That was from a very good Greg Mankiw article on economic epistemology (i.e. how do we know that we know anything about economics?). Here’s another one:

“… A shoe-store owner in Kentucky … claimed to have created nine jobs with $889 … The store owner apparently reasoned that he was creating one job for every pair of boots he sold the Army; after all, a soldier could not go to work on the project without a pair of boots.”

These sound silly. It would sound sillier in other applications as well. For example, should we consult the victim of an arson on how best to put out fires? Or should we consult someone who cut their fingers with a knife on how sharp knives should be allowed to be?

How come when we do similar things in the economic realm they are not viewed nearly as laughable as some of the above? Nothing makes me wretch more than watching politicians give a stump speech, where they invoke the trials and tribulations of some hard-working, nice, sweet-as-apple pie couple as a reason for overhauling the health system, or for extending unemployment insurance benefits. It is especially wretching to hear politicians argue that, “I’ve spoken to hundreds of people like Mary and Tom Smith” as if speaking to people who have had a tough time in the labor market makes either them or the politician an expert on labor market policy.

In fact, you might think that consulting those people who have been particularly affected by some economic change might be precisely the people you would not want to consult or invoke when proposing and promoting new economic policies. It is sort of like asking a newly dumped teenager what they think should be done about dating “policy.”

Nevertheless, I am preparing myself for the upcoming election season with a large bottle of Pepto Bismol. Maybe the pharma companies should consult me on how to formulate a new anti-puke medicine after the November elections are over?

In America, many self-described deficit hawks are hypocrites, pure and simple. They’re eager to slash benefits for those in need but their concerns about red ink vanish when it comes to tax breaks for the wealthy.

Here is Professor Landsburg:

So unemployment benefits are costly and tax cuts are not. Which doesn’t mean that all unemployment benefits are bad or that all tax cuts are good, but it’s plenty adequate to absolve the hypocrisy charge…

He was being way too nice. Krugman’s “analysis” reads like one of those small “cheat sheet cards” they hand out at a Progressive fundraiser or political event and he is just chanting #4 on the list of “arguments to make against serious people.” But what he should have said more forcefully is that Krugman is slaying an even Strawier man than Landsburg points out. You see, Landsburg’s argument is that Krugman misleads his readers into thinking tax cuts are costly while spending is not. But in my view, Krugman is even worse than that. You see, people like me are not deficit hawks – they are spending hawks. I’d gladly take a 1 trillion annual budget deficit if the way we got there was $1 trillion of government spending every year, and no tax collections at all.

Take this Krugman quote to illustrate my point:

Now and Later, by Paul Krugman, Commentary, NY Times: Spend now, while the economy remains depressed; save later, once it has recovered. How hard is that to understand?

It’s that when the economy is not depressed, the spending never does cease – in fact, the spending during good times is arguably why it is so hard to trim fat today, and why the states and localities find themselves in such an awful condition. Someone please find me a time when Krugman has written something to the effect of, “times are good, and now it is a good time to reduce government spending.” It will never happen. Spending cuts have and will always be demonized as starving the beast, favoring the rich, threatening the fragile recovery and threatening to diminish the investments in the new technologies and education that is necessary for America to complete in the 21st century.

All of this “pragmatic” blathering is just that – it is an ugly and very conspicuous cover to justify a Chavezian role for our government. What is so hard to understand about that?

In any case, how has the Keynesian apparatus held up over time? I’d argue that rather than government spending stimulating during recessions and dampening during expansions, government spending has been a major source of instability. On its face this should not be all that surprising. By the time politicians get the data on private activity, and by the time the legislative process takes its course, the stage of the business cycle is almost certainly changing. In other words, the difficulty in obtaining just-in-time information and the long lags in the legislative process virtually guarantee that fiscal efforts to mitigate business cycle movements are like a drunk man groping in a closet for his lost keys.

Below is some simple data to begin to make my point. The BEA reports on a quarterly basis total government spending, private consumption spending and private investment spending back to 1947.  The chart shows the quarterly percentage change in government expenditures and private consumption expenditures. A chart showing the same data, but taking 4 quarter moving averages before computing the quarterly percentage changes is identical. If I added in private investment to the consumption data, the pictures would be indistinguishable as well.

A careful look at the chart would tell you virtually nothing. Sometimes it appears that government spending and private consumption move in the same direction, sometimes in opposite directions. In fact, of the 252 quarters this chart covers, in 64.3% of the cases, government spending and private spending move in the same direction. If I add in private investment, the share actually rises. The correlation of these percentage changes is -0.12 – a very small slightly negative correlation. In an ideal Keynesian world, while the correlations would not be -1, they should certainly be much closer to one than zero.

But what about the timing problem I mentioned above? Well, suppose you look at changes in government spending a quarter after a change in private spending? Then we should see more occurrences of these two moving in opposite directions, right? Of course you would be wrong. Looking at changes in G one quarter hence, we see government spending and private spending moving in the same direction in 65.5% of the cases and if we look at G two quarters hence, we see government spending and private spending moving in the same direction in 67.9% of the cases.

Now, you cannot argue that these changes are reflecting successful government policy because I am looking at whether or not the government itself responded to the observed private data in a way consistent with Keynesian policy. This is an extremely primitive “analysis” so don’t take it at much more than reflecting the simple idea that it is not likely that governments respond in the way they think they can and that if there is truth to what I depicted then what appears to be going on is that government spending seems to ramp up during economic good times and ramp down during bad times – precisely the opposite of Keynesian proscriptions, and certainly destabilizing if you take that theory seriously.

My view is that if in fact this data is correct, then the government is doing exactly the correct thing if it hopes to alter business cycles. Government spending extracts resources from the private sector, making us poorer. So we should “want” more of that during expansions. Similarly, we should want less of this wasteful activity during recessions.

There’s lots more to say – I hope this inspires a student to dig deeper into what is really going on.

Here is Robert Heilbroner on Keynes:

Keynes himself in a letter to the New York Times in 1934 wrote, ” I see the problem of recovery in the following light: How soon will normal business enterprise come to the rescue? On what scale, by which expedients, and for how long is abnormal government expenditure advisable in the meantime?

Note “abnormal.” Keynes did not see the government program as a permanent interference with the course of business (wintercow emphasis). He saw it as lending a helping hand to a system that had slipped and was struggling to regain its balance.

I identify two factors as being particularly important in organizational stagnation: public insurance programs that are oriented to volume of care and not value, and inadequate information about quality of care. Recent reforms have aspects that bear on these problems.

Not once in the 43 pages of the paper does the word “regulation” appear. Not once in the 43 pages of the paper does the word “license” appear. Not once in the 43 pages of the paper does the term “American Medical Association” appear. In regard to the second of his observations – just think of how massive an opportunity “inadequate information about quality” would represent in any other market. Would it not be moderately academic to ask why such an inadequacy exists? It must be because he is smarter than us – being on Team Obama and from Harvard and all that. When I grow up perhaps I too will understand the complexity of the health care system.