system would be a good start.

As was the case in the 1930s, we also have a choice: it is to deal with these challenges co-operatively and pragmatically or let ideological blinkers and selfishness obstruct us...

This Week in Journamalism

Jonathan Weisman, formerly of the Washington Post and now of the Wall Street Journal, is this week's horrible embarrassment to the profession of journalism.

Outsourced to Steve Benen:

The Washington Monthly: In June, political reporter Jonathan Weisman noted, "The great irony is that [Barack Obama] is much more white than black, beyond skin color." A month later, Weisman took an Obama quote, second hand and out of context, to make a wildly misleading claim.

Today, Weisman reports on the Obama transition office's decision to honor Patrick Fitzgerald's request on the release of a list of contacts with Rod Blagojevich's office.

Robert Luskin, a Washington white-collar defense lawyer who knows Mr. Fitzgerald well, said he doesn't doubt the prosecutor would have asked that Obama officials keep quiet until his investigation is further along. That is to prevent witnesses from tailoring their stories to what they learn others are saying. But, he said, Mr. Obama and his aides don't have to comply. They are using the prosecutor as a "fig leaf" to avoid answering questions just now, Mr. Luskin said. They could just as easily have decided that assuring the public about their actions is more important than acceding to the prosecutor's request.

I see. So, yesterday the AP suggests Obama is trying to bury embarrassing news by listening to Fitzgerald and federal prosecutors, and today, the Wall Street Journal suggests Obama could have "easily" ignored the wishes of law enforcement officials altogether, and "reassured" the public this week, instead of next week.

The media's drive to make Obama look bad as part of the Blagojevich mess is getting kind of silly.... If Obama ignored Fitzgerald's request and released the findings anyway, the Wall Street Journal -- and the rest of the media -- would be full of stories about Obama deliberately undermining Fitzgerald's investigation. They'd be speculating breathlessly about why Obama would undermine the investigation, and claiming that it proves he has something to hide. And that's the entire point of Weisman's article -- that Obama could have blown off Fitzgerald's request...

Why oh why can't we have a better press corps?

Raghuram Rajan Is My Guru Now...

Milton Friedman became lord king guru of the world's economists by standing up at the end of 1966 and warning everybody that the high-pressure economics of the Kennedy-Johnson administration was about to make inflation a real problem.

Raghuram Rajan stood up in 2005 and warned everybody that increased financial complexity had made the world's financial markets riskier places. He is now my guru--along with Michael Mussa.

Justin Lahart tells the story:

Mr. Rajan Was Unpopular (But Prescient) at Greenspan Party: o outline his fears about the U.S. economy, Raghuram Rajan picked a tough crowd. It was August 2005, at an annual gathering of high-powered economists at Jackson Hole, Wyo. -- and that year they were honoring Alan Greenspan. Mr. Greenspan, a giant of 20th-century economic policy, was about to retire as Federal Reserve chairman after presiding over a historic period of economic growth.... Rajan... chose that moment to deliver a paper called "Has Financial Development Made the World Riskier?" Mr. Rajan quickly came under attack as an antimarket Luddite, wistful for old days of regulation. Today, however, few are dismissing his ideas....

He says he had planned to write about how financial developments during Mr. Greenspan's 18-year tenure made the world safer. But the more he looked, the less he believed that. In the end, with Mr. Greenspan watching from the audience, he argued that disaster might loom. Incentives were horribly skewed in the financial sector, with workers reaping rich rewards for making money, but being only lightly penalized for losses, Mr. Rajan argued. That encouraged financial firms to invest in complex products with potentially big payoffs, which could on occasion fail spectacularly. He pointed to "credit-default swaps," which act as insurance against bond defaults. He said insurers and others were generating big returns selling these swaps with the appearance of taking on little risk, even though the pain could be immense if defaults actually occurred.

Mr. Rajan also argued that because banks were holding a portion of the credit securities they created on their books, if those securities ran into trouble, the banking system itself would be at risk. Banks would lose confidence in one another, he said: "The interbank market could freeze up, and one could well have a full-blown financial crisis." Two years later, that's essentially what happened....

The Jackson Hole contretemps followed by a few months another set of attacks on Mr. Rajan for a study he co-wrote at the IMF that concluded foreign aid didn't help developing countries grow. Mr. Rajan says the twin controversies didn't deter him. At the IMF, he pushed the research department to focus on financial-sector issues, and continued to sound alarm bells about financial-market risks. By summer 2007, as the crisis began unfolding in earnest, Fed bank presidents Janet Yellen and Gary Stern were citing Mr. Rajan's critiques in their speeches....

Mr. Rajan is now focused on coming up with ways to avoid a regulatory backlash akin to what happened during the Great Depression, when governments around the world threw up protectionist barriers and clamped down on financial markets. Instead of heavy regulation, he says, the incentives of Wall Streeters need to change so that punishments for losing money are in line with rewards for earning it... bonuses that financial workers make during boom times should be kept in escrow accounts for a period of time. If the firm experienced big losses later, those accounts would be drained.

Facing withering criticism over the bonuses paid out in the boom, financial giant UBS and Wall Street firm Morgan Stanley have recently announced they're adopting policies along the lines of what Mr. Rajan proposed...

Will China's Economy Shrink from 2008 to 2009?

Yves Smith sends us to Reuters:

naked capitalism: Chinese Factory Output, Employment Falls at Record Pace: We expected economic conditions in China to deteriorate faster (at least for the next few months) than most had forecast, and that seems to be coming to pass. From Reuters:

Chinese factories slashed output and workers at a record pace in December and manufacturing activity overall fell for a fifth month as the global financial crisis hit export demand, a survey by brokerage CLSA showed on Friday. The figures, which CLSA said showed a sector close to recession, spell further gloom ahead for the Chinese economy and highlight the urgency with which the government is trying to cushion the country from the effects of the global crisis.... Official statistics showed that factory output grew just 5.4 percent in the year to November...

While the government is aiming to maintain growth at 8 percent in 2009 -- down from the 9.9 percent annual pace in the first nine months of 2008 -- many economists say growth could be well below that in the first half of this year.... New orders continued to shrink in December, at the second-fastest pace on record and marking the fifth straight month of contraction. New export orders also declined at the second-sharpest pace in the history of the survey. Firms' backlogs of work fell at the sharpest pace on record, and they accordingly cut their work forces by the biggest margin ever, boding ill for the government's efforts to preserve as many jobs as possible to help maintain social stability...

Charles Kindleberger: Anatomy of a Typical Financial Crisis

From Charlie Kindleberger, A Financial History of Western Europe:

p. 90 ff: No discretion was allowed in the issuance of bank notes, however.... Sir Robert Peel, the Prime Minister, first contemplated allowing a relaxing power in the 1844 legislation, but ultimately decided against it.... Peel protected himself... in a letter from Windsor Castle, written on 4 June 1844:

My confidence is unshaken that we have taken all the precautions which legislation can prudently take against a recurrence of a pecuniary crisis. It may occur in spite of our precautions; and if it does and if it be necessary to assume a grave responsibility, I dare say men will be found willing to assume such a responsibility (BPP 1847 [1969], Vol. 2, p. xxix).

The difficulty in making the note issue inelastic... is that it became inelastic at all times, when the requirement in an internal financial crisis is that money be freely available....

The Bank of England came to the rescue of the South Sea Company... belatedly, and at a punishing price..,. to dispose of a dangerous rival. Its recognition of its responsibilites in preventing, or at least mitigating, financial crisis in the public interest took more time. There was a lag in understanding the need to have the money supply inelastic in the long run but elastic in the short. A further question was whose task it was to serve as lender of last resort.

Thomas Ashton has staed that... the Bank of England was already the lender of last resort in the eighteenth century.... It is true that the Bank of England was pressured... but its response was, on the whole, reluctant and defensive.... The Bank occasionally took steps that increased the public's fear... 1745... 1772... 1782... 1793....

Critical debate over who should act as lender of last resort... took place behiind closed doors in December 1825.... [Chancellor] Lord Liverpool, having warned the market... that the speculators were going too far and that the government would not save them... threatened to resign if Exchequer bills were provided.... The emergency required action by someone.... Lord Liverpool... applied enormous pressure on the Bank to force it to issue special advances to merchants against inventories....

The lender of last resort function reached full flower under the Bank Act of 1844. 'Overtrading' which Adam Smith held to be the cause of financial crises--which were in his lexicon 'revulsion' and 'discredit'--produced incidents in 1847, 1857, and 1866.... [M]en of responsibility, as foreseen by Sir Robert Peel, figured out a way to suspend the Bank Act.... [T]he Chancellor of the Exchequer issued a letter to the Bank of England...

p. 270 ff: The macroeconomic system receives some shock--caused by Hyman Minsky, who virtually alone of modern economists is interested in financial instability, a 'displacement' (1982). This displacement can be monetary or real... changes expectations... with respect to the profitability of some range of investments.... [I]t can happen, and historically has happened, that the sum total of all the people reacting to the opportunity is excessive... credit is extended... stimulates business... credit is extended further... euphoria... speculation... more pervasive credit expansion.

Time and time again in these pages it has been stressed that when the macroeconomic system is constrained by a tight supply of money, it creates more, at leaset for a time... bank money, bank notes, bills of exchange, especially chains of bills of exchange, bank deposits, open-book credits, credit cards, certificates of deposit, euro-currencies, and so one....

At some stage... it becomes clear to a few, and then to more, that... positions are extended beyond some limit sustainable in the long run, and that the maintenance of capital gains depends on getting out of assets rising in price ahead of others.... More and more speculators seek to get out of whatever was the object of speculation, to reduce their distended liabilities, and switch into money; and more and more it becomes cleer that not everyone can do so at once. There is a rush, a panic, and a crash--or perhaps the lender of last resort intervenes to make clear it will furnish the market with all the cash it insists it requires. In this circumstance, perhaps belatedly, panic and distress subside....

Historically, the burden of proof runs against a theorist who says that destabilizing speculation is impossible when the record shows displacement, euphoria, distress, panic, and crisis occurring decade after decade, century after century, and noted by such classical observers as Adam Smith in the eighteenth century and Lord Overstone in the nineteenth, quoted with approval by Walter Bagehot (1852 [1978], Vol. 9, p. 273).... Bagehot adds:

Common sense teaches that booksellers should not speculate in hops, or bankers in turpentine; that railways should not be promoted by maiden ladies, or canals by beneficed clergymen... in the name of common sense, let there by common sense (1852 [1978], Vol. 9, p. 275).

But history demonstrates that common sense in these questions is uncommon, at least at ten-year intervals....

Whether there is a theoretical rationale for letting the market find its way out of a panic or not, the historical fact is that panics that have been met most successfully almost invariably found some source of cash to ease the liquidation of assets before prices fell to ruinous levels. An important question is who has responsibility to provide that cash....

The lender of last resort role is riddled with... ambiguity, verging on duplicity. One must promise not to rescue banks and merchant houses that get into trouble, in order to force them to take responsibility for their behavior, and then rescue them when, and if, they do get into trouble for otherwise trouble might spread....

[T]he central bank presumably seeks to follow rules of helping only sound houses with good paper. The dilemma is that if it holds off too long, what had been good paper becomes bad.... Lending to sound houses introduces a note of discretion and judgment... questions of insider-outsider, favoritism, and prejudice.... [T]here are bound to be questions raised as to whehter the Establishment took care of its own and rejected the outsiders and pushy upstarts...

Greg Sargent Takes a Big Risk...

He jumps from an organization with integrity and a reputation--Talking Points Memo--to one without--the Washington Post:

Signing Off -- Farewell, TPMers: I can't believe I'm writing this, but for the foreseeable future this is my last post at TPM. I'm heading over to The Washington Post, where I'll be writing the lead blog on a new site that WaPo is launching. This will drive you mad with curiosity, unfortunately, but the details on the new site and blog will only be forthcoming when it launches the week after next. Needless to say, I'm hoping that every last one of you will come check out the new place when it's up and running. If you all want info on the new site, or just want to stay in touch, shoot me an email at sargegreg at

As you already know, what Josh has created here at TPM is an enormous achievement. It's hard for me to express just how much I've enjoyed and learned from my experience here. It's the best gig I've ever had -- even better than playing first base on the neighborhood little league team -- and it was an honor and a privilege to have had the chance to do whatever I've been able to help implement Josh's truly unique journalistic vision...

I'm trying to think of people who have written for WPNI in the past half-decade without doing damage to their reputations. Dan Froomkin and Walter Pincus and Paul Blustein are the only names that come immediately to mind...

The Sharp-Eyed Tyler Cowen... the first person to ever explain chapter 4 of Keynes's General Theory to me. Tyler:

Tyler Cowen: Keynes's General Theory, chapter four, The Choice of Units: This chapter may seem cryptic but the key is the tiny footnote to Hayek; this chapter is Keynes obsessing over capital theory and the Austrians.

Hayek argued that an economic downturn should be understood as a discombobulation of the capital structure and here is Keynes arguing against that approach.  When you cut through the terminology, Keynes says that capital heterogeneity isn't needed to generate aggregate demand analysis and that his core mechanisms will operate in any case.

Keynes admits that with economic development labor gets very specialized, or very closely connected to particular capital goods, so yes there are capital complementarities of the Austrian kind.  But Keynes thinks such fragilities will only help his argument, while rendering the analytics too messy.  He declares his intention to proceed with homogeneous magnitudes of capital and labor.

This chapter often fails to receive its proper due; it is very important for understanding the location of Keynes in the history of economic thought. 

With this one chapter, Austrian capital theory falls off the map...

The footnote is:

[4] Cf. Prof. Hayek’s criticisms, Economica, Aug. 1935, p. 247.

It is attached to the word "formula" in the passage:

In order to arrive at the net National Dividend, Professor Pigou[3] deducts such obsolescence, etc., “as may fairly be called ‘normal’; and the practical test of normality is that the depletion is sufficiently regular to be foreseen, if not in detail, at least in the large.” But, since this deduction is not a deduction in terms of money, he is involved in assuming that there can be a change in physical quantity, although there has been no physical change; i.e. he is covertly introducing changes in value. Moreover, he is unable to devise any satisfactory formula[4] to evaluate new equipment against old when, owing to changes in technique, the two are not identical...

The Recession Gathers More Force

V. Phani Kumar:

Nikkei Tumbles as Auto Bailout Talks Fail in Senate: Asian markets tumbled Friday, extending losses as investors sold off shares across sectors on word the $14 billion bailout deal to aid struggling U.S. auto makers fell apart in the Senate Thursday night. The Nikkei 225 Average slumped 5.6% to close at 8235.87. Hong Kong's Hang Seng Index plunged 6% to 14675.41 and the Hang Seng China Enterprises Index shed 7.7% to 7830.95 in late trading. China's Shanghai Composite gave up 1.7% to 1997.25. Official data released earlier in the day showed retail sales on the mainland rose 20.8% in November from the same month a year earlier, easing from a 22% increase in October. South Korea's Kospi lost 3.8% to 1110.66, snapping a five-session advance, Australia's S&P/ASX 200 slid 2.4% to end at 3510.4 and New Zealand's NZX 50 index declined 1.8% to 2676.95. Singapore's Straits Times Index dropped 3% to 1740.09, while Taiwan's Taiex gave up 3.1% to 4510.89, in spite of a 0.75 percentage point cut in interest rates to 2% by the central bank Thursday.

Justin Fox Needs Help!

Justin asks:

The Curious Capitalist Must a journalist listen to the true believers in Austrian economics?

The answer is "No."

An Austrian perspective should be part of everybody's diversified intellectual portfolio. But engaging with the true believers is a fruitless task.

Justin goes on:

Greg "PrestoPundit" Ransom e-mails, with regard to my parsing of the views on recessions of Paul Krugman and Tyler Cowen, which contained a very brief discussion of Austrian business cycle theory:

Krugman's attacks on Hayekian economics are considered ridiculous, embarrassing -- if not brain dead -- by those who actually know Hayek's work.  It's pathetic stuff, really. I would be good ethics as a journalist (and scientist?) to report this truth of the matter. And, no, I don't count Tyler Cowen as a reliable reporter of the work of Hayek.... So why don't you go to people who actually know the Hayekian account -- economists like Roger Garrison and Steve Horwitz. This would be honest journalism, and honest science. TIME is known for such stuff, right?

And Justin protests:

All I was doing in my post was comparing a couple of recent opinion pieces by prominent economists, not trying to render a comprehensive verdict on Friedrich Hayek's 1920s writings about business cycles...

Once you have noted that somebody's opening blast is a claim that both Paul Krugman and Tyler Cowen are stupid... well, do you really need to know any more?

And then Justin threatens to disappear into the swamp forever:

I'm not going to do like Krugman and dismiss Austrian economics as "about as worthy of serious study as the phlogiston theory of fire." Just because something is outside the mainstream doesn't mean it's wrong. I guess the best thing for me to do would be for me to read more of the source material myself. I've dabbled in Hayek and Schumpeter and even Rothbard. If I devoured all of Menger's Grundsätze der Volkswirtschaftslehre, in German, that ought to give me a certain authority, right?...

Before coming to his senses:

That's not going to happen anytime soon, so I'll keep relying on Tyler Cowen...

UPDATE: Justin Fox:

Update Lew Rockwell weighs in on my taxonomy of Austrians:

The author hilariously sees Austrian economics as divided into two parts: the nice one, entirely in the super-wealthy Koch Brothers ambit, and the mean one, in mine! A little background: when I started the Mises Institute (an organization unmentioned by Time) 26 years ago, the head of the Koch Family Foundation angrily pledged to destroy me if I went ahead. "We have worked too hard to rid Austrian economics of Mises," he said. Hayek, he claimed, was their man, though, of course, he was far better than that, and a good supporter of the Institute. But the real problem turned out to be Murray Rothbard. It was the greatest of the Misesians and the founder of modern libertarianism whom the Koch World Empire longed to smash, and still does. Murray, founder of Cato, was the one man in the ambit to say no when the Kochs decided to jettison Mises for reasons of DC preferment. Otherwise, they felt, it would be harder to curry favor with the Fed and the Republican party. Hayek's views on central banking, gold, conservatism, and competitive currencies are no more DC-friendly than Mises's and Rothbard's, but they are ignored, and just his name invoked...

And Justin follows up:

Tyler Cowen: Statist, anti-Rothbardian agent of the Kochtopus: I had no idea what he was talking about regarding the billionaire Koch brothers, but a little Googling soon taught me that such salonfähig libertarian establishments as the Cato Institute, Reason magazine, and the George Mason University economics department are all mere tentacles of the "Kochtopus." And Tyler Cowen, who got me started on this whole adventure, is seen by some Austrian true believers of the Mises school as perhaps the Kochtopus's most monstrous creation. To quote (extensively) from David Gordon's history of the Kochtopus vs. Rothbard struggle on

Walter Grinder, working from the Koch-dominated Institute for Humane Studies, promised a "Rothbardianism with manners." In his view, Rothbard had been too acerbic; through a policy of suaviter in modo, Austrian views could better gain access to the mainstream.... Grinder and others in leadership posts at IHS concluded that they should concentrate on elite universities such as Harvard, Yale, and Princeton in the United States, and Oxford and Cambridge in England. If students could be recruited from these universities or, if already sympathetic, admitted to their programs, success was at hand. Grinder placed particular emphasis on Tyler Cowen, a brilliant student who had been interested in Austrian economics since his high school days. Cowen enrolled in an Austrian economics program at Rutgers, where he impressed both Joe Salerno and Richard Fink with his extraordinary erudition. When Fink moved to George Mason University, Cowen moved with him; and he completed his undergraduate degree there in 1983. Grinder considered him the next Hayek, the hope of Austrian economics. In accord with the elite universities policy, Cowen went to Harvard for his graduate degree. There he came under the influence of Thomas Schelling and gave up his belief in Austrian economics.

After he finished his PhD in 1987, Cowen was for a time a professor at the University of California at Irvine, and he used to visit me sometimes in Los Angeles. I was impressed with his remarkable intelligence and enjoyed talking with him. But I remember how surprised I was one day when he told me that he did not regard Ludwig von Mises very highly. Here he fitted in all-too-well with another policy of Richard Fink and the Kochtopus leadership. They regarded Mises as a controversial figure: his "extremism" would interfere with the mission of arousing mainstream interest in the Austrian School. Accordingly, Hayek should be stressed and Mises downplayed.... Cowen eventually returned to George Mason University as a Professor of Economics. He is said to be the dominant figure in the department. Because of his close friendship with Richard Fink, who left academic work to become a major executive with Koch Industries and the principal disburser of Koch Foundation funding, Cowen exerts a major influence on grants to his department. Although he is largely favorable to the free market and believes that the Austrian school has contributed insights, Cowen remains a strong critic of Austrian and Rothbardian views. He has published a book that sharply attacks Austrian business cycle theory, Risk and Business Cycles: New and Old Austrian Perspectives (Routledge, 1997); and in an article written with Fink, "Inconsistent Equilibrium Constructs: The Evenly Rotating Economy of Mises and Rothbard" (American Economic Review, Volume 75, Number 4, September 1985), he argued that a key feature in the economic theory of Mises and Rothbard, the evenly rotating economy, is fundamentally flawed. It was ironic that the hope of Austrian economics, according to Grinder, and the prime ornament of his stress on elite universities, wrote an article for the most prestigious economic journal in the United States critical of the theory Grinder wished to propagate. Cowen has also criticized libertarian anarchism, another fundamental plank in Rothbard's thought. He has defended government funding of the space program and limited government subsidies for the arts.

Now I get why citing Tyler Cowen on matters Austrian so raises the hackles of some Austrian true believers. He's an apostate! Notice how Gordon makes no attempt to explain what's wrong with Cowen's critique of Misesian and Rothbardian ideas--it's enough just to point out that he has strayed from orthodoxy. Theirs is the true path, and all others are in error. As William F. Buckley wrote in his somewhat nasty obituary of Rothbard:

In Murray's case, much of what drove him was a contrarian spirit, the deranging scrupulosity that caused him to disdain such as Herbert Hoover, Ronald Reagan, Milton Friedman, and--yes--Newt Gingrich, while huffing and puffing in the little cloister whose walls he labored so strenuously to contract, leaving him, in the end, not as the father of a swelling movement that "rous[ed] the masses from their slumber," as he once stated his ambition, but with about as many disciples as David Koresh had in his little redoubt in Waco.

That bit about the number of disciples is not as true now as it was in 1995, when Buckley wrote it. Thank (or blame) the Internet for that. I can attest from personal experience that a link from, while not nearly the traffic driver that a headline on the or homepages can be, brings more readers than a link from, say, Andrew Sullivan. Still, just as the great Austro-libertarian statesman Ron Paul's support in this year's presidential campaign turned out to be a mile deep and just a few inches wide, faithful-to-the-Mises-line Austrian economics will almost surely remain a pursuit for a small if enthusiastic minority. Because that's the way the small if enthusiastic minority seems to prefer it.

Fannie Mae and Freddie Mac

Justin Fox says that Bethany McLean writes a very good piece in Vanity Fair in spite of her editors' push to make her write personallity-driven fluff:

The Curious Capitalist: My old friend Bethany McLean, who was writing about Fannie Mae when writing about Fannie Mae wasn't cool (so was I, but far more superficially), has an epic dissection of "Fannie Mae's Last Stand" in the February Vanity Fair. It tries in places to be a typical personality-driven VF story, with former CEOs Jim Johnson and Frank Raines as the protagonists. But that never really takes—which is a good thing, because what Bethany has delivered instead is the fairest, most comprehensive examination I've seen of how Fannie and Freddie Mac got to be so powerful, how they landed in trouble, and how culpable they are for our current economic mess. As she writes near the end:

[A] few things are clear. One is that the argument that Fannie and Freddie caused our entire economic calamity is absurd. Yes, the volume of bad mortgages that Fannie and Freddie bought may have blown the bubble bigger than it otherwise would have been. But to put the blame entirely on Fannie and Freddie is to exempt all the other players, including the mortgage originators who sold subprime mortgages and Wall Street, which packaged up the bad mortgages and sold them to investors around the globe.

Another thing that's clear is that the critics were both right and very wrong about Fannie and Freddie. Yes, their executives and shareholders made fortunes in the glory years, and, yes, taxpayers are now bearing the brunt of whatever losses there are. Just as critics always warned, it's “the privatization of profits and the socialization of risks.” But what the critics missed is that that wasn't unique to Fannie and Freddie. It turns out our entire financial sector was operating under that same premise—and to a far greater degree than Fannie and Freddie.

Anyway, read it. It is really long. But this is a slow news week. You've got the time.

Rebecca Skloot Is Unclear on the Concept

Writing in the New York Times, she says:

Creature Comforts - Assistance Animals Now Come in All Shapes and Sizes: Some people enjoy running into an occasional primate... while shopping. Many others don’t...

Ummm... What is it behind the cash register but a primate?

Maybe Rebecca Skloot does all of her shopping via vending machines...

Let me, for one, say that I am very disturbed if I do not run into any primates while shopping.

How Does One Beware of a Black Swan?

Mark Thoma sends us to Chevelle, who is not sure what "beware of the black swan!" means:

Models & Agents: The barking swan: I recently attended an investor conference where, as is typical these days, people gathered to reaffirm how clueless we are about the future of our economy. Just to bang the point home, the keynote speaker was Nassim Taleb, author of “The Black Swan”; a “treatise” on how our failure to take into account eventualities that are possible only remotely, yet are highly consequential, can really hurt us.... Taleb seemed to draw tremendous pleasure from being invited to wine, dine and, for a nice sum, give a speech to those very “imbeciles” who got it wrong because “they didn’t want to hear” (him)....

[T]he suggestion that the present financial crisis is a validation of Taleb’s vilifying statements about economists, statisticians, finance professionals and their entire canon. Oh yes, and the French! Well it’s not. First, because the current crisis is not a black swan. Alas, the world’s economic history has offered a slew of (very consequential) credit and banking crises (see here for a free sample from the IMF). So not only aren’t credit crises highly remote; they can be a no-brainer, particularly if they involve extending huge loans to people with no income, no jobs and no assets.... [T]here were a few other blatant failures that contributed to the current crisis... the avid search for yield as global liquidity ballooned....

“Beware of the Black swan!”, he warns. But what does this mean in practice? For example, I work at one of the top floors of a high-rise building in Manhattan—with a (less than remote) probability that my floor might get hit by a flying suicide bomber dressed as Superman. Pretty consequential, if you care. But what should I do? Change jobs? Move to Peoria? Maybe Taleb can get me a parachute, a golden one please.... Alternatively, I can keep on living as I do, aware that I’m running the risk of becoming a case number in Homeland Security’s terrorist statistics. Taleb’s recommendations on asset allocation are as impractical—barring generalities (like diversification or more equity than debt) that are indisputable for being self-evident. But what about the specifics?...

Ultimately, no matter how imperfect our models are, the problem lies in our failure to use our brain. Only “using our brain” does not mean buying Treasuries. It means identifying investments that are productive and viable, improve our quality of life and create jobs...

Team Obama

Another very good choice.

Deborah Solomom:

Real Time Economics : Obama Expected to Name Labor Economist to Advisory Council: President-elect Barack Obama is expected to round out his economic team next week with the selection of Cecilia Rouse, a Princeton University labor economist well-known for her work on the economics of educational investments, according to an Obama economic transition aide. Ms. Rouse will join Christina Romer and Austan Goolsbee as the third member of the Council of Economic Advisers, which advises the President on economic policy. All three are academic economists with distinct specialties: Ms. Romer is an economic historian schooled in the Great Depression while Mr. Goolsbee is a taxation expert.... Ms. Rouse has written on the benefits of attending community college.... She is also well-known for a paper on discrimination, in which she and a co-author found that “blind” auditions were more likely to result in female musicians being hired into an orchestra.

But Keynes Is Saved by Walras's Law

Tyler Cowen writes:

Keynes's General Theory, chapter six: in part ii the bombshell comes, unannounced.  Keynes decides that he will declare savings to be a "mere residual."  Consumption and investment alone will determine income and savings is defined as whatever is left over to make the national income equations balance. At the time this was considered by many to be an enormous sleight of hand. The Austrian and Swedish traditions focused on the question of whether planned savings was going to equal planned investment and what happens if not.  Keynes has just banished such questions to the woodshed and he has done so by a terminological maneuver.

Whether or not you think that the Austrian and Swedish traditions lead anywhere fruitful, Keynes is on shaky ground here.  He is using definitions to favor one causal account of macro over another.  That's not right.  You can still make a plausible argument that Keynes is right on empirical grounds that planned savings is not an important force for understanding business cycles.  But so far no such empirical argument has been clinched...

I think it is much more than a terminological maneuver. Walras's law tells us that if one market is out of supply-demand balance, there must be another related market (or markets) that is also out of balance. If planned saving is in excess of planned investment, then planned consumption spending must be less than planned production of consumer goods. You can then follow the inventory adjustment chain--say that as inventories pile up producers cut back on the making of consumption goods. You then try to follow through on what is happening in the money market and you are led to the conclusion that ex ante savings must be destroyed by a process of deleveraging and deflation and... you wind up in the swamp. But you can be rescued from the swamp by recalling Walras's law, and recognizing that if you just follow the process by which equilibrium is restored in the goods market you will then discover that that process has also restored equilibrium in the flow-of-funds through financial markets.

Keynes's "terminological maneuver" would not have succeeded if it were not for the fact that Keynes's theory worked at a level that Wicksell's or Myrdal's or Ohlin's never could.