Sunday, July 22, 2012

Who is for growth?

This weekend, a prominent columnist delivered some brilliant advice to a presidential candidate:
...make America the launching pad where everyone everywhere should want to come to launch their own moon shot, their own start-up, their own social movement. We can’t stimulate or tax-cut our way to growth. We have to invent our way there....
...we should aspire to be the world’s best launching pad because our work force is so productive; our markets the freest and most trusted; our infrastructure and Internet bandwidth the most advanced; our openness to foreign talent second to none; our funding for basic research the most generous; our rule of law, patent protection and investment-friendly tax code the envy of the world; our education system unrivaled; our currency and interest rates the most stable; our environment the most pristine; our health care system the most efficient; and our energy supplies the most secure, clean and cost-effective.

No, we are not all those things today...
Ok, quiz time. Is this
  1. Some zany free-marketer pushing the Romney campaign to give some teeth to its "pro-growth" rhetoric?
  2.  Advice to Ron Paul on a speech to rouse the Republican convention?
  3. Thomas Friedman, New York Times columnist extraordinaire, in its Sunday pages advising the Obama campaign?
 Amazingly, C. The preamble was
Is there an integrated set of policies, and a narrative, that could animate, inspire and tie together an Obama second term? I think there is.... Obama should aspire to make America the launching pad..
Which gives me hope. Friedman is obviously much better connected than I. If he thinks there is even a ghost of a chance that the Obama campaign would adopt such a strategy, or that the administration would follow anything vaguely like this policy, that is tremendously good news. I thought these sorts of positions, while  middle-of-the-road growth economics, were, in the political sphere, too wildly free-market to hope for from the Romney campaign.

Think of what they mean.
  • "We can’t stimulate our way to growth" is a remarkable admission for anyone in the New York Times orbit. Ok, it included "or tax cut," but an "investment-friendly tax code" has to mean low marginal rates on investment, which means low marginal rates on investment income. No way around it, lower marginal rates, broaden the base.
  • "Our currency and interest rates the most stable" means likewise abandoning hope that endless rounds of Fed "stimulus" or devaluation as the key to success. Both statements are a repudiation of discretionary shoot-from-the-hip macroeconomic policy.
  • A "productive" work force is not composed of protected unions and government workers, on federal boondoggle contracts.  
  • "Openness to foreign talent" means we have to let people in. 
  • "Rule of law" means that health, energy and financial regulation cannot be run by powerful regulators and their crony-capitalist protected industries.
  • All of Friedman's startups succeed by undercutting and putting out of business old ossified but politically well connected companies, yes creating net new jobs but destroying a lot of old ones in the process. 
  • If you've been reading this blog at all, you know  the likelihood that the current health care law and expansion of medicare will deliver anything like "efficiency."
These are radical views indeed. Congratulations to Friedman for stating them, and I hope his friends at the campaign are listening. A Nixon-to-China moment would certainly be refreshing.

(OK, but the moon shot analogy is just weird. What does spending about 3 percent of GDP to send two guys to the moon have to do with unleashing the innovation of thousands of new entrepreneurs? )


  1. I'm stumped. Totally dumbfounded.

  2. Friedman is a windbag. In this election, Obama is the middle of the road moderate and the Republicans are living in a fantasy world. Friedman should just come right out and say that.

    In looking at the Friedman piece you see what you want to see.

    Going down the list of items you refer to:
    1) Can't tax cut your way to growth means exactly that. We have a savings glut and a tax regime which taxes the fruits of speculation at half the rate of honest effort. Interest rates are at historic lows. Cutting taxes on the earnings from existing investments will do nothing to grow the economy. "Base broadening" is just a stalking horse for eliminating middle class tax breaks.
    2) a productive work force is one that is healthy and educated
    3) pro-immigration is not a popular policy with the Republicans. (It is ironic that even pro-immigration Republicans are generally in favor of immigration policies that would have kept their own forebears out of the country - how many impoverished Scots and Irish would have been allowed in by the Republicans)
    4) If the the United States had the rule of law, Gore would have won the 2000 election and large numbers of Wall Street bankers would now be in prison.

    Apart from the items you highlight:
    1) Friedman wants honest markets. Wall Street is systemically corrupt. If you disagree then go read about MF Global, Libor manipulation and the "London Whale". Effective regulation of Wall Street would be good for the economy.
    2) Friedman identifies infrastructure as being important. You have made your general hostility to government infrastructure projects well known.

    Based on the part of Friedman's piece that you extracted it appears that Friedman is saying that Obama should be to the left of where he has been the last four years.

    1. I guess I was just a little too subtle for you...

    2. I think we understood each other fairly well - we just have different social utility functions.

      If x(i) is the total after tax income of person i, your utility function for the society is sum (x(i)) and mine is more like sum (ln(x(i)))

  3. How I wish that someone could write a post like that one in the most important italian newspaper....:(

    The Rebel Ekonomist

  4. Professor Cochrane, you say: "'Our currency and interest rates the most stable' means likewise abandoning hope that endless rounds of Fed 'stimulus' or devaluation as the key to success. Both statements are a repudiation of discretionary shoot-from-the-hip macroeconomic policy."

    I agree with you that shoot-from-the-hip monetary policy isn't a good thing.

    But you seem to be implying that advocates of further Fed "stimulus" are advocating discretionary monetary policy. That's not true. Many of them are advocating a monetary policy regime that doesn't target short term interest rates, and therefore doesn't hit the zero lower bound in a severe recession. For example, the central bank could target the price level instead of the inflation rate. John Taylor ( has said price level targeting actually produces MORE price stability than inflation targeting, because it doesn't "let bygones be bygones" when prices rise. Of course his logic also implies that price level targeting produces "catch-up" inflation in times where the price level drops, like happened in 08-09.

    And some economists actually believe that this catch up inflation would be good for the economy! Here's the notorious inflation-loving leftist Greg Mankiw (

    "Having the central bank embrace inflation would shock economists and Fed watchers who view price stability as the foremost goal of monetary policy. But there are worse things than inflation. And guess what? We have them today. A little more inflation might be preferable to rising unemployment or a series of fiscal measures that pile on debt bequeathed to future generations."

    So, I ask you, why not have the Fed adopt a price level target? They have an explicit 2% inflation target right now, surely it's not different to target the level, right?

    1. I am a big fan of a price level target. By that I mean just that -- nail down the price level, CPI 230 forever. Many people use "price level target" as an excuse for a discretionary bout of inflation to compensate for the lower inflation we had during the recession. Most of those people were not arguing for lower inflation in the boom, to make up for positive inflation shocks!

    2. Charlie Munger says in The Psychology of Human Misjudgment that economists are prone to "man with a hammer."

      Economists who want price stability are a man with a hammer when we live in a world where price stability is not possible.

      The problem with the price level target idea is that it immediately makes us hostage to the price of oil and makes extortion by the Saudi's and Iranians easier. We do not control our oil or energy prices, so to argue for stable prices is politically naive. Nor is a stable dollar realistic in a world where other countries can manipulate their currencies (as the Swiss have been re-learning).

      But let me return to oil. Can we agree that oil price shocks have been a principal cause of our problems since the early 1970s? see recent post by Noah Smith and see Stock and Watson, 2012, Brookings, available here:

      Until we have the real ability to make oil prices stable, a policy that we will keep our prices stable only invites further extortion (and now terrorism). Oil goes up. We raise prices, making us weaker and our enemies stronger. Sound familiar?

      There were two bombings just days ago, carried out by the Iranians, thru proxies. A purpose of both was to explain to people like the writer of this blog that anything can be bombed. Each reminds: if we attack Iran's nuclear facilities, Iran will retaliate by blowing up oil transportation facilities throughout the world.

      If the United States had the policy Prof. Cochrane advocated, the next day a message would arrive, in a bottle if necessary, from the Iranians saying "thank you." This would be a repetition of the mistakes always made by neocons (Iraq): they cannot see the second, third, and four order effect of this policies. IOW, doing what Cochrane advocates would once again being playing into the hands of the Iranians and nothing more.

      Or, said differently, who said economics was easy. We live in a World where price stability is not possible. The question we need to first ask is, What steps do we need to take to make price stability and what do we do in the meantime (helicopter money?)

      Regarding the price of oil, on this point we are screwed, politically.

      The Democrats have been, if anything, worse than Team Republican. Since Democrats formed the Dept of Energy it has been a complete failure, wasting probably trillions in the process. I won't bother explaining how Demos have been worse by also not coordinating environmental issues and oil prices.

      Friedman and Team Republic both misread American public's anger over Obamacare. Democracy works because the public is smarter than its politicians. Obamacare was the wrong issue. When Americans voted for hope and change, Oil prices were reaching their highest levels in July 2008. Americans knew that the big issue was energy prices. Remember that Obama even flirted with "nuclear power." Thus, that all the democrats got fired in 2010 was totally justified. They did not work on the first priority project they were hired to perform.

      Obama needs to find a way to tell the American public the truth. The situation is bad, both domestically and in International Affairs, because of oil prices. Our options are limited until we have oil price stability. He should then set forth a credible plan for reaching that goal, including being pro nuclear, telling his own party that, while such has risks, the real World is a riskier.

      The second point is that, only a strong, powerful, and effective government can bring us prosperity because only a strong, powerful, and effective government can assure a stable supply of reasonably priced energy and oil. Even Hitler, who was a mad man, realized that he had to risk everything in an ill timed war with the Soviet Union for the oil fields of the Caucasus, which he determined to be a better choice than to go for Saudia Arabia against the Brits.

  5. I am willing to direct traffic for 150K/Y I will even do it in the winter. We can all take turns directing traffic. What fun.

  6. The gov could pay anyone who wants to stay home and not work a minimum nonworking wage of 150KY then everyone would willingly go on strike till those greedy capitalists raise the wages they pay. BTW We no longer need people. So it doesn't matter if people go on strike. We now need to pay people to consume. Thank god for technology

  7. "No way around it, lower marginal rates, broaden the base"

    How would you broaden the base? which tax breaks would you eliminate ?

    1. Pretty much all of them, including the biggest money such as mortgage interest deduction, the charitable deduction, the employer provided group health insurance deduction. Of course tax breaks like those for rich people to buy $100,000 electric cars to drive out to meet their private jets...these go quickly. I'm an economist, I want low marginal rates first and foremost.

    2. what you write makes too much sense

    3. I want low marginal rates first and foremost.

      Why have income taxes at all. Due to, inter alia, the power of computers, a VAT and targeted consumption taxes would be far easier to administer, bring in far more revenue, and could be made fairer than any income tax.

      Impose an income tax only on individuals or households that spend more than say $10K a year, outside the Unite States.

      The really great advantage of a VAT is that it eliminates all State tax credits, etc.

  8. the group health insurance deduction is phased out over time in the HCA. ( tax on "cadillac" plans, that is not adjusted for inflation )

    charitable deduction does not appear to be likely to ever go away.

    Mortgage interest deduction elimination is a huge tax hike on the middle class. Do you really think this is going to be on the agenda for either party ?

    what's the next best alternative ?

    1. "Do you really think this is going to be on the agenda for either party ?"

      Romney and Ryan say they will balance the budget by eliminating deductions but refuse to say which ones. As a practical matter they have to be talking about employer health plans, the mortgage deduction, and retirement plans.

  9. Maybe I'm a bit slow today and was not attuned to your tongue being in your cheek, but I think your conception of the appropriate policies differ dramatically from Friedman's.

    But, who doesn't want a "pristine environment" (what's 'pristine' and what cost?); who doesn't want a tax code that is 'friendly' to investment (is friendly carving out more exceptions or a focus on marginal rates?); who doesn't want to let more talented foreign-born individuals in? etc.

    I am surprised though. The anecdote:content ratio was rather low for a Friedman piece.

  10. eternal growth?
    moto continuum growth?
    I'm I'm...

  11. Je reactie growth zichtbaar na de goedkeuring?

  12. Sure, but some of these things are wrong. We don't have the best internet anywhere (we do not have the best penetration rates or the fastest speeds), our infrastructure isn't the best (our infrastructure is often rated in need of repair), our education system is not the best (we have the best highest education system, perhaps, but not anything below that), our healthcare is not the most efficient (seriously?), and our energy is not the cleanest (although as a result it is among the cheapest). Our tax code is either too complex or the envy of the world, pick one. That leaves us with a productive labor force, openness to foreign talent, rule of law, the opinion-based claim that we have a beautiful landscape, and our superior financial system. America is great, but, as with any other country, I wouldn't call it worthy of hyperbole,

    1. Our higher education is defiantly not the best in any comparison. This reputation is due to the Phenominon called a bubble. I think it was mises who said "inflation allows incompitent people to enter the market". Just look at our SOSH department. These profs don't even have PhD's. They were brought in because they published some obscure book or some eagle scout project. Our reputation does not come from competition. The journals in biology and chemistry are biased toward schools with the largest endowments. These are not the result of gifts in recent years. The early seventies proved that the inter generational demands on institutional investments was in crisis. (Drucker) now these "Non-Profits are resorting to the golden circle with banks to ensure the interest, because the planet doesn't have enough people to create new money to satisfy the Non-Profit " demands. Drucker was right but he didn't see that his "Private hands" we're to be cut off. No. Our reputation is completely hot air. What a bunch of hot air.

  13. I think you missed both Friedman's and my point. ".we should aspire to be..." means we have none of these things and are in danger of losing what we have. And need to think seriously about what policies will actually achieve them rather than spin our wheels for another few decades.

  14. "Our currency and interest rates the most stable" means likewise abandoning hope that endless rounds of Fed "stimulus" or devaluation as the key to success. Both statements are a repudiation of discretionary shoot-from-the-hip macroeconomic policy."

    I think guys like Scott Sumner would take offense to that. Is fed stimulus to hit an NGDPLT shooting from the hip? I don'think so.

    I don't mean to bog down your comments with discussion of monetary policy all the time, but I can't help but notice that none of these proposals (many of which I support) won't really matter if our economy is being choked by tight money.

    I hope you do a post on NGDPLT/monetary policy soon. I'm looking forward to it.

  15. ChargerCarl you are exactly right.

    I did a response responding to the good professor on why a price level target is not sufficient. (He did not respond back) Its primarily because of supply shocks. an NGDPLT target eliminates those problems.
    Professor Cochrane. You really, really really really REALLY need to thoroughly examine Scott Sumner and his proposals. He can explain it much better than I can. The price level is the symptom, MV or PQ is the cause, which is roughly the same as NGDP. Why are so opposed to NGDPLT

  16. Friedman ruined his essay by pulling out the "sustainability" card as the solution to achieve those wonderful things. "Sustainability" is Malthusianism repackaged for the 21st century.

  17. The anecdote:content ratio was rather low fat...

  18. reactie wordt zichtbaar na de goedkeuringJuly 24, 2012 at 2:23 PM

    alles clar?


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