hard heads soft hearts

a scratch pad for half-formed thoughts by a liberal political junkie who's nobody special. ''Hard Heads, Soft Hearts'' is the title of a book by Princeton economist Alan Blinder, and tends to be a favorite motto of neoliberals, especially liberal economists.

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Sunday, November 14, 2010
Paul Krugman - The Age of Diminished Expectations (1989)

The well-being of the economy is a lot like the well-being of an individual. My happiness depends almost entirely on a few important things, like work, love and health, and everything else is not really worth worrying about - except that I usually can't or won't do anything to change the basic structure of my life, and so I worry about small things, like the state of my basement. For the economy, the important things - the things that affect the standard of living of large numbers of people - are productivity, income distribution and unemployment. If these things are satisfactory, not much else can go wrong, while if they are not, nothing can go right. Yet very little of the business of economic policy is concerned with these big trends.

To many readers this list may seem too short. What about inflation or international competitiveness? What about the state of the financial markets or the budget deficit? The answer is that these problems are in a different class, mainly because they have only an indirect bearing on the nation's well-being. For example, inflation (at least at rates the United States has experienced) does little direct harm. The only reason to be concerned about it is the possibility - which is surprisingly uncertain - that it indirectly compromises productivity growth. Similarly, the budget deficit is not a problem in and of itself; we care about it because we suspect that it leads to low national saving, which ultimately leads to low productivity growth. . .

Paul Krugman - Peddling Prosperity (1993)

. . .And yet, however ridiculous the professors may sometimes appear, their work isn't all academic games. After all, everything I just wrote about academic economists could be said equally well about university physicists or medical researchers - but physics and medicine have made startling progress over time. Close up, it's all ego, pettiness and careerism; back up, and you see an enterprise that adds steadily to our knowledge. . .

. . .Other things being equal, it would be better to seek fundamental solutions than to look for a number of ways to make things somewhat better. But it's no use insisting that economic policy face the big issues when you have no good idea about what to do about them. As Raymond Chandler once pointed out, there have been some very bad books written about God, and some very good ones about trying to make a living while staying fairly honest. . .

Paul Krugman - The Return of Depression Economics (1998)

. . .Well, as Robert Solow - the same economist who described total factor productivity as the "measure of our ignorance" - once pointed out, efforts to explain differences in economic growth rates typically end in a "blaze of amateur sociology." Which is not to say that such sociological speculations may not be right. . .

Paul Krugman's article endorsing Kathleen Brown for California Governor (1994)

. . .The larger point is that taxes and regulations are only part of what makes for a good business climate, and Wilson doesn't seem to understand this point.

After all, what was the basis of California's past prosperity? Was it a government that did nothing but build prisons? Of course not. California's prosperity was built on the foundation of superb public services--on the nation's best school system, from kindergarten through to its great public universities; a system of roads, ports, water supplies, that was the wonder of the world. . .

Paul Krugman - Baby-Sitting the Economy (1998)

. . .Above all, the story of the baby-sitting co-op tells you that economic slumps are not punishments for our sins, pains that we are fated to suffer. The Capitol Hill co-op did not get into trouble because its members were bad, inefficient baby sitters; its troubles did not reveal the fundamental flaws of "Capitol Hill values" or "crony baby-sittingism." It had a technical problem--too many people chasing too little scrip--which could be, and was, solved with a little clear thinking. . .

. . .But what about Japan--where the economy slumps despite interest rates having fallen almost to zero? Has the baby-sitting metaphor finally found a situation it cannot handle?

Well, imagine there is a seasonality in the demand and supply for baby-sitting. During the winter, when it's cold and dark, couples don't want to go out much but are quite willing to stay home and look after other people's children--thereby accumulating points they can use on balmy summer evenings. If this seasonality isn't too pronounced, the co-op could still keep the supply and demand for baby-sitting in balance by charging low interest rates in the winter months, higher rates in the summer. But suppose that the seasonality is very strong indeed. Then in the winter, even at a zero interest rate, there will be more couples seeking opportunities to baby-sit than there are couples going out, which will mean that baby-sitting opportunities will be hard to find, which means that couples seeking to build up reserves for summer fun will be even less willing to use those points in the winter, meaning even fewer opportunities to baby-sit ... and the co-op will slide into a recession even at a zero interest rate.

And now is the winter of Japan's discontent. Perhaps because of its aging population, perhaps also because of a general nervousness about the future, the Japanese public does not appear willing to spend enough to use the economy's capacity, even at a zero interest rate. Japan, say the economists, has fallen into the dread "liquidity trap." Well, what you have just read is an infantile explanation of what a liquidity trap is and how it can happen. And once you understand that this is what has gone wrong, the answer to Japan's problems is, of course, quite obvious.

Well, maybe not so obvious. The basic problem with the winter co-op is that people want to save the credit they earn from baby-sitting in the winter to use in the summer, even at a zero interest rate. But in the aggregate, the co-op's members can't save up winter baby-sitting for summer use. So individual efforts to do so end up producing nothing but a winter slump.

The answer is to make it clear that points earned in the winter will be devalued if held until the summer--say, to make five hours of baby-sitting credit earned in the winter melt into only four hours by summer. This will encourage people to use their baby-sitting hours sooner and hence create more baby-sitting opportunities. You might be tempted to think there is something unfair about this--that it means expropriating people's savings. But the reality is that the co-op as a whole cannot bank winter baby-sitting for summer use, so it is actually distorting members' incentives to allow them to trade winter hours for summer hours on a one-for-one basis.

But what in the nonbaby-sitting economy corresponds to our coupons that melt in the summer? The answer is that an economy that is in a liquidity trap needs expected inflation--that is, it needs to convince people that the yen they are tempted to hoard will buy less a month or a year from now than they do today.

The diagnosis that Japan is in a liquidity trap--and proposals for inflation as a way out of this trap--has been widely publicized in the last few months. But they have had to contend with a deep-seated prejudice that stable prices are always desirable, that to promote inflation is to cheat the public out of its just reward for saving to create perverse and dangerous incentives. Indeed, some economists and commentators have tried to claim that despite all appearances, Japan is not in a liquidity trap, perhaps even that such a thing can't really happen. But the extended baby-sitting story tells us it can--and that inflation is actually the economically correct way out.

It's worth noting that inflation, while probably the best way, is not the *only* way out of the slump. Anything that encourages people to invest now instead of hoarding for later will work. More "Cash for Clunkers"-style programs, while clunky, would work. When saving and investment cannot be coordinated, either elegantly by the interest rate or through some clunkier mechanism, saving isn't saving - it's hoarding. And while saving is virtuous behavior that will be rewarded in this world and the next, hoarding is not and will not.

John Maynard Keynes excerpt via Brad Delong

There is a respectable and influential body of opinion which… fulminates alike against devaluations and levies, on the ground that they infringe the untouchable sacredness of contract.... Yet such persons, by overlooking one of the greatest of all social principles, namely the fundamental distinction between the right of the individual to repudiate contract and the right of the State to control vested interest, are the worst enemies of what they seek to preserve. For nothing can preserve the integrity of contract between individuals except a discretionary authority in the State to revise what has become intolerable. The powers of uninterrupted usury are great. If the accreations of vested interest were to grow without mitigation for many generations, half the population would be no better than slaves to the other half.... The absolutists of contract... are the real parents of revolution...

Avinash Dixit's article on Krugman (1992).

Deirdre McCloskey - Economical Writing

You will have done some research (this is known as "thinking" and "reading" and "calculating") and are sitting down to write. . .the ancient recipe for success in intellectual pursuits: locate chair; apply rear-end to it. locate writing implement; use it. You may wish to increase the element of surprise by writing standing at a tall desk, as my colleague Gary Fethke does. . .Irrational cheerfulness is hard to teach but good to have for any work. . .

. . .Impenetrable theoretical utterances have prestige in economics. That's sad, because no scientific advance can be expected from such games on a blackboard. . .the result is filigreed boilerplate. The economist will write about the completeness of arbitrage in this way: "Consider two cities, A and B, trading an asset, X. If the prices of X are the same in market A and market B, then arbitrage may be said to be complete." The clear way does not draw attention to its "theoretical" character at all: "New York and London in 1870 both had markets for Union Pacific bonds. The question is, did the bonds sell for the same in both places?"

Paul Krugman - Two Cheers For Formalism

Attacks on the excessive formalism of economics - on its reliance on abstract models, on its use of too much mathematics - have been a constant for the past 150 years. Some of those attacks have come from knowledgeable insiders - from the likes of McCloskey (1997) or even Marshall. . .

. . .Here, then, is a revised version of Marshall's rules:

(1) Figure out what you think about an issue, working back and forth among verbal intuition, evidence, and as much math as you need. (2) Stay with it till you are done. (3) Publish the intuition, the math, and the evidence - all three - in an economics journal. (4) But also try to find a way of expressing the idea without the formal apparatus. (5) If you can, publish that where it can do the world some good.

In short, two cheers for formalism - but reserve the third for sophisticated informality.

I sort of think McCloskey is an economist David Brooks could love.

David Brooks - The Two Cultures

It’s become harder to have confidence that legislators can successfully enact the brilliant policies that liberal technicians come up with. . .It all makes one doubt the wizardry of the economic surgeons and appreciate the old wisdom of common sense: simple regulations, low debt, high savings, hard work, few distortions. You don’t have to be a genius to come up with an economic policy like that.

I guess my response to this, is that the conservative story seems to be we have a fundamental problems in the engine, attempts to go faster will make things worse, and there's no quick fix. The liberal story is that the car is fundamentally fine, it just needs more gas. The liberal story is certainly more easy and, if you like, self-indulgent. But that doesn't mean it isn't true.

The problem with attributing current economic problems with fundamentals is that we are no worse, and probably better, in fundamental terms than we were in 2007. We are more eager to work, more prudent about not squandering our paychecks, than we were in 2007. Yet despite the fundamentals, in that sense, being much better, the outcome is much worse. Why? Because this is not a problem of fundamentals.

In terms of fundamentals, saving is not as fundamental a fundamental as work. Only when saving is channelled into investment is it productive - otherwise it's not really saving, it's just hoarding. Normally we don't have to worry about channelling savings into investment, the interest-rate and other easy mechanisms take care of it, but these are not normal times.

The other problem I have with Brooks's column, is what's so difficult/genius-y about cutting interest-rates and other expansionary moves? It doesn't take a genius to put gas in the car. What does take genius is to build the car, but the US has already done that over 400+ years. What also perhaps takes genius, what indeed seems imposssible for a man of even Obama's ability, is running the car properly without enough gas.

But the main problem I have with Brooks's column is there's something missing from his list of fundamentals: high employment/low unemployment. I have no idea why.

The other thought I have on uncertainty is based on Paul Krugman's old Foreign Affairs piece on Global Glut. What we have is not so much regulatory uncertainty as a failure of imagination in the face of being twice-bitten, thrice-shy. Bitten by the stock bubble and the real estate bubble, and therefore sticking on to whatever we have left like glue. We can't imagine an exciting investment opportunity that doesn't end in tears. An understandable problem, and not one that repealing healthcare is going to fix.

But there are plenty of worthy things to invest in, and, without deifying him, Charlie Munger is a man who knows something about investing, and he recently suggested that now is the right time to fund large-scale government infrastructure projects, with "with special emphasis on becoming energy independent via the sun". Munger is a Republican, and doesn't have a very high opinion of Al Gore, so I would hope Republicans listen to him.

Ben Carson - interviewed by Robert H. Schuller for the "Hour of Power"

. . .interestingly enough you know I wanted to be a psychiatrist for the wrong reasons. Because you know growing up in poverty initially I wanted to be a missionary doctor and I said, "I'm not going to do well as a missionary doctor," because I didn't want to be poor for the rest of my life. So I said I wanted to be a psychiatrist because at least on television they all drove Jaguars, had big plush offices. And fancy houses, and all they did is talk to crazy people all day. And I said ... I said well, you know, I'm doing that anyway. So ... so why not make some money.

But you know I majored in psychology and advanced psyche, but then I started meeting a bunch of psychiatrists. But I discovered very quickly that they don't actually do in reality, what they do on television. Actually the things they do are much more interesting. But it wasn't what I wanted to do.

So I stopped and I assessed my gifts and talents and discovered that what I was really good at was things that involve tremendous eye-hand coordination. The ability to think in three dimensions. You know I was a very careful person. Never knocked things over and said, "Oops" and I loved to dissect things. When I was a child if there was a [already dead!] little animal or bug or something around, I always knew what was inside.

So, you know, I put all that together and I said, "You know you would be a terrific neurosurgeon." And that's how I actually made that choice. . .

RD India interview with Devi Prasad Shetty (2010)

. . .Dr Shetty’s group now does 12 percent of all heart surgeries in India, and he’s known for smartly using these numbers to haggle down the cost of medical equipment—so that patients pay less. . .

. . .Q. Were you a brilliant student?
DS. I was not very studious and had great difficulty with mathematics—still a mystery to me. I was educated in a small-town school. But my drawing teacher was so dedicated, he used to teach me maths too at his home. . .

. . .Q. What is the one medical reform you are rooting for?
DS. Medical education should be made inclusive. Any young doctor who wants to become a heart surgeon or neurosurgeon should be able to become one. What he makes of it is left to him. If we create the infrastructure, we can train ten thousand heart surgeons a year. Why put an artificial barrier? It is exactly like a licence raj, when we only had Ambassador cars. Once we liberalized, we got the world’s best cars. Why not do the same with medical education?. . .

It seems to me that all the "problems", which we as human beings have the ability to do anything about, can be thought of as due to a want of competence, a want of compassion, or a want of good cheer. And competence, it seems to me, can be thought of as having at least six dimensions: emotional, physical, mental, technical, social & spiritual.

Personally leery of saying anything more about competence, except that in my opinion, mental competence includes not only language & math, but some degree of "art" as well, at least the kind of art required for some degree of 1D/2D/3D visualization/imagination/representation.

Update: And, since a pseudonymous blog probably is the one place to speak without knowledge, some speculations on emotional/spiritual competence:

Emotional competence would mean your actions are in some accord with your hierarchy of desires. Spiritual competence would mean your hierarchy of desires is in some accord with the universe.

Emotional competence, stage I: the intention to try to do your best (worth a little)

Emotional competence, stage II: some reasonable confidence in your ability to do some reasonable approximation of your best over some reasonably sustained period of time. (worth a lot)

What proportion of the population is in emotional competence, stage II? Does it vary among times & places?

In ordinary times we get along surprisingly well, on the whole, without ever discovering what our faith really is. If, now and again, this remote and academic problem is so unmannerly as to thrust its way into our minds, there are plenty of things we can do to drive the intruder away. We can get the car out, or go to a party or the cinema, or read a detective story, or have a row with the district council, or write a letter to the papers about the habits of the night-jar or Shakespeare's use of nautical metaphor. Thus we build up a defence mechanism against self-questioning, because, to tell the truth, we are very much afraid of ourselves.

Dorothy L Sayers - What Do We Believe

". . .we must deeply acknowledge certain things to be serious yet retain the power and will to treat them often as lightly as a game. But there will be a time for saying more about this in the next chapter. For the moment I will only quote Dunbar's beautifully balanced advice:

Man, Please thy Maker, and be merry,
And give not for this world a cherry.

C.S. Lewis - The Four Loves

The Mysticism of the East

"Many people in the west think that in my country (India), because of our religions, because of our history, because of I don't know what, somehow we are more in tune with our spirituality, more at one with the forces of Nature. Well. . .we are! So well done, all those people who said that! . . .Now one of the ways in which we Gurus like to express our spirituality is in the form of ancient Sanskrit ragas. Now these are very similar to your Christian hymns, but they're more catchy tunes, with more chippanh. . ."

Guru Maharishi Yogi Goodness - "Goodness Gracious Me"

Reluctant Guru

When I accepted an invitation to become a Visiting Professor at a certain mid-western University, I had no clear notion as to what it meant. I asked myself again and again what does a Visiting Professor do. I also asked several of my friends in the academic world the same question. No one could give me a concrete or a convincing answer and so I contented myself with the thought that a Visiting Professor just visits and professes and if he happens to be in the special category of `DVP' (Distinguished Visiting Professor) he also tries to maintain and flourish his distinguishing qualities. Well, all that seemed to suit me excellently. . .

. . .When the interview appeared in the paper I found it charmingly written but over-emphasizing my mystic aspect!. . .At first it was amusing but day after day I found people on the campus looking at me with awe and wonder, perhaps saying to themselves, "There goes the man who holds the key to mystic life!" . . .A senior professor of the English Department approached me. . ."My student's want to hear you on Indian mysticism."

I told her point blank, "I know nothing about it."

"That shouldn't matter at all," she said. . .

I give here a composite report of my talk to various persons at different times.

Young friend (I said), perhaps you think that all Indians are spiritually preoccupied. We aren't. . .normally we also have to be performing ordinary tasks, such as working, earning, living and breeding. . .

. . .Of course, you are fed up with affluence, gadgets, mobility and organization, and he is fed up with poverty, manual labour, stagnation and disorganization. Your search is for a "guru" who can promise you instant mystic elation; whereas your counterpart looks for a Foundation Grant. The young person in my country would sooner learn how to organize a business or manufacture an atom bomb or an automobile than how to stand on one's head.

As a matter of fact, if you question him, you will find that our young man has not given any serious thought to Yoga and such subjects. . .At the moment the trend appears to be that he is coming in your direction, and you are going in his. So, logically speaking, in course of time, you may have to come to India for technology and the Indian will have to come to your country for spiritual research. . ."

When India Was a Colony

. . .How did a little island so far away maintain its authority over another country many times its size? It used to be said by political orators of those days that the British Isles could be drowned out of sight if every Indian spat simultaneously in that direction. It was a David-Goliath ratio, and Britain maintained its authority for nearly two centuries. How was the feat achieved? Through a masterly organization, which utilized Indians themselves to run the bureaucratic and military machinery. Very much like the Kheddah operations in Mysore forests, where wild elephants are hemmed in and driven into stockades by trained ones, and then pushed and pummelled until they realize the advantages of remaining loyal and useful, in order to earn their ration of sugarcane and rice. Take this as a symbol of the British rule in India.

The Indian branch of the army was well-trained and disciplined, and could be trusted to carry out imperial orders. So was the civil service. . .They turned out to be excellent administrators. They were also educated to carry about them an air of superiority at all times and were expected to keep other Indians at a distance.

I had a close relative in the ICS who could not be seen or spoken to even by members of his family living under the same roof, except by appointment. He had organized his life in a perfect colonial pattern, with a turbaned butler knocking on his door with tea in the morning, black tie and dinner jacket while dining with other ICS men. . .

The ICS was made up of well-paid men, above corruption, efficient and proud to maintain the traditions of the service, but it dehumanized the man, especially during the national struggle for independence. These men proved ruthless in dealing with agitators, and may well be said to have out-Heroded Herod. Under such circumstances, they were viewed as a monstrous creation of the British. An elder statesman once defined the ICS as being neither Indian nor civil nor of service. When Nehru became the Prime Minister, he weeded out many of them. . .

. . .Poverty however, was in the province of the missionary who lived among the lowliest and the lost. Although conversion was his main aim, he established hospitals and schools. . .The street corner assembly was a routine entertainment for us in our boyhood at Madras. A preacher would arrive with harmonium and drum and, facing heavy odds and violent opposition, begin a tirade against Indian gods. . .he could have saved his skin and got a hearing but for a naive notion that he should denigrate our gods as a preparation for proposing the glory of Jesus. . .

Our Scripture master, though a native, was so devout a convert that he would spend the first ten minutes calling Krishna a lecher and thief full of devilry. . .Once, incensed by his remarks, I put the question `If Jesus were a real God, why did he not kill the bad men?' which made the teacher so angry that he screamed, `Stand up on the bench, you idiot.'. . .

The hardiest among the British settlers was the planter who, born and bred in his little village in England, was somehow attracted to India, not to a city and its comforts but to a deserted virgin soil on a remote mountain tract where he struggled and built up, little by little, a plantation and raised coffee, tea and cardamom, which remain our national assets even today. He was firmly settled on his land, loved his work, now and then visiting a neighbour fifty miles away or a country club a hundred miles off. He loved his isolation, he loved the hill folk working on his plantation, learned their language and their habits and became a native in all but name.

R.K. Narayan - "The Writerly Life"

Deep Thought: College-6, a clean comfortable place to get some work done.

Deeper Thought: with towels, soap, and free wake-up calls, but no TV.

The lowest university president salaries of any national chain.

To explain an earlier Deep Thought, "You can't mix sambar with ketchup", like George Costanza, I yearned to combine the two great pleasures of life: the South Indian breakfast & the English breakfast. Alas, it can't be done, and the reason is that you can't mix sambar with ketchup, the combination is just too horrible. The three restaurant-genres which come closest are The South Indian "Military Hotels", the Mumbai Irani Cafes (which I've never been to), and my personal favorite, the Indian Coffee House worker-cooperatives. The Indian Coffee Houses, are, as far as I know, the only restaurants in the world where you can get bread, jam & an egg with South Indian coffee, and for that they have my undying loyalty. Significantly, though they serve South Indian dishes like idly and dosa, they serve them without sambar, only chutney.

To my surprise, I've gotten a few emails in response to this blog, one a very thoughtful, circa-2008 email on Kashmir, which in particular wondered why Kashmiri Muslims had been radicalized since the late 80's, whether that radicalization was due to foreign infilitrators, and what was the situation with the many minority groups in Kashmir: Hindus, Christians, Sikhs, Secular, Bhuddist, etc. FWIW, my reply. In hindsight, I seem to have been just basically borrowing the opinion and analysis of Stephen P. Cohen:

Hi EA,

Thanks for the query, I have to think and research a bit about your questions, and I should emphasize I'm not especially well-informed about what Kashmiris are thinking, even for a lay citizen, because I don't speak or read the relevant languages, except English. To your last question on radicalization, I would say that the deliberate fomenting of terrorism and extremism is responsible for the increase in violence, but not in the alienation and bitterness of the Kashmiri majority. My guess at the right policy, for an Indian, is to lay down these guidelines:

1. No change in international borders, because stability is important in these matters.
2. flexibility on autonomy/other issues
3. laying down the principle that terrorism and killing is not the solution
4. commitment from police/military to hold themselves accountable to minimize killing in dealing with militants, and to have the discipline not to seek revenge on the local population for terrorist attacks.
5. long-term endgame to play for is deligitimization of terrorism and violence, and eventually, turning Kashmir into a demilitarized zone with some autonomous privileges.

But this is just off the top of my head, and I would emphasize I don't have a current read on what all the relevant parties are thinking.

If you want some good background on the issue from an Indian perspective, Rediff produced a series of articles and interviews on Kashmir, in 1999. It's not updated for current events, but it's still useful for background, and as an introduction:

Blood in the snow: Ten years of conflict in Kashmir (1999)

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