Tucker's Infallible Maxim

Whether Sir Josiah Child did not call it a Vulgar Error to say, We have more Hands than we can employ? Whether he was a Judge of Trade? And Whether it is not an infallible Maxim, That one Man's Labour creates Employment for another? -- Josiah Tucker

Whether it was in the preface of his 1690 Discourse about Trade, that Child called it a vulgar error -- so commonly held as to have become "almost proverbial" -- to suppose that "We have people enough, and more than we can employ"? And whether Child did not also observe there that "the profit of the merchant, and the gain of the kingdom, are so far from being always parallels, that frequently they run counter one to the other..."?

Whether it was Child who said that "one man's labour creates employment for another"? Or was what he actually said, "Every English man in Barbadoes or Jamaica creates employment for four men at home"? And what, then, was the context for that remark?:

...where Liberty and Property is better preserved, and Interest of Money restrained to a low rate, the consequence is, that every person sent abroad with the Negroes and Utensils, he is constrained to employ, or that are employed with him; it being customary in most of our Islands in America, upon every Plantation, to employ eight or ten Blacks for one White Servant; I say, in this case we may reckon, that for Provisions, Clothes and Household-Goods, Sea-men, and all others employed about Materials for building, fitting and victualling of Ships, Every English man in Barbadoes or Jamaica creates employment for four men at home. [italics in original]

Whether Paul Lambert did not conclude his 1952 article "The law of markets prior to J.-B. Say and the Say-Malthus Debate" with the following assessment of Tucker's "infallible maxim"?:

The wording is loose; Tucker did not trouble to elaborate a consistent theory; he was looking for arguments in support of proposed naturalization legislation, and this coloured his approach. He did, however, enunciate the concept which in a more fully developed form was to become known as "the Law of Markets".

Whether Abba Lerner, in his review of the collection of International Economic Papers in which it was contained, called Lambert's article, "an oppressively learned examination of the origins of Say's Law"? Whether Lerner wrote that the article  "shows very clearly how the proposition that production creates its own demand developed as an illegitimate extension of the innocent proposition that money is a medium of exchange by which goods and services are exchanged for goods and services"? And whether he wrote that it "concludes with a fascinating account of how Malthus forced Say to re-define "products" to exclude products that could not be sold at a price that covered costs, so that his Law would properly read 'production creates its own demand except when it doesn't'"?

Whether backdating the origins of the law of markets from Tucker to Child casts doubt on the innocence of the proposition? Whether it would be frivolous to concede the compatibility of slavery with liberty? Whether liberty is compatible not only with slavery but with the proud assumption of "an infallible maxim"?

Whether John Stuart Mill wrote in On Liberty, "To refuse a hearing to an opinion because they [those who desire to suppress it] are sure that it is false, is to assume that their certainty is the same thing as absolute certainty"? Whether Mill maintained that "All silencing of discussion is an assumption of infallibility"? Whether any assumption of infallibility, in Mill's view, would be legitimate?

Whether Mill's view gives rise to a paradox similar to the liar's paradox? Whether this is what a correspondent to The English Churchman implied by stating, "If all principles be uncertain, upon what grounds can this principle be made the exception? Is this the one great infallible maxim, the one self-evident axiom?" Whether the criticism in The Churchman misses its mark? Whether instead of proposing an infallible maxim about infallible maxims, Mill was distinguishing between subjective certainty and absolute certainty and maintaining that one cannot ascertain the latter on the basis of the former?

Whether the claim of infallibility is rendered even more dubious by disputes over what the law of markets asserts and who should be recognized as its author? And whether some credit John Stuart Mill's father, James, as the author?

Whether one cannot refute the hydra-headed maxim unless one refutes all its myriad themes and variations, which, of course, regenerate from their bloody stumps as one proceeds from version to version? Whether there is any alternative to wrestling with Say's Mill's Tucker's Child's polycephalous serpent?

Whether Mill wrote also, "He who knows only his own side of the case, knows little of that"? Whether the other side in this case is the one labeled "vulgar error" by Tucker and Child: "We have more hands than we can employ; we have people enough, and more than we can employ"?  Whether the word "can" in those passages refers to anything substantive? Whether we can employ all, provided those in power implement policies that they would never agree to? What kind of a possibility would that be?

Whether the "vulgar error" may be restated as "a certain proportion of work to be done" or "a certain quantity of labour to be performed"? Whether in his Natural and Political Observations upon the Bills of Mortality, John Graunt (1662) assumed a "certain proportion of work" in arguing against employing beggars in the woolen industry?:

That if there be but a certain proportion of work to be done; and that the same be already done by the not-Beggars; then to employ the Beggars about it, will but transfer the want from one hand to another...

Whether Dorning Rasbotham (1780) disputed the "certain quantity of labour" in his defense of the use of machinery in the manufacturing of cotton?:

There is, say they, a certain quantity of labour to be performed. This used to be performed by hands, without machines, or with very little help from them. But if now machines perform a larger share than before, suppose one fourth part, so many hands as are necessary to work that fourth part, will be thrown out of work, or suffer in their wages. The principle itself is false. There is not a precise limited quantity of labour, beyond which there is no demand. Trade is not hemmed in by great walls, beyond which it cannot go.

Whether the latter argument glides between a given and a hypothetical possibility? Whether either Graunt's pessimistic assumption or Rasbotham's sanguine projection is infallible? Whether Rasbotham's refrain, became "almost proverbial" in the course of the 19th century industrialization of Great Britain?

Whether Josiah Child's warning about the frequent conflict between private profit and public gain is chronically ignored? And whether his speculations about the domestic employment generating prospects of colonial plantations was discretely expunged of its unsavory association with chattel slavery?

Environmental Action as Conversion: The Projection Hypothesis

Have you noticed that most environmentalists (in the US at any rate) take a religious approach to their cause?  They see environmental problems, including of course climate change, as resulting from the low ratio of enlightened to unenlightened consciousness—too few who see the light, too many who continue in their earth-destructive ways.  Part of the solution is education: expose the miscreants to the facts, show them the horrors we are visiting on the natural world and how their behavior perpetuates it.  Beyond that, call them out for their selfishness, putting their own comfort ahead of general good, not to mention the sustenance of Mother Earth herself.

I was struck by this when reading Naomi Klein’s This Changes Everything: Capitalism vs the Climate.  Readers like me who were hoping to learn something about Klein’s take on the role of capitalism in the environmental crisis were disappointed; her target is “capitalist thinking”.  Capitalism is a name for a cluster of ideas and attitudes that poison the minds of those who damage the earth, and the book is a call for mass conversion to a different sort of consciousness.  (I’ve got a much, much longer critique/meditation on the book and what it says about our political moment which I hope to disseminate at some point.)

On a more immediate level, I’ve been grappling with the same mindset as I teach environmental graduate students.  In general, they are thoughtful and open-minded, but the pull of the conversion template is always there in the background.  When I introduce political economy as an approach to understanding environmental issues, I begin with a pair of slides.  First I show them what I call the “naive” view of how these things work, in which the ideas that inhabit people’s minds directly determine the state of the world:

Then comes the social science view, which includes political economy.  Ideas are mediated by economic, political and social institutions, and these structural forces react back on how people think, too:

We get great discussions in class, but weeks later, when I read their exams and papers, I see a return to the original assumption: the core problem is unenlightenment, and the task of the environmental activist is conversion.  If only each of us understood the plight of “x” (a species, a treasured ecosystem, the earth itself), we would shop differently, change our diet, reduce our use of resources and become the solution.  Somehow the attention to laws, economic incentives, and the structure of power wanders.

To be clear, I think there’s always a need for more enlightenment in this world.  I’m a big fan of environmental education, which I think has had a large, positive influence on millions of people.  The problem is that this is not sufficient in itself, as the second slide should make clear.  Worse, to the extent they fixate on education/conversion as the sole pathway for social change, environmentalists fail to take on the political and economic aspects of the job.  Even worse—much worse—by assigning a moral reading to this enlightenment → social change template, the environmental movement gets bogged down in an unseemly and counterproductive obsession with virtue.

Why this conversion thing?  As far as I know, no one has studied the question systematically.  It would be nice if there were a body of empirical evidence, opinion surveys of environmentalists in different countries tracking these views over time.  Are some environmentalists more given to the conversion template than others?  Does the availability of collective action (more open political structures) diminish conversionism?  We need data!

In the absence of information, I can only speculate.  What I’m thinking at the moment is that, just perhaps, the view of environmental action as conversion has roots in personal experience.  Presumably those who become activists on behalf of environmental causes undergo their own process of conversion at some point.  Maybe it’s in school, studying environmental science or ethics, or in the field, doing research or service work, or simply exploring nature in play and recreation.  Whatever the trigger, something happens, and the beauty and necessity of the natural world pours in: another environmentalist is born.

These moments are wonderful.  There should be more of them.  Yet we also know there is a tendency to project our own experiences onto to the rest of the world, so our own conversion becomes a model for transforming society as a whole and how it treats the environment.  Social change is not a simple analog of personal change, however, so in this respect projection is unenlightening.

I am just speculating.  There are probably other hypotheses I haven’t thought of that are just as plausible, maybe more so.  Again, this is a topic that would benefit from empirical research.  As someone who teaches emergent environmental activists and practitioners, I’d like to know a lot more.

Against Independent Central Banks: The Short Version

Simon Wren-Lewis appeals to the history of the past few decades to develop an argument for making central banking less independent.  I think there’s a simpler way to put it: good macroeconomic policy typically requires coordination between monetary and fiscal policy.  This was true in the early-mid 1980s in the US when very expansive fiscal policy combusted with tight monetary policy to drive up the value of the dollar and require a Plaza Accord to repair the damage.  It’s true today, as SWL says, to facilitate some sort of helicopter to fly us out of chronically deficient demand.  This is old-fashioned Keynesian economics, the sort I learned in the 1970s, and it still makes sense.

Incidentally, one of the arguments for ICB’s that SWL cites has never impressed me much, that it counteracts the pro-inflation bias of populist politicians.  If the rest of the political economic landscape were perfectly neutral with respect to competing policy objectives, there might be a point. But in the world we actually live in there is a politically powerful financial sector in every country demanding hard money at each moment of the business cycle (except of course the crash).  This lends a contractionary bias to monetary policy under systems in which central banks are insulated from other political pressures.  Obviously, reducing CB independence is not a solution in itself, because politics is often misguided, but if there were truly a soft money bias from electoral pressures, it might take us closer to neutrality overall.

The $835 Million Man

And no autopsy?

Thinking About a Recession Election in the US for 2016

There has been a lot of skittishness recently about the prospects for a recession, US or global, this year.  No need to link—the discussion is everywhere.  Some say we are already in the initial downturn, others that we’re on the brink, and a third camp says it’s still blue skies to the horizon.  I have no expertise at all to weigh in on this; for me it’s just a spectator sport.  I do think, however, that prudence requires thinking about what such a recession would mean.  This applies to all levels, individual, institutional and society-wide.

Here I’d like to consider what it would mean if the election in November were held in the midst of a recession.  Standard political science formulas would give Republicans a much greater chance of winning the presidency if unemployment were rising during the runup to the vote, but of course this is not determinate in itself; the candidates and the campaign still matter.

So think about the candidates we actually see in the primaries, and imagine that the economy is sinking as the moment of decision draws near.  How would it affect the kinds of messages they deliver?  Assume also massive, unprecedented spending on advertising of all sorts—not only on TV but every other media type that allows it.  And think about the way the candidates and parties are framed, the overall narratives they try to tell about themselves that influence the interpretation of specific facts and events.

Of course, such a recession, fairly or not, would be blamed on Obama.  Given that, Democrats would either have to run against him or stick to happy talk about turning the corner and green shoots.  But this is not a choice that can be made freely; if Democratic candidates are tied closely in the public mind to Obama, and if they wait until the last minute to pivot, such a shift would not be credible.  In fact, it would look more like opportunism and disloyalty.  My sense is that this would be a much bigger problem for Clinton than Sanders.

Meanwhile, on the Republican side, nearly every candidate would benefit, because one of their chief memes all along is that the economy is doing a lot worse than the official numbers indicate.  Fairly or not, they would be seen as vindicated if the economy were plunging.  It might be enough for them to campaign as anti-Obamas, as the straightforward Obama = failure would resonate under the circumstances.  And what about Trump?  His calling card is that he is “tough”, and that what America needs now is a tough leader like him.  His ability to exploit a recession depends on whether he can convince voters that economic hard times are due to “soft” leadership for which he’s the remedy.  That’s not beyond the realm of possibility, as I see it.

All of this is purely speculative.  We don’t know where the economy’s going, or how public attitudes will evolve, or which messages candidates will attach themselves to.  Of course, the competence—and luck—they have going for them will be important as well.  At this point, the main thing is to begin to think through scenarios when we apply “realism” to political decision-making, and an election year recession is one of the scenarios that needs to be considered.

Wonkerydämmerung?

The first I heard of Friedman's numbers, I ignored them as a rosy scenario projection of trends-with-benefits: add up all the best outcomes of the positives and ignore any potential negatives. This kind of promotional rhetoric happens all the time in economics -- not just GOP/Laffer/voodoo economics, either.

Case in point the built-in mechanism in Robert Solow's 1973 "Is the End of the World at Hand" takedown of the Limits to Growth argument. I mention that one because I prescribe it as a reading for my Labour and the Environment course. It exemplifies the "oh, never mind those externalities -- they are incidental, we'll just internalize 'em" view that predominates in mainstream environmental economics. "Internalizing the externalities" is shorthand for "then a miracle occurs" step two in the famous New Yorker cartoon. Nothing new here.

It is the Mutual Assured Destruction response of Krugman and the Gang of Four that interests me. That wasn't about Friedman's pollyanna analysis; it was about intimidating and silencing those who are not authorized to commit the kind of "then a miracle occurs" step that the accredited authorities take as a matter of privilege.

"How DARE someone commit that SIN without OUR permission!"

When the same kinds of criticisms are directed at mainstream economics by so-called heterodox critics, they are ignored, brushed off with an "all models are wrong" shrug or responded to with a shitstorm of ad hominem derision aimed at the unqualified simpletons raising the objections.

One possible positive outcome of the Friedman/Krugman Gang of Four affair is that it brings out in the open the partisan hypocrisy that revolves around who has license to use the then-a-miracle-occurs step and who doesn't.

The authoritative word demands that we acknowledge it, that we make it our own; it binds us, quite independent of any power it might have to persuade us internally; we encounter it with its authority already fused to it. The authoritative word is located in a distanced zone, organically connected with a past that is felt to be hierarchically higher. It is, so to speak, the word of the fathers. Its authority was already acknowledged in the past. It is a prior discourse. It is therefore not a question of choosing it from among other possible discourses that are its equal. It is given (it sounds) in lofty spheres, not those of familiar contact. Its language is a special (as it were, hieratic) language. It can be profaned. It is akin to taboo, i.e., a name that must not be taken in vain. -- Mikhail Bakhtin, The Dialogic Imagination

Authority Figures Criticizing the Junk Science from Gerald Friedman

Christina and David Romer have written a devastating critic of that silly multiplier analysis from Gerald Friedman but some do not even want to read this as they are insulted by the alleged appeal to “authority”. I could understand this had the Romer’s included a long winded discussion of who they are but they did not jumping what Friedman wrote and their concerns. I’m thinking about this in terms of two business litigations where I did not testify because my side had attorneys who did not like what I had to say. Let’s play this out in terms of tale where a business used the technology from Bernie Co. to manufacturer and sell cutting edge sanders. Alas, they refused to pay royalties to Bernie Co. and so were sued for patent infringement. Let the attorneys for this slimy business be Team Republican who decide that the patent was not infringed just like real Republicans will scream Socialism. Of course this will not prevail as even Romer and Romer note:

Although we share many of Senator Sanders’s values and enthusiastically support some of his goals, such as greater public investment in infrastructure and education, we also believe it is vitally important to be realistic about the impact of policies on the performance of the overall economy

The plaintiff hires as its expert some little known valuation expert – Dr. Friedman – who posits a model of patent value (expected future sales, reasonable royalty rate, and a discount rate) that say the value is $29 billion (no Dr. Evil today). The defense attorneys are hoping that the estimated value can be placed at something south of $20 billion. What Romer and Romer showed that Friedman’s estimate was not credible as if it were “junk science” and would likely face a Daubert motion:

A Daubert motion is a specific type of motion in limine. It is raised before or during trial, to exclude the presentation of unqualified evidence to the jury. Daubert motion is used to exclude the testimony of an expert witness does not possess the requisite level of expertise or used questionable methods to obtain data

But what about an affirmative analysis? More on that latter after I noted the two real world litigations. The expert witness RIAA v. Napster was David Teece. His testimony started with his biography which I guess some might call appealing to Authority. Of course anyone who ever met David knows his expertise speaks for itself. The same goes with the Romers. But it was the high quality of his testimony that impressed the Court. The same holds for the Romer and Romer rebuttal. A lot of us back then were pulling for Napster but we also knew that the case for RIAA was impressive. But let’s turn to this diaper patent infringement case:

The Procter & Gamble Company ("P & G") has filed suit against Paragon Trade Brands, Inc. ("Paragon"), alleging that Paragon infringes P & G's patent rights to the barrier leg cuff feature on disposable diapers. Paragon has counterclaimed for the alleged infringement of a patent relating to diaper absorbent cores1 and for a violation of the antitrust laws.

While Paragon Trade Brands said they wanted to simply compete. Procter & Gamble was going to win it effect to drive out competition as their Ultra diapers did violate P&G diapers. And Bernie is a social democrat, I was not impressed with the expert witness and his overall valuation or his claim that a reasonable royalty rate should be 2.5%. I told the defense attorneys that the evidence supported a 2% royalty rate for reasons the Court later smartly noted. But that meant they did not want to hire me. They hired Robert Reilly instead as he argued for a very low royalty rate:

The highly experienced authors of the Guide to Intangible Asset Valuation define and explain the disciplined process of identifying assets that have clear economic benefit, and provide an invaluable framework within which to value these assets. With clarity and precision the authors lay out the critical process that leads you through the description, identification and valuation of intangible assets.

Yep – an appeal to Authority. Never mind that the Court rejected his testimony out of hand which often happens to his testimony in other cases as Courts seem him as advocate not an expert witness. While Friedman argues real GDP can be $29 trillion as of 2026, the CBO is saying that this will only be $20.6 trillion under current policies. Of course Sanders is proposing an interesting change in policies so one might argue we should model out how this might work. I’m sure Team Republicans might turn to section III.B of Romer and Romer:

Against these potential positives, there are features of Senator Sanders’s proposals that could work to slow the growth of productive capacity. The higher interest rates resulting from demand expansion that led to inflation would lower investment, and so slow growth of capacity. More generous Social Security, while surely desirable for poorer Americans, would cause some people to retire earlier. Strengthening disability insurance, another laudable goal, would likely lead to more people being on the program. Making public colleges free would cause some people to spend longer in school and less time working. And extensive research, to which we have contributed, shows that although the disincentive effects of higher tax rates are small, they are not zero.23 Potentially more worrisome are the extensive interventions in the labor market.

I’m sure weeds in the garden John Cochrane would be willing to use these effects to argue for a level of real GDP in 2026 less than $20 billion.

When Democrats have proposed incentive-killing growth-killing marginal tax rate increases with lots of exemptions for their donors...

Of course this ignores Romer and Romer’s section III.A.

Senator Sanders’s proposals would likely act to raise productive capacity in several ways. Most directly, infrastructure and education make the economy more productive. If Senator Sanders’s policies led to an additional $1.5 trillion of investment in these areas over the next decade and those investments have a rate of return of 10% (which appears to be a reasonable estimate for well-targeted public investments), this would raise output in 2026 by $150 billion, or somewhat less than 1%.19 Since this is an effect over ten years, the implied increase in average annual growth of capacity (or potential output) is less than a tenth of a percentage point. Thus, although there is a strong case for greater public investment based on its rate of return and on its potential impact on quality of life and equality of opportunity, it would not yield a fundamental change in the economy’s growth trajectory. Likewise, there is evidence that family-friendly policies, like parental leave, help keep workers in the labor force.20 And regulatory and tax changes that benefited low-income workers would make work more attractive. Again, such policies have much to recommend them.

They also say the net effects will be small as if their model might suggest real GDP closer to $21 trillion by 2026. I would argue, however, that a different model from what the CBO has might be used. Would that alternative model suggests $22 billion or $25 billion? Who knows as no one has done this. This is a shame as these issues mattered. I’m getting too old to do a quality job and I don’t have that magic Authority. But Team Democrat – whether Bernie or Hillary – should assemble a team of progressive economists to do the hard work

Romer^2 on Friedman on Sanders

Oh dear.  Today's Romer and Romer response to Gerald Friedman’s paper on the economic consequences of Sanders seems to have identified the core problem in GF’s analysis, confusing one-time and ongoing stimulus effects.  According to the R team, F attributed increases in economic growth in perpetuity to single bursts of stimulus, and not just once but repeatedly—in his treatments of demand stimulus, income redistribution and health care.  That plus his belief that the output gap is large enough to accommodate extremely rapid growth over a full decade, explains his headline numbers.  If this is true it’s an embarrassment.

For economists and other academics the message is to always circulate drafts before going public.  For the rest of us, don’t forget that this tussle has nothing to do with the merits of Sanders’ policies.

UPDATE: In my original post I attributed the supercharged growth rates to multiplier issues, primarily in out years.  That appears to be partly correct, in that GF's multiplier depends on his estimate of the output gap, which he thinks would remain substantial through the entire forecast period.  But the larger problem seems to be the multiplicands.  This is the sort of thing that requires actual replication to uncover.  Incidentally, this is turning into a poster case for the value of writing down your model and not jumping immediately into the spreadsheets.

The Sanders Fiscal Stimulus and Verdoorn’s Law

Noah Smith on the Friedman flap:

“If Friedman and others are right, it would up end most of mainstream macro, and would force a dramatic reconsideration of economic policy. But Friedman’s paper seems far-fetched because the normal action of stimulus -- putting unemployed people back to work -- wouldn't be nearly enough to create the kind of growth Friedman projects. In addition, we would need a huge boost to the growth rate of productivity. Usually we think of productivity gains as coming mainly from technological advancements, something that is very hard for government policy to affect. The notion that fiscal stimulus, in addition to raising employment, also boosts productivity growth was first suggested in 1949 by a Dutch economist, Petrus Johannes Verdoorn. According to what's known as Verdoorn’s law, all you have to do is boost gross domestic product growth -- for example, by fiscal stimulus -- and productivity will soar as well.”

What is this Verdoorn’s Law?

The importance of increasing returns for economic growth was revitalized only in the early twentieth century by Allyn A. Young (1928), who emphasized not only the reduction in the average cost of production brought by output growth in manufacturing but also the product diversification that characterizes an increase in the division of labor. Verdoorn’s law, an attempt to quantify this relationship, is named after the Dutch economist P. J. Verdoorn, who published a paper in 1949 in which he measured the impact of economic growth on labor-productivity growth in manufacturing for a group of countries in the late nineteenth century and early twentieth century. In general terms, Verdoorn’s law implies the existence of a stable and positive causal relationship from the growth rate of output to the growth rate of productivity in manufacturing in the long run. … The theoretical foundation of Verdoorn’s law is the existence of economies of scale in manufacturing, that is, the fact that the average cost of production falls with an increase in the amount of goods produced. The sources of economies of scale within a firm or industry are usually divided into two categories: static or dynamic. Static economies of scale come from the fact that most processes of production incur a fixed cost, that is, a cost that has to be paid no matter whether anything is produced. As a result, the higher the level of production, the lower the average fixed cost per unit produced and consequently the higher the economy of scale. It should be noted that static economies of scale are reversible because, if production is reduced, the average fixed cost rises. Dynamic economies of scale come from the productivity gains associated with innovations brought about by the increase in production. The intuition here is that the dynamic economies arise from learning by doing and as such are irreversible. Even if the level of production falls, the new knowledge acquired from experience does not vanish.

There is more on the empirical inquiries that occurred after Kaldor drew attention to this idea in 1966. I have been saying Team Bernie needs to hire economists to model out the economic effects of his policy proposals. This Verdoorn effect might be something worth exploring.

Krugman v. Mankiw on Rubio’s Tax Cut – Show Me the Model

Greg Mankiw of Team Republican tries to counter an attack from Paul Krugman on Rubio’s tax cut for the rich, which may come as breathing spell from the flap over that “analysis” by Gerald Friedman (my two cents on that flap in a bit). Greg says Rubio is proposing the David Bradford plan:

Good tax policy should be pro-growth, simple, and fair. An income tax, unlike a consumption tax, penalizes saving, which undermines economic growth and introduces complexity. An income tax is often thought to be fairer than a consumption tax, however, because it taxes saving, which is disproportionately done by higher-income individuals….The reduction in capital accumulation reduces labor productivity and lowers real wages throughout the economy, depressing the standard of living of future generations. Some studies have found that a switch to consumption taxation would increase the size of the U.S. economy by as much as 9 percent in the long run, although other studies estimate smaller gains.

Bradford does cite these studies and we will note one later. Can we take this back to the debate over the 1981 tax cut and note why I am so big on Show Me the Model? Voodoo economics was coined by George H. W. Bush as he did not believe Art Laffer had a real model of how large tax cuts could lead to a miracle growth. After all, standard economics tells us that tax cuts lead to less national savings, higher real interest rates, and crowding-out of investment. All of which happened. Laffer’s excuse for a model was a cocktail napkin which does not cut it. For what is worth, the Congressional Budget Office does model out potential output, which had been growing at a 3.5% clip since the end of World War II until 1980 but slowed to a 3% clip for the Reagan-Bush era. As Peter Dorman noted, Gerald Friedman failed to model out potential output and its projected growth path under the proposals of Bernie Sanders:

He never presented his model. The appendix to his report jumps immediately to parameter estimates, but there is no list of all parameters nor a formal model displaying how they relate to one another. I take it that the implicit model calculates GDP growth from spending projections subject to a multiplier, and that this translates into labor demand with productivity as a residual. The microeconomic results are determined by macro outcomes plus additional sector-specific factors. There does not appear to be a simultaneous relationship between macro and micro (especially labor market) outcomes, which is a cause for concern.

His defenders seem to miss the point with respect to the microeconomic or potential output side. Yves Smith wrote:

Friedman did this using a completely standard model. So the real issue is about the assumptions

A standard multiplier model without any consideration of potential output might be fine for forecasting a depressed economy over the next few years but not for a decade. In some ways, this defense from Jamie Galbraith was worse:

There are not many ambitious experiments in economic policy with which to compare it, so let's go back to the Reagan years. What was the actual average real growth rate in 1983, 1984, and 1985, following the enactment of the Reagan tax cuts in 1981? Just under 5.4 percent. That's a point of history, like it or not.

Of course the CBO model would note we had a GDP gap back then near 8% with potential growing at 3% per year. CBO now says the gap is around 2.8% and it is growing at only 2% per year. But is CBO the only model? Of course not. Menzie Chinn had an excellent discussion:

Note: I do not know what the output gap actually used in the Friedman study, as it is not reported…. One thing that should be remembered is that the trend line extrapolated from 1984-2007 implies that the output gap as of 2015Q4 is … -18%. A graphical comparison which highlights the implausibility of the -18% output gap is shown below… I want to stress that estimating potential GDP and the output gap is a difficult task

Indeed it is difficult but using trend lines is how Lawrence Kudlow does this for the National Review. Let’s not go there. Sandwichman wants to ditch NAIRU (I agree) and Mark Thoma has a must read discussion. All of this is fine but I still say Show Me the Model and as one does, please note the latest from Brad DeLong:

These are principal causes of "hysteresis". I do not believe that the output gap is the zero that the Federal Reserve currently thinks it is. But it is very unlikely to be anywhere near the 12% of GDP needed to support 4%/year real growth through demand along over the next two presidential terms. We could bend the potential growth curve upward slowly and gradually through policies that boosted investment and boosted the rate of innovation. But it would be very difficult indeed to make up all the potential output-growth ground that we have failed to gain during the past decade of the years that the locust hath eaten

Team Republican will likely have their models so permit to reach back to one of the models mentioned by Bradford in discussing something akin to the Rubio proposal which was an excellent paper entitled Simulating U.S. Tax Reform:

This paper uses a new large-scale dynamic simulation model to compare the equity, efficiency, and macroeconomic effects of five alternative to the current U.S. federal income tax. These reforms are a proportional income tax, a proportional consumption tax, a flat tax, a flat tax with transition relief, and a progressive variant of the flat tax called the 'X tax.' The model incorporates intragenerational heterogeneity and kinked budget constraints. It predicts major macroeconomic gains (including an 11 percent increase in long-run output) from replacing the federal tax system with a proportional consumption tax. Future middle- and upper-income classes gain from this policy, but initial older generations are hurt by the policy's implicit capital levy. Poor members of current and future generations also lose.

This estimated 11% gain happens only very slowly over time. Tax cuts do not pay for themselves and the proposition that everyone gains is not true. Maybe Greg Mankiw wants to pretend otherwise and maybe he has in mind a different model. But like Gerald Friedman – he has not laid out a real model.

Krugman, the Gang of Four and the NAIRU Straitjacket

G. Friedman v. M. Friedman

Krugman and the CEA Gang of Four former chairs don't come right out and say it but G. Friedman's projections are implausible because... "NAIRU!"

um... um... um...

Two points on that.

First is Dean Baker's post about the latest Economic Report of the President's "insight into the question of how fast the economy can grow, and more importantly how low the unemployment rate can go."

Economists have long held the view that lower rates of unemployment would be associated with rising rates of inflation and vice versa. When the Federal Reserve Board decides to raise interest rates to slow the economy it is based on the belief that unemployment is falling to a level that would be associated with a rising rate of inflation. 

Most economists now put the unemployment rate at which inflation starts to rise somewhere near the current 4.9 percent rate. (This is called the non-accelerating inflation rate of unemployment or NAIRU.) So does the ERP. But its analysis suggests a somewhat different story.

Second is Jamie Galbraith's 1997 -- that's almost 20 years ago -- Journal of Economic Perspectives article, "Time to ditch the NAIRU"

First, the theoretical case for the natural rate is not compelling. Second, the empirical evidence for a vertical Phillips curve and the associated hypothesis that lowering unemployment past the NAIRU leads to unacceptable acceleration of inflation is weak, and has become much weaker in the past decade. Third, viewed collectively, attempts to estimate the location of the NAIRU have become a professional embarrassment; disagreements remain on too many basic issues. Fourth, adherence to the concept as a guide to policy has major costs and negligible benefits. Conversely, the risks of dropping the natural rate hypothesis are minor, while the benefits from a sustained pursuit of full employment could be substantial.

G. Friedman's projections may well be wrong. But the argument that they are "implausible" is based on uncompelling theory, weak empirical evidence, embarrassing estimates and "a guide to policy [that] has major costs and negligible benefits."

But, hey, you can't criticize the top wonks if the they don't come right out and say it.

UPDATE: John T. Harvey writes, at Forbes:

In the words of Christina Romer, former chair of the Council of Economic Advisors under Barack Obama: 

"Just as there is no regularity in the timing of business cycles, there is no reason why cycles have to occur at all. The prevailing view among economists is that there is a level of economic activity, often referred to as full employment*, at which the economy could stay forever."

*Often referred to as full employment? War is Peace. Freedom is Slavery. Ignorance is Strength. NAIRU is full employment.

First they ignore you. Then they ridicule you...

And then they attack you and want to burn you. 

And last they forget you and attribute what you said to Gandhi, Stalin, Hitler, Abe Lincoln or Mark Twain.

Here, in full, is the address of Nicholas Klein to the third biennial convention of the Amalgamated Clothing Workers of America, May 15, 1918 (if you're in a hurry you can skip to the penultimate paragraph for the punch line):

Mr. President and Friends: I did not expect to be called upon at this very moment, at least, because of the presence of my good friend and colleague, who has just come to you from the City of Washington, with a message of encouragement,  I have no doubt. But I was asked when I approached the platform to say some few words of encouragement to the Schloss Brothers strikers of Baltimore. I can only say this, that much more than I could say this morning has already been demonstrated here on this platform and in this hall. The marching around of the men and the women this morning, and the standing up of the groups of delegates from the various cities, was indeed an inspiring spectacle to my mind. 

I believe that they have been on strike for five consecutive weeks. The strikers now realize what war means. And they also realize no doubt what Sherman said about war, because, my friends, a strike is a war, the two contending forces fighting like separate armies, each for its share of the spoils in this world today. 

The speaker this morning, the Chairman or the co-worker of Baltimore, said that a settlement was about to be had, and he expected to announce before the adjournment of your convention a settlement of this strike. My friends, I hope that is true. I hope that the Schloss Brothers strikers are going to win a splendid victory! (Applause.) 

There never has been such a wonderful opportunity for labor as presents itself this very moment. But, my friends, I have in mind this, and I say this to the strikers and I say this to the delegates. Labor just now is in the flower of its manhood. Just like this beautiful spring day, when the buds are beginning to open, so labor is coming into its own. But, my friends, that is due in great measure not so much to your stand either as workingmen or working-women, but to the peculiar economic status which has been brought about by the war. And I say to you, my friends, that perhaps after this war— and that is not so far off—a chance will come to you strikers, and to you workers, to show not by applause, but by action, how much per cent. you feel for organized labor. Because, my friends, after this war there will be a great unemployment problem. The munition plants will be closed and useless, and millions of munition workers will be thrown out upon the market. And then the time will come to show whether you strikers and you workers believe one hundred per cent. for organized labor or only 35 per cent., because, my friends, my good friend is he who is with me when the storms are beating, when I am hungry, when I have no money, when everybody is spitting on me, when I am in jail; and then, when a man comes to me and says, "I am with you; have courage; I'm your friend!" that man is my brother—that man is two hundred per cent., because that man is not a sunshine friend. Sunshine friends organized labor can get now. Sunshine friends organized labor can get when it is victorious, when it is on top. But the true test will come to you, strikers, and to you workers, in just a short time. To you strikers, who have been holding out five weeks, I may say a word of courage, and that is this: When you go into the Amalgamated Clothing Workers of America, you are going into a real organized Union, not a bosses' union. You are going into a union made up of those who have ideals, of those who believe in you, of those who are working for you, of those who are using every energy and every effort, not for politics, but to make it better for you in the shop, not because of a label, but because you are workers and you produce all the wealth.  

And I say to you, stick to that Union. That Union means just what it says. It is a Union of organized forces in America in the needle trades. 

So, my friends, without taking up any more time, let me say to you, and without being pessimistic, that there will be evil days coming. And they are not so far off. I wonder how many of the membership of New York and Chicago and all over the country are so solidified and will stick to the Union, to the Amalgamated, when the time comes— when the call comes, and you are put to the test. Will you be a real soldier in a grand army of labor, or will you be one of those stragglers who only come in to get two dollars or more wages per week? That is going to be the great problem. 

And the education of your membership now, the solidifying of your forces now, the making of your lines strong now, my friends, is the big, big question. and it can be done—anything can be done if a Union of one hundred thousand members can be organized in three years like has been so wonderfully done here by your leaders and by your officers and your membership, my friends, anything is possible. Education is possible, and the winning of strikes is possible. 

Let me close just now by giving you a little story that I have given you once before. I close by telling you the story, because I think it explains better than anything else, at this time, the great possibilities which can come to labor. There is a story told about the making of the first railway. There was an old man, it is said, whose name was Stevenson [sic: should be Stephenson], who made the first locomotive. You know, just like in the labor movement they said locomotives were impossible. You had to have horses or cattle to pull a train; that nothing would go without something being attached to it. There would be no locomotion. 

And when old man Stevenson proposed a train—something to be run without the aid of horses or oxen, he was ridiculed. One day a test was made, and they laid two pieces of wood and upon these two pieces of wood they placed some thin sheets of metal, and upon that crude arrangement was placed the first locomotive. 

And it is said in this story that thousands of people were out to see the first test of that locomotive, and of course the people all shouted, and pointed to their heads, and said the man was crazy, and they said the locomotive was out of question; it was impossible, and the crowd yelled out: “You old foggy fool! You can‘t do it! You can‘t do it!” And the same everywhere. The old man was in the cab, and somebody fired a pistol and the signal was given. He pulled the throttle open and the engine shot out. and in their amazement the crowd, not knowing how to answer to that argument, yelled out: “ You old fool! You can’t stop it! You can't stop it! You can't stop it!" (Applause.) 

And my friends, in this story you have a history of this entire movement. First they ignore you. Then they ridicule you. And then they attack you and want to burn you. And then they build monuments to you. And that is what is going to happen to the Amalgamated Clothing Workers at America. . . . . . . 

And I say, courage to the strikers, and courage to the delegates, because great times are coming, stressful days are here, and I hope your hearts will be strong, and I hope you will be one hundred per cent. union when it comes! (Great applause.) 

Alan Krueger and the "Environmental Kuznets Curve."

In 1994 Krueger -- one of the former CEA chairs who signed the Sanders letter -- and Gene Grossman published a paper titled "Economic Growth and the Environment." They studied four kinds of environment pollution and the countries' per capita income. They found "no evidence that environmental quality deteriorates steadily with economic growth. Rather, for most indicators, economic growth brings an initial phase of deterioration followed by a subsequent phase of improvement."

This finding subsequently became known as the "Environmental Kuznets Curve" by analogy with the Simon Kuznets's finding, once upon a time, of income inequality first rising with economic growth and then subsequently decreasing as growth continues. Ask Thomas Piketty about the robustness of that empirical theory.

A couple of years later, David Stern and associates published a critique of the Environmental Kuznets Curve theory. They pointed out that the inverted U shape relationship between environmental degradation and economic growth depends on the unrealistic assumptions that there is "no feedback from the quality of the environment to production possibilities" and "trade has a neutral effect on environmental degradation." Furthermore, the inference from some studies "that further development will reduce environmental degradation is dependent on the assumption that world per capita income is normally distributed when in fact median income is far below mean income."

This is not to disparage Krueger and Grossman's research or their findings but to point out that the implications of those findings were subsequently blown out of proportion by people who ignored the study's limitations. That enthusiasm has fostered an industry of unwarranted EKC optimism. Again, ask Piketty how that Kuznets Curve thing is working out.

There does appear to be an inverted U curve for SOME pollutants. Other pollutants get exported by rich countries to poor countries -- see the infamous 1991 Summers/Lant Pritchett  memo on toxic waste for a sarcastic commentary on that potential. And, last but not least there is no Environmental Kuznets Curve for global greenhouse gas concentrations.

Nevertheless, wishful thinking based on the EKC concept perennially fuels optimism about the prospects for "decoupling" GHG emissions from economic growth. Some of the boosters of decoupling even talk about "stabilizing" GHG emissions at current levels while growth continues. The decoupling fantasy sidesteps the reality that massive reductions in emissions -- not just stabilization -- are required to stop the continued increase in atmospheric GHG concentrations.

Now Go Do That Voodoo That You Do So Well, Dr. Krugman

Varieties of Voodoo, by Paul Krugman, Commentary, NY Times:

America’s two big political parties are very different from each other... Republicans routinely engage in deep voodoo, making outlandish claims about the positive effects of tax cuts for the rich. Democrats tend to be cautious and careful about promising too much...

Sorry, but there’s just no way to justify this stuff.

It would do well to recall that it was Democrats who first parlayed vulgar Keynesianism into the voodoo of weaponized growthmanship. NSC-68 set out "economic growth" rationale for tripling arms spending, conceived by Truman's Council of Economic Advisers chair, Leon Keyserling:

...the necessary build-up could be accomplished without a decrease in the national standard of living because the required resources could be obtained by siphoning off a part of the annual increment in the gross national product.

Of course that was two-thirds of a century ago. Nobody believes in such trickle-down arms build-up voodoo any more these days, do they? Except Paul Krugman:

Economics, as I say often, is not a morality play. As far as creating aggregate demand is concerned, spending is spending – public spending is as good as but also no better than private spending, spending on bombs is as good as spending on public parks.

The day after he wrote the above, Professor Krugman welcomed Republicans' fondness for weaponized Keynesianism on the grounds that it would expose the hypocrisy of Wall Street's complaints that government spending undermines business confidence:

Once you concede that the government can act directly to create jobs, however, that whining loses much of its persuasive power -- so Keynesian economics must be rejected, except in those cases where it’s being used to defend lucrative contracts. 

So I welcome the sudden upsurge in weaponized Keynesianism, which is revealing the reality behind our political debates.