Thursday, July 17, 2014

Hayek and Benevolent Dictators

Perhaps the biggest problem with libertarianism (and I'm talking about the more extreme minarchist and anarchist range of the spectrum, not Greg Mankiw saying he's largely a libertarian) is that it is a political philosophy which probably more than any other fails to engage its own unintended consequences and robustness. When problems do emerge the true Scotsmen close ranks and don't see it as an opportunity to reflect. What is even more fascinating about this is that these sorts of issues are regularly raised in criticisms of other viewpoints by libertarians.

An important example of this problem is, of course, Hayek and Pinochet. The Review of Political Economy has recently published a symposium on Hayek's relationship with Pinochet, featuring articles by Guinevere Nell and Andrew Farrant, among others. In the same issue, but not in the symposium, there is also an article by Jon Wisman, a professor at American University. Here are the abstracts:


Can a Dictator Turn a Constitution into a Can-opener? F.A. Hayek and the Alchemy of Transitional Dictatorship in Chile

Andrew Farrant & Edward McPhail

Commenting on the Pinochet regime, Friedrich Hayek famously claimed in 1981 that he would prefer a ‘liberal’ dictator to ‘democratic government lacking liberalism.’ Hayek's defense of a transitional dictatorship in Chile was not an impromptu response. In late 1960, in a little known BBC radio broadcast, Hayek suggested that a dictatorial regime may be able to facilitate a transition to stable limited democracy. While Hayek's comments about Pinochet have generated much controversy, this paper neither provides a blanket condemnation of his views (he did not advocate dictatorship as a first-best ‘state of the world’) nor tries to excuse his failure to condemn the Pinochet junta's human rights abuses, but instead provides a critical assessment of Hayek's implicit model of transitional dictatorship.

***

Hayek, Friedman, and Buchanan: On Public Life, Chile, and the Relationship between Liberty and Democracy 

John Meadowcroft & William Ruger

This article places recent evidence of Hayek's public defense of the Pinochet regime in the context of the work of the other great twentieth-century classical liberal economists, Milton Friedman and James M. Buchanan. Hayek's view that liberty was only instrumentally valuable is contrasted with Buchanan's account of liberty situated in the notion of the inviolable individual. It is argued that Hayek's theory left him with no basis on which to demarcate the legitimate actions of the state, so that conceivably any government action could be justified on consequentialist grounds. Furthermore, Friedman's account of freedom and discretionary power undermines Hayek's proposal that a transitional dictatorship could pave the way for a genuinely free society. It is contended that Hayek's defense of Pinochet follows from pathologies of his theories of liberty and democracy.

***

 Dictating Liberty 

Theodore Burczak

Andrew Farrant and Edward McPhail demonstrate Hayek's willingness to support, under certain circumstances, a transitional dictator who seeks to implement an institutional structure conducive to liberty, understood to mean economic freedom. This comment links this support to Hayek's mistaken rejection of democracy as a constitutive component of freedom, which is the result of his overestimation of the epistemological abilities of judges.

***

The Alchemy of the Can Opener: How an Austrian Economist Found Himself Supporting Dictatorial Imposition of a Liberal Order 

Guinevere Nell

Why would Hayek, the great critic of ‘rational constructivism’ and defender of spontaneous orders, think a transitional dictatorship could work? Here I attempt to dissect the alchemy of ‘turning a constitution into a can opener’ as Farrant & McPhail (2014) put it. Hayek argues against the imposition by an external source of order upon a society. He stresses the importance of an evolving culture and tradition, noting that they should be spontaneous orders not command systems, and that the culture of a society must be accepting and supportive of its institutions. Sometimes the culture is more important than the formal institutions of a society for efficiency. So why would Hayek argue that a transitional dictator could impose a constitution upon the people? It will be argued here that if Hayek had pursued the theoretical line set out in his Constitution of Liberty, he might have responded to the situation in Chile differently.

Wednesday, July 9, 2014

Some links

- Norm Matloff, a regular voice in the high skill immigration debate (but not an economist) is now blogging.

- Think tanks discussed on the Diane Rehm show recently.

- Suzanne Konzelmann takes a crack at the political economy of austerity in the Cambridge Journal of Economics. I have said for a while now that public choice theory is likely to be judged negatively in the future for its inability or unwillingness to rise to the occasion of explaining one of the most important facets of public life today - austerity. Often, perhaps due to libertarian priors, self-identified public choice theorists deny there is even anything there to study. Lots of other people are on the job of course. One nice thing about public choice theory is that it's a cohesive set of tools.

- Home production is primarily substitutable for market goods, which has implications for the relative taxation of goods and services.

Those Austrian brain worms on income and capital again!!!!

Just kidding... Robert Murphy's recent Econlib article on income and capital was quite good. The title is just a reference to a recent Noah Smith article*. This is not to say I am 100% convinced by Murphy.

Bob starts off by explaining the value of capital as the capitalized value of a stream of income generated from that capital, and then also introduces Hayek's alternative view from Pure Theory of Capital. I had a little trouble with the sharp distinction Bob was trying to draw here, with the former as being "static" and the latter as being "dynamic", united only when capital gains are considered. Capital gains follow so fundamentally and naturally from a basic capitalization approach that I think this treatment of capitalization as "static" is pretty weak. I think of the real contribution of Pure Theory of Capital as being the development of the idea of roundaboutness, but in fairness I've only read parts of the book.

I would not worry so much about the capitalization/Hayek distinction though. Indeed it seemed like just a nice excuse to get Hayek and Mises in there. The important thing is that Bob explains capitalization and capital gains to his readers because these are critical for understanding the new Saez-Zucman work and the potential trouble with using tax data.

So in a nutshell the Saez-Zucman study: (1.) uses the capitalization method to estimate wealth distributions from income data, and (2.) diverges from direct tax measures of wealth:


Bob argues that income tax changes in 1986 reducing top marginal income tax rates incentivized many people to reorganize their businesses as S corporations that would show up in the income tax data. Several years ago Scott Winship shared a chart that I think originally came from Alan Reynolds illustrating the point:


Notice, though that, the big jump you see in Winship's series happens between 1986 and 1988, for obvious reasons. After that there seems to be low, steady growth in the contribution of "entrepreneurial income" but the major contribution to personal incomes reported for tax purposes has already been made. That does not seem to explain the trend increase in the S-Z IRS data or the SCF (unless I'm misunderstanding something about how business income is reported and whether some of that comes under the wage increase - which is entirely possible). In other words, the big pre-1986/post-1986 change seems to be a level change and a composition change, but what Bob is trying to explain here is a trend change.


It's also worth noting the big differences between the rich and the super-rich (or more like the super-rich and the super-duper-rich). Most of the changes have happened at the very top, so it's important to think about whether Winship's income numbers, Saez-Zucman's wealth numbers, the SCF's wealth numbers, and Kopczuk-Saez's wealth numbers are all dealing with the same population. The sampling frames are quite different, and given the small share of the population we're talking about small differences in the population can make the difference between a stark U-shape and a flat line. In other words, the contradiction here may or may not even be contradictory.

Ultimately, something that the Zucman-Saez number has in its favor is that it lines up with the increase in the SCF over time. The SCF is designed to really get at the top earners and it's direct survey data that does not require the substantial imputations necessary for using estate tax data. The SCF is also nice because it reports both income and wealth (and it even counts the tax-deferred wealth that Bob raises as a problem for income tax measures). In theory, you could apply the Saez-Zucman capitalization method to the SCF and compare the SCF capitalization estimate of the top 1% share to the SCF reported wealth estimate of the top 1% share. Maybe someone has already done this (maybe Saez-Zucman have already done this and I haven't looked closely enough!) but that would be a very nice test of the validity of all this.

So we still have the estate tax data to explain. Needless to say I am neither old nor rich (although I am feeling a little more of both every year) so I don't feel like I have a good grasp of what goes into estate planning that might be relevant here. But it is worth noting that in the last thirty years estate tax rates and exemptions haven't exactly been stable either. The best explanation I can come up with is that a person's estate is going to be a lagging indicator of wealth changes for the obvious reason that dead people amass their wealth over several decades. Short-term effects like financial crises may have big immediate impacts on estates, but a legitimate increase in wealth inequality starting in the mid-1980s might take some time to show up.

Those are my thoughts - I have no strong answers but my prior is that personal income tax and SCF data are more direct measures and estate tax data is less direct, so when the former two agree with each other we ought to take note. I also think that Bob's explanation is more of a level effect than a trend effect (unless I'm misunderstanding something), so I'm not sure how much it really explains. But the article is a really nice introduction to the issues and to the Saez-Zucman controversy. 

* - Which, in case you care about my opinion on these things, mirrored quite closely the criticisms that the GMU Austrians have made of the exact same people that Noah was criticizing. For some reason, though, even the GMU Austrians didn't seem happy with his article. I guess it's an "only we are allowed to criticize our own" thing.

Sunday, July 6, 2014

Quick thoughts on "How to Pay for the War"

Sorry for the slow posting - here's something that might be interesting though. I've recently been leafing through a first edition of Keynes's "How to Pay for the War" (1940) that Evan picked up for me at a U Chicago library book sale. It's a really fascinating read and an often overlooked gem I think - I will have to read it properly once I'm done with Piketty. This, along with the Treatise on Money, for some reason does not get reprinted as often as Keynes's other books and so the treatment from people is often more casual. But I like it a lot for a couple reasons:

1. First it highlights quite explicitly the mission that is animating Keynes pretty much from the beginning, which is how a free society works in the modern economy. He sees one group of people who embrace a free society that pretend there is nothing really different about a modern economy (what he refers to elsewhere as "laissez faire", and then he sees another group that understands there is something different but addresses it by abandoning the free society (communists and fascists). He thinks that neither are a viable option. This understanding of his role is there throughout his life, but it comes out very clearly in How to Pay for the War.

2. The General Theory is detailed on investment theory but not as detailed on consumption theory - particularly the microfoundations of consumption theory. This is what gets developed in the 50s and 60s and this is really the foundation of New Keynesian economics. In How to Pay for the War Keynes seems to really deal a lot more with micro consumption behavior, which is understandable since he's talking about intertemporal public finance and tax issues.

3. He is talking about slowing growth and fighting inflation. A lot of people act like Kenyes forgot to address this, sometimes based on nothing more than a well circulated Hayek Youtube video claiming he forgot it.

4. He talks about expectations for post-war slumps, and as anyone that knows about his exchange at the Fed in '43 I believe (maybe '42) he is not pessimistic about it like Samuelson was at the time.

5. He carries over critiques of price controls and rationing that echo insights into consumer theory that he was making as far back as Economic Consequences of the Peace.

There are so many common threads here that just leafing through it makes me want to read his major works again (and in some cases for the first time), and take notes/outlines of it all to do something with... who knows.

Friday, June 20, 2014

Status report

Life's been pretty busy, but I thought some readers might be interested in what I've been up to.

I just learned that I passed my third and final comp, which officially means I only have the dissertation proposal and defense left. I should propose early in the fall semester. I started back at the Urban Institute, this time in the Income and Benefits Policy Center (previously I was with the Center on Labor, Human Services, and Population). They do broadly similar stuff with a few different emphases... I think the split is largely historical. I am working with the workforce development team which means a lot of education and training evaluations.

I have a lot of projects on my plate jumping in:

1. Assessing research plans for an evaluation of Trade Adjustment Assistance training grants to community colleges (not actually doing the evaluations ourselves, but overseeing the evaluators).

2. Part of the evaluation of a health professions training program that was a part of the Affordable Care Act.

3. An evaluation of the Accelerating Opportunity, an Adult Basic Education program.

4. An evaluation of a science and engineering education program in Alaska that I am still green on, but my understanding is that it takes Alaskan natives, supports primary and secondary science and engineering education, and then follows them and provides supports through college for those who continue to college.

I'm also involved in a proposal for an evaluation of an apprenticeship program in Maryland.

In addition to the dissertation and this work I have recently been asked to write another report for the National Academy of Engineering on the role of out of classroom training in the engineering technician and technologist workforce. It will cover apprenticeships, internships, co-ops, and on the job training. I'm putting together some data for it but it will be a lot of case studies as well (because a lot of the data on this stuff isn't that great).

So I'm keeping pretty busy, but the fact that I've been able to focus this work on education and training, and especially on both mid-level skills training and science and engineering is very encouraging for me. My work with the Urban Institute previously was nowhere near as focused on my specific research interests.

Monday, June 9, 2014

Quick thoughts on the Koch donation

Just like with the hospital donation a couple weeks ago, libertarians are twitterpated that the Kochs donated to the United Negro College Fund. But they're not just excited, they've (or at least half a dozen reasonably well known libertarians with an internet presence on my facebook feed) been making big pronouncements about leftist critics of the UNCF donation. I am still not sure exactly who these leftist critics are. In trolling through I can only find Dan Bier linking to "#Koch" on Twitter, and when I click on it (as I write this) I only see one person in the top results even mentioning the UNCF donation critically (and to be fair to that twitterer they're actually not criticizing the donation at all they're using the opportunity to criticize the Kochs). So none of this seems like the groundswell of opposition some libertarians are implying (which makes sense, because to be honest it seems a little stupid to expect a groundswell of criticism), but the fact is it is out there in today's news cycle at least.

I always find this strange. I don't personally mind the UNCF donation at all or the hospital donation. In fact I wish they gave all their donations to those sorts of things. The world would be a better place if they did. But even though I don't mind that, I can still have a sour view on the Kochs. I don't see why the sorts of libertarians that react to this have such a hard time grasping that what we don't like about the Kochs is not their good donations but their bad donations.

Second, whenever this comes up libertarians love to drone on about how the Kochs support gay marriage and oppose the drug war. I also find this reaction strange too. First nobody criticizes the Kochs for that presumably because that's not what they have a problem with. Second, do libertarians ever suddenly decide that leftists are a good influence on American society because they support the gay marriage and oppose the drug war? Of course not. So why would they expect liberals to suddenly warm up to the Kochs because they finally got something right on those issues?

Third, the only place I ever hear about the Kochs' support for gay marriage and the drug war is from libertarians. The really huge, well publicized stuff from the Kochs seems to be oppositions to progressive taxation, health reform, progress on climate change, and of course their support for libertarian leaning academic economics, political science, philosophy, etc. Maybe it's all selection effect (i.e. - the media only chooses to report on that stuff), but there are plenty of competing media outlets and the Kochs have the resources to push their own priorities. So chances are the Kochs care a lot more about those things that we hear about outside of libertarian defense pieces than they do about gay marriage or ending the drug war.

Urban Institute conference on apprenticeship in an international context today

I forgot to mention this - I'm at the Urban Institute today attending a conference on apprenticeships, organized by my dissertation advisor Bob Lerman. You can watch live (or see the video later) here.

Also in apprenticeship news, Bob recently appeared on a PBS segment on apprenticeship. Coincidentally Werner Eikenbusch, a committee member on the NAE committee on the engineering technicians and technologist workforce that I am working with currently, is also featured.

Friday, June 6, 2014

Did you hear the one about how income inequality isn't increasing?

Analysis at the "Political Calculations" blog suggesting that income inequality has been flat for decades has been making the rounds, including with Mark Perry and Don Boudreaux. I'm no inequality expert, but I wanted to make few points that I think are getting lost in sharing this around.

1. First, the basic analysis is right that household formation patterns are very important for understanding different measures of inequality. This is widely acknowledged.

2. But, what I think people are missing is that there are a lot of ways of measuring inequality besides the Gini coefficient. The Gini coefficient aggregates changes across the entire income distribution, which is a very important property! But it doesn't necessarily give you a good measure of what's going on at different points in the distribution. Most people who talk about inequality have been referring to what's going on at the upper end of the income distribution. Gini coefficients are fine, but don't use a Gini coefficient to try to refute a completely different claim.

3. I am taking the result at face value for the time being because I haven't crunched the numbers myself and they come right from the Census Bureau! But, we should be careful. They come from the CPS, which top-codes income, and of course we know that the biggest changes in inequality have come at the top of the income distribution. As recent Economic Policy Institute analysis has shown, this is even true of wage income. They use Social Security data which I assume does not top-code like the CPS data. So would the Gini coefficient hold as steady if better data were used? Maybe, maybe not. You just have to know what you're dealing with when you pass this stuff around.

Friday, May 30, 2014

It's all about the discontinuities

The other day I posted a suspicion of mine that Giles was very wrong about Piketty based on his treatment of discontinuous data series. I haven't been pouring poring over the excel sheets, so it was just a suspicion, but it was due to a problem that I think anyone who has worked with disparate data sources would immediately recognize.

Howard Reed has gone through the data sources and he agrees that "it's all about the discontinuities", "it" being the critique of Piketty. This is one of the best commentaries on this argument that I've seen yet. He does a great job walking you through the problems in Giles's work. What's more amazing is that Giles seems to recognize the difference between what he did and what Piketty did, but he does not recognize it's significance.

btw - some comments by Phil Magness on Facebook suggest he doesn't get this point either.

Thursday, May 29, 2014

More praise of "knaves, fools, and me" arguments

Brad DeLong reminds us of more of Pete's history of praising - not criticizing - "knaves, fools, and me" arguments. Far from it, in Pete said of the late Charles Rowley that he is principled and speaking truth to power (!!!!!) for writing:
"the Keynesian model never worked; and never will work. It has been resuscitated by opportunistic economists, not because they believe in its merits as an agent of macroeconomic rehabilitation, but because they recognize its political value as a weapon for moving economies from laissez-faire to state capitalism, or (hopefully) beyond that to fully-fledged socialism."
 Opportunistic economists rehabilitated Keynesianism in 2008 in pursuit of fully-fledged socialism?!

This sort of thing ought to be mocked or ignored, but it wasn't - at least not by Pete.

This is an example of an untethered rant, of course. It's not as careful even as Jesse Gastelle's argument about the original Keynesian revolution. But I still maintain we can argue about these sorts of "knave, fools, and me" claims. They are claims about intellectual history and normally we like to argue out intellectual history claims (this is just a very, very bad one that probably doesn't deserve the time of day).

But Pete, if you're going to praise stuff like this you really need to retract your statement about Krugman's post. We have two options here:

1. Grapple with "knaves, fools, and me" claims as potentially real possibilities to be addressed, or
2. Dismiss arguments framed that way generally impolite "conversation stoppers".

I opt for the former, but usually doubt the veracity of most claims of that form. You can't have it both ways.