Asymptosis

Damn, Krugman beat me to this yesterday. I thought I would be bringing in a fascinating piece from the fringes of the Australioblogosphere.

Bronte Capital: The Macroeconomics of Chinese kleptocracy.

My basic take is the same as Paul’s:

I have no idea whether this John Hempton piece on China is at all right, but it’s a terrific read, and provides food for thought.

The logic of the piece is very much dependent on the loanable-funds model:

The Chinese kleptocracy – and indeed several major trends in the global economy – depend on copious quantities of savings at negative expected rates of return by middle and lower income Chinese.

As we saw quite clearly in The Great Keen-Krugman Debate, Paul is a firm believer in that model (and obviously Hempton is too). I and many others (notably Keen) have suggested that the model is ridiculous and nonsensical on its face.

If we look at the Hempton piece through other eyes — MMT for instance — does it still hold up? How can we rewrite it to explain things better while retaining its rather convincing insights?

Now here’s what’s fascinating: my hat tip goes to a post two days ago by Craig Tindale at … Steve Keen’s blog — a blog where you find little patience for the loanable funds model.

1. Why do we find an implicitly approving link over there?

2. How did Krugman come across this piece? Has he taken to reading Keen? If so, it seems rather churlish of him to withhold the hat tip…

Cross-posted at Angry Bear.

This is not some limp-wristed notion from a coastal-elite dressing-gown blogger. (That would be me, caricatured uncharitably but not completely inaccurately.)

It’s from the man who one Army National Training Center official described,* in 1997, as “the best war fighter the army has got.”

Douglas Macgregor thinks we can cut the defense budget by $280 billion over ten years (above and beyond the $450 billion already in the cards), while maintaining our influence in the world and increasing our homeland security.

But the message for Republicans and Democrats alike should be that cutting defense doesn’t mean going defenseless. It means reducing America’s commitments overseas — the latter-day version of “imperial overstretch” — and changing the way the United States thinks about warfare. There’s a way to do this, one that will allow for deep spending cuts, but in a manner that will preserve and enhance the U.S. military’s competitive advantages while improving American national security.

For your delectation:

Lean, Mean Fighting Machine – By Douglas Macgregor | Foreign Policy.

A Radical Plan for Cutting the Defense Budget and Reconfiguring the U.S. Military – By Douglas Macgregor | Foreign Policy.

Hat tip (and further discussion): Mike “Mish” Shedlock.

*Sorry, this U.S. News and World Report article (07/28/97, Vol. 123, Issue 4) only seems to be available through a gated source. You’ll need university affiliation or some such to get at it. Why doesn’t USNWR post their archives?

Section 9: Foreign Policy and National Security | Pew Research Center for the People and the Press.

These posts by Arnold Kling and Will Wilkinson prompt me to write up a post I’ve had in mind for a long time.

I don’t want to write a history paper here, so I’ll just share a few facts, and some quotes from Wikipedia to highlight the differences between Eisenhower’s prudence and responsibility,  and the past thirty years’ radical disciples of Reaganism.

The top marginal tax rate when Eisenhower came to office was 91% on incomes above $400K (about $3 million in today’s dollars). He didn’t change it. The tax rate for the lowest bracket did decline — from 22 to 20%. The effect: you basically couldn’t make more than $3 million a year during Eisenhower’s presidency. Anything above that went to the public good. We’ve seen the disastrous effect that had on GDP…

Eisenhower didn’t feel the need to radically dismember the New Deal that America had agreed on, or kowtow to right-wing wack-jobs:

Instead of adhering to the party’s right-wing orthodoxy, Eisenhower instead looked to moderation and cooperation as a means of governance.[74] This was evidenced in his goal of slowing the growth of New Deal/Fair Deal-era government programs, but not weakening them or rolling them back entirely.[74]

Eisenhower did not end New Deal policies, and in fact enlarged the scope of Social Security, and signed the Federal-Aid Highway Act of 1956.

A la Lincoln, he invested huge government sums in public infrastructure — perhaps the most important single contributor to ensuing decades’ prosperity boom:

His subsequent experience with German autobahns during World War II convinced him of the benefits of an Interstate Highway System. Noticing the improved ability to move logistics throughout the country, he thought an Interstate Highway System in the U.S. would not only be beneficial for military operations, but be the building block for continued economic growth.^[48]

He didn’t use his pulpit as he should have to denounce the despicable “you’re a traitor” tactics of McCarthyism (think: Tea Party), but he had the sense to know that they were despicable.

Eisenhower was criticized for failing to defend George Marshall from attacks by Joseph McCarthy, though he privately deplored McCarthy’s tactics and claims.[73]

He coined the term for, and deplored and warned against, the “military-industrial complex” that has dominated the American economy ever since:

“Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. This is not a way of life at all in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron.” ^[78]

The very model of a modern major general, and of a true American conservative?

I often disagree with Bryan Caplan — often quite vehemently — but not always, by any means. He’s one of the people who I’m constantly testing my thinking against.

He gets it so right with the following post that I’m going to make an exception (first time?) and reproduce his whole post here.

Cliches of Anti-Pacifism

I’m a pacifist.  I realize that it’s an unpopular position, but I’m still surprised by how quick people are to dismiss the position with cliches.  Here are three of the most common.

1. “If you want peace, prepare for war.”  This claim is obviously overstated.  Is North Korea really pursuing the smart path to peace by keeping almost 5% of its population on active military duty?  How about Hitler’s rearmament?  Was the Soviet Union preparing for peace by spending 15-20% of its GDP on the Red Army?

No on all three counts.  The truth is that preparation for war often causes war by frightening and provoking other countries.  That’s why the collapse of the Red Army made the inhabitants of the former Soviet Union safer from nuclear attack than they’d been since 1945.  This doesn’t mean that disarmament always makes countries safer.  But it does mean that military preparation frequently has the perverse effect of making countries less safe.  Discovering the conditions under which this occurs takes a lot more than a one-liner.

2. “Those who beat their swords into plowshares, will plow for those who don’t.” In earlier centuries, this was usually true.  But almost all rulers treated their subjects like chattel in those days.  The main reason to fear war wasn’t that policies would change if “your” government were defeated, but that you’d suffer or perish before the conflict was resolved.  From the point of view of the ruled, pacifism would usually have been an improvement.

In the modern world, the plowshares cliche is even more misguided.  Take a look at this list of military spending by country.  The U.S. naturally leads the pack, but is any sensible person worried that the U.S. will invade their country in order to take their stuff?  While the U.S. has the power to literally enslave most of the world, most Americans think it would be wrong, so it’s not going to happen.  The same clearly holds for five of the other top-ten military powers: the UK (#3), France (#4), Germany (#6), Japan (#7), and Italy (#9).  Even China, at #2, has far less awful intentions than the plowshares cliche suggests: While it might invade a totally disarmed Taiwan, the next step would be One Country, Two Systems – not mass enslavement of the Taiwanese.

3. “Pacifism didn’t work with Hitler.”  True enough.  But then again, nothingworked with Hitler.  The man was a monster.  Poland tried resistance, and was virtually destroyed.  Stalin tried alliance, and was stabbed in the back.  The Allies tried unconditional surrender, and left most Europe in ruins, and half under Stalinism.  Sure, with 20/20 hindsight, Britain and France could have invaded Germany in 1933 – or interrupted his parents a few minutes before his conception in 1888.  But two can play at the hindsight game: Pacifism could easily have prevented World War I, leaving no room for the likes of Hitler to rise to power.

I would add my pet concept of “mercenary morality”: Adopting a truly superior moral position — in deeds as well as words — in many cases delivers true power: the ability to convince your friends and coerce your enemies (and vice versa). The Bush administration’s words and deeds post-9/11 epitomize the squandering of such a morally (or in rhetorical terms, “ethically”) superior position, and the power that accrues to it.

Which points out one key place that Bryan gets it less than totally right:

is any sensible person worried that the U.S. will invade their country in order to take their stuff?

C’mon! Are you serious? Does any sensible person — even the nuttiest neocon — believe that the Halliburton presidency would have chosen to invade Iraq if Iraq didn’t have oil? How does that look if you’re not an American? It’s not crazy to understand why other countries have reasonable concerns on that point.

This may seem obvious to many, but it’s been very clarifying for me.

People often argue against the free-market system — which is based on the idea of rational actors — by saying “people are obviously not rational actors!”

But that’s a stupid argument. It misses the point. Nobody thinks that everyone, always, makes rational decisions. That would be dumb. Rather, the Wisdom of the Crowds idea is that the market operates as if everybody makes rational decisions.

Here are the assumptions underlying that thinking:

The free market results in the best allocation of resources.

Because: People make decisions about what they want to buy, so resources flow to producers of those things.

Even though: Individual purchase decisions are often irrational — not delivering maximum utility to the purchaser (much less to society as a whole).

But: All those irrational decisions cancel each other out, so the rational decisions dominate, effectively allocating resources.

Because: The irrational decisions are random — non-systematic.

The final assumption — which most free-market advocates don’t know they’re making — is the fatal flaw underlying the belief system. (Or at least one of the fatal flaws.)

Bryan Caplan addressed this issue beautifully in his Myth of the Rational Voter. (Some comments on it here.) He points out (and demonstrates) that people’s voting choices are irrational. But more importantly, he shows that they’re systematically irrational. So rational choices don’t float to the top of crowd; they’re dominated by systematically irrational decisions by that crowd.

Example (mine, not his; he has lots of his own): People A) think foreign aid is a big part of the U.S. budget (it’s well under 1%), B) are naturally driven by jingoism and ethnocentrism, C) underestimate the personal and national benefits deriving from foreign aid (just ask Mullen and Gates), and D) don’t like taxes. So they vote for people who promise to cut the budget (hence taxes) by cutting foreign aid.

But Bryan is a free-market believer. So he doesn’t apply the same thinking to purchase decisions that he does to voting decisions. He doesn’t consider (or acknowledge) that in fact, the crowd’s purchase decisions are also systematically irrational.

Example: People A) vastly overestimate their own driving skills (almost everybody believes they’re above average, or even in the top 10%), B) underestimate the dangers of traffic accidents (#1 cause of death in children) while overestimating other dangers (child abduction or terrorist attack: vanishingly small odds), and C) greatly overestimate the value of maneuverability and visibility (sitting up high and looking down on others) in avoiding accidents (braking distance is what counts). So they systematically underspend on what matters for auto safety (braking distance, air bags, etc.), favoring power (“I need it to get out of dangerous situations”; yeah, right), style, size (which generally increases braking distance), and “handling” instead.

So in this case and myriad others, because of systematic human irrationality, the free market does not deliver the best allocation of resources — either for individuals or for society as a whole.

I won’t get into what we as a society do and should do given these facts. (If you want to, you could start here.) Just to say, it’s important to know the facts.

My friend Steve wonders at all the college students who study Lithuanian folk dancing and the like, and wonders whether they shouldn’t study something useful instead, and pursue less remunerative interests when they’re past their prime earning years.

This makes some sense to me, theoretically. But here’s what’s weird, something I’ve been wondering at myself for quite a while:

America is the only country in the world where “liberal arts education” is widespread, actually pretty much ubiquitous in higher ed. (And Canada? Je ne sais pas.) Every other country has a much more voc-tech model: even at Cambridge and Oxford (and certainly in France or China), when you get to college you declare your major immediately, pursue that major, then get a job in that major. In many countries you have to make that decision, or have it made for you, far earlier — at 12 or 15.

America also has, far and away (by everyone’s measure, here and abroad), the most, best universities in the world — maybe even equivalent to its military dominance. America is the number-one magnet location for students from across the globe. And countries across the globe are soliciting American universities to set up satellite shops — with their liberal arts models — in their countries.

How to explain this? The standard, loosy-goosey nostrums about developing critical thinking skills, flexibility of mind, adaptability in a fast-changing work world, etc. seem so vague and wooly up against hard-eyed, nuts-and-bolts preparation for the world of work. But on a national and global level they seem to be born out, in spades.

It’s worth noting that those university rankings give a lot of weight to the strength of graduate schools — which are, essentially, voc-techs at a high level. But (almost) all the people in those graduate schools came up through the liberal arts undergraduate system.

It’s possible, of course, that we have the best universities in spite of the liberal arts model, not because of it. Perhaps if we were more utilitarian and instrumental, we’d be even more profoundly dominant in higher education. But I’m thinking that that imagined counterfactual has the burden of proof on it, up against the existing evidence.

This reminds me of the comment I read a while back from history professor. His students would ask him what they could do with a history degree. He said (paraphrasing from memory here), “Unless you’re going to teach, nothing. But that’s the wrong question. The right question is ‘What do people with history degrees do?’ The answer is — everything.”

Me, I got my B.A. in Literature, Theory and Criticism, and went on to be an equity partner and/or principal in a whole string of startups, with combined values totaling tens of millions of dollars. Did that degree help me do that? I have absolutely no idea. I do know that it’s what I wanted to do at that time — what I’d work at day and night because I was fascinated by the subject. (Even though I had absolutely no intention, at any time in my life, of becoming a teacher or a professor.)

And that interest has continued, greatly enriching my life ever since. Viz. (Competing for the most life-enriching prize is what I call my pre-graduate degree, which I took in downhill skiing — paid for by loading chairlifts in Very Cold Weather for two winters at low wages, and by the opportunity cost of not doing something more remunerative and/or career-enhancing. Shoulda become an investment banker, right? I considered it at the time, it was quite clear where the money was…)

I don’t call myself representative — I’m somewhat smarter than the average bear, and I had a lot of other advantages of birth. Certainly many people will enhance their lives far more by studying something more practical.

But on a national level, I like to think about one of my kids’ best friends, who is currently at the Annapolis Naval Academy, majoring in … literature.

Wacky? Maybe so. But when I look at the world around me, the balance of the evidence tells me that our country and our world are better off because he has the freedom and opportunity to do that. It’s another aspect of the freedom that our country provides — cultural, institutional, intellectual, psychological. It’s among the main reasons — maybe the main reason — that we’re such a remarkably successful country.

Michael Bloomberg:

The simple fact is, this building is private property, and the owners have a right to use the building as a house of worship, and the government has no right whatsoever to deny that right. And if it were tried, the courts would almost certainly strike it down as a violation of the U.S. Constitution.

Should government attempt to deny private citizens the right to build a house of worship on private property based on their particular religion? That may happen in other countries, but we should never allow it to happen here.

I would add:

1. The moderate muslim community, which uniformly disowns and decries terrorism in the name of Islam as despicable and contrary to their religion, is the most powerful voice there is against those terrorists. There are few more effective things we can do that empower, embrace, and encourage that voice.

2. The voices against the mosque are raised not in prospect of any future good, but in angry reaction to past evils. Vengeance, revenge, should never serve as the spur to our actions, because the urge for vengeance — no matter how innate and irresistible it is to the human character — is always about looking backward, never forward.

Retribution — rooted in cold, clear, calculated reasoning and intended to prevent future evils — is often essential and inescapable. But vengeance-driven actions are almost inevitably counterproductive.

That’s what I think, anyway.

I’ve long lauded Jim Manzi for his cogent and convincing arguments against carbon taxes. He’s the antithesis of the “1998 was really hot! Look: it’s cooler now!” school of head-in-in-the-sand self-delusionists. Rather, he takes the 2007 IPCC report as the best available consensus scientific knowledge we have, and uses it to think through a clear-eyed, long-term cost-benefit analysis of carbon taxes/cap-and-trade. Anyone interested in this subject should read this article (and note that it’s published in the regular “In-House Critics” column of the  decidedly lefty New Republic, which speaks volumes about which side of this debate is willing to tolerate and consider — and yes, publish — strongly argued dissenting views).

When I consider arguments in favor of climate legislation, Manzi’s thinking is what I measure those arguments against. Here’s his argument in small (my emphasis for easy skimming):

• “the cost of policies designed to limit the rise in atmospheric carbon dioxide to 450 parts per million (ppm) average a little over 6 percent of global GDP by 2100 (with a very wide range of estimates). That is, we would start paying a cost today that would rise to about 6 percent of world output by 2100 in order to only partially avoid a problem that would have expected costs of about 3 percent of world output sometime later than 2100.”

• “hedging your bets and keeping your options open is almost always the right strategy. Money and technology are our raw materials for options. … the loss of economic and technological development that would be required to eliminate all theorized climate change risk (or all risk from genetic technologies or, for that matter, all risk from killer asteroids) would cripple our ability to deal with virtually every other foreseeable and unforeseeable risk.”

Yes, he addresses the uncertainty/risk/probability issues of global warming — notably those from Harvard’s Martin Weitzman.

It’s a compelling argument: given the risk scenario painted by the IPCC in 2007 — and its uncertainty — our best response is to promote economic and technological growth and development, so we have the resources to address problems in the future, when we have a clearer picture of what the problems are.

But the counterarguments are also very strong. If Manzi incorporated them into his thinking, I think he would come to very different conclusions. Respondents at The New Republic have offered several of them; I will steal from them unabashedly, and add a few of my own.

• The 2007 IPCC report is getting long in the tooth — it’s based on the best research from four to six years ago. Recent research is (almost uniformly) far more alarming. Two examples: 1. “The area of summer sea ice remaining during 2007-2009 was about 40% less than the average projection from the 2007 IPCC Fourth Assessment Report.” 2. One report posits a circa 5% chance that large portions of the planet will be rendered uninhabitable — including the eastern U.S..

• The 2007 report specifically did not make projections for sea-level rise. The modeling of ice-sheet behavior was considered too difficult at the time. The economic costs from rising seas could dwarf all others combined. A cost-benefit analysis that doesn’t include those costs doesn’t tell us much.

A 6%-of-GDP insurance policy against those eventualities starts to sound more reasonable. But even the 6% estimate has serious problems.

• Manzi assumes that carbon taxes will add to, not replace, other taxes. Economists agree that consumption taxes and “Pigovian” taxes — taxing negative externalities — are more economically efficient (they result in greater economic growth and prosperity) than many of our current taxes, like those on income, corporate profits, etc. A carbon tax is a Pigovian consumption tax. If our tax base shifts in that direction, the result is more economic efficiency, yielding the very result — faster growth and development — that Manzi champions.

• He assumes the need for a global taxing regime, ignoring the benefits to the U.S. of a unilaterally imposed carbon tax. The long-term savings in national defense and security from reduced fossil-fuel consumption are darned hard to predict, but even most righties will acknowledge that we wouldn’t have invaded Iraq if there was no oil over there. That war will cost us trillions, all told — somewhere north of 25% of U.S. GDP for a year. And that’s before even considering the fuel that it poured on the fire of global jihad. That was one damned expensive insurance policy to ensure future oil supplies.

• He ignores the threat that global warming poses to U.S. national security, as detailed by those left-wing nut jobs at the Pentagon in their Quadrennial Defense Review for 2010 (PDF): “climate change could have significant geopolitical impacts around the world, contributing to poverty, environmental degradation, and the further weakening of fragile governments. Climate change will contribute to food and water scarcity, will increase the spread of disease, and may spur or exacerbate mass migration.While climate change alone does not cause conflict, it may act as an accelerant of instability or conflict, placing a burden to respond on civilian institutions and militaries around the world.”

• He ignores the truly horrific, potentially even apocalyptic human impact of global warming, and a “mere” 3% decline in GDP, especially outside the developed world. (Quite resoundingly demonstrating Jonathan Haidt’s findings about libertarians’ lack of compassion.) As Nate Silver has pointed out (H/T Bradford Plumer) we could eliminate 43% of the world’s people and only reduce world GDP by 5%.

As I said, I greatly admire Jim Manzi’s thinking. But I have to say that his failure to include these points in that thinking gives the strong impression of confirmation bias.

If you’re like me, you hear your friends say this a lot about America: “we need to start making things again.” It seem intuitively correct, but there’s a pretty standard economic response: if we’re getting all the profits based on our knowledge and innovation, even though we’re not doing all the work, what’s the problem? Sounds kinda great, actually. Apple pulls a 60% margin on the IPhone 4, spending only $6.54 on assembly costs in China for a $600 item. (!)

It’ll all trickle down, right?

I’ve struggled with my thinking on this a lot; there are obviously lots of problems with the trickle-down idea (some of which I’ve discussed many times), but it’s hard to argue with the phenomenal prosperity (or at least profits) that the Apple model delivers.

Andy Grove’s new Bloomberg article does a lot to help me sort out that thinking, and adds another nail to the coffin to which “trickle down” is increasingly (finally!) being relegated.

His central point, cutting the Gordian knot: as the manufacturing ecosystem disappears in America — along with the jobs — we lose the ability to innovate. I think of the decades-long culture in my home town, Seattle, which has its roots in generations of Boeing machinists and engineers bringing up machinists and engineers. It’s a self-perpetuating culture from which innovation springs.

Grove’s article is brief and concise (and well worth reading in full), so rather than summarizing it I’ll just pull some choice morsels for you. All emphasis is mine.

… our own misplaced faith in the power of startups to create U.S. jobs. …

Startups … cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. …

The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs. …

American companies discovered they could have their manufacturing and even their engineering done cheaper overseas. When they did so, margins improved. Management was happy, and so were stockholders. Growth continued, even more profitably. But the job machine began sputtering. …

what kind of a society are we going to have if it consists of highly paid people doing high-value-added work — and masses of unemployed? …

Simply put, the U.S. has become wildly inefficient at creating American tech jobs. …

…the cost of creating U.S. jobs grew from a few thousand dollars per position in the early years to $100,000 today. …

Whoever made batteries then gained the exposure and relationships needed … U.S. companies didn’t participate in the first phase and consequently weren’t in the running for all that followed. I doubt they will ever catch up. …

a general undervaluing of manufacturing — the idea that as long as “knowledge work” stays in the U.S., it doesn’t matter what happens to factory jobs. …

we broke the chain of experience that is so important in technological evolution. …

Our fundamental economic beliefs, which we have elevated from a conviction based on observation to an unquestioned truism, is that the free market is the best economic system …  we stick with this belief, largely oblivious to emerging evidence that while free markets beat planned economies, there may be room for a modification that is even better.

Such evidence stares at us from the performance of several Asian countries … These countries seem to understand that job creation must be the No. 1 objective of state economic policy. …

these economies turned in precedent-shattering economic performances over the 1970s and 1980s in large part because of the effective involvement of the government in targeting the growth of manufacturing industries. …

Long term, we need a job-centric economic theory — and job-centric political leadership — to guide our plans and actions….

… our pursuit of our individual businesses … has hindered our ability to bring innovations to scale at home. …

Losing the ability to scale will ultimately damage our capacity to innovate. …

The first task is to rebuild our industrial commons. … Levy an extra tax on the product of offshored labor. … Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations.

I fled Hungary as a young man in 1956 to come to the U.S. … I witnessed first-hand the perils of both government overreach … there was a time in this country when tanks and cavalry were massed on Pennsylvania Avenue to chase away the unemployed. It was 1932; thousands of jobless veterans were demonstrating outside the White House. Soldiers with fixed bayonets and live ammunition moved in on them, and herded them away from the White House. In America! Unemployment is corrosive. …

If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us.

Grove understands what the rabid Norquistista free-marketers seem incapable of comprehending or acknowledging:  there is an invisible hand, but there is also a tragedy of the commons.

He only makes one real policy proposal: taxing offshore work and using the money to encourage onshore employment. There are many others (Robert Frank had some great suggestions in last Sunday’s Times), all rooted in central economic planning by the federal government. I’ll just mention my favorite once again, without further discussion: greatly expanding the Earned Income Tax Credit, and increasing its “salience” by delivering it on weekly paychecks.

And then there’s infrastructure, of course. I just rode the TGV from Paris to Avignon and back — at 200 mph. A great experience, and the prosperity it’s delivered to southern France is incalculable.

China is currently building 42 high-speed rail lines. We have one that we’re sort of, kind of, working on.

I’m sure this is because China is foolishly engaged in centralized economic planning.

And we — obviously far more clever than they — are not.