Monday, June 7, 2010
Obama's Secret Wish
Journalist Fred Barnes suggests in a recent article that President Obama is secretly hoping the Republicans take control of Congress in the November midterm elections, thereby allowing him to benefit politically from a "long-awaited pivot to the center" that a GOP majority would surely force. Though Obama has arguably made a number of attempts to appease Republicans during his first year in office (such as his willingness to explore offshore oil drilling on the East Coast, his buildup of troops in Afghanistan, and his inclusion of Republican proposals in healthcare reform legislation), there is much to like about Barnes' vision of divided government. He cites spending figures that show that the presidents most effective at holding down discretionary federal outlays have been those who faced Congresses controlled by the other party. According to Barnes, "Republicans could be the answer to [Obama's] political prayers."
Sunday, June 6, 2010
Catholic Cardinal Calls for Reform
"The primary thing to consider should not be the sin, but people’s striving to live according to the commandments… Instead of a morality based on duty, we should work towards a morality based on happiness."-Austrian Cristoph Cardinal Schönborn, on his view that the Catholic Church is “urgently in need of reform” with regard to its positions on remarriage after divorce and homosexual relationships
Saturday, May 29, 2010
The Inflation Hawk
The Wall Street Journal’s “Weekend Interview” column recently featured a piece on Kansas City Federal Reserve Bank President and Federal Open Market Committee member Thomas Hoenig (pronounced “HAW-nig”), whom the article describes as the Fed’s “monetary dissident.” Hoenig has earned this label as a result of his lone opposition to the repeated decisions of the FOMC (the committee that sets U.S. monetary policy) to promise that interest rate targets will be held “exceptionally low” for an “extended period of time.” He has been the only member to cast a vote against such language at the committee’s last three meetings.
Hoenig’s dissent is ostensibly motivated by worries that excessively easy monetary policy will lead to the formation of asset bubbles that will precipitate future crises much like the one that recently wracked the U.S. financial system. Although he concedes that the causes of bubbles are somewhat poorly understood, Hoenig also acknowledges that when investors and speculators can borrow at extremely low cost, the chances that asset prices will rise at an artificially fast pace are increased: “when you have an extended period of time with very low interest rates… those are some of the necessary conditions that will enable very rapid credit expansion leading to bubbles, perhaps. At least the likelihood of bubbles is greater under those circumstances.”
Because the FOMC is comprised of professional economists who are relatively insulated from the ephemeral pressures of the political world, there is generally broad agreement within their ranks. Truly fundamental ideological conflict is rare, though the members can certainly be thought of as lying on a spectrum whose poles are the twin objectives that constitute the “dual mandate” of the Federal Reserve: full employment and long-run price stability. For example, UC Berkeley Professor Emeritus Janet Yellen, who is currently President of the Federal Reserve Bank of San Francisco and who sits on the FOMC ex officio, has argued that the Fed ought to be far more concerned with unemployment than inflation at present, and that deflation might even be a more worrying threat given current macroeconomic conditions.
In contrast, Hoenig has been described as an “inflation hawk” because of his countervailing views on how the Fed ought to order its priorities. He maintains that there is little reason to fear that tightening up monetary policy sooner rather than later would inhibit recovery, and that the costs of unintentionally triggering asset bubbles outweigh any potential benefits to be gained by pursuing an expansionary strategy for an “extended period.”
I have a great deal of respect for Hoenig. Whether his persistent criticisms of the consensus view of the FOMC are motivated by real concerns or by a simple contrarian tendency isn’t all that important. What is important is that Hoenig represents a pragmatic sort of intellectualism that is wary of allowing any conclusions to go unchallenged, but that is mature enough to grant that reasonable people can disagree about a particular issue without disagreeing about everything.
Although his inflationary warnings seem to find a more receptive audience on the political right than on the political left, Hoenig avoids extreme positions such as those of Congressman Ron Paul (R-TX), who wants to see the Fed scrutinized more closely by Congress and ultimately done away with entirely. In his interview with the WSJ, Hoenig says that “it would be a tragedy to politicize the Federal Reserve system in any way more than it already is,” and that “the balance of private/public was designed in 1913 specifically to make sure that there was some independence that would allow the Federal Reserve to conduct monetary policy with the long-term in mind.”
In other words, we can have debates about the best way to conduct monetary policy without having fruitless squabbles about whether we should be conducting monetary policy at all. Criticism and dissent are crucial components of any thoughtful discussion (let alone discussions whose outcomes affect the economy of an entire nation), but blanket disagreement for its own sake is petty and counterproductive. If only more of our leaders would realize that.
Hoenig’s dissent is ostensibly motivated by worries that excessively easy monetary policy will lead to the formation of asset bubbles that will precipitate future crises much like the one that recently wracked the U.S. financial system. Although he concedes that the causes of bubbles are somewhat poorly understood, Hoenig also acknowledges that when investors and speculators can borrow at extremely low cost, the chances that asset prices will rise at an artificially fast pace are increased: “when you have an extended period of time with very low interest rates… those are some of the necessary conditions that will enable very rapid credit expansion leading to bubbles, perhaps. At least the likelihood of bubbles is greater under those circumstances.”
Because the FOMC is comprised of professional economists who are relatively insulated from the ephemeral pressures of the political world, there is generally broad agreement within their ranks. Truly fundamental ideological conflict is rare, though the members can certainly be thought of as lying on a spectrum whose poles are the twin objectives that constitute the “dual mandate” of the Federal Reserve: full employment and long-run price stability. For example, UC Berkeley Professor Emeritus Janet Yellen, who is currently President of the Federal Reserve Bank of San Francisco and who sits on the FOMC ex officio, has argued that the Fed ought to be far more concerned with unemployment than inflation at present, and that deflation might even be a more worrying threat given current macroeconomic conditions.
In contrast, Hoenig has been described as an “inflation hawk” because of his countervailing views on how the Fed ought to order its priorities. He maintains that there is little reason to fear that tightening up monetary policy sooner rather than later would inhibit recovery, and that the costs of unintentionally triggering asset bubbles outweigh any potential benefits to be gained by pursuing an expansionary strategy for an “extended period.”
I have a great deal of respect for Hoenig. Whether his persistent criticisms of the consensus view of the FOMC are motivated by real concerns or by a simple contrarian tendency isn’t all that important. What is important is that Hoenig represents a pragmatic sort of intellectualism that is wary of allowing any conclusions to go unchallenged, but that is mature enough to grant that reasonable people can disagree about a particular issue without disagreeing about everything.
Although his inflationary warnings seem to find a more receptive audience on the political right than on the political left, Hoenig avoids extreme positions such as those of Congressman Ron Paul (R-TX), who wants to see the Fed scrutinized more closely by Congress and ultimately done away with entirely. In his interview with the WSJ, Hoenig says that “it would be a tragedy to politicize the Federal Reserve system in any way more than it already is,” and that “the balance of private/public was designed in 1913 specifically to make sure that there was some independence that would allow the Federal Reserve to conduct monetary policy with the long-term in mind.”
In other words, we can have debates about the best way to conduct monetary policy without having fruitless squabbles about whether we should be conducting monetary policy at all. Criticism and dissent are crucial components of any thoughtful discussion (let alone discussions whose outcomes affect the economy of an entire nation), but blanket disagreement for its own sake is petty and counterproductive. If only more of our leaders would realize that.
Friday, May 28, 2010
"The Right Answer Forever"
I was pleased to discover that someone videotaped and posted online a talk that I attended at Haverford in early April by Nobel Prize-winning economist A. Michael Spence. His presentation provided an impressively thorough overview of the factors driving the rapid economic growth currently taking place in China, as well as the motivation behind (and possible consequences of) Chinese currency policy. I was particularly satisfied with Spence’s reply to a question that I posed about the impact of social safety nets on growth; though he remarked that he might have been “overstating” the issue, he used my question as a jumping-off point for a refreshing criticism of our political system’s obsession with making grand ideological debates out of even the most straightforward questions of short-term policy. According to Spence, it ought to be clear that any given piece of policy must necessarily change over time, and that “debating it on… first principles… to get the sort of right answer forever ain’t gonna solve the problem.”
My question and Spence’s reply can be found here (beginning at 25:45 in the section titled "Q & A").
My question and Spence’s reply can be found here (beginning at 25:45 in the section titled "Q & A").
Saturday, May 1, 2010
Obama on Openmindedness
"Still, if you're someone who only reads the editorial page of The New York Times, try glancing at the page of The Wall Street Journal once in awhile. If you're a fan of Glenn Beck or Rush Limbaugh, try reading a few columns on the Huffington Post website. It may make your blood boil; your mind may not often be changed. But the practice of listening to opposing views is essential for effective citizenship."-President Obama, in his commencement remarks at the University of Michigan
Tuesday, April 27, 2010
In Defense of the VAT
Earlier today, President Obama convened the first meeting of an eighteen-member bipartisan commission tasked with devising a plan to bring down the federal government’s record budget deficits. Expectations are understandably low. Few believe that the necessary but politically unpalatable decisions will be made in an election year, and even fewer believe that Congress will actually adopt the recommendations of the commission in the event that a consensus does emerge.
Cumulative federal deficits are projected to exceed $8 trillion in the coming decade, a level that economists believe poses a serious threat to future growth. As the president explained in his remarks at the start of the meeting, the magnitude of the problem is such that all options must be on the table. This means that liberals ought to be willing to consider reductions in the amount spent on popular programs such as Social Security and Medicaid, and conservatives ought to accept the fact that federal revenues must somehow be enhanced. These two sides of the equation – spending cuts and tax increases – are equally vital, but it’s the second that I’d like to briefly examine in greater detail.
Raising taxes on the wealthiest Americans is the least damaging option politically, but there are limits to the amount that the government can actually collect by doing so. In addition, there is truth to the argument that excessive taxation of corporations and high-earning individuals inhibits the sort of investment spending essential to the competitiveness of our economy. This is not to say that social priorities like economic equity cannot factor into the design of a tax code, but that these priorities must not be pursued at the expense of our standard of living.
An alternative to an across-the-board increase in income and payroll taxes is a value-added tax or VAT, a type of consumption tax widely used in the industrialized world. The VAT has a number of appealing attributes: it is relatively easy to collect, it promotes saving over spending, and it is border adjustable.
A VAT is a tax that is collected at every step in the chain of production and that is levied only on the “value added” at a particular step. Ultimately, the cost of the tax is borne almost entirely by the consumer, though it is not collected only at the point of purchase like an ordinary sales tax. By levying the tax on all producers and not just on those that sell to consumers, the government is able to minimize revenue losses. The effect of a single firm attempting to evade the tax is diminished by the fact that there are more firms paying it.
Critics of the current federal tax system, which relies primarily on personal and corporate income taxes and payroll taxes, point out that the status quo encourages immediate consumption over saving and investment. Income that is spent is taxed once; income that is saved is taxed twice, since depositors and investors pay taxes on interest and capital gains. Moving toward a consumption-based tax system would encourage individuals to opt for behavior that is better for the long-term structural soundness of the economy (saving) over behavior that has mostly short-term benefits (spending).
The VAT would also help to correct America’s enormous trade deficit by virtue of the fact that it is border-adjustable. Under current World Trade Organization agreements, nations with taxes such as the VAT allow exports an exemption while still exacting a levy on imports. The fact that the United States does not have taxes that are inherently border-adjustable is a significant damper on the competitiveness of our exports. A policy of this sort amounts to a de facto tariff on products bought from the United States, or a de facto trade subsidy to products that the U.S. buys from elsewhere.
There are two main arguments against the value-added tax. The criticism advanced primarily by liberals is that such a tax is regressive. Low and middle-income individuals spend a greater portion of their income on consumption than do the wealthy, who are more likely to save and invest. Some nations with VATs have attempted to reduce their burden on the poor by exempting certain essential goods and services like food and medical care, but there is a solid case to be made that this only causes inefficiency by incentivizing firms to pretend that their products are something they are not (e.g. prepared food rather than non-prepared food) in an effort to gain a price advantage over their competitors. Even worse, it can set the stage for intense political lobbying of the authorities who decide what gets taxed and what doesn’t. A more elegant solution to the problem of regressivity is to provide rebates to low-income taxpayers or to modify the rest of the tax code so that progressivity is preserved (i.e. by cutting marginal income tax rates or by increasing the personal exemption).
The other notable criticism of the VAT comes from the other end of the political spectrum. Conservatives claim that the very efficiency and relative invisibility with which the tax can be collected is a reason to believe that it will only serve to license a dramatic growth in government spending. This is a valid fear, and one that is substantiated by the past experiences of other nations with VATs and states with high sales taxes such as California and New Jersey. But the alternative is much worse; heavy borrowing cannot continue forever, and the sooner steps are taken to rein in the problem, the less painful they need be. Given our nation’s history of vigorous opposition to any form of new taxation, I find it difficult to accept the notion that politicians could wantonly increase VAT rates without coming up against the same sort of antitax forces fueling the current opposition to the policies of Obama and the Democrats in Congress.
Former Federal Reserve Chairman and Obama Administration economic adviser Paul Volcker recently declared that the VAT is “not as toxic” an idea as it has been made out to be. Politically, it remains to be seen whether this is the case, and it’s doubtful at best that it is. Economically, this is certainly true. Such a tax can be an important part of a recipe for ensuring robust economic growth and sustainable fiscal policies in the years and decades ahead. Let’s hope that Obama’s bipartisan commission and our leaders in Congress have the courage and will to consider it.
Cumulative federal deficits are projected to exceed $8 trillion in the coming decade, a level that economists believe poses a serious threat to future growth. As the president explained in his remarks at the start of the meeting, the magnitude of the problem is such that all options must be on the table. This means that liberals ought to be willing to consider reductions in the amount spent on popular programs such as Social Security and Medicaid, and conservatives ought to accept the fact that federal revenues must somehow be enhanced. These two sides of the equation – spending cuts and tax increases – are equally vital, but it’s the second that I’d like to briefly examine in greater detail.
Raising taxes on the wealthiest Americans is the least damaging option politically, but there are limits to the amount that the government can actually collect by doing so. In addition, there is truth to the argument that excessive taxation of corporations and high-earning individuals inhibits the sort of investment spending essential to the competitiveness of our economy. This is not to say that social priorities like economic equity cannot factor into the design of a tax code, but that these priorities must not be pursued at the expense of our standard of living.
An alternative to an across-the-board increase in income and payroll taxes is a value-added tax or VAT, a type of consumption tax widely used in the industrialized world. The VAT has a number of appealing attributes: it is relatively easy to collect, it promotes saving over spending, and it is border adjustable.
A VAT is a tax that is collected at every step in the chain of production and that is levied only on the “value added” at a particular step. Ultimately, the cost of the tax is borne almost entirely by the consumer, though it is not collected only at the point of purchase like an ordinary sales tax. By levying the tax on all producers and not just on those that sell to consumers, the government is able to minimize revenue losses. The effect of a single firm attempting to evade the tax is diminished by the fact that there are more firms paying it.
Critics of the current federal tax system, which relies primarily on personal and corporate income taxes and payroll taxes, point out that the status quo encourages immediate consumption over saving and investment. Income that is spent is taxed once; income that is saved is taxed twice, since depositors and investors pay taxes on interest and capital gains. Moving toward a consumption-based tax system would encourage individuals to opt for behavior that is better for the long-term structural soundness of the economy (saving) over behavior that has mostly short-term benefits (spending).
The VAT would also help to correct America’s enormous trade deficit by virtue of the fact that it is border-adjustable. Under current World Trade Organization agreements, nations with taxes such as the VAT allow exports an exemption while still exacting a levy on imports. The fact that the United States does not have taxes that are inherently border-adjustable is a significant damper on the competitiveness of our exports. A policy of this sort amounts to a de facto tariff on products bought from the United States, or a de facto trade subsidy to products that the U.S. buys from elsewhere.
There are two main arguments against the value-added tax. The criticism advanced primarily by liberals is that such a tax is regressive. Low and middle-income individuals spend a greater portion of their income on consumption than do the wealthy, who are more likely to save and invest. Some nations with VATs have attempted to reduce their burden on the poor by exempting certain essential goods and services like food and medical care, but there is a solid case to be made that this only causes inefficiency by incentivizing firms to pretend that their products are something they are not (e.g. prepared food rather than non-prepared food) in an effort to gain a price advantage over their competitors. Even worse, it can set the stage for intense political lobbying of the authorities who decide what gets taxed and what doesn’t. A more elegant solution to the problem of regressivity is to provide rebates to low-income taxpayers or to modify the rest of the tax code so that progressivity is preserved (i.e. by cutting marginal income tax rates or by increasing the personal exemption).
The other notable criticism of the VAT comes from the other end of the political spectrum. Conservatives claim that the very efficiency and relative invisibility with which the tax can be collected is a reason to believe that it will only serve to license a dramatic growth in government spending. This is a valid fear, and one that is substantiated by the past experiences of other nations with VATs and states with high sales taxes such as California and New Jersey. But the alternative is much worse; heavy borrowing cannot continue forever, and the sooner steps are taken to rein in the problem, the less painful they need be. Given our nation’s history of vigorous opposition to any form of new taxation, I find it difficult to accept the notion that politicians could wantonly increase VAT rates without coming up against the same sort of antitax forces fueling the current opposition to the policies of Obama and the Democrats in Congress.
Former Federal Reserve Chairman and Obama Administration economic adviser Paul Volcker recently declared that the VAT is “not as toxic” an idea as it has been made out to be. Politically, it remains to be seen whether this is the case, and it’s doubtful at best that it is. Economically, this is certainly true. Such a tax can be an important part of a recipe for ensuring robust economic growth and sustainable fiscal policies in the years and decades ahead. Let’s hope that Obama’s bipartisan commission and our leaders in Congress have the courage and will to consider it.
Saturday, March 27, 2010
The Radical Center
Thomas Friedman of the New York Times has an excellent column out this week in which he argues for a “Tea Party of the radical center,” a grassroots movement that would aim to wrest power from the “oligopoly of our two-party system.” As idealistic as such a vision might sound, anti-partisan rhetoric of this kind is increasingly moving from the realm of journalists’ fantasies to the real world of politics. The Times recently carried as well an op-ed by former Oregon secretary of state Phil Keisling arguing for reform of the primary election system. He explains that such changes as he proposes would empower moderates and independents and would keep politicians from having to “practice the dark arts of the ‘message zigzag,’ securing the base then feinting to the center.”
Saturday, March 20, 2010
People Who Want to Impeach Obama
I was driving past the post office in my hometown last week when I noticed a man setting up signs bearing the phrase “Impeach Obama” and posters depicting Obama wearing a Hitleresque mustache. I initially thought that he might have been a Tea Partier, though it was later suggested to me that he was likely a “LaRouchie.” This makes the Hitler comparison somewhat confounding; Lyndon LaRouche, a conspiracy theorist, self-styled economist, and leader of a cultish political movement, is himself an advocate of a near-fascist assortment of statist ideologies. In other words, LaRouche’s organization uses the image of Hitler to accuse Obama of not being enough like Hitler. It uses the image of a man who is universally loathed to deride the president for not adopting more of that same man’s political positions. The inconsistency here is so blatant that it’s hard to see how anyone could see this as a logical argument for a second.
When I have a disagreement with someone, I expect that there are certain accepted standards by which we can determine what we ought to take away from it. If our dispute is over fact or policy, then history or evidence will eventually declare one of us to be right (at which point the other should concede that he is wrong). If the dispute is over values or priorities, then hopefully we can appreciate both where we will never agree and where our beliefs are not really all that different. Unfortunately, some people don’t want to play by these rules. They don’t just want to be entitled to their own opinions, they want to be entitled to their own conception of how rhetoric ought to work.
Beyond the matter of illogical posters, I have another issue with people like the man by the post office. Calling for the impeachment of a president because of policy disagreements is absurd. It was absurd when Dennis Kucinich drew up articles of impeachment against George W. Bush, and it’s absurd now. We have elections for a reason. If we are displeased with the way that our policymakers are making (or not making) policy, then we are certainly free to vote for someone else to do the job instead as soon as we have the chance. Activists should focus their energies on more constructive tasks than name-calling and fearmongering. They should call or write letters to their representatives and senators sharing their reasoned thoughts about legislation. They should collect signatures on petitions supporting or opposing specific policy initiatives. We have more power than we might realize to affect how the business of government is done. We also have the power to do things that are a colossal waste of time.
I know which I prefer.
When I have a disagreement with someone, I expect that there are certain accepted standards by which we can determine what we ought to take away from it. If our dispute is over fact or policy, then history or evidence will eventually declare one of us to be right (at which point the other should concede that he is wrong). If the dispute is over values or priorities, then hopefully we can appreciate both where we will never agree and where our beliefs are not really all that different. Unfortunately, some people don’t want to play by these rules. They don’t just want to be entitled to their own opinions, they want to be entitled to their own conception of how rhetoric ought to work.
Beyond the matter of illogical posters, I have another issue with people like the man by the post office. Calling for the impeachment of a president because of policy disagreements is absurd. It was absurd when Dennis Kucinich drew up articles of impeachment against George W. Bush, and it’s absurd now. We have elections for a reason. If we are displeased with the way that our policymakers are making (or not making) policy, then we are certainly free to vote for someone else to do the job instead as soon as we have the chance. Activists should focus their energies on more constructive tasks than name-calling and fearmongering. They should call or write letters to their representatives and senators sharing their reasoned thoughts about legislation. They should collect signatures on petitions supporting or opposing specific policy initiatives. We have more power than we might realize to affect how the business of government is done. We also have the power to do things that are a colossal waste of time.
I know which I prefer.
Monday, March 8, 2010
Chris Christie Takes on NJ Transit
The reliably blue New Jersey has not had a Republican governor in roughly eight years. The fact that it now does has been widely interpreted as a signal that the public is finally clamoring for elected officials who will be willing to solve long-term fiscal problems at any cost – even that of their own political futures. Based on the work of his first month in office, it would seem that Chris Christie has already begun to espouse such an approach.
Within weeks of being sworn in, Christie announced a freeze on $1.6 billion in unspent funds in an effort to address his state’s massive budgetary shortfall. One of the most notable consequences of the freeze is a 10% reduction in the $300 million public subsidy given annually to the state’s semi-autonomous transportation authority, NJ Transit. In response to this announcement, the agency announced on Friday that it intends to enact systemwide service reductions and to increase fares by an average of roughly 25% beginning this spring.
Christie has called NJ Transit a “political patronage pit” that can afford to eliminate waste without asking riders to reach deeper into their pockets. He has suggested that instead of taking such drastic steps, the transit authority keep costs down by more aggressively resisting the demands of its unionized workers for generous benefits. Christie’s approval rating currently stands at around 52%, so the jury is still out on whether taking on NJ Transit is good politics. The more interesting question is whether it is good policy. Does the governor’s boldness constitute an important first step toward reestablishing the soundness of New Jersey’s finances, or will it simply lead to even more problems in the future?
It is important to note that the fact that NJ Transit has to be subsidized to the tune of several hundred million dollars annually is not in and of itself an indication that the agency is inherently inefficient or poorly administered. That transportation systems are so often publicly funded and operated is a direct consequence of the fact that markets generally fail to establish such systems on their own. A rail network, for example, entails relatively large fixed costs that few firms may be willing to incur, especially when faced with the reality that the demand for train rides might very well be insufficient to guarantee that the venture is profitable.
The issue is therefore not what NJ Transit ought to do to eliminate its operating deficit, but what it must do to minimize it. Wholesale privatization is likely not a viable option; various aspects of NJ Transit service are already administered privately, making it hard to see how $300 million in annual losses could be due to waste and “political patronage” alone. The challenge is instead for the agency to determine how closely its proposals adhere to a zero elasticity pricing standard.
As described in a study by the National Center for Transit Research at USF, the pricing of government services ought to begin on the assumption that their demand is perfectly inelastic, i.e. that the same quantity will be demanded at any price. According to this model, rates should initially be set at a level that best addresses given budgetary exigencies, and can be adjusted thereafter as deviations from the zero-elasticity ideal are observed in actual usage patterns. The crucial insight is that the zero-elasticity assumption is precisely that: an ideal, albeit an ideal that offers a reasonable starting point for a successful pricing scheme. It should not be interpreted by governments as a justification for raising rates to solve fiscal crises without having to worry about the subsequent impact on demand; imprudent attempts to reduce the amount of subsidy that public transit systems require may actually lead to larger subsidies becoming necessary in the future.
The central question that must be answered is therefore an empirical one: what exactly is the price elasticity of demand for public transportation in New Jersey, and will the planned rate increases have the intended effect of reducing NJ Transit’s structural deficits? The cited study presents a range of estimates for the PED of public transit, with the lowest guess having been obtained from a 1992 metasurvey of 50 other studies that concludes that the average value is around -0.43, which would imply that NJ Transit’s 25% fare hike will at best lead to an 11% decrease in ridership. The NJ Transit website notes that ridership has already decreased by about 4% over the past year “as a result of the economy and low fuel prices.”
This brings us to the final consideration: does the PED for public transport vary significantly over time? The study concludes that it does, and that in some cases the shift from short run inelasticity to long run elasticity can occur as soon as a year after the fare increases. It estimates that own-price PED can become as large as -1.59 as commuters switch to other modes of transportation.
Garden State commuters will understandably be upset with the large fare increases that will result from Christie’s subsidy cut, but only time will tell whether they will seriously consider finding alternative ways of getting to work as a result. In the short run, it’s very likely that they will grudgingly accept the new prices, and the governor will get a political boost from his efforts to make the system more efficient. But what happens several years from now is far from certain. If the rates remain too high for too long, NJ Transit could very well find itself even further in the red than it is today.
Within weeks of being sworn in, Christie announced a freeze on $1.6 billion in unspent funds in an effort to address his state’s massive budgetary shortfall. One of the most notable consequences of the freeze is a 10% reduction in the $300 million public subsidy given annually to the state’s semi-autonomous transportation authority, NJ Transit. In response to this announcement, the agency announced on Friday that it intends to enact systemwide service reductions and to increase fares by an average of roughly 25% beginning this spring.
Christie has called NJ Transit a “political patronage pit” that can afford to eliminate waste without asking riders to reach deeper into their pockets. He has suggested that instead of taking such drastic steps, the transit authority keep costs down by more aggressively resisting the demands of its unionized workers for generous benefits. Christie’s approval rating currently stands at around 52%, so the jury is still out on whether taking on NJ Transit is good politics. The more interesting question is whether it is good policy. Does the governor’s boldness constitute an important first step toward reestablishing the soundness of New Jersey’s finances, or will it simply lead to even more problems in the future?
It is important to note that the fact that NJ Transit has to be subsidized to the tune of several hundred million dollars annually is not in and of itself an indication that the agency is inherently inefficient or poorly administered. That transportation systems are so often publicly funded and operated is a direct consequence of the fact that markets generally fail to establish such systems on their own. A rail network, for example, entails relatively large fixed costs that few firms may be willing to incur, especially when faced with the reality that the demand for train rides might very well be insufficient to guarantee that the venture is profitable.
The issue is therefore not what NJ Transit ought to do to eliminate its operating deficit, but what it must do to minimize it. Wholesale privatization is likely not a viable option; various aspects of NJ Transit service are already administered privately, making it hard to see how $300 million in annual losses could be due to waste and “political patronage” alone. The challenge is instead for the agency to determine how closely its proposals adhere to a zero elasticity pricing standard.
As described in a study by the National Center for Transit Research at USF, the pricing of government services ought to begin on the assumption that their demand is perfectly inelastic, i.e. that the same quantity will be demanded at any price. According to this model, rates should initially be set at a level that best addresses given budgetary exigencies, and can be adjusted thereafter as deviations from the zero-elasticity ideal are observed in actual usage patterns. The crucial insight is that the zero-elasticity assumption is precisely that: an ideal, albeit an ideal that offers a reasonable starting point for a successful pricing scheme. It should not be interpreted by governments as a justification for raising rates to solve fiscal crises without having to worry about the subsequent impact on demand; imprudent attempts to reduce the amount of subsidy that public transit systems require may actually lead to larger subsidies becoming necessary in the future.
The central question that must be answered is therefore an empirical one: what exactly is the price elasticity of demand for public transportation in New Jersey, and will the planned rate increases have the intended effect of reducing NJ Transit’s structural deficits? The cited study presents a range of estimates for the PED of public transit, with the lowest guess having been obtained from a 1992 metasurvey of 50 other studies that concludes that the average value is around -0.43, which would imply that NJ Transit’s 25% fare hike will at best lead to an 11% decrease in ridership. The NJ Transit website notes that ridership has already decreased by about 4% over the past year “as a result of the economy and low fuel prices.”
This brings us to the final consideration: does the PED for public transport vary significantly over time? The study concludes that it does, and that in some cases the shift from short run inelasticity to long run elasticity can occur as soon as a year after the fare increases. It estimates that own-price PED can become as large as -1.59 as commuters switch to other modes of transportation.
Garden State commuters will understandably be upset with the large fare increases that will result from Christie’s subsidy cut, but only time will tell whether they will seriously consider finding alternative ways of getting to work as a result. In the short run, it’s very likely that they will grudgingly accept the new prices, and the governor will get a political boost from his efforts to make the system more efficient. But what happens several years from now is far from certain. If the rates remain too high for too long, NJ Transit could very well find itself even further in the red than it is today.
Saturday, February 27, 2010
Healthcare Reform on the Supply Side
Since the beginning of the Great Healthcare Debate of 2009 and 2010 just over a year ago, I’ve felt that Democrats and Republicans have both been missing a very important point. Mr. Obama and the members of his party in Congress have offered proposals aimed at dramatically expanding access to health insurance and offering coverage to tens of millions of the uninsured. Republicans counter that such plans will only worsen the problem of rampant medical inflation as price signals are further distorted in the market for healthcare and more people demand services that are already scarce. Their counterproposals, a number of which have been adopted in one form or another into the legislation that will presumably be reconsidered sometime soon, have mostly consisted of attempts to rein in costs through a combination of malpractice reform, decreased regulation of insurers, and incentives for people to save for their own healthcare expenses, thereby discouraging unnecessary spending by making consumers more aware of the true cost of their own decisions.
But both of these approaches only deal with half of the problem. Just as the Federal Reserve found itself trying to fight a supply-side problem with demand-side weapons during the era of stagflation in the 1970’s and 1980’s, Congress today finds itself attempting to resolve the healthcare issue halfway, by making changes that will only affect the nature of demand for healthcare and not its supply. It’s probably true that efforts to expand coverage will lead to more people wanting more services, but the critics offer no workable alternative.
Unlike most markets, where sustained increases in demand lead to more sellers supplying consumers with what they want, the market for healthcare is fundamentally unable to expand in such a way. Drug companies can produce more drugs, device makers can make more devices, but the amount of healthcare that can be supplied at any given time is still constrained by the number of doctors, and the number of doctors is constrained by the number of medical schools.
There’s no question that more and more people are trying to get into medical school, but getting in is becoming increasingly difficult, even for qualified candidates. President Obama has actually discussed the idea of offering better funding for medical students so that they aren’t rewarded for their toils with crushing debt upon graduation, but this doesn’t really address the root of the problem. So what if more people can pay for medical school? What if there aren’t enough medical schools?
Fortunately, the tide may be turning. An article published early last week in the New York Times discusses the fact that new medical schools all over the country are beginning the process of accreditation. It notes that there are currently 131 schools in the United States, and that only one new one opened during the 1980’s and 1990’s. In contrast, there are around two dozen that are currently close to opening, such as those affiliated with Quinnipiac and Hofstra Universities.
The article takes the contrarian view that this might not actually be as good a thing as it sounds. Not only will we not see a dramatic increase in the number of physicians anytime soon, but there is no guarantee that these doctors will end up in the rural and impoverished areas where they are so desperately needed, or that they won’t just create demand for their own services, thereby worsening the problem of access.
But in economics, there’s no such thing as a free lunch, and I for one would much rather pay for my lunch than go hungry. The system by which healthcare is provided and paid for in the United States is highly dysfunctional, but there is a limit to what demand management policies can accomplish. Without more doctors and nurses, our quandary will only get worse.
But both of these approaches only deal with half of the problem. Just as the Federal Reserve found itself trying to fight a supply-side problem with demand-side weapons during the era of stagflation in the 1970’s and 1980’s, Congress today finds itself attempting to resolve the healthcare issue halfway, by making changes that will only affect the nature of demand for healthcare and not its supply. It’s probably true that efforts to expand coverage will lead to more people wanting more services, but the critics offer no workable alternative.
Unlike most markets, where sustained increases in demand lead to more sellers supplying consumers with what they want, the market for healthcare is fundamentally unable to expand in such a way. Drug companies can produce more drugs, device makers can make more devices, but the amount of healthcare that can be supplied at any given time is still constrained by the number of doctors, and the number of doctors is constrained by the number of medical schools.
There’s no question that more and more people are trying to get into medical school, but getting in is becoming increasingly difficult, even for qualified candidates. President Obama has actually discussed the idea of offering better funding for medical students so that they aren’t rewarded for their toils with crushing debt upon graduation, but this doesn’t really address the root of the problem. So what if more people can pay for medical school? What if there aren’t enough medical schools?
Fortunately, the tide may be turning. An article published early last week in the New York Times discusses the fact that new medical schools all over the country are beginning the process of accreditation. It notes that there are currently 131 schools in the United States, and that only one new one opened during the 1980’s and 1990’s. In contrast, there are around two dozen that are currently close to opening, such as those affiliated with Quinnipiac and Hofstra Universities.
The article takes the contrarian view that this might not actually be as good a thing as it sounds. Not only will we not see a dramatic increase in the number of physicians anytime soon, but there is no guarantee that these doctors will end up in the rural and impoverished areas where they are so desperately needed, or that they won’t just create demand for their own services, thereby worsening the problem of access.
But in economics, there’s no such thing as a free lunch, and I for one would much rather pay for my lunch than go hungry. The system by which healthcare is provided and paid for in the United States is highly dysfunctional, but there is a limit to what demand management policies can accomplish. Without more doctors and nurses, our quandary will only get worse.
Friday, February 26, 2010
"A Night of Social Commentary With Christopher Hitchens"
I recently had the good fortune to meet and have dinner with Christopher Hitchens, the English-American secularist and self-styled polemicist who has written prolifically on everything from Islamic extremism to Mother Theresa to his own self-inflicted waterboarding. Aside from noticing his works while browsing the religion section of my local Borders, I first discovered Hitchens when watching an online documentary called “The Four Horsemen,” the title of which refers to four giants of the modern atheist movement: Oxford biologist Richard Dawkins, author Sam Harris, Hitchens, and Tufts University philosophy professor Dan Dennett, who I believe to be one of the greatest intellectuals of our day.
What was remarkable about the dialogue was that it revealed the genuine disagreement that exists among atheists about the role of their belief system in contemporary society and the approach that they ought to adopt when dealing with the religious. Dawkins, in his typically acerbic style, argues for the utter dissolution of all forms of religion, and denies that spirituality qua spirituality has ever been a force for good in the world. Rather, he claims that any apparent good done in the name of religion has actually been motivated by secularism, and only adopts the mantle of religion to protect itself from a largely orthodox zeitgeist. Hitchens, with some exceptions, generally agrees with this view. The most interesting argument made in the film, and one that he elaborates on further in his 2006 book Breaking the Spell, is Dan Dennett’s claim that moderate religion not only has the potential to be beneficial, but may even be necessary if we are to rid the world of religious extremism. More on this in a moment.
It was only a few weeks after I had watched “The Four Horsemen” that I found out that my college would be hosting Hitchens for “a night of social commentary,” and I was fortunate enough to be included in a group of about ten students invited to have dinner with him before his presentation. In real life, Hitchens is exactly what he appears to be in televised interviews or YouTube videos: sarcastically witty, profoundly knowledgeable, and completely at home in the realm of rhetoric. He has an uncanny ability to immediately appreciate the flaws in any argument, and his facility with language is dazzling; his most intellectually complex statements are tossed around like casual bromides, and even those reactions that seem impulsive and instinctive come out sounding polished and organic. It also helps that he has a British accent.
His talk dealt with “threats to free expression,” examples of which included the fatwa pronounced on author Salman Rushdie by the Ayatollah Khomenei of Iran after the publication of Rushdie’s controversial book “The Satanic Verses,” and the furor that erupted in 2005 over a Danish cartoonist’s depiction of the prophet Muhammad. To Hitchens, the evil of religious censorship is only part of the problem. The true horror is the relative ease with which others capitulate in the face of extremist anger. He decried not only the Ayatollah and all those who called for the killing of Rushdie in the aftermath of the fatwa, but also every bookstore that refused to sell the book and every library that refused to keep it on its shelves. In discussing the Danish Muhammad cartoon, Hitchens criticized CNN for not airing any actual image of the item that was causing so much controversy. He further claimed that he asked the producers of a CNN program on which he appeared to discuss the matter whether they were displaying such sensitivity because they were afraid. The answer, allegedly, was yes.
During the question-and-answer period that followed the talk, Hitchens was no less incisive, at one point replying to a student by wondering aloud why she wasn’t “able to make an actual question out of that.” I asked him if he could ever conceive of a situation in which censorship of any kind might be justified. He explained that, in principle, national security may at times require it, but that in most circumstances nobody is “good enough” to deserve the title of censor.
At the dinner before the talk, Hitchens got into a spirited back-and-forth with a student regarding his support for the Iraq War. He expertly rebutted the criticisms of his position, concluding the debate by adding that “if you try to say anything else at this point, you will only convict yourself of not knowing what you’re talking about” (my paraphrase).
It was at that point that I decided to steer the conversation away from foreign affairs by asking whether he agreed with the view that Dan Dennett expresses in “The Four Horsemen” that moderate religion is essential to eradicating extremism, and that atheists have not and cannot in principle make any dent in the problem because their views are dismissed from the outset by the dogmatists they hope to persuade. According to this thinking, reform can only be realized if it is spearheaded by moderates within a religious tradition who are willing to engage their more orthodox brethren in a dialogue about their respective theological positions.
Hitchens scoffed at the notion and told me it was absurd to believe that extremists are only angry because people like him are making them angry. I told him this wasn’t what I meant at all. What I was asking was whether he thought it prudent to criticize moderate religion when it might hold the elusive key to ending fundamentalism – a goal that Dennett and I believe might be beyond the ability of atheists to accomplish. He conceded that in certain parts of Africa, Christian organizations have been more effective than secular ones at getting ideological reactionaries to agree to stop practicing female genital mutilation.
Did I actually win an argument against Christopher Hitchens? Probably not, but considering what happened to everyone else who tried to challenge him, I’m happy to chalk up a draw as a victory.
What was remarkable about the dialogue was that it revealed the genuine disagreement that exists among atheists about the role of their belief system in contemporary society and the approach that they ought to adopt when dealing with the religious. Dawkins, in his typically acerbic style, argues for the utter dissolution of all forms of religion, and denies that spirituality qua spirituality has ever been a force for good in the world. Rather, he claims that any apparent good done in the name of religion has actually been motivated by secularism, and only adopts the mantle of religion to protect itself from a largely orthodox zeitgeist. Hitchens, with some exceptions, generally agrees with this view. The most interesting argument made in the film, and one that he elaborates on further in his 2006 book Breaking the Spell, is Dan Dennett’s claim that moderate religion not only has the potential to be beneficial, but may even be necessary if we are to rid the world of religious extremism. More on this in a moment.
It was only a few weeks after I had watched “The Four Horsemen” that I found out that my college would be hosting Hitchens for “a night of social commentary,” and I was fortunate enough to be included in a group of about ten students invited to have dinner with him before his presentation. In real life, Hitchens is exactly what he appears to be in televised interviews or YouTube videos: sarcastically witty, profoundly knowledgeable, and completely at home in the realm of rhetoric. He has an uncanny ability to immediately appreciate the flaws in any argument, and his facility with language is dazzling; his most intellectually complex statements are tossed around like casual bromides, and even those reactions that seem impulsive and instinctive come out sounding polished and organic. It also helps that he has a British accent.
His talk dealt with “threats to free expression,” examples of which included the fatwa pronounced on author Salman Rushdie by the Ayatollah Khomenei of Iran after the publication of Rushdie’s controversial book “The Satanic Verses,” and the furor that erupted in 2005 over a Danish cartoonist’s depiction of the prophet Muhammad. To Hitchens, the evil of religious censorship is only part of the problem. The true horror is the relative ease with which others capitulate in the face of extremist anger. He decried not only the Ayatollah and all those who called for the killing of Rushdie in the aftermath of the fatwa, but also every bookstore that refused to sell the book and every library that refused to keep it on its shelves. In discussing the Danish Muhammad cartoon, Hitchens criticized CNN for not airing any actual image of the item that was causing so much controversy. He further claimed that he asked the producers of a CNN program on which he appeared to discuss the matter whether they were displaying such sensitivity because they were afraid. The answer, allegedly, was yes.
During the question-and-answer period that followed the talk, Hitchens was no less incisive, at one point replying to a student by wondering aloud why she wasn’t “able to make an actual question out of that.” I asked him if he could ever conceive of a situation in which censorship of any kind might be justified. He explained that, in principle, national security may at times require it, but that in most circumstances nobody is “good enough” to deserve the title of censor.
At the dinner before the talk, Hitchens got into a spirited back-and-forth with a student regarding his support for the Iraq War. He expertly rebutted the criticisms of his position, concluding the debate by adding that “if you try to say anything else at this point, you will only convict yourself of not knowing what you’re talking about” (my paraphrase).
It was at that point that I decided to steer the conversation away from foreign affairs by asking whether he agreed with the view that Dan Dennett expresses in “The Four Horsemen” that moderate religion is essential to eradicating extremism, and that atheists have not and cannot in principle make any dent in the problem because their views are dismissed from the outset by the dogmatists they hope to persuade. According to this thinking, reform can only be realized if it is spearheaded by moderates within a religious tradition who are willing to engage their more orthodox brethren in a dialogue about their respective theological positions.
Hitchens scoffed at the notion and told me it was absurd to believe that extremists are only angry because people like him are making them angry. I told him this wasn’t what I meant at all. What I was asking was whether he thought it prudent to criticize moderate religion when it might hold the elusive key to ending fundamentalism – a goal that Dennett and I believe might be beyond the ability of atheists to accomplish. He conceded that in certain parts of Africa, Christian organizations have been more effective than secular ones at getting ideological reactionaries to agree to stop practicing female genital mutilation.
Did I actually win an argument against Christopher Hitchens? Probably not, but considering what happened to everyone else who tried to challenge him, I’m happy to chalk up a draw as a victory.
Thursday, February 18, 2010
Moderate Conservatism Goes Mainstream
Over the course of the first year of the Obama Administration - and some would argue, because of it - moderate Republicanism has all but ceased to exist. Dealmakers like Olympia Snowe are looked upon by the party establishment as defectors willing to cooperate with the evil socialist agenda of the White House. Center-right Senate candidates are being overtaken in public opinion polls by staunch conservatives like Marco Rubio and Rand Paul. Sarah Palin has assumed a new role as the face of the populist Tea Party movement. Her former running mate, an erstwhile champion of true bipartisanship, may very well lose his long-held Arizona Senate seat this November. And not because he's a Republican, but because he isn't Republican enough.
The GOP seems to be concluding exactly the opposite of what they had hoped Obama would: moving to the center is not the answer. Becoming more radical is.
It's hard to see how this could possibly be a good thing for America. During the 1990's, the nation experienced a time of unprecedented peace and prosperity, largely as a result of divided government. Bill Clinton was forced to abandon some of his more ambitious liberal goals with the election of a Republican Congress in 1994, but so too were the Republicans compelled to lay aside their more ideologically-driven aspirations. Clinton vetoed welfare reform several times before signing a version he approved of, and deals were struck that, while far from perfect, represented true sacrifice in the name of bipartisanship. The "Don't Ask Don't Tell" policy, which is rightly being put on a path to repeal, was arguably a significant accomplishment in its day.
Paul Krugman observed recently in his New York Times column that the Republican opposition seems to find political potential in making the country literally ungovernable. This is indeed a disturbing trend, but my hope is that the defenders of centrism among those on the right may yet prevail.
I was particularly encouraged by two columns out today, one in the Washington Post by George Will, in which he argues that Palin is not qualified to be President and that the GOP should turn to more reasonable alternatives; and the other in the Wall Street Journal by Karl Rove, who urges the Tea Party to disown its radical fringe and divorce itself from 9/11 denialism and charges that Obama was not born in the United States. Both convinced me that something profound is happening: moderate conservatism is finally returning to the mainstream. Conservative commentators are no longer just taking shots at Obama, but are finally trying to reverse the slide of their party to the far right by pointing out the very real virtues of centrism.
Either that, or they're just following Olympia Snowe in cooperating with the enemy.
The GOP seems to be concluding exactly the opposite of what they had hoped Obama would: moving to the center is not the answer. Becoming more radical is.
It's hard to see how this could possibly be a good thing for America. During the 1990's, the nation experienced a time of unprecedented peace and prosperity, largely as a result of divided government. Bill Clinton was forced to abandon some of his more ambitious liberal goals with the election of a Republican Congress in 1994, but so too were the Republicans compelled to lay aside their more ideologically-driven aspirations. Clinton vetoed welfare reform several times before signing a version he approved of, and deals were struck that, while far from perfect, represented true sacrifice in the name of bipartisanship. The "Don't Ask Don't Tell" policy, which is rightly being put on a path to repeal, was arguably a significant accomplishment in its day.
Paul Krugman observed recently in his New York Times column that the Republican opposition seems to find political potential in making the country literally ungovernable. This is indeed a disturbing trend, but my hope is that the defenders of centrism among those on the right may yet prevail.
I was particularly encouraged by two columns out today, one in the Washington Post by George Will, in which he argues that Palin is not qualified to be President and that the GOP should turn to more reasonable alternatives; and the other in the Wall Street Journal by Karl Rove, who urges the Tea Party to disown its radical fringe and divorce itself from 9/11 denialism and charges that Obama was not born in the United States. Both convinced me that something profound is happening: moderate conservatism is finally returning to the mainstream. Conservative commentators are no longer just taking shots at Obama, but are finally trying to reverse the slide of their party to the far right by pointing out the very real virtues of centrism.
Either that, or they're just following Olympia Snowe in cooperating with the enemy.
Tuesday, February 9, 2010
"Fear the Boom and Bust"
I originally found this little gem on Greg Mankiw's blog. It appears that it's the only piece that Econstories.tv has produced thus far, but I expect that many great things are yet to come.
Monday, February 1, 2010
Pelosi and Partisanship
“We’ll go through the gate. If the gate’s closed, we’ll go over the fence. If the fence is too high, we’ll pole-vault in. If that doesn’t work, we’ll parachute in. But we’re going to get health care reform passed for the American people, for their own personal health and economic security, and for the important role that it will play in reducing the deficit.”- Nancy Pelosi, on a proposal to pass comprehensive healthcare reform as a series of separate bills
Sunday, January 31, 2010
GDP and Bowling Analogies
The Wall Street Journal reports that the U.S. economy grew at an annualized rate of 5.7% in the fourth quarter of 2009, and provides an excellent interactive graphic that tells the story of Adam, a (horribly inefficient) bowling pin manufacturer, as a way of explaining the effect of inventory drawdowns on the measurement of GDP.
Saturday, January 30, 2010
An Economic Review of Ron Paul's "End the Fed"
I’ve always had a somewhat conflicted view of Ron Paul. During the 2008 Republican primaries, I found myself rooting for him, impressed by his honesty and his willingness to advocate ideas for their philosophical merit rather than their political expediency. After all, anyone who speaks openly about writing earmarks for his congressional district into spending bills and then voting against them obviously does so not because he’s grasping for soundbites that will make him more electable, but because he read some Rand and truly believes it. At the same time, he advocates a number of positions that are absolutist and far from mainstream in our contemporary political discourse, even among conservatives. He also once called Brüno “queerer th‘n th’ blazes”.
A few weeks ago, I happened upon his new book End the Fed while I was perusing the shelves of a local Borders. Given my lack of a clear position on his thinking, I decided that I’d read it and sort out the legitimate arguments from the anarchist paranoia for myself. What follows is my earnest attempt to give Paul’s economic philosophy a fair and balanced analysis – something it gets from neither his foes on the left nor from his teabag-waving, money-burning supporters on the libertarian right.
I must admit that End the Fed is incredibly persuasive. Aside from the fact that over half of its references are either to materials printed by the sympathetic Ludwig von Mises Institute in Auburn, Alabama (which promotes the teaching of the Austrian School of classical liberalism) or to things written by Ayn Rand, its scholarship is extensive and solid, and its argumentation sound and intellectual. It even includes a recommended reading list divided into categories based on level of familiarity with economics.
My overall impression of the book is that it correctly and incisively exposes the flaws that have become virtually inherent in the conduct of American monetary and fiscal policy and the ways in which irresponsible decision-making by our political leaders has exacerbated the wild fluctuations of the business cycle. It concludes from this, however, that the only workable alternative is an ideology that strictly prohibits the government from getting involved in the economy at all. The need for substantial reform is duly noted, and this reform may even have to consist of significantly crippling the powers of the Federal Reserve. It certainly does not mean that government should have no role in the economy, or that a return to the gold standard (the second main argument of the book) is necessary or desirable.
The Gold Standard
I’ll address this latter issue first, since it consumes a good part of End the Fed’s 210 pages. Paul repeatedly calls for a return to “sound money,” and indeed this is a worthy goal. Wealth is only truly safe from the “inflation tax” when it can be secured in a form that is not subject to changing political tides. Though he claims that he has no bias for gold in particular, and that any “system that would permit markets to once again choose the most suitable money, whatever that turns out to be”, would be acceptable, he also argues that “gold has all the qualities that we associate most with good money: divisibility, portability, high value per unit of weight, durability, and uniform quality” (pg. 71). He further claims that there is no need to ever change the size of the money supply, since “any quantity of money will do, so long as the money is sound. … New quantities of money injected into society confer no social benefit.” (pg. 203) In principle, this is true. Since wealth is created by the act of production, the physical supply of money (or even the nonphysical supply, as determined by a metric like M3) is secondary, a mere representation of something more abstract.
But the problem is that Paul attempts to conclude from this that there would be no inflation in an economy where manipulation of the money supply is not an option, since “inflation is always and everywhere a monetary phenomenon.” This assertion, originally stated by Milton Friedman and reiterated by Paul and others like him, is largely incorrect. Though inflation certainly can be precipitated by monetary policy (extreme examples are Weimar Germany and Zimbabwe prior to dollarization), the more common forms are due to changes in aggregate demand (“demand-pull inflation”) and changes in aggregate supply as a result of fluctuating factor prices or exogenous cost shocks (“cost-push” or “wage-push inflation”). Inflationary expectations can easily make either of these chronic and unstoppable, necessitating intervention. Even if inflation did disappear in Paul’s Fed-less America, growth with a fixed money supply would likely cause significant deflation, which entails its own very real costs.
End the Fed includes a partial transcript of a congressional hearing from July of 2005, in which Alan Greenspan replies to a question fielded by Ron Paul about the possibility of returning the U.S. to the gold standard:
In other words, the “soundness” of money has nothing to do with what that money is, or even how it’s backed, but rather with how the supply of it is manipulated by governments (or by gold miners – a fact that seems lost on Paul). True, commodity money whose value is managed by markets rather than by central banks is less susceptible to such manipulation, but it is by no means safe from the threat of becoming unsound for other reasons. Greenspan rightly points out that the blame for chronic boom-bust cycles rests not with fiat money as such, but with the people who print it.
Paul: The Patron Saint of Economic Morality?
Before I address Paul’s specific criticisms of the Fed, I want to touch upon his free-market ideology. Though he provides numerous examples of inefficient government interference in the economy (e.g. wage and price controls during World War II and the 1970’s), it is also true that markets do not always achieve the most efficient outcome, a phenomenon known as market failure. There are certainly government failures as well, in which government action does not achieve the most efficient outcome, but the existence of one does not negate the existence of the other. The Austrians would have you believe that market failures never happen – because they’ve defined markets as mechanisms that are incapable of any meaningful kind of failure. This is clearly disingenuous. The Austrians are guilty of intellectual dishonesty, for this and for the fact that they claim economics cannot be empirically studied (which conveniently renders their critics unable to prove them incorrect).
In the context of American politics, even strict constitutionalists and limited government-ers like Paul, whether knowingly or not, concede the need for some government involvement in the economy. I submit that the Constitution not only mentions but actually grants the federal government the right to address various types of market failure. Article I, Section 8 lists among the enumerated powers of Congress the power to “establish Post Offices and Post Roads” (provide nonexcludable public goods), “fix the Standard of Weights and Measures” (impose standards for the sake of efficiency in markets that do not automatically converge to their own), and to “promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries” (manipulate the ability of firms to acquire market power). The bottom line is that Paul’s ideology is deeply inconsistent, and his criticisms of the Fed should be approached with caution.
Where Paul Gets It Right (But Then Very Wrong)
Nevertheless, I would like to deal with one criticism in particular, namely that the Federal Reserve sets the stage for recessions and depressions by distorting market signals. I’ll briefly deal with this argument before explaining why the Fed is ultimately necessary and how we can learn from Ron Paul’s whistleblowing and make the system better.
Paul, on regulation:
In other words, the mere existence of the Fed can encourage irresponsible behavior – even by the Fed itself. By setting interest rates lower than the market would on its own, it gives entrepreneurs and investors the impression that more financial capital is available than actually is, and the construction of a house of cards begins. There are other problems too. As Paul points out, a central bank with money-printing powers can strongly tempt politicians to abandon a sense of fiscal discipline, and, he alleges, may even do much worse (“[If the Fed were ended, no longer would presidents be in a position to lean on the central bank to artificially boost the economy before elections…” (pg. 8)).
He also attempts to argue that a banking system akin to the kind that existed for most of the 1800’s would be more desirable than the status quo:
Not quite. Paul cites research that claims that the panics of the 1800’s were healthy for the system in that they destroyed banks that performed badly, and indeed Friedman argues elsewhere that attempts to stop banks from failing at the start of the Great Depression prolonged pain that would otherwise have been relatively self-limited. For all its merits, the problem with this thinking is twofold.
For one, banks and financial institutions today are remarkably interconnected in ways that could not have been dreamt of 150 years ago, and information about institutional instability is spread much more quickly. No longer is there a sense that a bank failure 100 miles away is not my problem. Secondly, the psychological impact of a bank failure is radically different from that of the failure of any other type of firm. Despite Paul’s assertion that “bank failures are no more to be regretted than any other business failures” (pg. 27), banks are not just “any other business.” They protect personal savings and the financial capital that is essential for future growth. The failure of a bank does not just cause people to decide that that bank was poorly run; it sows doubt as to whether any and all other banks are suffering from similar internal problems. The market may very well not self-correct. The economy could be paralyzed by systemic fear. The only way out is for an unshakable central bank to restore public confidence in a consistent and predictable way that minimizes the threat of moral hazard (Bear Stearns was allowed to fail, so why not Bank of America too?).
“The Way Out”
As he explains in the last chapter of the book, entitled “The Way Out,” Paul’s first step toward abolition of the Fed is to bring its activities under greater Congressional scrutiny by allowing the Government Accountability Office (GAO) to audit any and all of its decisions and transactions. In fact, an amendment he introduced to do just that passed the House on 19 November 2009, and will presumably be considered by the Senate after Obama’s healthcare saga comes to an end. The Fed was intended to be a completely apolitical entity, and while this is probably an unrealistic vision, bringing more of the Fed’s powers under the purview of Congress only worsens the problem. An audit is called for, but it would be better to have it done by a private sector firm than by another government agency. As for how to reconcile the need for a central bank with the need to keep it as politically detached as possible, I would propose a system under which monetary policy is run by a pool of academic economists. This group of experts (the bigger, the better) could be polled on whether or not to approve certain actions, with only a random subset of those votes actually counting. This would help to limit the amount of political pressure that could be exerted on the system by keeping it decentralized and partly anonymous.
Saith Paul, in the dramatic conclusion of his book: “We have a natural, God-given right to our lives, our liberties, and the fruits of our labor.” (pg. 210) I couldn’t agree more. But to paraphrase Galileo, a God who would give us the faculty of reason would not also encourage us to abandon its use. The science of economics has taught us much about how to better our lives, and while “liberty” is an appealing virtue, it is not the kind of nuanced answer required by the complex problems that face our society.
Moral of the Story
End the Fed is well worth the read, but like me, you might consider waiting until you can buy it for 50% off. Or until you have a giftcard, in which case somebody else is paying for it.
Addendum
I wrote roughly 80% of this note before I happened upon a similar commentary from a Time column called “The Curious Capitalist," which raises many of the arguments I've explicated and more.
A few weeks ago, I happened upon his new book End the Fed while I was perusing the shelves of a local Borders. Given my lack of a clear position on his thinking, I decided that I’d read it and sort out the legitimate arguments from the anarchist paranoia for myself. What follows is my earnest attempt to give Paul’s economic philosophy a fair and balanced analysis – something it gets from neither his foes on the left nor from his teabag-waving, money-burning supporters on the libertarian right.
I must admit that End the Fed is incredibly persuasive. Aside from the fact that over half of its references are either to materials printed by the sympathetic Ludwig von Mises Institute in Auburn, Alabama (which promotes the teaching of the Austrian School of classical liberalism) or to things written by Ayn Rand, its scholarship is extensive and solid, and its argumentation sound and intellectual. It even includes a recommended reading list divided into categories based on level of familiarity with economics.
My overall impression of the book is that it correctly and incisively exposes the flaws that have become virtually inherent in the conduct of American monetary and fiscal policy and the ways in which irresponsible decision-making by our political leaders has exacerbated the wild fluctuations of the business cycle. It concludes from this, however, that the only workable alternative is an ideology that strictly prohibits the government from getting involved in the economy at all. The need for substantial reform is duly noted, and this reform may even have to consist of significantly crippling the powers of the Federal Reserve. It certainly does not mean that government should have no role in the economy, or that a return to the gold standard (the second main argument of the book) is necessary or desirable.
The Gold Standard
I’ll address this latter issue first, since it consumes a good part of End the Fed’s 210 pages. Paul repeatedly calls for a return to “sound money,” and indeed this is a worthy goal. Wealth is only truly safe from the “inflation tax” when it can be secured in a form that is not subject to changing political tides. Though he claims that he has no bias for gold in particular, and that any “system that would permit markets to once again choose the most suitable money, whatever that turns out to be”, would be acceptable, he also argues that “gold has all the qualities that we associate most with good money: divisibility, portability, high value per unit of weight, durability, and uniform quality” (pg. 71). He further claims that there is no need to ever change the size of the money supply, since “any quantity of money will do, so long as the money is sound. … New quantities of money injected into society confer no social benefit.” (pg. 203) In principle, this is true. Since wealth is created by the act of production, the physical supply of money (or even the nonphysical supply, as determined by a metric like M3) is secondary, a mere representation of something more abstract.
But the problem is that Paul attempts to conclude from this that there would be no inflation in an economy where manipulation of the money supply is not an option, since “inflation is always and everywhere a monetary phenomenon.” This assertion, originally stated by Milton Friedman and reiterated by Paul and others like him, is largely incorrect. Though inflation certainly can be precipitated by monetary policy (extreme examples are Weimar Germany and Zimbabwe prior to dollarization), the more common forms are due to changes in aggregate demand (“demand-pull inflation”) and changes in aggregate supply as a result of fluctuating factor prices or exogenous cost shocks (“cost-push” or “wage-push inflation”). Inflationary expectations can easily make either of these chronic and unstoppable, necessitating intervention. Even if inflation did disappear in Paul’s Fed-less America, growth with a fixed money supply would likely cause significant deflation, which entails its own very real costs.
End the Fed includes a partial transcript of a congressional hearing from July of 2005, in which Alan Greenspan replies to a question fielded by Ron Paul about the possibility of returning the U.S. to the gold standard:
Would there be any advantage, at this particular stage, in going back to the gold standard? And the answer is: I don’t think so, because we’re acting as though we were there. (pg. 91)
In other words, the “soundness” of money has nothing to do with what that money is, or even how it’s backed, but rather with how the supply of it is manipulated by governments (or by gold miners – a fact that seems lost on Paul). True, commodity money whose value is managed by markets rather than by central banks is less susceptible to such manipulation, but it is by no means safe from the threat of becoming unsound for other reasons. Greenspan rightly points out that the blame for chronic boom-bust cycles rests not with fiat money as such, but with the people who print it.
Paul: The Patron Saint of Economic Morality?
Before I address Paul’s specific criticisms of the Fed, I want to touch upon his free-market ideology. Though he provides numerous examples of inefficient government interference in the economy (e.g. wage and price controls during World War II and the 1970’s), it is also true that markets do not always achieve the most efficient outcome, a phenomenon known as market failure. There are certainly government failures as well, in which government action does not achieve the most efficient outcome, but the existence of one does not negate the existence of the other. The Austrians would have you believe that market failures never happen – because they’ve defined markets as mechanisms that are incapable of any meaningful kind of failure. This is clearly disingenuous. The Austrians are guilty of intellectual dishonesty, for this and for the fact that they claim economics cannot be empirically studied (which conveniently renders their critics unable to prove them incorrect).
In the context of American politics, even strict constitutionalists and limited government-ers like Paul, whether knowingly or not, concede the need for some government involvement in the economy. I submit that the Constitution not only mentions but actually grants the federal government the right to address various types of market failure. Article I, Section 8 lists among the enumerated powers of Congress the power to “establish Post Offices and Post Roads” (provide nonexcludable public goods), “fix the Standard of Weights and Measures” (impose standards for the sake of efficiency in markets that do not automatically converge to their own), and to “promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries” (manipulate the ability of firms to acquire market power). The bottom line is that Paul’s ideology is deeply inconsistent, and his criticisms of the Fed should be approached with caution.
Where Paul Gets It Right (But Then Very Wrong)
Nevertheless, I would like to deal with one criticism in particular, namely that the Federal Reserve sets the stage for recessions and depressions by distorting market signals. I’ll briefly deal with this argument before explaining why the Fed is ultimately necessary and how we can learn from Ron Paul’s whistleblowing and make the system better.
Paul, on regulation:
The idea that we can depend on the [regulators] to protect us significantly contributes to moral hazard. More risks are taken believing the government will protect us, and our guard against evil is diminished. Easy credit by the Fed sets the stage for excesses… The entire system… is like a super Ponzi scheme (if we can’t pay it back, let’s just create more!)… (pg. 187)
In other words, the mere existence of the Fed can encourage irresponsible behavior – even by the Fed itself. By setting interest rates lower than the market would on its own, it gives entrepreneurs and investors the impression that more financial capital is available than actually is, and the construction of a house of cards begins. There are other problems too. As Paul points out, a central bank with money-printing powers can strongly tempt politicians to abandon a sense of fiscal discipline, and, he alleges, may even do much worse (“[If the Fed were ended, no longer would presidents be in a position to lean on the central bank to artificially boost the economy before elections…” (pg. 8)).
He also attempts to argue that a banking system akin to the kind that existed for most of the 1800’s would be more desirable than the status quo:
But would this be “wildcat banking” of the sort that is frequently condemned from the nineteenth century? No more so than we have “wildcat restaurants” or “wildcat shoe companies.” Markets are self-regulating, responding to the wishes of consumers. It would be the same in banking. (pg. 190)
Not quite. Paul cites research that claims that the panics of the 1800’s were healthy for the system in that they destroyed banks that performed badly, and indeed Friedman argues elsewhere that attempts to stop banks from failing at the start of the Great Depression prolonged pain that would otherwise have been relatively self-limited. For all its merits, the problem with this thinking is twofold.
For one, banks and financial institutions today are remarkably interconnected in ways that could not have been dreamt of 150 years ago, and information about institutional instability is spread much more quickly. No longer is there a sense that a bank failure 100 miles away is not my problem. Secondly, the psychological impact of a bank failure is radically different from that of the failure of any other type of firm. Despite Paul’s assertion that “bank failures are no more to be regretted than any other business failures” (pg. 27), banks are not just “any other business.” They protect personal savings and the financial capital that is essential for future growth. The failure of a bank does not just cause people to decide that that bank was poorly run; it sows doubt as to whether any and all other banks are suffering from similar internal problems. The market may very well not self-correct. The economy could be paralyzed by systemic fear. The only way out is for an unshakable central bank to restore public confidence in a consistent and predictable way that minimizes the threat of moral hazard (Bear Stearns was allowed to fail, so why not Bank of America too?).
“The Way Out”
As he explains in the last chapter of the book, entitled “The Way Out,” Paul’s first step toward abolition of the Fed is to bring its activities under greater Congressional scrutiny by allowing the Government Accountability Office (GAO) to audit any and all of its decisions and transactions. In fact, an amendment he introduced to do just that passed the House on 19 November 2009, and will presumably be considered by the Senate after Obama’s healthcare saga comes to an end. The Fed was intended to be a completely apolitical entity, and while this is probably an unrealistic vision, bringing more of the Fed’s powers under the purview of Congress only worsens the problem. An audit is called for, but it would be better to have it done by a private sector firm than by another government agency. As for how to reconcile the need for a central bank with the need to keep it as politically detached as possible, I would propose a system under which monetary policy is run by a pool of academic economists. This group of experts (the bigger, the better) could be polled on whether or not to approve certain actions, with only a random subset of those votes actually counting. This would help to limit the amount of political pressure that could be exerted on the system by keeping it decentralized and partly anonymous.
Saith Paul, in the dramatic conclusion of his book: “We have a natural, God-given right to our lives, our liberties, and the fruits of our labor.” (pg. 210) I couldn’t agree more. But to paraphrase Galileo, a God who would give us the faculty of reason would not also encourage us to abandon its use. The science of economics has taught us much about how to better our lives, and while “liberty” is an appealing virtue, it is not the kind of nuanced answer required by the complex problems that face our society.
Moral of the Story
End the Fed is well worth the read, but like me, you might consider waiting until you can buy it for 50% off. Or until you have a giftcard, in which case somebody else is paying for it.
Addendum
I wrote roughly 80% of this note before I happened upon a similar commentary from a Time column called “The Curious Capitalist," which raises many of the arguments I've explicated and more.
Welcome!
Welcome to "The Conscience of a Centrist." My name is Matt Mazewski, and this blog is my attempt at creating a place where I can record my thoughts and opinions on contemporary political, economic, cultural, and religious issues without having to bother sending links, videos, or articles to specific people who probably don't care to follow, watch, or read them anyway.
A little bit about myself - I am an undergraduate at Haverford College in Haverford, PA, where I am studying math and economics (my student webpage can be found here. When not at school, I live in northwestern New Jersey, safely situated many miles from the places that come to mind when someone says "New Jersey."
A little bit about my perspective - I consider myself a moderate and a centrist. Though a number of my political views tend to be left-of-center, I have learned from studying economics that the most important qualities for policymakers (and for everyone) to have are a genuinely open mind and a willingness to critically examine from time to time even their most fundamental assumptions. With this in mind, I often set out to persuade others not of the merits of specific arguments, but of the need to adopt centrism as a coherent philosophy in and of itself, and not just out of a desire to simultaneously appease extremists and ideologues from as many factions as possible.
Thank you for visiting. Please take the time to leave a comment, even if it's an ad hominem attack. I like to keep tabs on my enemies.
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