http://fairmodel.econ.yale.edu/vote2008/index2.htm
http://fairmodel.econ.yale.edu/
Thursday, October 16, 2008
Blinder Expresses Why I Chose to Be a Doctor
Hard Heads, Soft Hearts was great. But this is just the problem in my opinion. There was a time where I thought it would be so cool to be a policy maker. Not necessarily to be a politician, but to work in politics in some capacity where I would develop policy. The idea seems appealing, you go around as a smart person and you read up on things and conduct research and you come up with answers as to what the best solution to a given problem is. The government implements the policy and wham-o, you have just helped the lives of millions of people.
Then I did the Washington, DC program. I got a taste of how policy was really crafted. It seemed to me that Murphy's Law of Economics is not just true of economics but everything. We actually know more about everything than it may seem. While social sciences are necessarily vague in their responses to the correct solutions to many problems, there are wide-reaching consensuses. For example, class size reduction does not improve educational experiences of students in any way that is proportional to its cost. It costs a lot and it does not do much, there are a lot of things we could do that would help students more for the money. Nevertheless, California, among other states, has state-mandated and funded class size reducation laws that take classes from numbers like 32 down to 24 or things like that. And that costs so much and really does very little.
This is just one example, and of course half of Blinder's book is filled with others. But Blinder, like many a liberal is too much of an optimist. Wake up Blinder... shall I dare say... remove your blinders! It is not just that economists are poor communicators. This is true of every field.
The policy wonks say that solution Y to problem X is the best answer. You put it in the magical political machine and bam, instead of solution Y, the political hacks turn it into solution Z, as various interest groups fight, scratch, and bite. This is what frustrates me about policy making. Hence... I will be a doctor.
Then I did the Washington, DC program. I got a taste of how policy was really crafted. It seemed to me that Murphy's Law of Economics is not just true of economics but everything. We actually know more about everything than it may seem. While social sciences are necessarily vague in their responses to the correct solutions to many problems, there are wide-reaching consensuses. For example, class size reduction does not improve educational experiences of students in any way that is proportional to its cost. It costs a lot and it does not do much, there are a lot of things we could do that would help students more for the money. Nevertheless, California, among other states, has state-mandated and funded class size reducation laws that take classes from numbers like 32 down to 24 or things like that. And that costs so much and really does very little.
This is just one example, and of course half of Blinder's book is filled with others. But Blinder, like many a liberal is too much of an optimist. Wake up Blinder... shall I dare say... remove your blinders! It is not just that economists are poor communicators. This is true of every field.
The policy wonks say that solution Y to problem X is the best answer. You put it in the magical political machine and bam, instead of solution Y, the political hacks turn it into solution Z, as various interest groups fight, scratch, and bite. This is what frustrates me about policy making. Hence... I will be a doctor.
Let's get strategic
I found Krugman's discussion of free trade, protectionism and strategic trade to be quite interesting, especially knowing now that he just won the Nobel prize for is work on the analysis of trade patterns and location of economic activity (aka economic geography). Just recently I've become and advocate of free trade (Thanks Professor Blomberg!) instead of fair trade, so reading this chapter first put me on the fence on what I truly believe in terms of trade because of his strategic trade and protectionism arguments. I found his strategic trade policy arguments interesting and somewhat convincing as I saw it being a middle of the road between free and fair trade. Strategic Trade Policy, however "is really an argument for a limited government industrial policy consisting of carefully targeted subsidies, not for tariffs and import quotas." That being said, it seems like a strategic trade policy is a lot of work and could greatly interfere with free market efficiency which is not worth it, especially if "there just isn't any evidence that an aggressive strategic trade policy can produce large gains." Overall, strategic trade may work and it may have to work given that other major players are resorting to this policy method. Free trade, although probably best for our nation, may not be feasible all the time given that "free trade becomes very difficult to sustain politically if there is a widespread and growing perception that one of the main players is following different rules." All countries need to be on the same page for trade, but when we're all trying to protect our own interests, sometimes at the expense of others, getting countries on the same page is a difficult task. Thus, it may be necessary to get strategic to benefit ourselves the most.
Also, unlike Erik, I really enjoyed Blinder's book. I really empathized with what he said and completely agreed with his hard head, soft heart approach to policy. I just wish that politics and party divides were a little less involved in our economic policy because this involvement makes it a bit more difficult to achieve this hard head, soft heart approach that Blinder discusses. What would our world be like if we tried to achieve this "happy blend" buy joining "the rational economic calculation of the conservative Republican to the compassion of the liberal Democrat"? I think we'd see efficiency and more happiness. I'm all about it.
Also, unlike Erik, I really enjoyed Blinder's book. I really empathized with what he said and completely agreed with his hard head, soft heart approach to policy. I just wish that politics and party divides were a little less involved in our economic policy because this involvement makes it a bit more difficult to achieve this hard head, soft heart approach that Blinder discusses. What would our world be like if we tried to achieve this "happy blend" buy joining "the rational economic calculation of the conservative Republican to the compassion of the liberal Democrat"? I think we'd see efficiency and more happiness. I'm all about it.
Oh Eric... This book was awesome!
Well as Eric said, I as one of his liberal classmates loved this book. Krugman's effective use of economic theory in layman's terms made the book a very enjoyable read. The whole time I was reading this I kept thinking: "What would it say if it were written now?" I believe his points would hold even more truth. When he talks about the massive discrepancies between the income of the rich and the poor and points out the old theory that the rich are rich because they exploit the poor no longer works because while the poor may only have had a 5% drop in income the rich have had a 12 fold increase. His attribution of such a discrepancy to the evolution of financial markets seems to hold even more weight now over ten years later. When he gets to his section on Financial Follies, I know a key fourth example would be the events of the past year. Of course like a good liberal he shows how the Savings and Loan crisis was the result of government deregulation and I think he would rightly observe the exact same fault in the current situation. For myself his discussion on the actual importance of the G7 meetings for the US reinforces my belief that such meetings are pretty much nothing more than expensive photo ops. But at least the look of global economic progress is better than nothing?
I love tequila but not its effect
While reading Krugman's appraisal on the 1994 economic crisis in Mexico, I couldn't help but notice that Mexico's crisis and the U.S.'s recent predicament share a similar cause.
A little background on the crisis: In the early 90's international economists noticed that inflation in Mexico was rising faster than in the U.S. so it was proposed that the Mexican govermment take steps to devalue its currency. At the time, the political parties opposed taking any strong stance on the issue given the proximity of an upcomming presidential elections (sort of like now). Once the elction took place, however, the policy passed and it was not long before it was labeled the "December Mistake".
Krugman argues that the eventual magnified consequence of the policy can best be explained by faltering investor confidence. When the policy devalued the peso less than was expected, investors felt more devaluations would follow. Further burdening confidence in the Mexican market was news that certain insiders had been privy to the devaluation long before it had been announced. The circumstanced drop the value of the peso in half but the effect was not limited in Mexico. Rather, the drop in confidence spread onto other Latin American countries (this is what's known as the Tequila effect). Mexico's efforts to resolve their crisis with higher interest rates and a large $50 billion loan from the U.S. only sent them into a recession and it wasn't until 1996 that the situation seemed to have improved.
Krugman boldy claims "if the analysis of the crisis given above is correct, many countries may be vulnerable to what amounts to the whims of the capital markets"(191). Indeed, his analysis is correct but as we've seen this vulnerability is not limited to developing countries Krugman underlies the power of investor confidence by adding: "A country need not follow unsound policies to get in trouble; all that need happen is for investors to conclude... that the country is at risk- and their loss of confidence will produce a crisis that justifies their fears"(191).
Now, I'm not saying that the situation in the U.S. is as bad as it was in Mexico. Aside from facing inflation, Mexico was also facing political turmoil which only gave investors more to worry about: an indigenous uprising in Chiapas (which had declared war on the Mexican government) and the mysterious assassination of a presidential candidate. Now, given the validity of Krugman's theory on the power of investor confidence and their present sensitivity, it's clear that any such occurrence in the U.S. would send consumer confidence over the edge.
A little background on the crisis: In the early 90's international economists noticed that inflation in Mexico was rising faster than in the U.S. so it was proposed that the Mexican govermment take steps to devalue its currency. At the time, the political parties opposed taking any strong stance on the issue given the proximity of an upcomming presidential elections (sort of like now). Once the elction took place, however, the policy passed and it was not long before it was labeled the "December Mistake".
Krugman argues that the eventual magnified consequence of the policy can best be explained by faltering investor confidence. When the policy devalued the peso less than was expected, investors felt more devaluations would follow. Further burdening confidence in the Mexican market was news that certain insiders had been privy to the devaluation long before it had been announced. The circumstanced drop the value of the peso in half but the effect was not limited in Mexico. Rather, the drop in confidence spread onto other Latin American countries (this is what's known as the Tequila effect). Mexico's efforts to resolve their crisis with higher interest rates and a large $50 billion loan from the U.S. only sent them into a recession and it wasn't until 1996 that the situation seemed to have improved.
Krugman boldy claims "if the analysis of the crisis given above is correct, many countries may be vulnerable to what amounts to the whims of the capital markets"(191). Indeed, his analysis is correct but as we've seen this vulnerability is not limited to developing countries Krugman underlies the power of investor confidence by adding: "A country need not follow unsound policies to get in trouble; all that need happen is for investors to conclude... that the country is at risk- and their loss of confidence will produce a crisis that justifies their fears"(191).
Now, I'm not saying that the situation in the U.S. is as bad as it was in Mexico. Aside from facing inflation, Mexico was also facing political turmoil which only gave investors more to worry about: an indigenous uprising in Chiapas (which had declared war on the Mexican government) and the mysterious assassination of a presidential candidate. Now, given the validity of Krugman's theory on the power of investor confidence and their present sensitivity, it's clear that any such occurrence in the U.S. would send consumer confidence over the edge.
The Infant Industry Argument
Protectionism sucks, according to Blinder. And especially with infant industries: how do we know when they have been on the bottle too long? How can we wean them off? Blinder sees these problems as systemic within the American conception of economics. Too often, he claims, we give certain industries room to grow, or to re-tool themselves for changing in industry, without placing some sort of restriction upon when they need to be able to freely compete in the marketplace. I can't help thinking about biofuel, and in particular the cultivation of ethanol in the United States, which has been repeatedly proven to be the most moronic political boondoggle since Prohibition. We protect corn-based ethanol production under various guises: "national security" concerns because it has something to do with our fuel supply, protectionism of the American farmer, and under the ever expanding "green" label. Yet ethanol in the US has failed to become a viable source of energy, and has along the way helped drive up food prices worldwide. We put large tarrifs on Brazilian ethanol, which is produced at a fraction of the cost of American ethanol, because we believe that this industry will eventually take off.
Blinder says "the infant-industry argument is valid only if the ultimate gains to society will be great enough to repay the losses incurred by protecting in youth." Certainly this already can't be said of ethanol in the US. No one believes ethanol to be a long term fix for oil dependency, yet the political considerations let taxpayer money flow to farmers who would help us greater by letting us eat their corn.
Blinder says "the infant-industry argument is valid only if the ultimate gains to society will be great enough to repay the losses incurred by protecting in youth." Certainly this already can't be said of ethanol in the US. No one believes ethanol to be a long term fix for oil dependency, yet the political considerations let taxpayer money flow to farmers who would help us greater by letting us eat their corn.
I Love Democracy and America and Good
“People rarely speak of the ‘right’ to own an automobile or home that they want … why then should we assume that the right to pristine air and water is inalienable?” Blinder’s economic arguments are simple and often quite convincing. The pollution section is no exception. However, the statement above shows ignorance of the difference between public and private goods. Cos’s theorem does a great job of assigning costs, but only if ownership is established. I see a disconnect between Cos and goods such as the environment which one person or company cannot possibly claim title to. Does a democratic society give the government a right to dole out pollution credits, showing ownership through a sale? Perhaps, but I haven’t yet seen the argument spelled out convincingly in either class or a text.
“Some people argue that putting price tags on clean air and water ‘cheapens’ these things, that is, makes people think them less valuable. I don’t suppose they apply the same reasoning to mink coats or Rolls Royces.” Once again, Blinder is throwing out a contrived analogy to try to reduce the environmentalist’s argument to the absurd. In doing so, however, he mixes too many ideas to put across a clear point. Is Blinder suggesting that mink coats and Rolls Royces are more highly coveted because they cost more money? If so, he is rejecting the simplistic (and powerful) economic framework the book is meant to operate on. Is he is bringing in the idea of Giffen Goods, is he suggesting that as we make the environment more valuable, people will actually consume (pollute) more of it? No, this is clearly against his claim. Blinder makes a strong point about how to most efficiently reducing pollution – I remember hearing about a recently implemented national pollution credit system. He should leave the moral decisions on which the economic framework should be built to the philosophers, or perhaps democracy.
Wednesday, October 15, 2008
Hard Heads, Soft Hearts Makes Me Want to Throw Up
Ugh. I mean every word of my title.
Blinder's book wouldn't have been half as bad if he had just been honest. The goal of his book wasn't to find policies that incorporate both "hard headedness" (reliance on market structures) and "soft heartededness" (curbing inequality); rather, it was to bash Republicans and praise Democrats.
I'm sure my liberal classmates (whom I love dearly!) loved this book.
On page 10, Blinder makes the laughable assertion that, "The many policy changes that I advocate in this book are not easily classified as 'conservative' or 'liberal,' as Democratic or Republican. They derive... from a coherent underlying philosophy." Nevermind that his philosophy is the philosophy of the Democratic Party. [He was on Clinton's Council of Economic Advisors and an advisor to Kerry's campaign in 2004!!! And this guy claims to be anti-partisan?!]
He makes his first error on page 24, stating that welfare is 'public generosity.' He goes on and on about how Democrats and liberals care more about 'public charity' and 'public generosity' than conservatives and Republicans.
But taxes and welfare spending are not charity or generosity. I choose to give to charities; I am forced to pay taxes. If I don't give money to Make A Wish Foundation, no one throws me in jail. If I don't pay taxes, I end up in the slammer. Are we beginning to see the difference?
Blinder also states that the free market produces winners and losers, as if every market transaction produced a loser. (And as if only the rich win, another Democratic Party line.) But in a free market, wouldn't we see almost all winners? If I am (freely) engaging in a transaction, then I believe I am going to "win" and so does the person on the other end of the deal. Only when coercion enters the system (through taxes, regulations, etc.) will there be a loser produced.
Blinder is not wrong, however, to point out that the market produces inequalities. Free markets might produce inequalities... but they also make the poor better off - and if we are really to have a "soft-heart" for the poor, then the most just thing to do would be to follow the free market and abandon Blinder's redistributive policies.
Response to Blinder
Blinder’s professed “answer” to economists’ woes about their natural lack of eloquence and inability to put into writing any of their “unlovely” and wart-covered scientific cases comes in the form of a book, Hard Heads, Soft Hearts. There is no modesty involved; Blinder sees examples such as economists’ weak influence in politics where it matters most and the Murphy’s law infecting the science as a centuries-long cry for help to propose the right policy recommendations from economists in a coherent and persuasive way to the rest. Economists agree (!), according to Blinder—they just need to be heard rightly.
After searching around, I found a bit of humility in the text, where he states that although the “crusade for better economic performance” doesn’t have a “lofty moral” which campaigns against injustices or the like—there is still a lot of value we glean from an efficiently run economic system (193). He suggests that when the economic system is successful in terms of efficiency and less bureaucracy, then it is easier to achieve other national social policy goals. Of course, this is an easy argument to make. It is like making the argument that if one part of a country is happy—it is easier to make the rest of the country happy. Meaning that a part of the solution getting solved is one step toward solving the entire solution—however I do not believe that pure economic efficiency in terms of policy-making and policy outcomes are a prerequisite to all other social goods. Many social goods are non-governmental including the services and products produced by non-profits and other private activity.
Another interesting point made by Blinder (which also happens to belittle politicians and put a feather in the cap of the economist) is where he explains that “negative-sum economic policies are often positive-sum political policies” meaning that politicians will sign on to less efficient policies because they create positive political gain (202). I’m not convinced that this is true across the board (in fact it would be a sad world if that were true); however, thinking about examples such as ethanol does make one want to agree with Blinder’s attitude at least in part. See article from 2005: http://www.cbsnews.com/stories/2005/07/19/tech/main709983.shtml Has ethanol caused more than 25% of the rise in food costs? Is producing ethanol inefficient and not worth spending energy and resources on? “Even if every bushel of U.S. corn, wheat, rice and soybean were used to produce ethanol, it would only cover about 4 percent of U.S. energy needs on a net basis, Washburn estimates.” See http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_wasik&sid=aOS8e5kvDESE This example comes to mind when Blinder discusses special interest groups—and his solutions for interest group lobbying and manipulation of the political system may not be any more feasible than his theory about politicians is consistent.
After searching around, I found a bit of humility in the text, where he states that although the “crusade for better economic performance” doesn’t have a “lofty moral” which campaigns against injustices or the like—there is still a lot of value we glean from an efficiently run economic system (193). He suggests that when the economic system is successful in terms of efficiency and less bureaucracy, then it is easier to achieve other national social policy goals. Of course, this is an easy argument to make. It is like making the argument that if one part of a country is happy—it is easier to make the rest of the country happy. Meaning that a part of the solution getting solved is one step toward solving the entire solution—however I do not believe that pure economic efficiency in terms of policy-making and policy outcomes are a prerequisite to all other social goods. Many social goods are non-governmental including the services and products produced by non-profits and other private activity.
Another interesting point made by Blinder (which also happens to belittle politicians and put a feather in the cap of the economist) is where he explains that “negative-sum economic policies are often positive-sum political policies” meaning that politicians will sign on to less efficient policies because they create positive political gain (202). I’m not convinced that this is true across the board (in fact it would be a sad world if that were true); however, thinking about examples such as ethanol does make one want to agree with Blinder’s attitude at least in part. See article from 2005: http://www.cbsnews.com/stories/2005/07/19/tech/main709983.shtml Has ethanol caused more than 25% of the rise in food costs? Is producing ethanol inefficient and not worth spending energy and resources on? “Even if every bushel of U.S. corn, wheat, rice and soybean were used to produce ethanol, it would only cover about 4 percent of U.S. energy needs on a net basis, Washburn estimates.” See http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_wasik&sid=aOS8e5kvDESE This example comes to mind when Blinder discusses special interest groups—and his solutions for interest group lobbying and manipulation of the political system may not be any more feasible than his theory about politicians is consistent.
"Just a short hop"
As much as Blinder assures us that he is neither Republican nor Democrat (p12), and that he embraces the 18th c conception of a "liberal" in the sense of one who has respect for the virtues of the market and respect for those who the market leaves behind, his views are clear. His philosophy sounds awfully close to the fiscally-conservative yet socially-liberal argument that I've seen many liberal-minded students who have taken economics/business courses make when asked about their political views.
Blinder begins the book with an explanation of his "hard head" (free market) but "soft heart" (concerned with distributional justice). I thought his description of a "true liberal" at the beginning of the book was particularly funny. Have any of us ever cheered for the underdog (when we don't have a preference for either team), just because they are loosing?
I think he makes some of his most controversial points in his chapter discussing unemployment & inflation, opinions which he certainly carried over into his stint as Vice Chairman of the Board of Governors of the Fed (1994-1996). He comes off as a strong Keynesian and his arguments for more emphasis on unemployment and less on what he claims to be rather unfounded fears of inflation identify his liberal-mindedness (in very much the 21st c conception of the word). He believes in activist gov policy that aims to maintain the economy at full unemployment and he claims that for every percentage-pt reduction in the inflation rate, we must accept a 2 pt or to increase for 1 year in unemployment (Phillips Curve). Thinking back to the SRPC and the LRPC, I would have to agree with his assertion that the inflation-unemployment trade off is only a short-run phenomenon, meaning that the only wya to keep unemployment down in the long-run is to accept steadily increasing inflation.
However, I am not so convinced with Blinder's logic behind the redistribution of wealth. He discusses the robin hood-esque argument of poor men valuing dollars more than rich men, and then says that it is only a "short hop" to the conclusion that the gov must redistribute income from the rich to the poor. He is clearly underestimating the distance of that jump and oversimplifying what the heat behind the debate between liberal v. conservative economic philosophy.
Blinder begins the book with an explanation of his "hard head" (free market) but "soft heart" (concerned with distributional justice). I thought his description of a "true liberal" at the beginning of the book was particularly funny. Have any of us ever cheered for the underdog (when we don't have a preference for either team), just because they are loosing?
I think he makes some of his most controversial points in his chapter discussing unemployment & inflation, opinions which he certainly carried over into his stint as Vice Chairman of the Board of Governors of the Fed (1994-1996). He comes off as a strong Keynesian and his arguments for more emphasis on unemployment and less on what he claims to be rather unfounded fears of inflation identify his liberal-mindedness (in very much the 21st c conception of the word). He believes in activist gov policy that aims to maintain the economy at full unemployment and he claims that for every percentage-pt reduction in the inflation rate, we must accept a 2 pt or to increase for 1 year in unemployment (Phillips Curve). Thinking back to the SRPC and the LRPC, I would have to agree with his assertion that the inflation-unemployment trade off is only a short-run phenomenon, meaning that the only wya to keep unemployment down in the long-run is to accept steadily increasing inflation.
However, I am not so convinced with Blinder's logic behind the redistribution of wealth. He discusses the robin hood-esque argument of poor men valuing dollars more than rich men, and then says that it is only a "short hop" to the conclusion that the gov must redistribute income from the rich to the poor. He is clearly underestimating the distance of that jump and oversimplifying what the heat behind the debate between liberal v. conservative economic philosophy.
Monday, October 13, 2008
Guns, Germs and Steel at the Claremont Colleges
Thursday, October 23
2008 Dr. Bruce J. Nelson '74 Distinguished Speaker Series:
Jared Diamond: "Collapse: How Societies Choose to Fail or Succeed"
7:30 - 8:30 PM
Galileo Hall
Harvey Mudd College
240 E. Platt Blvd.
Claremont, 91711
(909) 607-0899
"Biology and the Environment: Past, Present and Future." Jared Diamond, Professor, Department of Geography, UCLA, and Pulitzer Prize winner for the book Guns, Germs and Steel. Lecture followed by a dessert reception.
Blomberg: The Prophet
Brockstar totes called this one:
http://www.nytimes.com/2008/10/14/business/economy/14econ.html
http://www.nytimes.com/2008/10/14/business/economy/14econ.html
Paul Krugman...This is exciting
On my NY Times home page this morning: Paul Krugman Wins Economic Nobel http://economix.blogs.nytimes.com/2008/10/13/paul-krugman-wins-economics-nobel/?hp
We're reading him this week!!! He's kind of a big deal....
We're reading him this week!!! He's kind of a big deal....
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