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Friday, September 12, 2008

A more comprehensive perspective

Recently, Alan Blinder wrote a column appearing in NYT espousing the superiority of Democrat economic policy. I was a bit embarrassed for Mr. Blinder given the obvious weakness of the case he presented. Russ Roberts picked apart the claims here offering several points including:
I learned from my textbook (Samuelson) the fallacy of post hoc, ergo propter hoc. After this, therefore because of this. Alan Blinder commits this fallacy...

Most economists will also tell you that Presidents don't even control fiscal policy. Here in the United States we have three branches of government. The Presidency is one of them. Then there is what is called the Congress. They have a say, too. Then there are external events besides fiscal policy and monetary policy and oil prices that affect the economy and that are beyond the President's control. Demographics. Cultural trends. Technology. None of these are controlled by the President.

Statistical regularities are stubborn things? No they're not. They are dominated by randomness almost by definition. That's why they're called regularities. They reveal a pattern in the data. Nothing more. Nothing less. Without a theory (and saying Democratic presidents are better at running the economy than Republican presidents is not a theory) it's just a regularity.
Don Luskin makes his contribution with DIVIDED GOVERNMENT IS BEST FOR THE MARKET:(read the whole article)
Let's get something settled once and for all. Have the stock markets and the economy historically done better under Democrats or Republicans?

I've run the numbers myself. Superficially at least, the Democratic claims are true: Since 1948, the Standard & Poor's 500 total return (capital gains plus dividends) has averaged 15.6% when a Democrat was in the White House and only 11.1% when a Republican was in the White House.

You get a similar result if you look at growth in real gross domestic product. Under Democratic presidents, the average since 1948 has been 4.2%. Under Republican presidents it has been only 2.8%.

But it's not so simple when you study that "study." First, not all Democrats act like Democrats, and not all Republicans act like Republicans. John F. Kennedy, for example, was an enthusiastic supply-side tax cutter, and George H.W. Bush raised taxes. Bill Clinton promoted free trade, and Richard Nixon imposed wage and price controls.

If you assign those four presidents to the opposite party based on that -- make the two Democrats into Republicans and the two Republicans into Democrats -- the numbers completely reverse. Now stocks average 14.7% under Republicans and only 10.5% under Democrats.

In fact, it turns out that if you do just one single switch -- if you make Richard Nixon into a Democrat -- it's enough to reverse the numbers. Then stocks average 14% under Republicans and only 12.1% under Democrats. This fact discredits this whole study more than it does Republicans, or even Richard Nixon himself. Any analysis that can be undone by omitting or changing a single data point isn't very robust.

By the way, as fond as Democrats are of saying how poorly stocks have performed under George W. Bush, here's a sobering fact: Stocks averaged 14.1% return in those Bush years when Republicans controlled Congress -- and when Democrats got in there and mucked things up, the average has been a loss of 8.9%. That's not even including 2008 year-to-date, which doesn't look so pretty.

If the electorate were really smart, it would elect a Democratic president and a Republican Congress. Under that deal, stocks have averaged a 20.2% total return, and real GDP averaged 4%. That tells us that economic and stock market success isn't really about partisan politics at all. Sadly, nobody has a political incentive to conduct a study about that.

The role of Nixon's economic record is rather interesting. I have long been amused that the left is so angry with RMN for nailing their boy Alger Hiss. If they really knew any economics they would have a better appreciation for how his economic policies set off an economic stink bomb that nobody knew how to defuse until Ronald Reagan came along. That would really get them worked up.

Also, did you make note of this?: Any analysis that can be undone by omitting or changing a single data point isn't very robust. Failure to grasp the significance of this point is yet another wonderful example of what Richard Feynman called fragile knowledge.

Finally, I'm a pretty big fan of divided government, Bret is an even bigger fan. Pretty smart guy that Bret!

25 comments:

erp said...

Nixon's economic record was socialist. The left can't get whatever they use for brains around that fact and try to make him into a conservative.

Harry Eagar said...

Hayekian free marketism is both logically and practically impossible and proven disastrous when anyone attempts to put it into practice.

How difficult a concept is this?

Well, very, for some people, I guess.

aog said...

"logically impossible"? I don't think those words mean what you think they mean.

Bret said...

harry eagar wrote: "Hayekian free marketism..."

What we currently have and have had for the entire American experiment is "Hayekian free marketism".

Looks like it worked okay to me.

Howard said...

Harry,

Having been honest enough to admit that you haven't read any Hayek, don't you think it's intellectually dishonest to then presume you know what constitues Hayekian free marketism? As someone who has read the bulk of Hayek's works, I assure you that relying on what other people say without finding out for yourself is simply inadequate.

Howard said...

Also, I would agree with Bret that America and more generally the Anglo-American model is more Hayekian than any alternative.

Harry Eagar said...

That's right, blame the socialists for 1929 and 2008.

Sheesh.

There is no evidence that the main driver of economic growth is anything but technique. The pace of growth does not correlate with 'freedom' of markets.

The reason 'free markets' are logically impossible is that without political intervention, you quickly end up with monopolies or cartels. How could it not?

Bret said...

harry eagar wrote: "There is no evidence that the main driver of economic growth is anything but technique."

Of course, especially in the long term.

The question is: what are the drivers of technique?

aog said...

"The reason 'free markets' are logically impossible is that without political intervention, you quickly end up with monopolies or cartels. How could it not?"

Because, long term, monopolies and cartels require government support.

I would also ask, what's wrong with a monopoly? Is it just intrinsically, indescribably evil? Or are there actual, specific effects that are bad?

P.S. Doesn't Mr. Eagar's claim about economic growth contradict much of the empirical evidence of that last few centuries?

Howard said...

If normal competition doesn't always preclude monopolies, creative destruction does. Although government sometimes attempts to block such change.

The primary economic freedom of importance is freedom from a centrally planned economy. Speaking of markets with no rules is like speaking of culture or civilization with no people - simply absurd. Finding better rules and those more suited to changing circumstances is an ongoing evolutionary process.

Harry Eagar said...

Gack! You are asking what's wrong with monopolies?

Where to start? Well, for one thing, they do not allocate resources efficiently.

Where does innovation come from? Excellent question. We know one part of the answer, though -- not only from free societies, in either the economic or the political sense.

You might ask yourself -- in what countries did modern physics evolve? How free were they?

(A reading of Charles Singer's 'History of Technology' would suggest that geography determines innovation. I am reluctant to believe this, because it seems absurd, but the evidence is the evidence.)

aog said...

"Where to start? Well, for one thing, they do not allocate resources efficiently."

I have decided that I am going to simply ignore these kind of absolute statements, as they have no relevance in the real world because you are comparing a real thing to an imaginary standard. If you want to provide a comparison to some other physically realizable thing, that would be relevant.

P.S. I am not asking what's wrong with monopolies. I am asking what you think is wrong with monopolies. Your definitions of many words are so at variance with normal usage that I am compelled to get clarification before any discussion.

Harry Eagar said...

Well, that's what's wrong with monopolies.

As W. Edwards Deming used to say, toward the end, the American carburetor makers were making the most precise, reliable, effective carburetors in history.

They just misunderstood what business they were in. They thought they existed to make carburetors, whereas the genuine economic need was to deliver fuel.

Luckily for fuel consumers, the American near-monopoly in carburetors was not worldwide, and the European fuel injector manufacturers destroyed it.

(To be precise, Deming's point was not about monopolies, but the example he liked to use happens to slot right in there.)

There are times when society is well advised not to worry about the inefficiencies of monopolies. I have already presented the example of bananas and there are others.

Howard, if somebody is making rules then freedom is being constricted somehow. That might not be a bad thing -- I would say, depending on what rule it is, it could be a good thing -- but free markets are impossible because powerful economic actors impose monopolies (or cartels) and creative destruction does not always destroy them.

In fact, I have a hard time thinking of any example of a monopoly that ever was undermined, except as with the carburetors by a competing technology.

aog said...

Ah, the problem with monopolies, in your view, is that they are not perfectly optimal. You must be disappointed quite a lot if that's your criteria for something being wrong.

Harry Eagar said...

Whereas free-marketeers are never disappointed, because the results, no matter how distasteful, are, by definition, the best that could possibly be obtained.

I am puzzled by your implied defense of monopolies. I thought competition was the name of the game, unless it was competition from government, in which case it somehow magically becomes bad.

I long to know more about the magical properties of monopoly, and am curious that all the free market economists I deal with are opposed to them.

aog said...

"I am puzzled by your implied defense of monopolies."

I am not defending them. I am trying to, indirectly, show you that absolute statements such as "monopolies don't allocate resources efficiently" are irrelevant to the real world. It is of no importance whether that statement is true. What is important is whether monopolies, overall, allocate resources less inefficiently than the alternatives. More generally, though, one should ask whether an economic system that permits consensual monopolies is overall less inefficient than systems that prevent the formation of such. And as long as you persist in your absolutism, you will never address this point.

P.S. Then there are the strawman statements like "Whereas free-marketeers are never disappointed, because the results, no matter how distasteful, are, by definition, the best that could possibly be obtained."

Could you just let us know how many times it will be necessary to explain that none of us think anything like that so we can start the countdown?

Harry Eagar said...

OK, not you personally. G. Bush and his minions. The people that Arnold Kling would call 'vulgar Hayekians' if he could bring himself to criticize them.

If absolutist statements are always wrong, then I hope never to hear again that taxes -- not further specified -- are dragging down the economy, costing Americans jobs, etc.

Anyhow, I subscribe to numerous absolutist statements about economic matters. One is, under modern conditions (that is, such as have existed since around 1840), unsupervised financial markets panic and crash every 6 to 20 years.

This is purely an empirical -- that is, real world -- conclusion, but there is no evidence against it, and only airy-fairy speculations from people with very poor records in other respects to contradict it.

Therefore, I hold it absolutely, subject to revision by events, which I do not expect.

aog said...

"I will also note that private equity funds and hedge funds, which aren't subject to all this wonderful regulation, appear to be doing better than the rest of the financial world."

-- Virginia Postrel

aog said...

"G. Bush and his minions"

Wasn't Glass-Steagall, you personal bete-noir, repealed during the Clinton years? Or did G. Bush and his minions get to him,too?

Howard said...

the American near-monopoly in carburetors was not worldwide

What a wonderful argument for free trade!

There are times when society is well advised not to worry about the inefficiencies of monopolies

That efficiency thing is so important to statists because statism makes it so much more difficult to produce abundance. It also reminds me of the Peter Drucker observation that, "there is nothing more wasteful than to do more efficiently that which should not be done at all."

if somebody is making rules then freedom is being constricted somehow. That might not be a bad thing -- I would say, depending on what rule it is, it could be a good thing -- but free markets are impossible because powerful economic actors impose monopolies (or cartels) and creative destruction does not always destroy them.

And yet so many antitrust cases are attempts by companies to seek government protection from competition!

Rules impede license. Freedom requires rules to limit our ability to interfere with each others smaller autonomous domains of action.

unsupervised financial markets panic and crash every 6 to 20 years.

Yes, as well might supervised financial markets. We could control them down to the point of being useless at bringing forth innovation in the financial or real economy, but what would be the point. Things are a bit volatile in the region of complex behavior between chaos and a extremely ordered but static world.
Better to just limit leverage as protection against systemic risk. Attitudes about this will varying depending on how great a psychological need one has for control.

"G. Bush and his minions"

Wasn't Glass-Steagall, you personal bete-noir, repealed during the Clinton years? Or did G. Bush and his minions get to him,too?


Right you are but easy there aog. I believe Harry suffers from BDS and that is soooo debilitating.

Are we having fun yet?

Harry Eagar said...

'Yes, as well might supervised financial markets.'

They might, but from 1936 to now they didn't. Don't results count?

I am aware that Glass-Steagall was repealed with the collusion of a Republican Congress and a Democratic president. He wasn't much of a president.

Howard said...

One of the points mentioned at the beginning of this post: the fallacy of post hoc, ergo propter hoc. After this, therefore because of this.

"They might(crash), but from 1936 to now they didn't. Don't results count?"

If you mean credit markets, let me offer another plausible explanation. The 1930s were like a reset wiping out so much debt that the financial system was far removed from any point of instability. It would take atleast a generation for people's extreme risk aversion to fade and another generation to accumulate a meaningful amount of new debt. That might bring us to the 1980s before the system would be tested again. There were tremors from the Latin American crisis and later the S&L mess. Plenty of rules, just not particularly effective ones for a changing world. Those vaunted results may be just an artifact of insufficient time having past. There were many factors contributing to the current problems but that will be part of a future post. Complaints about deregulation or ideology miss the mark rather badly.

Harry Eagar said...

Sez you.

In fact, there were plenty of bad crashes before 1929, and it never took 70 years to reach the next one.

I believe the shortest period between panics was four years (1869-73), and the longest was 22 years (1907-29). 15 years if you count the actual key events, which would be the crash of '07 and the collapse of US agriculture in '22.

Howard said...

Oh, so "great" is just a misnomer compared with other contractions.

Harry Eagar said...

I infer you have some graph that shows the recovery time plotted against the amount of debt obliterated?

Why weren't there lots of little panics as the economy recovered, as there had been during the previous century?

You have to explain why there were no panics for seven decades when they were common before, and have now begun again almost immediately the New Deal regulations were junked.

If the New Deal wasn't responsible, what was? You cannot just blow it off. The idea that we had to accumulate something like 20 trillion dollars of debt to trigger a panic is pretty funny.