Archive for September 2009
There are lots of Great Internet Debates- over operating systems, video game consoles, or politics. This last week, a similar sort of name-calling verbal brawl broke out among prominent macro-economists. But that exchange featured long posts and highly technical arguments. To simplify it for you, I will summarize the debate as the flame war it was at heart.
Nobel Laureate Paul Krugman: Who is to blame for the failure of economists to respond effectively to this crisis? Well, there are two types of economists: freshwater and saltwater. It sure wasn’t us saltwater people, so it must be that the freshwater types are to blame. They are so detached from reality that they think the Great Depression was just a Great Vacation for workers, resurrecting absurd fallacies I thought we had dispatched for good 70 years ago and thinking they must be right because their ideas are gussied up with fancy equations. Saltwater Keynesianism is the only game in town.
John Cochrane: Paul Krugman wants us to ignore the last 40 years of work in economics. In science, he would be the global warming skeptic of the HIV-AIDS denier. Only a paranoid, calumnous, superficial, idea-less schlock would rely on name-calling and personal attack like he did. Us freshwater types do not, in fact, deny the reality of bubbles, recessions, and other such real events. Krugman has no idea what caused the crash, and just advocated fiscal stimulus because he wants the government to be bigger. “So what is Krugman up to? Why become a denier, a skeptic, an apologist for 70 year old ideas, replete with well-known logical fallacies, a pariah… The only explanation that makes sense to me is that Krugman isn’t trying to be an economist, he is trying to be a partisan, political opinion writer…. Krugman wants to be Rush Limbaugh of the Left. I still want to be Milton Friedman, but each is a worthy calling.”
Brad Delong: John Cochrane’s 9-page response had one sentence that was TOTALLY wrong. The rest of what he said? I don’t feel like talking about it.
Paul Krugman: Nobody likes the freshwater people. They have no idea what Keynesians even said. I, by contast, know the literature so well that I finally cited a paper. Maybe next post I will cite two!
Brad Delong: Freshwater types haven’t read Keynesians? Of course, but more than that they haven’t read anyone. They commit fallacies which show they haven’t read Knut Wicksell, Irving Fischer, (fellow Chicago-school monetarist) Milton Friedman, or David Hume’s First Economics Paper Ever. Today’s Chicago school is an intellectual train-wreck.
Narayana Kockerlakota: What are you talking about guys? Macro is fine. If freshwater economists are so clueless why do we dominate the journals and provide most new hires at top universities? Really there isn’t even a freshwater/saltwater divide anymore. Here are links to a bunch of papers that Krugman thinks don’t exist, because they are about things he says we ignore.
Brad DeLong: Richard Posner is Uranus!
Justin Wolfers: All these old dudes are just cranky, Narayana is right that the new hires are moving past these problems and these flame wars. But macro isn’t really ok until the new generation starts paying attention to policy, and policymakers start paying attention to them.
David Levine: Paul Krugman is clueless about economics and just wants to expand government. It makes me feel physically ill that a distinguished economist could be so ignorant of his own profession.
Brad DeLong: David Levine is so clueless he is not in our galaxy. His piece is so bad the Huffington Post [not exactly the newspaper of record! JB] should not have published it.
Bob Murphy: A pox on both their houses! Paul Krugman is a jerk and offers horrible policy advice. But John Cochrane’s response is no friend-of-the-court brief in the Austrian critique of Keynesianism.
Scott Sumner: A pox on all their houses! Old Keynesians, New Keynesians, Monetarists, New Classicals, and Austrians are all wrong, and I am right.
Eric Falkenstein: All macro-economists are wrong! They have tried to fit their business cycle theories to the same ten data points, and the appearance of an eleventh one is not about to solve anything. It may eliminate some theories, but this is not so helpful since there an infinite number of ways to be wrong. Macroeconomics is the triumph of hope over experience, and has been no more successful than sociology [the ultimate insult to economists! JB]. At least private companies have figured out how useless this is and stopped hiring macro-economists.
Tyler Cowen: What the hell guys, you really thought you were going to fix macro with a flame war? I look forward to seeing some peer-reviewed journal articles.
Yoram Bauman: Maybe macro flame wars are a good thing, because the three most terrifying words in the English language are “macro-economists agree that”. The trouble with macro is built in to the definition of the field: micro-economists are wrong about specific things, while macro-economists are wrong about things in general.
Me: It is a bit traumatic for a young economist like myself to see this go down. I wonder, why do Mommy and Daddy have to fight like this? This is weird even by internet standards, because incivility is usually attributed to anonymity, but everyone here uses their real names and goes to the same conferences. What happened to the good old days when Milton Friedman and Paul Samuelson could lead opposing schools but still be friends? Do real sciences ever get this divided- was there ever a string theory flame war? But as economist/comedian Yoram Bauman says, maybe this will turn out for the best. Perhaps Krugman and Cochrane will do a joint show at the AEA humor session this January in which they reveal that this was all a hoax, and ask whether that wasn’t the most epic trolling ever. But it seems more likely that the reconciliation will be slow. Indeed, we may see a repeat of the late 70’s, when the two main factions (Keynesians vs Chicago Monetarists then, New Keynesians vs Chicago Ratex/RBC/New Classicals now) so effectively discredit each other that a third school will seize control of the policy arena.
After a few months of reading about this bizarre health care debate, I think I finally understand things well enough to put my thoughts on record. (Was the wait against the spirit of blogging? I probably should have written a ill-informed post to respond to each twist, turn and dumb remark)
First, I should say that the market for health care is weird. Very weird. Last year I wrote 20 pages about how weird it is and how much it necessarily differs from ideal, perfectly competitive markets. This means that the government should be involved in the health care market more than in others. I don’t think a “free-market” is ideal in this situation, nor would I say French-style “socialism” is ideal, though interestingly either extreme might be better than our current badly regulated mix.
So what does the Obama administration think is wrong with the current system? I think a fair characterization (after reading Obama’s OpEd) is:
1) Health care has too high a share of GDP
2) Insurance is too expensive / 47 million people are uninsured
3) “Bad practices” by insurance companies like recission, refusal to insure expensive-sounding patients; the industry is not competitive enough to improve quality on these counts
4) Waste, abuse, “pointless” high administrative costs
The Obama administration thinks it can solve all four of these problems at the same time. This would actually be easier than solving only the first three problems. It sounds crazy to want think you can reduce the cost (1 and 2), increase the quantity (2 and 3) and increase the quality (3) of health care all at the same time. It sounds like the left-wing’s answer to the right’s supply-side tax cuts; they think they found their own free lunch. So it is the job of the sober-minded economists to do what they did with the supply-siders and remind everyone that There Is No Such Thing As A Free Lunch.
Right? Right. But also wrong.
I think there is a free lunch to be had with health care, but that Obama & Co are looking in the wrong place.
Obama’s basic solution is as follows (though it is in fact hard to say exactly what his plan is since he is letting Congressional Democrats write the bill and they can’t agree on much):
1) Improve the quality and quantity of private insurance through mandates on insurance companies (cover anyone who asks) and individuals (buy insurance!). Result: higher prices for insurance.
2) Have the government cover more people (either through a Medicaid expansion, or a “public option”, or something). Result: Much higher government spending
3) Pay for it all: “We’ll cut hundreds of billions of dollars in waste and inefficiency in federal health programs like Medicare and Medicaid and in unwarranted subsidies to insurance companies”
So costs will definitely increase immediately, both for the private sector and the government; but somehow enough “waste and inefficiency” will be found and eliminated so that total costs will actually fall. It is of course easy to cut off medicare payments for inefficient treatments, as seniors don’t really vote and no one will shout about death panels. In reality, the small amount of “waste and inefficiency” the government will be able to find will turn out to be very politically difficult to eliminate.
My plan, of course, is even more politically infeasible; but in an honest way. I don’t propose expensive changes and say they will be payed for later by things which turn out to be politically impossible. I propose regulatory changes which will cost the government no more than the ink needed to write new laws, all while netting the government a large sum within one fiscal year and reducing costs in the private sector.
If there is a free lunch to be found, it is in the judicious reduction of regulation. Take a look back at the Problems with Health Care According to President Obama.
We can deal with #1 right away: is overall health care spending too high? In principle, no. I don’t worry about how health care and education have been rising as a percentage of GDP; in fact in so far as the greater spending leads to better outcomes this is a very good thing. As people get richer it is great that they want to be healthier and more educated rather than, say, spending more on a bigger house and better TV. Of course, the extra health care spending might not be doing so much; this seems likely after reading international comparisons, and the RAND study. Read much of Robin Hanson’s work and you will hear that much health care spending does nothing or less, but most people don’t really mind that. But this is not a problem in principle of health spending as a percentage of GDP being too high; it is more another way of stating problem #3, that quality is too low.
So we are left with problems #2 and 3, that the price of insurance is high (and so many are uninsured) while its quality is low. So lets fix it!
1) Think insurance should be cheaper? Stop making it illegal for people to buy cheap insurance. Most states have hundreds of mandates stating what health insurance must cover. Politicians think they are doing a good deed (or think that voters think so), helping out consumers by making insurance companies cover more; but of course consumers end up paying for it. If everyone is forced to buy a Cadillac or nothing at all, then we will spend a lot on cars and lots of people won’t be able to afford a car. The same applies to health care.
2) Think the insurance industry is an oligopoly and needs to be more competitive? Allow people to buy from out-of-state providers, and the market gets almost 50 times more competitive. This competition will itself drive down costs, plus allowing people to buy from companies based in states with fewer regulations and mandates goes a lot of the way to implementing Solution #1. Federalism is a barrier to both of these; I don’t know how easy it would be for national legal or political institutions to override this.
3) Think medicine itself is too expensive? Allow med schools to train more doctors. Currently there are tight limits on the number of students both public and private med schools can accept, courtesy of the government and the AMA. Allowing the quantity of doctors to increase is a good thing even apart from the price decreases that would result. Many other rich countries have many more doctors per capita, leading to better served populations and lower prices of seeing doctors.
4) Think seeing a doctor is too expensive? Stop making it illegal for people to use cheaper alternatives. The government at the behest of the AMA will prosecute people without the right degree and license for practicing medicine. I think all licensing requirements should be drastically scaled back or eliminated, but I think even normal people who looked at the list of things only M.D.s (and sometimes D.O.’s) are allowed to do would say that many of them could be done as well and much more cheaply by R.N.’s, P.A.s, et al.
5) Lower costs, increase competition and quality: End tax subsidies for employer-provided health insurance. Why did tying health insurance to employment ever seem like a good idea? There are lots of strange combinations for sale but most aren’t enshrined in the tax code. Now people get to lose their insurance when they lose their jobs, and businesses find it more complicated to hire people (it is debatable whether this makes it more expensive to hire as well). If the subsidy went away, more companies would supply individual plans and people would choose plans that better conformed to their desires, reducing average spending while increasing average quality.
6) Worried about inequality, social justice, and the uninsured? Well, lots more people can afford health care after solutions 1-5 brought massive cost reductions. A few million people still can’t afford good coverage? The government has a bunch of new tax receipts after solution #5 closed the tax loophole, so they can afford to expand Medicaid to cover slightly better off poor folks.
Wasn’t that free lunch delicious? The health care system could be higher quality and more equitable at a lower cost. Now all we need to do is get the political system to agree. It shouldn’t be too hard to overcome status quo bias, the AMA, insurance companies, Republicans who don’t want Democrats to get credit for a successful reform, and the majority of Americans who benefit from employer-provided health insurance!
There’s an intriguing and well written, though overly long, article over at HuffPo called “How the Federal Reserve Bought the Economics Profession“.
The basic idea is that so many economists work for the Fed, have worked for the Fed, or want to work for the Fed that their desire to please their employer has stifled debate over the Fed’s role throughout the profession.
Certainly such a thing is possible; Hayek, in his 1944 Road to Serfdom, noted that he was advocating for small government against his own self-interest since more active governments engaging in central planning hire lots of economists.
But is the problem that the Fed serves no purpose except to employ economists? Far from it. The importance of monetary policy has been noted by most economists for a very long time; as far as I know only the Austrians say it is necessarily a bad thing. Rational expectations folks say it does neither harm nor good (it really does just provide jobs to economists), but this almost undermines the monetary-economic complex conspiracy theory, since Ratex emerged in the 70’s just as this article said the Fed was becoming more powerful, and rational expectations continued to grow in popularity and power at the same time the Fed did. Interestingly, this crisis has not been good to the credibility of either the Fed or the Ratex people despite their opposition to each other.
So monetary policy is necessary, but the Fed still stifles criticism of its own current brand of monetary policy? This seems unlikely to me, because it would mean the Fed is working against its own long-term interest. The Fed gains power and credibility as its monetary policy gets better, and policy will get better only through criticism and refinement. Fed employees should be pretty forward-looking since their appointments last several years.
I wonder if advocates of unconventional monetary policy like Scott Sumner feel “stifled”. I suspect it is only people like Galbraith who question the Fed’s motives who run in to trouble, rather than people who simply think they could run things better.
As far as Galbraith’s accusation about the Fed’s political bias: his numbers actually did seem to bear this out when I looked at this last. However, of all major Presidential candidates it was George H.W. Bush who felt most strongly that the Fed cost him the election; and this in 1992 when the Fed was run by longtime Republican and former Objectivist Alan Greenspan.
The most convincing criticism in the article is the quote from the Father of Monetarism himself, Milton Friedman, criticizing the Fed’s large influence on the profession. I guess we could say that the Fed has some “market power” in the intellectual marketplace, making the market for ideas less than perfectly competitive.
On the whole though, I don’t worry that the Fed has bought the profession. But then, that’s probably just because I’m holding out for a job there. Or because of the check Bernanke is sending me to write this post.
(Continuing from my previous post, Does the idea of sustainability survive sustained inquiry?)
Sustainability means preserving good things for future generations. But as Bob Solow notes, we have no idea what the preferences of future generations are; we are likely to think they are weird. After all, if someone in 1800 were trying to make people in 2009 better off, what would they do? Burn less coal? Would these 2009 people prefer to have more cities, or farms, or picturesque villages, or wilderness (but who likes wilderness? We haven’t had a romantic movement yet, and Thoreau hasn’t even been born)? Certainly we would leave them better off by exterminating dangerous and destructive animals like tigers and wolves. And we are going a great service to future generations by spreading Christianity and civilization to the backward tribes of the world!
Clearly, it would be pretty hard for a well-meaning person in 1800 to do the right thing from our perspective. Presumably, the future is also pretty hard for us to figure out. Solow wisely notes this, then promptly ignores his own advice.
Most blatantly, he says that “control of population growth would probably be the best available policy on behalf of sustainability.” If he is considering the average utility of the members of future generations then this is at least plausible, although I would not bet on it as the best policy to please weird future people. But if he is considering the total utility of future people (as I think is proper), then then this is probably nonsense. A future with 10 billion people will have more happiness than a future with 9 billion people unless those additional people push the world over into famine and resource exhaustion, which seems to me at least highly implausible. And total utility is the right measure, because considering average utility leads to even more serious moral problems than utilitarianism generally; for instance, it implies that we should euthanize depressed people, or taken to its logical extreme we should euthanize everyone but the happiest person on earth.
But this is an isolated case of Solow being wrong. Now for the more general theory of his wrongness. He notes rightly that it is hard to know whether future generations would prefer for us to invest or to preserve the environment, since both are likely to benefit them. The problem is that he then asserts that both should be categorically superior to present consumption, which can only benefit the current generation.
This disdain for current consumption is at best an oversimplification. First, we need to distinguish the consumption of non-renewable resources from all other consumption. In general, this is the consumption that actually makes future generations worse off (by eliminating resources they could have used), and Solow’s idea to count it is a good one (we could subtract the consumption of nonrenewable resources from total GDP to get a measure of “sustainable GDP”, just as economists have sometimes tried to separate out GDP generated from the depreciation of the capital stock). In some special cases, of course, this consumption could still benefit future generations: the technologies developed for mining are applied more generally, or if today’s resource becomes tomorrow’s nuisance (invasive species?), or if the byproducts of consumption are actually beneficial (say, if future people like a warmer earth then they would appreciate that our consumption lead to CO2 emissions [there is probably a better example of this idea]).
But most consumption does not involve (at least directly) the use of nonrenewable resources. If I consume a lot of perishable, rival goods like corn or trees, people in the future could simply grow more. This sort of consumption is something people in 100 years would, in most cases view neutrally.
Most interestingly, there is the consumption of non-rival goods. Will people in 100 years be worse off because I read too many books, or watched too many movies, saw too many plays, listened to too many concerts? Not at all. In fact, to the extent that such consumption encourages the creation and preservation of such non-rival, not-very-perishable goods, it actually benefits future generations! Again of course there are exceptions, many people in the 20th century would have been better off if Lenin et al hadn’t bought Karl Marx’s books, and it is hard to imagine much current music being of any benefit to future generations. But in general the consumption of art and writing can be of great benefit to future generations.
Back to the general theory. Think of someone living in Athens in the golden age of Greece. What could they do to be of most benefit to future generations? Solow suggests that we would value their environmental protection and their investment. Well, I certainly don’t mind that they invested; I’m sure they enjoyed operating capital-intensive olive oil businesses. I suppose it is good that they protected their environment, though I might enjoy Greece more if they had turned more non-renewable marble into buildings and statues. But what I, weird future-person, value most from average ancient Greeks is their consumption- the fact that there was a market for Plato’s dialogues, Aristophanes’ plays, and Herodotus’ histories. This same applies to Renaissance patrons of the arts, classical concert-goers, the book-buying public of the Enlightenment and the modern era.
In a way, I suppose this blind spot for the incredible power of ideas, information, and other non-rival goods should be expected from Solow, whose namesake growth model sees technology as exogenous! But given that the development of ideas and technology really does depend partly on the knowledge that people will pay to consume them, I am glad that people in the past undertook that consumption and left us with the treasure trove of ideas we have.
In Bob Solow’s 1993 “Economist’s Perspective on Sustainability“, it survives as a “necessarily vague, but useful” idea. He notes that sustainability has been conflated with other moral ideas about environmental protection, but that sustainability itself does not necessarily mean preserving species or wilderness. Instead it is about “distributional equity” between the present and the future. This means that we should be comparing general standards of living- how much are we better off because we make future generations worse off- rather than only the status of the environment.
To Solow, this means that future generations will value our investments as well as our preservation of resources, so they would not necessarily want us to preserve resources at the expense of investment; but he does say that both investment and resource preservation should be preferable to consumption.
His best idea is to clarify all this by looking at the sustainability of past generations. We are talking about doing well by future generations, but to past people we are one of those future generations! Are we happy with how sustainable our predecessors’ economy was?
Well, they killed off the dodos and mammoths, used up most of the oil in the continental US, and left a lot of toxic chemicals lying around; so in the purely environmental sense, they did not do very well. But in a broader sense, they did fine by us; in fact, I think we got the much better end of the deal. We have a vastly higher standard of living than people did 50 or 100 or 10000 years ago; inter-temporal distributional equity would actually entail more past environmental degradation insofar as it allowed our very poor ancestors a higher standard of living.
This same logic implies that we should worry less about developing countries like China raising their living standards though industrial pollution, since future Chinese people (as well as current and future moralizing Westerners) will have better living standards even after resource degradation and pollution has been accounted for.
Certainly, I am happy that past generations built Philadelphia rather than leaving forests, built Paris rather than leaving plains, built Boston rather than leaving us swamps to enjoy. I would like to have mammoths around to look at in zoos (or hunt?!!), but I am sure that prehistoric hunter-gatherers got a lot more enjoyment from not starving than I would from having a better zoo.
Perhaps there is some inherent moral value to not polluting, or to preserving wilderness, or (most plausibly) to not causing species to go extinct. But this is a different thing than sustainability for the sake of future generations of humans; it is instead about valuing other species, or the environment generally, inherently and for their own sake. Which is another discussion entirely!
Through all this I am on board with Solow. In my next post, I will show how Solow gets things a bit wrong through oversimplification.