The Free Thinker

Over-Interpreting the Golden Age

It has long been customary for conservatives to look back to the 1950s as a Golden Age. Lately, this has become a habit among economists who are somewhat heterodox and/or left-leaning. Thus, Paul Krugman, in The Conscience of a Liberal, appeals to the 1950s as a better, more egalitarian time, with high taxes and more equality. Dani Rodrik, in The Globalization Paradox, holds up the Bretton Woods regime of the post-WWII years as an era of "moderate globalization," in favorable contrast to the "hyper-globalization" that began in the 1980s and accelerated in the 1990s. Robert Skidelsky, in Return of the Master, dates the decades immediately following WWII as an era when Keynes was the "coach," and contrasts them favorably to the time since then.

Skidelsky, by the way, makes the indefensible move of dating the end of the Keynesian era from 1973 in order to make the Keynesian era look good. Actually, the 1970s were the heyday of Keynesianism: it was 1971 when Nixon said "I am now a Keynesian." It was with Volcker and Reagan that Keynesianism began to be eclipsed, and it was only in the 1990s that a new anti-fiscal-policy consensus seems to have emerged. Include the 1970s and the Keynesian era doesn't look so good. But I digress.

All these authors use the post-WWII boom to support their view, by showing that growth was quite strong in that period. Generally, they are advocating a position which there are good theoretical reasons to believe to be anti-growth. Thus, Keynesianism discourages savings, which in the medium to long run must discourage investment, which slows growth. Again, globalization of finance and trade should yield benefits from diversification, economies of scale, comparative advantage, and so on which should raise the level and (at least in the short run, perhaps permanently) growth rate of GDP per capita, as well as (arguably) a more equal distribution of GDP globally. And Krugman's proposed high tax rates should obviously be expected to reduce the incentives to work, trade, save, and invest which grow the economy. Instead of acknowledging and responding to strong theoretical arguments that their preferred policies are anti-growth, they make the empirical point that when the policy regime was closer to their desiderata, growth was strong. It's rhetorically effective. But it will not do.

Two objections must be made. First, there are some big, obvious reasons for the strong post-WWII boom, and once these big, obvious reasons are considered, it's not clear that there's anything left to explain. Second, if one allows an atheoretic, empirical appeal to the 1950s and 1960s to count as a valid argument, one legitimizes other arguments that have the same form.

The big obvious reasons for the post-WWII boom are:

1. Recovery from the war (and depression). World War II was enormously destructive. So was the Great Depression before it. By the end of World War II, the world was a lot poorer than it knew how to be. You could get a lot of growth just by returning to normalcy at that point. (This argument applies especially in Asia and Western Europe, but in America too.)

2. Demography. Because of the baby boom after World War II, the population was unusually young. Young people tend to learn, or "accumulate human capital," faster, and consequently enjoy rising productivity. Also, with a smaller population of old people to support, it was much easier for governments to balance their books, with money to spare for public works projects.

I think there's also a third, subtler reason for the post-WWII boom: the West was still benefiting from the technological momentum of the late 19th and early 20th centuries, the golden age of innovation, the factory etc., the Age of Henry Ford, which had peaked in the 1920s, but had continuing to cast up new technologies which the conditions of depressions of war had not been able to exploit. A lot of low-hanging fruit had, so to speak, grown on the technology tree which a nation distracted by depression and war had not been able to exploit.

All this suggests that by the 1970s and 1980s growth had become a lot harder. Recovery from the war was complete, we were pushing up against technological frontiers, and demography was less favorable. So to compare the growth rate in 1980-2007 with that of 1945-1980 (even if you don't cheat by throwing the 1970s into the later period!) is not really a fair comparison. A growth slowdown was inevitable. Good thing Thatcher and Reagan came along, or it might have been a lot worse! (As, in fact, it was in France, Germany, and later Japan-- anywhere that didn't make a turn towards free markets about that time.)

The other problem is that if your argument is "growth was better in the 1950s and 1960s, we're not sure why, but it might be x" then you open the door to arguments like the following:

1. The civil rights movement caused the growth slowdown. The system of racial segregation before the mid-1960s was ugly, but efficiently protected the social capital of the white bourgeoisie, while the breakup of that system through anti-discrimination of laws was invasive and highly inefficient, depriving firms of quick, rough-and-ready methods of gauging employee compatibility. The cost of racial justice-- perhaps one well worth paying!-- was slower economic growth and rising economic inequality.

2. Feminism and the entry of women into the workforce caused the growth slowdown -- or perhaps, to be more exact, the productivity slowdown, by increasing the denominator of productivity statistics, person-hours of work, without increasing the numerator proportionally. Housework and breadwinning are complements. A man is both more able and more motivated to do good work on the job if a housewife is making his meals, cleaning his clothes and his house, and raising his kids. Breadwinners for a family are likely to place more value on cash relative to the intrinsic rewards of fun or interesting jobs, and that helps productivity, too. Also, when men's and women's roles are more clearly defined and prescribed by society, economic complementarity in marriage is much easier to acheive (just as it's easier to shop for electronics when all houses are equipped with the same style of plug). The cost of women's liberation and gender equality-- again, perhaps one well worth paying!-- was slower economic growth and rising income inequality.

3. The cultural and sexual revolution of the 1960s caused the growth slowdown. Tradition isn't always right but it tends to carry with it a lot of the moral values-- honesty, self-reliance, hard work-- that parents try to inculcate in children. The rebelliousness of the 1960s undermined these values, and made it distasteful to young people to emulate old heroes of industry like Henry Ford. They wanted to be rock stars instead. And the sexual revolution in particular diverted a lot of energy, for better or worse, into hedonistic sexual pursuits.

Now, I'm not endorsing (1), (2), or (3). And I think it would be very difficult to develop these speculations into rigorous theories that could stand up to critical testing and also perform well empirically, not just in "explaining" (or being consistent with) one or two big macro facts, but in detail. But I think it would be pretty easy to write books that developed these themes (and others) in an atheoretic way, and then pre-empt objections with a hand-waving appeal to empirical history. Such books are unlikely to be written, or at least unlikely to be read, because they are politically incorrect, but it's much more satisfying to say to such arguments, "No, your appeal to the 1950s and 1960s growth record in support of your argument is not persuasive, because that's sufficiently well explained by demography and the recovery from wartime destruction that there's really no mystery left to solve." And that's the same answer I'd give to Rodrik, Krugman, and Skidelsky.

My Take on Paul Romer's Charter Cities Concept

I am a fan of Paul Romer's ideas, as represented in this video, and in general at this blog, about charter cities. I very much like it that Romer is thinking out of the national sovereignty box. This is one of the great moral imperatives of our times. National sovereignty is to the present rather as feudalism was to the present: it helps to organize things but is an enormous source of systematic injustice, and people of good will ought to mitigate, undermine, modify, hamper, and confuse it at every turn. The big political causes I support, like the Iraq War and immigration reform, are calculated to replace the worst iniquities of national sovereignty with something more free, just, and/or rational. One of the great virtues of organizations like the IMF and the World Bank (and one reason why I'm proud to have worked at the latter) is that they stand athwart the matrix of sovereign states.

Romer is probably the greatest living theorist of economic growth, and I expect he'll win the Nobel Prize at some point. In the video, he makes the case that Hong Kong is the most successful development project in history, and he wants to replicate it. He actually toys with the idea of "Give war a chance," and it makes me wonder if he's a closet Iraq War supporter, on the obvious grounds that it replaced a worse government with a better one, but he doesn't think, in general, that conquest, or even liberation, by military force, is a good way to remake the world in a manner that is conducive to growth, development, the betterment of the human condition, etc. He suggests, instead, that charter cities might be carved out of the sovereign territory of less developed countries, with their consent, and administered by wealthy countries, but with the citizens of the less developed countries having full access-- a little bit like Hong Kong. These areas could be magnets for enterprising people and would then spread development through their host countries, as Hong Kong became the catalyst for economic growth throughout southeastern China.

Brilliant! Of course, it would depend on developing countries agreeing to it, but I think that might be possible. I would propose a different plan, though, which borrows Romer's ideas but adds another dimension and motivation to them.

Generally speaking, the right to migrate was better respected in almost any past epoch in history than it is in the present dark age of border controls. In ancient times, in the Middle Ages, in the early modern period, in the 19th century, one might easily wander from the heart of civilization to the ends of the earth and back without encountering official interference. Today, this is impossible, unless one is willing, among other things, to risk one's life in the deserts of Arizona, as some brave and noble souls dare to do. One might say that in the past the whole world was more like the deserts of Arizona. One might indeed run a risk of bandits, but the bandits were less likely to wear badges and were not paid by taxpayers. Of course this institution of immigration restrictions is highly regrettable, unjust, inefficient, and so forth, and in the interests of human flourishing, commerce, Christianity, and everything else good and praiseworthy I wish to see it abolished, but that is not the point here. My point is that while the right to immigrate was better respected in the past (especially for travelers and sojourners; acquiring land and settling might still have been difficult) the right to emigrate is in theory more widely acknowledged today. Thus, serfs had more rights than slaves, but they were still tied to the land, albeit running away was often not too difficult for the enterprising. 20th-century totalitarian regimes, too, tried to prevent emigration (and in general their citizens were a lot like slaves) but they were pressured by the West on human rights grounds to allow it, and since the fall of communism there are few places in the world where the right to emigrate is restricted by the country that is being emigrated from. Often, however, prospective emigrants have no place to go. And it seems to me disingenuous to deny that this gives a country like America a good deal of guilt in all the crimes of regimes that do not respect human rights. A Chinese or Iranian torturer might have fewer victims at his disposal if Chinese and Iranians could board a plane to the United States and expect to be admitted. People are trapped under bad governments by the immigration restrictions of the West. The border patrol is working for, among others, Vladimir Putin and Ahadminejad. We are their jailors.

Now, if we want to mitigate this guilt, it is not necessary to open our own borders, but only that some emigration options be available to all the world's people. So this becomes a second use for the Hong Kong-style charter cities that Paul Romer wishes to create. To administer them, I think the best agency would be the World Bank. It is largely in the business of institutional design or you might say institutional export. When I was working at the World Bank and found that people were confused about what it did, I coined a half-joking aphorism which, however, puts it in a nutshell: "Think of World Bank as the British Empire. But think of it through the lens of Marx's dictum that 'history repeats itself, first time as tragedy, second time as farce.'" That's slightly more cynical than I would actually want to be about the World Bank but I think it captures a lot of things. First, the altruism. The British Empire was partly motivated, at least, by very high ideals, by the quest to spread liberty and civilization to benighted peoples. The abolition of suttee, the despicable Indian custom of forcing widows to burn themselves alive, is emblematic. Second, third, fourth fifth, and sixth, the creativity, flexibility, consultativeness, enlightenment and intelligence of the British Empire/World Bank: they like to work with local rulers and win them over, using reason and argument as well as the influence of prestige, plus, lastly, a bit of money. Of course, the British Empire also had guns. This is where the analogy breaks down, and it's also why the word "farce" is not entirely inapt: sometimes, indeed often, World Bank consultants develop excellent plans and schemes but are helpless against local vested interests and corruption. But they have lots of experience thinking about government, they have good intentions, they have a kind of international legitimacy that the US, for example, lacks, they are throughly multicultural and progressive (a word which has a much more creditable meaning internationally than domestically), they are technocratic and insulated from politics. They are trusted by multinational corporations.

So, my proposal. Launch a global initiative-- probably the US would have to help, but Europe could originate it too-- to make the right to emigrate a worldwide reality, by creating an archipelago of no-passport-necessary sanctuary cities, administered by the World Bank. A general offer would be made by which countries could alienate small pockets of territory to the World Bank, probably not permanently but as a long term lease, e.g., 49 years or 99 years. This would typically be relatively undeveloped territory; not major cities. It would be up to the World Bank and/or donors to build the infrastructure, ports and roads and power plants etc. Passport control lines would be erected between these new charter cities and the rest of the host country's territory, not to keep the host country's nationals out-- again, no one is to be kept out-- but to keep in the migrants to the charter cities, other than host country nationals or those with visas to travel in the host country. This is to ensure that host countries can agree to the creation of charter cities on their territory without entirely opening their own borders, though if they want to do that, too, great, and it might be encouraged with further offers of aid.

Why would any country agree to this? Several reasons. First, money. I envision this being a development project initiated by rich countries who are willing to pay to make it happen. The terms of the lease might be quite lucrative. I would suggest, too, that regular transfers should be arranged from the tax revenues collected in the charter cities to the governments of the host countries, so that if a real Hong Kong arose on one's territory, it would pay off well. And of course, a successful charter city could promote development in the host nation the way Hong Kong promoted development in China, buying its products, outsourcing jobs as wages in the charter city rose. Also, tourism: if the charter city was successful, its residents would surely want to travel in the host country. A second incentive might be security. It might not be a good idea to have US soldiers guarding the charter cities: too politically sensitive. I would picture UN troops or some kind of global security agencies (i.e., mercenaries); but there would be at least an implicit and probably a partly explicit guarantee of the charter cities' integrity by the US and/or NATO, and perhaps by other regional security bodies and/or the UN as well; and this might be extended on a case-by-case basis to the host country as a whole. The World Bank itself might outsource a lot of its own operations to the charter cities (World Bank staffers are sometimes irritated by the hassles of getting US visas and might feel more at home in a place where they called the shots) and this could give a certain prestige and global influence to host countries. And of course, when the lease runs out, the country would gain control, if all goes well, of a dynamic new modern city built by the World Bank... albeit one populated largely by foreigners whom it might be awkward to expel. So, how many countries would take this deal? I have no idea, but it doesn't seem improbable that some would. I'm thinking mainly of Africa, but Latin America or South Asia might, too. Rich countries might do it with outlying possessions: Guam, for example, or Guantanamo Bay. Of course, the territories would be unlikely to be completely uninhabited, and how to deal with the locals is a problem, but probably not an insurmountable one. They wouldn't be kicked out, after all, and while they would have to tolerate a flood of newcomers, they could be very well compensated for that, first in direct payments, second in the rising value of their land. (The "lease" would be design to leave residual ownership rights with locals while the World Bank would get administrative rights.)

The founding principle of these charter cities would be that anyone could come, and policy would have to adapt to that. Their assets would be some donor aid and the "imprimatur," as the financial press sometimes says, of the World Bank. Who would come? Initially, the most obvious candidates are entrepreneurial types of refugees of conscience. The "market-dominant minorities" (Amy Chua's term) that lead moderately prosperous but very insecure lives in all sorts of places would certainly trust the World Bank much more than the local governments in, say, Africa, and might be glad to move to a charter city, or to acquire a second home there and spend part of their time there, perhaps educating their children there. Western universities might be keen to set up satellite campuses; or perhaps the World Bank would induce them to do so. Multinational corporations might set up offices there too: they would be ideal if you want to do business in Africa but limit one's contact with corrupt local officials. Economic migrants would be disproportionately clever and entrepreneurial; religious refugees and refugees of conscience would be disproportionately orderly and ethical, so that these charter cities would probably have rather appealing populations. They would probably be predominantly English-speaking, since in any agglomeration of people drawn from all over the world English is generally the lingua franca; possibly if one were set up in Honduras, say, it would be mainly Spanish-speaking. English might enhance the appeal of the places: "go there to learn English," parents would say. I expect the World Bank would want to use the dollar for a local currency, though if they wanted to use the charter cities as bases from which to spread a rival global currency (along the lines of the IMF's SDRs) to the dollar, that would be interesting too.

If the goal is to apply the Hong Kong model, policy would presumably be rather libertarian. But is that the World Bank's philosophy? Sort of, yes, I think. I mean, the World Bank is always thinking about social safety nets, but if you're working in Africa, South Asia, Central America, and so forth, you have to get used to the social safety net being at a pretty low level. World Bank staffers might, a bit inconsistently, support a much more generous social safety net in rich countries, but they couldn't indulge such a preference in a charter city that was constitutionally obligated to accept all comers. On social issues and religious freedom and so forth, World Bank staffers' inclinations are quite libertarian.

I expect you'd get a lot of ideas fermenting, from tech entrepreneurialism to political radicalism. You might get a flourishing of the arts as well, just as a result of the blending of different cultures. You might get a lot of religious piety too. Christian missionaries would love them, but the international left might find them hospitable too: charter cities might be to the global left today what Geneva was to Lenin.

What about crime? A possibility. Why crime is high in some places and low in others is not well understood, and to the extent that it depends on social solidary (but I'm not sure it does) that would be hard for World Bank technocrats to foster. What about terrorism? Also a possibility.

If it were just me, I'd feel silly proposing something so ambitious and eccentric. But Paul Romer might just have enough influence to make it happen.

Battle of the Straw Men

Pete Wehner:

In his speech in Osawatomie, Kansas, President Obama took another stab at summarizing the philosophy of the Republican Party. And this is the best Obama could do: “Their philosophy is simple: We are better off when everybody is left to fend for themselves and play by their own rules.”

This is a silly and intentionally misleading statement — silly because it’s so transparently false and intentionally misleading because the president surely cannot believe his own rhetoric. The problem for Obama is it’s becoming a pattern. Earlier this year, he charged that Republicans want the elderly, autistic children and children with Down syndrome to ““fend for themselves.”

After that, he told us the GOP plan is “”dirtier air, dirtier water, less people with health insurance.”” Given his rhetorical trajectory, Obama will soon be insisting that Republicans favor reinstituting slavery at home and genocide abroad (or perhaps it’s favoring genocide at home and slavery abroad).

These are the kinds of things a politically desperate and intellectually bankrupt politician says. The president must believe he cannot win a debate on philosophy on the merits, so he instead employs the crudest caricatures he can.

Paul Krugman:

President Obama has tried — desperately, and far beyond the point at which it made any kind of sense — to reach out across the partisan divide. He has bent over backwards to be nice to bankers. He has clearly been uncomfortable with any kind of populist rhetoric, although that may finally be changing.

And his reward for all that is that Mitt Romney describes him as a full-on Marxist, from each according to his ability to each according to his needs:

[Obama] seeks to replace our merit-based society with an entitlement society. In an entitlement society, everyone receives the same or similar rewards, regardless of education, effort and willingness to take risk. That which is earned by some is redistributed to the others. And the only people to enjoy truly disproportionate rewards are the people who do the redistributing — the government.

Reality just doesn’t matter here — which is why Obama might as well reach out to his base instead of the unreachable right.

Romney and Obama, and for that matter Krugman and Wehner, deserve each other.

Incendiary Quote from *Principles of a Free Society*

The following is the incendiary climax of Chapter 5 in Principles of a Free Society:

A thief, or a philanderer, might look for arguments against the rights of property, or marriage, with which to justify himself. He will prefer strong arguments but will settle for weak ones if they are all that he can find. And herein lies the importance of Hobbes: that although his case for sovereignty must be one of the weakest arguments a philosopher has ever penned, yet it is the best defense that can be made of the cowardly subservience and statist bigotry with which much of mankind has, for thousands of year and still in the present day, not only submitted to-- that might be done in a spirit of meek but unbowed nonresistance, as Socrates submitted to his Athenian jury and Christ to Pilate and the Sanhedrin and Gandhi to the British Raj, hating the sin while loving the sinner-- but condoned, endorsed, approved, cheered, praised, honored, respected, believed in and aided even the most brutal, unjust, and lying rulers, and sneered at and persecuted those who spoke truth to power, all of which can, thanks to Hobbes, be summed up in a word: sovereignty.

Now, doesn't that make you want to buy the book and see how I got there?

Abuse of Numbers

Sometimes what makes me want to blog is that I'm highly irritated by something I read. The danger is that it will make me seem bad-tempered. Oh well. Fareed Zakaria's article, "Obama's speech shifts focus from deficits" really irritated me. He begins:

With his speech in Kansas, President Obama has begun a national conversation about the economy and the role of government. In presenting his view, Obama shifted the economic conversation from deficits to the crucial issue of growth. After all, deficits matter because they could have a harmful effect on growth. The question we should all ask is: What would make this economy grow?

One theory heard a lot these days is that the economy is burdened by excessive government regulation, interference and taxes. All these pressures on business, especially small business, are keeping the economy down. Cut them, the Republican candidates all say, and the economy will be unleashed. It’s a compelling picture, but the data simply do not support it.

Now right here, already, the proper reaction to this is something like "Who does he think he is to be writing about numbers at all?" If you think a claim like this can be dismissed because "the data do not support it," then you don't understand the use of data. Data is not a substitute for theory. Theory is needed in order to interpret data. Disraeli said "there are three kinds of lies: lies, damn lies, and statistics." That's too cynical, but it's true that many, many uses of statistics are misleading to the point of being worthless, and people who think they can resolve big questions like this merely by quoting a few numbers are just the types of people who abuse statistics. Even so, I didn't think it would be as bad as it would turn out to be.

A World Economic Forum survey that ranks countries on their overall economic competitiveness puts the United States fifth; the countries ahead of it, including Singapore and Finland, are tiny, with populations around 5 percent that of the United States. The World Bank publishes a report that looks at “Doing Business” across the globe. The United States ranks No. 4, again behind a handful of tiny countries. As is the case with the World Economic Forum, that ranking has not changed much over the years.

Of course, there's plenty of controversy around the way these numbers are compiled, and the whole idea of "overall economic competitiveness" of countries is, in my considered judgment, baloney. To put it bluntly, it is totally eviscerated and refuted by Ricardo's theory of comparative advantage. But even if you take the number at face value, it does not support Zakaria's claim. The US has a light burden of government relative to other advanced countries, so it's quite "competitive." If it had a still lighter burden of government, the crude logic would suggest, we would be still more "competitive." What is Zakaria's point?

The Kauffman Foundation, which looks at the level of U.S. entre­pre­neur­ship, found that in 2010, 340 out of every 100,000 Americans started a business each month. That rate hasn’t changed much in the past few years; it is only slightly higher than in 2007, before the recession. Regarding regulations, Bloomberg News has crunched the numbers and found that the Obama administration has not reviewed or issued significantly more rules than its predecessors.

Again, what is Zakaria's point? That the pace of business development hasn't been stalled by over-regulation? But, first of all, while these raw numbers are interesting, they are hard to interpret. Not all rules are alike, after all; some are much more burdensome than others. And then, how are they enforced? That can change from administration to administration too. As for the number of Americans starting a business each month, we might expect that number to rise, since one reason for starting a business is to escape unemployment, and there are a lot more unemployed Americans now than in the past. Also, not all business expansion takes the form of individuals starting businesses; it can consist of established firms embarking on ambitious new projects. Really, not much can be drawn from these numbers.

The Organization for Economic Cooperation and Development (OECD) released a study last week measuring tax revenue as a percentage of gross domestic product. The United States came in 27th out of 30 countries. Taxes are low in historical terms as well, the lowest since the early 1950s. But the complexity of the U.S. tax code clearly exacts a price in terms of economic growth and competitiveness. The World Bank study finds that the only category in which the United States is not in the top 20 is “paying taxes,” where it ranks a miserable 72. (The U.S. ranking has shifted from 76 in the 2008 report to 46 in 2009 to 61 in 2010.) Tax reform that gets rid of the loopholes, deductions and credits — and the inherent corruption related to them — would clearly help the economy.

The point that taxes are low right now is well taken, as far as it goes. I think most small government advocates right now are not so much focused on lowering taxes as on reducing the deficit, about which Zakaria says nothing. The problem, of course, is that while taxes may be low now, everyone is afraid that they will rise. And that deters investment, entrepreneurship, risk taking, etc.

So, outside of the tax code, the United States does not seem to have slipped very much in terms of competitiveness and ease of doing business. What has changed? The answer is pretty clear. Only five years ago, American infrastructure used to be ranked in the top 10 by the World Economic Forum. Now we’re 24th. U.S. air infrastructure has gone from 12th to 31st, roads from eighth to 20th.

And so what? First, is this change because our infrastructure has gotten worse, or because other countries' has gotten better. But, more importantly, what is the evidence that infrastructure is an important constraint on the economy, at the margin? My own experience doesn't suggest that road quality is a significant constraint on the economy. The highways pretty much get me where I want to go. Potholes and other road quality issues are a negligible annoyance. If Zakaria wants to make this case, let alone to say that "the answer is pretty clear," he needs to cite data showing that companies are being significantly held back by the quality of infrastructure.

By the way, I think there might be some 21st-century infrastructure project that really would help to revive the economy-- something along the lines of universal free wi-fi, or better search engines, or a government-funded, much more comprehensive and smarter, Wikipedia, available through government kiosks anywhere, plus IP buyouts... But these guys always want to build the infrastructure for the last generation of technology, which we already have. It's a great plan... for the 1930s.

The drop in human capital is greater. The United States used to have the world’s largest percentage of college graduates. We’re now No. 14, according to the most recent OECD data, and American students routinely rank toward the bottom of the developed world. The situation in science education is more drastic. The number of engineering degrees conferred annually decreased more than 11 percent between 1989 and 2000. Even with the increase in college attendance over the past two decades, there were fewer engineering and engineering technologies graduates in 2009 (84,636) than in 1989 (85,002). Research and development spending has risen under Obama, but the basic trend has been downward for two decades. In percentage terms, the federal share of research spending — which funds basic science — is half of what it was in the 1950s.

Two problems here. First, decisions about how many people go into engineering and science are made by individuals. I suppose you could subsidize higher education in the natural sciences more, but that would just be helping people who are generally going to come out on top anyway. Second, it's up to the market to decide how much reward to provide to engineers, and thus, how much incentive to create for people to become engineers. My cousin got an engineering degree and it took him a year to get a job. He's doing all right now, but his experience does not suggest that demand is white-hot. It's just not smart to second-guess the market in such matters. If not that many people are going into engineering, the likely explanations are either that there's not really that much need for engineers after all, or that not many people have the aptitude and/or desire to do the job, even if the rewards are fairly good. Either way, the market outcome is optimal.

The irony is that Zakaria's own article is a good example of the ineptness in the use of numbers which he deplores.

In other words, the big shift in the United States over the past two decades is not a rise in regulations and taxation but a decline in investment — in physical and human capital. And investment is the crucial locomotive of long-term growth. Michael Spence, the Nobel Prize-winning economist, points out that the United States got out of the Great Depression because of the spending associated with World War II but also because during the war, it dramatically reduced its consumption and expanded investments. People spent less, saved more and bought war bonds. That surge in investment — by people and government — produced a generation of growth after the war. If we want the next generation of growth, we need a similarly serious strategy of investment.

I'm all in favor of investment! But the way to get it is to reduce the deficit so that investors are less afraid of future taxation and savings aren't being soaked up by government bonds (plus some loose money a la Scott Sumner). If Zakaria understood the ramifications of his own argument here, he'd be making common cause with those he mocks at the beginning. It makes me wonder: why is he taking this side of the argument at all? The numbers certainly don't compel him to it. I think the reason is his temperament and his social milieu: he likes elites, he likes arguments that empower elites, he likes arguments that ingratiate him to elites.

Anyway, back to where I started, my irritation. Zakaria's Olympian tone in "the data do not support it" is, to say the least, unwarranted. Maybe I should say insufferable.

I don't usually pay attention to Obama's speeches, but I did glance at Robert Reich's write-up of his Kansas speech. This makes me sick. Again and again, insistently, Obama tries to cultivate a victim complex in the middle class. The American middle class is super privileged by world or historical standards. It needs to understand that, be grateful, and ask what it can do to help the less fortunate. It needs to be the country's backbone, to some extent the world's backbone. It needs to stand on its own two feet. Obama is trying to turn middle-class people into a bunch of crybabies begging for government handouts. Handouts, if any, should be for the poor only. Anyone who says "I'm middle class" should be understood to be saying, "I don't need any special help from the government." Meanwhile, 400,000 people a year are being deported from this country. Despicable.

Why the West Invented Modernity (Comments on Joel Mokyr)

An excellent lecture by Joel Mokyr, highly informative and fascinating. A few remarks.

1. Guilds.I was struck by how positive Mokyr is about guilds. G.K. Chesterton would be pleased. I had thought of the guilds as basically rent-seeking organizations that inhibited progress, and to some extent they were. Adam Smith wasn't very positive about the apprenticeship system either. But Mokyr argues that one of the big European advantages was that they had high-quality craftsmen, and that, in turn, had a lot to do with the guilds. It's one thing to invent stuff, it's another thing to make it. If you don't have people who are dexterous with their hands, you probably can't get your inventions to work. Other civilizations would sometimes even have the same technology-- gunpowder, for example-- but the quality was much lower. Here is Chesterton:

When we pass from the strictly educational hierarchy to the strictly egalitarian ideal, we find again that the remains of the thing to-day are so distorted and disconnected as to be comic. There are City Companies which inherit the coats of arms and the immense relative wealth of the old Guilds, and inherit nothing else. Even what is good about them is not what was good about the Guilds. In one case we shall find something like a Worshipful Company of Bricklayers, in which, it is unnecessary to say, there is not a single bricklayer or anybody who has ever known a bricklayer, but in which the senior partners of a few big businesses in the City, with a few faded military men with a taste in cookery, tell each other in after-dinner speeches that it has been the glory of their lives to make allegorical bricks without straw. In another case we shall find a Worshipful Company of Whitewashers who do deserve their name, in the sense that many of them employ a large number of other people to whitewash. These Companies support large charities and often doubtless very valuable charities; but their object is quite different from that of the old charities of the Guilds. The aim of the Guild charities was the same as the aim of the Common Land. It was to resist inequality—or, as some earnest old gentlemen of the last generation would probably put it, to resist evolution. It was to ensure, not only that bricklaying should survive and succeed, but that every bricklayer should survive and succeed. It sought to rebuild the ruins of any bricklayer, and to give any faded whitewasher a new white coat. It was the whole aim of the Guilds to cobble their cobblers like their shoes and clout their clothiers with their clothes; to strengthen the weakest link, or go after the hundredth sheep; in short, to keep the row of little shops unbroken like a line of battle. It resisted the growth of a big shop like the growth of a dragon. Now even the whitewashers of the Whitewashers Company will not pretend that it exists to prevent a small shop being swallowed by a big shop, or that it has done anything whatever to prevent it. At the best the kindness it would show to a bankrupt whitewasher would be a kind of compensation; it would not be reinstatement; it would not be the restoration of status in an industrial system. So careful of the type it seems, so careless of the single life; and by that very modern evolutionary philosophy the type itself has been destroyed. The old Guilds, with the same object of equality, of course, insisted peremptorily upon the same level system of payment and treatment which is a point of complaint against the modern Trades Unions. But they insisted also, as the Trades Unions cannot do, upon a high standard of craftsmanship, which still astonishes the world in the corners of perishing buildings or the colours of broken glass. There is no artist or art critic who will not concede, however distant his own style from the Gothic school, that there was in this time a nameless but universal artistic touch in the moulding of the very tools of life. Accident has preserved the rudest sticks and stools and pots and pans which have suggestive shapes as if they were possessed not by devils but by elves. For they were, indeed, as compared with subsequent systems, produced in the incredible fairyland of a free country.

Without endorsing this word for word, I wonder if Chesterton was onto something here. I could put it in terms MacIntyre might like by saying that the guilds learning to value practices for their own sake, and not merely for the extrinsic rewards associated with them.

2. European space. Mokyr emphasizes the importance of political fragmentation, and in particular, the ability of the leading intellectuals, when persecuted in one place, to move somewhere else. I agree! And that's yet another reminder of how valuable it would be today to abolish the barbarous passport regimes which shackle and smother the human race and declare open borders. But there's another point here: even though Europe was politically fragmented, yet it was a unified cultural space. Europeans could talk to each other. They could travel and feel more or less at home. Prestige in Paris meant prestige in London and prestige in Berlin. There was a shared cultural frame of reference. That European space was a cultural unity made possible the respublica litteraria of the Enlightenment, but what made it possible; why was Europe a cultural unity? The answer to that lies deep in the Middle Ages, in the missionaries who brought Christianity to the far corners of the continent, in the monasteries that Christianized Europe and preserved literacy in Latin and mastered the ancient literature in the ancient languages, in the internationalism of the university of Paris and the Dominican and Franciscan orders, and so on. In short, it was the work of Christianity and the Church. The remarkable thing about this is that because the Church is not a temporal, political order (despite the efforts of a corrupt papacy to make it one, for a time), this unity did not depend on any regime. So it made possible political-fragmentation-admist-cultural-unity, which is precisely the fortunate arrangement that made the Enlightenment possible.

3. Slavery and the Middle Ages. One of the questioners near the end puts with peculiar eloquence how strange the rise of Europe is, when one considers how much more advanced the Muslim world was a few hundred years before, and challenges Mokyr to explain it. But this questioner very much overstates her case. As far as I understand, the Muslim Middle East was indeed richer in the high and late Middle Ages, but there were plenty of signs of Europe's coming ascendancy if one knew what to look for. The Muslim world absorbed Aristotle and to some extent responded to it, but much less creatively than the scholastic thinkers of medieval Europe. At the time of the Crusades, the Muslim states were indeed richer, but Europeans were by no means overmatched militarily. On the contrary, crusading knights were individually superior to their Muslim opponents, by a wide margin. Moreover, and very revealingly, the Muslims did not imitate the Crusader knights, even when it was clear that the knights were effective. They couldn't; they didn't have the cultural wherewithal to do it. The Crusader kingdoms were eventually overrun, but considering how disadvantageous was their position, with small contingent of "Franks" in a narrow strip of land surrounded by Muslim powers, that they lasted for a couple of centuries is suggestive of the precocious strength of Europe. The absence of slavery in western Europe, already an accomplished fact by 1200 or so, stands in stark contrast to the practice of slavery on an enormous scale in the Muslim world, and was a harbinger of the moral advantages and the greater freedom that Europe was steadily to enjoy and to increase in the centuries that followed. The Magna Carta was signed in 1215, and proto-parliamentary institutions appeared in several countries. Europe had the separation of Church and state, and its feudal social order contrasts sharply with the despotism that prevailed in the Muslim world. In fact, I don't know the history of the Islamic world all that well, but from what little I do know I've never heard of any blossomings of liberty or republicanism or representative government, such as exist all over the West, and even in the Russian city-state of Novgorod in the Middle Ages. As far as I know, the Islamic world was an unbroken record of tyranny for a thousand years.

If we imagine an astute observer in 1200, an observer who is somehow able to understand what an Industrial Revolution is apart from the particular history by which it occurred in the West, I think this observer could not only have forecast that it would occur in western Europe and nowhere else, but would have been surprised that it happened so late. Also, I don't think it would have happened anywhere else without the stimulus from Europe, or to be more exact, from Christianity, which is the key. Christianity contained moral forces that abolished slavery and softened despotism into lawful kingship. It contained the blueprints for an institution, the Church, which had an institutional life independent of the state, which could resist it, critique it, hold it accountable, though of course it often failed to do so. And it was able, to a greater extent than other forces in history, to create cultural unities broader than any particular polity, giving the human spirit more scope in which to develop.

Psalm 137.

If This is the Best Case They Can Make for Keynesianism...

... it must be even wronger than I thought. Krugman writes:

Financial markets are cheering the deal that emerged from Brussels early Thursday morning. Indeed, relative to what could have happened — an acrimonious failure to agree on anything — the fact that European leaders agreed on something, however vague the details and however inadequate it may prove, is a positive development.

But it’s worth stepping back to look at the larger picture, namely the abject failure of an economic doctrine — a doctrine that has inflicted huge damage both in Europe and in the United States.

The doctrine in question amounts to the assertion that, in the aftermath of a financial crisis, banks must be bailed out but the general public must pay the price. So a crisis brought on by deregulation becomes a reason to move even further to the right; a time of mass unemployment, instead of spurring public efforts to create jobs, becomes an era of austerity, in which government spending and social programs are slashed.

Krugman is conflating two quite different ideas here: (a) that the government (or the central bank) has to bail out banks to prevent a collapse of the financial system, and (b) that most governments need to retrench right now. Not only are the two ideas quite separable-- the government could bail out the banks and increase spending; or it could do neither-- but if anything, they are philosophically opposed. A comprehensive interventionist might advocate both; a libertarian would support neither. TARP is at this point not, I think, especially controversial among economists, so it's interesting that Krugman stakes out an anti-TARP position here. I'm glad of it: I think the anti-TARP view deserves more of a hearing than it has gotten. But how he would justify conflating TARP and austerity, I have no idea.

This doctrine was sold both with claims that there was no alternative — that both bailouts and spending cuts were necessary to satisfy financial markets — and with claims that fiscal austerity would actually create jobs. The idea was that spending cuts would make consumers and businesses more confident. And this confidence would supposedly stimulate private spending, more than offsetting the depressing effects of government cutbacks.

Some economists weren’t convinced. One caustic critic referred to claims about the expansionary effects of austerity as amounting to belief in the “confidence fairy.” O.K., that was me.

But the doctrine has, nonetheless, been extremely influential. Expansionary austerity, in particular, has been championed both by Republicans in Congress and by the European Central Bank, which last year urged all European governments — not just those in fiscal distress — to engage in “fiscal consolidation.”

And when David Cameron became Britain’s prime minster last year, he immediately embarked on a program of spending cuts in the belief that this would actually boost the economy — a decision that was greeted with fawning praise by many American pundits.

Now, however, the results are in, and the picture isn’t pretty.

This is ridiculous. First, one distinction which it's essential to make is that between (a) countries that could have borrowed more, such as the United States, at least in the short run, or Germany; and (b) countries that lost access to financing or were on the verge of doing so, like Greece, Italy, Portugal, Spain, and Ireland. The latter were compelled to adopt austerity, not on their own terms but on those imposed by the markets, and the sovereign debt crisis hurt them in other ways too. The former had flexibility to design austerity in the way that would do them the least harm. So it's fair to use the example of Britain, but not Greece, Latvia, etc.

Second, the results are certainly not in-- yet. The European debt crisis seems to have been resolved, finally, but only just. There's been no time for it to take effect. And in general, austerity is a policy oriented towards the longer term. One doesn't expect it to help over the long term, but over three, five, ten years. In the East Asian crisis of 1998, austerity was pursued, and the recession was very deep and painful; but there was a strong rebound a couple of years later; in Japan after the crash of 1989, Keynesian stimulus was pursued, and the recession became more or less permanent.

It would be much more reasonable to say that "the results are in" on the path that was taken in America, namely, not-austerity, but Keynesian stimulus, "and it ain't pretty." Stimulus has had more time to work. The European sovereign debt crisis is much less of an issue here. And Keynesian stimulus is supposed to work in the short run; that's the whole point. Of course, Krugman claims that America has pursued austerity, but that just underscores the uselessness of this conceptual framework. With deficit spending at 10% of GDP for three years, this is as Keynesian a fiscal policy as we've had in decades. If we were deficit-spending 20% of GDP and it didn't work, the Keynesians could always say, hey, it should have been 30%. Of course, the Keynesians can also deny that it didn't work: they can say it did work, because things would have been even worse. If they were worse, they can say they would have been even worse than that. If we were deficit-spending 20% and unemployment were 15% instead of 9%, well, they could say that if we had been deficit-spending only 10% of GDP, unemployment would have been 20%. Why they expect anyone should believe their counter-factuals when none of them foresaw the crisis is a mystery. More conservative, free-marketeer, rational-expectations type economists are more epistemically modest. All we know is that the economy has a natural tendency towards full employment, and the best bet is that if policy had been neutral (admittedly that's hard to define) it would probably have reverted to trend (admittedly that's also hard to define) in a few years. By that standard, Keynesian stimulus seems to have made things worse, and certainly hasn't helped much; and the marginal effect of Keynesian stimulus would probably have been even more harmful, since the marginal benefit of just about anything falls, and the marginal cost rises, as you get more of it. But that's just the best guess.

Greece has been pushed by its austerity measures into an ever-deepening slump — and that slump, not lack of effort on the part of the Greek government, was the reason a classified report to European leaders concluded last week that the existing program there was unworkable. Britain’s economy has stalled under the impact of austerity, and confidence from both businesses and consumers has slumped, not soared.

Maybe the most telling thing is what now passes for a success story. A few months ago various pundits began hailing the achievements of Latvia, which in the aftermath of a terrible recession, nonetheless, managed to reduce its budget deficit and convince markets that it was fiscally sound. That was, indeed, impressive, but it came at the cost of 16 percent unemployment and an economy that, while finally growing, is still 18 percent smaller than it was before the crisis.

So bailing out the banks while punishing workers is not, in fact, a recipe for prosperity. But was there any alternative? Well, that’s why I’m in Iceland, attending a conference about the country that did something different.

If you’ve been reading accounts of the financial crisis, or watching film treatments like the excellent “Inside Job,” you know that Iceland was supposed to be the ultimate economic disaster story: its runaway bankers saddled the country with huge debts and seemed to leave the nation in a hopeless position.

But a funny thing happened on the way to economic Armageddon: Iceland’s very desperation made conventional behavior impossible, freeing the nation to break the rules. Where everyone else bailed out the bankers and made the public pay the price, Iceland let the banks go bust and actually expanded its social safety net. Where everyone else was fixated on trying to placate international investors, Iceland imposed temporary controls on the movement of capital to give itself room to maneuver.

So how’s it going? Iceland hasn’t avoided major economic damage or a significant drop in living standards. But it has managed to limit both the rise in unemployment and the suffering of the most vulnerable; the social safety net has survived intact, as has the basic decency of its society. “Things could have been a lot worse” may not be the most stirring of slogans, but when everyone expected utter disaster, it amounts to a policy triumph.

And there’s a lesson here for the rest of us: The suffering that so many of our citizens are facing is unnecessary. If this is a time of incredible pain and a much harsher society, that was a choice. It didn’t and doesn’t have to be this way.

"Iceland let the banks go bust and expanded its social safety net." OK. But far more importantly, to-the-exclusion-of-everything-else importantly, Iceland has a floating currency and could devalue. Real wages could fall. For a tiny economy like Iceland's, trade is crucial. We always knew that improving competitiveness by devaluation can help a lot in a crisis.The East Asians did it in 1998, too. That's monetarism, not Keynesianism.

One supposes Krugman would use the best available arguments in favor of "the path not taken." If this is it, I was right to be dismissive.

The Debt Ceiling Battle Pays Off

Good news on the economy this morning:

The U.S. economy expanded at a much faster pace in the third quarter, growing 2.5% as consumers spent more on big-ticket items such as autos and businesses investment surged. Growth almost doubled the 1.3% rate of the second quarter. The U.S. was forecast to expand by 2.8% in the third quarter, according to a MarketWatch survey of economists. Consumer spending climbed 2.4%, the highest rate since the end of 2010, and business investment shot up 16.3%. Inventories, which subtract from gross domestic product, rose 1.9%. Excluding inventories, final sales of goods and services increased 3.6%. Inflation, as measured by the price index for gross domestic purchases, fell to 2.0% in the third quarter from 3.3% in the second quarter. Excluding food and energy, the index declined to 1.8% from 2.7%.

Particularly good news here is the spike in business investment. And note the timing: it seems to have been just as the debt ceiling battle was heating up, and then ending in a Republican semi-victory, that businesses decided to invest. It could be a coincidence, but my tentative interpretation would be that businesses saw the government finally getting its act together on long-term debt, and swung into investment mode.