Russ Roberts

Garett Jones on Macro and Twitter

EconTalk Episode with Garett Jones
Hosted by Russ Roberts
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Garett Jones of George Mason University talks with EconTalk host Russ Roberts about the art of communicating economics via puzzles and short provocative insights. They discuss Jones's Twitter strategy of posting quotes and short puzzles to provoke thinking. Jones, drawing on his experience as a Senate staffer, discusses the interaction between politics and economics in the area of tax cuts and earmarks. For example, are earmarks good or bad? Jones gives an unconventional analysis. He also discusses the economics of the new workplace and why that might mean a different path for productivity over the business cycle than in the past.

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0:36Intro. [Recording date: February 16, 2010.] Garett is a macroeonomist, but uses Twitter, which is micro. Tweets on deep issues using tweets as a form of both entertainment and economics education. Career path and how got to George Mason? Undergraduate degree in history at Brigham Young U., minored in sociology, thought they were good ways to learn how societies worked. Noticed that in both, the most interesting explanations came from economics. Read some of Fogel's work on economics of slavery, Rodney Stark on economics of religion. George Stigler, economist, said, "There's only one social science and we're its practitioners." Decided to try to get a Ph.D. in political science. Took all the fun classes in one year. Learned a lot of great stuff. Ultimately realized econ was the way to go. Took a year off to take appropriate classes, math classes. During the year off, was lowly intern for Orrin Hatch of Utah in Washington, D.C. Tax policy. Making copies, licking envelopes. Advice: Always be willing to do more work, take more to do. Eventually got to the point of being able to draft speeches and op ed. After that, went to UC San Diego in economics--reputation for being very mathematical, very formal. Trying to get away from years of squooshiness, trying to find balance. Went to first academic job after dissertation that job market wasn't that excited about--on how the Federal Reserve controls interest rates on a day-to-day basis. Part was on intraday changes in the Federal Funds rate. Got to think about natural experiments, so common now in microeconomics. Thesis adviser was Jim Hamilton. What if Fed accidentally puts in or takes out a billion dollars too much? Hard for them to tell how much to put in or take out of the economy. Thinking about macro in micro terms. Toiled away in academia for a couple of years. A few weeks after 9/11, phone call from Senator Hatch's office--wanted a Ph.D. economist on staff, found him through Google at Southern Illinois University. Left academia for 15 months; economic policy adviser to Orrin Hatch--tax issues, labor issues. Year of the 2003 tax cuts, when taxes on dividends and capital gains were cut; a lot of the Bush rate cuts were sped up. Then back to academic life. During time in the Senate had decided it was fun but not as much fun as the free thought in academia; so if going back, had better find something to work on that was incredibly exciting. Otherwise, stick around a couple of years and then cash in as a lobbyist. All about the opportunity cost. Went to work on economic growth.
7:01Working on a book in economic growth--relationship between IQ and economic growth--will do future podcast. For here, experience with Twitter and academic--real world--experience. Two unreal places--academic life and Congress. Twitter, in the abstract first. Russ on Twitter as EconTalker, questions for listeners, announcements of who is coming up, occasionally for short bloggings, but not a lot of "I'm having a pizza right now." Tyler Cowen podcast: older folks tend to look down on Twitter; but it's a form of communication. Just a short form of blogging if you don't do it on your cell phone. Twitter limited to 140 characters, including spaces; a lot of abbreviations are used. Somewhat like Haiku, there is an elegance that arises from the constraints of 140 characters. How does Tweeting relate to your Senate experience and public choice? Common when reading books or blogs to find great little short nuggets, short quotes. Whole books like Bartlett's Familiar Quotations consist of short quotes--guess that half are 140 characters or less. The best parts of books are often in that 140 character range. A lot of economics is distilling things to their essence. Political Science class--this week, we'll read this 1000 page book; we'll come in and talk about it next week. Ultimately you pull out maybe a little more than 140 characters, but not too much more. In academic economics, we often write 30-page articles that can say more--or less--than 1000 page books; a core insight. Twitter encourages focus on the basic idea. Hayek's "The Use of Knowledge in Society"--15 pages--read many times and worth rereading. Most we could ask for from Twitter is a tweet that is so provocative, so distilled that it would be worth rereading it many times. What are some? On Twitter with one "r" in "Garett"--GarettJones. One the other day, Tyler Cowen just linked to: If businesses say the tax cut doesn't help them, that's an argument for the tax cut. That's a puzzle. Tries when twittering to create a puzzle. If the tax cut doesn't help them, that seems to be an argument against them, since after all, the idea of a tax cut is to get the business to respond. Want a big response, big help. How can it be that it's an argument for the tax cut. Would seem to be an argument for the impotence of the tax cut, and therefore a bad argument, a case against it. Businesses love it when you cut their taxes on things they are already doing. That's what they get really excited about. Saw lobbyists coming in while on the Hill; companies do spend a modest amount on lobbying tax issues. A lot of business see taxes as a cost to be managed, not as a policy choice--if you cut taxes we'll respond this way: if you cut taxes on capital, we'll do a lot more investing. A way to get their rents lowered. Not interested in making the country better off; focused on their bottom line. The kind of tax cuts businesses would respond most to are ones where they are kind of indifferent between doing one activity versus another. Example: whether a business locates on the right or the left side of the street. Simple choice; we as voters might have a preference: A city council might decide they want a gas station on the right side of the street rather than the left. Could just turn around; so let's call it the East side versus the West side. Small tax, pennies, dollars, to encourage them to locate on the east side of the city or the intersection. If you want them on the east side, only a very small incentive is necessary to get them to do it. A lot of tax changes that get bandied about are really just paying businesses to tell them to do what they would have done anyway. In some cases, a lot of things tax lobbyists would come in and ask for were genuine simplifications--government would just have a lot of crazy rules, hoops for businesses to jump through.
16:05Standpoint of the classroom: infra-marginal changes versus marginal changes. Inframarginal: stuff I'm already doing, so it will take a massive change in price or taxes to get me to do something different. Marginal meaning it's going to affect my behavior. A lot of people get confused because they have trouble keeping these things straight; people say: If we make it less lucrative to be a doctor, that's not going to change the number of people who becomes doctors because "no one goes into medicine to get rich--they do it to help people." For an economist, hard not to laugh. People go into medicine for lots of reasons--presumably because they like to help people, find it satisfying; presumably because it pays very well. There are many, many people who, if their wages were cut in half might still want to be in medicine. But there are millions more who would become lawyers, who are just willing to get their medical degree; so if you make it less lucrative, they are going to go do something else. It's not to say that people are motivated to become doctors solely for the money--it's just that money matters. To finish the tweet: flat supply and demand curves; what do relatively flat or elastic curves mean? A perfectly flat supply curve means that businesses are going to supply the amount of output at one particular price. If the price rose slightly, there would be an infinite amount supplied; if the price were cut slightly, there would be none supplied. Might be the equivalent of whether you open your gas station on the East side versus the West side. If just a little bit steep, not quite perfectly flat, then if the price rises just a little bit, you will get a huge quantity response. People will supply a lot more of that product. For example, might happen if you paid people more to be a specialist in medicine, ear, nose, and throat specialist. Pay a little more, a lot of people go into that specialty. What that means is that if the supply curve is relatively flat, there is not that much of what we call producer's surplus out there in the market. Not that much extra value being created that gets the producer excited. Producer surplus is basically the difference between what you'd have to pay a person to be willing to produce that unit of output, versus what they actually get paid. It's a little bit like profit. A relatively flat supply curve means it doesn't take a lot of extra money to draw me or my suppliers into the industry. The costs of me doing it, what I'm giving up by expanding or going into this industry, are relatively similar to what I'm already doing. We say in that case that there's very little economic profit; or that there is very little producer surplus in those industries where my next best alternative is almost as good. If something doesn't work out, I can just go ahead and do that other thing. In a setting like that, there isn't going to be a lot of extra value created if the price goes up a little bit. The producers are going to switch over from one market into another market, but it's not going to be the kind of thing they are going to get excited about enough to lobby about. The consumer might benefit tremendously, though, because the shape of the demand curve has nothing to do with the shape of the supply curve. If consumers are very eager to get this new product, relative to the old one, even if it doesn't cost a lot for the market to supply it they are going to get a huge bargain. So much of the production and innovation that goes on is by companies already in a line of work, deciding to just tweak slightly what they are doing in order to create a lot more value for people. The iPad is a great example of this. Everybody made fun of it the day after it came out--they said it's just a huge iPhone. But when you think about it, a huge iPhone might be great. So from Apple's point of view a small change. We'll see how that will work out. We don't know, and they don't either. Idea would be that if the business is saying this isn't going to help us, it could be a very good thing to encourage or discourage this activity because the consumer could benefit a lot. The fact that a business is asking for one tax cut or another shouldn't really get that much play in our political process. We need to think through the consequences. Sometimes what's good for General Motors (GM) is good for the country. Usually not. Especially right now--old quote, someone being appointed to a position in a Presidential administration who had helped run GM, about 50-60 years ago; different world now.
22:45Another example: Pointed out on twitter the other day that the way to control spending is to create more earmarks. Strange idea; put "[sic]" as a reminder that it was not a typo. Everybody's against earmarks, though they are not popular. It's not my earmark, so it's a terrible thing; we've got to get rid of earmarks. The impolite way to say it is "pork"--driving us into debt. What could possibly be good about earmarks? They are one way for party leaders to control individual members. American politicians are really entrepreneurs. Every person is building his own brand. Not like in the British system, if you are in the Labour Party you have to do what the Labour Party says. Why is that, by the way? Not entirely sure. Much more party loyalty in the United Kingdom than in the United States. Well, what's so great about party brands? Parties last a long time. Parties are a brand. In the private sector, why do employees pay attention to the company brand reputation? Because there is this corporation saying let's pay attention to Toyota's reputation. Creating some bad cars, some trouble; Toyota cares about that name value. Executives at Toyota have an incentive to take care of the brand. Employee gets paid the same no matter what, does same job no matter what; doesn't care about the brand. That creates an incentive those who have a bigger stake in the brand to monitor, to encourage caring about the brand. IBM, Microsoft, even Ford have good brand value. Parties are one part of American politics that last for a long time--Republican party brand, Democrat party brand have some value. Go up and down--polls. Party brand on average may have a longer focus on the future than individual politicians would. Individual politicians might say they will be in office for 4, 6, 8 years, then cash in as a lobbyist or go back and run for Governor. The party brand might be focused on the long run. Donald Whitman's The Myth of Democratic Failure--there are market failures in political markets, but brands are one way to overcome that. Earmarks are one way to keep the underlings in line. It's a way of rewarding your friends and punishing your enemies. People at the top have some control over earmarks. The Majority Leader and Speaker of the House can tell someone they need your vote for something, and when the member says, what's in it for me? A new post office, a new interchange, a new four lane bridge instead of two lane bridge; and they get to brag about that back home. In the United States, both parties get to exercise their earmarks. Surprising how it's a bipartisan game. In the last Presidential election, John McCain came out boldly for getting rid of earmarks. Remember it as being a remarkably small amount of money--tens of billions, not even a hundred billion. Something like $20 billion. A drop in the bucket in the U.S. budget. Suggesting it is an incentive system within Congress to get stuff done that otherwise would not get done; we'd like to think that maybe would be better than the alternative because maybe some longer term incentives would be in play. At some point, this or the next decade, Congress is going to wrestle with entitlement spending. The options are pretty clear--will be some combination of raising taxes, cutting spending, or defaulting on the debt. Default might mean some inflation or just being a slow payer. When the time comes it's going to be parties that cut the deal. Both parties would like to brag about that to the voters, saying they didn't cut your benefit; but the parties both know it has to be done. Later rather than sooner. Having the ability to discipline members--which are such an inexpensive way to buy the votes of politicians--will work better than trying to appeal to their patriotism, for instance. The alternative: extra entitlement spending. Given choice between giving a Congressman a $2 million post office in his district versus a $2 billion dollar increase for his district in Medicare spending--say, because he's got an older population--it's cheaper with earmarks.
31:22Digress: Rep. John Murtha passed away, recently. Washington Post obituary called him the King of Pork, master at getting stuff for his district. Don Boudreaux wrote a letter to the editor--don't know if it got published; email Russ if you want to get on his mailing list--similar to Twitter, has to be short--It's interesting if you are a Congressman and you manage to get millions of dollars for your constituents, you are considered a hero. You get re-elected and you brag about it. But if you went around the country breaking into homes and banks, took the money and gave it to your friends, you'd be called a thief. What's the difference? Russ: don't think there's a big difference; not a big fan of earmarks, at least not in the short term. But is it imaginable that part of our challenge as a body politic in the United States today stems from the fact that what was once considered honorable is now considered dishonorable and vice versa. Maybe there was a time in America when to bring home pork for your constituents was considered somewhat inappropriate. The mechanisms may not have been there. It's a cultural change. There are a handful of people in Congress who would say it is wrong. The more stuff you don't do because it's wrong, the better off you are. You don't want to rely on legislation as a way to stop. Consider it a form of redistribution from one part of the country to the other. Some are better at gaming the system because they have been at it a longer time or they know the rules better; are able to use that influence and knowledge and channel their influence to a small group of people known as their constituents. Why wouldn't you be ashamed of that? Surely there was a time where people might have been ashamed; now they are good politicians. Senator Nelson in Nebraska was embarrassed that he cut a deal for his constituents to get a deal on health care; Senator Landrieu of Louisiana had some embarrassment. But they've decided to live with it. Thoughts on those issues? Was in the Senate at the time when pork was king. Same size as normal pork projects. Many small, little tax breaks, can imagine they are designed to benefit small groups. Often in the range of tens of millions of dollars. Occasionally a billion dollars. Sense that this has gone on for a long time. Building canals in the 19th century; where railroads went was probably pretty politicized. It seems that it is a signal voters look to as a sign that their politician has some skill. If writing down a model of political economy, would model it that way. Voters can see a new bridge with a sign that says "Your tax dollars at work." Of course, it's other people's tax dollars; should say: "Your distant neighbor's tax dollars at work." In the Troubled Asset Relief Program (TARP) bill, which was a $700 billion bill, which failed the first time--the second time it passed. We were told we were on the edge of a cliff, apocalypse. Hidden away in that very long bill was a paragraph or two of green energy. Who is not in favor of green energy? Turned out it was a subsidy for cars that were using some form of electric power; and it just turned out that it only applied to one car--the Chevy Volt. The way they did that was to make it apply to a certain type of electric battery. More than one company working on electric batteries, but the Volt had its own unique battery, so that's what the subsidy was for. On Capital Hill, call that a "rifle shot." Targeted. Usually rifle shots are considered shameful. Some range to it, roughly $5000 per car, huge. That rifle shot was done quietly. Even though you can brag about it to your constituents, it's considered somewhat gauche to do it out in the open. Like steroids--kind of tolerated in the culture of baseball, before they were banned. Considered okay, but not exactly. They all hid it; wanted people to think their skills were natural. Earmarking and pork is something like that steroid debate. Try to do it quietly.
40:22Productivity. A few tweets over last few months that mention organizational capital. Arnold Kling at EconLog has a theme on this. What is it? Organizational capital is basically the ideas and habits of work that people build at work. We know what physical capital is--the machines. Businesses also build cultures, R&D labs and trained people. A lot of what we are doing at work is building patterns, processes. When Arnold worked at Freddie Mac, he didn't spend his time processing loan applications. People spent their time building computer programs that would take care of the stuff automatically. At Citibank--another semi-private, quasi-private, faux-private enterprise in the United States. These folks build patterns--write or approve computer programs about which checks clear, loan approval. Engineers at an auto company--it doesn't take that many people to build a car; it takes a lot of people to design a car in advance. How much money will go into safety, how thick should be the sheet metal? The job of a corporation is to get the process moving. Thought of Russ in San Francisco over the weekend--video about a local fortune cookie factory which manages to crank out 10,000 fortune cookies a day with exactly two workers. Russ's The Price of Everything--how few people it takes to run an egg processing facility. Whole idea of people-free production--sounds like you are playing when you say there are not many people involved in making a car. After all, they are involved in design--so they are making the car. Yet it makes a difference. Car factory--should go. Can sometimes see some of the magic in an ad. In a Ford plant in Kansas City in the mid-1990s. If you stand in the right part of the factory, every 30 seconds a brand new car rolls off the line. For fans of "I, Pencil," think of the people who designed the robots. Extraordinary thing the way we have embodied knowledge within capital. There are factories that have no people. Don't have to have lights or heat; save more money. Wasn't true 50-100 years ago. Why relevant? Relevant for explaining the recession and the recovery. For this recession right now, we have seen that the productivity of workers is going up during recessions. For people on the streets, that makes sense--that's when the boss comes and says he's going to make you work harder. Certainly some of that going on. Even Marx made this point about the reserve army of the unemployed--the boss can always point to the unemployed on the streets so you better work harder. Puzzle is that it wasn't always this way. Before last few recessions it wasn't this way. There is a whole theory built around the idea that productivity tends to go up during booms and down during recessions--real business cycle theory--Ed Prescott and Finn Kydland got the Nobel Prize for inventing this model. Pro-cyclical productivity. They noticed the fact--which economists didn't really dispute--that productivity was higher during booms and lower during recessions. In the past. They came up with this model in the 1980s. They said: let's see if we can explain that by assuming or believing it's the productivity that is following its own path. There are times when productivity is high--say when we are having a lot of innovations or when government regulation is supportive--and maybe bad times when there is the opposite. Or maybe animal spirits; or maybe when oil prices are low it's really cheap to bring in inputs from overseas. What Kydland and Prescott did was show they could explain everything else that goes on the business cycle starting with that. Economy grows faster, more investment, unemployment goes down, etc. Boiling it down to an aphorism: You make hay when the sun shines. The reason you don't make hay when the sun doesn't shine is because it will be damp and mildewy, and the hay will rot. Better wait. Work more when productivity is high and less when it is low. Self-reinforcing. Were able to explain why wages and investment are high during booms and why productivity was procyclical. The problem was--the model was true until it wasn't. The last three recessions we've had the opposite happen. 1991, 2001, and the current one. We've returned to the land of common sense, where it looks like bosses make people work harder. Decades of commons sense being false; all of a sudden common sense is true. Unlikely that bosses have suddenly decided to be greedy and previously deciding to lay off workers--we don't want to work them too hard--in the old days.
50:38So what could have changed? Goes to this idea of organizational capital. In layoffs, they might be laying off people involved in design. There is a lot of uncertainty about what is going to profitable or even legal in the future. Financial services industry. Now is not a good time to invest in new production processes. Keep around the people working on the line at Ford. That number will be relatively unresponsive to swings, is the claim. McDonald's probably be keeping the same number of people at the restaurants making hamburgers, but probably have fewer people at Hamburger University. Measured productivity. In everyday language we think productivity means how skilled are you. If I've gotten more productive, that means I can make more in a particular amount of time. But that isn't exactly what it is. it's An aggregate number gathered by looking at a measure of labor--number of workers, hours worked. If number of workers, the denominator can go down a lot without productivity going down a lot during a recession. Most of us sitting in cubicles making sure people get paid, taxes get done, writing computer programs. Can't do that in construction. If you are building half as many houses as before, you can't do that. In the past recession, large percentage of construction workers laid off. Tweet on this particular one: it's an old one.
54:29Anything else, fun, for tweets? Supply siders pretty popular in some circles: people respond to tax changes. Models may be too optimistic, predicting that people respond a lot to tax changes. One prediction, if you were an honest-to-goodness supply-sider, would predict that 2010 would be a boom year, at least for America's rich, because taxes are going to be going through the roof in 2011 for people making over $100,000 or $200,000 a year. 2010 compared to 2011. Can look at this after the fact. People should make hay while the sun shines. Think they are going to be wrong. Chastening moment. Tax rates are important, but maybe not so important for labor supply. Empirical question. For podcast, talked about looking at whether there is a correlation between tax cuts and government spending. Milton Friedman said he never saw a tax cut he didn't like: the less money the government has to play with the less damage they'll do. Often goes by the name of Starve the Beast. Theory of politics--not economics--that there was a politically acceptable deficit they can run. They'll spend all the money they take in in taxes plus that deficit; that's total government spending. Tax cuts pull down the level of government spending. Distinction between tax rates and tax revenue. Assuming that cuts in tax rates lead to less tax revenue--usually the case, holding everything else constant, that we are not in the downward part of the Laffer curve. We've had decades of experience with this; you can look at the data yourself. A few have looked at it more formally--Christina Romer, before she took office as head of the Council of Economic Advisers, with David Romer, looked at it herself using one statistical method. Niskanen at Cato Institute used another method. Both came to roughly same conclusion--that tax cuts today may cause tax revenues to increase in the future. William Gale at Brookings: politicians have two ways of looking at the world--Puritan Mode or Partier Mode. Puritan mode: parties restrain each other, on a diet. Partier Mode: just let go. Seems to match the U.S. data. Time to revisit idea that tax cuts control government spending. May be encouraging Congress to party more. We haven't made much impact on the size of government. How to move in opposite direction? People are a little more worried than they used to be. Baby boomers moving toward retirement. We just saw a trillion dollars go out the window without politicians making too big of a deal about it. Get you thinking. We were supposed to be putting our fiscal house in order in the last ten years getting ready for the baby boomers.

COMMENTS (31 to date)
Richard W. Fulmer writes:

Another possible explanation for rising government spending following tax cuts is that the Laffer Curve is correct.

That is: tax cuts result in more economic activity, which leads to higher business and personal revenues, leading to higher tax payments, more government revenues, and more government spending.

Jason Woertink writes:

The portion of the podcast where Russ considers that "Maybe there was a time in America when to bring home pork for your constituents was considered somewhat inappropriate." and it reminded me of a line from Mr. Smith goes to Washington where Senator Paine says "You've got to face facts, Jeff. I've served our State well, haven't I? We have the lowest unemployment and the highest Federal grants."

J. F. Giertz writes:

Anecdotal evidence suggests that there was little shame in the past about earmarks and pork. Mendel Rivers and Robert Kerr are two cases in point.

“During Mendel Rivers’ tenure from 1941-70 representing Charleston, S.C., on the House Armed Services Committee, that city’s naval yard became a major Atlantic Fleet base and acquired squadrons of destroyers and nuclear submarines. The base added submarine-training and maintenance centers, a hospital, supply and weapons depots, and a mine-warfare center. An Army depot, Air Force base, Marine recruiting depot, Coast Guard station and veterans hospital opened. Never was a campaign slogan truer than “Rivers Delivers.” “You put anything else down there in your district, Mendel, it’s gonna sink,” a colleague once told him.” Jeff Thomas (http://gazettenewsroom.freedomblogging.com/category/military/)

Oklahoma Sen Robert Kerr (senator from 1949-1963), labeled the “King of the Senate,” almost singlehandedly made the Arkansas River a navigable water way into northeastern Oklahoma even overcoming a presidential veto of Pres. Eisenhower. The project connects the bustling port of Catoosa, Oklahoma to the Mississippi.

B. Watson writes:

I was surprised to hear you so thoroughly denounce earmarks, Russ. And further, for you to long for the good old days when we could count on people to do the right thing? When have you ever argued that it is enough to expect someone to do something that was against his interests for the larger good, or perhaps out of shame. Why should anyone be ashamed of striking a good deal? How is this anything like stealing? All of this sounds like the other side of the arguments usually forwarded on this podcast, the unthoughtful many who demonize the shrewd as thieves The response I expected from Mr. Jones, the one I thought he was making at first, is that earmarks are essentially a form of money. Earmarks are the result of quid pro quo trade not burglary. No one gives you bridges you trade for them because you want the new bridge more that you hate the legislation. And of course rule number one on Econtalk is: trade always makes everyone better off. I don't see what in the world is wrong with buying votes in this way or any way to be honest.

Scott clark writes:

B Watson, I agree with you that it's out of place to believe that the past had some special people who were more upright. Since the time of the articles of confederation in this country people have been trying to satisfy their desires through the political means. But the point about earmarks being stealing is that they are just straight up redistribution, taking from some and giving to others without any good pretext that this is for the good of the nation as a whole. I am one of those unfortunate people that recognizes the state as an anti-social institution controlled by one set of people to be used to exploit other sets of people, so it's all illegitimate to me, other people just recognize it a little more in the form earmarks.

Shawn writes:

Someone's been listening to econtalk and they can't see the difference between trade and rent-seeking? I'm inclined to believe that that's a failure on their part, rather than Russ'.

Greg Ransom writes:

Earmarks are overwhelmingly used to logroll increases in spending and increases in government -- can Garret given even one example where an earmark was used to reduce spending or decrease the scope of government?

The folks who control the game are the appropriations guys -- these aren't constitutionalists or small government people, by their nature. It's like expecting those with a taste for running a totalitarian system to have no taste for wielding power -- people who are attracted to appropriations are in it for the big spending and the power that goes with it.

Garrett's earmark idea reminds me of the worst aspects of academia -- clever but very dumb stuff produced because clever sells, no matter how dumb. And in my field of philosophy, dumb is off the Richter scale, the dumber the better, because only the very, very clever can get away with it, e.g. "possible worlds semantics" where the "possible worlds" really exist. Really. Really, really.

You can make a name for yourself by being so clever that the spin for your really, really dumb claim is so clever that it's very difficult to knock it down -- even as it is very easy to point out that the idea makes no sense and is absurd.

Joel Weyrick writes:

To add another comment about earmarks, the discussion reminded me of a folksy story of Davy Crockett, no less. I'm not sure which side of the argument it proves, whether people used to look at "earmarks" with disdain or were happy with them. The story itself seems to imply that people were happy with them, however it was apparently a popular story which argued against government "charity."

http://fee.org/library/books/not-yours-to-give-2/

Pingry writes:

Russ,

I look forward to listening to this podcast.

May I make a suggestion? Could you do a podcast with Frederic Mishkin on monetary policy and inflation targeting?

--Pingry

Daniel Klein writes:

Greg Ransom above carries himself distastefully, but I too thought that Garett needed to complete his argument on earmarks.

Garett is saying that earmarks are a way for the over-agent to enhance cooperation among those among the agency's ranks.

But is it like getting more cooperation among a band of pirates?

Garett needed to explain why the over-agent in this case -- the political party -- is more like an enlightened leadership than like a band of pirates.

B. Watson writes:

You may not like the framework of government but given that we have one I'm not sure I understand why it's desirable to take away politicians' ability to barter on behalf of their constituents? I get the stealing point but the money has already been stolen, taxes have been taxed. The question at issue is what do we do with it? What mechanism do we have that allows us to fairly distribute the stolen money?

"redistribution, taking from some and giving to others without any good pretext that this is for the good of the nation as a whole"

Why even ask for a good pretext? What good pretext could there possibly be? This is where I'm surprised. Asking for a better rationale for the top-down redistribution. But we already know how to get good reasons out of the relevant parties and it's through a price system. Earmarks help price the votes (in bridges say). Since we'll always disagree on what money should go where, what works and doesn't, why not let self-interest loose on the government? Politicians only make deals when they each benefit.

Now, if your actual concern is that you don't believe that politicians are looking out for the constituency's interests, I tend to agree. But if you think that the solution to the problems of government regulation is more regulation I don't agree.

Bob Promm writes:

The General Motors quote was from Charles Wilson Secretary of Defense in WWII

AHBritton writes:

Richard W. Fulmer,

What you propose is an empirical question and, on the face of it, easy to disprove.

What you are suggesting is that tax cuts increase revenue and then the government decides to spend it. This is not true, at least in a limited short term sense. What Garett Jones is referring to is the fact that the Federal government tends to cut taxes, which DOES decrease immediate revenue, and that they also increase immediate deficit spending, i.e. without waiting for an increase in revenue.

This means that the government increases the spending of money it doesn't have at the same time as cutting taxes. This is born out by the empirical evidence.

As far as the proposition that the tax cuts themselves eventually increase revenue through stimulating productivity, that is more complicated. Even if true it still does not dispute the fact that governments tend to both cut taxes and increase spending of money they don't have.

Superheater writes:

Russ:

I listened to Garett Jones’ discussion on earmarks in your most recent econtalk podcast and quite frankly was aghast that he myopically finds these things not only acceptable, but actually asserts them to be useful in producing positive outcomes in ways that defy the evidence of historical fact.

My primary objection to his acceptance of this spoils systems is his presumption that there should be “party leaders”; who can discipline (browbeat) the “rank and file” into adhering to some mythical party orthodoxy. Leaders may be necessary to maintain parliamentary procedure; but powers in excess of those necessary to conduct the business of the legislature are an invitation to create (unconstitutional) powers that are sure to be abused. In my state (PA); party leaders have-and still do unless there's been a big change-had the power to allocate staff sizes, office locations and other powers and benefits of office-effectively rendering peers into subjects. Incidentally, both the Republicans and Democrats fail to adhere to national norms on a variety of topics. Indeed the common complaint in the Keystone state is that there is insufficient choice-just a monoculture of creative spending based on conspicuous benefits and hidden costs. We are also in the middle of huge corruption scandals (google Vince Fumo and Mike Veon)

However, even if the preservation of party “brands” were desirable and accomplished by the presence of “leaders” enforcing discipline by wielding a spoils system; most thinking people should have a problem with this in that it represents centralized control and clearly violates the concepts of equal protection and equal representation under the law.

It’s a long recognized problem, one old politician whose name escapes me explicitly stated that control over procedure would trump control over substance every time.

Parties are clearly durable (at least in the United States); but they seem to function as the political equivalent of gangs. Whatever their merits; they are not businesses to be analyzed with some Boston Consulting Group abstraction.

I reject the idea that earmarks controlled by party leaders protect the “brand”, such things only protect power structures that have given us decades of fiscal profligacy. Political parties often survive because necessity FORCES them to change; not because of enlightened leadership. The Democrats used to be the party of segregation and Jim Crow; the Republicans were protectionist; today neither adheres to such ideas, indeed advocates of such ideas would be treated as atavistic throwbacks.

Perhaps most fantastically, Mr. Jones asserts that this system will demonstrate its greatest utility in producing discipline when hard choices regarding entitlements have to be made-yet there is no evidence that such enforcement mechanisms have EVER produced fiscal responsibility.

Mr. Jones may have come to the economics profession because it offered the most answers-and I agree it does-it does not supply the only answers-and its important to know when to consult other disciplines or considerations.

Christine writes:

I believe one possible reason that British politicians are more loyal to their party is that British citizens tend to vote by party and not individual.

Snaporaz writes:

FUN podcast. Please become a regular Garett!

AHBritton writes:

I am often surprised by the fact that people who supposedly believe in the diffuse and imperfect nature of knowledge, as well as the false hubris that creates the belief that society can be planned, are at the same time blind to their own hubris and certainty of thought. I am not really sure where this comes from, although I have my suspicions that for some it is Mises' confusingly flawed and philosophically weak foundationalist epistemology which resulted in his idea of praxeology.

In reality, if knowledge is scattered and imperfect (as I believe it to be) we are all possessors of various imperfect fragments of knowledge. Which is why it is of utmost importance that we try to understand the diversity of ideas out there instead of immediately dismissing them. Raised in a rather liberal Democratic household I could have easily held onto those ideas and failed to question them. I have, however, strived to question my own assumptions, no matter how fundamental. This does not, for me at least, make me awash in a sea of nihilism. Instead it provides me with the exhilarating experience of trying to best understand the vast multitude of economic, political, and philosophical ideas presented to us in the modern world.

Too many people on all sides of the spectrum don't do this I find, and this includes Hayekians, libertarians, Von Misians, whatever they want to be called. Often they will say, well I use to believe liberalism, but now I KNOW that anarcho-capitalism is right and that the government is nothing but thieves. What I don't understand about this is that these same people will often point to established institutions and systems that develop and say that there is probably an internal logic that we just don't understand. After all if paying CEO's such high salaries was unprofitable, why would any one invest in it? Why can't the same be said of governments? If the united states government (and every other government for that matter) is just a bunch of crooks who steal money and destroy productivity, why hasn't anyone created a highly productive anarcho-capitalist utopia?

Isn't that what various "economic freedom" indexes are striving to show? It's more prosperous to live in an economically freer country? It seems like according to the heritage foundation, among others, that we should all be moving to hong kong.

Or if that smacks too highly of government intervention, why not the very south of Mexico, where the Mexican Federal government does not have the power to enforce its own laws, or any of a multitude of other "lawless" places. Shouldn't, in the absence of government intervention, a well-spring of unrepressed productivity prop up?

Russ Roberts writes:

AHBritton,

A lot of interesting ideas in your comment. Two reactions: I'm not an anarchist. I'm a classical liberal. I don't think Mexico does a good job doing the basic things government can do well such as courts and enforcing property rights. But that isn't why Mexico is poor. Mexico is poor because its people are unskilled and the government does a lot of redistribution from poor to rich.

THe other thought that I think is important is that not all emergent order is healthy. Traffic at rush hour is an example of a very orderly process that no one controls. It's horrible. Government is an emergent process. There are good things and bad things about that. But emergent orders work best when there are healthy feedback loops. In capitalism, profits and losses combine with competition to create good outcomes. But in the case of traffic, the feedback loops are lousy. No one owns the roads so no one has a stake in making them work well. They are priced at zero.

I'm not suggesting private roads could necessarily do better or that tolls are the answer--there are problems with both of those. My point is that not everything that emerges naturally is good.

Seth writes:

I agree with Richard Fulmer.

Garrett says it himself in the podcast as he quotes Friedman, "take a tax cut, even if it loses you revenue, because it will help starve the beast."

Were the tax cuts that Romer looked at tax cuts that actually lost the government revenue? Or, more directly, was the government revenue less at the time of the spending hikes she found than before the tax cut?

Steve Hemingway writes:

Other countries political systems always seem mysterious. It's not the Labor Party, it's the Labour Party, by the way: we have our own spelling as well as our own political system.

Basically the reasons that MPs have nothing like the independence of US members of congress and senators is that they are much more dependent on the party machine. Essentially they cannot be elected unless they are acceptable to the party hierarchy, and if they step out of line they will be 'deselected' thereby, in effect, expelling them from parliament and making them unemployed, and probably unemployable.

This reality the lack of capacity for independent voting by MPs applies to both the major parties, but discipline is far easier to impose when one is the governing party. It has been described as an 'elective dictatorship', and is regularly condemned by parties when they are out of power, although never reformed by those same parties when they themselves gain power.

Sorry about the spelling, Steve! I've fixed it.

Thanks, too, for the explanation. How common is deselection? Is it likely for someone to be deselected for stepping out of line even if he is popular with his constituents? Wouldn't other representatives of the party suffer if the voters disagreed with the party's deselecting someone? Sorry to be so lacking in knowledge of the British political system. You've raised some interesting points.

AHBritton writes:

Seth,

I already responded to this. It is pretty easy to find the information. If you look at periods in which there were large tax cuts, such as under Reagan, these are also times when large deficits are run. Even IF you say that revenue was increased through the tax cuts it doesn't help your argument, it only hurts it. IF revenue is increased then that means the Federal Government had to not only spend enough to create the record deficits, but ALSO spend all the EXTRA revenue it gained through the stimulation of the economy... so they ramped up spending EVEN MORE. Although I will grant the fact that there are complications with contrasts between marginal and effective tax rates and possibly not the biggest data set.

In other words the beast apparently can't be starved… at least not very easily.

Although I question Garett Jones's explanation that it is because liberals see conservatives get their tax cuts and decide that they can then have their extra spending. At least in the Reagan white house, plenty of the spending was from his party in regards to military spending I believe.

Also, what (admittedly little) I have looked into it, the idea that taxes increase growth or government revenue seems tenuous at best. As far as I can tell there is no easily discernible effect on GDP related to tax cuts. For example the 1960's were a period of relatively steady and high growth despite having anywhere from a ~70-90% marginal tax rate on the highest bracket.

I believe government revenues (and this is paraphrasing as I am having trouble remembering where I got this info) did not return to their 1978 levels in real inflation adjusted dollars until something like 1988, 7 years after Reagan began the process of lowering the top marginal rate.

I agree that these are complex issues and that there are many other factors that effect the revenue from taxes and the growth of the economy as a whole. I would say, at the very least, that I am skeptical that marginal (or effective) tax rates have the drastic effects some claim they do. If anyone has good information or research on this let me know.

AHBritton writes:

Russ,

Thank you for your reply, I know you must be very busy. What you said inspired a variety of responses from me, although since they are rather long I'm not sure if they are all appropriate here. If you are interested I might be able to e-mail some of it.

I agree with much of the critical portion of what you said, and I think for the most part you are very even handed. What I wrote was more directed towards many supporters of Hayek and Ron Paul with which I have had discussions. I just worry sometimes that people take certain aspects of libertarianism to conspiratorial or illogical extremes. Not that I find that in any of your reasoning. One reason why I listen to you is that you at least try to explore subjects fully, and never seem to declare your "solving" of a political or economic question.

For example, I think one thing that is the greatest strength of economics is the insight it has into human interactions. Yet at the mere suggestion that maybe some of the economic give and take, or some of the same interactions that happen in a market, could happen in government through the use of earmarks sends people into a tizzy. Yes rent seeking is different, but it is still part of human interaction and thus complex and also open to the effects of market forces. I'm not saying I agree with Garett's view, but to just proclaim it wrong on its face is to fail to evaluate it for any possible worth.

Similarly, as I know you have gone through a personal period of growth and disillusionment with the ability of economics to solve problems, I haven't (maybe that's because I'm relatively new to the field) in regards to economics specifically. What I have become disillusioned with is people who fail to question their beliefs. I happen to take the phrase "the unexamined life is not worth living," very seriously.

By all this I mean that I find much more agreement with people of a diverse range of political and philosophical perspectives who are willing to question those beliefs than I do with those who are willing to accept anything, as long as it comes from the right source. No matter what your perspective you can find a community to be involved in, and I'm not saying that this is to be discouraged as that is one of the biggest things with which I struggle (Not to say I don't have plenty of friends whom I love). As many other people I feel I don't have a "party." Even for Hayekians they have mises.org, or Ron Paul, but I'm not interested in joining into a specific world view, I want people of diverse world views that aren't afraid to question. That is what I sometimes see as the best of EconTalk, when people can open up and agree to question their beliefs.

AHBritton writes:

Russ,

In regards to your reference to Mexico, I agree in many ways with you and am sure that there are 111 million or so people working on these problems, among others, some for good and some for ill. Either way I think there is a long history of both cultural and political elements within Mexico and in regards to their history and relationship with their neighboring countries. Not all of this can be boiled down to simple economic and or political issues, if it could I'm sure they would have solved it by now. Once again it is in ~111 million peoples best interest. Maybe you have a great knowledge of Mexican history and economics, I do not. However I do know that even slight changes can have devastating effects on an economy. An unstable government, lack of trust in currency or institutions, something as simple as shoddy products being distributed by a SINGLE COMPANy can have the effect of tainting a major export sector thus rippling through the rest of the economy. In other words it is very complex. I look forward to looking at it more closely in regards to many countries but I will try and give Mexico a look.

One thing as far as redistribution of wealth (and let me stress that again I do not know Mexico's situation) it can seem simple yet be very complicated. Obviously confiscation of property and arbitrary redistribution of wealth can be devastating to a countries sense of rule of law and confidence in property rights. What can also be devastating is a lack of confidence in domestic control of resources or a generalized feeling of having been exploited. By this I mean that I can see reasons why countries that have very little domestic control of their natural resources or a history of injustice in the initial distribution of land and resources might not see the benefit of reliance on foreign powers to extract their resources or the justice in laws that previously discriminated against them. Despite the sarcasm I often hear I think there is something to be said for animal spirits (although I honestly don't know the context of Keynes's use of the tern). If people don't trust a government (regardless of the governments trustworthiness) it can create a crises. If people feel like the law is unfairly applied it can lead to an unstable society. Reason does not always reign supreme.

Brian writes:

After listening to three plus years of EconTalk podcasts, this is the first and only one I thought was a waste of my time. I have stored every EconTalk podcast on my iPod, but this one will not be retained. I am glad Mr. Jones is no longer directly involved in government, and happy for him that he is where he belongs; in academia, where one can get paid to tweet contrarian economic tidbits that serve no worthwhile purpose and have no meaningful application in the real world.

As an aside, why does every discussion of the role of government and government policy begin with the assumption that those in government are genuinely interested in serving the public good or doing the right thing? Where is the evidence to support that assumption. All these discussions should begin with the assumption that elected representatives and government bureaucrats serve personal and political interests before all others. To assume otherwise is a fantasy. This is the source of the important economic "failures" of our nation - we assume the people in government will serve the common good and act in the best interests of the public. The evidence does not support this assumption. There is no basis on which to assume government is more likely to serve the public interest than the private sector.

Ricardo Cruz writes:

Brian, didn't you hear Prof Jones talking of how pervasive the lobbying is for special tax cuts, or spending benefits? Are you sure you didn't hear another podcast? :)

I was not very happy about this podcast, because I kept wishing Prof Jones would go back to first principles when making his provocative points. For instance, it is never explained why political parties have a longer term horizon in mind than party politicians. Is the president of, say, the Democratic party elected for life? Consider if the body politic of a party was recycled every 6 months and elected by chapters across the country: I'd expect them to have a shorter time horizon than the politicians that carry their label if that was the case.

(Sure Prof Jones made the analogy to private firms, but the analogy doesn't really hold much water. There is a mechanism that explains why private firms wish to maintain their brands. Consider public companies: stockholders could increase dividends in the short-term by exploiting the brand, but that would be offset by a much greater fall in the price of the stocks they hold as future dividends fall, so it doesn't really pay-off to think short-term.)

It's never explained why individual politicians don't have the long-term in mind, in the first place: voters should already consider their future welfare when voting (or are there information asymmetries? or enforcement issues?)

And this was not the only topic discussed lacking reasoning from first principles.

MarshallUtah writes:

The laffer curve is the worst of economics thinking and has no empirical evidence to support it.

Garett is right, people that want lower taxes will find any reason for lower taxes, even if the data show otherwise, probably the reason he isn't a supply sider.

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kebko writes:

On the topic of manufacturing productivity, they are now building milking operations in Indiana where nobody is required. The cows enter the parlor voluntarily, when they want to be milked & to grab a snack, and the operation is entirely automated. There is one farm where I have been told that there are times when literally nobody is there.

iceman writes:

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Country_Prof writes:

Just listened to this podcast, and there are two issues I want to raise.

1) Earmarks and party discipline. Contrary to what Garett said regarding how earmarks are used to keep party discipline in the long run, we just watched earmarks help enact a huge piece of government spending that will only grow and grow as an entitlement (e.g., mental health, homeopathic remedies, will have to be covered at some point). There is a strategic incentive to hold out for pork even when enacting large entitlement spending.

2) 2010 won't be a boom year for the wealthy. This was made in reference to the impending jump in tax rates. First, Garett doesn't place his bet with any controls in place, particularly factors outside the control of individual choice. Second, watch what happens in December when people start cashing out some of their assets in advance of capital gains jumps. That is the better test.

Two bits of anecdotal evidence. 1) Hillary Clinton cashed out in December before the early 90s tax increases. 2) When I was in grad school, I was involved in a grant that gave stipends to the senior faculty on the project. I think the amount was about $5,000. The payout was supposed to come in the late fall, early winter of the year. One of the anthropologists on the team asked for their payment to be deferred to the next year because she calculated that with some other projects she had been paid for, she would be kicked into a higher marginal tax bracket with this cash and she would be better off getting it in the next year when she would likely have a lower income. This was a "social justice" type anthropologist who was adamantly in favor or higher taxes on the rich. And she knew very little of econ 101. Yet, she was sensitive to the marginal tax rate on an additional $5,000! Yeah, it is just an anecdote, but a pretty powerful one. If a non-economist, "soak the rich" anthropologist is making these marginal calculations on a relatively small amount of income above the next tax bracket, you can be sure that other folks are doing this as well -- or have accounts reminding them of this!

Is it my misperception, or do I sense that more and more economists are getting on the "big government / let experts control the economy" bandwagon? I do put Garett Jones in that category based on this podcast.

Country_Prof writes:

Counterintuitive the the sake of being counterintuitive?

It seems this twitter format of pithiness (which has its benefits), encourages counterintuitive postings.

But in academia, it seems as if scholars pursue counterintuitiveness for its own sake, or for the sake of saying something different just to be heard.

I don't consider this to be a good incentive.

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