Democrats have many good ideas. Republicans have no ideas whatsoever.

This is a partisan post. Which is not to say I'm writing this because I like Democrats better in general. I just like Democrats better right now, because they have ideas to fight our country's problems. Republicans do not.

Note that this was not always the case. In the Reagan era, Republicans had a lot of ideas, and Democrats largely promised more of the same. Voters seemed to realize this when they made their choice. but Republicans dropped the mantle of the "party of ideas" about a decade ago, and show no signs of picking it back up.

What are the main problems facing our country today? Well, there's the ongoing depression. Republicans' best idea has been to cut unemployment benefits, which reduces structural unemployment slightly but raises cyclical unemployment a lot. We are not in a recession because people have suddenly decided that they don't want to work; people are looking for jobs, and simply not finding ones that match their skills.

Then there's that long-term deficit. A simple breakdown shows that most of that deficit comes as a result of the Bush tax cuts; reversing these cuts would help stabilize our public finances (though in the long run, big cuts in Medicare are needed as well). But Republicans absolutely refuse to rescind those unsustainable tax cuts. Instead, if they are in power, they will probably just threaten to shut down the government unless Obama comes up with ideas for big spending cuts; then, if Obama capitulates (and he is kind of a capitulating sort of dude), the GOP will slam him for the very same spending cuts they forced him to make.

And then there's health care. Republicans have essentially no ideas for how to cut healthcare costs, unless they decided to support Medicare cuts, which they are afraid to do. When pressed, Republicans suggest tort reform and "allowing people to buy health insurance across state lines"; the former is a good idea but a drop in the bucket, and the latter is basically a meaningless red herring.

Financial reform? Republicans recognize the moral hazard problem - the idea that implicit government promises of bailouts encourage banks to take crazy risks - but they have no solution to this other than to have the government say, very sternly, "We won't bail you out the next time!" Which is a laugh, because yes you will, and you know it.

And finally, there's energy. Republicans have nothing on this. "Drill here drill now"? Not a solution, since that oil can and will be sold anywhere. What else? Deafening silence.

Compare this to the Democrats.

On the depression: Democrats are split on additional stimulus spending, but they definitely favor rebuilding our infrastructure, which is important in the short-term (because it adds to demand) and the long-term (because it improves our competitiveness). They favor having the Fed do more quantitative easing (printing money and buying stuff), although legislators cannot tell the Fed what to do. These ideas are good, although the other thing I think we need to do - pressure China to immediately revalue its currency - is unlikely to happen.

On the deficit: Democrats favor rescinding the Bush tax cuts. This is the right thing to do, since those tax cuts were unsustainable. In the short and medium terms that will make a huge difference, but in the long term we'll need to contain health care costs and cut health care spending a lot. This, sadly, is something Democrats are not yet talking about much.

On health care, Democrats finally switched us to a universal coverage nation. That was an important first step - it removed the division of the country into health-care "haves" and "have-nots," which should make future cost-cutting measures more politically possible. It implemented various small cost-control measures, any of which could be ramped up hugely in a few years if it is found to work. This is almost certainly the best health care fix that we could expect in the short term; it remains to be seen if the Dems will come through with serious cost-control ideas in the future.

On financial reform, the Democrats have had a bunch of good ideas, many of which - a resolution authority to reduce the moral hazard problem, a consumer protection agency to reduce lending scams, rules on derivative trading to cut unnecessary complexity from the system - are in the process of being put into law, thanks to Dems and no thanks to the GOP. And on energy, Democrats are correctly investing in alternative energy technology.

Now, I am not saying that I agree with all of the Democrats' ideas. A cap-and-trade system, for example, seems pretty pointless to me (especially since U.S. emissions are falling anyway). And on some issues (China trade, health cost control) they need to go much farther. Nor is having a lot of ideas automatically good; Chairman Mao had a whole little red book full of bad ideas.

But the point is that the Democrats' ideas are mostly good ones. They are a clear improvement over the status quo - ballooning deficits, a collapsing health care system, a bloated unproductive financial sector, vulnerability to peak oil. The Republicans offer no such improvement. They have no ideas whatsoever.

For this reason, stumping for the Democrats in the fall elections is not partisan, and it is not ideological. It is simply patriotic. A vote for a Republican is, at this juncture, a vote for sclerosis and decline.

The Business Plan

Purveyors of stuffy soundness would human you expect that the really honour situation you ought to do when surround up a new commerce is to create a line project.

It doesn't thing whether you are marketing odds and ends on eBay from your experience position or something larger and solon daedal,

Acting plans are superior and requisite. Far too few of us self-employed and freelance group use them

Driving Drowsy

A 2008 study, taken from the Annals of Internal Medicine, suggest that some antihistamines may impair driving ability, even more than alcohol. The driver doesn’t even have to feel drowsy.

Forty study participants, when given diphenhydramine and an amount of alcohol to boost their blood alcohol level to .10 (legally impaired in most states), tested worse in a driving simulator when under the influence of antihistamine than under the influence of alcohol. A newer non-sedating antihistamine, Allegra, did not affect driving any more than the placebo given in a blind test screen.

The Asthma and Allergy Foundation of America estimates there are 50 million allergy sufferers in the United States. Allergies account for more than 17 million outpatient physician visits each year. Since the 1940s, antihistamines have been among the most widely prescribed medications. It is estimated that currently there are 30 million patients in the United State taking regular antihistamine medications in this $8 billion drug market.

If you have taken antihistamines, ask your doctor if a non-sedative prescription will work for you.

He's right and he's right? They can't both be right!

Ryan Avent, perhaps prodded by my comment-thread heckling (yeah...in my dreams!), has started making a lot more sense in his arguments against the industrial-policy-ists:

And over the long-term, the needs in America are the same as they have been for decades. The country has been underinvesting in the basics, and the effects have become ever clearer. Its infrastructure—from transportation to water and power to broadband—is wholly inadequate. Educational attainment is plateauing and may begin to decline. Its labour market policies aren't up to handling sectoral shifts or millions of people in long-term unemployment. Its research funding is ample for any project with a potential military application and meagre for everything else. The weaknesses are clear.

This is absolutely right. The collapse of America's pubic-good provision is the single biggest problem with our economy. Trade issues, and industrial policy, are secondary to our crumbling infrastructure and dysfunctional education system.

And yet, when Tim Duy says things like this, it's hard to ignore the sneaking suspicion that maybe trade-imbalance and industrial-policy issues are a bigger part of the picture than we realize:

[I]n aggregate real wages and nonfarm payrolls have been stagnant for a decade. Where are these high wage paying jobs? Or even median wage paying jobs at this point? Silly me, I actually believe the unapologetic and unquestioning supporters of free trade need to answer this question. We are millions of jobs below trend, and we have lost millions of jobs in manufacturing - the manufacturing of goods that we still consume, no less. Moreover, these two trends occurred in the same decade, in concert with a third trend - the sharp rise in foreign official reserve accumulation. How can you not be even allowed to suggest that there just might be a connection?

The problem I see with Avent and his fellow-travelers (Yglesias) is not that they are wrong about the structural problems facing our economy - the lack of investment in public goods, the Republican commitment to ever-expanding deficits - but that they are so dogged in their belief that these are the only problems we face. Perhaps they are afraid that they'll labeled as economic know-nothings if they question the free-trade orthodoxy (a legitimate fear, given that most of the Grand Old Men of the economics professions are still ideological conservatives). Or perhaps a trade war with China is what they fear most.

But either way, if Tim Duy's question turns out to have an answer we don't want to hear - an answer that implies that a strong-dollar policy and a finance-favoring industrial policy have hurt our economy - then writers like Avent and Yglesias are preventing liberals from coming up with a workable answer to America's economic woes. Which, in the long run, is bad news for the liberal movement.

Trade models I don't teach - The "New Trade Theory"

I was going to have three posts on trade models - the two I teach, and the one I don't teach. But I realized that the middle model - the Heckscher-Ohlin model - is not different enough from the Ricardian model to merit its own post.

(Briefly, the Heckscher-Ohlin (HECK-sure o-LEAN) model tries to describe trade between rich and poor countries, by pointing out the fact that rich countries have a lot of equipment and machines and buildings and infrastructure (capital), while poor countries have a lot of cheap labor, so poor countries will make labor-intensive goods (e.g. clothing) while rich countries will make capital-intensive goods (e.g. cars). Fine. But the thing is, Heckscher-Ohlin treats each country like a single person, just like the basic Ricardian model, and so there can't be any negative externalities to trade...hence, the model assumes right off the bat that free trade is always and everywhere a good thing. Yawn.)

Instead, I want to discuss the "New Trade" model, invented by Krugman in 1979 and refined in 1991, for which (among other things) he won the Nobel prize a couple of years ago. This is the model that most economists actually use now to explain and predict trade. I am never asked to teach it in Econ 102, but that's only because it involves lots of math that most undergrads can't handle.

Krugman's model was developed in order to explain the fact that many trading partners produce very similar goods: Japan and America both produce cars, for example. The classic Ricardian theory of trade says that comparative advantage determines what gets imported and what gets exported, but the data seem to buck that. So Krugman brought in a different idea. People like variety, he said, so different countries will trade different varieties. Small initial differences between countries (example: Japan had no domestic oil reserves, and so focused more on smaller, more efficient cars) determine which variety gets produced where.

OK, so far, so good. Now, what about free trade? Unlike the Ricardian and Hecksher-Ohlin models, New Trade DOES have an externality. Specifically, since people like variety, the more variety I produce and sell, the more you can produce and sell as well. Each company becomes sort of like a monopolist, being the only producer of its own specialized variety of good. More trading countries means more global variety, making consumers better off everywhere.

Of course, this externality is purely a positive externality. Japan selling us cars is good because it allows us to focus on producing a different type of car. There is no negative side effect from increased trade, and so free trade, again, becomes by assumption the best possible policy, always and everywhere. The free trade orthodoxy is still baked into the cake.

In order to get a model that says that free trade might not be the best policy, we'd need to write down a model that has a negative externality to trade. Perhaps opening up trade allows companies to put their dirty factories in the country with the most lax pollution regulations, hurting the environment. Perhaps opening oneself up to trade creates financial instabilities because of international investment flows. Or perhaps countries can engage in "predatory" trade practices, to which the best response is a temporary trade war.

These models all exist (see links), but no one has yet paid them much attention. Instead, whether in the classroom or in our actual modeling, we continue to unquestioningly use models that assume that no trade restriction can ever be a good idea.

Now, I'm not saying these are bad models! And I am not saying that free trade is not, in fact, the optimal policy. What I am saying is that in every intro macro course, one of the first (and last) things we say is: "Macroeconomists agree on very few things, but they generally agree that free trade is good." And this is true, they do. But the reason that they agree is not that they've proven it. It's that they assumed it, and decided to use models that assumed it. When the inevitable chorus of economists turns out to cheerfully berate anyone who suggests "protectionism," they may be reveling in their rare opportunity to finally agree on something...but really what they are doing is drowning out dissent for the fun of it. Our profession-wide consensus comes at the expense of scientific honesty - and, if it turns out that the consensus is wrong, it has also come at the expense of American prosperity.

An econ prof explains why macro went down the tubes

I've often ranted about the "neoclassical revolution" in macroeconomics, which came along in the late 70s and early 80s and turned macro into a cargo cult (or what Krugman calls a "Dark Age"). I've generally implied, or said outright, that the reason people like Robert Lucas and Ed Prescott committed this dastardly deed was political - they wanted an intellectual justification for the rising tide of anti-government conservatism that was sweeping the nation. But rarely do you hear supporters of the neoclassical (or "Real Business Cycle") paradigm admit this openly. Which is why this blog post by Stephen Williamson of Washington University (the most "conservative" econ department after Chicago) is so refreshing:

In the Keynesian world, fluctuations in aggregate economic activity are inefficient, and the logic appeared to be consistent with what we observe. We find ourselves in the middle of a recession. In terms of the its basic fundamentals, the economy looks more or less the same as it did before the recession happened. There is roughly the same set of people, with the same skills. The same buildings and machines are in existence, and we know just as much about how to produce stuff as we did before the recession happened. However, we are producing less and more people are out of work. Surely something has gone wrong, and the government can do something about it, by spending more and relaxing monetary policy to put people back to work.

However, the Phelps volume writers and Lucas got us thinking about the following. An unemployed person is someone who answers the labor force survey in a particular way. This person is engaged in a particular activity – search – and we can analyze this process just as we would analyze anything else in economics, as involving choice and incentives. Due to a mismatch between the workers that firms want and the jobs that workers would like to have, separations due to various factors, and people moving in and out of the labor force, there will always be unemployment. Further, fluctuations in these factors determining unemployment will make the unemployment rate fluctuate. Indeed, we might imagine fluctuations in unemployment that are purely efficient – there may be nothing the government should do about this.

The part in bold illustrates the neoclassical concept of unemployment: it doesn't exist. Unemployed people are simply unwilling to take the jobs that are being offered to them. You can hear this idea in the speeches of many Republican politicians to this very day.

Next, along come Kydland and Prescott in 1982, with what later became known as real business cycle analysis...Kydland and Prescott were thinking outside the box, and they were very much in the faces of mainstream macroeconomists...[they] gave economists license to contemplate the possibility that business cycles could be bad events that we should do nothing about – government intervention could serve only to make the problem worse[.]

This is extremely telling. Usually, you hear economists say that Prescott's contribution was methodological; that he showed economists that they could make models using more sophisticated techniques than they had been using before, and that these new techniques allowed economists to take more things into account. What Williamson is saying is that, actually, Prescott's work was embraced because of its ideological contribution - it gave people "license" (i.e. an excuse) to say that government shouldn't try to do anything about recessions.

The economics of Kydland, Prescott, Lucas, Sargent, and Wallace looked more firmly grounded in the solid general equilibrium theory developed by Arrow and Debreu, and these people had good arguments which appeared to match well with empirical observations. Relative to this, mainstream Keynesian economics just looked mushy. Who would want to tie their caboose to that train?

The part about "matching empirical observations" aside (RBC models do not), what Williamson is saying is that the fancy math of RBC models was useful because it made Keynesian models look bad in comparison. Math was used as a signal of smarts, in order to get people to abandon Keynesianism.

Now, though Kydland and Prescott presented an extreme view of business cycles, which could be interpreted as telling us that the government is irrelevant...[t]he key lesson is that...[s]kepticism about the role of government is healthy[.]

Williamson is not directly saying that economics should be moral philosophy first and descriptive science second. But that is what his retelling of history amounts to. Models, in his view, should receive attention according to the moral stories that they tell. After all, anyone can write down a model that assumes that the government is powerless to change the economy; it didn't take Prescott's fancy math to do that. Williamson and other supporters of the RBC paradigm looked for the lesson they wanted to be taught.

(Of course, this is not exactly surprising, given that Prescott said just the other day that our current recession was caused by people predicting that Obama would be elected and raise their taxes! But it's one thing to expose Prescott as a crank, another to realize that a whole school of macroeconomic thought was embraced by thousands of economists for ideological reasons.)

This illustrates one of the basic problems with macroeconomics as a science - politics always gets involved. Good economic management inevitably has to compromise itself to the interests of various groups who are seeking to divide the pie to their liking; in the case of the RBC "revolution," the interest group in question was composed of rich individuals who wanted lower taxes and businesses who wanted lighter regulation. They wanted a theory that said government is bad, and they got it. In the short term, only the scientific credibility of macroeconomics suffered, but thirty years later, it's your job, your wages, your prospects, and your security that are suffering.

(Note: in the photo above. Prescott is the man smiling at the camera. The man shaking Bush's hand is Finn Kydland, his co-author on the original RBC paper - i.e. a Norwegian guy Prescott brought in to do all the math.)

Michael Spence joins the heretics

Michael Spence, winner of the 2001 economics Nobel, joins the heretic movement that was given voice by Andy Grove:

The structural evolution of the US economy over the past 15 years has been driven by excess consumption, enabled by debt-fuelled asset inflation. The crisis put a stop to this, but structural deficiencies remain. America’s export sector is too small and underdeveloped. The financial sector became outsized, and is down-sizing.

A pattern of underinvestment in infrastructure has left the economy less competitive than it should be. Energy pricing issues have been ignored, causing underinvestment in urban infrastructure and transport. The education system has widespread problems with efficiency and effectiveness...

The real issue is employment: not just stubbornly high unemployment, but a bigger problem described recently in a thoughtful article by Andy Grove, the long-time chief executive of Intel. He argued that manufacturing is vanishing in the US, a trend that must be reversed. The question is how.

There is little doubt that America’s social contract is starting to break. It had on one side an open, flexible economy, and on the other the promise of employment and rising incomes for the motivated and diligent. It is the second part that is unravelling.

Incomes in the middle-income range for most Americans have stagnated for more than 20 years. Manufacturing jobs are moving offshore. Globally the set of goods and services that is tradable is expanding, but the US and other advanced countries are not competing successfully for an adequate share of the tradable sector.

The employment effects of these trends over the past 15 years have been masked by excess consumption and the overdevelopment of sectors such as finance and real estate. The latter are now set to shrink, as multinational companies grow where they have access to high-growth emerging markets in Asia and Latin America. Such companies will locate their operations where market and supply chain opportunities lie. In the tradable sector, in manufacturing and in a growing group of services, that means outside advanced countries.

The availability of low-cost, disciplined labour forces in developing countries reduces the incentive for these companies to invest in technologies that enhance labour productivity in the tradable sectors of the advanced economies. As a result, the evolving composition of advanced economies is increasingly weighted towards the non-tradable sector, combined with a set of high-end tradable services where both human capital and proximity matter. The rest of the tradable sector is shrinking.

The shrinkage creates problems. Over-specialisation could threaten independence and national security. Spillovers between R&D, product development and manufacturing will be lost if manufacturers leave. Employment will stagnate. Income distribution will move adversely and the social contract will erode further...

To avoid an outbreak of protectionism, there has to be an alternative. President Barack Obama’s new export council, announced on Wednesday, is a step in the right direction. But a bolder move is needed: a broad public-private partnership to invest in the development of technology in parts of the tradable sector where there are opportunities to make advanced countries competitive. The goal must be to create capital-intensive jobs that have labour productivity levels consistent with advanced country incomes.

Would this damage developing countries? Clearly not. The US (or even developed economies combined) does not have hundreds of millions to employ. A targeted programme would leave the vast majority of labour-intensive manufacturing right where it is now: in the developing world. With new credible growth strategies in America (and other advanced countries) developing countries may even be willing to play an important complementary role in restoring global demand through, for example, the reduction of excess savings.

I added the emphasis, in order to note something very interesting: Spence obviously believes that export competitiveness is heavily influenced by the kind of public goods that I am always ranting about: infrastructure, education, and most importantly research. It is precisely these public goods that conservatives have neglected over the past 20-30 years, in their zeal to eliminate all government intervention in the economy. But it may be precisely these public goods that enable a country to have good high-paying middle-class jobs.

Anyway, blogger Mark Thoma already endorses Spence's heresy. Paul Krugman hasn't addressed this particular controversy yet, but has made noises about China's currency policy. Could we have a movement on our hands?

(If so, one positive sign for the industrial-policy movement is the fact that the first people to criticize Grove's article have been editorialists from The Wall Street Journal and Forbes' Reihan Salam. As they say, "by their enemies shall you know them"...)