Fed Policy Disagreements

The minutes of the most recent Fed meeting have been published. The Wall Street Journal is running an article today about the increasing differences in views about what the Fed should do.  A recent speech by Jeremy Stein, a new member of the board of the Fed, emphasizes some of the concerns that many have concerning some unwanted effects of the current policy.  As someone I saw on Squawk Box this morning put it--we may go from one financial crisis to another without having a boom time in between.  The persistently very low interest rates pusued by the Fed have to have some perverse effects.  The one talked about the most is that it encourages people to take on more risk to get a higher expected return.  In my view, the whole allocating process of financial markets is disrupted and perverted, and cannot be healthy in the long run and not doing much good in the short run.

Armen Alchian, RIP

The bulletin board outside the office of the Economics Department at UCLA had a picture of an old-style executioner, which the note underneath indicating it referred to the first graduate micro class students took. The class was taught by Armen Alchian in a manner similar to that seen in the old movie, "The Paper Chase."  While the class was intimidating, it also was stimulating.  There is an article in today's Wall Street Journal about Alchian as an obituary. He died at 98 years of age.

While getting my master's degree at Cal. State Haywarde and studying for the micro comprehensive exam, someone suggested I should read Alchian and Allen's Exchange and Production. It was their micro portion of their principles of economics text. Normally, one doesn't study for a graduate comprehensive exam by reading a principles textbook, but Exchange adn Production was no ordinary principles exam.  It was very rigorous and written at a college level, which meant it was too much for most college students.

Alchian's contributions to economic theory were mostly in the areas of analysis of property rights.  Several of his articles, are seminal in the field.  He also worked often in the law and economcis area, also teaching in the Economics for Lawyers (and another for judges) sponsored at the time by the George Mason University Law School.  I attended the law for economists course one summer, and Alchian was there teaching in the course for lawyers.  It was a good chance to visit with him.  He also played golf every day he was there.  Golf provided many examples in class as well.  My colleague at UCLA, Bob Newman, recounted one time that he was watching the eveining news and their was footage of a major traffic jam on an LA freeway. A helicopter was filming a portion, and one could see cars stopped. There was a man on the side of the road with a putter in his hand.  The camera focused on him as he walked down to pick up his golf ball and then turned around to face the camera. It was Alchian.  He was a great economist and teacher.  I am sorry to hear of his death.

Miscellaneous Items: British history, mental health care, and macroeconomic theory but not all together

Several links I found interesting:

1.  New York Times article on the declaration that bones discovered under a parking lot in England are the remains of King Richard III.

2.  Article from Seattle paper on poor care of the mentally ill in western Washington (sent to me by my daughter, Shelley, who works in mental health in Spokane.)

3. John Cochrane's blog on three views of consumption and the slow economy.  The post is somewhat technical in evaluating arguments in terms of New Keynesianism theory, permanent income hypothesis and old Keynesianis.  Cochrane's blog has become my favorite. He doesn't post often and when he does, they are long. But I find them helpful and informative.

Bullish or Bearish on the Economy, or Do We Just Muddle Along?

The stock market has returned to the levels that existed prior to the financial crisis.  Market experts are discussing whether the bull market can continue or whether the bottom will drop out again soon.  Opposing views can be found in many places, including this link

I am not as concerned about the equity markets as the economy as a whole.  Is there reason to be bullish on the economy or not?  On the plus side:  the American economy continues to be more innovative and resilient than most economies; immigration reform may actually come and immigrants tend to offer dynamism to the economy; households are getting their financial house in order--most corporations have already done so; inflation is still contained; productivity is high; among other things.

What about he negatives? These include: the recovery is very tepid and shows little sign of picking up soon; labor force participation rates, especially of men, are down; baby boomers are entering retirement age implying further reduction in labor force participation rates and increased transfer payments in the form of social security and medicare; there is too much of a concern over the short run--this includes the government, pundits and the Fed; dysfuntional government; a larger share of the population is dependent on the government for their income; Europe has problems; among other things.

I tend to be optimistic most of the time, but it is difficult to be optimistic right now.  I suspect we will continue to muddle along for awhile, but not see robust growth any time soon.

James Buchanan on Whether There is a "True Good Sociesty"

I am continuing to read works by James Buchanan. An article he published in Ethics in 1967 entitled, "Politics and Science: Reflections on Knight's Critique of Polanyi" is of relevance today. It deals with methodological issues about how science is done and whether the same approach can be made to the study of the political arena.  Polanyi's book was Science, Faith and Society and Polanyi argues for a somewhat realist approach to science--there is an underlying truth we are trying to discover.  In this, Polanyi was not a post-modern philosopher.  Polanyi evidently thought there could be a similar approch in the social sciences.  With this, Frank Knight, one of Buchanan's teachers I believe, was less confident.

Polanyi argued for a free and decentralized approach for science, and argued that the discoveries, challenges, and free discussion would ultimately lead to an idea of being closer to the truth. Hopefully, this is how science works.  But what about the political arena.  Buchanan writes, "If politics is not aimed at the discovery of 'truth' in any sense comparable to science, agreement among individuals cannot be expected to emerge as a result of free and open discussion. Enlightenment does not necessarily produce unanimity....Poltics becomes the proces through which divergent interests are compromised."

Buchanan then discusses whether there is one "good society." If there is, if there is a "truth" about the good society to discover, then there is no guarantee that free and open discussion will be the route there. If there is not a truth to discover but some believe there is and they have found it, it is likely they will seek to impose their view of truth and all others. Intolerance may be the result.  Buchanan then writes, "This attitude of intolerance seems especially to characterize the modern American left-liberal who dominates the academic setting and to whom there must always exist a set of prevailing 'truths,' politically determined, and from which open dissent becomes, somehow, 'immoral.'"

Does Paul Krugman come to mind?

Further Thoughts on James Buchanan

I wrote earlier about the death of James Buchanan and how I have read him more in recent years than I had earlier in my career.  I have read a lot of his work since his death, including two books--PUBLIC PRINCIPLE OF PUBLIC DEBT and DEMOCRACY IN DEFICIT: THE POLITICAL LEGACY OF LORD KEYNES (writen with Richard Wagner). While I was getting my Master's degree, I took a public finance class in which we used Buchanan's THE DEMAND AND SUPPLY OF PUBLIC GOODS as the text. Much of his writing was in the public finance area. However,  he is known more for helping create public choice.  I checked a couple of public finance textbooks as did my colleague, Sarah Estelle, who teaches public finance. It was interesting to see that Buchanan is hardly cited in them, and when he is, it is on a topics related to public choice rather than "pure" public finance.  The exception is a public finance book I have that was written in German and for the German market.  Buchanan is cited a lot, including his pure public finance work.

In a way, it is incorrect to separate public finance and public choice in Buchanan.  One of his first articles is, "The Pure Theory of Government Finance: A Suggested Approach," published in THE JOURNAL OF POLITICAL ECONOMY in 1949.  In the article, Buchanan says that the pure theory of government finance can be built upon one of two foundations--the "organismic" theory of the state or an "individualistic" theory of the state.  The organismic theory sees the state and all individuals in society as a single organic entity while the individualistic theory views the state as the sum of the individual members of society acting  in a collective capacity.  A theory of government finance that is built upon the first theory of the state may be totally inappropriate for the second theory of the state.

One place where Buchanan argued that this difference is important is in the treatment of public debt.  The modern approach is Keynesian, and says public debt is very different from private debt and public debt is not borne by future generations.  This may be appropriate if the state is "organismic," but inappropriate if the individualistic theory of the state is used.  A key reason is that those voting today, when confronted with choices that either increase government spending on popular programs or reducing taxes, and funding either by debt, will be more popular since the current generation will not bear the full costs of their decisions.  It is hard to refute his claim when examining public debt levels in the U.S. and Europe once Keynesianism became orthodox.

The arguments in this article suggest that Buchanan never saw a distinction between public finance and public choice.  Theories related to govenrment must pay some attention to institutions otherwise one would assume government actions are similar whether under Hitler or Stalin, or under representative democracy or Athenian democracy.  In some areas of economic analysis, pure theory can abstract from institutions, but surely not when trying to analyze actions of governments.

I think Buchanan is still worth reading and plan on continuing to do so.