Bad deal. And now what?

The Senate has passed a bad deal. I think the Democratic Senators expect the House will turn it down.

…and what will they do if the House Republicans break rank and vote with the Democrats? They might. Obama may be trying for that.

Saltwater, Freshwater, academic discussion

Wow. Links from big-name bloggers really get attention. The original post in this series got a noticeable spike in pageviews, and some people even clicked through to the original Brad Delong interview.

It also sparked some serious discussion among academic bloggers, which Noah Smith (Noahpinion) chronicled. I haven't followed it all, though I do note that Prof. Williamson continues the freshwater tradition of contempt for critics from the saltwater school by calling Prof. Krugman deranged.

Socialism, Keynesianism, and Hayek

Hayek, quoted by Brad Delong, in the context of the validity of regulation:

[…] the most important change which extensive government control produces is a psychological change, an alteration in the character of the people. This is necessarily a slow affair, a process which extends not over a few years but perhaps over one or two generations […]

My comments, first made on Prof. Delong's blog:

But how could he validate this hypothesis? He did not have one or two generations of data to back it up and history was no guide; there had never been anything like a 20th century industrial economy in history. In this, he sounds remarkably like the current freshwater economists arguing that hyperinflation and an explosive rise in interest rates are around the corner, any day now.

There is also the problem of what is meant by “socialism.” Is the pursuit of full employment by policies based on Keynesian theories socialism? So far as I know, most political socialists, then and now, say not. Socialism is a political as well as an economic idea, and socialists are uncomfortable seeing some of their goals realized without a political victory. On the other hand, there is Keynes famous remark about “a somewhat comprehensive socialisation of investment.” Would a society which pursued full employment and various social benefits through a benevolent ruling class have the same effects on the character of the people as a democracy which did so? By Hayek's reasoning, apparently yes; only a full-on anarchy would escape the destructive effects of “socialism.”

I don't think the terms are well-enough defined for scientific reasoning; we don't know what is lasting and what is an evanescent political phenomenon.

Croak of Yesterday

“So we're going to hit the debt ceiling then go off the fiscal cliff. I assume an anvil lands on us after that.”—@pourmecoffee@twitter

And God Jul to you all in 2012

May the next year be better!

The Shift in the US Two-Party System

There is a split between the Tea Party and Wall Street Republicans, and the conservative and liberal Democrats.  The Wall Street Republicans and conservative Democrats are the current governing coalition, the so-called "centrists." The Tea Party Republicans act as a blocking opposition. Since the House Republicans can't pass legislation, the Wall Street Republicans might be enticed, perhaps by Obama's Grand Bargain, to vote with the Democrats and ultimately become Democrats.

This would entirely freeze out the actual center, let alone the progressives. It is hard for me to imagine that Tea Party Republicans would form a coalition with liberal Democrats, so I suppose that both groups will be powerless for some time. Long-term factors that are likely to lead to such a coalition, however, might be: (1) a labor market with employment improving but salaries remaining low; (2) abuses of the PPACA on the part of the health insurance industry; (3) environmental difficulties and disasters, especially those affecting agriculture and major cities; (4) the domestication of drone surveillance and policing; and (5) the continued growth of the national security state. Demographic changes might also shift the balance in the favor of the liberals, but only if a liberal leadership emerges around major issues like the five I listed above.

Hoisted from comments: on the Economic Computation Problem

Jay Ackroyd writes:

These comments are actually inspired by a blog post I read a couple of years ago that I can't possibly find. (Stuart might be able to.)

In it, the policy economist expressed surprise and dismay that a mathematically oriented new classical guy actually took the results of his calculations literally, instead of subjecting them to an Econ 101 evaluation and rejecting them as, well, naive and stupid.

This was telling, doubly, because first, the policy guy was criticizing the competence of the math guy but, second, because he was admitting that these models really don't work.

Or at least, that the models aren't applicable without thought and results have to be checked. Hunh.

For a long time, I've been quoting Robert Solow's Growth Theory, where he describes "stylized facts." I don't think macro can go beyond that--that there are some general principles you can apply, but you can't push them too far. Rigor really isn't possible. (There are good, rigorous reasons in the literature to support this, by the way. The New Classical critique makes some of these arguments. Others are old, like the "adding up" problem. There's no way to add up the preference orderings of a collection of consumers in an economy to arrive at an aggregate demand number. This is at the heart of the NC "where are the people in this model?" critique of Keynsians.)

So in your view, the unpredictability of human behavior invalidates some models, the way it does in some design disciplines. In design, there are problems which can be solved by computation—Will the building stand up? Can this result be computed?—and problems which can only be solved by testing with humans—Will people like this building? Will people be able to navigate this interface? Some designers get good at devising first cuts at such things, but even that group has to test their work with actual humans.

Is it perhaps that the dream of an economic system that is like a machine that computes the best way to satisfy human needs is simply not achievable? This is a criticism which is usually directed at Communism, but in the end the "free" market is another mechanistic solution.

Keynesian economics suggests that an economic system that maintains both good levels employment and production requires governance and therefore must be integrated into a political system. Given that Keynesian economics is valid, what might Keynesian institutional forms be?

[Editorial changes made for clarity on the day of publication.]

Is this the end of the Republican Party?

Last night brought the news that the Tea Party and centrist factions of the Republicans have split, and are unable to agree on a budget. Is this, perhaps, the end of the Republican Party? Did the Republicans just go the way of the Whigs?

Well, it is 12/21/12.

Saltwater, Freshwater, and OMG! Paul Krugman linked me

A brand new post for new discussion of "Saltwater, Freshwater, and Economic Policy: a reaction to a Brad Delong interview." No moderation delay here.

And thank you to Paul Krugman for the link!