The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity
The subtitle tips the hand of Brian Domitrovic a bit, but the central idea is a good one: despite its importance in world economic history, the combination of policies that broke stagflation's back and spurred the economic expansion of the 1980's has not benefited from an academic history. Domitrovic sets out to write one; he succeeds in substantial part. At times lapsing into hagiographic hallucinations about Arthur Laffer and Robert Mundell, the book does an admirable job of sketching the underlying economic intuition, academic building blocks, and political barriers that lead to the "supply-side revolution." As for the hero-worship, many historians fall victim to their subjects. That weakness could be overlooked. It was the final dozen pages in which an academic history delved into policy suggestions for President Obama that the author's credibility was irretrievably shattered. (That said, some of the suggestions looked pretty reasonable.)
Some people still complain about "Reaganomics," "trickle-down economics," or "voodoo economics." The three are different, and Domitrovic does a good job of identifying the key policy planks for supply-siders: tight money and marginal tax cuts. He tends to brush off criticisms about inequality a bit too lightly. Economists are interested in inequality, just not as good at assessing it as efficiency. Citizens and humans are certainly interested in equality. Avoiding the trade-offs inherent in any economic policy, and in fact denying their very existence, makes the reader suspicious.
The personalities are captivating---almost as interesting as the theory and its effectiveness. Mundell and Laffer are just the starting point, each coming from the tail of the distribution. Jude Wanniski was a different duck. The beauty is that you get some super-straight-laced conservative types too boot: Robert Bartley, Paul Craig Roberts, even All-American Jack Kemp. Certainly it is easier to come off as smooth and cosmopolitan when you're being compared to Jimmy Carter. For what it's worth, Domitrovic seems to miss the point that Mundell won the Nobel for his contributions on international capital flows rather than domestic economic policy.
People recognize that the supply-side policies worked in the early 1980's. That leaves two questions for the future. First, will continual marginal rate cuts and tight money continue to work. Can marginal rate cuts yield more revenue increases, or do the budgetary problems that result from political inability to control spending finally outweigh the benefits? Second, what other implications do supply-side policies have? What costs does income inequality impose in the long run? How might the policy mix be adjusted to mitigate the undesired effects?
Takeaway: a nice idea about a really compelling economic policy shift, but not carried out as well as one would hope. Critical thinking is the pathway to credibility.
Friday, February 25, 2011
Sunday, January 31, 2010
Book Review: Animal Spirits
There is really only one achievement that gives economists public credibility: the ability to reliably explain (and preferably predict) macroeconomic phenomena. The recent economic crisis has left many professional economists shrugging. Standard models and textbook economics don't offer explanations. Even new-fangled behavioral economics research can't explain why an overheated housing sector managed to kneecap the entire world economy. August economists George Akerlof and Robert Shiller propose a theory that they claim will explain recent events in Animal Spirits , which is a term stolen from the theory of none of other than the revived John Maynard Keynes.
Akerlof and Shiller actually enumerate five animal spirits: confidence, fairness, corruption, money illusion, and stories. Keynes simply observed that animal spirits, perhaps a code for irrational behavior, could take hold in financial markets. Akerlof and Shiller explore the effects of their animal spirits in specific economic circumstances. In the process, they try to answer the kinds of questions that give economists panache. Why do economies go into depression (and what could we do about it)? Why can't some people find a job? Why are financial prices volatile when expected earnings are not? Why are minorities poor?
The book is well-written and interesting. It variably connects recent research in behavioral economics (e.g., Ernst Fehr on fehr-ness) and historical economic theory (e.g., Milton Friedman on, well, everything) to current examples of economic questions. It endorses an activist role for government in cases where animal spirits prevent smooth functioning of markets.
Perhaps the least satisfying element is the volume's brevity. Expanding the theory to additional examples would certainly be entertaining. However, the academics surely anticipate that this will happen. Engaging minds will construct and test hypotheses, provided of course that convincing measures of stories and confidence can be found. Reasonably extensive research on corruption, fairness, and money illusion exists.
Akerlof and Shiller actually enumerate five animal spirits: confidence, fairness, corruption, money illusion, and stories. Keynes simply observed that animal spirits, perhaps a code for irrational behavior, could take hold in financial markets. Akerlof and Shiller explore the effects of their animal spirits in specific economic circumstances. In the process, they try to answer the kinds of questions that give economists panache. Why do economies go into depression (and what could we do about it)? Why can't some people find a job? Why are financial prices volatile when expected earnings are not? Why are minorities poor?
The book is well-written and interesting. It variably connects recent research in behavioral economics (e.g., Ernst Fehr on fehr-ness) and historical economic theory (e.g., Milton Friedman on, well, everything) to current examples of economic questions. It endorses an activist role for government in cases where animal spirits prevent smooth functioning of markets.
Perhaps the least satisfying element is the volume's brevity. Expanding the theory to additional examples would certainly be entertaining. However, the academics surely anticipate that this will happen. Engaging minds will construct and test hypotheses, provided of course that convincing measures of stories and confidence can be found. Reasonably extensive research on corruption, fairness, and money illusion exists.
Thursday, January 21, 2010
Book Review: Nudge
I am admittedly late to the party in reading this popular book by University of Chicago faculty members Richard Thaler and Cass Sunstein. It is a popular interpretation of the work by behavioralists on the effects of framing and choice architecture. The authors endorse thoughtful choice architecture in light of known proclivities of humans to make decisions which might not be in their best long-term interests. The idea is that by providing people with a "nudge," they are more apt to make the "right" decision. The authors are fairly consistent in this message, although a couple of early digressions on daylight savings time, social interactions, and the Rev. Jim Jones confuse the reader into thinking that nudges cause ineffective substitution effects, information cascades and peer effects, and who-knows-what, respectively. After about the fourth chapter the authors settle into a groove that illuminates their central point.
The nudge framework is presented as an alternative to both unbridled (and often overwhelming) choice and to direct command via governmental proscription. Framing effects have been pretty well explored in the academic literature on behavioral and experimental economics. The book was released in 2007 and in paperback in 2008. It was apparently influential in shaping the thinking of some members of Obama's administration, of which Sunstein is one.
I am broadly sympathetic with the attention that could maybe should be paid to choice architecture. If advertisers and marketers have learned the lessons, and there seems to be plenty of evidence that they have, then perhaps others responsible for public and private decision-making (either their own or that of other people) can also benefit from these insights. While the authors do an admirable job of anticipating their critics in a chapter near the end of the book, they don't explicitly address one of my concerns about libertarian paternalism, their ostensibly-oxymoronic moniker for profligate governmental nudging.
Economists are perhaps unique in their uniform objective of efficiency--most other disciplines, including the subset of behavioral economists--acknowledge the richness of other possible motivations for human decisions. So what makes a decision "right?" Which outcome should we nudge towards? To take a concrete example, consider the nudge inherent in proposed changes to laws for labor union formation: instead of an anonymous ballot, advocates endorse changing the choice architecture so that workers need only sign a (non-anonymous) card. This is pretty clearly the type of nudge that Thaler and Sunstein are talking about. Changing the default is a simple way to affect the outcome of infrequent decisions like unionization. But who gets to decide that more unionization is a good thing? On what grounds? The apparent answer is the party in power, implying that nudges can be undone and reversed as political winds change. On these grounds I'm not sure that nudges are likely to "improve decisions about health, wealth, and happiness;" it seems more likely that they are simply a tool to effect different decisions. So far as there is broad agreement about goals (healthier food choices reduce public health expenditures), nudges are useful. When (potentially clandestine) agendas are forwarded, as in the labor unionization case, nudges take on a less Pareto-improving shine.
The nudge framework is presented as an alternative to both unbridled (and often overwhelming) choice and to direct command via governmental proscription. Framing effects have been pretty well explored in the academic literature on behavioral and experimental economics. The book was released in 2007 and in paperback in 2008. It was apparently influential in shaping the thinking of some members of Obama's administration, of which Sunstein is one.
I am broadly sympathetic with the attention that could maybe should be paid to choice architecture. If advertisers and marketers have learned the lessons, and there seems to be plenty of evidence that they have, then perhaps others responsible for public and private decision-making (either their own or that of other people) can also benefit from these insights. While the authors do an admirable job of anticipating their critics in a chapter near the end of the book, they don't explicitly address one of my concerns about libertarian paternalism, their ostensibly-oxymoronic moniker for profligate governmental nudging.
Economists are perhaps unique in their uniform objective of efficiency--most other disciplines, including the subset of behavioral economists--acknowledge the richness of other possible motivations for human decisions. So what makes a decision "right?" Which outcome should we nudge towards? To take a concrete example, consider the nudge inherent in proposed changes to laws for labor union formation: instead of an anonymous ballot, advocates endorse changing the choice architecture so that workers need only sign a (non-anonymous) card. This is pretty clearly the type of nudge that Thaler and Sunstein are talking about. Changing the default is a simple way to affect the outcome of infrequent decisions like unionization. But who gets to decide that more unionization is a good thing? On what grounds? The apparent answer is the party in power, implying that nudges can be undone and reversed as political winds change. On these grounds I'm not sure that nudges are likely to "improve decisions about health, wealth, and happiness;" it seems more likely that they are simply a tool to effect different decisions. So far as there is broad agreement about goals (healthier food choices reduce public health expenditures), nudges are useful. When (potentially clandestine) agendas are forwarded, as in the labor unionization case, nudges take on a less Pareto-improving shine.
Monday, January 11, 2010
Book Review: Superfreakonomics
Steven Levitt and Stephen Dubner follow on the tremendous success they enjoyed with their initial effort, Freakonomics, by pushing the envelope beyond sumo wrestlers to hookers.
The final chapter has been the source of virtually all discussion about this book. I'd embed the hyperlinks, but I'm way too lazy. Instead of joining the plaintive cries of heresy by those who would prefer faster and more immediate action to counteract limate change, or the more reasonable queries about the facts as Levitt and Dubner present them (e.g, DeLong), I'd like to address my concern as an economist. I expect Levitt to get the economics right, even if Dubner wrote most of the chapter.
In trying to be provocative and a little cute, the authors suggest that geoengineering might be a cost-effective way to offset emissions. Maybe it is. Certainly some of its proponents are wicked smart guys (e.g., Myhrvold). Forget about the engineering problems--they are easy to solve--the underlying problem is that the climate is a public good. We can't prevent anyone on the planet from experiencing the same climate as the rest of us, and one individual does not preclude another from experienceing the climate. So the economic issue involved in forestalling global cliamte change is a public good provision problem.
Public goods are not always provided in optimal quantites by private actors (sometimes they are--lighthouses, for example) for any number of reasons. One reason that Copenhagen was such a miserable failure is that nobody figured out how to solve the strategic interaction problem inherent in the necessary multilateral action. All of Europe can preach what it wants, but if China and India head in the opposite direction, the aggregate effect will be negligible.
Again, the problem is not that we don't know how to curtail emissions--we do. We can put a price on carbon, which will provide a valuable incentive. There are a number of good ways to do this through tradable permits, taxes, or other instruments. The problem is in imposing/enforcing that price everywhere in the world when there is a strong incentive to cheat.
Pumping sulfur dioxide into the stratosphere will supposedly alter the climate and could be calibrated to just offset warming due to anthropogenic emissions. Great. But geoengineering is also a public good. Levitt and Dubner blithely ignore the issues of public good provision. Who decides where, how much, and when to pump the gas into the air? Who pays for it? What happens if someone doesn't want to pay their share?
Levitt and Dubner's basic insight is maybe there's a cheaper way to get to the objective stated in the Stern report. Fine. But their proposal in no way moves us any closer to the geoengineering solution. Albeit the relatively low price tag sugegsts that a small number of wealthy indidivudals could unilaterally affect the global climate, but who would trust them? Did anyone else get scared by SPECTRE in all of those Bond movies? After all of the schlock about thinking "freaky," or like an economist, exploring the hidden side of everything, ..., I expected more from the authors.
The final chapter has been the source of virtually all discussion about this book. I'd embed the hyperlinks, but I'm way too lazy. Instead of joining the plaintive cries of heresy by those who would prefer faster and more immediate action to counteract limate change, or the more reasonable queries about the facts as Levitt and Dubner present them (e.g, DeLong), I'd like to address my concern as an economist. I expect Levitt to get the economics right, even if Dubner wrote most of the chapter.
In trying to be provocative and a little cute, the authors suggest that geoengineering might be a cost-effective way to offset emissions. Maybe it is. Certainly some of its proponents are wicked smart guys (e.g., Myhrvold). Forget about the engineering problems--they are easy to solve--the underlying problem is that the climate is a public good. We can't prevent anyone on the planet from experiencing the same climate as the rest of us, and one individual does not preclude another from experienceing the climate. So the economic issue involved in forestalling global cliamte change is a public good provision problem.
Public goods are not always provided in optimal quantites by private actors (sometimes they are--lighthouses, for example) for any number of reasons. One reason that Copenhagen was such a miserable failure is that nobody figured out how to solve the strategic interaction problem inherent in the necessary multilateral action. All of Europe can preach what it wants, but if China and India head in the opposite direction, the aggregate effect will be negligible.
Again, the problem is not that we don't know how to curtail emissions--we do. We can put a price on carbon, which will provide a valuable incentive. There are a number of good ways to do this through tradable permits, taxes, or other instruments. The problem is in imposing/enforcing that price everywhere in the world when there is a strong incentive to cheat.
Pumping sulfur dioxide into the stratosphere will supposedly alter the climate and could be calibrated to just offset warming due to anthropogenic emissions. Great. But geoengineering is also a public good. Levitt and Dubner blithely ignore the issues of public good provision. Who decides where, how much, and when to pump the gas into the air? Who pays for it? What happens if someone doesn't want to pay their share?
Levitt and Dubner's basic insight is maybe there's a cheaper way to get to the objective stated in the Stern report. Fine. But their proposal in no way moves us any closer to the geoengineering solution. Albeit the relatively low price tag sugegsts that a small number of wealthy indidivudals could unilaterally affect the global climate, but who would trust them? Did anyone else get scared by SPECTRE in all of those Bond movies? After all of the schlock about thinking "freaky," or like an economist, exploring the hidden side of everything, ..., I expected more from the authors.
Tuesday, June 23, 2009
Book review: A Farewell to Alms
Ambitiously-subtitled "A Brief Economic History of the World," UC-Davis economist Gregory Clark really tries to do three things in A Farewell to Alms.
First, he attempts to define economic conditions around the world prior to the Industrial Revolution, asserting that living conditions in different countries were largely equal and consonant with the vision of physical limits to economic growth propounded by Thomas Malthus. This is a difficult problem of inference from spotty and inconsistent data, and is typified by keyhole comparisons across centuries and civilizations.
Second, Clark explores the causes of the Industrial Revolution in England and its pattern of diffusion, albeit somewhat less convincingly than the previous exploration of Malthusian economies. Taking a stab at both the where and the when of the escape from the Malthusian trap is admittedly a high bar to try to clear.
Third, the narrative searches for some explanation of the pronounced divergence in growth rates and material living standards since the Industrial Revolution that has opened a gap between developed and developing countries. Explanations focus on the relative intensities of labor and capital usage in similar industries, notably textiles. Despite more and better data, the endogeneity of growth is a difficult empirical reality.
One the whole, the book is very detailed as the weight of academic evidence on these issues is meticulously brought to bear, yet the treatment is somewhat lighter than a standard academic tome. The result is an intermediate pace that is noticeably more formal than much of the popular economics literature that seeks to "explain" globalization. For anyone accustomed to reading academic work, it moves along quite nicely.
While some gaps must necessarily appear in a book with such a broad-ranging and ambitious objective, this volume makes a reasonable pass at presenting the logic of paradigmatic economic models as applied by economic historians and scholars of institutional change and growth to the causes and results of industrialization.
First, he attempts to define economic conditions around the world prior to the Industrial Revolution, asserting that living conditions in different countries were largely equal and consonant with the vision of physical limits to economic growth propounded by Thomas Malthus. This is a difficult problem of inference from spotty and inconsistent data, and is typified by keyhole comparisons across centuries and civilizations.
Second, Clark explores the causes of the Industrial Revolution in England and its pattern of diffusion, albeit somewhat less convincingly than the previous exploration of Malthusian economies. Taking a stab at both the where and the when of the escape from the Malthusian trap is admittedly a high bar to try to clear.
Third, the narrative searches for some explanation of the pronounced divergence in growth rates and material living standards since the Industrial Revolution that has opened a gap between developed and developing countries. Explanations focus on the relative intensities of labor and capital usage in similar industries, notably textiles. Despite more and better data, the endogeneity of growth is a difficult empirical reality.
One the whole, the book is very detailed as the weight of academic evidence on these issues is meticulously brought to bear, yet the treatment is somewhat lighter than a standard academic tome. The result is an intermediate pace that is noticeably more formal than much of the popular economics literature that seeks to "explain" globalization. For anyone accustomed to reading academic work, it moves along quite nicely.
While some gaps must necessarily appear in a book with such a broad-ranging and ambitious objective, this volume makes a reasonable pass at presenting the logic of paradigmatic economic models as applied by economic historians and scholars of institutional change and growth to the causes and results of industrialization.
Tuesday, April 7, 2009
Guessing game
"Now they's good timber up here too. Real good timber. It's been cut over fifteen twenty year ago and so maybe it ain't big timber yet, but looky here. While you're a laying down there in your bed at night this timber is up here growin. Yessir. And I mean that sincerely. They is real future in this property. As much future as you'll find anywheres in this valley. Maybe more. Friends, they is no limits to the possibilities on a piece of property like this. I'd buy it myself if I had any more money. And I believe you all know that ever penny I own is in real estate. And ever one I've made has been from real estate. If I had a million dollars I would have it ever cent invested in real estate within ninety days. And you all know that. They ain't no way for it to go but up. A piece of land like this here I sincere believe will give ye ten percent on your investment. And maybe more. Maybe as high as twenty percent. Your money down here in this bank won't do that for ye and you all know that. There is no sounder investment than property. Land. You all know that a dollar won't buy what it used to buy. A dollar might not be worth but fifty cents a year from now. And you all know that. But real estate is goin up, up, up." -- 1973
who?
who?
Sunday, March 8, 2009
Book Review: Here Comes Everybody
I once wrote an article about the Quincy Library Group, an unlikely group of environmentalists, loggers, and small-town residents in Northern California. I spent quite a bit of time relating how difficult and costly it was to organize this group of people--in 1997. Looking back, today the task would be much easier, thanks in large part to the proliferation of communication tools that preclude the need to book a room in the town library in order to form an organization bent on improving forest management. (What would they have named it today?)
Clay Shirky claims that "social tools" like email, text messaging, and open-source models for business and pleasure represent a revolution of historic proportion. Here Comes Everybody is his magnum opus on the topic, condensing years of writing and teaching on the topic into a well-written volume. Detailed and well-chosen examples illustrate his point: from finding a phone left in a NYC taxicab to fomenting political dissent in Belarus to finding a friend of a friend in a busy bar. The chapters address how individuals generate media instead of simply consuming it, with the result that we have a publish-then-filter model, and explores some of the implications of these developments for social networks. The book is clearly better than other (unmentioned) attempts to "explain the current communication revolution." One of the strengths of the book is its reference to a Coasean framework for organization.
Coase laid out a framework for explaining who some activity takes place in a single organized entity--a firm--and other activity takes place in a decentralized way--the market. Shirky interjects a third category--the group--that he thinks will come to play an increasingly important role in society. In fact, he spends most of the book defining and illustrating what he thinks a group is. For example, a group needs three things: a promise (idea), a tool (means), and a bargain (contract). Why is this not just a new type of organization that is particularly suited to taking advantage of power law contributions? Shirky's argument is that transaction costs incurred in organizing groups have been dramatically lowered. Agreed. According to Coase, lowering transaction costs should lead to more activity period, and more activity within the scope of the firm. The Linux work group is still a firm even though its members work for free. Perhaps what we need is a retooling of our theories of not-for-profit activity--I agree.
But what about the challenge to familiar organizations (firms) that the existence of groups poses? Shirky cites the Boston archdiocese abuse scandal, and the organization of parishioners to bring it to the forefront of public debate as an example of how "groups" undermine "firms." Given the inherent heterogeneity of "groups," ranging from Wiccan discussion groups, to networks of college friends on Facebook, to community organizations working for specific changes in managing the forest surrounding their town, this new category doesn't seem very different from firms. There are big firms and small firms. Small firms rise and fall daily; when big firms crash, it makes the network news. So too with groups. It may be that groups are the kind of firms that can easily take advantage of power law or open source architecture. That contrasts them nicely to the existing and familiar firms that our government is trying to save.
My final critique of amending the Coasean framework with the introduction of the group is it makes no relation between them and markets. Coase's theory was useful (in part) because it was parsimonious--there are firms and there are markets, both broadly defined. Shirky's observations about changes in communication having large implications in business and society are astute, but unique only in their articulateness. Shoehorning a new category into Coase's framework without relating it to one of the existing two strikes me as a bit presumptuous and intellectually unsatisfactory. As the revolution progresses, perhaps the linkage will become more clear, and Shirky will have staked an intellectual claim.
Clay Shirky claims that "social tools" like email, text messaging, and open-source models for business and pleasure represent a revolution of historic proportion. Here Comes Everybody is his magnum opus on the topic, condensing years of writing and teaching on the topic into a well-written volume. Detailed and well-chosen examples illustrate his point: from finding a phone left in a NYC taxicab to fomenting political dissent in Belarus to finding a friend of a friend in a busy bar. The chapters address how individuals generate media instead of simply consuming it, with the result that we have a publish-then-filter model, and explores some of the implications of these developments for social networks. The book is clearly better than other (unmentioned) attempts to "explain the current communication revolution." One of the strengths of the book is its reference to a Coasean framework for organization.
Coase laid out a framework for explaining who some activity takes place in a single organized entity--a firm--and other activity takes place in a decentralized way--the market. Shirky interjects a third category--the group--that he thinks will come to play an increasingly important role in society. In fact, he spends most of the book defining and illustrating what he thinks a group is. For example, a group needs three things: a promise (idea), a tool (means), and a bargain (contract). Why is this not just a new type of organization that is particularly suited to taking advantage of power law contributions? Shirky's argument is that transaction costs incurred in organizing groups have been dramatically lowered. Agreed. According to Coase, lowering transaction costs should lead to more activity period, and more activity within the scope of the firm. The Linux work group is still a firm even though its members work for free. Perhaps what we need is a retooling of our theories of not-for-profit activity--I agree.
But what about the challenge to familiar organizations (firms) that the existence of groups poses? Shirky cites the Boston archdiocese abuse scandal, and the organization of parishioners to bring it to the forefront of public debate as an example of how "groups" undermine "firms." Given the inherent heterogeneity of "groups," ranging from Wiccan discussion groups, to networks of college friends on Facebook, to community organizations working for specific changes in managing the forest surrounding their town, this new category doesn't seem very different from firms. There are big firms and small firms. Small firms rise and fall daily; when big firms crash, it makes the network news. So too with groups. It may be that groups are the kind of firms that can easily take advantage of power law or open source architecture. That contrasts them nicely to the existing and familiar firms that our government is trying to save.
My final critique of amending the Coasean framework with the introduction of the group is it makes no relation between them and markets. Coase's theory was useful (in part) because it was parsimonious--there are firms and there are markets, both broadly defined. Shirky's observations about changes in communication having large implications in business and society are astute, but unique only in their articulateness. Shoehorning a new category into Coase's framework without relating it to one of the existing two strikes me as a bit presumptuous and intellectually unsatisfactory. As the revolution progresses, perhaps the linkage will become more clear, and Shirky will have staked an intellectual claim.
Subscribe to:
Posts (Atom)