Monthly Archive for June, 2010

An Immense Discovery

bastiat.smallA month ago, I prematurely celebrated the 209th birthday of the great economic communicator Frederic Bastiat. Today (unless I’ve screwed up a second time) is actually his birthday. A good way to celebrate is to read (or reread!) Bastiat’s little masterpiece Economic Sophisms; you will never see the world the same way again. Here’s a taste:

At a time when everyone is trying to find a way of reducing the costs of transportation; when, in order to realize these economies, highways are being graded, rivers are being canalized, steamboats are being improved, and Paris is being connected with all our frontiers by a network of railroads and by atmospheric, hydraulic, pneumatic, electric, and other traction systems; when, in short, I believe that everyone is zealously and sincerely seeking the solution of the problem of reducing as much as possible the difference between the prices of commodities in the places where they are produced and their prices in the places where they are consumed; I should consider myself failing in my duty toward my country, toward my age, and toward myself, if I any longer kept secret the wonderful discovery I have just made.

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For Heaven’s Sake

HuckabeeMAHere’s Mike Huckabee, quoted in The New Yorker:

If somebody asked me, How do I get to Heaven, I would tell them that the only way I personally am aware of is faith in Christ, because I believe the New Testament. That’s the only map I got. Somebody says, Well, I got a different map. O.K.! You know what? If it works, I’m not going to argue with you.

Well, that makes sense. If somebody asked me, How do I get to Mount Rushmore, I would tell them that the only way I personally am aware of is Route 90, because I believe in Google Maps. Somebody says, Well, I got a different map. O.K.! You know what, if it works, I’m not going to argue with you. Unless, of course, I actually care whether you make it to Mount Rushmore or not, in which case I might take the trouble to defend my map.

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I’m taking four days off for camping, ice cream making and general frolicking in the woods. See you all on Tuesday!

The Machinery of Freedom

machineryDavid D. Friedman’s The Machinery of Freedom, a classic of libertarian thought, has long been out of print and hard to find. (Well, it’s easy to find, actually. But hard to find for less than about a hundred bucks.) It is therefore a very good thing that David’s gotten his publisher’s permission to post the entire book on the World Wide Web, for free.

What does David get out of this? Well first, of course, he wants you to read his book. But second, he’s about to start preparing a third edition and welcomes reader feedback. If you post your comments here, I’ll make sure he sees them.

Click here to comment or read others’ comments.

Nonsense 4.0

powerballThe most recent winning Powerball numbers were 9,30,31,50,54,39. But a month ago, nobody would have placed any significant probability on those exact numbers coming up. What better illustration that questions about the future cannot be answered, even in the probabilistic sense?

If that made you scratch your head, your scalp will probably be rubbed raw before you’re finished reading Anatole Koletsky‘s Wall Street Journal essay, excerpted from his book Capitalism 4.0. (Caveat: I have not read the book, so I’m not sure how much danger the rest of it poses to your scalp, or to your sanity.) Mr. Koletsky’s “proof” that some questions “cannot be answered, even in a probabilistic sense” is this:

In 1980, nobody would have put any significant probability on computer sales exceeding car sales by a factor of 10 to 1.”

But that’s not all! There’s also this:

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You Can’t Keep a Good Straw Man Down

The artwork above is courtesy of Jodi Beggs, proprietress of the lively Economists Do It With Models site, who graced us with a visit in yesterday‘s comments and expanded on those comments on her own page. (That’s me kicking Paul Krugman in the gut.)

Jodi objects to the tone, and in part to the substance, of my response to Paul’s recent attacks on the “deficit hawks” who oppose various spending programs that Paul happens to favor. I’d summarized his rhetorical technique as follows:

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There He Goes Again

krugmanPaul Krugman sinks to a new low with this passage:

In America, many self-described deficit hawks are hypocrites, pure and simple. They’re eager to slash benefits for those in need but their concerns about red ink vanish when it comes to tax breaks for the wealthy. Thus, Senator Ben Nelson, who sanctimoniously declared that we can’t afford $77 billion in aid to the unemployed, was instrumental in passing the first Bush tax cut, which cost a cool $1.3 trillion.

Where to begin?

First, no economist—let me repeat that—NO economist, not even Paul Krugman on the days when he’s being an economist—would count a tax cut as a cost for purposes of policy analysis. A cost is something that consumes resources, not something that changes the ownership of resources. My Principles of Economics students all understand this; so, presumably, does the Nobel-prize winning author of a prominent Principles textbook. (A possible exception: You could call a present-day tax cut costly if it necessitates a future tax increase which, for some reason, is costlier to collect than the present-day tax. I guarantee you this is not what Krugman has in mind. If it were,the $1.3 trillion number that he highlights would be totally irrelevant to the actual cost.)

Next, unemployment benefits are costly, both insofar as they discourage recipients from seeking work and insofar as they necessitate taxes that discourage productive activity. The cost of $77 billion worth of benefits is not $77 billion, but it’s not zero either.

So unemployment benefits are costly and tax cuts are not. Which doesn’t mean that all unemployment benefits are bad or that all tax cuts are good, but it’s plenty adequate to absolve the hypocrisy charge.

But Krugman, as is his wont lately, appears committed to the following flat-out dishonest rhetorical agenda:

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What Even Google Can’t Tell You

How far is it from Seattle to Vancouver? About 142 miles, according to Google maps. But a classic paper from about 15 years ago estimates the distance as 75,000 “economic miles”, meaning that the cost of transporting goods across the border is equivalent to the cost of adding an extra 75,000 miles to the trip. A subsequent paper estimates the economic distance from the United States to Japan as roughly 7 light years, raising the question of why we trade with Japan when it would be so much cheaper to trade with Alpha Centauri, a mere 4 light years down the road.

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Environmental Economics

oilspillWhen big companies (like, say, British Petroleum) wreak great havoc (like, say, by spilling millions of gallons of oil into the Gulf of Mexico), it can be good policy to make them compensate their victims (like, say, with a $20 billion claim fund). It can also be bad policy.

A.C. Pigou taught us that we get better outcomes when decisionmakers bear the costs of their actions. Ronald Coase taught us that Pigou’s lesson cuts two ways. The shrimp boats that are sitting idle today are sitting idle partly because BP decided to drill in the gulf, but also partly because the shrimpers chose to operate in the vicinity of an oil rig. In this case, making BP feel the costs of its own decisions entails insulating the shrimpers from the costs of theirs.

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Alternative History

I’m visiting the Atlanta Fed this week, and had planned to arrive in my hotel room Tuesday evening in time to compose something interesting for you to read Wednesday morning. But the Atlanta airport was “closed for weather” as the airlines choose to word it, so I flew to Greenville, SC instead, drove a rental car to Atlanta, and arrived too late to say anything thoughtful.

I will leave you instead with this seven-year-old quote, and let you contemplate how history might have been different if anyone had listened:

Today, I will introduce the Free Housing Market Enhancement Act, which removes government subsidies from the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the National Home Loan Bank Board. . . . Congress should act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors who were misled by foolish government interference in the market.

—Ron Paul, 2003

(Hat tip to Patri Friedman.)

Bad Logic — Or Bad Arithmetic?

In a blog post on what he calls the “Bad Logic of Fiscal Austerity”, Paul Krugman lays the following calculation before the public:krugman

Let me start with the budget arithmetic, borrowing an approach from Brad DeLong. Consider the long-run budget implications for the United States of spending $1 trillion on stimulus at a time when the economy is suffering from severe unemployment.

That sounds like a lot of money. But the US Treasury can currently issue long-term inflation-protected securities at an interest rate of 1.75%. So the long-term cost of servicing an extra trillion dollars of borrowing is $17.5 billion, or around 0.13 percent of GDP.

Yes. That’s the long-term cost of borrowing an extra trillion dollars. (Actually, the cost is even lower than Krugman says it is.) But the long term cost of spending an extra trillion dollars is somewhere in the vicinity, of, oh, about a trillion dollars, or about 7.4% of GDP.

Now you might argue that if some of that spending puts unemployed resources to work, then the true cost of spending a trillion is somewhat less than a trillion, but Krugman, at least here, does not attempt to make that argument. Nor do I expect that even Paul Krugman would dare to argue that an adjustment for unemployed resources could reduce the cost of government spending by roughly 98%.

Krugman is right when he says that borrowing is cheap. But the issue isn’t borrowing; it’s spending—and spending is expensive. It appears that like the President, Krugman wants to divert your attention from spending to borrowing so he can dismiss legitimate concerns without even acknowledging them. It’s a cheap trick. Don’t let either of them get away with it.

Edited to add: In fairness to Krugman, he appears to be imagining that the trillion is never paid back, so that the cost of spending it is simply the debt service of 17.5 billion per year forever. But his column makes it sound like the cost is a single one-time payment of 17.5 billion, which is absurd.

Riddle Me This

qA few years back, when Google acquired YouTube, I was heard to remark that the deal seemed kind of…imprudent. Given YouTube’s potential as a lawsuit generator, the best owners might not be the guys with some of the world’s deepest pockets.

A colleague points out that it seems equally odd for a company with pockets the depth of BP’s to be engaged in as risky an activity as deep water oil drilling. Why wasn’t this project sold off to someone with a lot less to lose?

Maybe BP expected to be protected by laws limiting its liability, but surely it was foreseeable that those laws might be circumvented, as it appears they’re about to be. So if that’s part of the answer, it’s only a small part.

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Weekend Roundup

roundup2The reason we have journalists is to direct our attention to both That Which Is Seen and That Which Is Unseen. The New York Times fell down on the job last week when it came to proposed regulation of the nanny market, by showing us That Which Is Seen by the New York Times while overlooking not only That Which Is Unseen but even That Which Is Seen By Everybody Without Blinders On. On Monday, we did our bit to pull the blinders off.

On Wednesday we contemplated the prospect of Betelgeuse going supernova, and asked this question: If an explosion happens, by how much will various earthbound observers disagree about its timing? Answer: If the explosion becomes visible just as you’re standing on a streetcorner while a driver runs over your toe, heading in the direction of Betelgeuse at 70 miles per hour, then you’ll say it took place 600 years ago whereas the driver will say it took place 600 years plus half an hour ago. A small amount in the scheme of things, but here at The Big Questions, we worry about the details.

(The geometry is here. To forestall confusion, the steeper red line is not the driver’s worldline; it is parallel to the driver’s worldline. His worldline crosses the vertical axis at the time when light from the explosion arrives, about 600 years above the illustrated line.)

On Thursday, we lamented the politicization of the President’s Council of Economic Advisors, which, as our commenter Uncle Maury observed, began under the first President Bush, but has been carried to new depths by the current administration. It is sad indeed that Council Chair Christy Romer allowed herself to be dragged into this muck.

And on Tuesday and Friday, we had a little light refereshment.

I’ll see you next week.

Posted Without Comment

Teachers and Councilors

S030409JB-0043.JPGThe White House has dispatched Christy Romer, a distinguished economist and chair of the President’s Council of Economic Advisors, to rustle up support for emergency spending to keep teachers employed. Her piece in the Washington Post is remarkable for a complete absence of arguments in favor of spending this money on teachers as opposed to say, plumbers or cab drivers or pharmaceutical researchers or computer programmers or minor league ballplayers. (See for yourself.)

So why the singular focus on teachers? The answer, of course, is that unlike plumbers or cab drivers or pharmaceutical workers or computer programmers, teachers, through their unions, were major contributors to the Obama campaign.

All victorious politicians engage in the unsavory practice of diverting spoils to their most vigorous supporters at everyone else’s expense. In this, the current administration may be no more blameworthy than any other. But I’m pretty sure that sending out the chair of the Council of Economic Advisors to defend these political payoffs marks a new sort of low. Traditionally, the Council is composed of first-rate academics whose job is to give good counsel and remain above the political fray. Shame on the President for debasing that noble mission, and shame on Christy Romer for going along with it.

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I’m not pompous; I’m pedantic.
There’s a difference.
The Calligraphic Button Catalogue

Just about a year ago, a team of scientists reported that Betelgeuse—the bright red star in Orion’s shoulder—appears to have shrunk by about 15% since 1993. That would mean the diameter’s been shrinking at about 1200 miles an hour for all that time.

Such shrinkage—if it’s really happening (it’s hard to be sure)—could be the precursor to a supernova explosion, which would be way cool. The mathematician John Baez computes that a supernova Betelgeuse might be roughly as bright as the full moon, or maybe up to three times as bright.

Surprisingly, it took almost a year for this information to be widely reported on the Internet, but in the past few weeks, a number of sites have cropped up touting the upcoming supernova, and, as you might expect, a few prophecying doom. You can ignore the doomsayers; at a distance of 600 light years, Betelgeuse is too far away to hurt us.

Browsing the various science forums (such as Discover‘s), I’m struck by how often the following simple question comes up: Given that Betelgeuse is 600 light years away, is it or is it not true that it would it would take 600 years for us to notice any explosion? Or to put this another way: If the sky lights up with a new moonlike object tomorrow night, does that mean the explosion took place 600 years ago?

A pretty good answer—and the one that’s being given on all those science forums—is “yes”. But that can’t be exactly right, at least not for all of us, because at any given moment some of us are sitting in our living rooms while others are driving on the Interstates. Relativity tells us that if we’re moving relative to each other, then we must disagree about the times of distant events.

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The Star of the Phillipines

One year ago today, somewhere in the Phillipines, a reporter checked his web logs and wondered where all the new readers were coming from. Today we celebrate the first anniversary of one of the most unfortunately worded headlines in the history of journalism.

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Nanny Nanny Boo Boo

I guess this is why I never got that call from the New York Times.

To be a Times contributor, you apparently have to write like Mara Gay, who penned these lines for a front page article last week:

New York may soon become the first state to offer employment protection for nannies.

The state Senate passed a bill of rights for domestic workers this week, a measure that would require employers to offer New York’s approximately 200,000 household workers paid holidays, overtime pay and sick days.

Supporters say the step will provide needed relief to thousands of women — and some men — who are helping to raise the children of wealthier New Yorkers without any legal workplace rights beyond the federal minimum wage.

Now, you see, if I had been writing this article, it might have opened more like this:

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Weekend Roundup

I jumped the gun on Tuesday, celebrating Frederic Bastiat’s birthday about a month early. Fortunately, our commenter Cloudesly Shovell saved me from embarrassment by noting that Bastiat is well worth an entire month of celebration.

On Wednesday, we had some biting words about math education from my colleague Ralph Raimi, whose web page I continue to recommend for amusement and edification.

And on Thursday and Friday, we took on current events, lamenting the President’s misleading suggestion that tax increases can be a cure, or even a palliative, for excessive spending, and lamenting the general lack of perspective that leads to more gnashing of teeth over a $10 billion oil spill than a $300 deadweight loss due to taxation.

Several commentators noted that with this last post, we’d come full circle right back to Bastiat, author of timeless That Which is Seen and That Which is Not Seen. In the words of commenter Seth, “A duck caked in oil is seen. The deadweight loss is unseen.” (ScottN and others made the same point.) Yes, that’s probably the explanation. How sad that after 200 years, Bastiat’s lesson (that the unseen is as important as the seen) has yet to sink in.

See you Monday.

What’s Worse Than An Oil Spill?

Let’s try for a little perspective. The BP oil spill threatens to cause something like $10 billion worth of damage. That’s pretty bad. By contrast, an extra trillion dollars worth of federal spending threatens to cause something like $300 billion worth of deadweight loss (that is, underproduction due to tax avoidance and disincentives to work). That’s 30 times worse. How is it that so much angst about the former seems to be coming from people with a history of shrugging their shoulders at the latter?

Both $10 billion and $300 billion are extremely rough guesses, but the $300 billion figure comes from the widely cited estimates of Harvard’s Martin Feldstein, according to which a one dollar tax increase triggers about 30 cents in deadweight losses. Since a trillion in new spending means a trillion in new taxes (either now or in the future), we get $300 billion in deadweight loss.

Of course $10 billion worth of oil-related damage is still big enough to be worth a goodly dollop of angst. But keep these things in mind:

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Maple Tree Economics

mapleIn his speech at Carnegie-Mellon yesterday, the President lamented the growth of federal spending and proposed to attack the problem partly by letting the Bush tax cuts expire. Can you say non sequitur, boys and girls?

Now as it happens, I’ve got this maple tree in my yard that’s been growing much too fast for my tastes. In fact, it’s been growing far faster than I have. But inspired by the president, I’ve found a solution. I’m going to stock up on E.L. Fudge Double Stuf cookies so I can grow faster than the maple.

The President raises the real problem of excessive spending so that he can misdirect your attention to the phony “problem” of excessive government debt—that is, an excessive gap between spending and tax revenues. This is very like my raising the real problem of my overlarge maple tree in order to misdirect your attention to the phony “problem” of an excessive gap between the height of the maple and the size of my waistline—giving both me and the President equally flimsy excuses to do exactly what we wanted to do in any case, namely gorge out on junk food or let taxes rise.

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Making Math Palatable

My colleague Ralph Raimi is witty, acerbic and wise about many things, but particularly about mathematics education. A little time spent browsing around his web page will reap ample rewards in the form of both entertainment and edification. Today I’d like to share a little passage he sent me by email:

I have never tried to count the times I have read a newspaper article explaining that students are bored with math that has no visible practical application, and follows with an example of a teacher, or club, that rectifies the situation in some novel and engaging way.

In the present case a class has built a sculpture that resembles a graph of a modulated wave motion. Of all the practical, real-world
applications of mathematics! It is as practical as a snowman.

Why doesn’t anyone ask for real-world applications of table tennis? What a bore any game must be, that has no real-world application! Why do kids stand for it? Ping-pong again? Ugh.

But I can think of something: Let’s all make a model of a ping-pong ball in the school yard, seventy feet high, blocking all the entrances and thus preventing all us students from entering the (ugh) school. Then we can take our fishing poles and torn straw hats out from under our beds and, with the hats on our heads and fishing poles over our shoulders, all traipse together down the dusty road to Norman Rockwell’s house.

Frederic Bastiat

bastiat.smallToday is the 209th birthday of Frederic Bastiat, the patron saint of economic communicators.

Of all the essays ever written, the one I most wish every voter could read and understand is Bastiat’s That Which is Seen and That Which is Not Seen. A boy breaks a window. Someone in the crowd observes that it’s all for the best—if windows weren’t occasionally broken, then glaziers would starve. This can’t be right, says Bastiat. If it were, we’d have no reason to diapprove of a glazier who pays boys to break windows. But why is it wrong? It’s wrong because it focuses on what is seen—six francs in the glazier’s pocket—and ignores what is unseen, namely the shoemaker who is deprived of a sale because those six francs come from what would have been the homeowner’s shoe budget.

Bastiat’s great insight in this essay is that exactly the same fallacy, in only slightly subtler form, underlies many of the public policy positions that were taken seriously in the 19th century—and, we might add, in the 21st.

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