Mmmm, this cocaine is delicious

If the study of rat-behavior in the presence of fatty foods can translate to humans, it suggests that pigovian sin taxes will not be enough to stop the growing obesity problem in the US. If over-eating can be like becoming addicted to cocaine, and humans increasingly tolerate pain (in the stomach and in the wallet) in order to satisfy their addiction(s), then the motivation to reduce consumption in the presence of higher prices/taxes will be inadequate by itself as a long-term strategy. After-all, coke-heads pay a hefty premium for their habit without blinking an eye.

So why isn't cocaine so prevelent? Well for one, banning a substance, while it does lead to black market activity, does work. Does this mean we should ban all fatty foods? No, I'm not suggesting that (in fact, if you were to take my peanut butter away I'd probably injure you). But perhaps there is a middle-ground? Perhaps the FDA should be given power to enforce stricter regulations of food content. Perhaps, dare I say, we need to change the way we reward children in the developing years. When I was a kid, after my mom's divorce, I had a bad habit of kicking the shit out of my cousins for no apparent reason. So, my mom took me to a behavioral psychologist who decided all my problems could be solved if she rewarded my good behavior with a McDonald's 'Happy Meal' each time. ... I don't think I need to spell out all the problems with that for you. Heck, even the way we market implies fat=happy. And why shouldn't companies market it that way... fat and sugar = big bucks to companies that rely on addictive eating behavior for their profits.

The government regulates how we safely drive our cars (seat-belts), how we safely go to work (not at age 10), how we safely drink our alcohol (again, not age 10), but the government does not yet regulate how we safely eat. Some major cities (New York) already have bans on trans fats. But obviously regulations can be problematic because they interfere with individual choice - exactly what fats are 'bad'? Where is the line?

But there are other more outside-the-box ways the government can get involved. The government could provide subsidies for 'buddy' programs. Some of us spend hundreds of dollars a year on gym coaches (think Biggest Loser), but completely ignored is that the real problem is not in the gym - it's in the home. People don't (just) need fitness experts, they need eating experts. The government could subsidize payment to dietitians etc. to basically become home nurses / 'buddies' in a family's fight to change their eating and food shopping beliefs and habits.

I'm no diet expert, but this is my two cents. I'd love to hear yours.

Reviving Economics - Call to Arms

David Brooks (IMOP correctly) states that the state of (mainstream) economics is at a crossroads, and simply cannot continue along its current path without some major upheaval in thought and methodology.

Mainstream economist and textbook author Greg Mankiw disagrees (of course), and absurdly implies that mainstream economists were, for years before the crisis, paying attention wholeheartedly to financial structural problems. I'm sure there were a handful of mainstream economists dipping their toes in the water, but I know of no mainstream economist who put forth any real ideas - all the real ideas were coming from heterodox schools (for DECADES)which mainstream economics not so subtly abhorred and continues (amazingly) to shun (because its gains mean the very revolution David Brooks talks about). And I find it laughable that he invoke behavioral economics as if there is the great hand-holding relationship between behavioral economists and the mainstream. It's true that behavioral economics is gaining (and has received) some acceptance at the micro level - but there is still the undercurrent within the mainstream that behavioral econ is just a nice "add on" to mainstream models - which defeats the point.

There's a reason that the vast majority of economists and academics that predicted the impending doom were from heterodox fields - it's because textbook economics - arguably led and embodied by Greg Mankiw - is, by itself, a failure. I acknowledge the usefulness of much of what can be found in such textbooks - I still use a mainstream text to teach - but the old textbooks do need to be thrown away (or at least heavily supplemented). I threw away Mankiw's two years ago because there are other authors that aren't so dismissive of the need for the field to change.

David Brooks is spot on when he says:
"The moral and social yearnings of fully realized human beings are not reducible to universal laws and cannot be studied like physics."

And I'll let people in on a secret - students agree. I teach a mix of mainstream and heterodox concepts from a pluralist perspective - and I'm seeing the light bulbs go on in students' minds - the next generation, whether people like Mankiw like it or not, will change the field. Mankiw will have a legacy of supporting the stagnation of economics - via his short-sighted best-selling economics textbooks. But I for one will be proud that, albeit in a very small way, I supported the dialog of change that will help revive economics.

American Enterprise Institute is Bad Research

Nothing about AEI is non-partisan. They are group-think conservative Republicans. The end. Everyone of course already knows this, so I don't understand why serious academics even consider working for such a scientifically bankrupt and biased institution.

Just To Make Sure My Fellow Hoosiers Understand ...

This brings two thoughts to mind

1. The utter inability for State economic forecasters to be conservative enough to match the reality of our recession (they have been way off estimates of tax revenue for 17 consecutive months). Failure to accurately forecast means spending cuts can't easily be reasoned over time but instead must be spur of the moment "oh crap we need to cut something or else" afterthoughts.

2. The spending restraint has been necessary. Indiana has a huge surplus largely from efficiency gains made to government and of course from the lease of the Indiana toll road. According to the budget forecasts (which are rosier than they should be as it is), without cuts made to education, State agencies etc. (again, it would have been nice if these forecasts were more accurate to allow less hasty decisions), our surplus would have quickly turned to deficit within months.

We still run this huge risk - even given current cuts. If and as revenue forecasts continue to be further off than we expect, we can expect more 'spontaneous' cuts. It is either that or lose our edge in the Midwest as the only State in the vicinity to not be in dire budget straights (relatively speaking). Risking that status, means not just risking the positive perception by businesses outside our State, but it risks the State premium credit rating as a whole.

Short of the Feds coming in and providing no-string-attached funds to States, there is no easy solution. But even if the Feds accommodated that. Does California deserve the same amount of funds per capita that Indiana does? Does an unruly child who throws tantrums when things don't go his way deserve ice cream as much as a more thoughtful child that recognizes the strength that a clam intellect can provide? IMOP, the Feds shouldn't be the spoiling parents for every State. Much in the same way that overly-simplistic Keynesian spending by the government can sometimes be for the benefit of the private sector's bad apple industries and interests over others, so does the same go for funding that the Feds spend on States.

Mankiw Doesn't Fully Understand Pigovian Taxation

I hate to pick on Prof. Mankiw some more, but last week he lambasted the 'liberal' NPR, which happens to be my favorite news source, radio station - it is just all around awesome. So, now he gets what's coming to him.

My issue is that he keeps saying 'sin taxes' are not Pigovian. I've disagreed on this point, and I disagree continually. A basic definition of a Pigovian tax is: a tax levied on a particular behavior in the market that is generating negative externalities. The idea is the tax re-aligns the real social cost with the benefits of the activity. Mankiw distorts this defintion and implies that negative externalities can only occur as an action by one group negatively affects another. Of course, this is ridiculous because behavioral studies show that, in reality, people do not always behave in a manner that is temporally beneficial. IE., people are short-sighted. So, a sin tax is not just the State imposing morals, it is helping people help their (future) selves. Just because there aren't always bystanders for eating bad foods for example, doesn't mean there is no externality. The externality is there - it's not external of self at that time, it's external of self OVER time. It's correcting behavior that, if a person had complete foresight and 20/20 clarity of the totality of their life, one likely would do less of. ...And this is ignoring the very real argument that many 'sins' DO have real negative external consequences at a given point in time - consequences on family and relationships that, while often non-pecuniary, cannot be ignored.

Mainstream economics has had a history of ignore the implications of time and behavior - and Mankiw promotes this problem. One can legitimately argue whether these tax systems should be imposed, but regardless of how you define it, it's a system that by necessity is a market intervention that involves some amount of judgement absent the ability to EVER fully measure the degree of negative externality.

Reflections on a Past Self

This is from one of my early blog posts, back in January 2007:

I've been picking on Mankiw lately. Nothing should be read into that. He's undoubtedly at least 56% smarter than me, and he is one of the greatest economists of our time in my opinion. I consider myself a New Keynesian so I rever him in many ways. Besides, he's got the best econ blog on the web - so I have to post about him all the time - even though we often disagree. Besides, I love his text book(s).

It's amazing how much I have changed over the last 3 or 4 years. I don't think Mankiw is one of the 'greatest economists of our time.' I definitely don't consider myself New Keynesian anymore (I blame my schooling for indoctrinating that into me). And I certainly don't think Mankiw has one of best blogs on the web either - especially since he stopped allowing comments. And, above all, his textbooks are the most generic, least explanitive, most indoctrinating books on the market - yuck, yuck, yuck. Not to be overly critical, but I mean really... I know his texts are popular, but they are just not very good - pretty and popular, but not good.

Great Post Quoting Karl Marx on the Unique Importance of Money

Kudos to Brad DeLong for bringing this to the forefront.

Cyclicality of Labor Productivity

Most economists teach productivity is, obviously a key factor in long-run growth. But also, many teach that (as much data shows across time and across regions) that productivity has tended to be pro-cyclical - that it rises during boom times and falls during bad times. This obviously is not the case this time around.

Many less 'classical'-leaning economists claim that cyclicality of labor productity is not that simple - that it depends on what kind of economic cycle we are talking about. Supply shocks could potentially induce pro-cyclical productivity (one theory is that of 'labor hoarding'), but demand shocks like the one we are currently experiencing should, by their very nature of layoffs and cut hours, cause counter-cyclical behavior as those left with jobs are forced to do twice as much work in a given day (as the article notes).

So, I'm left with wondering again, what's the purpose of aggregation in macroeconomics if it leaves you with misleading results during times when analysis could really could use a little bit of realism.

Chartalism - Causality and Necessity is Problematic

From-http://bilbo.economicoutlook.net/blog/?p=4870

(S – I) = (G – T) + (X – M)

So total private savings (S) is equal to private investment (I) plus the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)), where net exports represent the net savings of non-residents. That has to hold as a matter of accounting. It is not my opinion.

Thus, when an external deficit (X – M < 0) and public surplus (G - T < 0) coincide, there must be a private deficit. While private spending can persist for a time under these conditions using the net savings of the external sector, the private sector becomes increasingly indebted in the process.

I've continued my skepticism on Chartalism's basic arguments. First, I don't think, as many of them claim, that mainstream economists are ignoring an accounting identity. I am not particularly mainstream, but I think Chartalists are over-selling their argument. I agree with the above accounting equation. What concerns I have are two fold:

1. That the causality does not necessarily have to be government deficits CAUSING a net savings. An accounting identity is just that - it is not a model of causality. THe identity leaves open numerous and simultaneous causation runs. Net savings could fund deficits, a capital account surplus could fund net investment....

2. I disagree with the above statement, "...private spending can persist for a time under these conditions using the net savings of the external sector, (but) the private sector becomes increasingly indebted in this process."
How is this supposed indebtedness a given? If we are running a current account deficit, and by definition a capital account surplus, foreigners are providing us part of their savings to fund our negative net savings and government debt. What is it about this that is unsustainable for as long as our currency and economy is strong?

I agree with the typical post-Keynesian argument that debts financed from abroad can lead to bubbles in some cases, but not necessarily this Chartalist subgroup. I don't see how this means the solution is for government debt (deficit spending) to replace foreign funding to pay for investment spending. Further, I don't see how encouraging further private savings (less consumption) would be somehow less attractive than running large government deficits.

I get that the government is the monopolist of money and therefore has no offsetting liabilities for money assets in aggregate. I don't get how it necessarily follows, given the above, that the government should just spend and spend and spend, and print and print and print.

I'm still open to dialogue on this, but I have to say, the inability of chartalists to present a cohesive argument is not appealing. (And I've read up a LOT on this subject).