Rational Ignorance?

I puzzled a few days ago about why the media focuses so much attention on how our Presidents in Waiting would respond to the current economic situation. Today, the folks over at Marginal Revolution have a nice post summarizing and then discussing a Matt Yglesias post on PIW John McCain's apparent ignorance of economics. (Davide Leonhardt has a good article here) Yglesias' bottom line is: "John McCain would not govern very well on economic policy issues, and would fare poorly in a campaign that focused heavily on economic problems."

How much economics McCain knows, and what that implies for his qualification to be President raises a broader question: might it be fully rational for president to know zero economics? Consider the following two propositions:

• The president has no institutional authority to affect any macroeconomic policy instrument directly. The constitution (Article I) assigns to Congress (to the House, actually) authority over fiscal policy. The Federal Reserve Act assigns to the Federal Reserve Board the authority to set monetary policy. Thus, the president cannot directly make any decision that affects either of the two major macroeconomic policy instruments. It is not obvious, therefore, why a person who wishes to be president would invest lots of time learning the intricate details about economic policy. Because time is scarce, wouldn't it be more rational to invest in learning about those issues that one would be able to affect directly? In the US political system, the president has greatest authority over foreign and security policy. (This is probably why most presidents ultimately wind up focusing on foreign policy and wind up being remembered more for foreign policy than domestic policy successes and failures (with some obvious exceptions, such as FDR).
• In selecting a president, we are really selecting a presidency, an organization with a highly-refined division of labor staffed by people with specialized knowledge. Perhaps we have a mental image of our president sitting in the oval office for hour after hour pouring over the details of one policy after another. Being president is much like being in school--one hour on macroeconomics, one hour on international politics, etc. This is not what the president does. The president sets a broad agenda; the president (and staff) select people. These people, with expertise in their field, make policy. The president then persuades and cajoles, brides and threatens legislators to vote for these policies.
  

The president's job, therefore, is to set the agenda, pick smart people with expertise who share this broad agenda, create an organizational structure that enables these people to work effectively, and try to get Congress to enact the policy proposals that emerge. It thus seems quite rational for McCain (and all other candidates) to have little knowledge about economics.

This makes me wonder whether we don't focus on the wrong things when we select presidents. Because the president is a leader, a politician, and not a policy maker, perhaps we should focus more attention on our PIWs' leadership capabilities: their broad agendas ("where do you see the country in five years?"), their ability to work effectively with Congress ("do you think that you work well with others?"), and the degree to which we believe they will exercise good judgment in those domains where they have greatest authority (foreign affairs). This would allow us to worry less about what they as individuals would do when confronted with some hypothetical situation about which they have no expertise and over which they have little direct authority.

Economists and fiscal Stimulus

The New York Times disputes my assertion that the serious economists do not think that fiscal stimulus is warranted at this point. Apparently, mainstream economists such as Jared Bernstein (Economic Policy Institute), Alan Tonelson (?) and Larry Summers (Clinton Administration) think that stimulus is warranted. Only non-mainstream economists such as David Henderson, (who the Times labels as a "libertarian economist") question its merits. As an aside, I don't know why Bernstein doesn't warrant a "liberal economist" label if Henderson warrants the "libertarian" one. And Alan Tonelson is not an economist. His bio says he has a BA in History.

The story draws conclusions that are not warranted by the evidence provided: "Most economists praised the deal as a necessary effort that by increasing the public debt to put cash swiftly into the hands of ordinary consumers, could limit the severity and duration of a recession and very likely spare some jobs." Did they survey all economists? If not, how do they know that this is what most economists did?

Stimulus Package

Congress and the administration reached agreement on fiscal stimulus. Paulson's comments in the announcement of the agreement indicates partly why this may offer much in the way of quick relief. "If all works well," he expects the rebates to begin flowing in May. He said the aim is to start sending the checks within 60 days of enactment of the stimulus package, with most recipients receiving their checks in less than 10 weeks.

There has been considerable chatter about whether a fiscal stimulus is a) necessary and b) likely to work. The balance of commentary by macroeconomists seems to be a double no. See, for example,
Mankiw, and Brad DeLong. Of quite different ideological stripes, from conservative (Mankiw) to to DeLong a moderate liberal, and yet, similar conclusions: not time yet--let monetary policy do its job and then use fiscal policy. DeLong's video is worth watching, if only for its somewhat fascinating dorky-intellectual-oddness.

Krugman (the columnist, not the economist) demurs.

It is hard to argue with DeLong's conclusion (which I think I anticipated): "John Edwards and Hillary Rodham Clinton might respond that these stimulus packages are political rather than policy documents--acts of campaigning rather than acts of governance--and they are right, up to a point."

Schadenfreude

EU Finance Ministers seem almost happy about current financial market turmoil.

"Mr Almunia (the EU's Monetary Affairs Commissioner) contrasted imbalances in the US economy with what he described as Europe’s “solid, sound fundamentals”.

“We have a positive current account position. We have a level of savings that is the level required to finance our investments. We have improved our fiscal positions a lot. Moreover, we haven’t got subprime mortgages in our financial systems,” Mr Almunia said.

He denied, however, that he was gloating over the US economy’s troubles. “I’m not engaged in any criticism. I’ve simply described the situation,” he told reporters.

On the Lighter Side...

The Onion reports that Bill Clinton has announced his bid for the presidency.

"My fellow Americans, I am sick and tired of not being president," said Clinton, introducing his wife at a "Hillary '08" rally. "For seven agonizing years, I have sat idly by as others experienced the joys of campaigning, debating, and interacting with the people of this great nation, and I simply cannot take it anymore. I have to be president again. I have to."

He continued, "It is with a great sense of relief that I say to all of you today, 'Screw it. I'm in.'"

Too funny. Even more so when juxtaposed to this: President Clinton: "Think what being President's like. They play a song every time you walk into the room. They play 'Hail to the Chief.' Shoot, I was lost for 3 weeks after I left the White House. Nobody played a song anymore. I didn't know where I was. It was terrible." (Yes, this is a real quote).

This is Scary

Asian markets at 12:50 a.m. EST.

Check for latest here: World Stock Market Indices

The Only Thing We Have to Fear...

Is Fear itself. But, this is kind of scary. "Investors reacted with what many analysts described as panic to the multiplying signs of weakness in the American economy...“There is indeed some panic,” said Thomas Mayer, the chief European economist at Deutsche Bank in London.

Mystify Me

I have been deeply puzzled by something of late. As you all know, we may or may not be in or heading toward a recession. As a consequence, Bush and Congress are discussing fiscal stimulus, and Bernanke has promised to bring lower interest rates to the party. All of this is good.

What I don't get is this: the media has devoted lots of time and attention to what each of our hopeful "presidents in waiting" would do. Why? On the one hand, what a PIW would do once elected is irrelevant to the current debate about what we should do. On the other hand, by the time one of them becomes president, either (a) we won't be in recession (average recession is 1 year) or (b) the recession is so unprecedented that what one might do today facing a "normal" recession is irrelevant. Might just as well ask them what they would have done in 1929.

I also don't understand the logic of their proposals:

Clinton: $70 billion plan to "jump start" the economy; repeal the Bush tax cuts for households earning more than $250,000. The "jump start" money is half what seems to be required (about 1% of GDP); repealing tax cuts for the rich will be anti-stimulus.
Edwards: $25 billion immediately, additional $75 billion in event of recession; repeal the Bush tax cuts for households earning more than $200,000. Same problem as Clinton, though Edwards seems not to realize that we may not know we are in recession until it is over.
Obama: $80 billion in tax cuts targeted at middle and low income. Repeal Bush tax cuts. See above.

Republican PIWs: make Bush tax cuts permanent. Not clear how this constitutes a fiscal stimulus.
Ron Paul: Balance the budget, go back on gold. Ron Paul officially wins the Andrew Mellon Prize.

Trade and Compensation, Again

Yet another round of debate on “trade, income, and compensation.” In case you are just tuning in, the trade, income, and compensation debate is the following: Trade liberalization reduces the income of one group of people and raises the income of a different group. Should those who gain compensate those who lose?

Here is why this is tiresome.

A. There is no “right” answer. There are good arguments to be made for yes, and there are good arguments to be made for no. There are no external grounds to which we can appeal to select one over the other.

B. Adherents to the yes side (winners should compensate losers) typically under-analyze the economics.

1. The moral obligation to compensate losers must be reciprocal. If tariff reductions redistribute income then tariff increases must redistribute income in the opposite direction. If we should compensate losers from tariff reductions then we should also compensate losers from tariff increases. As textile workers and farmers and (insert protected industry here) have not compensated losers from high tariffs, I do not see why those who win from low tariffs now have a moral obligation in the other direction. Appeals to “fairness” lose their purchase.

2. Losers from trade liberalization already have been compensated. The tariff enables workers to earn above-market returns. This rent compensates for the lower income they earn once the tariff is gone. Imagine that a worker in a protected industry saves the rent (the difference between the wage in the next best available job and her current wage). Once the tariff is eliminated and the worker is employed at a lower wage, those saved rents, spent slowly over time, provide an income higher than the new lower wage. The fact that people don’t behave this way is irrelevant to the broader insight—the rent the tariff provides is compensation for the risk that the tariff might one day disappear. It is not obvious that society has an obligation to compensate them again.

C. Adherents to the “no" side typically under analyze the political problem.

1. Tariffs reflect political influence. Eliminating a tariff, therefore, requires a policy exchange. This policy exchange need not be compensation for workers in the now-liberalized industry, but it must be something equal to the present value that the tariff holder attaches to the stream of rents the tariff generates. Normative arguments (aw, you should just surrender your property rights) are irrelevant. No free lunch in politics either.

2. Sustaining low tariffs in a democratic society requires popular support . The public is more likely to support trade if they believe they are somewhat insured against its downside risk. Hence, compensation might be a political necessity for openness in a democratic society.

D. Thus, debating whether we should or shouldn't compensate losers is pointless; the question is whether compensation is a necessary part of the policy bargain that must be struck in order to construct majority support for trade. As this is not a normative question, debating the question in normative terms—should we or shouldn’t we—is entirely beside the point.

Why Fiscal Policy is Better

Mankiw poses an important question for policymakers regarding current enthusiasm for a fiscal stimulus:

"If the economy now gets the fiscal stimulus being proposed (about 1 percent of GDP), does that mean that the Federal Reserve will cut interest rates less than it otherwise would?"

He continues, "If the answer ... is Yes, then ask, How much higher will interest rates be kept as a result of the fiscal stimulus? And is it really better to have a fiscal stimulus and higher interest rates than a smaller deficit and lower interest rates?" (This is a rhetorical question, in case you are unclear, to which the answer is certainly, "no, it is not really better to have a fiscal stimulus and higher interest rates). Update: Mankiw answers the question.

He does not define what he means by "better," but I imagine he conceptualize this in purely economic terms. But, in political terms, the answer is quite different. It's hard for politicians seeking re-election to mail a lower interest rate to voters. Many of them will never even know it has occurred. How can politicians capitalize on their largesse? It's quite easy, however, to send a fiscal stimulus, and when it arrives, voters thank the sender.

So, although monetary policy may be easier, and perhaps even better in economic terms, fiscal stimulus is clearly better in political terms. Sending checks is especially terrific if you can send them to some voters and not to others.