Greg Mankiw, New Keynsians and Dynamic Scoring

Greg Mankiw is one of the more interesting economists around. He is known in the field as one of the leading exponents of “new-Kenysianism.” These are folks who believe that the macroeconomy occasionally suffers from large-scale failure and that government intervention is occasionally necessary to put the economy back on track. Unlike old-Keynsians, however, new-Kenysians are not single-mindedly fixed on aggregate demand shortfalls. Many largely accept the lessons of the “new classical” and “real business cycle” schools of thought and believe that fluctuations in both aggregate demand and aggregate supply determine the economy’s path.
In my mind, the single most important contribution of new-Keynsian analysis was to provide microeconomic theoretical and empirical justification for the notion that occasionally prices and wages do not move as fluidly as might be ideal. This seems far more realistic than the mathematically-precise but unrealistic assumptions which dominated the profession for so long.
One of the most interesting things to note about the new-Keynsians, though, is their ideological diversity. As one might expect, their ranks include a number of old-style Kenysians who prefer that government take an active role in the economy. These are folks like David Romer and Joseph Stiglitz. They also include a number of relatively free-market economists, however. And in this camp, one must surely put Greg Mankiw and the new fed chair Ben Bernanke.
Mankiw, of course, recently served a stint as President Bush’s economic advisor. He has a new blog here which is very readable and very interesting. He also has a forthcoming article with Weinzierl in the Journal of Political Economy. In it, he finds empirical justification for “dynamic scoring,” the old supply-side notion that when you estimate the impact of a tax cut on treasury revenues, you should account for whatever boost the cut will provide the economy. While tax cuts hardly pay for themselves (sorry conservatives), they do find that 17 percent of the revenue loss from a reduction in labor taxes is recouped by the treasury because of greater economic activity. Moreover, fully 50 percent of the revenue loss form a cut in capital taxes is recouped. Personally, I think tax cuts are good for their own-sake, irrespective of their impact on the treasury. Still, this is a powerful refutation for those who say that tax cuts will bankrupt the government.

Three Cheers for Oil Dependence

In response to President Bush’s assertion that “America is addicted to oil,” Harry linked to this article in the Wall Street Journal. The author catalogues 35 years of failed energy initiatives designed to free us from dependence on foreign oil.
Time and time again politicians have been taken in by the fallacy of composition. Their logic seems to be something like this: Individual independence is good. Individuals are part of the nation. Therefore, national independence from foreign oil is good for individuals. It is not.
Any time politicians try to flex national power in order to make the country independent from a foreign supplier, they rob individuals of their own independent right to buy from whomever they wish. Thus in matters of trade, national independence can only come at the price of sacrificing individual liberty.
Americans buy a lot of oil from abroad. They do so because oil happens to be abundant abroad. There is some indication that domestic sources of oil are relatively underutilized due to environmental restrictions and the “not in my backyard” approach to building (or not) refineries. But even without these restrictions on American supply, Americans would probably still want to buy some oil from foreigners. It is a simple matter of fact that the world’s largest oil deposits are not located in North America.
It seems to me that allowing Americans to buy from abroad is both morally and economically correct. If a farmer named Chuck in Sterling, Ill. wants to buy cheap gas from Amir in Egypt, and Amir wants to trade his oil for Chuck’s cash, then who are we to stop these two from a mutually beneficial exchange? I suppose that nationalists and unionists like Pat Buchanan or Charles Schumer would respond by saying that Chuck should buy from a Texan named Billy Bob and not from a foreigner like Amir.
There are only three ways to make Chuck buy from Billy Bob rather than from Amir: The government can outright forbid Chuck from trading with Amir, it can highly tax his trade with Amir, or it can tax Chuck and all other Americans and use the revenue to subsidize Billy’s production and lower his price relative to Amir’s. All three of these options redistribute wealth from Chuck to Billy. There being little reason to suspect that oil men are any closer to starvation than farmers, I don’t see much of a case for this redistribution. Apparently folks like Buchanan and Schumer do. Furthermore, all three of these options involve redistribution from Amir to Billy. There being even less reason to believe that First-World Americans are worse-off than Third-World Egyptians I again don’t see the moral argument.
What of the economics? Some may claim that we will make America and therefore all Americans—even Chuck—better off by encouraging domestic producers. This was Alexander Hamilton’s point in his 1791 Report on Domestic Manufacturers. This point was no more correct when Hamilton made it than when today’s politicians make it. For one thing, a simple model of supply and demand will demonstrate that consumers lose more than producers gain when government plays favorites. For another, we all may lose from barriers to trade if other nations retaliate (just ask the Great Depression generation how they felt about the Smoot-Hawley Tariff). In the long run, in fact, we are probably doing Billy Bob and his fellow oil-men a disservice by protecting them from competition. As the economist Gordon Tullock pointed out in 1975, industries which enjoy government’s protection do not, in the long, earn higher profits than non-protected industries. Instead, there are only short-term or transitional gains to be had from redistribution. This is because as soon as government gives an industry an unfair advantage such as a subsidy or a targeted tax break, others enter the industry, increasing supply, driving down price and eliminating whatever above-normal profits the government hand-out precipitated. As David Friedman has said, “the government can’t even give anything away.” We can’t remain walled off forever. Eventually, we will have to trade. And when we do poor Billy will find that he and his fellow oil men are not nearly as productive compared to Amir and his fellows. By that time, how many young workers will we have tempted into an unproductive oil patch and how old will they be when they start looking for new jobs?
Adam Smith long ago demonstrated that the wealth of nations is made in trade and specialization. I am extremely thankful that I depend on others to make my clothes, husband my food and construct my shelter. It would take years to master any one of those trades. Luckily, I only have to learn how to teach economics and can trade with others for these staples. I am grateful that I depend on others. I am even more so when the government permits me the independence to make my own choices.

Happy Birthday Fourth Amendment!

On December 15, 1791, the Fourth Amendment to the United States Constitution was ratified. It read:

The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

Two hundred and fourteen years and one day later, we learn this.
The President may not be familiar with this part of the Constituiton. I wonder if he is familiar with Article II, Section 1 which requires him to:

solemnly swear (or affirm) that I will faithfully execute the Office of President of the United States, and will to the best of my Ability, preserve, protect and defend the Constitution of the United States.

(Need I mention Article II, Section 4?)


Young, inexperienced workers can breathe a sigh of relief. The “living wage” ordinance in Albuquerque failed–but just barely.

Why we don’t want a right to everything

Judge John Roberts has now been confirmed as the 17th chief justice of the US Supreme Court. Bushy is set to name another justice to fill the second vacancy any day (hour?) now. So it seems an appropriate time for another post on constitutionalism.
One of the themes Senator Biden sounded during the Roberts hearings was why the nominee did not support a broader interpretation of the Constitution to include more rights. A few weeks ago I offered one reason why the judge might be reluctant to recognize some rights. Namely: they might not be in the Constitution. But going beyond that, we might ask WHY some rights are not in the Constitution. If they are not, perhaps it is time from some amendments to put them there?
Let us begin with the republic’s mission statement, the Declaration of Independence. Perhaps better than any document before or since, the Declaration articulated the Enlightenment Era’s conception of government: People have certain unalienable rights. Governments are constituted for the purpose of securing these rights. If the government fails in this raison d’etre, the people have a legitimate cause to overthrow the government.
So if governments are constituted for the purpose of securing rights, then why not secure the heck out of all sorts of rights? This was basically the gist of Senator Biden’s indignant question to Mr. Roberts.
The answer is rather simple. It lies in the somewhat paradoxical fact that rights inherently involve restrictions of freedom. My right to life restricts your freedom to kill me. When we say that someone has a right to something we mean that the rest of us have an obligation to respect that right. Some obligations are more costly than others. And in some instances the obligation to respect Mr. A’s right may be onerously costly to Mr. B. It may even cost Mr. B his own rights! Thus, we have to be very careful when we delineate the rights which people possess. We cannot just hand them out like so many public high school diplomas.
To make this more concrete, let us think of some rights which can be respected with relatively low cost. Take, for instance, the right to life. When we say that I have a right to life, we oblige the rest of you to respect that right. In general, it is fairly easy to respect it. You don’t have to do anything but resist the temptation to pull a trigger. For another example, take the right to property. Here again, my right to my wallet means that you are obliged not to take it from me. Not too terribly onerous an obligation. These are examples of what philosophers call “negative rights.” They get their name because respecting them requires no positive action be taken by others.
I think it is safe to say with little exaggeration that at the time of America’s founding, negative rights were the only recognized rights. Those who recognized a broad class of negative rights were called liberals and those who had a more circumscribed view of rights were known as conservatives. (Nowadays few thinkers in the Western world defend the old conservative position.) As the 19th century wore on, however, some came to recognize a new species of right: what some have called a “positive right.”
Unlike a negative right, a positive right DOES obligate positive action be taken by others. For instance, some say that I have a right to medical care. You are in violation of my right if you are a doctor and you do not provide medical services to me. When society says that I possess a positive right like that of medical care, it is asking a great deal more of my fellows than when it says I have a negative right. It is obliging the nurse, the doctor, the hospital employee to attend to me. Other examples of positive rights include the right to education, or what FDR called the right to “freedom from want.”
Like those recognizing negative rights, those recognizing positive rights also called themselves liberals. This of course, got confusing, so to distinguish themselves from both conservatives and the new liberals, those who didn’t recognize positive rights began to call themselves classical liberals. Increasingly, they call themselves libertarians.
Anyway, back to the story. Why do libertarians fail to recognize positive rights? For one thing, it is simply more costly to impose an obligation on others to do something than it is to oblige them not to do something. In most instances, the obligation to respect another’s right to life or property can be fulfilled without cost. But an obligation to provide medical care can be extremely costly. Are all doctors obliged to save all people who might be suffering at all times? Obviously they must sleep. Are they permitted to take the weekend off? If we oblige someone to take a certain course of action—which is what we do when we recognize a positive right—we rob people of their more fundamental negative right to liberty.
The logic becomes crystal clear when we take the example to its extreme and recognize every positive right which comes to mind: a right to a job, a car, a girlfriend. The only way to recognize these rights is to force others to hire you, give you cash, or go see a Hugh Grant movie with you. A free society is impossible when everyone has a right to everything under the sun.
Because positive rights can be so much more costly to respect, their recognition poses another important problem: the risk that society will simply ignore them. No society is actually going to enforce someone’s right to medical care by obliging every doctor and nurse to work every waking hour. Thus society is likely to tolerate the abridgement of positive rights. Once it becomes acceptable to abridge a positive right, it may become acceptable to abridge more fundamental negative rights.
On this, all liberals, classical and modern can agree. A society which fails to recognize fundamental negative rights is a society which is lost.

What an ass

Can you believe what Alaskan Republican Congressman Don Young said when someone suggested that he return the money he got for a bridge to nowhere in Alaska to pay for Hurricane Katrina relief?

Down with the fair-weather constitutionalists

We’ve heard a lot of platitudes about the Constitution this week. My personal favorite was Joe Biden’s description of the document as “our civic bible.” Most politicians treat the Constitution as some sort of flag: An iconic and patriotic symbol to be revered. It is a convenient symbol for them, easily worked into speeches as a substitute for apple pie, eagles soaring and other American metaphors.
Unfortunately, I believe that few politicians actually think about the Constitution. Few know its purpose, its meaning and what “respecting” it actually means. Far too often, politicians are opportunistic about constitutionalism. They proudly don the language of strict constructionism when doing so will promote their pet cause only to turn around and praise the benefits of a looser interpretation when the Constitution seems to stand in the way of their goals. They are fair-weather constitutionalists.
Think, for example, of Al Gore who complains regularly that the Justice Department’s prosecution of the war on terror has jeopardized important constitutionally-guaranteed rights. Personally, I think the former VP has a good point. Unfortunately, it is vitiated when we consider that just a few years earlier it was Gore who said that the Constitution was “a living, breathing document.” It was he who claimed that we should not strictly interpret the Constitution so as to limit government’s ability to do what seems right. His philosophy might be described as something like this: The Constitution permits policies which I feel are right but prohibits policies I feel are wrong.
Lest you think I am picking on Mr. Gore, the conservatives are just as bad. A few months back the Supreme Court struck down the national “do not call list” because it was erroneously put under the purview of the Federal Trade Commission, an agency which lacks the statutory authority to oversee such a program. The President argued that two popularly elected branches of government had made a decision and that the third should respect that decision. This is exactly the wrong way to think about our constitutional system.
We have a constitution because we DON’T think that the popular majority should always get what it wants. What if a majority of people want to disarm a minority? What if a majority wants to establish a national religion? Put someone in jeopardy of life or limb without due process? Tough. They can’t. And it is the Constitution which ensures that they can’t. As John Adams put it, ours is a nation of laws and not men.
This may mean that we have to inconvenience ourselves and do things by the book. It may even mean that policies like the “do not call list” will be delayed while we find the Constitutionally-permitted solution (which, by the way, we have in the case of the list).
Why should we inconvenience ourselves? What is the virtue of a society based on the rule of law? What if the law is bad? What if it seems like you can achieve more good in the short run by breaking the law?
To answer these questions, we must first appreciate that government has a monopoly on force. It has the legal authority to take property, arrest citizens, order certain conduct and even put someone to death. We need government to have these powers because we need it to protect us from others. But we must recognize that government’s authority might be very dangerous. As Washington put it, “Government is not reason; it is not eloquent; it is force. Like fire, it is a dangerous servant and a fearful master.” Recognizing this, it is important that government’s power be carefully circumscribed by a strictly adhered-to constitution. It is necessary that the constitution explicitly state the powers delegated to the government so that those with a monopoly on force are not permitted to use force arbitrarily. It may even be necessary to explicitly say what powers are not given as in the prohibition on establishing religion or infringing on the right to keep and bear arms.
But notice something very important: One need not agree with everything in the Constitution to believe that the Constitution should be obeyed! I, for one, do not care for the 16th Amendment’s legalization of the income tax. Nor do I like the fact that the Constitution permits capital punishment. While my opposition to these provisions might make me support amendments to change them, they do not make me change my interpretation of the Constitution. Clearly, the Constitution permits income taxation and capital punishment (the latter is mentioned a number of times in the document). To argue otherwise is to misuse the Constitution. It is to weaken the document by finding provisions in it which are simply not there.
Today the Constitution has been severely weakened. The government no longer bothers to follow the Constitutional requirement that Congress declare war when it sends troops into combat. Since 1936, Congress has regulated labor contracts despite the fact that no such power exists in the Constitution. Since 1942, Congress has regulated commerce even when that commerce is not interstate as the Constitution requires. More recently, it has been declared Constitutional for local governments to take private property and give it to other private citizens. And the latest: An American citizen can be detained indefinitely without honoring the 5th Amendment requirement that no one be deprived of life, liberty or property without due process.
Any justice willing to stand up to this slow but ever-advancing erosion of constitutionalism would be a welcome addition to the Supreme Court. Let us hope that Judge Roberts is such a judge.

Constitutionalism and the Supreme Court

Readers of this page will know that constitutionalism is very near and dear to our hearts. Both Harry and I are products of George Mason University, an institution made famous by the pioneering work of Nobel Laureate James Buchanan on the political economy of constitutions. Buchanan’s life-long career might be described as an intellectual defense of James Madison’s project, that is, a defense of constitutionalism. With two vacancies on the Supreme Court, now seems an appropriate time to muse over some Constitutional issues. Stand by for a number of posts on the subject.

Genuine Generosity

The images and stories coming out of New Orleans are just awful. It is nearly impossible to scroll through the pictures without tearing up (of course, I sometimes tear up watching Puppy Chow commercials).
Anyway, the politicians will be pledging lots of taxpayer money and accepting accolades for their generosity. If you want to one-up the politicos and be generous with your own money, Glenn Reynolds offers a list of good charities. You might also try this guide to “wise giving,” or this charity navigator.