Liberals flunk mainstream econ? Or conservatives don't look outside the theoretical box?

Zogby released stats showing that liberals / Democrats have a huge lack of economic understanding compared to their more conservative counterparts. Daniel Klein recently wrote a WSJ op-ed about this which my friend asked me to comment on. My comments are as follows:

I disagree with Mr Klein, and appears my point of disagreement is largely with his statement,

To be sure, none of the eight questions specifically challenge the political sensibilities of conservatives and libertarians. Still, not all of the eight questions are tied directly to left-wing concerns about inequality and redistribution. In particular, the questions about mandatory licensing, the standard of living, the definition of monopoly, and free trade do not specifically challenge leftist sensibilities.

Having just glossed over the full Zogby questionnaire, I would still offer that perhaps these questions do more at highlighting philosophical / political differences than economic intelligence. I suspect that many liberals felt their core identity would be threatened if they didn't answer in ways that were sympathetic to their core beliefs. It is a strongly known psychological fact that when our basic beliefs are threatened, so are our identities. For example, one of the questions was "Third world workers working for American companies overseas are being exploited, agree or disagree...?" Liberals of course would agree statistically compared to conservatives - to do otherwise would suggest an attack on their identities, whether they were technically correct or not from an economic point of view. The issue is NO issue should ever be looked at STRICTLY from a mainstream economic point of view - which is precisely why this study is hogwash. To say liberals don't understand economics is an assumption. One could just as easily say, based on the data, that liberals don't see answers as being black-and-white or defined by just one method of study.

Other questions like, "minimum wage laws raise unemployment, agree or disagree?" is just as problematic, if not just for the fact that many economists (some even in the mainstream) have done studies suggesting that unemployment rates are negligibly or not affected or in some cases enhanced in the long-run with minimum wage standards. Mainstream economic theory says "agree," but it's not a fully testable hypothesis since unemployment and wage levels are not set in an experiment that mimics real life. Obviously liberals, who believe that there should be minimum standards of earnings would "disagree." And as I mentioned in the above paragraph, they might disagree regardless of whether or not they are technically wrong or right because they might view the issue of wage rates as affecting things other than unemployment - like creating a better life for workers that might otherwise be below the poverty level. It's a matter of framing, and of looking beyond textbook economics.

My final issue with the study and the op-ed I can explain by talking about another question that was asked: "Overall, the standard of living is higher today than it was 30 years ago, agree or disagree?" Mainstream economics of course shows that it has - unequivocally...based on the following assumptions: (1) that standard of living is defined as income per capita growth, (2) that income is defined by GDP, (3) that GDP is solely and sufficiently representative of income, and therefore standard of living, and on, and on ....

I teach in my class that many heterodox (outside the mainstream) economists have come up with other tools, besides GDP per capita growth to measure standard of living. One has to take into account resource depletion, externalities, inequality, number of work vs. leisure hours....

So do liberals lack a solid economic education? Or do they just see things other than the bottom dollar as being important? The flip-side question is, are conservatives too ideological/theoretically driven? Do they think outside the box?

In the end, this study doesn't really highlight which group knows more about economics, it highlights how ideologically one-sided and shallow the current state of mainstream economics is.

Why the Tea Party will Fail

The tea party will fail, and I submit as evidence, Mr. Rand Paul, the recent winner in KY's GOP primary election. He is backed by the Tea Party and its supporters.

Recently, just after his election win, Mr. Paul went on the Rachel Maddow show and Rachel played some (typical) 'gotcha' journalism and caught him in a loop of trying to explain his positions on discrimination policies, particularly those applied to private companies, and institutions.

Maddow: Do you think that a private business has a right to say that 'We don't serve black people?'

Paul: I'm not in favor of any discrimination of any form. I would never belong to any club that excluded anybody for race. We still do have private clubs in America that can discriminate based on race.

But I think what's important in this debate is not getting into any specific "gotcha" on this, but asking the question 'What about freedom of speech?' Should we limit speech from people we find abhorrent. Should we limit racists from speaking. I don't want to be associated with those people, but I also don't want to limit their speech in any way in the sense that we tolerate boorish and uncivilized behavior because that's one of the things that freedom requires is that we allow people to be boorish and uncivilized, but that doesn't mean we approve of it...

Of course some in the media and on the left have said, due to these statements, that Paul would try to get rid of the Civil Rights Act, or that he's some sort of racist. All that is ridiculous. Frankly, everyone should have expected Paul to say something like that. Because he's something much more scary than a racist: he's an extremist Libertarian (albeit in Republican clothes).

Rand, like many extremist Libertarians are ideologically and narrowly driven in their beliefs. They believe that government should be severely curtailed or abolished altogether, especially as it pertains to private industry and homes (taxes should be cut to next to nothing, subsidies should be eliminated, regulations on behavior, including hiring practices, should be limited to none). It also means condemning any government 'hand-slapping' when private industry does things that are bad for the public (because to an ideologue of this bent, that simply isn't possible). I hope this ideology sounds familiar to you, because it lines up very nicely with the Tea Party's stated beliefs and goals.

And so this brings me to my point. There are reasons that the Rand Paul's of the world, when they speak, don't stay in power long or are not elected in the first place - it's because they are extremists with no room for shades of gray. They believe in abstract principles and make the leap of faith that when practiced, these principles will make sense - without ever really developing any real plans. So, the Tea Party will die as well - because it is based on the same black-and-white extremist philosophy. People are voting for these candidates now because they are scared. Many tea partiers are backing people because they are scared, not because they necessarily agree or even understand the reality behind the Tea Party's principles.
Once the fear dies off, so too will the Tea Party --- along with the Libertarian extremists they support.

What does this have to do with economics? Well I've mentioned myriad times on this blog the connection between mainstream economic thinking and 'black-and-white' textbook ideology. The problem is the same - the reality of our economic system is in sharp contrast to this ideology. But is it fear that keeps the extremist side of mainstream economics alive? No, it's the power and the confusion I believe. They wrap themselves in a cocoon of dazzling math lights, distracting the students until their message simply becomes so convoluted or confusing or assumption-laden, that many just proclaim, well, that must just be 'how things are'. Then from this refusal to think beyond the dazzling light display, comes the power, accumulated over decades. We won't change the system by attacking the power. We will only change the system by exposing the ideology, and breaking the dazzling light display.

Downside of European Monetary Union?

When the US is in financial crisis, our Fed, for better or worse, can flood with system with money (either in the form of loan, or just out-and-out money supply cash. And that's exactly what it did in 2008 and 2009, and it did so fairly quickly, and consistently over the months.

The European Central Bank, because it has no real central governing body, and because it represents multiple distinct European countries, takes what seems like forever to initiate emergency monetary policy - causing increased uncertainty and market volatility in the process (the US stock market plunged hundred of points last week on concern for Europe, and then rose by as much today as Europe, with the help of the IMF, finally proposed a bailout package for Greece, Spain and other fiscally irresponsible countries in the Euro Zone.

Defining Sin

Followers of my blog with recognize that I'm a fan of some sin taxes (smoking is a no-brainer example), but enacting this dynamic pigovian taxes do have downsides. The biggest downside is, how do we define "sin?"

If I sneak over to your house while you are at work, shoot your dog in the face, and leave it on your porch for you to find when you get home, that is "sin" by most all accounts.

If I put a little extra salt on my french fries and eat it or serve it to others, is that sin? If it is sin, what does that sin cost? Surely if I know salt will kill myself or others in the future, and I knowing feed it to myself, then I am acting in a sado-masochistic fashion - I'm slowly killing myself or others, and damn it feels (tastes) so good.

But, do we know salt will cause harm to us in the future? If so, how much?

People can point to statistics and say salt is a factor in high blood pressure and heart disease. Others may point to statistics showing that, globally, that is not always the case. In the case of salt, many of the producers of salt-laden product have come to an agreement to voluntarily reduce their usage of salt in their products. In many ways, this is a much more palatable way of reducing 'sin' when compared to a forced taxation. But, I've come to learn that large corporations usually don't do something on purpose to hurt their bottom line - so one has to wonder if this is a temporary PR move that can enable companies to get on-board the 'health' train. I hope it isn't - if not it's a huge plus for Bloomberg and I give him kudos for getting around having to tax the salt out of peoples' mouths.

The Contract From America Will Destroy Us All

I originally posted this on facebook, but I think it makes sense to put this on the blog as well:

First, read the contract here: http://www.thecontract.org/
Second, thank the flying spaghetti monster that they aren't in power (yet)

Here is my point by point critique, which I normally wouldn't do, but since it was requested:

1. Protect the Constitution
Yeah, sounds great, until you read the fine print - which would require congress to prove (to who?) that their legislation is allowed by Constitution. Last I checked, most everything Congress does is Constitutional, and if it's not, they are brought before the Supreme court. I assume this point stems from the health care bill - which is completely Constitutional and the vast majority of legal scholars agree. So, this is a ridiculous red herring for the fact that tea partiers, who tend to be old white guys, just hate the health care bill.

2. Reject Cap and Trade
I actually agree with this - I'm against Cap and Trade because I'm suspicious of it's ability to be geographically or socioeconomically equitable. But, I disagree with the subtext which says we should reject ANY legislation that is 'regulation that would increase unemployment, raise consumer prices....' Frankly, I think we need (at some point in time) some legislation that could do just that. This point has the same problem also that the first one does - who decides what regulation is "bad" and "good?" Sarah Palin? Count me out, bro.

3. Demand a Balanced Budget
OOOOh how original. First of all, Obama AGREES that we need to re-institute PAYGO. I like that generally, but again, the subtext is the kicker: a "2/3 majority vote for a tax hike?" Seems kinda random. What about a tax CUT? What about changes in tax code to maintain progressivity over time? What about spending to increase public infrastructure and tech improvements that the private market fails to do? I don't like GM bailouts, and I agree much of our spending is out of proportion, but I'm not prepared to be so absolutist and black and white like the tea party crazies.

4. Enact Fundamental Tax reform
HAHAHA. This one is easy. It's conservative code for a flat tax. I thought Forbes was dead, but I guess not. Limiting the tax code to be the same length as the Constitution??? Not even worth a comment.

5. Limited Government and Fiscal Responsibility (or as I like to call it, "Repubicans in disguise")
Every President that has been in office since I've been alive has done some version of this so-called blue ribbon task force, including Clinton and Obama - so I don't really see the point or value added here.

6. End runaway government spending
Not really seeing the difference between this and "5" above... they all start to run together. There's some merit, nevertheless, in limiting government spending to changes in inflation and population growth, from an economics perspective, but again, it seems like a 'hand-tying' kind of legislation which, if it were in place at the start of the financial crisis, would likely have crippled our economy.

7. "I hate health care"
Yeah, yeah, we get it. Too f-ing bad. You lost, get over it. I had to bare the damn Iraq war which I was against when it popular... I never said it was unconstitutional (immoral, maybe)

8. All of the above energy policy
I agree. This is what Obama campaigned on, and what he is doing. So what's your point?

9. Stop the pork
I agree with this - and I bet Obama would agree.

10. Stop the tax hikes
Wow, just wow. Only the tea party crazies can contradict themselves in their own contract. See point "5" above.

The movement is starting to churn!

I doubt that Mr. Macdonald saw my 'call to arms' post from a couple weeks back, but that makes his post all the more fascinating.

Michael Burry Asks How Greenspan and other Economists Could have Missed the BOat

I'll tell you how:
Greenspan and many economists didn't realize they were neck-deep in water.

Were Burry and the handful of non-mainstream economists and business gurus that called the crisis a bunch of "lucky coin flippers?" I don't think so.

What they were were realists - not held down by textbook models of overly-applied math and unrealistic theories of finance and money.