Good news for me

Just arrived in the mail today:

Dear Dr. Kates,

Good news for you: your article “Alesina and the Keynesians: Austerity and Say’s Law” has now been published in the following paginated issue of Atlantic Economic Journal: Volume 40, Issue 4 (2012), Page 401-415

It is good news. It is a paper I presented in July at a symposium on the work of Alberto Alesina who has provided an immense amount of empirical evidence showing that cuts to public spending generally lead to recovery, and the turnaround is almost immediate. This is the abstract:

Alberto Alesina’s empirical work has led to re-examination of Keynesian theory and policy. His demonstration that reductions in public spending are often followed by improvements in economic conditions is a direct contradiction of modern macroeconomic theory, where increases in aggregate demand are seen as the most important precondition for recovery even where such increases in demand are unproductive in themselves and largely wasteful. The present paper suggests that the theoretical framework necessary to understand Alesina’s empirical results is embedded within the classical theory of the cycle which argues that only value adding production could lead to recovery. Most importantly, the paper argues that only through a correct understanding of Say’s Law of markets can Alesina’s empirical results be properly understood.

Then to underscore the same point, there was this article in The Washington Post today by Anne Applebaum comparing Latvia and Greece in their response to the global financial crisis.

Even within Europe, after all, perceptions of economic policy can vary a great deal, as a quick comparison of Latvia and Greece reveals. Recently, the former has received some well-earned attention for its successful pursuit of economic austerity. In the wake of the 2008 crash, the Latvian government slashed public spending, fired a third of its civil servants and reduced salaries of those remaining while refusing to inflate the currency. Gross domestic product declined dramatically, falling 24 percent in two years. And then the recovery began. The Latvian GDP is now growing at more than 5 percent, and the budget deficit has been dramatically reduced.

You could either quote Alesina or you could quote me if you are trying to make a forecast of the policy consequences of reducing unproductive public spending. But if you would like to understand why it happened and not just discover that A follows B on a regular basis where A is a cut to public spending and B is recovery, you really do need to understand Say’s Law and the pre-Keynesian theory of the cycle.

And beyond all this, today I was reading Paul Krugman’s quite interesting and sensible 1994 book on free trade, Pop Internationalism, when I came across this (and to understand Krugman’s point you need to know that Friedrich List was a nineteenth century economist who continually advocated trade protection):

The new cult of List bears an uncanny resemblance to the right-wing supply-siders’ canonization of the classical French economist Jean-Baptiste Say, who claimed that the economy as a whole could never suffer from the falls in aggregate demand that produce recessions.

Well I would claim the same: an economy as a whole cannot ever suffer from a fall in aggregate demand that produces a recession.

I would agree that a recession can cause a fall in aggregate demand – although that’s a very misleading way of phrasing what has happened which will get you into lots of trouble if you think along those lines in framing policy – but I have never seen a single instance where a fall in aggregate demand was the cause of a recession. It’s all about what’s the cause and what’s the effect.

Anyway, it is good news that my paper has now gone out in the world. I might just note that when I presented the paper, Alesina said to everyone who was there about what I had just said that “I agree with everything you say”. It’s a good paper and I commend it to anyone interested in such things.

Choosing a husband

This posting should be paired with the posting below on Parenting Girls. Here we have some parenting advice that might actually do some good. It is a blog post by Penelope Trunk (via Instapundit) about how imperative it is to be clear eyed in How to pick a husband if you want to have kids. It pretty well leaves any notions of love and romance out of the picture and instead offers some practical advice for young girls entering the mating game. Here is the opening para; the rest follows directly from the initial premise:

You cannot pick a husband to have kids with until you know if you want to work full-time while you are raising them. Some women will say they know for sure that they do want to work full-time. Most women will say that they don’t know for sure. But there are actually only two choices: be a breadwinner or marry a breadwinner. Then, within those two choices, there are a few strategies you could use.

The advice is sound and sensible and after you’ve read that, you could go onto why divorce is immature and selfish and should not be done.

“The predominant Keynesian thinking has been tested, and it has failed spectacularly”

The evidence that Say’s Law is valid just keeps accumulating. This very nice article with this great title, Why Austerity Works and Stimulus Doesn’t was picked up by Skuter. There it says amongst other things:

After five years of financial crisis, the European record is in: Northern Europe is sound, thanks to austerity, while southern Europe is hurting because of half-hearted austerity or, worse, fiscal stimulus. The predominant Keynesian thinking has been tested, and it has failed spectacularly.

Yes that’s all very well in practice but does it work in theory. This is from a note to a friend that takes the above empirical result into a theoretical dimension.

Every economist knows at some level that

(1) investment is based on saving

and they also all know that

(2) during recessions there is less demand in aggregate for everything that had been produced.

The Keynesian issue has been to put these two together with the first, too much saving, given as the cause of the second, less demand than there is supply.

It was this association that Say’s Law was designed to prevent. Because as we have seen time and again, once you think (1) as the cause of (2) the automatic response during recession is to increase demand as if demand in aggregate were some entity that exists apart from supply in aggregate.

And the crucial bit that was added by the classics was that the only kind of demand that would be effective at job creation over anything other than the short term – that is, would raise the actual level of sales in real terms and therefore the number of jobs – had to be demand that was based on the production of value adding goods and services. You could not raise effective demand or increase employment by digging holes and immediately filling them again.

It shouldn’t be hard to understand and yet it turns out to be almost superhuman. Let me highlight this quote from John Stuart Mill from his Principles.

This theorem, that to purchase produce is not to employ labour; that the demand for labour is constituted by the wages which precede the production, and not by the demand which may exist for the commodities resulting from the production; is a proposition which greatly needs all the illustration it can receive. It is, to common apprehension, a paradox; and even among political economists of reputation, I can hardly point to any, except Mr. Ricardo and M. Say, who have kept it constantly and steadily in view. Almost all others occasionally express themselves as if a person who buys commodities, the produce of labour, was an employer of labour, and created a demand for it as really, and in the same sense, as if he bought the labour itself directly, by the payment of wages. It is no wonder that political economy advances slowly, when such a question as this still remains open at its very threshold.

Mill writing in 1848, three decades past the general glut debates and at a time in which these principles ought to have been embedded in the active consciousness of economists, still can think of no one besides his father and J.-B. Say who understood this proposition well enough never to lose track of its point in the midst of discussion. Buying things does not create jobs. Producing things that are not self-financing through their sale does not create jobs other than in the immediate present.

I would say that hardly anyone got it then or gets it now except that when I teach it, even people who otherwise fail their exam with around a 20% score still get this right. It can be understood if explained properly but whether such people later on in life never confuse buying things with producing things, of this I cannot be sure.

I go along with Mill that “it is no wonder that political economy advances slowly, when such a question as this still remains open at its very threshold”. But open at its threshold it most certainly is, taught to every student of macro except my own as obvious without need of proof.

Parenting girls

There is an article by Kate Figes on the editorial page of The Age that is a wonder to read. It is about parenting girls. First, however, we must introduce Ms Figes. She is obviously a formidable presence and must know a thing or two about such issues.

Kate Figes is the author of Because of Her Sex: the Myth of Equal Opportunity for Women; Life After Birth; The Terrible Teens and The Big Fat Bitch Book.

Now, I am of the opinion that since the sexual revolution of the 1960s being a girl has been a wilderness of terrors with no socially sanctioned refuge. Girls, you are on your own and it must often be terrible. Ms Figes would seem to think the same:

The distress of young girls is clearly visible in the rising rates of mental health problems, binge drinking, eating disorders and the rampant growth of bullying in our schools. Girls are now expected to be all things – attractive, thin, good, successful, happy, kind, loving, self-sufficient; perfect, in other words, within an imperfect world that still does not give women the equal status they deserve.

She does not attribute these problems to feminism itself but comes up with the usual explanation for anyone on the left:

[When author Steve Biddulph states that] ‘never before has girlhood been under such a sustained assault’, he is right. Young girls have become a soft target for big business; messages propagated through television and advertising tend to accentuate female sexualised imagery and their bodies rather than their brains. Consequently, everywhere a young girl goes ‘she sees messages that make her feel that she is not good enough’.

Well that’s one explanation. But this I found quite an admission, if an admission it is intended to be:

My daughters are intelligent, capable, beautiful, ambitious and kind people and I couldn’t be more proud of them. But I also see how they cannot help but internalise the message that they are not attractive, thin or sexy enough, and need regular, repeated reassurances that they are, in fact, utterly stunning. [My bolding]

Do they really need regular and repeated assurances that they are “utterly stunning”? If you ask me, these girls do not seem have the kinds of personalities that would take the hard knocks the world will inevitably and repeatedly rain on anyone in a competitive environment. These are girls unprepared for life but will have a bagful of excuses ready made for any and all occasions.

Then there is this which I will pass over without comment but is pretty indicative of a failure to understand how things work and will always work in the world inhabited by the human species.

I have no doubt that countless girls are growing up profoundly confused by the conflicting messages they are given. Take sex. On the one hand they are as entitled to sexual exploration and fulfilment as the boys. They feel sexy and are understandably interested in sex. They are encouraged by the boys to reveal body parts that can be instantly messaged from phone to phone. But the prevailing ethos is still that ‘good’ girls ‘don’t’. ‘Slag’ is the number one insult hurled at girls by both sexes and rumours almost always trash another girl’s reputation. Boys are never tarnished in the same way. [My bolding]

This is clearly a woman who has had the cushiest human existence, not comparable to any of the women whose stories are found everywhere across the world and who are genuinely oppressed. In Australia, to talk of “a world that is still so profoundly unequal in the treatment of men and women” shows a pampered life with no real adversity, and certainly with few obstacles that have been put in her way because she is a female. She finishes with this, that “every girl is somebody’s sister, mother or wife”. That is a not an untypical logical flaw since there are plenty of girls who are no one’s sister, mother or wife. What she meant to say is that for every male, their sisters, wives and daughters, if they exist, are woman as are their mothers. Which is why for most of us males brought up in this culture, accusations of being anti-women is irritating and completely untrue.

One characteristic of modern feminism

This is from Glenn Reynolds at Instapundit:

One characteristic of modern feminism is the strong belief that men are not entitled to judge women for anything, coupled with the equally strong belief that women are entitled to judge men for everything.

It comes with this story which ends with these views about the Mr Nice Guy excuse for not finding love:

Why do these guys turn to the Nice Guy™ narrative to explain their predicament? Partly because they’re been weaned on Hollywood love stories where the geeky best friend gets the girl just before the credits roll, and on tough love self-help that urges men to act like douches if they want to get laid.

Partly because, if you’re someone who hasn’t had much luck in the romance department, it’s less heart-breaking to fall back on the idea that you’re ‘too nice’ (or smart, or intimidating) than that you’re too insecure, or that people just don’t find you sexy. And partly, yes, because on some level they’ve bought into the idea that men’s ‘niceness’ can be exchanged for sexual access.

But if it’s wrong to assume that if you treat someone nicely enough, they’ll eventually fall in love with you, surely it’s also wrong to conclude that if someone is a serial sexual reject, it must be because they’re a jerk.

Life is more complicated than that. Sometimes, the person you fall for won’t fall for you in return, no matter how nice you are to them. Sometimes their reasons will be superficial, other times they’ll be deep seated: either way, you will have to accept it. And sometimes, people who make all the same missteps as the Nice Guys of OkCupid will find love nonetheless, however questionable their ‘niceness.’

Can anyone explain this?

Icebergs on the horizon. Full speed ahead. This is Niles Gardner looking at welfare spending in the US:

I have just read a staggering report written by my colleagues Patrick D. Tyrell and William W. Beach for the Heritage Foundation’s Center for Data Analysis (I direct the Margaret Thatcher Centre for Freedom at Heritage.) It is a real eye-opener for anyone who cares about America’s future as the world’s superpower, on either side of the Atlantic. Ironically, Britain, through the tremendous determination of Iain Duncan Smith and his team at the Department of Work and Pensions, is starting to roll back the welfare state, precisely at the same time the current US administration is expanding it.

The United States isn’t just gliding towards a continental European-style future of vast welfare systems, economic decline, and massive debts – it is accelerating towards it at full speed. Or as Acton Institute research director Samuel Gregg puts it in his excellent new book published today by Encounter, America is already ‘becoming Europe,’ with the United States moving far closer to a European-style welfare state than most Americans realize.

How they going to find out? From The New York Times? CBNBABSC? The Telegraph in London? Suppose they knew, would they know enough about what causes what to care? And suppose they did know and they do care, what would they do about it? Refuse to take the money they can get just for asking? It’s all lobster trap from here on in.

Except there was this to sort of remind us that there are some who know better and that good economics does work. Why it works no one can any longer tell you, but at least it does work. One day the theory will catch up with reality, but not just yet.

The state comptroller estimates that Texas will generate $96.2 billion in general revenue in 2014-2015, a major jump in tax collection from the last two-year budget cycle.

Republican Comptroller Susan Combs on Monday was releasing her biennial revenue estimate. The crucial number sets the limit on what lawmakers can spend for 2014 and 2015, when Democrats and teachers hope to reverse, or at least bandage, deep cuts in the current budget that included $5.4 billion slashed from public education.

Combs reported Monday that the state collected $8.8 billion more revenue during the current 2012-2013 revenue cycle than she initially forecast, giving lawmakers breathing room in settling a $5.2 billion deficit in the current budget. . . .

Texas’ economy is humming again after lawmakers in 2011 wrote a cut-to-the-bone budget as the nation lurched out of the Great Recession.

At the time, unemployment in the state was the highest in a decade and the Legislature faced a $27 billion shortfall. But unemployment now is at a four-year low of 6.2 percent, sales tax receipts are skyrocketing and money is pouring into state coffers behind a new energy boom.

Got that. Public spending went down and tax revenue from the private sector is booming. Can someone help me here? Any explanation? Must have a look at my copy of Mankiw to see what it has to say.

Krugman knocks back Tres Sec job he was never offered

Fancy that, there really are people in high places who think Krugman would have made a fine Secretary of the Treasury, not just columnists at The Grauniad. But as he puts it, why should he take a lower less influential job than the one he has already, a pontificating guru with no responsibility and where everything he says comes out right because he tells you so. In his words quoted via The Weekly Standard:

‘Yes, I’ve heard about the notion that I should be nominated as Treasury Secretary. I’m flattered, but it really is a bad idea, writes Krugman.

The first reason Krugman lists is, he admits, that he’s ‘indeed the World’s Worst Administrator — and that does matter.’

The second reason: ‘Oh, and there’s not a chance that I would be confirmed.’

But the foremost reason, according to the guy who was never offered the job in the first place, ‘is that it would mean taking me out of a quasi-official job that I believe I’m good at and putting me into one I’d be bad at.’

And, by his own admission, Krugman’s better at playing the ‘outside’ game than the inside one. He writes, ‘The New York Times isn’t just some newspaper somewhere, it’s the nation’s paper of record. As a result, being an op-ed columnist at the Times is a pretty big deal — one I’m immensely grateful to have been granted — and those who hold the position, if they know how to use it effectively, have a lot more influence on national debate than, say, most senators. Does anyone doubt that the White House pays attention to what I write?’

Working for Obama, rather than the Times, would be a step down. ‘By my reckoning, then, an administration job, no matter how senior, would actually reduce my influence, leaving me unable to say publicly what I really think and all too probably finding myself unable to make headway in internal debates,’ writes Krugman.

Krugman, a metonym for all that’s wrong with economics today, remains at his post. There really could not have been a better way to discredit Keynesian economics although, having observed the world for the past four years, there is nothing at all that could cause Y=C+I+G to disappear from our texts. Why people want to balance budgets in such uncertain times as ours if this little equation is valid is beyond me. But we see (a) that additional deficit financed public spending wrecks an economy and (b) that things get better as budgets are brought into line. How this equation helps to explain the way the world actually behaves no one really knows (they just show it by moving lines on a graph), but we will keep teaching it from now until the crack of doom.

Krugman for US Secretary of the Treasury – only a suggestion so far but I like it a lot

There was a suggestion published in The Guardian on the weekend that Obama should pick Paul Krugman as the next Secretary of the Treasury to replace Tim Geithner. So many birds would be killed by that one stone that I know it’s not going to happen but the pleasure even of the idea is scrumptious beyond delectation. Here are the nominating words themselves:

President Obama hasn’t picked a treasury secretary yet for his second term, so he has a chance to do something different.

He could ignore what Wall Street and conservative media interests want and pick somebody who would represent what the electorate voted for. And not even just the people who voted for him: there are a lot of Republican voters out there who are also unemployed.

A proposal of the highest calibre and from The Grauniad of all places. Look what a genius Krugman is. He is the very epitome of the Keynesian brand and as pointed out has had one success after another so why not get him to show his stuff by fixing the US and world’s economies all by himself.

Krugman has been right about the major problems facing our economy, where many other economists and much of the business press have been wrong. A few examples: he wrote about the housing bubble before it collapsed and caused the Great Recession; he has forecast and explained that large budget deficits and trillions of dollars of “quantitative easing” (money creation) would not cause inflation or long-term interest rates to rise; and that the ‘confidence fairies’ would not reward governments that pursued austerity in the face of recession.

Most importantly, Krugman is on the side of the majority of Americans. He has written extensively in favor of policies that favor job creation, explained the folly of budget cutting in the face of a weak economy, and opposes cuts to social security and Medicare benefits.

Perfect, perfect, perfect. With Obama’s 100% track record, this must be a natural for him and for them both.

But we were wrong, wrong, wrong

Better a sexual revolution than no revolution at all as my old mate . . . who was it who used to say that? Anyway, not as bad as other kinds of revolutions would have been but we have been left with a sexual wilderness and little in the way of guidance to the young other than some version of “just do it”. We too were told to just do it too but we had been brought up to know that we shouldn’t so we didn’t. That was a restraint of sorts. Now this generation and probably the one before has had to make up their own rules of restraint. Since every boy is just about ready to do it at the drop of a hat, the discipline has to come from the girls. If they don’t provide it you can be sure the boys won’t.

So why bring this up? you ask. Well, there’s this article in The Mail Online with the title, “I’ve lived through the greatest revolution in sexual mores in our history. The damage it’s done appals me”. That’s my view exactly and you have to be something like our age even to be young enough to notice that things have changed since only those my age or older would have been there before the sexual wilderness we now find ourselves in. Adultery (what’s that?), sexual disease, abortion, divorce – misery enough to go around.

The truth is that the Sexual Revolution had the power to alter our way of life, but it could not alter our essential nature; it could not alter the reality of who and what we are as human beings.

It made nearly everyone feel that they were free, or free-er, than their parents had been — free to smoke pot, free to sleep around, free to pursue the passing dream of what felt, at the time, like overwhelming love — an emotion which very seldom lasts, and a word which is meaningless unless its definition includes commitment.

How easy it was to dismiss old-fashioned sexual morality as ‘suburban’, as a prison for the human soul. How easy it was to laugh at the ‘prudes’ who questioned the wisdom of what was happening in the Sexual Revolution.

About one-third of marriages in Britain end in divorce.

Yet, as the opinion poll shows, most of us feel at a very deep level that what will make us very happy is not romping with a succession of lovers.

In fact, it is having a long-lasting, stable relationship, having children, and maintaining, if possible, lifelong marriage.

But does he have a solution? No, not really. He thinks it will peter out as the next generations find a new equilibrium and work to maintain stability, peace and a happy home in its midst.

I have not conducted a scientific survey, but my impression, based on anecdotal evidence and the lives of the children of my contemporaries, is that they are far less badly behaved, and far more sensible, than we were.

My guess is that the backlash will be even greater in the wake of the whole Jimmy Savile affair, and in reaction against the miserable world which my generation has handed on to our children — with our confused sexual morality, and our broken homes.

Our generation, who started to grow up ‘between the end of the Chatterley ban and the Beatles first LP’ got it all so horribly wrong.

We ignored the obvious fact that moral conventions develop in human societies for a reason.

We may have thought it was ‘hypocritical’ to condemn any form of sexual behaviour, and we may have dismissed the undoubted happiness felt by married people as stuffy, repressed and old hat.

But we were wrong, wrong, wrong.

Two generations have grown up — comprising children of selfish grown-ups who put their own momentary emotional needs and impulses before family stability and the needs of their children.

However, I don’t think this behaviour can last much longer. The price we all pay for the fragmentation of society, caused by the break-up of so many homes, will surely lead to a massive rethink.

At least, let’s hope so.

Maybe. But I talk to enough of these young women to make me despair that anyone can convince them that when they get to fifty say they will want to have children around and when they get to around seventy what they will want around are their children, grandchildren and someone they have been married to for about forty years. But if they’re going to arrange that they had better do it in their thirties, and that is just the wrong time to tell so many of these people how to prepare for that bleak future that will be upon them soon enough.