More Hayek Sightings
The long Hayek Week continues, a full two weeks after Cato’s all-star panel on The Constitution of Liberty. The Washington Post today features George Mason University professor Russell Roberts and his Hayek-Keynes rap videos.
And by reading the actual print edition of the New York Times Book Review, I discovered that the same issue that included Francis Fukuyama’s review of the The Constitution of Liberty last Sunday also included a letter from one David Beffert of Washington, D.C., coincidentally responding to a review of Fukuyama’s own new book. Beffert wrote:
I enjoyed Michael Lind’s April 17 review of Francis Fukuyama’s important new book, “The Origins of Political Order.” But even as someone who prefers John Maynard Keynes and Karl Polanyi to F. A. Hayek, I still feel compelled to defend Hayek from Lind’s mischaracterization. While I agree with Fukuyama’s argument that, as Lind puts it, “a strong and capable state has always been a precondition for a flourishing capitalist economy,” Hayek can hardly be accused of trying “to explain society in terms of Homo economicus.” A doctor of law and political science, Hayek afforded the state a central role in his philosophy — specifically, he saw the Rechtsstaat, constitutional government enforcing the rule of law, as a guarantor of liberty and a functioning capitalist order. In that sense he, like Fukuyama, is closer to the 19th-century sociological tradition than to neoclassical economists, who would appear to be Lind’s real target.
Speaking of misconceptions about Hayek, if you Google “soros hayek,” the first item that comes up is a page of letters in the Atlantic Monthly taking Soros to task for misunderstanding Hayek — in 1997. Tadd Wilson argues:
Soros cites Hayek as an advocate of laissez-faire and then goes on to reject laissez-faire economics on the grounds that it is a dogmatic system at once claiming and demanding perfect knowledge and equilibrium. Of course, Hayek’s major contribution to economics was his critique of scientific assumptions in equilibrium-based economics. In a nutshell, Hayek argues that the market process relies on contextual, personal knowledge to coordinate the activities of millions of individual participants – a vaguely Popperian notion. Soros misses Hayek’s crucial point.
This is much the same criticism that Bruce Caldwell made of Soros’s understanding of Hayek two weeks ago. Considering the many complaints that were raised about Fukuyama’s understanding of Hayek, we can only ask: Why can’t the Times get someone like, say, David Beffert or Tadd Wilson to review Hayek?
By the way, if you Google Hayek, you’ll discover that it’s a big week for Salma Hayek, too. They’re not related, but you can find a slightly dated comparison here.
The ‘Every Economist’ Myth
Just days after we rapped Rep. Betsy Markey (D-CO) for claiming that “every economist from the far left to the far right was saying the government needs to step in because there was absolutely no private sector investment,” Rep. Gerry Connolly (D-VA) tells the Washington Post,
You’re darn right I voted for the stimulus. Every economist, including [some] Republican economists . . . said, for God’s sake, don’t let it go off the cliff.
This is the myth that just won’t die. Markey and Connolly are echoing similar claims by President Obama, Vice President Biden, and even the notoriously unreliable Robert Reich. When Biden said it, Harvard economist Greg Mankiw asked if he was “disingenuous or misinformed” and pointed out:
That statement is clearly false. As I have documented on this blog in recent weeks, skeptics about a spending stimulus include quite a few well-known economists, such as (in alphabetical order) Alberto Alesina, Robert Barro, Gary Becker, John Cochrane, Eugene Fama, Robert Lucas, Greg Mankiw, Kevin Murphy, Thomas Sargent, Harald Uhlig, and Luigi Zingales–and I am sure there many others as well. Regardless of whether one agrees with them on the merits of the case, it is hard to dispute that this list is pretty impressive, as judged by the standard objective criteria by which economists evaluate one another. If any university managed to hire all of them, it would immediately have a top ranked economics department.
When Robert Reich tried to claim that “economic advisers across the political spectrum support Obama’s plan,” I pointed out that that claim depended on exactly two names and that the Washington Post had demonstrated that neither of them was in fact a Republican supporter of the $787 billion stimulus bill.
In fact, of course, hundreds of economists went on record against the stimulus bill. The Cato Institute’s full-page ad with their names appeared in all the nation’s major newspapers. The ad and the economists were featured on dozens of television programs.
Which brings us back to the question that Mankiw asked of Biden and that I asked of Markey. Is Representative Connolly really unaware that there was vigorous debate among economists about the so-called stimulus bill, and that hundreds of economists expressed their opposition in every major newspaper? Connolly has lived in Washington his entire adult life. He spent 19 years on a Senate committee staff. He served for 14 years on the Fairfax County Board. He worked as vice president at two large government contractors. Is it possible that he doesn’t read the Washington Post — or the Wall Street Journal, or the New York Times, or Roll Call, the newspaper of Capitol Hill? If so, then maybe he really believes that “every economist, including Republican economists” endorsed the stimulus. Someone should ask him: misinformed or disingenuous?
Betsy Markey: Misinformed or Misleading?
On NPR stations this morning, the “Power Breakfast” segment from Capitol News Connection profiled Rep. Betsy Markey (D-CO), who is fighting hard to keep her seat this year. The reporter noted:
She’s a Blue Dog, one of those fiscally conservative Democrats who frequently complicate things for Party leaders by insisting on spending offsets and the like.
A claim slightly complicated by the reporter’s earlier noting that Markey voted for the $787 billion stimulus bill, the health care overhaul, and cap-and-trade. How exactly does that make her a Blue Dog fiscal conservative? Oh, and in her first year she got a score of 19 percent on tax and spending issues from the National Taxpayers Union. The search for an actual Blue Dog goes on.
But I was really struck by this line about the massive stimulus bill:
MARKEY: [E]very economist from the far left to the far right was saying the government needs to step in because there was absolutely no private sector investment.
This is of course not true. Hundreds of economists went on record against the stimulus bill. The Cato Institute’s full-page ad with their names appeared in all the nation’s major newspapers. It is hard to imagine that Representative Markey missed it. If she wasn’t much on reading newspaper ads, lots of economists wrote op-eds and blog posts opposing the stimulus. If she didn’t read op-eds or blogs either, the ad and the economists were featured on dozens of television programs.
And so we come to the question in this post’s headline: Could Rep. Betsy Markey really be so misinformed that she actually believed that “every economist” supported a massive increase in spending and debt on top of TARP and the other bailouts?
Actually We Aren’t Running the World
Bloggers have already noted the most glaring problems with Arthur Brooks, Edwin Feulner and Bill Kristol’s Monday Wall Street Journal op-ed, “Peace Doesn’t Keep Itself,” which worries that conservatives are figuring out that trying to run the world is not conservative.
The op-ed pretends that the fact that defense spending isn’t the largest cause of the deficit means it isn’t a cause of the deficit. It obscures the fact that we spend more on defense than we did in the Cold War by counting the defense budget as a portion of the economy without noting the latter has grown faster than the former.
So I can limit myself to less obvious angles. The first is that neoconservatives like Kristol are for increasing the defense budget no matter what. For them the military is basically an expression of national awesomeness (to use an academic term). Enemies and other details, like what we spend already, come up mainly in the justification phase.
In 2000, when U.S. defense spending was nearly $180 billion lower than today—excluding the wars and adjusting for inflation—Bill Kristol and Robert Kagan wanted to increase defense spending by $60 to $100 billion a year. After September 11, they called for a “large” and “substantial” increase. Having got that and then some, Kristol, at least, wants even more. The neoconservative appetite for military spending is insatiable because their militarism is.
Second, I want to pick on one point the op-ed makes because it is both wrong and widely believed: “Global prosperity requires commerce and trade, and this requires peace. But the peace does not keep itself.”
Prof. Krugman Is Wrong, Again
Prof. Paul Krugman asserts in his New York Times column of May 31st that “Both textbook economics and experience say that slashing spending when you’re still suffering from high unemployment is a really bad idea — not only does it deepen the slump, but it does little to improve the budget outlook, because much of what governments save by spending less they lose as a weaker economy depresses tax receipts.”
While Prof. Krugman and most other fiscalists believe this to be self-evident, it is not. Indeed, this fiscalist dogma fails to withstand the indignity of empirical verification. Prof. Paul Krugman’s formulation fails to mention the state of confidence. This is an important oversight. As Keynes himself put it: “The state of confidence, as they term it, is a matter to which practical men pay the closest and most anxious attention.”
By ignoring the confidence factor, economic theory can lead to wildly incorrect conclusions and misguided policies. Just consider naive Keynesian fiscal theory — the type presented (as Prof. Krugman notes) in textbooks and embraced by most policymakers and the general public. According to Keynesian theory, an expansionary fiscal policy (an increase in government spending and/or a decrease in taxes) stimulates the economy, at least for a year or two after the fiscal stimulus. To put the brakes on the economy, Keynesians counsel a fiscal contraction.
A positive fiscal multiplier is the keystone for Keynesian fiscal theory because it is through the multiplier that changes in the budget balance are transmitted to the economy. With a positive multiplier, there is a positive relationship between changes in the fiscal deficit and economic growth: larger deficits stimulate growth and smaller ones slow things down.
So much for theory. What about the real world? Suppose a country has a very large budget deficit. As a result, market participants might be worried that a further loosening of fiscal conditions would result in more inflation, higher risk premiums and much higher interest rates. In such a situation, the fiscal multipliers may be negative. Fiscal expansion would then dampen economic activity and a fiscal contraction would increase economic activity. These results would be just the opposite of those predicted by naive Keynesian fiscal theory.
Obama to Increase FHA Risk
The Federal Housing Administration is heading toward a taxpayer bailout, yet the president’s latest mortgage modification plan would further increase the agency’s exposure to risky mortgages. Mark Calabria calls it a “Backdoor Bank Bailout.”
The administration’s plan would encourage borrowers who owe more than their house is worth to refinance into FHA-insured mortgages. Therefore, the risk of a future foreclosure on these mortgages would fall to the government and taxpayers instead of private lenders.
A recent study from economists at New York University found that the FHA is underestimating its risk exposure. One of the problems is that the FHA isn’t properly accounting for the risk to underwater FHA mortgages that have been refinanced into new FHA mortgages. So it’s hard to see how the president’s plan to refinance private underwater mortgages into FHA mortgages won’t further exacerbate the situation.
To get these mortgages in better shape so the FHA can insure them, $14 billion in TARP money is going to be used to pay private lenders to reduce the amount borrowers owe on their mortgages. Some of this money will also be used to cover eventual losses on these loans. As a taxpayer whose mortgage is underwater, and who would rather go bankrupt than accept a government handout, I find it infuriating that my tax dollars are being used to bail out others in a similar situation.
But with government housing programs, it’s standard practice for officials to cannonball into the pool and worry about who gets splashed by the water later. On Sunday, CNN.com reported on “FHA’s Florida Fiasco,” where the collapse of the heavily FHA-insured condo market has contributed to the possibility of a FHA bailout. The FHA has now tightened its condo standards, but once again it’s a day late and possibly more than few bucks short.
The new FHA initiative is the latest in a series of efforts to “stabilize” the housing market with more subsidies. Policymakers seem oblivious that it was government interventions that helped instigate the housing meltdown to begin with. The housing market would stabilize itself if the supply of and demand for housing was allowed to be brought back into equilibrium. There would be pain in the short-term, but in the long-term we would have a smoother functioning housing market. Unfortunately, for politicians the long-term means the next election.
State of the Union Fact Check
Cato experts put some of President Obama’s core State of the Union claims to the test. Here’s what they found.
THE STIMULUS
Obama’s claim:
The plan that has made all of this possible, from the tax cuts to the jobs, is the Recovery Act. That’s right — the Recovery Act, also known as the Stimulus Bill. Economists on the left and the right say that this bill has helped saved jobs and avert disaster.
Back in reality: At the outset of the economic downturn, Cato ran an ad in the nation’s largest newspapers in which more than 300 economists (Nobel laureates among them) signed a statement saying a massive government spending package was among the worst available options. Since then, Cato economists have published dozens of op-eds in major news outlets poking holes in big-government solutions to both the financial system crisis and the flagging economy.
CUTTING TAXES
Obama’s claim:
Let me repeat: we cut taxes. We cut taxes for 95 percent of working families. We cut taxes for small businesses. We cut taxes for first-time homebuyers. We cut taxes for parents trying to care for their children. We cut taxes for 8 million Americans paying for college. As a result, millions of Americans had more to spend on gas, and food, and other necessities, all of which helped businesses keep more workers.
Back in reality: Cato Director of Tax Policy Studies Chris Edwards: “When the president says that he has ‘cut taxes’ for 95 percent of Americans, he fails to note that more than 40 percent of Americans pay no federal incomes taxes and the administration has simply increased subsidy checks to this group. Obama’s refundable tax credits are unearned subsidies, not tax cuts.”
Visit Cato’s Tax Policy Page for much more on this.
SPENDING FREEZE
Obama’s claim:
Starting in 2011, we are prepared to freeze government spending for three years.
Back in reality: Edwards: “The president’s proposed spending freeze covers just 13 percent of the total federal budget, and indeed doesn’t limit the fastest growing components such as Medicare.
“A better idea is to cap growth in the entire federal budget including entitlement programs, which was essentially the idea behind the 1980s bipartisan Gramm-Rudman-Hollings law. The freeze also doesn’t cover the massive spending under the stimulus bill, most of which hasn’t occurred yet. Now that the economy is returning to growth, the president should both freeze spending and rescind the remainder of the planned stimulus.”
Plus, here’s why these promised freezes have never worked in the past and a chart illustrating the fallacy of Obama’s spending claims.
JOB CREATION
Obama’s claim:
Because of the steps we took, there are about two million Americans working right now who would otherwise be unemployed. 200,000 work in construction and clean energy. 300,000 are teachers and other education workers. Tens of thousands are cops, firefighters, correctional officers, and first responders. And we are on track to add another one and a half million jobs to this total by the end of the year.
Back in reality: Cato Policy Analyst Tad Dehaven: “Actually, the U.S. economy has lost 2.7 million jobs since the stimulus passed and 3.4 million total since Obama was elected. How he attributes any jobs gains to the stimulus is the fuzziest of fuzzy math. ‘Nuff said.”
Another Reason Imports Get a Bad Rap
Why blame only media and politicians for the public’s confusion about imports and trade deficits? Surely economists deserve some scorn. Some of the misunderstanding can be traced to the famous National Income Identity, which expresses gross domestic product, as: Y = C + G + I + (X-M). That is, national output (Y) equals personal consumption (C) plus government spending (G) plus investment (I) plus exports (X) minus imports (M).
The expression clearly lends itself to the wrong interpretation. The minus sign preceding imports suggests a negative relationship with output. It is the reason for the oft-repeated fallacy that imports are a drag on growth. Here’s why that conclusion is wrong.
The expression is an accounting identity, which “accounts” for all of the possible channels for disposing of our national output. That output is either consumed in the private sector, consumed by government, invested by business, or exported. The identity requires subtraction of aggregate imports because consumption, government spending, business investment, and exports all contain, in various amounts, import value. Americans consume domestic and imported products and services, the aggregate of which shows up in Consumption. Likewise, Government purchases include domestic and imported products and services; businesses Invest in domestic and imported machines and inventory; and, eXports often contain some imported intermediate components. Thus, the identity would overstate national output if it didn’t make that adjustment for iMports. After all, imports are not made on U.S. soil with U.S. factors of production, so they shouldn’t be included in an expression of our national output.
Vikings and Pirates and Taxes, Oh My!
Today’s episode of “Hagar the Horrible” could be an epigraph for the new Fall 2009 issue of Cato Journal.
This issue includes Greek economists Michael Mitsopoulos and Theodore Pelagidis on “Vikings in Greece: Kleptocratic Interest Groups in a Closed, Rent-Seeking Economy” as well as Peter Leeson, author of The Invisible Hook: The Hidden Economics of Pirates, writing (with David Skarbek) on the effects of foreign aid. As for taxes, well, editor Jim Dorn has assembled a number of useful papers:
- Andrew T. Young on taxing, spending, and “fiscal illusion”
- Michael J. New on the “starve the beast” hypothesis
- Alan Reynolds on Paul Krugman’s misunderstanding of the monetary and fiscal lessons of the Great Depression and Japan’s lost decade
And on the general rapaciousness of the state, don’t miss Jason Kuznicki’s careful review of government racial discrimination from the end of Reconstruction until the civil rights movement.
ACORN and Health Care
Last week, editors at Politico posed two questions to an online panel to which I contribute: “ACORN: Underplayed or overblown?” and “Will the Dems ever get their act together on healthcare?”
The two are intimately connected by a simple proposition: “Most people want more housing and health care than they can afford.” Of course, for “housing” or “health care” one could substitute whatever one wishes: food, clothing, cars, education, entertainment, vacations, you name it. Economists call this the problem of scarcity, and it’s the beginning of economics.
In a free society, most individuals, families, and firms will deal with that problem through such homely measures as creating and husbanding wealth, planning for the future, and living within their means. Some, however, will be indifferent to such discipline and will demand more than they can afford. Enter thus ACORN and the Dems — the party of government. ACORN, like our president, is in the “community organizing” business — a euphemism for putting (some) people in a position to better demand things from government. Some of those demands are perfectly legitimate: reduce crime; fix the potholes. But others, the demands ACORN specializes in, are not thus “common.” They can be satisfied, in a world of scarcity, only by taking from some and giving to others.
And that’s what the housing and health care debates today are largely about. And it’s why on both, the Dems are having difficulty getting their act together, because however much they turn a blind eye toward scarcity or pretend that they all agree, the truth is that they represent discrete constituencies, with discrete conflicting interests. That’s what happens when we’re all thrown into the common pot. What once was decided by individuals, reflecting their own particular interests, is now decided by government — and it’s a Hobbesian war of all against all.
What Is Regulation?
The New York Times tries to spin the work of Nobel laureates Elinor Ostrom and Oliver Williamson as not anti-regulation:
Neither Ms. Ostrom nor Mr. Williamson has argued against regulation. Quite the contrary, their work found that people in business adopt for themselves numerous forms of regulation and rules of behavior — called “governance” in economic jargon — doing so independently of government or without being told to do so by corporate bosses.
But none of us “anti-regulation” folks are against “rules of behavior that people in business adopt for themselves independently of government.” The world is full of rules, from wearing clothes in the office to customary trade practices to the rules for managing common-pool resources that Ostrom studied. Anyone who opposed such “forms of regulation” wouldn’t be a libertarian or even an anarchist — he’d be a nihilist. (Of course, one could sensibly oppose particular rules; but no one seriously wants a world without rules of behavior.)
David Henderson analyzes one of the misunderstandings about the laureates’ findings:
Some have summarized their work by saying that institutions other than free markets often work well. But that statement can mislead you to conclude that government solutions are the answer. Free markets are only a subset of free institutions. A better way to sum up their work is that what Ms. Ostrom and Mr. Willamson really show is that voluntary associations work.
The Concise Encyclopedia of Economics defines “regulation” this way: “Regulation consists of requirements the government imposes on private firms and individuals to achieve government’s purposes.” That’s the kind of regulation that is controversial among economists and often criticized by libertarians. It is entirely different from “rules of behavior that people in business adopt for themselves independently of government.” Those sorts of rules — often called “governance,” as the New York Times notes — are private and voluntary, made by the voluntary interactions of a few or many people.
The work of Ostrom and Williamson supports the idea of spontaneous order, an order that emerges as result of the voluntary activities of individuals and not through the commands of government. Spontaneous order can be hard to grasp, though it is the background of our entire world — language, common law, money, and the economy are all spontaneous orders (though government has intruded into some of those orders). It’s misleading to say that work of Ostrom and Williamson is somehow supportive of “regulation,” given the way that word is commonly used.
Sheldon Richman made a similar point back in June and wrote a Facebook note on the same paragraph that caught my eye.
The VAT Debate: Should Politicians in Washington Get a Huge New Source of Tax Revenue as a Reward for Overspending?
Based on five criteria, James Pethokoukis of Reuters connects the dots and warns that President Obama is going to propose a value-added tax.
Does President Obama have a secret plan to raise taxes on middle-class Americans — and,well, pretty much everybody else — with a European-style, value-added tax? Actually, it’s not such a big secret. …Obama’s campaign promise to not raise taxes on households making less than $250,000 a year was always considered a joke here inside the Beltway. …Maybe it was a joke inside the campaign, too. Since being elected, Obama has raised cigarette taxes and has advocated raising healthcare taxes, energy and small business taxes, in addition to corporate taxes. What’s more, economic advisers like Larry Summers seem eager to get rid of all the Bush tax cuts, not just those on so-called wealthy Americans. And it’s also no secret that economists love the idea of a VAT. It promotes savings over consumption, and its hidden nature may mean it has less behavioral impact on taxpayers. …Liberals love the idea of a VAT because it’s, well, so European — also because it does raise tons of revenue to expand government. And that is what Obama wants: more revenue to pay for bigger government. Is a VAT better than the soak-the-rich approach favored by Democrats such as Nancy Pelosi and Charlie Rangel? Sure. Of course, the concern is that a VAT would be in addition to new soak-the-rich taxes.
While the timing is unclear, his prediction is correct. The politicians in Washington want much bigger government, but they know that it will be difficult to achieve that goal without a big new source of revenue. The VAT would be perfect from their perspective. It is a form of national sales tax, but would be hidden in the price of products and therefore easy to increase. Moreover, every time they increase the VAT, they would use that as an excuse to raise income tax rates for “distributional fairness.” It is no exaggeration to say that the VAT is the biggest fiscal threat to the cause of limited government.
One final point about the column. Economists don’t love the VAT, per se, but they do view it as being less destructive – per dollar raised – than the income tax. But less destructive is still destructive. And since the VAT would be in addition to the taxes we have now (and actually create the conditions for higher income tax rates), its enactment would create a lose-lose situation for taxpayers.
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