Wednesday, January 27, 2010

State of the Union: A Great Disappointment

The first State of the Union for Obama... and his 1,523rd campaign speech... since being elected. He concluded by asking for a "new start," which seemed to sum his position nicely. I was deeply disappointed, a point I'll get to shortly. Let's see, what campaign promises did he make...

A freeze on non-defense discretionary spending...
A new jobs bill...
New spending on infrastructure and green energy...

(Ummm, err)

Health care reform...
Tax cuts...
Spending repaid TARP money on subsidizing small banks and firms
Fiscal responsibility...


Increasing exports...
More free trade...
Taxes to punish firms who engage in international trade...

(Hoo boy)

OK, it made no more sense than the nonsense George W. Bush used to peddle at these events. However, the correct grammar, the correct pronunciation, and the clear enunciation were delightfully refreshing. If we must have gibberish, it's wonderful to have it articulated so beautifully.

His singling out of the Supreme Court for its ruling in "Citizens United" was despicable, but "Citizens United" is for a later post.

So the address was mildly interesting...

But ultimately, what a disappointment. Here's why.

During the address, Obama stated that without "his" stimulus spending, unemployment would have been double what it is now. Earlier today, Hank Paulson told Congress that unemployment would have been 25% without his bailout of AIG on behalf of Goldman Sachs. These claims are completely fabricated; there's nothing at all behind them. They are completely made up ex post.

So my great disappointment: where was the guy who was supposed to jump up and shout "You lie!"

Unforeseen Contingencies announces New UC Contest!

As part of its crusade for government fiscal responsibility, the Peter G. Peterson Foundation is sponsoring a Fiscal Haiku contest. There are some great submissions so far. Two examples:

use dollars and sense
to make your way in this life
ask same from leaders

Michael S.


Loan is called, bubble burst
Must work for dinner now, we
Ate our dessert first.

Mary F.

Very fine stuff... but haiku is a bit highbrow for "our" tastes here at UC. And so it is with great pleasure that "we" announce a new contest, The Unforeseen Contingencies Fiscal Limerick Contest.

Contest rules: Everyone is eligible to submit limericks, including the sponsors and judges and all "their" friends and family. All limericks remain property of the submitter, but UC will post them anywhere it chooses regardless. Submissions should be emailed to steele_econ[at] Include hyperlinks for data sources, citation, etc. as warranted. The deadline for submission is 23:59:59 Mountain Standard Time (U.S.) on 28 February. No haiku allowed, send these to PGPF. All decisions of judges are final, unless they change their minds. A prize will be awarded to the first place winner!

Since I am eligible to enter, here's the first entry:

Tim Geithner drops down to his knees,
And begs of our creditors "Please,
continue your lending,
Someday we'll stop spending."
But sadly, they just speak Chinese.

Unromantic Keynesian

Here's a very interesting video clip with Nouriel Roubini discussing the current economic dilemma. He's largely on target (although of course I'm skeptical of spending stimulus). Roubini was one of the very earliest to warn of the credit bubble and debt crisis; much of his analysis is compatible with Austrian business cycle theory, although he claims Keynesian theoretical roots, and does advocate short run aggregate demand management. But he does not romanticize government spending the way ideologues like Paul Krugman do.

What's particularly interesting about this clip is that Roubini answers two questions, good ones, from listeners who are clearly skeptical of government solutions. What's wrong with Roubini's response to the first one?

(Hint: "Laissez faire" doesn't mean "privatize the profits, socialize the losses." It means "privatize the profits AND the losses." Roubini is using the Bush-Bernanke-Paulson definition.)

Tuesday, January 19, 2010

Political Correctness kills (formerly "In defense of Brooks")

I've rewritten this post because the topic is serious, and deserves more than the rant I initially composed.

David Brooks posts a rather bland set of observations in NYT, as usual, and for a change, not only does the world take notice, but a good share of it has an apoplectic fit.

In an op-ed on Haiti, Brooks observes that the reason Haiti suffered such destruction from the recent earthquake is that it's not a developed country. He's certainly correct about this. Earthquakes of similar magnitude in the U.S. or Japan are far less lethal. Wealth, technological sophistication, and competent organization reduce the destructiveness and vastly improve the response to disaster. Or consider China, still a developing country with substantial poverty. In the 2008 Sichuan earthquake, inferior construction led to considerable loss of life, but China also had sufficient development to respond. The loss of life between China and Haiti appears to be roughly equivalent, even though the Sichuan quake was ten times more powerful than the Haiti quake. (Don't make too much of these numbers, though...the population densities of Sichuan epicenter Wenchuan County and Ouest Departement where Port-au-Prince lies are quite different.) It's clear that development increases our ability to withstand natural disasters.

Brooks then asks why Haiti has failed to develop. One of the things he dares to suggest is that among explanations we should include "progress-resistant cultural influences."

Multiculturalists, diversity worshippers, and thought police are up in arms over this. How dare anyone suggest that ideas, behaviors, and the other informal institutions that make up culture could have anything to do with how a society functions! Matt Taibbi posted a particularly vicious and foul attack on Brooks, accusing him of racism, while in fact Taibbi wallowed in racial and religious bigotry himself. His slur-filled attack was reposted on Huffington Post. The attack entirely sidestepped Brooks' points, and accused Brooks of arguing that no one should donate to Haitian relief, that Haitians are racially inferior, and the like. (Taibbi also postured as some sort of international expert, which he's not.)

In fact, Brooks suggests that we need to help Haiti develop, and correctly points out that foreign aid spending does not help countries develop. OK, let's say that again: foreign aid spending does not help countries develop.


If there's anything we've learned from the past 50 years of foreign aid interventionism, it's this. I can't think of an empirical proposition in economics better established than this.

So why don't countries develop? It's not education, but that's a long story for later. It's certainly not resources -- natural resources tend to hinder development, not further it. The single most important factor is institutions: formal ones (constitutions, laws, etc.) and the foundation that supports them, informal institutions. And, sorry to say for the PC diversity crowd, not all informal institutions, i.e. cultures, are equivalent.

I suspect Brooks has no particular knowledge of Haiti, but he's quite correct in general that there are mentalities that hamper development. One would have to be utterly ignorant of the world -- or utterly blinded by PC ideology -- to not get this. And Brooks does provide citations for claims. Taibbi didn't even bother to address them.

I was outraged by something else in Brooks piece. His fourth point suggests that development must ultimately be undertaken by locals. But in making this otherwise perfectly sensible point he could not restrain his neoconservative ideology, and identified better schools as "paternalism." A standard kneejerk reaction for Brooks is to declare that libertarian, laissez faire, and free market principles don't work. For him, solutions to problems always require participation by a wise, paternalistic government. (He once argued in NYT that the failure of American public schools shows that free markets can't solve problems of education, and that we need the federal government to oversee national education!) To label stricter, more rigorous schools as "paternalist," well, it's just Brooks' usual kneejerk neocon opposition to individual liberty and responsibility. (Defending Brooks certainly doesn't come naturally to me)

But the more important point: if such bland words as Brooks' are demonized by leftists (who falsely call themselves "liberals" and "progressives"), how are we going to make progress in development? Brooks words are not bigoted, nor hateful (unlike Taibbi's). If a calm discussion of the very real problems of "progress-resistant cultural influences" cannot even occur, we'll simply be locked into our old destructive patterns of giving foreign aid to wealthy elites, elites who then block real reform, so as to keep the aid coming.

In such case, every time another child in an LDC unnecessarily dies, and every time a poor country suffers needless destruction and death, a share of the blood will be on the hands of Matt Taibbi and his PC friends.

Postscript: I've had many very informative discussions with Africans, South Asians, East Asians, and Eastern Europeans from a wide variety of cultures on how cultural attitudes restrict development. In every case these were discussions initiated by my friends, and in every case they pointed to elements of their own cultures that they believed dysfunctional. The Political Correctness that requires we blind ourselves to these issues is intellectually less respectable than Creationism, which at least is willing to address the science of Evolution.

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Monday, January 18, 2010

Exciting New Blog!

Well, at least I find it exciting.

I'm pleased to announce something that's been in the works for a little while:, a blog I'll be co-writing with my colleague, Gary Wolfram. Our focus will economics, and particularly as it relates to policy matters (I suspect I will address matters of theory from time to time, as well).

We'll be posting on a daily basis, or close to it.

Readers should expect no changes to Unforeseen Contingencies. I'll still be blogging here on my usual irregular basis, on economics, politics, philosophy, foreign policy, wilderness adventuring, and my occasional wild outbursts that require admired reader NV to intervene to restore me to my senses.

And as always, on both blogs, comments are welcome!

Tuesday, January 05, 2010

Too Big To Behave?

Meetings finished!

The best session of these meetings (for me, at least) was a panel this morning organized by John Taylor, Ending Government Bailouts As We Know Them. How do you end the "too big to fail" syndrome? The panelists were largely in agreement, made great sense, and the overall message was quite depressing. I especially appreciated Carmen Reinhart (co-author with Ken Rogoff of the excellent “This Time It’s Different” book). Wow, is she cynical (and proudly says so). With each solution she proposes, she essentially says "good luck" when it comes to generating the political will to implement it.

I think all the participants had very clear ideas of what needs to be done and seemed to have not much hope for it happening. Another participant was head of the Minneapolis Federal Reserve; he kept posing scenarios in which a "hypothetical" bank gets away with one or another essentially dishonest thing and no one intervenes to stop it, for example switching back and forth between being an FDIC regulated deposit bank and an unregulated investment bank. I wonder who he could mean?

I’ll have plenty to say on this topic later myself.

For now, the sessions have ended, and I’m about to start the AEA continuing education course in Time Series Econometrics, taught by James Stock and Mark Watson. Somehow I don’t think I’ll be blogging a lecture-by-lecture account.

Monday, January 04, 2010

The Mad Hatter on Contract Design

Greetings from Atlanta, Georgia, where, in a tribute to global warming, nature has dealt us 20F (minus 7C) and dropping.

As an aficionado of absurdity, I certainly enjoy the following provision in the contract I just accepted in order to get internet access so as to post this for my faithful and dearly appreciated readers:

By using the high-speed Internet services provided by iBAHN™ (the "Service"), whether or not you clicked "I ACCEPT" when prompted upon commencement of using the Service, you agree to be bound by these Terms of Use and iBAHN's Privacy Policy, Disclaimer of Warranties, and Limitation of Liability, all of which are incorporated as part of these Terms of Use and together form the entire agreement relating to your use of the Service. The Service includes, without limitation, iBAHN™ high-speed Internet services, wired and wireless Internet access services, and Lobby PC™ services. As used in these Terms of Use, "iBAHN" includes iBAHN, Inc. and all of its affiliated companies.

The most current version of these Terms of Use is available on iBAHN's website at Please review the Terms of Use at iBAHN's website prior to accessing the Services since the Terms of Use are revised from time to time.
(emphasis mine)

Ha ha ha! You’ve got to appreciate such nonsense and such chutzpah.

The efficient market hypothesis/ratex people seem to think that the financial crisis stemmed from an unforeseeable "black swan." Some of the Keynesians think it stemmed from irrationality and animal spirits. Both are, I guess, explanations for why all those contracts that comprise mortgage backed securities went toxic. But how about this as an alternative explanation: people intentionally design bad contracts to give themselves the upper hand in exchanges.

On the Cutting Room Floor

I guess with video they don’t actually physically cut anything and drop it to the floor, but if they did that’s where I’d be. After Bernanke’s presentation yesterday, CNN interviewed your faithful UC correspondent; it was a little blurb thing, "What one thing would you do to fix the economy?" They caught me off guard, and I’m afraid I wasn’t very eloquent, but at least I tried throwing the long bomb* and suggested two things (two is quite close to one in econometric estimations):

• Get the long run fiscal position of the federal government into balance. We have to do it by cutting spending and especially entitlements, we can’t do it by taxation. And if we don’t, we face a national bankruptcy.

• Get regulators into the financial markets, not to regulate innovation, but rather to enforce honest accounting and transparency. If we do, we’ll very possibly find that Goldman Sachs and similar big banks have been engaging in things that look awfully close to control fraud.

I wish I’d been considerably more eloquent, because these are important points, and any hearing they get is progress. But I was rather surprised that they wanted to interviewme instead of Bernanke.

Hmm. Could it be that CNN is slowly catching on to who really knows what’s important?


*"Throwing a long bomb" is a term from American football, and refers to a bold attempt to make a sudden great gain. In particular, it’s not statement amount anything explosive. (Mr. Bernanke’s Secret Service detachment, please note!)

World Premier! Hayek vs. Keynes

So far, the highlight of the AEA/ASSA meetings has to be the world premier of Fear the Boom and Bust: A Hip-Hop Macro Anthem. It’s a extremely cool music video featuring Friedrich Hayek debating John Maynard Keynes, and is a cooperative venture between Russ Roberts (Mercatus Center) and John Popola (The Productioneers). I don’t think it is yet available, but apparently it will be in a few weeks, along with commentary on macroeconomics from a wide variety of economists. I’m no rap fan, but it’s really well made, highly amusing, and a very good introduction to business cycle theory.

I’ve been sitting in a number of sessions on where macroeconomics is today, and frankly, this video is probably the proper stopping point for studying business cycles as well.

Sunday, January 03, 2010

The Chairman’s Defense

In late 2008, John Taylor of Stanford U. wrote a blistering attack on Federal Reserve monetary policy, attributing the housing bubble to our friends at the Fed. (Available here and worth reading.) Taylor’s argument is, in short, that the Fed foolishly departed from the "Taylor rule" for setting interest rates, keeping rates too low for too long thus generating the housing bubble. A simulation run by Taylor using a counterfactual Taylor rule rate did not exhibit a housing bubble.

Ben Bernanke’s presentation today was his rebuttal. In a nontechnical nutshell, Bernanke first disputed the way Taylor showed a divergence from the Taylor rule. Using what Bernanke considers better measures of price inflation, and FOMC forecast values of key variables as opposed to current values, he was able to show that Fed policy was not looser than what the Taylor rule would have called for. Second, he provided a variety of "empirical data" that suggest that interest rates have little effect on housing prices, and that foreign capital inflows do - supporting the global savings glut hypothesis.

My reaction is threefold: (i) Bernanke has a strong argument that the Fed did not diverge substantially from the Taylor rule. OTOH, the defense that interest rates weren’t held too low too long because we can come up with a different metric that generates a Taylor rule sounds a little like Robert Anton Wilson’s "Law of Fives:" any phenomenon in the world can be shown to be intimately related to the number five, given enough ingenuity on the part of the observer. I look forward to Taylor’s rebuttal. (ii) I’m unconvinced monetary policy Bernanke’s argument against an important role for monetary policy in the boom was entirely unconvincing. His VAR results suggested only a small role for low interest rates in generating the boom in housing prices. Yes, probably right – just like a match has only a small role in an arson fire. (iii) If you take on the head of the Fed chairman, keep in that he has an army of some of the best technical economists in the world at his beck and call to help him shoot back.

If history is any indicator, there’ll be a seemingly endless stream of increasingly complex statistical analyses of these issues, written from opposing viewpoints, which will generate interesting new econometric tools and precisely no new understanding of anything economic.

It bears emphasis that this presentation concerned an academic debate concerning one particular historical event, one in which Bernanke has been criticized. It was not over current policy or future events.

I sat with Mark Skousen, and he asked the chairman what will be the likely consequences of a greatly expanded money supply, and whether or not the big purchases of gold by India and China are harbingers of anything for the dollar.

Any guesses as to how the not-yet-reconfirmed chairman responded?

Saturday, January 02, 2010

Greetings from the Meetings!

and Happy New Year!

the 2010 AEA/ASSA Annual Meetings, that is.

I’m in Atlanta for the 2010 conferences of the American Economic Association and Allied Social Sciences Association, and preparing for three days of econ fun: lots of sessions devoted to the Great Recession, and lots more devoted to wondering why economists got it wrong, plus numerous sessions on health care economics, and all the other usual and unusual areas. How about this for a session: "Entrepreneurship in Medieval China, Early Muslim Societies, and the Dutch Republic: Economies with Extraordinary Creativity that did not Last - lessons for the U.S." with NYU’s William Baumol presiding.

Unfortunately it conflicts with "Why Did Economists Not Predict the Crisis?" featuring Paul Krugman, Raghuram Rajan, Tom Sargent, and Robert Shiller, Dani Rodrik refereeing (I think it’s a tag team match.) Which to attend will be a tough call.

I’ll be up early tomorrow to try to get a question to Ben Bernanke when he speaks, and the fun will just go on from there!

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