Brad DeLong--Economics Only

For the First Time Since 1997, the Fed Is More Dovish than Brad DeLong

I wouldn't have done it. I would have kept the FF rate at 4.75% and dropped the discount rate to 4.75%. But it is a marginal change...

Eoin Callan, Michael Mackenzie, and Daniel Pimlott report for the Financial Times:

FT.com / World - Fed cuts rates by another quarter point: The Federal Reserve cut US interest rates by a quarter point to 4.5 per cent on Wednesday in a bid to protect the American economy against the risks from the housing slump and credit squeeze. The second successive rate cut by the central bank follows an accelerated decline in the housing market that has confirmed some of central bankers’ worst fears and fostered fresh jitters in financial markets.

Disappointing earnings in the banking sector and downbeat corporate forecasts have added to concerns about a slowdown in activity, despite a strong overall economic performance last quarter. “This one was for the banks. The cut is intended to keep money flowing freely and stem the risk of spillover from the financial markets to the real economy,” said Jeoff Hall, an economist at Thomson Financial. Financial stocks have lagged the overall market as the third quarter earnings season has delivered the first negative quarter of profits year-over-year for S&P 500 companies since 2002.

The Bank of Japan on Wednesday cited “uncertainties regarding overseas economies and global financial markets” as it held interest rates steady and lowered its forecasts for growth and inflation this year. At its monetary board meeting, Japan’s central bank kept the overnight call rate target unchanged at 0.5 per cent, as widely expected, reflecting the growing risk of economic slowdowns in the US and Japan and continued uncertainty in financial markets. The BoJ cut its forecast for real gross domestic product growth for the year to March 2008 from 2.1 per cent in April to 1.8 per cent, and its forecast for consumer price inflation to 0.1 per cent from 0.2 per cent. “To be frank, the downside risks have increased,” Toshihiko Fukui, the BoJ’s governor said.

The uncertainty in financial markets also played a key role in the Fed’s decision-making. The combined risks from tight credit conditions, negative outlook for house prices, and corporate pessimism outweighed the relatively robust performance by the US economy last quarter. US growth was its strongest since the beginning of last year in the third quarter, according to figures on Wednesday which showed gross domestic product rose at an annual rate of 3.9 per cent in the three months to the end of September, significantly better than the 3.1 per cent growth forecast. But David Greenlaw, an analyst at Morgan Stanley, said the underlying figures pointed to weakness ahead, with businesses expected to pare back investment. “This translates into a reduction in the expected growth performance in the fourth quarter,” said Mr Greenlaw. Several economists said, however, that the figures underlined why the central bank should have kept rates on hold, as consumer spending, which makes up about two thirds of the US economy, rose at 3 per cent in the quarter, up from 1.4 per cent in the second quarter. The figures also showed inflation rose unexpectedly to 1.8 per cent from 1.4 per cent, underscoring concerns about price increases among more hawkish central bankers.

Despite signs of reservations among some policymakers, the cut of a quarter-percentage point had been heavily priced in by interest rate futures, with some investors betting on a bolder half-percentage point easing in monetary policy.

Paul Krugman Is Right!

Alex Tabbarrok writes:

Marginal Revolution: Assorted Links: The Impact of Milton Friedman on Modern Monetary Economics.  A nice review by Edward Nelson and Anna Schwartz of Friedman's thought and influence over monetary policy that also, in the author's words, sets the record straight on Paul Krugman's 'Who was Milton Friedman'...

I tend to be on Paul's side of this--especially on the issue of the 'liquidity trap'. In a liquidity trap, (a) short-term interest rates are essentially zero and (b) banks have excess reserves. Normally the Federal Reserve changes people's behavior by trading short-term government bonds (which pay interest) for bank reserves (which allow banks to expand their deposits and loans). Fewer government bonds in the economy means more appetite by banks to buy corporate bonds and thus to finance corporate investment. More bank reserves means banks have more freedom to make direct loans as well.

But in a liquidity trap bonds pay no interests, and banks have more than enough reserves to cover their lending to all the borrowers they think are credit worthy. So when the Federal Reserve swaps government bonds for bank reserves it is swapping two assets that are equivalent. Why should this change anybody's behavior? The only reason is that banks think that they might be short of reserves and want more at some unknown point in the future, but can this have a big impact on the economy?

I would say no: that Paul Krugman's approach to the liquidity trap is right.

Hoisted from the Archives: Review of Johnson and Broder, The System

Now that health care reform is heating up again, I want to be reminded of what I thought back in another decade far, far away. It's also worth noting that there are two different critiques of the Higher Broderism:

• The first is that David Broder is not doing his job as he envisions it--he is not being a straight reporter/analyst, but is instead providing cover for his friends like Karl Rove: "Let me disclose my own bias in this matter. I like Karl Rove. In the days when he was operating from Austin, we had many long and rewarding conversations. I have eaten quail at his table and admired the splendid Hill Country landscape from the porch of the historic cabin Karl and his wife Darby found miles away and had carted to its present site on their land." (Cf. recent columns providing cover for HHS Secretary Michael Leavitt and Mike Huckabee, plus the big wet kiss for Republican governor Bobby Jindal--and that's only the past two weeks!)

• The second is that his job as he envisions it is not worth doing--it is as likely to misinform as to inform his readers. My disappointment with Johnson and Broder's The System is the second kind of critique.

So let's roll the videotape:

J. Bradford DeLong, "Review of Haynes Johnson and David Broder (1997), The System (Boston: Little Brown: 0317111457)
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/

I had been avoiding reading The System--Washington reporters Haynes Johnson and David Broder's account of the catastrophic collapse of the Clinton Administration health care reform effort--for a number of years. The worst hours of my life in 1993-1994 were those I spent providing analytical support for health care reform. I watched the catastrophe approach and then saw the crash, the product of a three-fold bankruptcy: moral, intellectual, and political. The moral bankruptcy was on the part of the Republican Party's power structure, which thought (correctly) that placing the government into total gridlock was a road to political success, and cared not at all for making public policy better along any dimension. The intellectual bankruptcy was on the part of President Clinton and the senior White House domestic policy staff, which never solved the puzzle of how to construct and sell a plan to make the American health care system better and how to construct a coalition to support reform. The political bankruptcy was on the part of the Democratic congressional majorities in the House and Senate, which ultimately failed to pass even a ghost of a bill to reform America's health care system along any dimension. The combination of these three bankruptcies has left America in 2000 with a health-care system even more wasteful and inefficient and even worse at delivering health care to the poor than we had a decade ago.

Participating in this was a dark experience. And it left me with a profound sense of guilt: a lot of people would lose the chance for better medical care because my side--me, my political allies, and those whom we had chosen to lead us--failed to do our job.

But when I did pick up The System I found it a good book of its kind: largely free of factual mistakes, an engaging read, almost fair (although sometimes more-than-fair) to all the participants. It reminded me of why my political commitments are what they are, and solidified them. But it was a good book of its kind only: it was not a good book. For I do have three major quarrels:

• Because Johnson and Broder are journalists whose principal sources are politicians and "media affairs people" and not policy analysts, they show little sign of understanding the substance of health care policy.
• Johnson and Broder take the failure of health-care reform as a "metaphor" for the failure of the American political "System." It wasn't a metaphor for anything. It was a policy debate.
• Johnson and Broder give the last word (in the paperback edition, at least) to someone who does not deserve to have it.

Let me postpone my quarrels and, first, summarize the story:

Johnson and Broder begin the story with the moment at the start of the 1990s when the American political class realizes that middle-class Americans are genuinely worried that if they lose their jobs they will lose their health insurance and their medical care. As Harris Wofford put it in his successful 1992 campaign for the Senate in Pennsylvania: "the Constitution says that if you are charged with a crime, you have a right to a lawyer. Every American, if they're sick, should have the right to a doctor." Johnson and Broder report that the audience "...response was immediate. Loud applause" (pp. 59-60). Thus health-care reform becomes a large political issue in the 1992 election, and to push for health-care reform becomes a major campaign promise of President-to-be Bill Clinton. (I would have stared the story at another point: with penicillin, or Bismarck's first national health program in late nineteenth-century Germany. Starting with the policy gives you a much better background for understanding. But, as I said, Johnson and Broder are journalists, not analysts.)

Thus after his election, President Clinton set up a policy-planning process to prepare a health-care reform plan for congress to pass. He chose his wife, the First Lady, Hillary Rodham Clinton to head up the planning process. He chose his long-time friend Ira Magaziner to be her deputy. He told them to think big.

It is hard to tell how much power Hillary Rodham Clinton had. Certainly she did not effectively manage the process. But I did see Ira Magaziner in action. And it seems to me that the process was impossible to manage as long as Ira Magaziner was involved, and perhaps she did not have the power to fire him.

Magaziner, you see, had two major flaws. His first was that his instinct was always to make things more complicated. Faced with a choice between doing 90% of a job with an organization that has 10% of the present complexity and doing 100% of a job with 200% of the present complexity, he would always choose the second. He had no sense that complicated organizations tend to break, to exhibit bizarre and unplanned behaviors, and are hard to explain--but he had never run and had spent little time working in large human organizations, and when he got his chance to do so during health-care reform he rapidly proved to be incompetent at marshalling resources and using his people's time effectively.

His second flaw was that he thought like a management consultant. A management consultant's principal goal is to win a debate in front of his employer, the senior decision maker, the "Principal." You win a debate by making intellectual arguments, controlling the flow of information to the senior decision maker, walling-off potential adversaries from the process, and winning the confidence of the Principal by telling him things that he likes to hear: that he is smart, that his goals can be achieved, that the nay-sayers just don't grasp the issues. But that's not how you develop a policy. You develop a policy by forming a large coalition all of whom agree that the proposal will make the world a better place, and that it is close to the best that can be attained at the current moment. Then you have a large group of people who are enthusiastic about the proposal: they will go out and make your arguments for you. The compromises and concessions that had to be made within the policy-planning group in order to form the coalition will then perform a very important exterior purpose: just as they brought people within the process onboard, so they will bring other people outside the process who think in a similar fashion onboard as well. For a management consultant, it doesn't matter if everyone else in the organization hates your guts as long as the Principal--the CEO--is convinced, for the CEO is the boss and can then make things happen. For a policy planner, winning the confidence of the Principal is almost beside the point: instead, the point is forming a coalition that can then be extended to win a majority of the House of Representatives, the 60 votes in the Senate to end a filibuster, and a Presidential signature.

So those were his two maor flaws: a love of complexity, and the instincts of a consultant--no, three major flaws: his judgment was also very poor. Remember: this is a guy who, without knowing anything about nuclear physics, testifies before congress that America has no choice but to pour lots of money into research into Cold Fusion. This is a man who thinks at the end of the 1970s--a time of record high energy prices and rapidly-growing competition from new producing nations like Brazil and Korea--that what America really needs to do is to invest in more brand-new integrated steel factories. Combine Magaziner's flaws with the sense at the start of 1993 that possibilities were unbounded--that, as one (anonymous) senior White House aide put it, no one in the White House "...was thinking about the fact that Bill Clinton got only 43 percent of the votes. He was on top of the world. He was young, he was good-looking, he gave a good speech. The world was full of hope"--and you have the setting for a policy-planning disaster.

And the policy-planning disaster duly took place, for Magaziner set up a process that was the antithesis of the coalition-forming, doubt-resolving, opposition-coopting process needed to construct a viable legislative proposal. As Johnson and Broder put it, Magaziner wanted a non-standard design. He wanted "...outside experts to challenge the conventional views.... to keep the veteran policy-network players [out]... [to keep] the final key decisions... [in the hands of] three people," the President, the First Lady, and Ira Magaziner. That this turned out to be a bad idea did not come as a surprise. At the very start of the Clinton Administration Donna Shalala, HHS Secretary, and Alice Rivlin, Deputy Director of OMB, were especially vocal at stating their belief that the Magaziner process was not "a disciplined policy-development process that would result in a piece of legislation that was fully vetted."

But don't blame Magaziner for the whole thing. Blame the guy who chose him--Bill Clinton. And blame Bill Clinton's inability to accept bad news and his eagerness to trust those who would tell him what he wanted to hear. As Senator Jay Rockefeller tells the story, his former aide Judy Feder "...flew to Little Rock.... She was worried.... Economists among the working group argued strongly that their work must not be tainted by the kinds of 'rosy scenarios' that had marred other administrations' cost projections.... [T]he cost estimates Feder had been asked to prepare... came in... 'very high'.... Feder confided to Rockefeller that she didn't think they were going to like them.... 'Be honest,' Rockefeller counseled her.... But, [Rockefeller] later reflected, 'Of course, I was wrong She got crushed. They were furious at her. Clinton personally was furious at her...'" (pp. 109-110). So Judy Feder did not get the job of the First Lady's deputy on health-care reform (a job she would have performed with distinction). Ira Magaziner did. And he began constructing a plan that he believed would produce (a) universal health coverage with (b) a generous and extensive benefit package that would (c) cost the federal government less than it was currently spending on health care because (d) "managed competition" among health care providers would immediately and substantially reduce the cost of medical care.

The economists assigned to health care reform planning were all--every one--upset and disturbed. The cost savings from increased competition seemed to be generated not by estimates of what could reasonably accomplished without compromising the quality of care, but by whatever was required to keep health care reform from costing the federal government money. And to make sure that health care reform did not cost the federal government money, price controls would be imposed on the amount that insurance companies could charge for health-insurance policies. But what if "managed competition" (which had never been tried) did not produce immediate and massive improvements in efficiency? Then health insurance companies and HMOs would find themselves under enormous pressure to save money and avoid bankruptcy by reducing the quality of care. Extremely tight controls on premiums seemed to produce the possibility of an unnecessary health-care disaster. Moreover, they greatly lessened the potential political attractivenss of the plan: few centrist Democrats and no Republicans in congress wanted to sign on for such a large expansion of government regulation.

Ira Magaziner responded to these criticisms not like a policy planner building a consensus but like a management consultant. Instead of bringing the Clinton Administration's economic (and social!) policy analysts and cabinet secretaries (and senators and representatives who chaired committees) on board, he posed his and their positions to the President as sharp alternatives. And in early September 1993 the Peresident ruled in favor of Magaziner--and against Rubin, Bentsen, Shalala, Panetta, Rivlin, Tyson, and company, who had argued that the "so-called premium caps would be viewed, correctly, as proxies for price controls--and congress despised price controls... that the alliances were too regulatory... the overall plan too bureaucratic... that Magaziner had stacked the deck against them in the briefing papers...." Joining the policy analysts in opposition to Magaziner were the White House media affairs people: as Johnson and Broder say: "'The plan itself is disastrously complex', Bob Boorstin said, days after it was presented to Congress.... 'Somewhere, somebody... should have come in and said, "We cannot send this fucker up to the Hill." George or Mandy or Stan or myself or somebody should have gone to Ira and Hillary and said, "This isn't a working document."'"

The reaction once the Magaziner plan was made public should not have been unexpected. Conservatives feared that the requirement that all firms pay for their employees' health insurance would cost jobs, and nearly everyone feared that the extremely tight price controls would compromise the quality of care. Magaziner's belief that it was sufficient to roll over the economic and social policy planners and win the confidence of the President meant that the plan when issued had no effective defenses against those outside the Administration who had similar concerns. More important, the Democratic members of Congress and their staffs felt betrayed. The way that David Abernathy, staff director of the Ways and Means Health Subcommittee, put it was as follows: "I have been doing this all my life and I just marveled at the chutzpah of the administration coming out with these numbers. It begs the straight-face test to think that you're going to cover thirty-eight-and-a-half million new people and not spend any more.... They just went out and told the American people, 'Don't worry. This will be very easy'" (p. 172). As a result, the congress had been "boxed in" because "that son-of-a-bitch Magaziner" had made "... their plan look cheap" and "screwed us." If the congress adopted more realistic estimates of likely savings, then it would have been the Democrats in congress--not the President--who had proposed raising taxes to pay for health-care reform. If the congress scaled back the benefit package to avoid tax increases than that would have been their responsibility too.

The sense of betrayal was heightened among the centrist Democrats whose support was absolutely and totally crucial as the Clinton Administration adopted a strategy of attempting to stampede rather than coopt the moderates. The worst example was the triple offensive--by the First Lady, House Committee Chair John Dingell, and the AFL-CIO--against Tennessee congressman Jim Cooper, sponsor with Senator John Breaux of an alternative centrist reform bill. As Johnson and Broder tell the story:

At a union-sponsored rally in Chattanooga, a copy of the "phony" Cooper-Grandy bill was ceremoniously burned. Unless Cooper changed his tune, threatened Jim Neely, the President of the Tennessee AFL-CIO, labor would either 'sit out' the Senate election or possibly endorse Republican candidate Fred Thompson. The most damaging blow fell at a civil rights meeting in Memphis. AFSCME... distributed a flyer that claimed "Cooper's plan would punish African-Americans more than others" and is "an injustice to our community." Cooper, the flyer said, has joined forces with the "health care profiteers" to offer "a fatal dose of phony reform"' Ellen Globocar, AFSCME's political director, justified the tactics: "Cooper probably did more damage to Bill Clinton's program than anybody.... We would get calls from the DNC [asking]... 'Why are we beating up on him?" And we'd say, "Maybe it's because he's trying to kill the President's health care proposal'."

Yet aggressive attacks on centrist Democrats--key swing votes--were coupled by total passivity on the part of a White House that seemed unwilling or unable to make the case for health care reform. They way Jay Rockefeller put it as early as December 1993: "I'm furious right now at the White House for several reasons. There is still no organization on health care. There's nothing out there.... The White House was simply not fighting back. There wasn't any effective political operation to win the battle..." Later on President Clinton would claim that the failure of the White House to get the pro-reform message out was his own fault. "I had cut back the staff of the White House as I said I would," the President told Johnson and Broder. "We didn't have the resources to do it, and we should have..." This claim on the part of President Clinton is a lie. First, the core White House staff was not cut back: the cutbacks in the "White House staff" had come in the Office of National Drug Control Policy (and these cutbacks may have been a good idea: as far as I know, all the ONDCP does is to try to make sure the President takes credit for whatever good happens with respect to drug abuse and make sure the President avoids blame for whatever bad happens; it doesn't teach people about dangers, treat addicts, conduct research into pharmacology and neurophysiology, or intercept smugglers). But the core White House staff was untouched. Second, the main resources of the Administration had been and remained outside the White House: the principal policy planners and policy advocates who could fix flaws in proposals, marshall arguments that policies were good for America, and communicate with the public remained where they had always been in the agencies and in the Democratic policy community. They had, after all, worked very hard for President Clinton and won him other significant victories. But on health care they were unused.

I paged through Newsweek for 1994. I found one story by Jane Bryant Quinn that focused on how quickly and unexpectedly a family could lose its health insurance--and how health care reform would fix this. I found no other stories that spent any significant amount of space on the potential benefits for the country of health care reform. Instead, I found Godfather's Pizza CEO Herman Cain talking about how he would have to fire people if the Clinton proposal passed. (I did not find it mentioned that the Clinton proposal would have given Godfather's Pizza a 70% price break on the cost of employer-sponsored health insurance), and the National Federation of Independent Businesses predicting a million lost jobs from the Clinto plan. On deficit reduction, on GATT and NAFTA, on crime control, and on other--successful--Clinton Administration initiatives, the elite print and video media were force-fed studies, numbers, and stories of the extraordinary potential benefits of Clinton Administration policies. I know: as a not-so-senior administration official I was sent out to force-feed them. But memos, studies, and supporting documents making arguments for health-care reform that were sent up the food chain to the White House Health Care War Room vanished, as if thrown down a well. And the flow of phone calls from journalists asking for background information and of invitations to come and talk to audiences about the benefits of reform never started.

I don't know whether it was managerial ineptness or paranoia that kept the Magaziner-led health care effort from drawing on the rest of the government to make the substantive case for policy reform in 1994. Maybe the work we did on the case for reform was never used because Magaziner and company drowned in paper. Maybe the work was thought counterproductive--too hostile to Herman Cain of Godfather's Pizza, say, by accusing him of being a cheapskate unwilling to spend even a cent to get health insurance for his employees (but if so, then why the treatment of Jim Cooper?). Maybe paranoia set in, and the economic analysts' quarrels with the Magaziner Plan were viewed as opposition to all reform. But whatever the source of the failure to make the substantive case, health care reform quickly entered its death spiral: Republicans decided to block any reform, no matter how minor; congressional Democrats could not assemble a majority on their own; and President Clinton had promised in his State of the Union address to veto any bill that did not provide for universal coverage. Combine these with a plan with severe substantive weaknesses and next to no attempt to make the substantive arguments for reform, and the end was sure once the Republicans had decided that it was essential to oppose the plan, and that the better the plan the more essential it was to oppose it. (They could not, you see, let President Clinton pass a reform that would be good for the country--that would be bad because it would entrench the Democrats.)

Johnson and Broder tell this part of the story--the congressional politics, the feints and false starts, the collapse--well. It is their home turf, after all. And I ended the book thinking that they had told that part of the story well. They should have spent more time detailing the moral bankruptcy of the Republicans--they really fell down there. I would have appreciated it if they had spent more time detailing the politcial bankruptcy of the Democrats who did not understand that their jobs on Capitol Hill were at risk if health care-reform failed. But you cannot ask reporters who see themselves as Washington insiders and who require the daily cooperation of Capitol Hill to be blunt and frank if being blunt and frank is too discreditable to sitting senators and representatives.

Nevertheless, a good book of its kind, not a good. book. Here are the quarrels with the book that I promised to return to at the end:

First, because Johnson and Broder are journalists whose principal sources are politicians and "media affairs people" and not policy analysts, they don't understand the substance of health care policy. They don't understand the dilemmas confronting any serious attempt to fix America's badly-broken health-care system. More serious, they are not aware of their lack of understanding: they seem to have made little or no attempt to correct it. Thus they can couple quotes from Ira Magaziner's "strategy memos" on how Republican cooperation was essential and fail to note that Magaziner's cost-containment mechanisms had already and automatically ruled out Republican votes. They can call CEA Chair Laura Tyson "one of the administration's tougher guardians of the free marketplace," not knowing that Tyson is a strong believer in a major role for the government in the economy--not a mindless knee-jerk believer that markets must be "free", but is instead for competent and well-planned government action to structure markets so that private incentives are aligned with social consequences. Thus they miss the fact that the debate within the administration was not between traditional Democrats and free-marketeers, but between an Ira Magaziner who somehow knew--how he knew this when no one else did we could never figure out--that costs could be stringently controlled by fiat without affecting quality of care, and the rest who feared that Magaziner's enthusiasm for managed competition was as well-founded as his enthusiasm for Cold Fusion.

Second, Johnson and Broder take the failure of health-care reform as a "metaphor" for the failure of the American political "System." But it wasn't a metaphor for anything. It was a policy debate. Its catastrophic end was the result of a unique combination of malevolence, bad luck, and incompetence. But their story will not support broad conclusions. Had they taken a look at some other Clinton Administration policy initiatives--deficit reduction say, or what I believe to be the almost completely destructive "reform" of welfare--they would have reached very different conclusions about the ability of the "System" to get things done and to reform how America works. Gridlock is not inevitable. The currently-favored interests do not always have to triumph.

Third, Johnson and Broder give the last word (in the paperback edition, at least) to someone who does not deserve to have it. They give Ira Magaziner, the man whom the Democratic congressional staff called "Hillary's Rasputin," the last word. Magaziner defends "the President's judgment" that massive immediate cost savings were feasible. But those of us who were there remember that one of Magaziner's standard--and most mendacious--moves was to claim that his judgments were the President's, and he was merely echoing them as the President's most loyal servant. Magaziner claims that the President was correct, failing once again to recognize that the task was not to win a debate but to construct a reform-passing coalition. To those of us who were there Magaziner's Parthian shot is a painful reminder of just how screwed-up the process was; but to those who were not there it gives him a bit of credibility and a platform he does not deserve.

Larry Summers Writes About U.S. Policy Toward China

I think Larry Summers has the rhetoric wrong. The right things for reality-based political economists to be saying right now are:

• To the U.S. Congress: a rapidly-growing China that views the U.S. as a helping friend rather than an enemy is an enormous source of strength and wealth; the overall U.S. unemployment rate is set on the Mall rather than in Beijing; yes, China's economic policies have transferred wealth from America's manufacturers and manufacturing workers to the construction sector and to coastal homeowners--but dealing with that transfer is an internal matter for us.

• To the government of China: the longer China delays rebalancing--delays shifting from export-led development driven by an undervalued currency to development driven by domestic demand--the greater the likelihood of a major crash someday, the greater the magnitude of that crash should it come, and the higher the chances that China's economic development will suffer a severe check and that the cadres of the CCP will wind up in the garbage dump of history.

Summers is in the Financial Times:

FT.com / Columnists / Lawrence Summers - How America must handle the falling dollar: The falling dollar generates anxiety almost everywhere. Americans and those dependent on American growth worry about the proverbial “hard landing” as inflation and interest rates rise with a weakening dollar, causing asset prices and output to fall. Europeans and others with currencies that float freely against the dollar worry that their currencies will... appreciate too far, leading to competitiveness problems.... The dollar’s decline may provoke anxiety but it should not be a surprise.... There is nothing very new about a decline in currency of a country running a large current account deficit and whose economy is softening.

But in important respects the situation of the dollar is almost without precedent.

The vast majority of the US current account deficit is now being funded by central banks accumulating reserves.... The Clinton administration approach of asserting the desirability of a strong dollar based on strong fundamentals while allowing its value to be set on foreign exchange markets... is insufficient in the current world, where the dollar’s trade-weighted exchange rate is to an important extent managed abroad. Some means of engagement must be found....

The US has responded in an ad hoc way by carrying on a “strategic dialogue” with China... backed by congressional threats to address exchange rate issues using the tools of trade policy and references to communiqués from the Group of Seven leading industrial nations. In reality the dialogue is anything but strategic.... [The Bushies] confuse the firm statement of legitimate desire with the serious conduct of diplomacy.

Think of the questions Chinese policymakers must ask themselves. What is the highest US priority – global financial stability or market access for well-connected US firms? Can the US take yes for an answer or is it a certainty that a new president will insist in 18 months on a new set of economic diplomacy accomplishments with China? In which areas, if any, is the US prepared to adjust its policies in response to global interests? Given that the Chinese authorities have presided over nearly double-digit annual growth for a generation, do US officials who make assertions about what is in China’s interest have the experience and knowledge of China that should cause their views to be taken seriously?...

Maintaining global financial stability and the role of the dollar requires a more strategic approach – a task that, given the political calendar, is likely to fall to the next US administration.... The right and potentially effective case for adjustments in the current alignment of exchange rates relies on their unsustainability and the distortions they induce in macroeconomic policies, not on ideas of fairness to workers.... [M]ultilateralism is better politics and economics than unilateralism.... The stakes are high. Well-managed finance cannot on its own make a country stable and prosperous, let alone the world. But history tells us that poorly managed finance foments instability and economic insecurity.

Larry Summers Writes About U.S. Policy Toward China

I think Larry Summers has the rhetoric wrong. The right things for reality-based political economists to be saying right now are:

• To the U.S. Congress: a rapidly-growing China that views the U.S. as a helping friend rather than an enemy is an enormous source of strength and wealth; the overall U.S. unemployment rate is set on the Mall rather than in Beijing; yes, China's economic policies have transferred wealth from America's manufacturers and manufacturing workers to the construction sector and to coastal homeowners--but dealing with that transfer is an internal matter for us.

• To the government of China: the longer China delays rebalancing--delays shifting from export-led development driven by an undervalued currency to development driven by domestic demand--the greater the likelihood of a major crash someday, the greater the magnitude of that crash should it come, and the higher the chances that China's economic development will suffer a severe check and that the cadres of the CCP will wind up in the garbage dump of history.

Summers is in the Financial Times:

FT.com / Columnists / Lawrence Summers - How America must handle the falling dollar: The falling dollar generates anxiety almost everywhere. Americans and those dependent on American growth worry about the proverbial “hard landing” as inflation and interest rates rise with a weakening dollar, causing asset prices and output to fall. Europeans and others with currencies that float freely against the dollar worry that their currencies will... appreciate too far, leading to competitiveness problems.... The dollar’s decline may provoke anxiety but it should not be a surprise.... There is nothing very new about a decline in currency of a country running a large current account deficit and whose economy is softening.

But in important respects the situation of the dollar is almost without precedent.

The vast majority of the US current account deficit is now being funded by central banks accumulating reserves.... The Clinton administration approach of asserting the desirability of a strong dollar based on strong fundamentals while allowing its value to be set on foreign exchange markets... is insufficient in the current world, where the dollar’s trade-weighted exchange rate is to an important extent managed abroad. Some means of engagement must be found....

The US has responded in an ad hoc way by carrying on a “strategic dialogue” with China... backed by congressional threats to address exchange rate issues using the tools of trade policy and references to communiqués from the Group of Seven leading industrial nations. In reality the dialogue is anything but strategic.... [The Bushies] confuse the firm statement of legitimate desire with the serious conduct of diplomacy.

Think of the questions Chinese policymakers must ask themselves. What is the highest US priority – global financial stability or market access for well-connected US firms? Can the US take yes for an answer or is it a certainty that a new president will insist in 18 months on a new set of economic diplomacy accomplishments with China? In which areas, if any, is the US prepared to adjust its policies in response to global interests? Given that the Chinese authorities have presided over nearly double-digit annual growth for a generation, do US officials who make assertions about what is in China’s interest have the experience and knowledge of China that should cause their views to be taken seriously?...

Maintaining global financial stability and the role of the dollar requires a more strategic approach – a task that, given the political calendar, is likely to fall to the next US administration.... The right and potentially effective case for adjustments in the current alignment of exchange rates relies on their unsustainability and the distortions they induce in macroeconomic policies, not on ideas of fairness to workers.... [M]ultilateralism is better politics and economics than unilateralism.... The stakes are high. Well-managed finance cannot on its own make a country stable and prosperous, let alone the world. But history tells us that poorly managed finance foments instability and economic insecurity.

Brad Setser: Just Because the Dollar Has Fallen (Against the Euro) and the Current-Account Deficit Is Shrinking (as a Share of GDP) Does Not Mean that the Future Is Rosy

Brad Setser writes:

The balance of financial terror, circa August 9, 2007: Back in early 2004, former Treasury Secretary Lawrence Summers highlighted... [the fact that] China – and others – relied on the US for demand that their economies were not generating internally, and the US depended on China – and others – for financing... "a situation where we [in the US] rely on the cost to others of not financing our current account deficit as assurance that financing will continue."... China has a highly concentrated -- and rapidly expanding -- position in US dollar-denominated bonds.  It depends, wisely or unwisely, on the US to provide a somewhat stable store of value for China's external savings.  The United States, in turn, is extraordinarily dependent on China’s government for external financing.... China now holds about a trillion dollars worth of US bonds.   That is about 1/3 of China’s [annual] GDP.... Summers noted... in early 2004:

There is surely something odd about the world’s greatest power being the world’s greatest debtor. In order to finance prevailing levels of consumption and investment, must the United States be as dependent as it is on the discretionary acts of what are inevitably political entities in other countries? It is true and can be argued forcefully that the incentive for Japan or China to dump treasury bills at a rapid rate is not very strong, given the consequences that it would have for their own economies. That is a powerful argument, and it is a reason a prudent person would avoid immediate concern. But it surely cannot be prudent for us as a country to rely on a kind of balance of financial terror to hold back reserve sales that would threaten our stability....

In 2004, China and Japan combined to add around $400b to their reserves in 2004.  In 2007, China alone is on track to add $500b to its reserves (counting the CIC) this year.... If China’s government wasn’t willing to issue RMB bonds – whether PBoC sterilization bills for CIC long-term bonds – to buy dollar assets, the global economy wouldn’t balance. At least not the way it does now....

Yet the United States' large and growing dependence on the willingness of China’s government to continue to act as an intermediary rarely attracts a lot of popular attention. It is just part of the economic landscape, sort of like the United States need to import roughly 14 mbd of oil every day. But I suspect that there is an underlying unease, a concern that the balance of financial terror may not prove to be as stable as the balance of nuclear terror proved to be during the cold war. Every now and then the United States' need for Chinese financing does attract a lot of attention. Yesterday was one such day.

With the collapse of the housing boom, the domestic rebalancing inside the U.S. has commenced. I won't say so far so good, but I will say so far not a complete and total disaster. It looks as though the U.S. could manage a steep decline in the capital inflow from Asia accompanied by a decline in imports--people would feel poor and be unhappy, but it would not have to lead to mass unemployment here.

But Asia's rebalancing has not commenced. The dollar is our currency, but--to paraphrase something John Connally once said--it is now or is about to be their problem.

Paul Krugman Has Housing Market Pictures from the JEC

He writes:

Paul Krugman: The new Joint Economic Committee report on subprime is, aside from its policy moral, a great source document for facts about the housing bubble, illustrating some key facts about what happened, where, and when. I thought it might be interesting to readers if I gave you a few highlights:

Oil Shocks

From Econobrowser:

Dollar price per barrel of West Texas Intermediate divided by the CPI.

Econbrowser: $90 a barrel: Is it time to start worrying about the oil price shock of 2007?: Oil shocks in 1973, 1979, and 1990 were each followed by a recession. But we saw the price of oil climb from $20 a barrel in 2002 to $75 a year ago, and so far it has not resulted in a significant economic downturn. What's different now, and can we count on it to continue? The question of why the economy may be less vulnerable to oil price shocks today has been examined by a number of recent academic studies. A new paper by Olivier Blanchard and Jordi Gali identified four factors as all making a contribution: (a) good luck (i.e. lack of concurrent adverse shocks), (b) smaller share of oil in production, (c) more flexible labor markets, and (d) improvements in monetary policy.

A study last year from the Congressional Budget Office emphasized a similar list of favorable developments. Jerry Taylor and Peter VanDoren review some of the other evidence, and conclude:

All the new analyses agree that the more flexible economy that we have now, allows us to cope more easily with oil price shocks.... It is time for America to get over its inordinate fear of oil shocks. Soaring prices aren't pretty, but they are scarcely the existential threat to our economy posited by many.

Munechika Katayama, a Ph.D. candidate here at the University of California, San Diego, also has an interesting new study on this question. Katayama notes that regulation of the transportation sector during the 1970s resulted in excessive monopoly power and inefficiencies in the trucking industry, and suggests that deregulation may have been another factor that has helped the economy to respond more flexibly to oil price changes.

Felix Salmon Says Apple Is Now Worth More than IBM

An interesting fact:

Market Movers by Felix Salmon: Apple's market capitalization, @ $186.55/share: $162.23 billion. IBM's market capitalization, @ $114.00/share: $157.32 billion...

Nouriel Roubini Says: "I Told You So!"

Well, he didn't quite tell us so. But close enough:

RGE - Revisiting Predictions Made a Year Ago: Who is on Earth, on the Moon and Who was a “Lunatic”: This author spent the last weekend in Washington at the annual meetings of the IMF to make several presentations and  get a sense of the views of policy makers, scholars and market participants about the US and global economy prospects. To get the sense of the overall mood... Vitorio Corbo - the distinguished governor of the Chilean Central Bank - was asked what were the mood and views of policy makers and market folks. His reply was along the following lines: “Usually at this kind of meetings I used to hear that the views of Nouriel Roubini about an impending financial and real hard landing are from the Moon. But this year there are plenty of “lunatics” around!”... [V]iews that a year ago were considered way off consensus and "from the moon" are now becoming consensus....

[H]aving a little more than a year passed since this blogger first made in August 2006 his call for a 2007 housing bust, financial turmoil, credit crunch and hard landing (recession)  for the U.S. economy it is worth revisiting such a call.... At that time [I] argued that:   * the  U.S. would experience its worst housing recession in decades; * home prices would follow sharply (at least 20% in the next  few years); * the housing troubles would start in the sub-prime mortgage market and lead to move severe problems and a credit crunch in broader mortgage and credit markets; * housing woes would spillover to the rest of the economy and to other components of demand  - including consumption - via a variety of channels; * multiple bearish factors (housing slump, credit crunch, spillovers of housing to other sectors, high oil prices) would lead to a hard landing of the economy in 2007; * the world would not decouple from such a U.S. hard landing.   Such views were very much out-of-consensus and controversial.... [M]ost mainstream analysts got it wrong about housing, its financial fallout and the credit crunch. As the IMF host kindly put it in introducing this author at his recent September 2007 talk at the IMF:  

today I am glad to welcome Nouriel Roubini back here to the Fund. …As a prologue I thought I would just briefly recall what he said at this time last year, at least my memory of what he said this time last year which may a little bit biased, and compare it to what has actually happened. Let me recall three predictions. First, Nouriel said that the U.S. housing correction would not go away quietly, but would go from bad to worse, and I think in this he has certainly been right on the nose. Second, he said that weakness in the U.S. subprime mortgage market would cause broader problems in the financial system, and here again Nouriel was certainly right, although for once perhaps not quite gloomy enough. (Laughter.) I think like most of the rest of us, I am not sure that Nouriel fully anticipated the extent of the damage that would be caused. Third, he put a high probability on the risk of a recession in the United States and a global hard landing. This has not happened yet. In fact, the U.S. economy continued to grow at a moderate pace over the past year at around 2 percent, and the global economy has accelerated. But the game ain't over yet, and we are again at a time when there is a lot of concern about recession risk.

This analyst still holds the view that the US will experience a hard landing that is already in the making.... Indeed, in August 2006  (not today) when the conventional wisdom and consensus was of “housing slowdown” and no one had heard of “subprime” this analyst wrote the following about the reckless lending practices in subprime and mortgage markets: 

The scariest thing is that the gambling-for-redemption behavior... are not the exception in the mortgage industry; they are instead the norm. There are good reasons to believe that this is indeed the norm as lending practices have become increasingly reckless in the go-go years of the housing bubble and credit boom.  If this kind of behavior is – as likely – the norm, the coming housing bust may lead to a more severe financial and banking crisis than the S&L crisis of the 1980s.... [A] serious housing bust followed by an economy-wide recession implies serious financial risks for the entire financial system, not just risks for the real side of the economy. A systemic risk episode triggered by a housing bust cannot be ruled out.

Indeed, a year later we have now seen the biggest housing recession in US history that is getting worse by the day, a collapse and total meltdown of the sub-prime market, the beginning of a massive credit crunch in near prime and prime mortgages and a massive episode of financial volatility and turmoil taking the form of a severe liquidity and credit crunch....

[T]oo bad that too many analysts did not have the willingness to engage in a more intelligent discussion of the risks of the housing recession, its financial fallout and of its impact on the economy. So now some of the same critics have to play catch up with reality as the facts on the ground have repeatedly proven them altogether wrong on many of their consensus views: the housing recession did not bottom out; its spillovers to other sectors and final demand were not modest; the subprime did not turn out to be a niche and contained problem; the financial contagion and credit and liquidity crunch has been severe and persistent; the Fed did not raise rates as the “inflation hawks” worried its should but it was rather forced to cut the policy rates; and the risk of a hard landing were not minimal; they were large then and are sharply rising now.   As for decoupling of the rest of the world from the US slowdown this author argued as early as August of 2006 - and again throughout the fall of 2006 - that the decoupling view was conditional on the US achieving a soft landing....   But back to the present now. In his recent IMF talk... this author fleshed out again and elaborated the arguments for a U.S. hard landing... we will soon see a worsening of the liquidity and credit crunch and will experience a generalized credit crunch; and that monetary policy or shell game schemes like the Super-Conduit will not rescue the financial system or the real economy from such a hard landing....   Petty critics of this blogger keep on hammering (in comments on this blog) that the recession did not occur by Q2 of 2007. But, as the Bible put it:  “Why do you notice the splinter in your brother's eye, but do not perceive the wooden beam in your own eye?”  Indeed, most of these soft landing optimists kept on predicting a modest housing slump that would bottom out by early 2007; they kept on repeating the mantra of subprime as a “niche problem” that would “remain contained”; they dismissed concerned about a severe financial contagion and the risk of a liquidity and credit crunch; they kept on predicting sustained growth rates above 3%...

Greg Clark: Against Institutional Explanations of Economic Divergence

Greg Clark says that Malawi's economic institutions are as good as Sweden's:

FtA: [T]he Heritage Foundation, in an index constructed in conjunction with the Wall Street Journal, ranks Sweden as 21st in the world in its index of economic freedom (72.6% free), and Malawi as 104th (55.5% free) out of 157 countries.... The index weights equally scores on 10 criteria.... [T]he weightings of the components of the index are chosen with the result in mind.  Had Heritage and the Wall Street Journal produced an index which ranked economic freedom higher systematically in poor countries, noone would have liked the index.  This is not a scientific enterprise, it is an ideological one.

Thus the features curtailing economic incentives systematically in high income societies – high marginal tax rates, lump sum provision of many social goods independent of effort, strong restrictions on the labor market, legal systems that threaten enterprises with lawsuits from unhappy investors and consumers – are given very modest weight in the overall index. The features characteristic of low income economies – higher inflation rates, corruption, formal restrictions on business and trade activity – are given relatively high weights.

Yet frequently corruption in low income societies is a way of getting round burdensome bureaucratic requirements.  Why should states like those of northern Europe which impose many arbitrary and vexatious requirements on their citizens and businesses be further rewarded in the index of economic freedom by the fact that their soulless bureaucrats are rigid in the enforcement of these regulations?  Why should states where such arbitrary exactions can be evaded by the deployment of modest bribes be penalized in the index?... [T]he entire oppressive weight of the system of taxes and transfers employed in Sweden, where the government collects 51% of all income, results in a penalty of 48 points compared to Malawi where government taxation is a mere 20% of income.  But more than counterbalancing this is the penalty of 64 points levied against Malawi because “corruption is perceived as widespread.”

Higher inflation rates, characteristic of poorer economies, are also assessed a much higher penalty than any economic losses we would associate with the inflation tax and the reduced value of money as a medium of exchange.  Malawi looses 19 points on this basis. Similarly having assessed Malawi penalties for its legal systems failure to follow the formal rule of law (a whopping 50 points), the Freedom Index then penalizes Malawi a further 41 points under Business Freedom for having a formal set of requirements on business enterprises that are more onerous than in Sweden, even though given the weakness of the legal system we have no idea if any of these rules are applied in practice.  The Chinese market traders so evident across countries like Malawi do not seem to have found the formal business requirements of the Malawian legal code too much of an obstacle.

This was an index enterprise whose result was known before it was ever begun, and whose underpinning is an economic ideology that assumes that economic freedom must produce economice growth, so that the absence of growth must be found in a restriction of economic freedom. Any sensible assessment would say that while their institutions vary, Malawi through its low tax and transfer regime, and its highly unregulated labor market, offers excellent economic incentives for the mass of the population.  Sweden with its high marginal tax rates (see below) and its extensive system of government benefits for all, combined with strong restrictions in the labor market, offers very poor economic incentives to the bulk of the population...

Yet people in Malawi are worse off than people were back in the stone age:

FtA: I first compare England in 1800 relative to hunter-gatherer societies, then England in 1800 against modern Malawi.  The English in 1800 lived at about the same level as the Stone Age.  Incomes in Malawi in 2000-2 seem to have been 33-40% of those of England in 1800, and hence significantly less than those of the Stone Age.

Looking for an Expert on the Agrarian History of South Asia

David Ludden:

• David Ludden, New Cambridge History of India: An Agrarian History of South Asia
• David Ludden, _India and South Asia: A Short History
• David Hardiman reviews David Ludden, The New Cambridge History of India. Volume 4, Part 4, An Agrarian History of South Asia http://links.jstor.org/sici?sici=0002-8762%28200012%29105%3A5%3C1718%3ATNCHOI%3E2.0.CO%3B2-%23
• Marcia Frost reviews reviews David Ludden, The New Cambridge History of India. Volume 4, Part 4, An Agrarian History of South Asia http://eh.net/bookreviews/library/0250

Rubber Tomato Blogging: Hoisted from Comments

Hoisted from Comments: JRoth writes:

Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal: I think that you have severely misused or even misunderstood the supermarket tomato. I know that you have a major weakness for rhapsodizing the plenty of industrial agriculture, and I would agree that a world that contains shippable tomatoes is a better one than one in which tomatoes are a 3 month/year treat for most Americans. But I would not agree that the "rubber tomato" exclusively is a preferable substitution - and thanks to centralized capitalist planning, that's what we had in American for close to 50 years. Americans, with their metis, did not choose cheap rubber tomatoes to the exclusion of local, ripe ones (which are scarcely more expensive when in season) - they had rubber tomatoes forced upon them, even in high summer.

I can honestly say that I did not taste a fresh, worth-eating tomato for the first 20 years of my life - that is the legacy of the rubber tomato.

The fact that other varieties are now available for purchase (when in season) is a much-belated correction to the centralized capitalist planners, who were not interested in creating a product for sale only 9 months of the year. Just as Germany no longer ruins its forests, supermarkets no longer force rubber tomatoes on their customers. That the bad practice has stopped is not a defence of the practice.

And I have to ask: "Why not? Why didn't you taste a tomato worth eating for the first twenty years of your life? What stopped you? Was some commissar standing over your parents waving a kalishnikov? Or did your parents just not think it was worth the extra money?"

James Scott and Friedrich Hayek

My review of James Scott (1998), Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed (New Haven: Yale University Press: 0300070160):

---

I. Introduction

There is a lot that is excellent in James Scott's Seeing Like a State.

On one level, it is an extraordinary well-written and well-argued tour through the various forms of damage that have been done in the twentieth century by centrally-planned social-engineering projects--by what James Scott calls "high modernism" and the attempt to use high modernist principles and practices to build utopia. As such, every economist who reads it will see it as marking the final stage in the intellectual struggle that the Austrian tradition has long waged against apostles of central planning. Heaven knows that I am no Austrian--I am a liberal Keynesian and a social democrat--but within economics even liberal Keynesian social democrats acknowledge that the Austrians won victory in their intellectual debate with the central planners long ago.

This book marks the final stage because it shows the spread of what every economist would see as "Austrian ideas" into political science, sociology, and anthropology as well.

No one can finish reading Scott without believing--as Austrians have argued for three-quarters of a century--that centrally-planned social-engineering is not an appropriate mechanism for building a better society.

But on a second level, it is an act of displacement. Friedrich Hayek, after all, won the Nobel Prize in Economic Science for making many of Scott's key arguments: that the bureaucratic planner with a map does not know best, and can not move humans and their lives around the territory as if on a chessboard to create utopia; that the local, practical knowledge possessed by the person-on-the-spot is important; that the locus of decision-making must remain with those who have the craft to understand the situation; that any system that functions at all must create and maintain a space for those on the spot to use their local, practical knowledge (even if the hierarchs of the system pretend not to notice this flexibility). These key arguments are well known: they are the core of the Austrian economists' critique of central planning.

From one perspective, this is a compliment to the Austrians: their arguments are powerful and applicable, and it is striking that others looking at the same problem come up with their conclusions. From another perspective, this is odd: we all think better thoughts when we explicitly recognize and acknowledge our intellectual roots.

II. Seeing the Forest

Scott's Seeing Like a State begins with a ride through eighteenth- and nineteenth-century German forestry. In Germany, "scientific" forestry led to the planting and harvesting of large monocrop forests of Norway spruce and Scotch pine. And for the first century or so the pockets of forest-owners bulged as more and more valuable trees were harvested from the increasingly-ordered and managed forests.

But the foresters did not understand the ecological web that they were trying to manage: Clearing of underbrush to make it easier for lumberjacks to move about in the forest "greatly reduced the diversity of insect, mammal, and bird populations" (p. 20); the absence of animals and the absence of rotting wood on the forest floor greatly reduced the replenishment of the soil with nutrients. In places where all the trees are mature, of the same age and of the same species, storms can wreak catastrophe as trees knock each other over like bowling pins. Pests and parasites that attack a particular species find a bonanza and grow to epidemic proportions when they find a monocrop forest.

The result was what Germans call Waldsterben--the death of the forest, as it becomes both a pale shadow of its previous ecological richness and an inefficient source of timber for human use.

Why does Scott begin with such a tale of pseudo-scientific hubris in Germany before 1900? After all, he could have looked across the North Sea at England a century or so before, where the systematic experimentation and analysis of the agricultural revolution had led to a quite sophisticated understanding of what patterns of crop rotation, nutrient addition, and farm diversity could produce maximum sustainable and maximum economic yield. Why not tell a story about how human communities successfully managed a sustainable agriculture, rather than one about how human communities unsuccessfully created an unsustainable forestry?

Scott opens with his tale of German foresters because he argues that this type of interaction--people in rooms lined with green silk lay out complicated plans, which are then approved by the politically powerful, implemented with no regard for local conditions or local knowledge, and wind up as disasters--is typical of how states have dealt with problems and people in the twentieth century. When states--bureaucrats in offices in the capital--try to assess what is going on, they use maps: maps of territory, often with the demarcations between plots or regions made to be straight lines that meet at right angles, whether or not such lines of demarcation make any sense for those who live on the ground; maps of people--the lists of names and relationships that allow the state to track those from whom it will claim "obligations"--maps of laws, that fit human relationships of gift, exchange, and indebtedness that have both economic and emotional facets into a few well-defined categories of right and wrong.

But the map is never the territory. Scott reports that the first railroad from Paris to Strasbourg ran straight east from Paris across the plateau of Brie, far from the populated Marne, because the bureaucrat Victor Legrand drew the line so. The consequence was that the railroad was ruinously expensive because Victor Legrand forgot that to be useful a railroad has to carry goods and passengers from where they are to where they or their owners want them to go--not look like a pretty straight line on a map back in Paris (p. 76). By page 87 the reader is well-prepared to agree with Scott that the map is never the territory, and that what the state "sees" is only a very small slice of reality.

---

III. The Critique of "High Modernism"

However, these discussions of forests and maps are just the warm-up. Scott's main argument begins on page 87 as he lets twentieth-century states have it with both barrels. Scott then mounts a vicious, powerful, and effective fangs-bared critique of what he calls "high modernism": the belief that the bureaucratic planner with a map--whether Le Corbusier designing a city, Vladimir Lenin designing a planned economy after what he thought he knew of the German war economy, or Julius Nyerere "villagizing" the people of Tanzania--knows best, and can move humans and their lives around the territory as if on a chessboard, and so create utopia. Scott sees the "idea of a root-and-branch, rational engineering of entire social orders in creating realizable utopias" as a twentieth-century idea that has gone far to making this century a dystopia.

A. High Modernism in Urban Planning

Scott's critique of "high modernism" as a mode of urban planning focuses on Brazil's capital, the now more than one generation-old planned city of Brasilia. As far as they possibly could, the designers of Brasilia tried to achieve the spatial segregation of different aspects of life--housing in a different place from work, recreation, traffic, public administration in different districts as well--as high-modernist guru Le Corbusier had commanded.

The consequences of the plan--as far as it could be carried out--are insane. As Scott writes of the central square of Brasilia:

...what a square! The vast, monumental Plaza of the Three Powers, flanked by the Esplanade of the Ministries, is of such a scale as to dwarf even a military parade... In comparison, [Beijing's] Tien-an-Men Square and [Moscow's] Red Square [both of which are too large a scale for the foot and vehicle traffic through them on a normal day] are positively cozy and intimate.... If one were to arrange to meet a friend there, it would be rather like trying to meet someone in the middle of the Gobi desert. And if one did meet up with one's friend, there would be nothing to do.... This plaza is a symbolic center for the state; the only activity that goes on around it is the work of the ministries... (p. 121)

Scott draws heavily on the excellent work of Jane Jacobs to criticize this planned, surprise-free, every-apartment-building-looks-the-same high-modernist order of pre-planned Brasilia. Jacobs argued that rigid spatial segregation of functions made for visual regularity from the bird's-eye view of the architect but made the city damn hard to live in. By contrast, it is the mingling of residences with shopping areas and workplaces that makes an urban neighborhood interesting--and livable. And this urban diversity of uses cannot be planned by the high-modernist architect. At best it can be planned for--by the government providing a framework and infrastructure for urban development instead of specifying land use down to the last square centimeter.

As Scott argues, even planners who recognize diversity will never plan it. You cannot spend your life at the office, and bureaucratic budgets are limited. Thus:

...the logic of uniformity and regimentation is well-nigh inexorable [in comprehensive urban planning]. Cost effectiveness contributes to this tendency. Just as it saves a prison trouble and money if all prisoners wear uniforms of the same material, color, and size, every concession to diversity [in the urban plan] is likely to entail a corresponding increase in administrative time and budgetary costs.... [T]he one-size-fits-all solution is likely to prevail (pp. 141-2).

B. High Modernism, the Revolutionary Party, and the Planned Economy

Scott's second example of "high modernism" run amuck at enormous human cost is Lenin's attempt to design the revolution, the society, and the economy of Russia.

To Lenin, "the party is to the working class as intelligence is to brute force, deliberation to confusion, a manager to a worker, a teacher to a student, an administrator to a subordinate, a professional to an amateur, an army to a mob, or a scientist to a layman" (p. 149): the vanguard party possesses the scientific theory--Marxism--that allows it to plan the revolution. And the transmission of information and commands must be one-way only: the only thing that the party could learn from the workers would be petty-bourgeois ideologies that would infect it as with a disease (p. 155).

After the revolution, according to Lenin, utopia will be built through use of the state. Quoting State and Revolution, Scott draws out of Lenin's ideas for economy and society the image of a gigantic ocean liner, captained by the party's politburo:

The revolution ousts the bourgeoisie from the [controlling] bridge of the "ocean liner" [of society], installs the vanguard party, and sets a new course, but the jobs of the vast crew are unchanged. Lenin's picture of the technical structure... is entirely static. The forms of production are either set or... [their] changes cannot require skills of a different order (p. 162).

Or as Lenin put it in his "Immediate Tasks of the Soviet Government:

...large-scale machine industry... the foundation of socialism... calls for absolute and strict unity of will, which directs the joint labors of hundreds, thousands, and tens of thousands of people.... But how can strict unity of will be ensured? By thousands subordinating their will to the will of one.... We must learn to combat the public-meeting democracy of the working people--turbulent, surging, overflowing its banks like a spring flood--with iron discipline while at work, unquestioning obedience to the will of a single person, the Soviet leader, while at work (p. 163).

And the end of the process that Lenin sees in State and Revolution--an end that Scott calls "chillingly Orwellian"--no one will be able to move an inch from their assigned place:

Escape from this national accounting will inevitably become more difficult... and will probably be accompanied by such swift and severe punishment... that very soon the necessity of observing the simple, fundamental rules of social life in common will have become a habit (p. 163).

Scott contrasts the communism of Rosa Luxemburg and Alexandra Kollontai to that of Lenin. Luxemburg did see that when one was exploring new social territory: "only experience is capable of correcting and opening new ways. Only unobstructed, effervescing life falls into a thousand new forms and improvisations, brings to light creative force, itself corrects all mistaken attempts" (p. 174). And Luxemburg did see that Lenin's "socialism... decreed from behind a few official desks by a dozen intellectuals" was headed for complete disaster:

...with the suppression of political life in the land as a whole, life in the soviets must also become crippled. Without general elections, without unrestricted freedom of the press and assembly, without a free struggle of opinion, life dies out in every public institution.... Public life gradually falls asleep... an elite of the working class is invited to applaud the speeches of the leaders, and to approve proposed resolutions unanimously--at bottom then, a clique... a dictatorship... (p. 174).

We all know the economic and human consequences of Lenin's centrally-planned soviet vision. Scott writes that the high estimates--20 million or so--of deaths from the collectivization of agriculture have "if anything, gained more credibility as new archival evidence has become available" (p. 202). Yet he notes that from Stalin's perspective collectivization was certainly a success:

Collectivization proved a rough-and-ready instrument for the twin goals of traditional statecraft: appropriation and political control. Although the Soviet kolkhoz may have failed badly [at efficient produciton], it served well enough as a means whereby the state could determine cropping pattersn, fix real rural wages, appropriate a large share of whatever grain was produced, and politically emasculate the countryside (p. 203).

C. "Villagization" in Tanzania

Scott's third major example of destructive high modernism is Julius Nyerere's attempt from 1973 to 1976 to move all the rural inhabitants of Tanzania into villages. Five million farmers and their families were moved into newly-constructed villages set up so that the state could easily deliver social services to (and levy taxes from) the populations.

Nyerere believed that Tanzanians should live in villages--rather than scattered across the countryside where agricultural resources were to be found--because:

... unless we [live in villages] we shall not be able to provide ourselves with the things we need to develop our land and to raise our standard of living. We shall not be able to use tractors; we shall not be able to provide schools for our chldren; we shall not be able to build hospitals, or have clean drinking water; it will be quite impossible to start small village industries, and instead we shall have to go on depending on the towns for all our requirements; and if we had a plentiful supply of electric power we should never be able to connect it up to each isolated homestead (p. 230).

And what if the farmers did not want to live in villages, or did not want to grow the crops that Nyerere's bureaucrats back in The House of Peace thought that they should grow? Then: "[i]t may be possible--and sometimes necessary--to insist on all farmers in a given area growing a certain acreage of a particular crop until they realize that this brings them a more secure living, and then do not have to be forced to grow it" (p. 231).

The consequences of Nyerere's policies were predictable. As Scott summarizes:

Peasants were... shifted to poor soils on high ground... moved to [houses near] all-weather roads where the land was unfamiliar or unsuitable for the crops... village living placed cultivators far from their fields, thus thwarting crop watching and pest control... the concentration of livestock and people... encourag[ed] cholera and livestock epidemics... pastoralists [found that]... herding cattle to a single [village] location was an unmitigated disaster for range conservation and pastoral livelihoods.... [Bureaucratic] insistence that they had a monopoly on useful knowledge and that they impose this knowledge set the stage for disaster... (pp. 246-7).

The only bright spots were "the Tanzanian state's relative weaknesses... as well as the Tanzanian peasants' tactical advantages, including flight, unofficial production and trade, smuggling, and foot dragging" which "combined to make the practice of villagization" less destructive than it might have been (p. 247).

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IV. Trees, Forests, and Roots

A. Deja Vu

Well before the middle of the book this non-Austrian liberal-Keynesian economist was--any economist would be--struck by a strong sense of deja vu. Scott's declarations of the importance of the detailed practical knowledge possessed by the person-on-the-spot--of how such knowledge cannot be transmitted up any hierarchy to those-in-charge in a way to do any good--of how the locus of decision-making must remain with those who have the craft to understand the situation--of how any system that functions at all must create and maintain a space in which there is sufficient flexibility for craftsmen to exercise their local, pratical knowledge (even if the hierarchs of the system pretend not to notice this flexibility)--all of these will strike any economist as very, very familiar.

All of these seem familiar to economists because they are the points made by Ludwig von Mises (1920) and Friedrich Hayek (1937) and the other Austrian economists in their pre-World War II debate with socialists over the possibility of central planning.

Hayek's adversaries--Oskar Lange and company--argued that a market system had to be inferior to a centrally-planned system: at the very least, a centrally-planned economy could set up internal decision-making procedures that would mimic the market, and the central planners could also adjust things to increase social welfare and account for external effects in a way that a market system could never do.

Hayek, in response, argued that the functionaries of a central-planning board could never succeed, because they could never create both the incentives and the flexibility for the people-on-the-spot to use the immense amount of knowledge about the actual situation that only people-on-the-spot can know. As Hayek argued in his "Impossibility of Socialist Calculation," the enormous amount of dispersed knowledge that individual producers know and act on in a market economy can never be mobilized by a central planner. That a central planner could--that he or she could ever "possess a complete inventory of the amounts and qualities of all the different materials and instruments of production" available to the manager of a single plant--is "a somewhat comic fiction."

In Hayek's view, as he wrote in "The Use of Knowledge in Society," the fundamental economic problem is:

...the fact that knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.... It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge...

All of Scott's examples are cases illustrating that the centrally-planned social-engineering that Scott calls "high modernism" is definitely not a way to solve this fundamental economic problem. The bulk of Scott's book is spent adducing evidence for the critique of centrally-planned social engineering that had been made by Friedrich Hayek back before World War II.

Yet a casual reader of the book would not find any significant pointers to the Austrian intellectual tradition--no references to works like "The Impossibility of Socialist Calculation," "The Use of Knowledge in Society," or "Competition as a Discovery Procedure" that are directly on point for Scott's critique of centrally-planned social-engineering (the only works referred to are The Road to Serfdom and the collection Studies in Philosophy, Economics, and Politics, with no references to the individual works collected in the volume).

B. Where Is Hayek?

So how is it that Scott can see the trees and the overall forest so very very well, but does not see his own intellectual roots?

I should note that today almost every single economist--even those who (like me) are profoundly hostile to many of Hayek's arguments (that government regulation of the money supply lies at the root of the business cycle, that political attempts to reduce inequalities in the distribution of income are likely to lead to totalitarianism, that the Federal Reserve should be abolished, that the competitive market is the "natural spontaneous order" of human society)--agrees that Hayek and his company (including Scott) hit the particular nail that is Scott's central theme, the critique of high-modernist centrally-planned social-engineering, squarely on the head.

Scott's Seeing Like a State's index contains no references to Ludwig von Mises. It does contain six references to Friedrich Hayek:

• A favorable reference on page 256 to Hayek for pointing out that a "command economy, however sophisticated and flexible, cannot begin to replace the myriad, rapid, mutual adjustments of functioning markets and the price system."

• A critique in a footnote of Hayek's belief that the market economy is a spontaneous form of social order. Instead, Scott believes, the market economy "had to be imposed by a coercive state in the nineteenth century, as Karl Polanyi has convincingly shown."

• This is coupled with an admission that "Hayek's description of the development of common law" as "I believe, somewhat closer to the mark."

• An approving reference in a footnote to Hayek's skepticism about the usefulness of economic theory (p. 427); a reference to the "curious unanimity" between "such right-wing critics of the command economy as Friedrich Hayek and such left-wing critics of communist authoritarianism as Price Peter Kropotkin" who call, in Albert Hirschman's word, for "more 'reverence for life'... less straitjacketing of the future... more allowance for the unexpected... less wishful thinking" in economic development (pp. 344-5).

• A supporting footnote stating that Hayek--"the darling of those opposed to postwar planning and the welfare state"--makes the same point as Michel Foucault, who said in a lecture that was then published in 1991 that: "political economy announces the unknowability for the sovereign of the totality of economic processes and, as a consequence, the impossibility of an economic sovereignty," and that this was one of the main points of liberal political economy (pp. 101-2, 381).

• And, finally, a preemptive strike against Hayek in the introduction: "Put bluntly, my bill of particulars against [the high-modernist centrally-planning social-engineering] state is by no means a case for politically unfettered market coordination as urged by Friedrich Hayek or Milton Friedman. As we shall see, the conclusions that can be drawn from the failures of modern projects of social engineering are as applicable to market-driven standardization as they are to bureaucratic homogeneity" (p. 8).

The first two references I agree with. Hayek is right in criticizing the inflexibility of the command economy, and Scott is right in arguing that the market economy is not the "natural" form of human social order.

The third, fourth, and fifth references seem to me to miss the point: no one reading Hayek should be surprised that he is skeptical about claims to useful theoretical knowledge, the unanimity between the left and right branches growing out of the anarchist tradition is not "curious" but a result of these two branches' common roots, and the late Foucault (even though correct, and at the time of his death a serious student of liberal political economy) is not the expert of choice on liberal political economy.

The sixth reference may be the key. Scott cannot cite Edmund Burke in Seeing Like a State--and much of Scott's book consists of praise for the wisdom embodied in community practices in a Burkean vein--except as an "apologist... for... power, privilege, and property." And Scott cannot embrace Friedrich Hayek out of the fear that it will turn his book into a "case for politically-unfettered market coordination." Instead, he believes that his argument is as much a critique of "market-driven standardization" as of "bureaucratic homogeneity."

C. Rubber Tomatoes

How can market-driven standardization have the same consequences as the commands of architects who have never lived in the cities they design, or as the collectivization of Soviet agriculture, or as the forced "villagization" of Tanzanian peasants?

It is unclear.

Scott has a long critique of agricultural extension services and agricultural development programs in the third world, and the scorn their "experts" had for the practical knowledge of the rural peasant (pp. 270-306). But any Austrian would agree with all of it: the claims of the experts from the center that they know everything and the peasant knows nothing about how to grow crops in Ghana is ludicrous.

Woven into the critique of agricultural development programs are asides about the destructiveness of DDT, the effect of sterile hybrid seeds in diminishing the autonomy of the farmer, the vulnerability of American monoculture farms to pests and epidemics, and the pre-packaged relatively-tasteless--but overwhelmingly cheap--rubber tomatoes developed to be machine-sprayed and machine-picked. However, people bought (and buy) rubber tomatoes because they are cheap--because relatively little social labor is required to produce them. Overall we have the "unparalleled agricultural productivity" of the industrial West, in which the U.S. is a major exporter of food products even though its economy now employs fewer farmers and farm laborers than gardeners and groundskeepers.

The argument that market-driven processes are as harmful to human freedom as state-led high modernism appears suddenly at the end of a discussion of the importance of practical, local knowledge and expertise. Scott calls this practical, local knowledge "metis," taking the word from the skill traditionally attributed to Odysseus. Takes it to be a counterweight to the type of theoretical or technical knowledge held by bureaucrats, scientists, and others (pp. 309-341). Most such practical knowledge cannot be easily summarized and simple rules, and much of it remains implicit: the devil is in the details.

In the middle of this discussion of "metis" we suddenly read that:

The destruction of metis and its replacement by standardized formulas legible only from the center is virtually inscribed in the activities of both the state and large-scale bureaucratic capitalism (p. 335).

But when we look around at modern large-scale bureaucratic capitalism, we see what Scott calls "metis" everywhere. Everything from the flick of your wrist so that the supermarket laser-scanner reads the bar code (try it some time) to the virtual experience at flying 747's that airline pilots gain in simulators to knowing when you have lost your lecture audience and need to back up to knowing when it too risky to drive the moving van over Donner Pass--all of these are forms of metis. Attempts to design-out metis--to turn workers into efficient, pre-programmed automatons as in the imagination of Frederick W. Taylor--usually fail. They fail precisely because they do not make allowance for the importance of local, practical knowledge. And when they fail businesses that recognized the importance of their workers' skills take up the slack.

We have lost many forms of metis. But as Scott points out, many of them are well-lost:

Once matches become widely available, why... know... how to make a fire with flint and tinder. Knowing how to scrub clothes... on a stone in the river is undoubtedly an art, but one gladly abandoned.... Darning skills were similary lost, without much nostalgia, when cheap, machinemade stockings came on the market... (p. 335).

And overall local, practical knowledge does not seem to be vanishing because of large-scale bureaucratic capitalism. Indeed, the modern forms of metis whose destruction Scott mourns on pages 337-339 were the creations of (previous generations of) large-scale bureaucratic capitalism.

---

V. Conclusion

The key fault of what Scott calls "high modernism" is its belief that details don't matter--that planners decree from on high, people obey, and utopia results. Note that Scott's conclusion is not just that attempts at high-modernist centrally-planned social-engineering have failed. It is--as von Mises argued 70 years ago--they are always overwhelmingly likely to fail. As Scott puts it:

... [the] larger point [is that]... [i]n each case, the necessarily thin, schematic model of social organization and production animating the planning was inadequate as a set of instructions for creating a successful social order. By themselves, the simplified rules can never generate a functioning community, city, or economy. Formal order, to be more explicit, is always and to some degree parasitic on informal processes, which the formal scheme does not recognize, without which it could not exist, and which it alone cannot create or maintain (p. 310).

Yet even as he makes his central points, Scott appears unable to make contact with his intellectual roots--thus he is unable to draw on pieces of the Austrian argument as it has been developed over the past seventy years. Just as seeing like a state means that you cannot see the local details of what is going on, so seeing like James Scott seems to me that you cannot see your intellectual predecessors.

That the conclusion is so strong where the evidence is so weak is, I think, evidence of profound subconscious anxiety: subconscious fear that recognizing that one's book is in the tradition of the Austrian critique of the twentieth century state will commit one to becoming a right-wing inequality-loving Thatcher-worshiping libertarian (even though there are intermediate positions: you can endorse the Austrian critique of central planning without rejecting the mixed economy and the social insurance state).

And when the chips are down, this recognition is something James Scott cannot do. At some level he wishes--no matter what his reason tells him--to take his stand on the side of the barricades with the revolutionaries and their tools to build utopia. He ends the penultimate chapter of his book with what can only be called a political pledge-of-allegiance:

Revolutionaries have had every reason to despise the feudal, poverty-stricken, inegalitarian past that they hoped to banish forever, and sometimes they have also had a reason to suspect that immediate democracy would simply bring back the old order. Postindependence leaders in the nonindustrial world (occasionally revolutionary leaders themselves) could not be faulted for hating their past of colonial domination and economic stagnation, nor could they be faulted for wasting no time or democratic sentimentality on creating a people that they could be proud of (p. 341).

But then comes the chapter's final sentence: "Understanding the history and logic of their commitment to high-modernist goals, however, does not permit us to overlook the enormous damage that their convictions entailed when combined with authoritarian state power" (p. 341).

---

References

Friedrich Hayek, ed. (1935), Collectivist Economic Planning: Critical Studies on the Possibility of Socialism (London: Routledge: 0678007659).

Friedrich Hayek (1937), "Economics and Knowledge," Economica 4, pp. 33-54.

Friedrich Hayek (), "The Impossibility of Socialist Calculation,"

Friedrich Hayek (1945), "The Use of Knowledge in Society," American Economic Review 35, pp. 519-30.

Friedrich Hayek (), "Competition as a Discovery Procedure"

Jane Jacobs (1961), The Death and Life of Great American Cities (New York: Vintage).

Jane Jacobs (1965), The Economy of Cities (New York: Vintage).

Frank Knight (1936), "The Place of Marginal Economics in a Collectivist System," American Economic Review 26:2, pp. 255-6.

Abba Lerner (1934), "Economic Theory and Socialist Economy," Review of Economic Studies 2, pp. 51-61.

James Scott (1998), Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed (New Haven: Yale University Press: 0300070160).

Ludwig von Mises (1920), "Die Wirtschaftsrechnung im sozialistischen Gemeinwesen," Archiv fur Sozialwissenschaften und Sozialpolitik 47:1, pp. 86-121.

Ah. Stanford's David Kennedy Can't Quote Properly Either...

David Kennedy of Stanford opens his review of Paul Krugman's "Conscience of a Liberal" with a claim that AEA founding president Francis Amasa Walker defined an economist as a faithful believer in laissez-faire, “not... the test of economic orthodoxy, merely.... [But] used to decide whether a man were an economist at all.”

Why am I not surprised that Francis Amasa Walker actually said something very different?

Francis Walker did not say that belief in laissez-faire determined "whether a man were an economist at all." What Francis Walker said in "The Recent Progress of Political Economy in the United States" was: (a) the better part of economists had never imposed such a test, (b) the worse part of economists in the United States who posed as "guardians of the true [laissez-faire] faith" had lost their influence, and (c) the subject was much the better for it.

Here is what David Kennedy of Stanford wrote:

The Conscience of a Liberal - Paul Krugman - Books - Review - New York Times: [M]aybe [Paul] Krugman is not really an economist — at least not according to the definition offered more than a century ago by Francis Amasa Walker, the first president of the American Economic Association, who wrote that laissez-faire “was not... the test of economic orthodoxy, merely.... [But] used to decide whether a man were an economist at all.”

Here is the real context in which Kennedy's quote appears, in Francis Walker (1889), "The Recent Progress of Political Economy in the United States," Report of the Proceedings of the American Economic Association. Third Annual Meeting, Philadelphia, December 26-29, 1888, pp. 17-40:

Yet, while Laissez-Faire was asserted, in great breadth, in England, the writers for the reviews exaggerating the utterances of the professors in the universities, that doctrine was carefully qualified by some economists, and was by none held with such strictness as was given to it in the United States. Here it was not made the test ofeconomic orthodoxy, merely. It was used to decide whether a man were an economist at all. I don't think that I exaggerate when I say that, among those who deemed themselves the guardians of the true faith, it was considered far better that a man should know nothing about economic literature, and have no interest whatever in the subject, than that, with any amount of learning and any degree of holiest purpose, he should have adopted views varying from the standard that was set up....

The abandonment of Laissaz-Faire, as a principle of universal application, however strongly individuals may still maintain it as a general rule of conduct, at once makes communion and cooperation, not merely possible. but desirable among economists. When it is confessed that exceptions, not few or small, are to be admitted, every thinking man has a part to take in the discussion; every interested and intelligent person becomes a possible contributor; every class of men, whether divided from others by social or by industrial lines, have something to say on this subject, which no other class can say for them, and which no other class can afford not to hear from them. The characteristic institutions of every nation, the experiences of eyery distinct coinmunity not only become pertinent to the subject, but constitute a proper part of the evidence which is to be gathered, sifted and weighed....

That barrier removed, political economy becomes something which never is, but is always to be, done; growing with the growing knowledge of the race, changing, as man, its subject-matter, changes; something which, in the nature of the case, must be the work, not of one mind but of many; something to which every man in his place may contribute, to which all classes and races of men must contribute, if the full truth is to be discovered; something to which every clime and every age bring gifts all their own; something to which the history of institutions, the course of invention, the story of human experience are not pertinent only but essential.

In such a work who would not wish to join? In such a work who would not welcome every faithful and honest helper?...

A Gathering of the Clans...

Economic historians, historians of economic thought, practitioners of political economy, and others are painting themselves blue with woad and practicing with staves after reading Stanford's David Kennedy's trashing of Paul Krugman.

Here is Gavin Kennedy:

Adam Smith's Lost Legacy: I treat what David Kennedy has written as they stand. That he quotes Francis Amasa Walker (1840 – 1897!) for his criterion of what constitutes and economist in 2007 suggests he is seriously out of touch, and that he associates Adam Smith with laissez faire supports this conclusion. Adam Smith was not the author of what passes today as ‘classical doctrines’ (an impossibly broad tent covering Malthus, Ricardo and Marx, from among which I would snatch Adam Smith).

The sentence including, “Adam Smith, whose fabled “invisible hand”, gives the game away. David Kennedy, a professor of American history, refers to the ‘fable’ of the invisible hand, but it wasn’t a fable of Adam Smith’s making; for Smith it was merely a handy metaphor when explaining why opening a domestic market to foreign goods for consumption would lead to higher domestic investment, partly by the foreign products competing with domestic products and partly by the risk avoidance of local merchants preferring to invest their capital locally. As the arithmetical whole is the sum of its parts, if local merchants invest locally instead of abroad, domestic capital formation will be higher than otherwise.

For 18th-century readers of Wealth Of Nations (Book IV.ii.9: p456), who were not economists – more likely to be legislators and people who influence them – he summed this process after clearly explaining it by using a common 17th-18th-century literary metaphor of the invisible hand (see Shakespeare’s ‘Macbeth’, Defoe’s ‘Moll Flanders’ or ‘Colonel Jack’, or Voltaire’s Oedipe: 'Tremble, unfortunate King, an invisible hand suspends above your head’; and ‘an invisible hand pushed away my presents’, etc.,).

The fable of the invisible hand has passed through the string of tenuous development.... Its origins are located in the environs of 51st Street, Chicago, and which has been propagated all over American academe, via its graduates and the media, until the fable is now regarded as the reality.... I would expect an historian to know this, or at least to be interested in it...

Here is Mark Thoma:

Economist's View: New York Times Review of "The Conscience of a Liberal": where's a decent reviewer when we need him? As Krugman notes in his response, David Kennedy is wrong about the history of prohibition, and the other "error" is a pretty trivial slip of writing 1964 instead of 1965. If those are the best examples of Krugman's errors Kennedy (as an historian himself) can come up with, then you have to conclude that Krugman is on pretty solid ground with the historical story he tells.

The review also ignores a lot of evidence from political scientist Larry Bartels on values voting that supports Krugman's position.... The values voting conclusions aren't things Krugman simply asserts - as you might conclude from the review - Krugman reviews solid evidence before coming to this conclusion.... [Kennedy] does not tell us about nor bother to try to rebut the careful, detailed discussion of right-wing institutions and their common funding sources that comes before this statement. Krugman's statement is a summary of this evidence, and to focus on the summary statement rather than than the evidence that supports it is not much of a rebuttal.

It's too bad that Kennedy chose to argue that, in essence, "Democrats have problems too" -- as though that somehow excuses Republicans for issues like racial politics -- rather than dealing with the evidence Krugman presents concerning the political and economic changes that produced the New Gilded Age...

PGL:

Angry Bear: The NY Times review of The Conscience of a Liberal starts off with a brief resume of its author – Paul Krugman. This is followed by a really stupid statement: "And yet maybe Krugman is not really an economist..." Who is Mr. Kennedy thinking of when he says “most modern economists”? The know-nothing nitwits over at the National Review? They religiously believe in laissez faire. This is followed by attacks not only on the book but also the author...

Alex Tabarrok:

Marginal Revolution: Krugman Badly Reviewed: It will not surprise readers to know that I'd enjoy a good smash of Paul Krugman's book Conscience of a Liberal but historian David Kennedy's negative review in the NYtimes is more trash than smash.  First, there is a bizarre attempt to argue that Krugman is not an economist because he is not laissez-faire!... At this point I was willing to forgive. Unfortunately, the rest of Kennedy's review has very little meat.  If the best that historian Kennedy can say against Krugman's "factually shaky" history is that "Kansas, whatever its other crimes and misdemeanors, is not customarily regarded as the birthplace of Prohibition; the Voting Rights Act passed in 1965, not 1964." then maybe Krugman is on to something.  (For the record, the first point is arguable the second point is a trivial error.)

Worse yet, Kennedy agrees with Krugman when Krugman is wrong.... I don't understand the divisions within the liberal fold which explain Kennedy's review (he is no right-winger) but I know something is up when Tyler says "The Conscience of a Liberal is um... not that polemic.  It's not that shrill."  While liberal Kennedy says "Like the rants of Rush Limbaugh or the films of Michael Moore, Krugman’s shrill polemic may hearten the faithful, but it will do little to persuade the unconvinced or to advance the national discussion of the important issues it addresses."

My ultimate response to Kennedy's review?  I bought the book.

If David Kennedy had any arrows, I would suggest that he start practicing the longbow...

The End of the Clinton-Era Productivity Growth Boom?

Source: Congressional Budget Office

John Schmitt and Dean Baker fear that the Clinton-era productivity growth boom is at an end. I think it is possible, but unlikely, and way too early to start panicking. Note the word "arguably" in their first sentence and the phrase "is sustained" in their second:

Comment is free: The real economic crisis: [A]rguably an even more fundamental problem facing the US economy: the sharp deceleration in productivity growth since the middle of 2004.... [I]f sustained... the deceleration in US productivity growth since the second half of 2004 is striking by historical standards. Between 1947 and 1973, the golden age of postwar capitalism, productivity growth averaged about 2.8% per year in the United States. At that pace, the output of the average worker was set to double about every 25 years, allowing roughly comparable increases in national living standards. From 1973 through 1995, however, productivity growth took a nosedive, with the average rate dr