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The Federal Reserve on… The Federal Reserve

 

http://www.federalreserveeducation.org/fed101/fedtoday/FedTodayAll.pdf (check for yourself if you don’t believe it)

 

Page 29:

Myth:

When the Fed prints money for banks it increases the national debt.

[Nice Strawman, should have stuck to that…]

REALITY:

Federal Reserve Banks do not print money, they manage the inventory of the existing stock of
currency. Money is printed by the Bureau of Printing and Engraving, an agency of the U.S.
Treasury Department. Government debt is generated by government borrowing.The amount
of bor rowing, measured by the deficit, is not decided by the Fed.The government’s debt and
deficit are the result of the budgetary decisions of the Congress and President.

 

Ok, then…

Myth:

The Fed is not a good supervisor of banks because it allows banks to keep only a fraction of
their deposits on hand.

REALITY:

The fact that banks are required to keep on hand only a fraction of the funds deposited with
them is a function of the banking business. Banks bor row funds from their depositors (those
with savings) and in turn lend those funds to the banks’ borrowers (those in need of funds).
Banks make money by charging borrowers more for a loan (a higher percentage interest rate)
than is paid to depositors for use of their money. If banks did not lend out their available funds
after meeting their reserve requirements, depositors might have to pay banks to provide
safekeeping services for their money.
For the economy and banking system as a whole, the practice of keeping only a fraction of
deposits on hand has an important cumulative effect. Referred to as the fractional reserve
system, it permits the banking system to “create”money.

Bob Murphy’s Response to Cochrane (who responded to Krugman)

 

Here’s why I like Bob Murphy, and why it pains me to see him go off the deep end so often when it comes to non-economic issues.

Monday, September 14, 2009

==========
Cochrane Threatens Austrians More Than Krugman Ever Did
By Robert P. Murphy

Although some Austrian economists (e.g. Mario Rizzo) expressed disappointment with Chicago University economist John Cochrane's response to Paul Krugman's infamous NYT Magazine piece, for the most part the people on "my side" have high-fived Cochrane for kicking sand in Krugman's face.
This is a very short-sighted view. Just because someone gets in a fight with someone who we can't stand--and I've criticized Krugman enough to have credibility on that score--doesn't mean we should endorse any old arguments. There was quite a bit in Cochrane's response that should alarm an Austrian economist, and in fact his views are arguably more dangerous to the Austrian alternative than Krugman. After all, all Krugman did was ignore us. But Cochrane ignored us and defended himself from Krugman in a way that "proves" Austrian economics is a collection of second-rate ideas. I don't see how any Austrian economist can overlook all of that, just because he likes Cochrane's conclusions that "Keynesian economics is awful" and "Paul Krugman is a jerk," true those conclusions may be. In this brief essay I'll quote from Cohrane and show how his ostensible attack on Krugman actually takes down Austrian economics as collateral damage.

Most of all, [Krugman's article is] sad. Imagine this weren’t economics for a moment. Imagine this were a respected scientist turned popular writer, who says, most basically, that everything everyone has done in his field since the mid 1960s is a complete waste of time. Everything that fills its academic journals, is taught in its PhD programs, presented at its conferences, summarized in its graduate textbooks, and rewarded with the accolades a profession can bestow, including multiple Nobel prizes, is totally wrong. Instead, he calls for a return to the eternal verities of a rather convoluted book written in the 1930s, as taught to our author in his undergraduate introductory courses. If a scientist, he might be a global-warming skeptic, an AIDS-HIV disbeliever, a stalwart that maybe continents don’t move after all, or that smoking isn’t that bad for you really.

I don't need to dwell on why Austrians should dismiss this opening salvo from Cochrane. This is the incredibly naive Whig theory of history. Cochrane could just as easily blow up any Austrian who thinks Human Action contains better economic analysis than the latest edition of Mankiw.
(What's really ironic is that later in the essay, Cochrane says, "Occasionally sciences, especially social sciences, do take a wrong turn for a decade or two. I thought Keynesian economics was such a wrong turn. So let’s take a quick look at the ideas." So I'm not sure what to make of his opening paragraph. It seems Cochrane finds it "sad" that today's Keynesians would dare to use arguments that Cochrane had deployed against yesterday's Keynesians. A bit like the US government saying other countries shouldn't have nuclear weapons, because after all some evil regime might use them against civilians one day.)
After lamenting the sad day when someone would dare to criticize Nobel laureates (isn't Krugman a Nobel laureate?), Cochrane then says:

And that’s the biggest and saddest news of this piece: Paul Krugman has no interesting ideas whatsoever about what caused our current financial and economic problems, what policies might have prevented it, or what might help us in the future, and he has no contact with people who do. “Irrationality” and “spend like a drunken sailor” are pretty superficial compared to all the fascinating things economists are writing about it these days.

What is Cochrane talking about? Krugman has written boatloads on what could have prevented the current financial crisis. For example, Krugman has pointed to various types of (what he labels) "deregulation." And as for the "drunken sailor" wisecrack, Krugman has put up formal models showing his views on aggregate demand and so forth.
Don't get me wrong--I think Krugman is completely wrong (bordering on "insane" if that word is to have any meaning in reference to academics) in his views. But Cochrane's rude dismissal of Krugman is just as much a lie as anything Krugman said about Cochrane. So again, for those Austrians who can't stand what a dishonest thug Krugman is, you can't very well think Cochrane did a great job taking him down. Unless it's OK to lie for free markets (or in Cochrane's case, significantly-less-socialized markets).
But the next paragraph is what really made me lose it:

It’s fun to say we didn’t see the crisis coming, but the central empirical prediction of the efficient markets hypothesis is precisely that nobody can tell where markets are going – neither benevolent government bureaucrats, nor crafty hedge-fund managers, nor ivory-tower academics. This is probably the best-tested proposition in all the social sciences. Krugman knows this, so all he can do is huff and puff about his dislike for a theory whose central prediction is that nobody can be a reliable soothsayer.

How in the world can the proponents of the EMH continue to justify their belief in the EMH...by appeal to the EMH?!! I occasionally stop the radio channel seek on Christian stations, and it's hilarious during the short spots when they say things like, "A lot of people wonder how we can trust the Bible. But they need to read First Corinthians 5 where Paul writes..." (I am a Christian, by the way.)
There were plenty of economists (especially the Austrians--see e.g. Mark Thornton back in 2004) who "called" the housing boom. I don't know what exactly the EMH theorists make of this. Yes, you could argue that at any given time, you will have no shortage of economists (all of whom are ignorant of the EMH and the limits of their knowledge) shouting out all kinds of predictions, and then simple statistics show that some of them will be "proven right."
But on the other hand, what more could opponents of the EMH do than to point to the recent housing bubble?! When Cochrane says the EMH is the "best tested proposition in the social sciences," it is only because it is a tautology. Really, think about it: Do we need to go test the proposition that "if someone is making a bunch of money doing an activity, then other people will copy him and whittle away his returns, unless there is some reason that they don't"? (I'm exaggerating slightly, but when you read the actual empirical defenses of the EMH against its typical objections, you realize that it is a way of viewing the world. It is not a conclusion derived from the facts; it is a way of organizing the facts.)

Krugman writes as if the volatility of stock prices alone disproves market efficiency, and efficient marketers just ignored it all these years. This is a canard that Paul knows better than to pass on, no matter how rhetorically convenient....Data from the great depression has been included in practically all the tests. In fact, the great “equity premium puzzle” is that if efficient, stock markets don’t seem risky enough to deter more people from investing! Gene Fama’s PhD thesis was on “fat tails” in stock returns.

I am a bit out of my league here, but I still suspect that Cochrane is once again defining away his opponents. Again I ask: What would the world look like if the EMH were false? Wouldn't there be giant bubbles, during which many participants knew (or were quite sure) there was a bubble in progress--and invested and profited accordingly? (Of course that happened; don't let Cochrane fool you into thinking otherwise with his "best tested proposition in the social sciences" bluff.)
As far as the equity premium puzzle, proponents of Mandelbrot's "non-Gaussian" approach to financial markets say that it is the standard neoclassical use of a Gaussian distribution (calibrated with historical stock returns, yes including the Great Depression) that makes investors appear far too risk averse than we think they really are. What is happening is that the actual stock market is far more volatile than the calibrated models suggest. The housing bubble that just burst--as well as the 1987 crash--should have been "once-in-a-thousand-year events," according to the standard models that Krugman is attacking. (Of course I am making up that number. But the basic point is right.) That's one of the main themes in Nassim Taleb's work, that the value-at-risk and other risk measures used by Wall Street quants gave a false sense of security. I'm not accusing Cochrane of being ignorant of this fact, but at best he is throwing out a non sequitur to evade the very real problem that Krugman pointed out.
Oh wait, it turns out Cochrane isn't so sure about the usefulness of the EMH after all:

It is true and very well documented that asset prices move more than reasonable expectations of future cashflows. This might be because people are prey to bursts of irrational optimism and pessimism. It might also be because people’s willingness to take on risk varies over time, and is sharply lower in bad economic times. As Gene Fama pointed out in 1972, these are observationally equivalent explanations at the superficial level of staring at prices and writing magazine articles and opeds. Unless you are willing to elaborate your theory to the point that it can quantitatively describe how much and when risk premiums, or waves of “optimism” and “pessimism,” can vary, you know nothing. No theory is particularly good at that right now. Crying “bubble” is no good unless you have an operational procedure for identifying bubbles, distinguishing them from rationally low risk premiums, and not crying wolf too many years in a row.

There you have it, folks. After telling us that Krugman is attacking the best tested proposition in the social sciences, Cochrane falls back on, "Yeah we don't know anything, but neither do you. Until you can predict when a bubble will burst, stop complaining about my theory that predicts bubbles are impossible." (Again I am slightly exaggerating to make the point--but not much.)

In economics, stimulus spending ran aground on Robert Barro’s Ricardian equivalence theorem. This theorem says that debt-financed spending can’t have any effect because people, seeing the higher future taxes that must pay off the debt, will simply save more. They will buy the new government debt and leave all spending decisions unaltered. Is this theorem true? It’s a logical connection from a set of “if” to a set of “therefore.” Not even Paul can object to the connection.

Nope. Again I'm a bit out of my league here, but I am pretty sure that Cochrane is completely full of it on this point. Ricardian equivalence says that if the government finances a tax cut by running a higher deficit, while holding total government spending constant, that this won't change aggregate consumption, GDP, private sector investment, or interest rates. Rational taxpayers realize they will face higher tax bills in the future, and so they put aside the tax refund to roll over at interest and pay the bills. Thus, what the government gives back with the left hand, it borrows out of the private sector with the right. (Interest rates don't change because the extra saving by the private sector cancels out the extra borrowing by the government.)
Now there are all sorts of caveats in my argument above; it matters if it's a lump-sum tax cut versus a reduction in marginal tax rates, it matters if the current generation of workers will die before the higher taxes hit, etc. That's the tweaking of assumptions that Cochrane is referring to.
However, as Brad DeLong and Krugman have pointed out many times (in justified exasperation) on their blogs, Ricardian equivalence does not say that an increase in government deficit spending will be perfectly offset by the private sector. Think about it: The government decides to borrow and spend $100 billion more. Now for Ricardian "equivalence" to kick in, it means that the private sector must reduce its current consumption by $100 billion and increase savings by that amount, at the same interest rate. [UPDATE: I am assuming that the extra $100 billion in government spending is classified as "consumption" and not "investment."] In other words, faced with a higher future tax bill, the present generation decides to deal with it by slashing current consumption by $100 billion, while maintaining all future levels of consumption at their pre-announcement levels. Well why the heck would they do that? It would make a lot more sense to assume that consumers originally try to cushion the blow by reducing consumption across all future time periods. Then interest rates have to rise in the present in order to force consumers to make present consumption (and private-sector investment) channel an extra $100 billion into the government's coffers. So you can see, there is nothing "equivalent" going on here at all. Don't misunderstand--Krugman and DeLong are totally wrong in my opinion for thinking it's a good idea to boost "aggregate demand" (measured in nominal terms) by having the government borrow money and spend it. But Cochrane is totally wrong for invoking Ricardian equivalence to show that, to a first approximation, such a maneuver wouldn't boost aggregate demand in the present. (This is what Krugman is complaining about in the 7th paragraph here.)
Uh oh, now the Austrian reader isn't sure he can continue down this path with me. Suuuure, I didn't actually endorse deficit spending, but I suspiciously agreed with Krugman and DeLong when they claimed to defang one of the most popular Chicago School critiques of it (namely, that private sector reactions perfectly offset it in a frictionless world). Well maybe I can win you back with this final quotation from Cochrane:

Third, and most surprising, is Krugman’s Luddite attack on mathematics; “economists as a group, mistook beauty, clad in impressive-looking mathematics, for truth.” Models are “gussied up with fancy equations.”...
Again, what is the alternative? Does Krugman really think we can make progress on his – and my – agenda for economic and financial research — understanding frictions, imperfect markets, complex human behavior, institutional rigidities – by reverting to a literary style of exposition, and abandoning the attempt to compare theories quantitatively against data? Against the worldwide tide of quantification in all fields of human endeavor (read “Moneyball”) is there any real hope that this will work in economics?
No, the problem is that we don’t have enough math. Math in economics serves to keep the logic straight, to make sure that the “then” really does follow the “if,” which it so frequently does not if you just write prose. The challenge is how hard it is to write down explicit artificial economies with these ingredients, actually solve them, in order to see what makes them tick. Frictions are just bloody hard with the mathematical tools we have now.

I rest my case. Paul Krugman is a jerk and offers horrible policy advice. But John Cochrane's response is no friend-of-the-court brief in the Austrian critique of Keynesianism.
Robert P. Murphy holds a Ph.D. in economics from New York University. He is the author of The Politically Incorrect Guide to the Great Depression and the New Deal (Regnery, 2009), and is the editor of the blog Free Advice.

Libertarians that support Truthers are stupid

 

Here’s a little rant I wrote in response to another wild and crazy post titled “Say what you will, Charlie Sheen isn’t giving Obama a pass” on what would otherwise be a fine Austrian Economics blog. Well, and if it wasn’t for the regular stupid religion postings. Bob Murphy was the first big name Austrian Economist I’ve communicated with, and I have to say in all fairness that he has always been very nice to me.

But Bobs wild and wacky lapses into religion and weirdness outside economics make it impossible for me to ever recommend him to others. A real shame, really, because his economic writings are excellent. One of his posts over at Mises.org provided me with the starting point for a chapter in my thesis. So, I do feel bad when I am less than kind in return – but as far as I’m concerned, it’s tough love – because Bob seems to be a genuinely decent fellow.

In any case, I responded to one of the comments on this post of his, according to which

“The point would be that a lot of innocent people died on that day and the truth of what happened has not been presented.

The freedom movement has only benefited from the 9/11 movement. I have friends that will listen to me and read Austrian economics books only because they believe that our Government is willing to take their lives to push an agenda, and they want to know how we could eliminate them from our lives. It is a heck of a lot easier to convince a 9/11 truther that we don't need the State then a Bush or O'bama supporter.”

[The wacky spelling is all his, and just to make sure there is no misunderstanding: Bob did NOT write THAT]

Ok, he’s right – there is a huge overlap between Libertarians and Truthers. Many Truthers found their way to Libertarianism because Libertarianism is the only ideology that openly opposes the State. I have observed this weird phenomenon before with my own eyes, and it puzzled me. Almost as much as it puzzles me that so many Atheists are Socialists – but that’s a big enough topic all by itself.

So, here’s what came to me, and I will try to elaborate on this sometime in the future.

The "Truth" of what happened has been presented. A group of people consisting mostly, or even exclusively, of (Saudi) Arabs conspired to crash planes into important American landmarks in something left-wing anarchists would have dubbed 'propaganda of the deed'. They succeeded beyond their wildest dreams, partially because they correctly anticipated the reaction of the American government. In another way, they failed - since the anticipated uprising of the "Arab Street" did not happen.

The American Government, wilfully and stupidly walked right into what COULD have been a major bear trap, only to go right ahead and dig themselves a massive hole, and succeed in achieving what the perpetrators of the 9/11 did not achieve directly.

Osama bin Laden is probably still giggling at this in utter disbelief.

The "Truth" movement, on the other hand, is little more than the outgrowth of a wild combination of hubris and paranoia.Hubris, because these people cannot believe that their powerful State has been outsmarted by a bunch of Arabs. After all, the Arabs are wild, uncivilized people who can barely count to ten and are too stupid to understand the first thing about our Great Nation. Paranoia, because the only way to explain the failue of the powerful state is to reinterprete the failure as a evil plan.

In reality, the Truth Movement is very much like the "Stab-in-the-back" movement in Germany post-WWI. Why, our powerful Empire could not have possibly succumbed to those Franzen and Tommies and Ivans and Amis - it must have been the evil people in our own government, probably the JEWS!!!!!!

Your Truthers are little more than the budding shock-troops of Fascism. Seriously. You think these crypto-Patriots, these flag-wavers, these paranoiacs are on the side of Liberty?

Maybe you people should broaden your reading list to include a little Hannah Arendt in addition to Rothbard, in particular her The Origins of Totalitariansm.

Not having read The Origins is a serious lack in your education, and probably one of the reasons you don't recognize the Truthers for what they are.

Get real, and stop embarassing the rest of us

Norman Borlaug - Scientist, Humanist, Life Giver, Dies at 95

 

Nobody has saved more human lives than Norman Borlaug – Father of the Green Revolution. Billions live today thanks to him. May his legacy live on.

Norman Borlaug, 95, Dies; Led Green Revolution

By JUSTIN GILLIS

Published: September 13, 2009

Norman E. Borlaug, the plant scientist who did more than anyone else in the 20th century to teach the world to feed itself and whose work was credited with saving hundreds of millions of lives, died Saturday night. He was 95 and lived in Dallas.

The cause was complications from cancer, said Kathleen Phillips, a spokeswoman for Texas A&M University, where Dr. Borlaug had served on the faculty since 1984.

Dr. Borlaug’s advances in plant breeding led to spectacular success in increasing food production in Latin America and Asia and brought him international acclaim. In 1970, he was awarded the Nobel Peace Prize.

He was widely described as the father of the broad agricultural movement called the Green Revolution, though decidedly reluctant to accept the title. “A miserable term,” he said, characteristically shrugging off any air of self-importance.

Yet his work had a far-reaching impact on the lives of millions of people in developing countries. His breeding of high-yielding crop varieties helped to avert mass famines that were widely predicted in the 1960s, altering the course of history. Largely because of his work, countries that had been food deficient, like Mexico and India, became self-sufficient in producing cereal grains.

“More than any other single person of this age, he has helped provide bread for a hungry world,” the Nobel committee said in presenting him with the Peace Prize. “We have made this choice in the hope that providing bread will also give the world peace.”

The day the award was announced, Dr. Borlaug, vigorous and slender at 56, was working in a wheat field outside Mexico City when his wife, Margaret, drove up to tell him the news. “Someone’s pulling your leg,” he replied, according to one of his biographers, Leon Hesser. Assured that it was true, he kept on working, saying he would celebrate later.

The Green Revolution eventually came under attack from environmental and social critics who said it had created more difficulties than it had solved. Dr. Borlaug responded that the real problem was not his agricultural techniques, but the runaway population growth that had made them necessary.

“If the world population continues to increase at the same rate, we will destroy the species,” he declared.

Traveling to Norway, the land of his ancestors, to receive the award, he warned the Nobel audience that the struggle against hunger had not been won. “We may be at high tide now, but ebb tide could soon set in if we become complacent and relax our efforts,” he said. Twice more in his lifetime, in the 1970s and again in 2008, those words would prove prescient as food shortages and high prices caused global unrest.

His Nobel Prize was the culmination of a storied life in agriculture that began when he was a boy growing up on a farm in Iowa, wondering why plants grew better in some places than others. His was also an unlikely career path, one that began in earnest near the end of World War II, when Dr. Borlaug walked away from a promising job at DuPont, the chemical company, to take a position in Mexico trying to help farmers improve their crops.

The job was part of an assault on hunger in Mexico that was devised in Manhattan, at the offices of the Rockefeller Foundation, with political support in Washington. But it was not a career choice calculated to lead to fame or honor.

Indeed, on first seeing the situation in Mexico for himself, Dr. Borlaug reacted with near despair. Mexican soils were depleted, the crops were ravaged by disease, yields were low and the farmers could not feed themselves, much less improve their lot by selling surplus.

“These places I’ve seen have clubbed my mind — they are so poor and depressing,” he wrote to his wife after his first extended sojourn in the country. “I don’t know what we can do to help these people, but we’ve got to do something.”

The next few years were ones of toil and privation as Dr. Borlaug and his colleagues, with scant funds or equipment, set to work improving yields in tropical crop varieties.

He spent countless hours hunched over in the blazing Mexican sun as he manipulated tiny wheat blossoms to cross different strains. To speed the work, he set up winter and summer operations in far-flung parts of Mexico, logging thousands of miles over poor roads. He battled illness, forded rivers in flood, dodged mudslides and sometimes slept in tents.

He was by then a trained scientist holding a doctoral degree in plant diseases. But as he sought to coax better performance from the wheats of Mexico, he relied on a farm boy’s instinctive feel for the plants and the soil in which they grew.

“When wheat is ripening properly, when the wind is blowing across the field, you can hear the beards of the wheat rubbing together,” he told another biographer, Lennard Bickel. “They sound like the pine needles in a forest. It is a sweet, whispering music that once you hear, you never forget.”

Norman Ernest Borlaug was born on March 25, 1914, in his grandfather’s farmhouse near the tiny settlement of Saude, in northeastern Iowa. Growing up in a stalwart community of Norwegian immigrants, he trudged across snow-covered fields to a one-room country school, coming home almost every day to the aroma of bread baking in his mother’s oven.

He was a high-spirited boy of boundless curiosity. His sister, Charlotte Culbert, recounted in an interview in 2008 in Cresco, Iowa, that he would whistle aloud as he milked the cows, and pester his parents and grandparents with questions. “He’d wonder why in some areas the grass would be so green, and then over here it wouldn’t be,” Mrs. Culbert recalled.

At the time, most farm boys dropped out of school. But Norman’s grandfather Nels Borlaug, regretting his own scant education, urged his grandson to keep going. Norman worked his way through the University of Minnesota during the Great Depression. More than once in those desperate years he encountered townspeople in Minneapolis on the verge of starvation, which sharpened his interest in the problems of food production.

He first studied forestry, but fell under the influence of a legendary expert in plant diseases, Elvin C. Stakman, who encouraged him to switch to the broader field of plant pathology. After earning a doctorate in the field, he took a job with DuPont in 1942 and worked on chemical compounds useful in the war. But Professor Stakman helped persuade him to join the Rockefeller Foundation’s Mexican hunger project in 1944.

Dr. Borlaug’s initial goal was to create varieties of wheat adapted to Mexico’s climate that could resist the greatest disease of wheat, a fungus called rust. He accomplished that within a few years by crossing Mexican wheats with rust-resistant varieties from elsewhere.

His insistence on breeding in two places, the Sonoran desert in winter and the central highlands in summer, imposed heavy burdens on him and his team, but it cut the time to accomplish his work in half. By luck, the strategy also produced wheat varieties that were insensitive to day length and thus capable of growing in many locales, a trait that would later prove of vital significance.

The Rockefeller team gradually won the agreement of Mexican farmers to adopt the new varieties, and wheat output in that country began a remarkable climb. But these developments turned out to be a mere prelude to Dr. Borlaug’s main achievements.

By the late 1940s, researchers knew they could induce huge yield gains in wheat by feeding the plants chemical fertilizer that supplied them with extra nitrogen, a shortage of which was the biggest constraint on plant growth. But the strategy had a severe limitation: beyond a certain level of fertilizer, the seed heads containing wheat grains would grow so large and heavy, the plant would fall over, ruining the crop.

In 1953, Dr. Borlaug began working with a wheat strain containing an unusual gene. It had the effect of shrinking the wheat plant, creating a stubby, compact variety. Yet crucially, the seed heads did not shrink, meaning a small plant could still produce a large amount of wheat.

Dr. Borlaug and his team transferred the gene into tropical wheats. When high fertilizer levels were applied to these new “semidwarf” plants, the results were nothing short of astonishing.

The plants would produce enormous heads of grain, yet their stiff, short bodies could support the weight without falling over. On the same amount of land, wheat output could be tripled or quadrupled. Later, the idea was applied to rice, the staple crop for nearly half the world’s population, with yields jumping several-fold compared with some traditional varieties.

This strange principle of increasing yields by shrinking plants was the central insight of the Green Revolution, and its impact was enormous.

By the early 1960s, many farmers in Mexico had embraced the full package of innovations from Dr. Borlaug’s breeding program, and wheat output in the country had soared sixfold from the levels of the early 1940s.

Urgent queries began to pour in from other poor countries, for they were caught in a bind. After World War II, the introduction of basic sanitation in many developing countries caused death rates to plunge, but birth rates were slow to follow. As a result, the global population had exploded, putting immense strain on food supplies.

On the Indian subcontinent in particular, a crisis developed. The population was growing so much faster than farm output that it was not clear how the masses could be fed. In the mid-1960s, huge grain imports were required to avert starvation.

At the invitation of the Indian and Pakistani governments, Dr. Borlaug offered his advice. He met resistance at first from senior agricultural experts steeped in tradition, but as the food situation worsened, the objections faded. Soon, India and Pakistan were ordering shiploads of Dr. Borlaug’s wheat seeds from Mexico.

One vital shipment through the Port of Los Angeles was delayed by the Watts riots of 1965 in that city, and Dr. Borlaug spent hours yelling on the phone to get it through.

Indian and Pakistani farmers took up the new varieties, receiving fertilizer and other aid from their governments. Just as in Mexico, harvests soared: the Indian wheat crop of 1968 was so bountiful that the government had to turn schools into temporary granaries.

As with the Mexican effort, the Rockefeller Foundation and other donors set up a project in the Philippines to work on rice. It led to the creation of semidwarf varieties that also caused rice yields to soar. Chinese scientists ultimately followed in the footsteps of Western researchers, using semidwarf varieties to establish food security in China and setting the stage for its rise as an industrial power. And Dr. Borlaug and his colleagues helped spread the new crop varieties to additional countries of Latin America, notably Colombia, Ecuador, Chile and Brazil.

Dr. Borlaug’s later years were partly occupied by arguments over the social and environmental consequences of the Green Revolution. Many critics on the left attacked it, saying it displaced smaller farmers, encouraged overreliance on chemicals and paved the way for greater corporate control of agriculture.

In a characteristic complaint, Vandana Shiva, an Indian critic, wrote in 1991 that “in perceiving nature’s limits as constraints on productivity that had to be removed, American experts spread ecologically destructive and unsustainable practices worldwide.”

Dr. Borlaug declared that such arguments often came from “elitists” who were rich enough not to worry about where their next meal was coming from. But over time, he acknowledged the validity of some environmental concerns, and embraced more judicious use of fertilizers and pesticides. He was frustrated throughout his life that governments did not do more to tackle what he called “the population monster” by lowering birth rates.

He remained a vigorous man into his 90s, serving for many years on the faculty of Texas A&M and continuing to do vital agricultural work. In recent years, he marshaled efforts to tackle a new variety of rust that is threatening the world’s wheat crop.

Dr. Borlaug’s wife of 69 years, the former Margaret Gibson, died in 2007. He is survived by a sister, Charlotte Borlaug Culbert; a daughter, Jeanie Borlaug Laube; a son, William Borlaug; five grandchildren; and six great-grandchildren.

Gary H. Toenniessen, director of agricultural programs for the Rockefeller Foundation, said in an interview that Dr. Borlaug’s great achievement was to prove that intensive, modern agriculture could be made to work in the fast-growing developing countries where it was needed most, even on the small farms predominating there.

By Mr. Toenniessen’s calculation, about half the world’s population goes to bed every night after consuming grain descended from one of the high-yield varieties developed by Dr. Borlaug and his colleagues of the Green Revolution.

“He knew what it was they needed to do, and he didn’t give up,” Mr. Toenniessen said. “He could just see that this was the answer.”

Gerald Jonas and Sarah Wheaton contributed reporting.

How did Paul Krugman get it so Wrong?

 

John H. Cochrane[1]

Many friends and colleagues have asked me what I think of Paul Krugman’s New York Times Magazine article, “How did Economists get it so wrong?”

Most of all, it’s sad. Imagine this weren’t economics for a moment. Imagine this were a respected scientist turned popular writer, who says, most basically, that everything everyone has done in his field since the mid 1960s is a complete waste of time. Everything that fills its academic journals, is taught in its PhD programs, presented at its conferences, summarized in its graduate textbooks, and rewarded with the accolades a profession can bestow, including multiple Nobel prizes, is totally wrong. Instead, he calls for a return to the eternal verities of a rather convoluted book written in the 1930s, as taught to our author in his undergraduate introductory courses. If a scientist, he might be a global-warming skeptic, an AIDS-HIV disbeliever, a creationist, a stalwart that maybe continents don’t move after all.

It gets worse. Krugman hints at dark conspiracies, claiming “dissenters are marginalized.” Most of the article is just a calumnious personal attack on an ever-growing enemies list, which now includes “new Keyenesians” such as Olivier Blanchard and Greg Mankiw. Rather than source professional writing, he plays gotcha with out-of-context second-hand quotes from media interviews. He makes stuff up, boldly putting words in people’s mouths that run contrary to their written opinions. Even this isn’t enough: he adds cartoons to try to make his “enemies” look silly, and puts them in false and embarrassing situations. He accuses us of adopting ideas for pay, selling out for “sabbaticals at the Hoover institution” and fat “Wall street paychecks.” It sounds a bit paranoid.

It’s annoying to the victims, but we’re big boys and girls. It’s a disservice to New York Times readers. They depend on Krugman to read real academic literature and digest it, and they get this attack instead. And it’s ineffective. Any astute reader knows that personal attacks and innuendo mean the author has run out of ideas.

That’s the biggest and saddest news of this piece: Paul Krugman has no interesting ideas whatsoever about what caused our current financial and economic problems, what policies might have prevented it, or what might help us in the future, and he has no contact with people who do. “Irrationality” and advice to spend like a drunken sailor are pretty superficial compared to all the fascinating things economists are writing about it these days.

How sad.

That’s what I think, but I don’t expect you the reader to be convinced by my opinion or my reference to professional consensus. Maybe he is right. Occasionally sciences, especially social sciences, do take a wrong turn for a decade or two. I thought Keynesian economics was such a wrong turn. So let’s take a quick look at the ideas.

Krugman’s attack has two goals. First, he thinks financial markets are “inefficient,” fundamentally due to “irrational” investors, and thus prey to excessive volatility which needs government control. Second, he likes the huge “fiscal stimulus” provided by multi-trillion dollar deficits.

Efficiency.

It’s fun to say we didn’t see the crisis coming, but the central empirical prediction of the efficient markets hypothesis is precisely that nobody can tell where markets are going – neither benevolent government bureaucrats, nor crafty hedge-fund managers, nor ivory-tower academics. This is probably the best-tested proposition in all the social sciences. Krugman knows this, so all he can do is huff and puff about his dislike for a theory whose central prediction is that nobody can be a reliable soothsayer.

Krugman writes as if the volatility of stock prices alone disproves market efficiency, and efficient marketers just ignored it all these years. This is a canard that Paul knows better than to pass on, no matter how rhetorically convenient. (I can overlook his mixing up the CAPM and Black-Scholes model, but not this.) There is nothing about “efficiency” that promises “stability.” “Stable” growth would in fact be a major violation of efficiency. Efficient markets did not need to wait for “the memory of 1929 … gradually receding,” nor did we fail to read the newspapers in 1987. Data from the great depression has been included in practically all the tests. In fact, the great “equity premium puzzle” is that if efficient, stock markets don’t seem risky enough to deter more people from investing! Gene Fama’s PhD thesis was on “fat tails” in stock returns.

It is true and very well documented that asset prices move more than reasonable expectations of future cashflows. This might be because people are prey to bursts of irrational optimism and pessimism. It might also be because people’s willingness to take on risk varies over time, and is lower in bad economic times. As Gene Fama pointed out in 1970, these are observationally equivalent explanations. Unless you are willing to elaborate your theory to the point that it can quantitatively describe how much and when risk premiums, or waves of “optimism” and “pessimism,” can vary, you know nothing. No theory is particularly good at that right now. Crying “bubble” is empty unless you have an operational procedure for identifying bubbles, distinguishing them from rationally low risk premiums, and not crying wolf too many years in a row.

But this difficulty is no surprise. It’s the central prediction of free-market economics, as crystallized by Hayek, that no academic, bureaucrat or regulator will ever be able to fully explain market price movements. Nobody knows what “fundamental” value is. If anyone could tell what the price of tomatoes should be, let alone the price of Microsoft stock, communism would have worked.

More deeply, the economist’s job is not to “explain” market fluctuations after the fact, to give a pleasant story on the evening news about why markets went up or down. Markets up? “A wave of positive sentiment.” Markets went down? “Irrational pessimism.” ( “The risk premium must have increased” is just as empty.) Our ancestors could do that. Really, is that an improvement on “Zeus had a fight with Apollo?” Good serious behavioral economists know this, and they are circumspect in their explanatory claims so far.

But this argument takes us away from the main point. The case for free markets never was that markets are perfect. The case for free markets is that government control of markets, especially asset markets, has always been much worse.

Krugman at bottom is arguing that the government should massively intervene in financial markets, and take charge of the allocation of capital. He can’t quite come out and say this, but he does say “Keynes considered it a very bad idea to let such markets…dictate important business decisions,” and “finance economists believed that we should put the capital development of the nation in the hands of what Keynes had called a `casino.’” Well, if markets can’t be trusted to allocate capital, we don’t have to connect too many dots to imagine who Paul has in mind.

To reach this conclusion, you need evidence, experience, or any realistic hope that the alternative will be better. Remember, the SEC couldn’t even find Bernie Madoff when he was handed to them on a silver platter. Think of the great job Fannie, Freddie, and Congress did in the mortgage market. Is this system going to regulate Citigroup, guide financial markets to the right price, replace the stock market, and tell our society which new products are worth investment? As David Wessel’s excellent In Fed We Trust makes perfectly clear, government regulators failed just as abysmally as private investors and economists to see the storm coming. And not from any lack of smarts.

In fact, the behavioral view gives us a new and stronger argument against regulation and control. Regulators are just as human and irrational as market participants. If bankers are, in Krugman’s words, “idiots,” then so must be the typical treasury secretary, fed chairman, and regulatory staff. They act alone or in committees, where behavioral biases are much better documented than in market settings. They are still easily captured by industries, and face politically distorted incentives.

Careful behavioralists know this, and do not quickly run from “the market got it wrong” to “the government can put it all right.” Even my most behavioral colleagues Richard Thaler and Cass Sunstein in their book “Nudge” go only so far as a light libertarian paternalism, suggesting good default options on our 401(k) accounts. (And even here they’re not very clear on how the Federal Nudging Agency is going to steer clear of industry capture.) They don’t even think of jumping from irrational markets, which they believe in deeply, to Federal control of stock and house prices and allocation of capital.

Stimulus

Most of all, Krugman likes fiscal stimulus. In this quest, he accuses us and the rest of the economics profession of “mistaking beauty for truth.” He’s not clear on what the “beauty” is that we all fell in love with, and why one should shun it, for good reason. The first siren of beauty is simple logical consistency. Paul’s Keynesian economics requires that people make logically inconsistent plans to consume more, invest more, and pay more taxes with the same income. The second siren is plausible assumptions about how people behave. Keynesian economics requires that the government is able to systematically fool people again and again. It presumes that people don’t think about the future in making decisions today. Logical consistency and plausible foundations are indeed “beautiful” but to me they are also basic preconditions for “truth.”

In economics, stimulus spending ran aground on Robert Barro’s Ricardian equivalence theorem. This theorem says that debt-financed spending can’t have any effect because people, seeing the higher future taxes that must pay off the debt, will simply save more. They will buy the new government debt and leave all spending decisions unaltered. Is this theorem true? It’s a logical connection from a set of “if” to a set of “therefore.” Not even Paul can object to the connection.

Therefore, we have to examine the “ifs.” And those ifs are, as usual, obviously not true. For example, the theorem presumes lump-sum taxes, not proportional income taxes. Alas, when you take this into account we are all made poorer by deficit spending, so the multiplier is most likely negative. The theorem (like most Keynesian economics) ignores the composition of output; but surely spending money on roads rather than cars can affect the overall level.

Economists have spent a generation tossing and turning the Ricardian equivalence theorem, and assessing the likely effects of fiscal stimulus in its light, generalizing the “ifs” and figuring out the likely “therefores.” This is exactly the right way to do things. The impact of Ricardian equivalence is not that this simple abstract benchmark is literally true. The impact is that in its wake, if you want to understand the effects of government spending, you have to specify why it is false. Doing so does not lead you anywhere near old-fashioned Keynesian economics. It leads you to consider distorting taxes, how much people care about their children, how many people would like to borrow more to finance today’s consumption and so on. And when you find “market failures” that might justify a multiplier, optimal-policy analysis suggests fixing the market failures, not their exploitation by fiscal multiplier. Most “New Keynesian” analyses that add frictions don’t produce big multipliers.

This is how real thinking about stimulus actually proceeds. Nobody ever “asserted that an increase in government spending cannot, under any circumstances, increase employment.” This is unsupportable by any serious review of professional writings, and Krugman knows it. (My own are perfectly clear on lots of possibilities for an answer that is not zero.) But thinking through this sort of thing and explaining it is much harder than just tarring your enemies with out-of-context quotes, ethical innuendo, or silly cartoons.

In fact, I propose that Krugman himself doesn’t really believe the Keynesian logic for that stimulus. I doubt he would follow that logic to its inevitable conclusions. Stimulus must have some other attraction to him.

If you believe the Keynesian argument for stimulus, you should think Bernie Madoff is a hero. He took money from people who were saving it, and gave it to people who most assuredly were going to spend it. Each dollar so transferred, in Krugman’s world, generates an additional dollar and a half of national income. The analogy is even closer. Madoff didn’t just take money from his savers, he essentially borrowed it from them, giving them phony accounts with promises of great profits to come. This looks a lot like government debt.

If you believe the Keynesian argument for stimulus, you don’t care how the money is spent. All this puffery about “infrastructure,” monitoring, wise investment, jobs “created” and so on is pointless. Keynes thought the government should pay people to dig ditches and fill them up.

If you believe in Keynesian stimulus, you don’t even care if the government spending money is stolen. Actually, that would be better. Thieves have notoriously high propensities to consume.

The crash.

Krugman’s article is supposedly about how the crash and recession changed our thinking, and what economics has to say about it. The most amazing news in the whole article is that Paul Krugman has absolutely no idea about what caused the crash, what policies might have prevented it, and what policies we should adopt going forward. He seems completely unaware of the large body of work by economists who actually do know something about the banking and financial system, and have been thinking about it productively for a generation.

Here’s all he has to say: “Irrationality” caused markets to go up and then down. “Spending” then declined, for unclear reasons, possibly “irrational” as well. The sum total of his policy recommendations is for the Federal Government to spend like a drunken sailor after the fact.

Paul, there was a financial crisis, a classic near-run on banks. The centerpiece of our crash was not the relatively free stock or real estate markets, it was the highly regulated commercial banks. A generation of economists has thought really hard about these kinds of events. Look up Diamond, Rajan, Gorton, Kashyap, Stein, and so on. They’ve thought about why there is so much short term debt, why banks run, how deposit insurance and credit guarantees help, and how they give incentives for excessive risk taking.

If we want to think about events and policies, this seems like more than a minor detail. The hard and central policy debate over the last year was how to manage this financial crisis. Now it is how to set up the incentives of banks and other financial institutions so this mess doesn’t happen again. There’s lots of good and subtle economics here that New York Times readers might like to know about. What does Krugman have to say? Zero.

Krugman doesn’t even have anything to say about the Fed. Ben Bernanke did a lot more last year than set the funds rate to zero and then go off on vacation and wait for fiscal policy to do its magic. Leaving aside the string of bailouts, the Fed started term lending to securities dealers. Then, rather than buy treasuries in exchange for reserves, it essentially sold treasuries in exchange for private debt. Though the funds rate was near zero, the Fed noticed huge commercial paper and securitized debt spreads, and intervened in those markets. There is no “the” interest rate anymore, the Fed is attempting to manage them all. Recently the Fed has started buying massive quantities of mortgage-backed securities and long-term treasury debt.

Monetary policy now has little to do with “money” vs. “bonds” with all the latter lumped together. Monetary policy has become wide-ranging financial policy. Does any of this work? What are the dangers? Can the Fed stay independent in this new role? These are the questions of our time. What does Krugman have to say? Nothing.

Krugman is trying to say that a cabal of obvious crackpots bedazzled all of macroeconomics with the beauty of their mathematics, to the point of inducing policy paralysis. Alas, that won’t stick. The sad fact is that few in Washington pay the slightest attention to modern macroeconomic research, in particular anything with a serious intertemporal dimension. Paul’s simple Keynesianism has dominated policy analysis for decades and continues to do so. From the CEA to the Fed to the OMB and CBO, everyone just adds up consumer, investment and government “demand” to forecast output and uses simple Phillips curves to think about inflation. If a failure of ideas caused bad policy, it’s a simpleminded Keynesianism that failed.

The future of economics.

How should economics change? Krugman argues for three incompatible changes.

First, he argues for a future of economics that “recognizes flaws and frictions,” and incorporates alternative assumptions about behavior, especially towards risk-taking. To which I say, “Hello, Paul, where have you been for the last 30 years?” Macroeconomists have not spent 30 years admiring the eternal verities of Kydland and Prescott’s 1982 paper. Pretty much all we have been doing for 30 years is introducing flaws, frictions and new behaviors, especially new models of attitudes to risk, and comparing the resulting models, quantitatively, to data. The long literature on financial crises and banking which Krugman does not mention has also been doing exactly the same.

Second, Krugman argues that “a more or less Keynesian view is the only plausible game in town,” and “Keynesian economics remains the best framework we have for making sense of recessions and depressions.” One thing is pretty clear by now, that when economics incorporates flaws and frictions, the result will not be to rehabilitate an 80-year-old book. As Paul bemoans, the “new Keynesians” who did just what he asks, putting Keynes inspired price-stickiness into logically coherent models, ended up with something that looked a lot more like monetarism. (Actually, though this is the consensus, my own work finds that new-Keynesian economics ended up with something much different and more radical than monetarism.) A science that moves forward almost never ends up back where it started. Einstein revises Newton, but does not send you back to Aristotle. At best you can play the fun game of hunting for inspirational quotes, but that doesn’t mean that you could have known the same thing by just reading Keynes once more.

Third, and most surprising, is Krugman’s Luddite attack on mathematics; “economists as a group, mistook beauty, clad in impressive-looking mathematics, for truth.” Models are “gussied up with fancy equations.” I’m old enough to remember when Krugman was young, working out the interactions of game theory and increasing returns in international trade for which he won the Nobel Prize, and the old guard tut-tutted “nice recreational mathematics, but not real-world at all.” How quickly time passes.

Again, what is the alternative? Does Krugman really think we can make progress on his – and my – agenda for economic and financial research -- understanding frictions, imperfect markets, complex human behavior, institutional rigidities – by reverting to a literary style of exposition, and abandoning the attempt to compare theories quantitatively against data? Against the worldwide tide of quantification in all fields of human endeavor (read “Moneyball”) is there any real hope that this will work in economics?

No, the problem is that we don’t have enough math. Math in economics serves to keep the logic straight, to make sure that the “then” really does follow the “if,” which it so frequently does not if you just write prose. The challenge is how hard it is to write down explicit artificial economies with these ingredients, actually solve them, in order to see what makes them tick. Frictions are just bloody hard with the mathematical tools we have now.

The insults.

The level of personal attack in this article, and fudging of the facts to achieve it, is simply amazing.

As one little example (ok, I’m a bit sensitive), take my quotation about carpenters in Nevada. I didn’t write this. It’s a quote, taken out of context, from a bloomberg.com article written by a reporter who I spent about 10 hours with patiently trying to explain some basics. (It’s the last time I’ll do that!) I was trying to explain how sectoral shifts contribute to unemployment. Krugman follows it by a lie -- I never asserted that “it take mass unemployment across the whole nation to get carpenters to move out of Nevada.” You can’t even dredge up a quote for that monstrosity.

What’s the point? I don’t think Paul disagrees that sectoral shifts result in some unemployment, so the quote actually makes sense as economics. The only point is to make me, personally, seem heartless -- a pure, personal, calumnious attack, having nothing to do with economics.

Bob Lucas has written extensively on Keynesian and monetarist economics, sensibly and even-handedly. Krugman chooses to quote a joke, made back in 1980 at a lunch talk to some business school alumni. Really, this is on the level of the picture of Barack Obama with Bill Ayres that Sean Hannity likes to show on Fox News.

It goes on. Krugman asserts that I and others “believe” “that an increase in government spending cannot, under any circumstances, increase employment,” or that we “argued that price fluctuations and shocks to demand actually had nothing to do with the business cycle.” These are just gross distortions, unsupported by any documentation, let alone professional writing. And Krugman knows better. All economic models are simplified to exhibit one point; we all understand the real world is more complicated; and his job is supposed to be to explain that to lay readers. It would be no different than if someone were to look up Paul’s early work which assumed away transport costs and claim “Paul Krugman believes ocean shipping is free, how stupid” in the Wall Street Journal.

The idea that any of us do what we do because we’re paid off by fancy Wall Street salaries or cushy sabbaticals at Hoover is just ridiculous. (If Krugman knew anything about hedge funds he’d know that believing in efficient markets disqualifies you for employment. Nobody wants a guy who thinks you can’t make any money trading!) Given Krugman’s speaking fees, it’s a surprising first stone for him to cast.

Apparently, salacious prose, innuendo, calumny, and selective quotation from media aren’t enough: Krugman added cartoons to try to make opponents look silly. The Lucas-Blanchard-Bernanke conspiratorial cocktail party celebrating the end of recessions is a silly fiction. So is their despondent gloom on reading “recession” in the paper. Nobody at a conference looks like Dr. Pangloss with wild hair and a suit from the 1800s. (OK, Randy Wright has the hair, but not the suit.) Keynes did not reappear at the NBER to be booed as an “outsider.” Why are you allowed to make things up in pictures that wouldn’t pass even the Times’ weak fact-checking in words?

Well, perhaps we got off easy. This all was mild compared to Krugman’s vicious obituary of Milton Friedman in the New York Review of Books. But most of all, Paul isn’t doing his job. He’s supposed to read, explain, and criticize things economists write, and preferably real professional writing, not interviews, opeds and blog posts. At a minimum, this leads to the unavoidable conclusion that Krugman isn’t reading real economics anymore.

How did Krugman get it so wrong?

So what is Krugman up to? Why become a denier, a skeptic, an apologist for 70 year old ideas, replete with well-known logical fallacies, a pariah? Why publish an essentially personal attack on an ever-growing enemies list that now includes practically every professional economist? Why publish an incoherent vision for the future of economics?

The only explanation that makes sense to me is that Krugman isn’t trying to be an economist, he is trying to be a partisan, political opinion writer. This is not an insult. I read George Will, Charles Krauthnammer and Frank Rich with equal pleasure even when I disagree with them. Krugman wants to be Rush Limbaugh of the Left. I still want to be Milton Friedman, but each is a worthy calling.

Alas, to Krugman, as to far too many ex-economists in partisan debates, economics is not a quest for understanding. It is a set of debating points to argue for policies that one has adopted for partisan political purposes. “Stimulus” is just marketing to sell Congressmen and voters on a package of government spending priorities that you want for political reasons. It’s not a proposition to be explained, understood, taken seriously to its logical limits, or reflective of market failures that should be addressed directly.

Why argue for a nonsensical future for economics? Well, again, if you don’t regard economics as a science, a discipline that ought to result in quantitative matches to data, a discipline that requires crystal-clear logical connections between the “if” and the “then,” if the point of economics is merely to provide marketing and propaganda for politically-motivated policy, then his writing does make sense. It makes sense to appeal to some future economics – not yet worked out, even verbally – to disdain quantification and comparison to data, and to appeal to the authority of ancient books as interpreted you, their lone remaining apostle.

Most of all, this is the only reason I can come up with to understand why Krugman wants to write personal attacks on those who disagree with him. I like it when people disagree with me, and take time to read my work and criticize it. At worst I learn how to position it better. At best, I discover I was wrong and learn something. I send a polite thank you note.

Krugman wants people to swallow his arguments whole from his authority, without demanding logic, or evidence. Those who disagree with him, alas, are pretty smart and have pretty good arguments if you bother to read them. So, he tries to discredit them with personal attacks.

This is the political sphere, not the intellectual one. Don’t argue with them, swift-boat them. Find some embarrassing quote from an old interview. Well, good luck, Paul. Let’s just not pretend this has anything to do with economics, or actual truth about how the world works or could be made a better place.

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[1] University of Chicago Booth School of Business. Many colleagues and friends helped, but I don’t want to name them for obvious reasons. Krugman fans: Please don’t bother emailing me to tell me what a jerk I am. I will update this occasionally, so please pass on the link http://faculty.chicagobooth.edu/john.cochrane/research/Papers/#news not the document.