A VERY SIMPLE QUESTION

by Mario Rizzo

Professor and Fed Chairman Ben Bernanke did not predict the financial mess and subsequent “Great Recession” — at all, never mind the extent of each.

So now he is charged with predicting where the economy is going and how to prevent or ameliorate further deterioration of the lackluster “jobless” recovery by the appropriate balanced monetary stimulus.

What? Am I missing something?

So why are business decisionmakers waiting around to see what happens?

Teaching Classical Liberalism

by Mario Rizzo  

Classical Liberalism 2010 

I have been involved in teaching a course in classical liberalism at NYU for almost two decades. For most of this time I have taught an Honors Seminar for first-semester freshmen. More recently, I have been teaching a version for NYU law students (now cross-listed at the Columbia Law School). I am posting the syllabus for the law course with active links for those who may be interested. (Unfortunately, I cannot provide access to any readings that do not have the publicly-available links.)  

This course is multidisciplinary.

Fannie, Freddie and Mortgage Addiction

By Chidem Kurdas

In the first inning of what looks to be an intricate political game, the Obama administration and its financial industry allies suggested that the economy needs the federal government full force in the mortgage market.

The case was pithily made  by bond honcho Bill Gross,  who oversees more than $1 trillion of investments as head of giant bond shop PIMCO and was a speaker at the Treasury Department’s conference on the future of Fannie Mae and Freddie Mac.

“Having grown accustomed to a housing market aided and abetted by Uncle Sam, the habit cannot be broken by going cold turkey into the camp of private lending,” he wrote in a recap of his talk.

It’s an argument  that is at once practical and yet nightmarish. Heroin dealer has his customers hooked. They can’t do without him. Therefore they will have to make sure he stays in business and continues ministering to their needs.

Econ. 101

by Jerry O’Driscoll

The AP reports today that sales of existing homes plunged 27 percent, despite the lowest mortgage interest rates in history.  How could this happen?

Part of the Obama stimulus package was a tax credit for homeowners who purchased homes within a stated time frame.  The credit has now expired.  Economic theory predicted the program would be a failure on its own terms and it was.

Housing is a durable good and the stimulus in effect was a one-time income transfer program. What does economics tell us that individuals do with transitory additions to income? They save most of it.  Because of the way this particular program was structured, the saved in the form of a durable good, that is, housing.  

Just the “Basic Facts,” Mam

by Gene Callahan

I was recently in a conversation with a very bright economist who declared “We are in agreement about the basic historical facts here; we are just interpreting them differently.”

This is a common but very damaging misunderstanding of historical knowledge: that there are a set of “basic facts” that historians are “given” to start with, and what historians then do is apply a “theory” to fit an interpretive scheme over those facts. That this view cannot be correct becomes obvious once one realizes that no such thing as the “basic facts” this views relies upon can exist in history.

Calling All Cartesians

by Gene Callahan

Or at least all students of Descartes works. My situation:

I am trying to write a review of Vernon Smith’s Rationality in Economics. (No easy task: I think I’m going to have to read a book on auctions in the process.) In any case, I came across him quoting Hayek saying: “Descartes contended that all the useful human institutions were and ought to be deliberate creation(s) of conscious reason…” (p. 26). This is sourced to Hayek (1967: 85). And there, indeed, Hayek says that — but with no reference to where Descartes claimed this. Now, I happened to be researching The Discourse on Method recently, and I said:

“Descartes was cautious enough to add caveats to his programme, such as declaring, for instance, ‘Thus my purpose here is not to teach the method that everyone ought to follow in order to conduct his reason correctly, but merely to show how I have tried to conduct mine’ (1993: 2). But Descartes’s modesty here was not embraced by his epigones;

China Catch-Up and Two Freedoms

by Chidem Kurdas

China is expected to produce more than Japan this year, thereby becoming the world’s second largest economy after the US.   Chinese annual output is only $5 trillion compared to American $15 trillion and per person income is only a fraction of the US, but it is clear that China is catching up.

We’re witnesses to a gigantic experiment in political economy. Here is an authoritarian government that apparently recognizes the superiority of free markets, private property and individual enterprise in organizing an economy. It has lifted the shackles off industry and commerce, to an extent, so as to benefit from these powerful forces. Thus China is growing at phenomenal rates.

But freedom of expression and political dissent remains suppressed even as economic freedom expands. In the ever-resonant words of Milton Friedman, “Economic freedom is an essential requisite for political freedom. By enabling people to cooperate with one another without coercion or central direction, it reduces the area over which political power is exercised.”

Perils of Macro Aggregation

by Mario Rizzo  

Richard Ebeling, as usual, does an excellent job of showing how the inability to see macroeconomic phenomena as the outcome of complex micro-processes leads to poor policy prescriptions. Take a look at his response, at EconomicPolicyJournal.com edited by Richard Wenzel, to a post by Tyler Cowen at Marginal Revolution. The upshot is that the subsidization of employment during a recession is a bad idea.

Anniversary of Social Security

by Mario Rizzo  

Today is the seventy-fifth anniversary of Social Security.  

Only an unreconstructed reactionary (that is, a classical liberal) would, at this late date, be opposed to Social Security Act of 1935.  

My purpose here is not to go over that issue, however. It is to comment on a recent Washington Post article on Social Security.  

Constitutionalism: Point/Counter-Point

By Chidem Kurdas and Thomas McQuade

In our previous post, Thomas argued that voter feedback is weak in constraining the exercise of legislative power. Chidem countered that the other fundamental constraint, the constitution, is therefore all-important. Commentators were divided, with cogent arguments pro and con. We continue this discussion.

Chidem:  Constitutionalism is the idea of subjecting political power to rules that stand above that power. The concept took a long time to develop and became effective only in some societies. Its roots go back to the Magna Carta of 1215 in which King John of England accepted limits to his authority and an earlier Charter of Liberties. Today’s struggles about the US Constitution are but another chapter in this long history.

Public choice pioneer and Nobel-prize winner James Buchanan powerfully made the constitutionalist case. Geoffrey Brennan and Buchanan offer this definition in The Reason of Rules (1985): “the essence of the constitutionalist approach is that political action (including the making of laws) be conducted according to certain rules (or meta-rules).”

In the alternative view, majority voting is the ultimate source of morally legitimate political power and there should be no constraints on it.  Buchanan and Roger Congleton (Politics by Principle, Not Interest, 1998) argue that in the absence of meta-rules politics devolves into majority-seeking deals where some benefit at the expense of others.