Church, state, and holy wars

 

In honor of the death of bin Laden, I think I'll take a break from economics and do some random, off-the-cuff historical musing.

I've always been struck by the parallels between the Christian Crusades and the modern-day "jihads" roiling the Islamic world. Back in 1000 AD, "Christendom" was a backwater. It was a poverty-stricken civilization, nostalgic for its vanished glories. It was also a violent place, ruled by local strongmen, suffering from explosive fertility rates, with no real separation of church and state. In other words, it was experiencing more severe versions of the problems facing many Islamic countries in recent decades.

Into this volatile mix emerged a religious leader (Pope Urban II) who declared a holy war on a richer, more cosmopolitan infidel civilization. Ancient European glory would be recaptured with a wave of pure religious zeal. Generations of starry-eyed French, German, British, and Italian youth flung themselves against the lands of Islam in a ravening horde; sheer ferocity and the element of surprise gave them a few initial victories, which they celebrated with savage brutality. But eventually the superior technology and organization of the Islamic nations slapped the Crusaders down like the annoyance they were. In the end, the Crusaders ended up doing the most harm, not to Islam, but to a rival sect of Christianity, when they sacked Orthodox Constantinople in 1204.

A very similar thing is happening with today's jihads - although al-Qaeda (the modern-day Knights Templar?) had a few spectacular initial successes, and have slaughtered a great number of their co-religionists, they've never really done any serious damage to the West. Yes, that could change if al-Qaeda gets nukes. But right now, in the wake of the ignominious death of Osama bin Laden, it's looking like the jihads have failed.

So why is this important? Well, according to my personal reading of history, the Crusades were a big turning point in European civilization. They demonstrated that religious zeal and high birth rates were not sufficient to win wars. And, more crucially, they showed that theocracy is a poor foundation upon which to build civilizational greatness. After the Crusades, Europe started moving toward the separation of church and state, and never stopped. The results, in retrospect, seem pretty darn positive.

I hope, therefore, that the failure of Osama bin Laden's program for restoration of Muslim glory will provoke a similar rethink. Al-Qaeda's jihad, like the Crusades, has turned out to be both nihilistic and weak. This will hopefully convince Muslim countries from Saudi Arabia to Pakistan to Iran that "rendering unto Caesar" represents best practice. In fact, the Muslim world seems much better positioned today to make that transition than Christendom was a thousand years ago - countries like Indonesia, Turkey, and (to some degree) Egypt have already separated church and state.

In other words, I'm optimistic regarding the Islamic world. It took Europe five centuries to throw off the yoke of theocracy after the Crusades crashed and burned, but don't be surprised if it takes the Middle East and other Muslim lands only a few decades. In fact, I predict that well before the end of this century, the term "Islamic world" will be as obsolete as "Christendom." And make no mistake, that will be a very good thing for those countries. If you want your nation to be rich, stable, and powerful, separation of church and state is clearly the only way to go.

Update: Fadi Hakura agrees.

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Not much to say but...

 

OWNED.

Now stop touching my junk, America.

That is all.

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A script for putting page numbers on PDF pages

We had a project in the office recently wherein a large amount of web documentation was converted to a (single) PDF file using the built-in Web Capture capability of Acrobat X (otherwise known as Control-Shift-O), and when we were done, we wanted a page number to appear on each page. It turns out, it's fairly easy to apply page numbers to (any) PDF file using a bit of JavaScript.

Here is a script that will add a page number (as a read-only text field) to the upper left corner of every page of a PDF document. (Obviously, you can adjust the script to place the page number in any position you want, if you don't like the upper left corner.) The best way to play with this code is to run it in the JS console in Acrobat Pro (Control-J to make the console appear). Paste the code into the console, select all of it, then type Control-Enter to execute it.

var inch = 72;
for (var p = 0; p < this.numPages; p++) { 
 // put a rectangle at .5 inch, .5 inch 
  var aRect = this.getPageBox( {nPage: p} ); 
  aRect[0] += .5*inch;// from upper left corner of page 
  aRect[2] = aRect[0]+.5*inch; // Make it .5 inch wide 
  aRect[1] -= .5*inch; 
  aRect[3] = aRect[1] - .5*inch; // and .5 inch high 
  var f = this.addField("p."+p, "text", p, aRect ); 
  f.textSize = 20;  // 20-pt type
  f.textColor = color.blue; // use whatever color you want
  f.strokeColor = color.white; 
  f.textFont = font.Helv; 
  f.value = String(p+1);  // page numbering is zero-based
  f.readonly = true; 
} 

When you're done, you'll have a page number (as a read-only text field) on each page. If you like, you can Flatten the PDF programmatically using flattenPages() in the console afterwards, to convert the text fields to static objects on the pages (making them no longer editable as text fields).

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What I learned in econ grad school

I always find it interesting that criticisms of economics education focus more on the graduate side than the undergrad. Consider this broadside by Brad DeLong and Larry Summers:

For Summers, the problem is that there is so much that is “distracting, confusing, and problem-denying in…the first year course in most PhD programs.” As a result, even though “economics knows a fair amount,” it “has forgotten a fair amount that is relevant, and it has been distracted by an enormous amount.”...

The fact is that we need fewer efficient-markets theorists and more people who work on microstructure, limits to arbitrage, and cognitive biases. We need fewer equilibrium business-cycle theorists and more old-fashioned Keynesians and monetarists. We need more monetary historians and historians of economic thought and fewer model-builders. We need more Eichengreens, Shillers, Akerlofs, Reinharts, and Rogoffs – not to mention a Kindleberger, Minsky, or Bagehot.

Yet that is not what economics departments are saying nowadays.

This is interesting because, as someone who never studied econ as an undergrad (I was a physics major), I learned everything I know about macro from my grad courses. If there is an aspiring economist out there whose understanding of macro has been hurt by an overly narrow graduate curriculum, it would be me.

So, what did I learn in my first-year graduate macro course at the University of Michigan?

My first semester was on business cycle theory. (the second semester was all growth theory). We spent a day covering the basic history of the field - the neoclassicals, Keynes, Friedman, Lucas and the RBC people, and finally the neo-Keynesian movement. I recall reading the Summers vs. Prescott debate but not really getting what it was about. From then on it was all DSGE. We did the Ramsey model and learned about Friedman's Permanent Income Hypothesis. We spent a lot of time on RBC. We took a big break to learn value function iteration and how to numerically solve DSGE models by fixed-point convergence. Then we did Barro's model of Ricardian Equivalence, learned a basic labor search model, briefly sketched a couple of ideas about heterogeneity, touched on menu costs, and spent a good bit of time on Q-theory and investment costs. Finally, at the very end of the semester, we squeezed in a one-week whirlwind overview of Calvo Models and the New Keynesian Phillips Curve...but we weren't tested on it.

This course would probably have given Brad DeLong the following reasons for complaint:

1. It contained very little economic history. Everything was math, mostly DSGE math.

2. It was heavily weighted toward theories driven by supply shocks; demand-based theories were given extremely short shrift.

3. The theories we learned had almost no frictions whatsoever (the two frictions we learned, labor search and menu costs, were not presented as part of a full model of the business cycle). Other than Q-theory, there was nothing whatsoever about finance* (Though we did have one midterm problem, based on the professor's own research, involving an asset price shock! That one really stuck with me.).

At the time I took the course, I didn't yet know enough to have any of these objections. But coming as I did from a physics background, I found several things that annoyed me about the course (besides the fact that I got a B). One was that, in spite of all the mathematical precision of these theories, very few of them offered any way to calculate any economic quantity. In physics, theories are tools for turning quantitative observations into quantitative predictions. In macroeconomics, there was plenty of math, but it seemed to be used primarily as a descriptive tool for explicating ideas about how the world might work. At the end of the course, I realized that if someone asked me to tell them what unemployment would be next month, I would have no idea how to answer them.

As Richard Feynman once said about a theory he didn't like: "I don’t like that they’re not calculating anything. I don’t like that they don’t check their ideas. I don’t like that for anything that disagrees with an experiment, they cook up an explanation - a fix-up to say, 'Well, it might be true.'"

That was the second problem I had with the course: it didn't discuss how we knew if these theories were right or wrong. We did learn Bob Hall's test of the PIH. That was good. But when it came to all the other theories, empirics were only briefly mentioned, if at all, and never explained in detail. When we learned RBC, we were told that the measure of its success in explaining the data was - get this - that if you tweaked the parameters just right, you could get the theory to produce economic fluctuations of about the same size as the ones we see in real life. When I heard this, I thought "You have got to be kidding me!" Actually, what I thought was a bit more...um...colorful. 

(This absurdly un-scientific approach, which goes by the euphemistic name of "moment matching," gave me my bitter and enduring hatred of Real Business Cycle theory, about which Niklas Blanchard and others have teased me. I keep waiting for the ghost of Francis Bacon or Isaac Newton to appear and smite Ed Prescott for putting theory ahead of measurement. It hasn't happened.)

Now keep in mind, this was back before the financial crisis, at the tail end of the unfortunately named "Great Moderation." When the big crisis happened, I quickly realized that nothing I had learned in my first-year course could help me explain what I was seeing on the news. Given my dim view of the standards of verification and usefulness to which the theories I knew had been subjected, I was not surprised.

Around that time, I started teaching undergrad macro (under Miles Kimball and others), and was instantly struck by the disconnect between what I was teaching and what I had learned. Intro macro had a lot of history. Explication was done with simple graphs rather than calculus of variations. And undergrad macro was all about demand - never once did I utter the words "technology shock" in class. We taught Keynes and Friedman. Minsky got a shout-out, and we spent a whole week on the fragility of the financial sector, in addition to the week we spent analyzing the 2008 crisis.

In other words, Brad DeLong would probably have approved of the macro course I taught. He would probably think that the bankers, consultants, managers, executives, accountants, and policy researchers who even now are going through life looking at the economy through the lens of that intro macro class have been reasonably well-served by their education.

But all the same, I absolutely don't blame the grad-level professor for teaching what he taught. Our curriculum was considered to be the state of the art by everyone who mattered. Without a thorough understanding of DSGE models and the like, a macroeconomist is severely disadvantaged in today's academic job market; if he had spent that semester teaching us Kindleberger and Bagehot and Minsky, our professor might have given us better ways to think about history, but he would have been effectively driving us out of the macroeconomics profession.

Thus, DeLong and Summers are right to point the finger at the economics field itself. Senior professors at economics departments around the country are the ones who give the nod to job candidates steeped in neoclassical models and DSGE math. The editors of Econometrica, the American Economic Review, the Quarterly Journal of Economics, and the other top journals are the ones who publish paper after paper on these subjects, who accept "moment matching" as a standard of empirical verification, who approve of pages upon pages of math that tells "stories" instead of making quantitative predictions, etc. And the Nobel Prize committee is responsible for giving a (pseudo-)Nobel Prize to Ed Prescott for the RBC model, another to Robert Lucas for the Rational Expectations Hypothesis, and another to Friedrich Hayek for being a cranky econ blogger before it was popular. 

If you want to change economics education, it is to these people that you must appeal. The ghost of Francis Bacon, unfortunately, is not available for comment.

*Update:  I now recall that we also learned the Consumption Capital Asset Pricing Model (CCAPM). So that was about finance too.

Update 2: In my second year I took a macro field sequence, which taught me all about demand-based models, frictions, heterogeneity, and other interesting stuff. I don't want to make it sound like graduate school taught me nothing about how to understand the recession...it taught me plenty. It just all came in the field course...

Update 3: I've decided to remove the professor's name from this post. Although I tried to make it clear (and it should be obvious anyway) that one teacher is in no way responsible for the problems in the field of macroeconomics, I am still worried that some readers might interpret the post to reflect negatively on him, which is the last thing I want.

Update 4: I added a sequel to this post, describing what I learned in my second year.

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Short thoughts, mostly about the decline of America

1. The Economist is a "classical liberal" publication. The Economist understands that America needs more, not less, government spending on infrastructure if our economy is going to thrive. The Economist also understands that America needs more, not less, government spending on research if our economy is going to thrive. Which is to say The Economist understands well the existence and importance of public goods. (It occurs to me that this might be the difference between British "classical liberals" and American "libertarians"; the former will support government intervention in the economy if the intervention raises standards of living, while the latter will usually oppose it on principle.)

2. Why is American public good provision lagging? Brad DeLong blames Republicans, and I agree. Paul Ryan, the Republicans' thought leader on budget issues, wants to slash spending on both transportation infrastructure and research and development.

3. Why are Republicans so intent on starving the economy of public goods? Well, I think conservatives (and not a few liberals!) have really fallen into the rut of thinking that all government spending = redistribution. Part of this may be a simple failure to recognize that America's gravy days are over, and that arresting the rapid shrinkage of our national pie is more important than squabbling over who gets which slice. 

But if you read this blog, you know I think that there is something bigger and deeper at work, namely our national identity crisis. Remember Alesina and Easterly's finding that ethnic divisions reduce public good provisions. This is what I believe we're facing. Conservative whites have decided that America will soon cease to be the white ethnic nation that they think it used to be; therefore, they have little interest in bankrolling the nation's future.

4. This tribal divide explains why the birthers are birthers. James Fallows:

Tribal knowledge vs actual knowledge front: Yesterday, about half of all Republicans thought Obama was foreign born, and therefore an illegal occupant of the White House. How many Republicans will think the same thing one week from now? My guess is: about half. We've reached that stage on just about everything...[I]f "actual knowledge" mattered, the number of people who thought Obama was foreign-born would approach zero by next week...My guess is that the figures will barely change.

Birthers believe in birtherism because it is a rallying flag for their ethnic/tribal identity movement. Experessing doubts about Obama's American-ness is a way of expressing solidarity with other people who think that only whites can be "real Americans."

5. As I see it, most American liberals want to heal the ethnic rift. Liberals seem to believe that America is a nation based on shared ideology and shared institutions, not on blood and soil. This explains why liberals are more likely to favor spending on public goods, and IMHO it also explains why liberals tend to be more redistributionist (they view poor blacks and Hispanics as their fellow countrymen, which conservatives generally do not). This is why, although I'm not generally a redistributionist, I count myself a liberal on economic issues.

But we liberals are up against the terrific power of the conservative populist narrative, which holds that all government spending is redistribution, and that all redistribution is racial redistribution.This is the narrative of the lazy blacks and lazy Hispanics using government to confiscate white money and jobs. Nearly every day I hear this narrative repeated. Just today, Republican Sally Kern declared that "minorities earn less because they don't work as hard." If you want more of the same, just listen to...well, everything Rush Limbaugh has ever said.

Conclusion: If our nation-state is going to succeed, we need to start thinking of ourselves as a single nation again. But powerful forces are at work every day, trying to get us to think exactly the opposite. This has been a major theme and focus of this blog, but I think it bears repeating.

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The tax debate has never been about the evidence

Matt Yglesias sees the American right retreating from intellectual/empirical attacks on progressive taxation, and falling back on moral attacks:

You can tell something’s happening in the economic policy debate when you start reading more things like AEI’s Arthur Brooks explaining that it would simply be unfair to raise taxes on the rich. Harvard economics professor and former Council of Economics Advisor chairman Greg Mankiw has said the same thing...[W]e used to have a debate in which the left said redistributive taxation might be a good idea and then the right replied that it might sound good, but actually the consequences would be bad. Lower taxes on the rich would lead to more growth and faster increase in incomes.

Now that idea seems to be so unsupportable that the talking point is switched. It’s not that higher taxes on our Galtian Overlords would backfire and make us worse off. It’s just that it would be immoral of us to ask them to pay more taxes[.]

Paul Krugman attributes this to the closing of the conservative intellectual worldview:

[M]y take is that what we’re looking at is the closing of the conservative intellectual universe, the creation of an echo chamber in which rightists talk only to each other, and in which even the pretense of caring about ordinary people is disappearing. I mean, we’ve been living for some time in an environment in which...Chicago professors making several hundred thousand a year whine that they can’t afford any more taxes, and are surprised when that rubs some people the wrong way. Why wouldn’t such people find it completely natural to think that the hurt feelings of the rich are the main consideration in economic policy?

While I think neither Yglesias nor Krugman is incorrect, I do think there are a couple of important factors that they don't mention in their posts.

The first of these is a selection effect. Specifically, after decades of conservative economic policies, the only people left arguing for even more conservative policies tend to be either blinkered ideologues or vested interests. Back in the 70's taxes on the rich were high, but now they're quite low. There's no room to cut them any more without forcing the American government into default (and, in fact, the Bush tax cuts will probably do this if not repealed). Any economic benefit that we might ever have gleaned from trickle-down economics had to have been tapped out way back in the 80s. 

So who is still arguing that taxes on the rich are oppressively high? Well, rich people who don't mind if the country is forced into default, for one. And also people who, because of their personal morals, just really, really, really don't like progressive taxation. The winnowing of the conservative raison d'etre is going to produce the kind of "echo chamber" that Krugman sees, as well as the increasing moralization cited by Yglesias. Conservatives won the policy debate, back when Matt Yglesias and I were in diapers. What we call the "conservative intellectual movement" in 2011 is a handful of corrupt, silly, or monomaniacal people trying (somewhat lamely) to replicate the victory their forebears won in the 80s.

But actually, I think there is something even bigger that Yglesias and Krugman don't mention. Specifically, the debate about taxation may have been an intellectual one at the elite level, but on the level that really matters - mass opinion - it has always been about morals and emotions, and never about elasticities or deadweight losses. The idea that progressive taxation "punishes success" is something my dad was hearing back in the early 80s; my history teacher gave me that line back in '97, and I suspect it was a common refrain a century earlier than that. The "fairness" argument is not new. And on an even broader level, it was stereotypes of "welfare queens" and lazy minorities that turned working-class whites against social insurance (and against government programs in general) in the Reagan years.

It was these emotional and tribal appeals that shifted much of America to the Republican camp. The average working- or middle-class Republican voter doesn't have a clue who Greg Mankiw is, what determines economic growth rates, or how trickle-down economic policies are supposed to work. But, in whole or in part, he has bought into a narrative that tells him that he does a hard, honest day's work, and that taxes and government spending are nothing more than a way of punishing him for that hard day's work (and, probably, rewarding some black or Hispanic person for a life of indolence).

That is why we are still having a debate over progressive taxation at all. The rump movement that is still trying to make an intellectual case for tax cuts at the elite level maintains their outsized clout and elevated profile only because of the success of the populist narrative that keeps the Red States red. Until we change that populist narrative, we can smack down Arthur Brooks and laugh at Greg Mankiw all we like, but we're not going to save our nation-state from fiscal ruin. I'm sorry if that sounds overly pessimistic.

Update: More on that conservative populist narrative.

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Local nonsatiation and the "man who can't be taxed"

Some people I've talked to are of the opinion that I've been too harsh on Steven Landsburg. They say that I've been too harsh because:

A) Landsburg wasn't talking about current consumption being constant, he was talking about consumption from now until the end of time being constant.

B) Landsburg was assuming full employment (i.e. no wasted resources), so consumption from now until the end of time is in fact fixed, since it must then equal income from now until the end of time.

Yes. If by "consumption" Landsburg means "the present value of (infinite) lifetime consumption", and if he is assuming full employment, then Reasons 1 and 4 from my previous blog post do not apply (and Reason 2 is nitpicky). So was too quick to label Landsburg's idea "nonsense" and hit him with the Bat Boy picture?

The thing is, even granting the aforementioned assumptions, Landsburg is still clearly wrong. And the reason is not hard to see.

The reason is something called Local Nonsatiation. It is a basic axiom (assumption) of economic theory. It means that you're never 100% satisfied. And if you're never 100% satisfied, then any additional dollar you get will increase your utility, because you will use it to buy some of what you want. Conversely, any dollar that I take away from you will shrink your utility, because that is a dollar that you would have otherwise used to buy something you wanted.

In Landsburg's example, the rich and idle Mr. Kendrick consumes essentially zero; hence, confiscating his bank account does not hurt him in any way. This statement clearly violates Local Nonsatiation. By confiscating Kendrick's bank account, the government has reduced Kendrick's choice set. The set of possibilities open to Kendrick is now smaller. Hence, by Local Nonsatiation, Kendrick's lifetime utility must go down. 

Why does Kendrick's utility go down? Perhaps he wanted to leave his wealth to his heirs. Perhaps he planned to consume more someday. Perhaps his wealth was a safety cushion that made him feel secure. Who knows! The point is: as long as Local Nonsatiation applies, you're always worse off with less wealth. It really is that simple.

Landsburg compares Kendrick to a dead man, since he consumes nothing. But there is a big difference between the ascetic and the dead. That difference is called the future. A live Kendrick may have very little current-period consumption, but he has the option to consume more, or give away his wealth, in the future. You cannot take options away from a dead man, but you can take them away from an ascetic.

Now, you may ask: OK, but why should we assume that Local Nonsatiation holds? What if someone really could be completely, utterly satisfied with what he has - not just today, but forever? 

Fine. Maybe Kendrick is a bodhisattva, and has reached his bliss point. He violates Local Nonsatiation. BUT, if you take away Local Nonsatiation, then Landsburg's case completely falls apart, for a different (and yet still obvious) reason.

Central to Landsburg's case is the statement that "taxes must impose a burden on someone." But that is only true if Local Nonsatiation holds. If people can be perfectly satisfied with X amount of stuff, then taking any extra stuff away from them imposes no burden on them whatsoever, because they still have X. Taxing a man who is still at his bliss point after being taxed is like finding apples on the ground; it's a free lunch. If you don't understand that, you need to think harder!

Ever heard "There's no such thing as a free lunch"? Well, take away Local Nonsatiation, and that's no longer true. That's why economists pretty much always assume Local Nonsatiation!

So we arrive at a concise statement of Landsburg's error: The statements that "Taxation must impose a burden on someone" is logically inconsistent with the statement that "There exists a person who cannot be burdened by any tax."

All the brouhaha about full employment, interest rates, price levels, accounting identities, etc. is just a fun sideshow. The central point here is that Landsburg is making a case that is logically contradictory. In my opinion, the logical contradiction is immediately and clearly obvious. And that is why I called his case "nonsense."

But yes, of course Steve Landsburg is not insane. He's just wrong! We all say slightly insane things from time to time...

Update: Steven Landsburg responds in the comments:

The assumption throughout this exercise, as I believe I've made clear multiple times, is that Mr Kendrick is at what you call his bliss point...The other assumption is that people other than Mr Kendrick are not at their bliss points. (Mr Kendrick, as the article makes clear, is a very unusual person.) 

Well, that clears things up! It appears we have isolated the nub of the problem: Landsburg believes that taxation of a person who is at a bliss point must still impose a burden on someone, somewhere.

This is not correct. Suppose I have everything that I could ever possibly want (I am at my bliss point). I also have a chocolate bar, which I do not want. A man (the "government") comes and takes my chocolate bar and gives it to a third person, Ry, who enjoys eating the chocolate bar. My utility is not decreased, since I am still at my bliss point. Ry's utility has been increased, since he enjoyed the chocolate bar. No third party has been affected by this event. Hence, confiscation of my chocolate bar (taxation) has not imposed a burden on anyone, anywhere, at any time. The taxation was a Pareto Improvement.

From this simple and indisputable example we see that taxation of a person who is at his bliss point can be a Pareto Improvement, and hence need not impose a burden on anyone. This is why Landsburg's argument is a fallacy.

Update 2: Greg Mankiw chimes in. He thinks Landsburg is making an interesting point about tax incidence. Seems to forget that you can't actually do tax incidence - the traditional way, anyway - unless you have Local Nonsatiation, which Landsburg says he is chucking. Oh well.

Update 3: Niklas Blanchard with more reasons Landsburg is wrong.

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