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In an ancient home of civilization, with a long and storied history and culture, it was the end of an era, the end of a great war. The superpowers whose influence had maintained stability withdrew, and sure enough, in the name of nationalism and self-determination, the local people, unused to and unprepared for true self-government, divided along tribal lines led by “big men” and began to brutally slaughter each other. The crimes committed were truly horrible, including ethnic cleansing, mass civilian slaughter, and even mass rape camps. Even after decades, peace and stability have been elusive, as has true democracy. And while glimmers of economic success have lately emerged, the region’s name is still synonymous in the Western public consciousness with backwardness, tribal strife, and the specter of perpetual conflict and Western intervention.

I’m talking about the Balkans. What were you thinking of?

I recently had a long Twitter debate with Bryan Caplan plus some monarchist dude (seriously – see Noah Smith for more) about whether anti-colonialism was evil because after the colonial powers left a lot of very bad things happened in Africa.* Without looking at the broader picture of just how demented a perspective this is, what I want to hone in on is the simple fact that, at least by Caplan’s libertarian, there just is no way to justify the kind of rule that characterized colonialism in principle even without delving into colonialism in practice (which was pretty terrible from start to finish). It also doesn’t engage with the counterfactual of the likely consequences of attempting to maintain colonialism – for the benefit of the natives, surely! – after the colonized had clearly and strongly expressed their preference for self-government. Caplan’s view seems to be that, after a century of some of the most brutal rule known to history, well, now there was penicillin, and self-government might bring conflict, so let’s muddle through the status quo. It just wasn’t possible. And more to the point, why would public choice theory, which Caplan and other libertarians so dearly love for making a maximalist case for every potential tyranny in American federal regulatory agencies, provide any support the benevolence of colonial government? And if colonial government was good for the colonized, wouldn’t that suggest that perhaps Western governance is also good for Westerners, even with all its regulations and taxes and welfare? If you’re a libertarian, and you sound indistinguishable from neoreactionary monarchists, you might want to reconsider!

Let’s put it this way – on the question of immigration, even though Caplan may be sympathetic to the same fact set as neoreactionaries, he still supports freedom of movement whereas monarchists are diametrically opposed. It seems natural that the same dynamic should prevail on the question of ending colonialism, and I don’t know why it doesn’t.

I am well aware of all the failures of analogy between the Balkans c. 1990 and Africa c. 1960, but the ways they are analogous points out just how patronizing and blinkered the pro-colonial viewpoint is. I’ve never heard anyone argue that the instability and conflict that followed the collapse of the USSR therefore mitigates in favor of perpetuation of the Cold War and Soviet dominance of Eastern Europe (though whether that would have prevented or softened the implosion of Yugoslavia is also debatable), but yet the case is made that if only Europe had retained control of Africa things would have been better, for reasons. There isn’t any evidence for this in the historical record, and certainly nobody has a plan for how the same countries that committed vast crimes and sins in Africa, devastated its ecosystem and bled it of resources, would then somehow re-establish the kind of civil society and norms of politics and governance that could have led, at any point, to a peaceful transition to self-rule. What happened after 1960 was almost certainly carved in stone in Berlin in 1885.

*I tried to figure out Storify but it was more complicated than I thought and I am busy.


A couple weeks ago Noah Smith wrote a very sharp piece for the Atlantic about the limits of macroeconomic models that nevertheless, IMHO, fails to reach the most important conclusion of all.

Let’s say I devise a macroeconomic model that can accurately predict the economy. Whoohoo! Now, what to do about it? There are two broad categories of action I could proceed to take, both which end in the same confounding paradox – either publish the model, or proceed to make a massive killing in the markets.

Either way, someone is going to make a massive killing, either immediately or once the value of the model becomes clear. So much so that model-adherent traders and investors will quickly grow to the point where they are a substantial share of the market itself. So the model will make a prediction and traders and investors will act in such a magnitude as to alter the economy’s path. But the model will then consume all the new data and spit out a new prediction, which will then spur traders into a new path-altering round of trading, and is the paradox clear yet? Essentially, the very existence of this model would send markets into a Gödelian-loop of accelerating paroxysms of wild trading. Imagine this model connected to HFT algorithms and you get the idea – volatility without end, markets seizing.

The moral of the story is that all finite formal systems are limited by their inability to account for themselves (ie, can never be complete, consistent, and decidable) and that more broadly human behavior is in part determined by human knowledge about human behavior and thus as the latter changes so does the former and thus can never be complete or settled.

Or to simply quote Ambrose Bierce:

Mind, n. A mysterious form of matter secreted by the brain. Its chief activity consists in the endeavor to ascertain its own nature, the futility of the attempt being due to the fact that it has nothing but itself to know itself with.

Miles Kimball and Yichuan Wang find that high government debt doesn’t cause low GDP growth, and Kimball says he finds that surprising, as does Matt Yglesias. But as I suggested in a post last month, I’m not really surprised by this at all.

Governments tax or borrow. The former is withdrawing money from the economy in exchange for nothing (or perhaps a promise not to sanction the taxed) while the latter withdraws money from the economy in exchange for a piece of paper. That’s debt! Evil, evil, debt! Oh, no!

Wait, let’s start over.

The goverment decides it wants to do something it isn’t already doing, and therefore needs to command a higher share of total social production going forward than it has been. Developed-world governments don’t directly commandeer social resources, they claim through the proxy of money, by spending it. Assuming an economy at full capacity (whatever that means), if the government commandeers resources by spending money without removing any money from the economy then you’d have inflation, unless the central bank raises interest rates substantially, which would likely have undesireable negative effects. So the government attempts to roughly balance the resources claims it makes using money by withdrawing an equivalent amount of money from society. Sometimes it does this through taxes, which has some desireable properties (no future obligations on the state, can be used Pigovianly) and some undesirable ones (unintended consequences, involuntary, discourages desireable activity). Borrowing also has some desireable properties (voluntary, compensates those who part with their money) and some undesireable properties (obligates the state).

Therefore, there are two key intertwined questions to be asked about this new government activity, which remember is centrally about taking some resources deployed previously to some private purpose and redirecting them to some other, presumably public purpose – is the new activity more valuable than the activity(s) it is supplanting, and how is it being financed? They are intertwined because the latter question informs the former.

Let’s say we all agree that this new government project – let’s say it’s a SUPERTRAIN, for fun – is widely considered to be of higher value than the marginal private activity it supplants regardless of how it is funded. The government could raise taxes to fund it, but unless it is taxing something undesireable (like carbon or booze or Kardashians) this would have the drawback of incurring some "deadweight loss," not to mention other unintended consequences. It could also borrow the money, which would have two consequences. Firstly, it would supplant something different – rather than raising the cost of work or carbon emissions, it would be more likely to supplant a capital investment of some kind somewhere in the economy. Secondly, it would obligate the government.

And to what would it obligate the government? Key to understanding this is that governments, unlike Lannisters, never pay their debts. They cleverly disguise this fact by paying their debts in full and on time. Huh? From the perspective of a borrower, you get your interest payments, and then your principal in full. But from the perspective of a government, you don’t pay the principal back out of tax revenue, you pay it by rolling over the debt and issuing new debt in the amount of the principal. This works because of NGDP growth (both the RGDP growth and inflationary components). In fact, we’re still likely rolling over all the debt we incurred from WWII, which back then was 110% of NGDP but today is less than 2% of NGDP.

So really what the government does when it issues a bond is issue itself a negative perpetuity. And the key to understanding the value of a perpetuity is knowing the interest rate, since the PV = C/r. Therefore, the obligation on the government is much more dependent on the interest rate path than on the nominal coupon value.

But that interest rate path isn’t just some made-up thing – it’s fundamentally related to NGDP growth. Don’t believe me? Here’s the fed funds rate divided by the NGDP growth rate:

Inline image 1

So when recessions happen, the ratio spikes (and whether it spikes up or down is very interesting), but otherwise it’s very steady; if you exclude just the 12 of 223 periods where the absolute value of the ratio is greater than 3, you get an average of 0.8 and a standard deviation of 0.6.

So what does that mean? As interest rates grow, so does the obligation on the government – but it also implies that the government’s ability to meet that obligation is growing in tandem. Which suggests that, while governments cannot borrow limitlessly, the pain point at which government indebtedness begins to inflict structural economic harm is vastly higher than previous assumptions.

Japan, for example, is often cited as an example of government debt creating a huge drag/time bomb/giant vengeful lizard that is harming Japan’s economy. But since 1990, Japan’s debt/GDP ratio increased from 67% to 211% and GDP-per-capita…grew! Significantly! Not awesomely, not enough to catch-up with the US (in fact, it fell behind), but grow it did. Certainly more than you might think it would if the 90% monster were real and starting smashing major cities or something.

Many people have begun to worry whether the seemingly-inevitable Japanese debt crisis is nearing as yield have crept up. But yields have crept up because NGDP-growth-expectations have crept up. As long as they increase in tandem, contra Noah Smith, Japan should always be able to pay its debts.

And I’d be willing to put money/my reputation on this point. While Noah Smith is 100% right that bets != beliefs, I am nonetheless willing to agree in principle to any reasonably-valued bet that neither Japan nor the United States will default over any arbitrary time period. Any takers?

Ashok Rao busts me for being lazy this morning, and he has me dead to rights. I blithely waved away a further discussion of what would actually happen if there was a large secular increase in aggregate saving on the part of the poor. I was lazy about this, and in my defense, I was using “economic disequlibirum” as a stand-in for saying “a) I’m at the office, b) I didn’t think it was entirely relevant to the final conclusion of my post, and c) I was feeling lazy.”

So now that, at the very least, condition a) has been relieved, let’s take a look at Ashok’s point. He notes – quite correctly – that 1) even if you make unrealistically egalitarian assumptions about the initial wealth distribution that increased saving by the poor doesn’t affect the ratio very much, and the more broad point that 2) the wealth gap between rich and poor will continue to increase so long as the rich save at a higher rate than the poor regardless of the initial distribution. Both of these are correct, but they do end up being somewhat tangential to the real question re: the effect on the economy on a substantial secular increase in the social desire to save.

This is, in fact, a much disputed question in economics, and what effects it might have (and whether that effect depends on whether current conditions are recessionary and whether we’re at the ZLB) are not the subject of much consensus. As a general point, though, Americans used to save much more, so if we decided to save more now, in all actuality it may not have much economic impact at all.


But just because things used to be one way doesn’t mean that, under current conditions, they could just be that way again – a lot has changed since the 1970s and perhaps it might not be so simple to revert back to saving that much. Tangentially, I’m really not a huge fan of the distinction between “saving” and “consuming” anyway, so maybe I’m not the perfect person to be breaking this down, but what the heck, let’s give it a shot:

What happens to the economy when the poor start saving more depends on what “savings” is in this context. Let’s start with some real data – the lowest quintile of Americans take home 3.4% of national income, and therefore a 1% increase in the savings rate of “the poor” (defining that as coterminous with the bottom quintile of earners, which is totally not actually correct) would result in an increase in the total national savings rate of .034%. So we’re talking pretty small taters, frankly, which is really the key issue.

But beyond that, we can still discuss the theoretical side, which truly does depend on what “savings” means. If it means “putting the money into deposit accounts at banks” then the aggregate effect of those savings depends on whether it increases loaned funds from that bank in an amount that equals or exceeds the forgone consumption. The reason the “paradox of thrift” doesn’t always hold is that the saved money “has to go somewhere” which means it could (though not will) become someone else’s consumption (of perhaps a more durable good) that will offset the loss in more short-term oriented consumptions. So the disequilibirum” that results could be a net loss in output and/or it could be a sectoral shift in output, and how disequilibirum-izing you think that is depends on how PSST-y you think the economy is or more broadly how inflexible it his, how high transaction and discovery costs are, how rooted labor markets are, that kind of thing.

Anyway, the point is, while this is theoretically all interesting, my two conclusions from Ashok’s post are a) the net short-term economic impact of even a substantial shift in the savings preferences of the poor will be small and b) I still think the conclusion of my prior post was right because it wasn’t dependent on whether or not a) is true.

Ethan Gach at TLoOG puts his finger on what it was about Noah Smith’s article about the poor and saving that didn’t sit quite right:

Hmmm, I wonder what would happen if everyone started saving as much income as they reasonably could? Where would the high yield investments be with so much capital sloshing around? How would the markets react when aggregate demand plummets even further?

Snark aside, the key here is that, while it would benefit any individual poor person to save more (assuming, of course, that’s possible given their income and cost-of-living, which is not an assumption I’m eager to make), if every poor person somehow stumbled onto Smith’s article and tried to save more it might generate economic disequlibria that wouldn’t benefit anyone. This is semi-related to the point I’ve made before that aggregate saving is a very different animal than individual saving.

IMHO, the best thing we can do for poor people is to a) give them money and other stuff (mostly healthcare), but perhaps more importantly b) make American richer so that we can more easily afford to give poor people money and healthcare. Public policy-wise, this mostly means investing in things that increase forward-looking productivity – high-speed rail, super-fast public internet access, etc. If America is richer tomorrow than it is today, than transfer programs can either a) grow without affecting the real net incomes of those paying for them or b) can remain at current levels of generosity while simultaneously allowing effective taxes to decline or making more public investment possible. That makes the political economy of the welfare state more sustainable and leads to a virtuous cycle. I don’t think it’s a coincidence that most wealthy nations have generous social safety nets.

Note that this is distinct from the right-wing trope that economic growth automatically benefits the poor because every time GDP grows golden coins rain from the flying limousines of the rich onto the heads of the grateful poor. The key is still in active support networks for the poor and the way that economic growth tends to strengthen them

So I already commented on Ashok Rao’s blog re: the content of Ryan Enos’ op-ed in The Washington Postre: racial polarization and partisan preferences, but after more careful examination following Noah Smith’s call for Richard Florida to refute it, I realized that a substantial part of the op-ed is not only wrong-headed but dishonest as well. He writes:

In that same year, I examined the voting of Latinos in Los Angeles and found that those who lived near predominantly African American neighborhoods were far less likely to vote for Obama than Latinos who lived farther away — suggesting that contact with their African American neighbors may have prompted them to vote against an African American candidate.

The link is to a paper authored by Enos, which, if you read, is about the 2008 Democratic presidential primary. Putting aside (very real) questions about the paper’s internal validity, by citing it in the article without mentioning that it is about the primary and not general election vote in the context of an op-ed warning of partisan polarization, Enos can only be said to be deliberately misleading readers into believing that Latinos who live nearer to African-American neighborhoods were more likely to vote for McCain or Romney as opposed to Hillary Clinton. In fact, the same precints his paper cites as the best examples of polarization in the Democratic primary are precints that went 9-to-1 for Obama in 2012.

At the very least this calls for a substantial correction to the article.

Noah Smith has called out Dean Baker for being anti-immigration, and Dean Baker has thoughtfully responded. Before I address the substance of the two claims here, I want to make a broader point.

Noah: Dean Baker is not anti-immigration. This guy is anti-immigration:

And, really, I’m not being pedantic here. While Noah Smith and Dean Baker certainly have disagreements about the practical effects and thus the desireability of different kinds and amounts of immigration, neither of them are anti-immigration. If the anti-immigration position in the United States were characterized by Dean Baker, who says this:

First of all, there is the immediate issue of what we do with the undocumented workers who are already here. I don’t see much ambiguity on this one; they should be allowed to normalize their status and become citizens. These people are here as a matter of government policy even if they are working in violation of the law.

And this:

The question is really how we structure immigration policy going forward. Noah argues the merits for having an open door for high-skilled immigrants. I am 100 percent for this policy, although I may draw the line in a somewhat different place than Noah. I absolutely want to see more foreign doctors, dentists, lawyers and other professionals in the United States.

We would be the most pro-immigration country in the world. This is especially weird because Smith ends his post by advocating for unity by embracing lots of high-skilled immigration, Baker agrees with Smith, and then Smith says he’s disappointed. Weird.

As for the substantive differences between them, though, I first want to respond to this from Dean:

Btw, we can structure this so the foreign countries benefit as well. It would be a relatively simple matter to impose a modest tax (e.g. 10 percent) on the earnings of foreign professionals for the first ten years or so they work in the U.S. This money could be repatriated to their home countries so that they could educate 2-3 doctors for every 1 that came to the United States. You don’t trust this to work? Well, the foreign countries get zero now for the doctors who are leaving, so we have a pretty low bar to beat.

This is probably unnecessary to the point of counterproductive. Voluntary remittance outflows from the United States are already anywhere from $51-$110 billion, and remittances are perhaps the best way to get money from the United States to home countries since they are precisely targeted by people with local knowledge in amounts and for purposes designed to maximally benefit the intended individuals. Presumably, allowing in many foreign "doctors, dentists, lawyers," etc, would lead to far greater voluntary outflows without instituting any new tax that would have to be administered and foreign aid that could prove difficult to target well.

As for Social Security, I think Baker is right, and as for urban agglomaration and productivity arguments, I think Smith is right, but I think Smith doesn’t realize that if he is right about urbanization then he’s wrong about Social Security, because if you can create more productive cities with the labor force you already have you don’t need to import workers to "fix" Social Security since the increased productivity will get you the same actuarial gains as a higher worker:retiree ratio.

I am surprised, though, that neither post uses the word "moral." I know they are both economists and therefore specializing in their comparative advantage in the arena of public debate, but the economic arguments (and economic language) is uniquely suited to explain the moral benefits of immigration, especially low-skilled immigration. If we allow millions of low-to-medium-skilled workers emigrate to the United States, their expected lifetime earnings will skyrocket and more than offset any expected wage losses from incumbent American workers – a massive potential Pareto improvement. Additionally, I think a major value shift we will see in coming decades is one where the long-standing assumption that the accident of your place of birth ought to be determinant of where you are allowed to live and work is increasingly questioned, and for good reason. If I wanted to live and work in Brussels or London, I don’t see why it’s completely obvious why the default position should be that I am prohibted from doing so and should have to work extremely hard to apply for permission, yet when I want to move from DC to San Francisco or Anchorage or Honolulu or Santa Fe or Austin or Miami or Minneapolis that I am free to do so. Obviously there are questions of practicality and sociopolitical sustainability (I think there should be a cap on net annual immigration to the United States – just a large one), but that would still mitigate in favor of a very different world than the one we inhabit.

In conclusion, I strongly suggest everyone go watch Like Crazy.

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