Author Archive
New at Cato Unbound: Monetary Lessons from the Not-So-Great Depression
Accounting for the Great Depression and devising plans for preventing a sequel has been a major preoccupation of monetary and macroeconomics for over seventy years now. If the sometimes vitriolic infighting raging now within the economics profession is any indication, our recent recession and financial collapse may play a similar role for years to come. Did Bernanke display a virtuoso touch and keep a bad thing from becoming worse? Or did the Fed drive the economy over the edge by compounding prior errors with fresh mistakes?
Until the Milton Friedmans and Anna Schwartzes of our “great recession” emerge, try this month’s Cato Unbound for some preliminary answers. We’ve recruited a panel of top-notch money specialists to tease out some of the key monetary lessons from the present mess, and here’s a quick gloss on what they’ve said so far.
In our lead essay, Bentley University economist Scott Sumner, a specialist on the Great Depression, stands against conventional wisdom in arguing that monetary policy in the period running up to the carnage in the financial sector was disastrously contractionary. Easier money, Sumner says, might have prevented the worst. He proposes a new strategy for central bankers — targeting forecasts of nominal GDP — that might help avert future crises. Sumner warns of the political dangers of misdiagnosing the crisis: unless the record is set straight, free markets will once again take the fall for a flubbed central banking.
In his reply essay, “It’s Harder than it Looks,” James Hamilton of UCSD and the popular blog Econbrowser disagrees with some, but agrees with much of Sumner’s diagnosis, including the claim that the Fed could have done better and might have limited the damage of the financial crisis had it pushed rates of nominal GDP growth higher than they were. But Hamilton points out that this is easier said than done and raises doubts about the practicability of Sumner’s preferred targeting strategy.
Cato senior fellow and University of Georgia economist George Selgin agrees with Sumner that “tight money was the proximate cause of the post-September 2008 recession” and that “a policy of nominal income growth targeting might have prevented the recession.” But Selgin encourages Sumner to acknowledge the role easy money played in the subprime crisis, and argues that Sumner’s favored five-percent nominal income-growth target is “unnecessarily and perhaps dangerously high.” Selgin favors a lower target and tolerance for some price deflation, a strategy he contends would be less likely to perpetuate boom-bust cycles.
In the last of this issue’s formal replies, San Jose State’s Jeffrey Rogers Hummel sees merit in much of Sumner’s account of the causes of the financial crisis, but he doubts a better rule for central bankers will keep us out of trouble in the future. Hummel contends that “only abolition of the Fed, elimination of government fiat money, and complete deregulation of banks and other financial institutions offer any long-term hope of bringing better macroeconomic stability.”
Stay tuned as our panelists continue to hash it out in free-for-all blog chat that begins Wednesday. And if this is the sort of thing that revs your engine, don’t forget about Cato’s annual monetary policy conference coming up in November.
Thomas Friedman’s New Math of Democracy
Thomas Friedman’s New York Times column today would be astonishing in its incoherence if only Friedman hadn’t long ago sapped us of our ability to be astonished by his incoherence. Like many capital-’d’ Democrats, Friedman has soured on democracy for failing to deliver on his policy wish list.
Watching both the health care and climate/energy debates in Congress, it is hard not to draw the following conclusion: There is only one thing worse than one-party autocracy, and that is one-party democracy, which is what we have in America today.
Why does Friedman say the United States has one-party democracy? Because the Republican Party is effectively opposing the Democratic Party’s agenda! Not even kidding. Get this:
The fact is, on both the energy/climate legislation and health care legislation, only the Democrats are really playing. With a few notable exceptions, the Republican Party is standing, arms folded and saying “no.” Many of them just want President Obama to fail. Such a waste. Mr. Obama is not a socialist; he’s a centrist. But if he’s forced to depend entirely on his own party to pass legislation, he will be whipsawed by its different factions.
Only the Democrats are really playing! You might think that would mean they can do whatever they darn well please. But no! The Democrats can’t do anything! Because the other party‘s opposition is so effective! So it’s exactly as if there’s just one party: nothing gets done!
My hunch is that the Times’ editors see Friedman aiming the gun at his foot, but watching a man stupid enough to actually pull the trigger is so fun they hate to intervene. That or they’re trying to explode the myth of American meritocracy.
So where were we? Oh, yes: one-party democracy is aggravating because sometimes one party can’t do what it wants because the other party gets in the way. Sooo frustrating!!! Why have democracy at all when all you end up with is a single party stymied by the other one! And so it is that Friedman comes to wax romantic about communist central planning:
One-party autocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century. It is not an accident that China is committed to overtaking us in electric cars, solar power, energy efficiency, batteries, nuclear power and wind power.
Nikita Kruschev, the enlightened leader of a now-defunct one-party autocracy, was also committed to overtaking the United States in technology and so much more. “We will bury you” is how he put it. At the time, more than a few left-leaning American opinionmakers suspected he was right. After all, how can inefficiently squabbling democracies possibly keep pace with undivided regimes wholly devoted to scientifically centrally planning their way into the brighter, better future? And that, children, is why we speak Russian today.
New at Cato Unbound: Brian Doherty Defends ‘Folk Activism’
In today’s installment of Cato Unbound, Reason senior editor Brian Doherty defends “folk activism” (that’s what we do here at Cato, in case you’re wondering) against Patri Friedman’s complaints of ineffectiveness.
Doherty argues, in effect, that Friedman’s effort to simply go out and float a boat upon which one can do whatever floats one’s boat is parasitic on earlier “folk activism” aimed at persuasion. It is hard to find 20,000 people who will commit to moving to New Hampshire for the cause of liberty and, as Brian points out, it’s even harder to find people who will now commit to moving to a man-made island. The viability of projects like Seasteading seems to depend on the success of prior evangelism.
That said, one of the merits of Friedman’s “dynamic geography” is that it is not really a “libertarian” project at all. As he writes in his Unbound lead essay:
Because we have no a priori knowledge of the best form of government, the search for good societies requires experimentation as well as theory — trying many new institutions to see how they work in practice.
I think there’s good reason to expect competing sea-top jurisdictions to settle on a scheme of governance more libertarian than what the world’s current nation states have to offer. But I also think there’s little reason to expect a seastead to embody the system of most libertarians’ dreams unless a lot of libertarians coordinate and settle there. In that case, it’s really clear that creating a libertarian society from whole cloth depends on the prior existence of libertarians, which depends on the success of the folk activism that produces them.
For more on seasteading, check out yesterday’s Cato Policy forum with Patri Friedman and today’s podcast interview.
No Dice, Pickens!
Last Thursday on public radio’s Marketplace Morning Report, Bob Moon interviewed billionaire T. Boone Pickens about his highly self-publicized energy plan, which centers on using wind power to replace a portion of the natural gas used to create electricity, and then using that replaced natural gas to power cars. As it happens, Pickens has invested in a big way in windmills and is extremely well placed to profit from an increase in the use of natural gas-powered vehicles. But the part that bothers me most isn’t the fact that a billionaire is running a propaganda campaign in an effort to rig the regulatory structure to force consumers to buy what he sells — though that bothers me plenty. The part that bothers me most is the mixture of toxic nationalism and egregious economic illiteracy in the ads Pickens is airing to plump for his plan. Which brings us back to Moon’s interview with Pickens:
Moon: Let me ask you to respond to something that Will Wilkinson of the Cato Institute said in a commentary on Marketplace the other day. Here’s some of his criticism of you:
Will Wilkinson clip: He’s leaning hard on our worst nationalist impulses. What he’s really saying is, why buy the things you need from dangerous foreigners when you could be paying more to buy them from rock-ribbed Americans, like T. Boone Pickens.
Pickens: It’s more than me. I mean, this is about America. This isn’t about Boone Pickens and whether Pickens’ wind farm makes money or whatever happens to it. But I mean, here with $700 billion going out of the country, and let’s say that we could cut it in half — $350 billion in the United States, can you imagine how that would multiply for jobs here. I’d much rather that gonna $350 billion was being used here than to give some for foreign oil.
Allow me to point out that Pickens’ reply is nonsense. He continues to insist on characterizing mutually-beneficial exchange across borders as hundreds of billions of American dollars “going out of the country.” But, in a nutshell, the reason Americans bought all this oil from abroad was that they had no way to get more energy bang for their energy buck. Unless the prices of domestic energy sources decline relative to that of foreign oil, shifting domestic consumption to energy from domestically-produced sources will require Americans to pay more for energy–leaving them less for everything else.
This is not a recipe for multiplying jobs. Rather, it would leave less money in the economy to start new businesses and to expand successful ones. This is a recipe to make ordinary American consumers poorer and energy corporations, like the ones Pickens owns, richer. If Pickens was making sense, the implication would be that Americans would be better off if we “in-sourced” everything. T. Boone Pickens, meet David Ricardo.
Either one of the world’s wealthiest men doesn’t understand elementary economics, which clearly tells us that his plan will make Americans poorer, or his plan is not really “about America.”
Here’s my July 31st Marketplace commentary on Pickens. And here’s Cato’s Jerry Taylor in March debunking “energy independence.”
Losing Faith in What?
In the Los Angeles Times, Peter Gosselin offers a “news analysis” on the theme that “Americans may be losing faith in free markets.”
For a generation, most people accepted the idea that the core of what makes America tick was an economy governed by free markets. And whatever combination of goods, services and jobs the market cooked up was presumed to be fine for the nation and for its citizens — certainly better than government meddling.
No longer.
This kind of crisis of confidence occurs every time the economy temporarily heads south — which it inevitably does from time to time. What does this tell us? It tells us that people do not understand the economy very well. And what do stories like Gosselin’s tell us? That most journalists don’t either.
But economic downturns do offer the motivated reporter an opportunity to speculate on the possible political consequences of unflagging public and media ignorance. The causes for our current economic troubles are evidently too complex to fathom, so instead of writing intelligibly about what is actually happening and why, we are asked to wonder (hope? fear?) whether voters can be made to demand a “New Deal Lite,” before the economy regains steam and we become too satisfied to regulate ourselves into oblivion.
It would be useful if journalists could find a way to report on the actual nature of the American economy. This would be a real public service. The American economy is in fact a byzantine amalgam of market and state institutions enmeshed in a thicket of regulation. Gosselin maintains that “most people” in the U.S. think there is something out there called “the free market” that operates without “government meddling.” I’m not really sure that most people think that, but it seems Gosselin does, because he goes on to structure his “news analysis” as if the story is that dissatisfaction with a kind of laissez faire we do not have may be generating demand for basically the kind of dirigisme we’ve already got. But since economic systems we haven’t got can’t cause our economic problems, the result is confusion.
New at Cato Unbound: Can the Schools Be Fixed?
In April of 1983, the Ronald Regan-appointed National Commission on Excellence in Education released a landmark study, “A Nation at Risk: The Imperative for Educational Reform,” which diagnosed the ills of American education and set forth a list of prescriptions for fixing what seemed to be flailing educational system. It’s been twenty-five years now since the report. So how are we doing? And what, if anything, should we be doing differently? These are the questions we’ll be asking in this month’s edition of Cato Unbound, “Can the Schools Be Fixed?”
This month’s lead essay comes from Richard Rothstein, a former national educational columnist for the New York Times and research associate of the Economic Policy Institute, who offers a fresh, critical assessment of “A Nation at Risk” and the lessons we can draw from its fate. The public schools aren’t as bad as many think, Rothstein argues, and the report oversold the importance of the education system for America’s economic competitiveness and success.
Today, Michael Strong, co-founder of FLOW, education entrepreneur, and former charter school principal, chimes in with a stirring brief for the freedom to innovate in education.
Stay tuned for contributions from Sol Stern, a senior fellow at the Manhattan Institute who recently made waves with his article “School Choice Isn’t Enough,” and from Frederick Hess, the director of Education Policy Studies at the American Enterprise Institute.
If that’s not enough for all you education reform junkies, be sure to tune in to next week’s Cato forum on “Markets vs. Standards: Debating the Future of American Education.” You’ll learn something.
New at Cato Unbound: James Flynn on IQ
If you think you’re so smart, then why don’t you know what intelligence is? Because no one does! Is intelligence a unitary, general factor — the psychometrician’s famed g — or is it more plural and fragmented? What role do genes play in determining IQ? The environment? If intelligence is in the genes, then why do IQ scores continue to rise generation after generation all over the world? Are we actually getting smarter, or are we just getting better at taking tests? While these questions may seem recondite and academic, they are in fact central to ongoing, extremely heated controversies pertaining to education, welfare, and immigration policy. Which is why we have assembled a stellar panel of intelligence experts to delve into “The IQ Conundrum,” the topic of this month’s Cato Unbound.
This month’s lead essay by James R. Flynn, the discoverer of the famed “Flynn effect” and author of the new book What Is Intelligence? Beyond the Flynn Effect, argues that “the brain is much more like our muscles than we had thought” and that the genetic component of IQ is weaker than many have supposed. Commenting on Flynn’s rich essay over the next week we will have Linda Gottfredson, co-director of the Delaware-Johns Hopkins Project for the Study of Intelligence and Society; Stephen J. Ceci, the Helen L. Carr Professor of Developmental Psychology at Cornell University; and Eric Turkheimer, associate professor of psychology at the University of Virginia. They may not get to the bottom of the IQ conundrum, but readers will no doubt come away smarter. Check it out.
Why the Mechanisms of Inequality Matter
Atlantic blogger Matthew Yglesias argues that it doesn’t matter why income inequality is increasing. According to Matt, as long as higher top tax rates and more downward redistribution won’t much hurt economic performance, then we ought to just go ahead and raise taxes and increase transfers, never mind the mechanisms of rising inequality.
Oftentimes, though, liberals act as if the thing that needs to be done is to prove somehow that inequality has exploded because people are in some sense “cheating” — so you get these long stories about corporate governance and corrupt compensation committees, etc. The problem here, though, is that even if this is true, it could still also be true that the cure — policy interventions into the operation of the market — would be worse than the disease. And, conversely, if you could prove that the rise in inequality was all above board — really was driven entirely by globalization and technological change — nothing about that causal analysis would debunk the idea that we ought to make our tax system more progressive.
The relevant debate isn’t about how we got here, it’s about what would happen if we tried to change things. Some people, of course, think changing things would be immoral. Indeed, there are some people I know who adhere to the bizarre view that one source of injustice in the contemporary United States is that our richest citizens aren’t rich enough. But beyond those people, you have a lot of people who take the view that raising taxes would have dire economic consequences, whereas lowering them would have large benefits. That’s the only debate that really matters in this regard. If the costs to the non-rich of higher taxes on the rich would be small (as I believe), then higher taxes on the rich to provide more benefits to the non-rich makes sense irrespective of why inequality has grown so much whereas if the costs would be high then it doesn’t make sense — again, completely apart from the causal issue.
I think Matt and I agree that the pattern of national incomes is largely morally irrelevant, but for quite different reasons.
New at Cato Unbound: Philip Jenkins versus Mark Lilla
In his spirited reply to Mark Lilla’s lead essay the eminent Penn State religion scholar Philip Jenkins contests both Lilla’s reading of history and the lessons he draws from it. In contrast to Lilla’s claim of American innocence of political theologies, Jenkins points to the centrality of religiously-motivated politics in “the moral crusades of the late nineteenth century, … the Social Gospel, the era of Progressivism and Prohibition” and the civil rights movement. Jenkins’ alternative theory of the rise of liberal toleration emphasizes “changes in the material life of Western societies” brought about by increasing commercialization, which “has nothing to do with the intricacies of Christian theology, and was only marginally connected with Enlightenment political theory.” Muslim theology and culture aren’t at the bottom of Muslim intolerance and religious militancy, Jenkins says, but the failure of these societies to create “economic development, … free institutions and free media.”
Don’t miss Wednesday’s essay from Damon Linker, author of The Theocons: Secular America Under Siege, and be sure to tune in Monday when blogging eminence Andrew Sullivan joins the fray.
New at Cato Unbound: Mark Lilla on Religion and Politics
The new issue of Cato Unbound on “Religion and Politics, Home and Abroad,” is hot off the electronic presses with this month’s lead essay by Columbia University’s Mark Lilla, author of the new book The Stillborn God: Religion, Politics, and the Modern West. Drawing on themes from his book, Lilla attempts to explain why the United States, the most religious nation in the modern West, can neither understand nor cope with “the religious passions dominating contemporary world politics.” Lilla lays out how the “Great Separation” in Western political thought, which set aside “political theology” as the basis for conceiving of the legitimacy of the political order, together with the exceptional American experience of religious toleration, has made it difficult for Americans to grasp how uneasily Western ideals of democracy and toleration fit within frameworks of thought that still put God at the center of politics.
Joining Lilla over the next few weeks we will have the prolific Penn State professor of history and religion Philip Jenkins; Damon Linker, author of The Theocons: Secular America Under Siege; and The Atlantic’s Andrew Sullivan, author of recent The Conservative Soul: How We Lost It; How To Get It Back.
New at Cato Unbound: Peter Leeson on Practical Anarchy
Everybody seems to know we need government … But pirates didn’t! How did they manage without the state? In this month’s thought-provoking Cato Unbound lead essay, Peter T. Leeson, the BB&T Professor for the Study of Capitalism at George Mason University, explores what pirate “constitutions,” credit institutions among 19th century African bandit traders, and the well-being of Somalians after the collapse of the Somalian state have to tell us about the possibility of practical anarchy. It works better than you think, Leeson concludes. “As long as there are unrealized gains to realize, people will find ways to realize them” — state or no state.
Can organizations really solve complex problems of coordination without government coercion? Can voluntary bands provide public goods? Are there conditions under which groups are better off stateless? Leeson will be joined in tackling these question by three eminent commentators: Florida State economics professor Bruce Benson, author of the seminal The Enterprise of the Law: Justice without the State; Dani Rodrik, professor of international political economy at Harvard’s Kennedy School of Government; and Randall Holcombe, another distinguished Seminole economist and current president of the Public Choice Society. Benson is on deck to reply this Wednesday. Stay tuned!
Brink Lindsey on “The Libertarian Center”
The July issue of Cato Unbound hits virtual newsstands this morning with Cato VP for research Brink Lindsey’s new essay elaborating his argument in The Age of Abundance: How Prosperity Transformed America’s Politics and Culture that the culture wars are over and a vaguely libertarian consensus is the result. While recognizing that principled libertarianism doesn’t have a significant constituency, Lindsey argues that the soft libertarian synthesis constrains the Democrats and Republicans as they seek to cobble together working political majorities. Keep your browsers pointed to Cato Unbound: Jonah Goldberg of National Review has first whack at Brink on Wednesday.
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