35 Responses

  1. Jon Murphy says:

    Economics is organized common sense.

    I like that.

  2. morganovich says:

    “5. There are tradeoffs between equality and efficiency.”

    and they compound. thus, even if one can get a larger slice of the pie now through governmental redistribution, this has a serious effect on the size of the pie later.

    getting 7% of a small pie winds up being a smaller actual slice over time than getting 5% of a much bigger one.

    this is why efforts to reduce poverty through redistribution fail over time. you do not get fewer poor people, just fewer rich ones.

    http://www.forbes.com/sites/warrenmeyer/2013/12/10/do-we-care-about-income-inequality-or-absolute-well-being/

    even such alleged bastions of successful enforced equality as switzerland, denmark, and sweden, virtually everyone winds up worse off than in the US.

    their poor are not richer and their middle classes are far worse off (perhaps 40% poorer as an average at the 50th decile)

    • Jon Murphy says:

      Right you are.

      That is a big reason why Europe, despite having less nominal income inequality, has a standard of living equal to the poorest US states.

    • truthiness says:

      Did you know that there is this thing called the Internet where you can easily check for facts and statistics?

      Switzerland GDP per capita = 78,928 USD
      Denmark GDP per capita = 56,364 USD
      Sweden GDP per capita = 55,040 USD
      USA GDP per capita = 51,749 USD

      http://data.worldbank.org/indicator/NY.GDP.PCAP.CD

      • mahood says:

        Thank you for pointing this out.

      • Ron H. says:

        Did you know that there is this thing called the Internet where you can easily check for facts and statistics?

        Indeed. In fact it’s so easy to find information on the internet that one must be careful to understand what one is seeing. Like fire, the internet can be a dangerous servant and a fearsome master.

        For example, if adjusted for PPP your list changes dramatically, and other organizations find different results.

        And of course GDP per capita tells us very little about what percentage of that production is used by the people who created it and how much is spent by government, which can greatly reduce increased standards of living over time.

        Did you read the Forbes article? Perhaps you missed the point that equality of income doesn’t translate to a higher standard of living.

    • truthiness says:

      Excuse me, but did you know that there is this thing called the Internet where you can easily check for facts and statistics?

      Switzerland GDP per capita = 78,928 USD
      Denmark GDP per capita = 56,364 USD
      Sweden GDP per capita = 55,040 USD
      USA GDP per capita = 51,749 USD

      http://data.worldbank.org/indicator/NY.GDP.PCAP.CD

    • Will White says:

      Equality and Efficiency are not inversely related.

      While it is true that a 100% tax rate on the wealthy would have a negative relationship on the “size of the pie”, the converse is also true. If a small number of individuals make 100% of the income, the pie also gets smaller … Mexico has been a good example historically.

      When a majority of wealth is concentrated in too few hands, there are fewer consumers with enough income to make purchases and so the pie gets smaller. Just as an economy needs producers of goods, it also needs consumers …

      • Ron H. says:

        Will

        When a majority of wealth is concentrated in too few hands, there are fewer consumers with enough income to make purchases and so the pie gets smaller.

        No it doesn’t.

        Just as an economy needs producers of goods, it also needs consumers …

        Of course. And those who have acquire great wealth have demonstrated their ability to provide great benefit to consumers by creating jobs and providing goods and services for which consumers *voluntarily* choose to spend their money – absent government interference in those transactions, of course.

        In a voluntary exchange, both parties benefit, and are better off after the exchange. Great wealth or high income is an indicator of how much benefit someone is providing to others.

        • Will White says:

          To suggest that … “Great wealth or high income is an indicator of how much benefit someone is providing to others.” is foolishness of the first order.

          Putin’s Russia is perhaps the best example. If you want to live in an oligarchy, just say so, but the world is never as simple as most Ayn Rand fans would want you to believe.

          • Ron H. says:

            Will

            To suggest that … “Great wealth or high income is an indicator of how much benefit someone is providing to others.” is foolishness of the first order.

            I’m sorry, I assumed you understood that I meant in the context of a relatively free market, in which exchanges are voluntary. Obviously in a planned economy markets can’t operate correctly and everyone suffers.

            Let me reword that:

            “Great wealth or high income is an indicator of how much benefit someone is providing to others in an economy where exchanges are made voluntarily.

            When we buy something, absent government coercion, it is because we value that something more than the money we exchange for it. The person who sells us that something values the money more than they value the “something”. It’s a mutually beneficial exchange.

            If a lot of value is provided to a lot of people who voluntarily exchange money for somethings, the seller of somethings may become wealthy.

            So someone’s great wealth – in a market economy – means they have provided great benefit to others. It’s that simple.

  3. Ken says:

    Actual shortest graduation speech ever:

    “Never give in. Never give in. Never, never, never, never — in nothing, great or small, large or petty — never give in, except to convictions of honor and good sense.” – Winston Churchill

  4. chuck martel says:

    “That is why governments sometimes default on loans and other promises that they have made.”

    It’s because the governments and the individuals that make up that government don’t feel a particular obligation to keep the promises that others have made.

    ” It is feasible for one generation to shift costs to subsequent ones.”

    But there’s no moral obligation for the subsequent generation to accept them.

    • morganovich says:

      “But there’s no moral obligation for the subsequent generation to accept them.”

      nor a sound moral basis for doing it in the first place.

      isn’t “clean up your own mess” one of those things one is supposed to learn in kindergarten?

  5. Hieronymus says:

    Berkeley?

    Was he booed from the podium?

    [Probably not, given that, assuming other than a Pavlovian knee-jerk against the identifier of "economist," booing implies an understanding of the concepts being voiced.]

  6. Che is dead says:

    Yeah, yeah, yeah, but these are only his “truths”. And while interesting, one can’t help but notice that a lot of his assertions would seem to have a grounding in mathematics. And therein lies the peril:

    “ … [M]ore often it has been used to hurt them. Math was behind the development of nuclear weapons. It is used to maintain an economic divide between a handful of wealthy, White people and the billions of poor people of color around the world. It is used as a rationale for depriving people of access to cheap, life-saving drugs. So my question is: what good has the progress of mathematics as an intellectual discipline done for people? Maybe if our mathematics had a background in social justice, we wouldn’t have so many people suffering around the world.” — Jonathan Osler, “The Guide for Integrating Issues of Social and Economic Justice into Mathematics Curriculum”

    “Finally, the content of any science is profoundly constrained by the language within which its discourses are formulated; and mainstream Western physical science has, since Galileo, been formulated in the language of mathematics. But whose mathematics? The question is a fundamental one, for, as Aronowitz has observed, “neither logic nor mathematics escapes the `contamination’ of the social.” And as feminist thinkers have repeatedly pointed out, in the present culture this contamination is overwhelmingly capitalist, patriarchal and militaristic: “mathematics is portrayed as a woman whose nature desires to be the conquered Other.” — Alan D. Sokal, Dept. of Physics, NYU

    His next invitation will be greeted with protests, denouncing him as an extremist and a racist.

    If he is ever allowed to speak on a university campus again, he will find himself restricted to the “First Amendment Zone” established on the outer reaches of the campus.

    • morganovich says:

      “So my question is: what good has the progress of mathematics as an intellectual discipline done for people?”

      absolutely. i mean, who uses computers, flies on airplanes, navigates, or lives in a building that does not fall down?

      this “math” sounds pretty dodgy to me…

      btw, that second quote is from the sokal hoax. it’s not a real paper.

      http://en.wikipedia.org/wiki/Sokal_affair

      it was an article of pure nonsense, deliberately written to be pure nonsense as an experiment to see if a paper that was devoid of any actual content or coherent ideas could be published in a leading “social journal” if it were populated liberally with quotes from “ideologically correct” authors.

      he succeeded.

    • geoih says:

      Those quotes remind me of the girls math class on the Simpsons: “How does a plus sign feel?”

      If ecomonics is organized common sense, then social justice is emotion run amok (often wielding a gun).

  7. Citizen Buddy says:

    I liked the speech very much but wondered about the use of the economic terms such as incentives and equilibrium.

    Alas, this was given as the commencement address to the 2007 Econ Department grads at UC-Berkeley.

  8. jack512 says:

    Paul Krugman comments on this article:

    No Time For Sargent
    I’m a little late to this, but there’s lately been some buzz about the unearthing of Tom Sargent’s 2007 graduation speech, in which he briefly laid out 12 principles of economics. For the most part the speech is getting favorable attention. So let me be a spoilsport. It’s not so much that what Sargent said is wrong, although some of his principles are by no means universally agreed upon, even in normal times. What’s so striking about Sargent’s points is that it’s hard to think of a worse time to cite them. And the people citing that old speech clearly have ulterior motives.

    So, about the not so time-dependent points: Sargent declared as a principle, “There are tradeoffs between equality and efficiency.” Well, every economist would agree that Cuban-type equality is bad for efficiency. But would reducing our current level of inequality reduce efficiency? That’s far from clear: there are a number of reasons to believe that high levels of inequality have adverse effects on economic growth – and evidence to that effect is coming not from fringe leftists but from places like the IMF.

    The main point, however, is that Sargent’s principles aren’t actually immutable truths; they’re statements about a fairly efficient market economy not too far from full employment. Even leaving general issues of market failure aside, they seem remarkably off-point in an economy still suffering from high unemployment and excess desired savings (as evidenced by the fact that interest rates are at the zero lower bound).

    So when Sargent reminds us that communities face trade-offs, that’s much less clear at a time when the community is not at all like an individual – in which there are substantial amounts of unemployed resources, and putting those resources to work would be pure gain, not a tradeoff. And then he tells us this:

    When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation.

    There are very good reasons to believe that this is just wrong under current conditions. There’s overwhelming evidence that in an economy against the zero lower bound government spending has a large, positive multiplier, so the goods the government buys don’t come at the expense of other consumption or investment; and there’s a reasonable argument to the effect that even in purely fiscal terms spending more than pays for itself.

    Now, when Sargent gave that speech – before the financial crisis – he could reasonably have imagined that conditions under which his eternal truths weren’t true would be rare. But at this point we’ve been against the zero lower bound for more than five years, and we’re talking seriously about the possibility that depression-like conditions are the new normal.

    So why the sudden attention to Sargent’s 2007 speech? I think it’s fairly obvious: it’s essentially stealth anti-Keynesian propaganda, cloaked in the form of a widely respected and liked economist uttering what sound like eternal truths. But they aren’t, and the real goal here is to undermine the case for fighting unemployment in the here and now. There are virtues to that 2007 talk, but right now is no time for 2007 Sargent.

    http://krugman.blogs.nytimes.com/2014/04/21/no-time-for-sargent/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs&region=Body

    • Ron H. says:

      jack512

      Paul Krugman comments on this article:

      Yes, anyone can easily read Krugman for themselves at the NYT. What does jack512 have to contribute?

      Perhaps you could explain why you believe – if you do – that Sargent is wrong in this statement:

      “When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation.”

      Since government produces nothing, and can only spend what it has first taken from someone who has produced it, It seems pretty hard to dispute the fact that all government spending ultimately comes from individual taxpayers or from consumers through inflation.

      To suggest that government spending can improve economic conditions requires a belief that someone in government can better determine how a person’s money should be spent than they can determine for themselves. A seemingly ridiculous notion.

      What say you, Mr. jack512?

      • bcw says:

        @Ron H. Perhaps jack512 posted the comments from Prof. Krugman because people you like don’t seem to be able to read them even when posted on a website you like. vis:
        ““When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation.”

        Krugman directly addresses this point in his 5th and 6th paragraphs.

        To expand further, the notion you call silly would also imply everyone should be self-insured and living on isolated farms. Government is more efficient at activities where an action makes sense for the population as a whole but where no single individual can justify the expense: roads, infrastructure and the administration of the economy. Yours is the typical Libertarian assertion but remember that we lived in a “libertarian” world for centuries – it was called subsistence farming. The closest we have to it now is places like Somalia and Haiti where no one pays taxes and the only paved roads lead to the barracks and the airport.

        • Ron H. says:

          bcw

          Perhaps jack512 posted the comments from Prof. Krugman because people you like don’t seem to be able to read them even when posted on a website you like.

          Perhaps you are confusing reading Krugman, with agreeing with Krugman. Pasting an entire Krugman article here is not a better argument than posting a link, which jack512 has done also.

          If you read Krugman on a regular basis you will understand that there is nothing new in his Sargent piece. He regurgitates the oft repeated, but erroneous Keynesian notion that “aggregate demand” is the key to a thriving economy, and that simply putting money in consumers’ hands via government spending will make everything better again through some magical multiplier.

          Never addressed are the questions of WHY aggregate demand has fallen, and WHY it’s reasonable to believe that government can make better choices with other people’s money, than they can make with their own.

          It should be clear eventually that production must *precede* consumption, not the other way around, and that production creates its own demand.

          “When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation.”

          That statement is complete, and is true. There are no other sources of money for government to spend.

          Krugman directly addresses this point in his 5th and 6th paragraphs.

          Yes, he says “it ain’t always true”, but fails to explain WHY it isn’t always true. Instead he opines on WHEN government should spend. Not the same argument at all.

          To expand further, the notion you call silly would also imply everyone should be self-insured and living on isolated farms.

          Not at all. There’s no suggestion that everyone should fend for themselves. Voluntary co-operation, division of labor, and group action are essential for a peaceful and prosperous society, since individuals CAN’T do everything for themselves.

          The objection is to the idea that someone knows better than you do what is in your best interest, how the fruits of your labor should be spent, and that it must be taken from you without your consent to spend on things you may not want or need. Do you really believe others know better than you do what’s in your best interest and that you must be forced to comply?

          Government is more efficient at activities where an action makes sense for the population as a whole…

          But who can decide what makes sense for the population as a whole? The “population as a whole” is only the sum of the individuals in that group. All individuals don’t agree.

          …but where no single individual can justify the expense: roads, infrastructure…

          Then groups of individuals may be able to justify the expense. That doesn’t mean the blunt force of government should be used to force people to join that group if they don’t wish to.

          …and the administration of the economy.

          Newsflash: the economy doesn’t need to be administered. Do you really believe that top down direction provides better outcomes than voluntary exchanges in a free market?

          Yours is the typical Libertarian assertion but remember that we lived in a “libertarian” world for centuries – it was called subsistence farming.

          That is not a libertarian world. Obviously you don’t understand the meaning of the word.

          The closest we have to it now is places like Somalia and Haiti where no one pays taxes and the only paved roads lead to the barracks and the airport.

          Well, that didn’t take long. Both Somalia, and Haiti in one sentence! I’ll bet you know virtually nothing about either country, except that they are poor.

  9. jack512 says:

    Krugman elaborates further:

    The Economy is Not Like a Household
    I dashed off my Sargent comment in the few minutes before class, which meant that it was longer and more complicated than it should have been. So I want to come back to what I think is the most important point. In his speech, Sargent went right away to this:

    2. Individuals and communities face trade-offs.

    At one level this is, of course, true. But left there without further elaboration, it is deeply misleading — especially right now. For the essence of what’s happening now — the key to understanding the mess we’re in — is that sometimes the economy is not like a household, that our individual choices sometimes lead to outcomes that are in nobody’s interest.

    In particular, when you have economy-wide deleveraging — when everyone is trying to spend less than his or her income, so as to pay down debt — you have a fundamental adding-up problem. My spending is your income, and your spending is my income, so if both of us try to spend less at the same time, what we end up achieving is mutual impoverishment.

    Ah, you say, but the price mechanism will take care of that. Indeed: in normal times interest rates rise or fall to match desired spending to the economy’s productive capacity. But what if the interest rate needed to achieve this outcome is negative? Well, that can’t happen — so when the deleveraging shock is big enough, the economy goes into a depression.

    And that’s the world we’re in! I know that many people just hate it when economists talk about liquidity traps — it all sounds like mumbo-jumbo to them — but the zero lower bound isn’t hypothetical, it’s staring us in the face.

    And if you want to insist that some other kind of flexibility would save us if only markets were perfect and pure enough, tell me how. A fall in the overall price level would do nothing to raise real incomes, but it would increase real debt, increasing the pressure to deleverage. If for some reason wages were to fall while prices didn’t, it would reduce real wages — but firms would have less, not more, incentive to hire workers, because their real sales would fall too. And so on down the line.

    I’m going on too long again, so let’s just come back to the key point: the reason we’re in the state we’re in is precisely the fact that the community doesn’t face the same kinds of tradeoffs that face individuals. Highlighting supposed words of wisdom that suggest the opposite is a big step backward.

    http://krugman.blogs.nytimes.com/2014/04/21/the-economy-is-not-like-a-household/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs&region=Body

    • Ron H. says:

      jack 512

      You are wasting valuable blog comment space. If you wish to reference Krugman, just post the link and a short explanation of why you are doing it.

  10. Jim Rose says:

    Mark, David, Paul Krugman blogged today that I originally posted the Sargent link as part of a vast right-wing conspiracy to keep unemployment up, and you, David Newmark and Alex Tabarrok must have reposted it as my conspiratorial minions.

    As I already said at Marginal Revolution on 20th April: “Too many on social media such as reddit responded by smearing Sargent as a right-winger and neo-liberal. He is a life-ling Democrat.”

  11. Barry says:

    Nobel laureate Paul Krugman has some comments:

    http://krugman.blogs.nytimes.com/2014/04/21/no-time-for-sargent/?smid=tw-NytimesKrugman&seid=auto

    Tl;dr: Sargent’s comments apply only under rather exotic circumstances.

    • Jim Rose says:

      I thought Krugman said:

      “It’s not so much that what Sargent said is wrong, although some of his principles are by no means universally agreed upon, even in normal times.

      What’s so striking about Sargent’s points is that it’s hard to think of a worse time to cite them.

      And the people citing that old speech clearly have ulterior motives.”

  12. Tito says:

    Ah, 2007 when the world was thought flat, the Great Recession had not laid waste to EMT and Behavior Economics hadn’t proved most EMT based on faulty understanding of human nature. Those were times even Alan Greenspan can’t uphold. Reality distresses the finely crafted delusions of man. EMT is going through the usual dead cat bounce.

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