Might Be the Best Econ Blog Comment in Many Months

This might be the best econ blog comment I have read in many months--hoisted from here . I say "might be" because I'm real shaky on micro (my chagrin tinctured by the notion that it just might be a psuedo science anyway). And the commentator is, you will have to concede, more than a tad elliptical in his presentation. Still--an earlier commentator had asked "how many libertarians are there[?]" --with the suggestion that there weren't very many. "Bartlett" is Bruce Bartlett, the renegade Republican who wrote an admirable book with material drawn almost 100 percent from critics on the right. The commentator (a certain "Blissex," otherwise unknown to me) responds:

Well, there are at least two strands of libertarians in the republican party, gun activists and small-government ones. The gun people are actually quite numerous. My impression is that the small-government ones are few and they matter(ed) only as the ideological conscience or figleaf of the party.

Bartlett's problem is that he does not want to talk about the 3rd wing of the party, the business interests.

Because while many small-government libertarians assume that business interests were small-government too, this was a colossal misunderstanding: business interests care a lot not about principles like small government, but about outcomes, so they are against big government only when it benefits someone else, and wholly in favour when it benefits them. And they are far more important than the libertarians because they pay the bills.

Then I thoroughly disagree with, as rather selective and self-serving, his summary of policy in the 70s and 80s:

«[W]hen inflation became a serious problem in the 1970s, the Keynesians really had no good explanation for it or a cure.»

Well, those were as a rule neoclassical Hicksian ''keynesians'' (general equilibrium + liquidity trap), but the explanation was there and the cure was there: It was fairly well known that after the Vietnam War ''gun and butters'' economic policy and the subsequent oil shock inflation was deliberately being let rip to shift the brunt of the adjustment on savers to the benefit of corporate (business and union) interests.

The cure was to stop using inflation to do so, but it was politically impossible for a while.

Contrarily to Friedman's shallow principle, ''inflation is always and everywhere a political phenomenon'' (coinage and seignorage are some of the principal tools of political power) and this was well understood in the 1970s too, doublespeak or not.

«In this intellectual vacuum, libertarian economists like Milton Friedman gained credibility and influence by arguing tight money was needed to stop inflation.«

My impression is that instead when the inflation party had reached their objectives, the anti-inflation party used Friedman as the excuse to return to normal. Volcker's primary instrument was very painfully high nominal (and real) interest rates for years, in other words (investment side) long term demand management to counter inflationary expectations. Money supply followed.

Economists were not asking themselves how to stop inflation; they knew very well. The questions were how create a political climate that allowed for the pain of lowering of inflation, and how to sell it using which figleaf.

«The Keynesians also had little to offer when economic growth slowed...»

Well, those neoclassical Hicksian ''keynesians'' had a full employment general equilibrium model with the one little exception (the liquidity trap), and thus were indeed a bit stumped. Keynes had quite interesting concepts as to why growth happened, and so did Schumpeter...

«This opened the door for the supply-siders, who advocated tax rate reductions to stimulate growth. ...»

But this was just demand management by another means, and the tax-rate excuse was thin, as tax rates even within large bands seem to have little effect. In the 50s the top rate was 90% on incomes above $3m-$5m (depending on which inflation index you use):

http://WWW.IRS.gov/pub/irs-soi/histaba.pdf

seemingly without ill effects, and anyhow with supply-side tax cuts government did not become that small, the deficit just went up.

But there were two types of supply siders: those who thought that a deficit stimulus via lower taxes would succeed where a deficit stimulus via higher spending wouldn't (neither worked much beyond redistributive effects), and the ''micro matters'' supply siders who thought that the brake was not an insufficiently large deficit, but institutional and microeconomic constraints, like excessive government regulation and ownership of industries, which was generating too many positions of rent. For example AT&T was a master at regulatory capture, and was holding back (deliberately) computer networking and technology (consent decree of 1956 and consequences).

The ''micro matters'' supply siders seem to have had a rather greater impact on welfare and growth than the deficitarians whether Hicksian or Lafferian, and that is really a vindication of Keynes (and Schumpeter) and ''animal spirits'' theory.

Bartlett again tries to forget what is uncomfortable for him: just as the Republicans have a business interests faction which is far more important than the libertarian one, supply siders had a ''micro matters'' faction that actually made a lot more sense than the tax-cutting one.

Posted by: Blissex | Sep 6, 2006 4:44:55 AM

The source blog ("Economist's View") is a current favorite. Great for stimulating econ stuff, with a virtually total absence of snide or snarky commentary.Comments to Blissex continue to roll in. They deserve attention in their own right.