ArticleIP_3852.txt

   
   
      
         
            

            
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               (posted Thursday, Feb.
13)
            

            
               Green
Cheese and Keynes
            

            Professor Paul Krugman
("The Dismal
Scientist") has done me the honor of another attack, this time for an
alleged vulgarization of the great British economist John Maynard Keynes.

            The odd thing is that Paul
and I actually agree, more or less, on the policy question. I favor a low
interest rate. Paul doesn't say quite as much. But he does concede that it is
OK, intellectually speaking, to quarrel with Alan Greenspan's judgment. This
may be the closest I'll get to having Paul's explicit endorsement on this
important issue, and I'll take it with pleasure.

            Paul and I also agree that
the way to get lower interest rates is for the Federal Reserve to cut them.
This is what the German central banker Hans Tietmayer always calls, with severe
disapproval, "the easy way out." I definitely favor the easy way out when it is
available.

            Our argument begins with
Paul's assertion that Keynes had some contrary and different view. Krugman
seems to be saying that Keynes overlooked the importance of monetary policy to
the determination of the interest rate. He writes that Keynes held a "liquidity
preference" theory of the interest rate, according to which, in Krugman's
version, markets for money and bonds determined the interest rate, with
monetary policy playing no visible role.

            This misrepresents Keynes,
who understood central-bank powers extremely well. Among other things, Keynes
had wielded those powers himself, for all practical purposes, at the British
Treasury during World War I. Later, he was a vociferous opponent of tight
British monetary policy during the 1920s.

            Liquidity preference, though
important in Keynes, is not a full theory of the interest rate. It is only a
theory of the "demand for money"--of the choice between holding illiquid bonds
and liquid cash. In order to get from money demand to a full theory of the
interest rate, you need a theory of money supply. Keynes was well aware of
this, and his view of the supply situation was more or less the same as Paul's
or mine. The central bank supplies the liquidity (money) that speculators
demand. The terms on which it does so, combined with the demand conditions,
together determine the interest rate.

            Keynes therefore understood
perfectly well that a low interest-rate policy requires an accommodating
central bank. If people increase their demand for money, then either interest
rates must rise, cutting investment, or transactions must fall, cutting output
and employment--unless the central bank acts. The problem, Keynes wrote, was
that "people desire the moon"--a perfectly safe place to store their wealth.
The solution, in Keynes' own metaphor, is to persuade them that "green cheese"
is nearly as good, and to have a green-cheese factory--a central
bank--conveniently at hand.

            Now, if Keynes'
interest-rate theory is not so easily written off, perhaps we should also look
again at that paradox of thrift. That argument which holds that the attempt to
raise saving will end up lowering national income, because consumption will
fall, and with it profits, output, and employment. Was Keynes also right when
he warned against excessive saving?

            Paul shrinks from this view.
He wants to maintain the tidy and comfortable belief, beloved by Victorians of
all epochs, that thrift is always a virtue. I know that he also strongly favors
a reduction in the federal budget deficit, precisely because that represents a
rise in so-called "national savings." Paul agrees that such a rise in national
savings might have some tendency to depress the economy, along lines of Keynes'
multiplier model. But since--according to Krugman--the Federal Reserve can
control output and unemployment, he believes that this tendency is easily
offset by cuts in interest rates to hold employment steady.

            This is Paul's second error,
in my view. It is one thing to assume that the Federal Reserve could in
principle always lower interest rates enough to offset the depressing effects
of tax increases and spending cuts. But, in fact, there is no assurance that
Greenspan and his colleagues have any actual intention of behaving in this way,
nor any persuasive evidence that they have done so in the past. Paul's
statement that this is "simple" and "reasonable" does not make it right.

            Paul seems to regard Alan
Greenspan as an ideologue who actually does control the unemployment rate
according to the dictates of some economic theory. Greenspan himself has
repeatedly denied this, and I believe him. I think that Greenspan is a nimble
political figure, no more nor less. That being so, the main reason we have high
interest rates is that the forces favoring them are more powerful than the
forces opposed. This, I believe, is the deplorable truth.

            In October 1993, recall,
Congress took drastic action to raise "national saving" by cutting the expected
future budget deficits in half. But the Federal Reserve then raised interest
rates, beginning in February 1994, an action rationalized by entirely spurious
fears of inflation. The raising of interest rates went on for 18 months, was
never fully reversed, and actually raised federal spending on interest payments
by enough to wipe out a large part of the deficit reductions.

            That 1994 experience proved
that one cannot rely on the Federal Reserve to offset the workings of the
paradox of thrift. That being so, excess saving is a danger, just as Keynes
warned. Analytically, Keynes' theory is right and Krugman's revision of it is
based on a false premise. And the way to get lower interest rates and more
investment and durable consumption spending and lower unemployment, all of
which I favor, is not to increase thriftiness or to cut deficits. The essential
thing is to get the Federal Reserve to bring interest rates down.

            Paul and do I agree on one
other thing. It is very hard to improve on Keynes, and more people should read
him. When they do so, they will find that parable of the widow's cruse--a
marvelous tidbit on the rewards of vigorous consumption spending as opposed to
parsimony, niggardliness, and thrift. But, speaking of vulgarity, they ought to
know that this is not from some "old folk tale," as Krugman writes. The source
is actually the Bible: 1 Kings 17:16. "And the barrel of meal wasted not,
neither did the cruse of oil fail."

            You'd
think a good Keynesian economist would know that.

            
               --James K. GalbraithLBJ
School of Public AffairsThe University of Texas at Austin
            

            

               Moneybags
            

            What a great job of compiling
America's top philanthropists in the "Slate 60"! However,
there are a couple of things I wanted addressed: Why Paul Mellon is missing
from the list? And Walter Annenberg? Also, Lebanese Prime Minister Rafik Hariri
donated $10 million to the Boston University School of Management last year for
its new building. That is a big donation from a foreign politician.

            No. 113, Alfred Slifka, does
not belong to a New York City family of real-estate developers and investment
managers. Instead, Slifka is a Bostonian who owns Global Petroleum Corp., New
England's largest distributor of gasoline.

            Hope you
can correct the errors.

            
               --York Lo
            

            
               Ann Castle's reply:
One of the important lessons I've learned since we started the Slate project is
to be open to change, especially in an entrepreneurial effort like this one.
Another equally important message is that no matter how carefully we try to
craft categories of giving, human behavior refuses to be comprehensively
categorized. I find that reassuring.

            We didn't include the Hariri
gift because it came from a non-American citizen. There were several very large
ones made both in the United States and outside the United States last year. We
may consider changing that guideline this year, or we may do a feature on gifts
from non-American citizens to institutions here and abroad.

            We also decided to list gifts
only in the years the actual gift was announced, not when payments were made on
previously announced pledges. This accounts for a number of missing foundation
gifts. I did not do a mailing last year to private foundations (or to anyone,
for that matter) to compile the list; I've changed that procedure this year. I
relied on what I could find in public sources, and sometimes foundation gifts
are not as well-publicized. We were quite open about this in the Introduction to the
"Slate 60."

            As for the background on
Slifka, I took that information straight from a news story. I have learned that
I need to verify everything and that even the most reliable sources are
occasionally wrong.

            We will
stick with our decision to list gifts as they are announced, and won't list
gifts made to create or add to private foundations. Again, we may address this
type of giving in a separate feature. We will only list gifts from a private
foundation to an actual grantee. We are always looking for ideas of how to make
the "Slate 60" even more useful than it has proved to be so far.

            
               In
Defense of the New York Suburbs
            

            Attention really should be
drawn to Nicholas Lemann's incredible article on suburban New York, "The Suburbs Have
Won." If I was forced to pick one (and only one) favorite bit, I think I
would have to go with the equation of Starbucks coffee shops with
sophistication--perhaps the single most novel, irreverent idea I've ever read
in Slate. (Not that I wouldn't be mighty tempted by Lemann's pining for "a
Merchant-Ivory-type movie theater," mind you.) You, of course, are free to dive
in and pick your own favorite strand of drivel.

            Lemann then goes on to
explain that New York has no suburbs that are "truly hip." He doesn't favor us
with a definition of "truly hip," but he is kind enough to drop some clues:
"[A] truly hip suburb (no, that's not oxymoronic--go visit West Lake Hills,
Texas, or Berkeley or Topanga, Calif.), where there would be leaflets stapled
to the telephone poles and vegetarian restaurants and rave clubs, is completely
out of the question in New York." Never having been to either West Lake Hills
or Topanga, I can only go on the little Lemann gives us to grasp what makes a
place "truly hip," but let me go ahead and see if I don't have the whole
picture--uh, upper-class, white, Protestant children with dreadlocks, tattoos,
and nascent heroin addictions playing in bad rock bands named after legendary
1970s TV sitcoms? Bookstores with lots of Noam Chomsky? Loud, irony-free
discussions of Irony? Burrito delivery? Am I in the ballpark? Close? Well, gee,
I guess if that's "truly hip," then suburban New York does come up sorely.

            What can I tell you? The New
York suburbs are largely the product of the migration of white-ethnic Catholic,
Jewish, and African-Americans (and now Asian-Americans and Latinos) from the
city of New York. People who were (or are), by and large, at most one
generation removed from poverty. People who were (or are), as they say, shaped
by that experience. If one judges their communities by the standards of middle-
and upper-class WASP bohemians from Middle America (Starbucks coffee shops and
vegetarian restaurants), yeah, they're going to come up short.

            Since Lemann's claim to fame
is that he wrote a 408-page book explaining to prep-school-educated liberals
that many black people used to live in the South, this refusal to address basic
sociology is glaring. There are a lot of awful things to be said about suburban
New York, but Lemann is clearly not the person to make the case for or against
a region of the country he simply does not understand. And, of course, it isn't
all bad.

            Take, for instance, oh,
food. The food here is really good. Really, really good. Turns out the rest of
America isn't full of bakeries and pizzerias. And 24-hour diners and
delicatessens that cut giant chunks of meat with scary slicing machines. Not to
mention the thousands of fine, relatively inexpensive ethnic restaurants. I
realize that Lemann is partial to giant, homogenized chains, but some of us are
still content to eat in independently owned restaurants. I guess we're just not
as "sophisticated."

            Then there's the matter of
our cultural influence, which is huge (and by no means entirely benign), even
if its full magnitude isn't always appreciated by the NPR crowd. Nassau County
alone has given the world Eddie Murphy, Howard Stern, Rosie O'Donnell, and
Jerry Seinfeld--four comedians, who for better or worse, probably shape the
cutting edge of our national culture more than Charlotte, N.C.; and Berkeley,
Calif.; and Austin, Texas; and all the truly hip suburbs with "a patina of
sophistication" combined.

            Lemann's
silly, misinformed article completely ignores issues of class and ethnicity
while presenting the giant chain stores of mall America (Borders, Starbucks)
and the passing trends of middle America upper-class youth (leaflets on
telephone poles, Anglophile raves) as some sort of ideal. His problem with the
suburbs of New York would seem to be that they have too much New York and not
enough suburb. All in all--just a really dumb piece.

            
               --Michael
Langnas
            

            
               West Lake
Hills Is Not Hip
            

            I can't think of a more
sophisticated way to begin, so I'll just blurt it out: West Lake Hills, Texas,
is in no way, shape, or form a hip suburb, no matter what Nick Lemann says in
"The Suburbs Have
Won." I'm from West Lake Hills. I left my parents and brother behind when I
moved five years ago, but I still visit frequently, and I have to tell you,
there's not a vegetarian restaurant in sight. A notice for a rave party would
send an army of cell-phone-waving parents into the school counselor's office
and church hallways demanding action. (After, of course, said parents learned
what a rave party was.)

            West Lake
Hills is a pretty place, lots of wood, stone, and gorgeous views of Lake
Austin. The new Albertson's supermarket is great fun to shop in--good coffee,
fresh herbs, and reasonably good focaccia bread. But in all that lovely,
expensive real estate, there's no edge, no irony, no one dressed in black,
even. It's certainly no Berkeley. Which, I suspect, is why my parents still
live there. It's also why I don't.

            
               --Jennifer
Bradley
            

            

               Fresh-Brewed Influence
            

            The one
issue that James J. Cramer avoids in his article "I Had Coffee With
Clinton" is the fact that had he not given money to the Democratic National
Committee or the president, he would not have had the opportunity to sit next
to the president and discuss his stock-option idea. It's not what he may or may
not have been "shaken down" for that day, but what he paid for the price of
admission. Access to the president should be for all. Why are someone's ideas
more important than mine because they gave money to the president or his
party?

            -- Joe Strupek
            

            
               Train in
Vain
            

            In Jacob Weisberg's review of
Charles Murray's What It Means to Be a Libertarian ("The Other L-Word"),
he states, "But if government can't reroute the freight train in a better
direction, it's hard to see how it can derail it." As an engineer, I feel
qualified to point out that rerouting requires new track and a switch (not to
mention a new destination) before the train arrives. Derailing can be done with
a few common chemicals or tools (remove a short section of rail), or a tow
strap and vehicle (simply pull the rail out of line a few inches).

            In truth, most government
"programs" actually accomplish the opposite of the goals they are intended to
achieve. Thus, welfare has created a group of permanent dependents, gun control
has increased gun-related crime, and the war on drugs has created an immensely
profitable drug trade. Weisberg incorrectly states the nonaggression principle
as "no one can use force against anyone else." The proper statement is, "No one
may initiate force against another." The difference is obvious when considering
self-defense.

            Also, in writing about
Libertarianism: A Primer , by David Boaz, he states that "Boaz's model
for this is the Internet" and asserts that "[h]e neglects, of course, the fact
that the Internet began life as a federal defense project." Granted, the
Internet's grandfather was DARPANET. This may be one of the (no more than six)
cases where a government project went right. DARPANET was intentionally
designed as a decentralized network in order to (as much as possible) ensure
survivability in the event of World War III. The current Internet, still
decentralized, has become a worldwide threat to authoritarian government, due
to the free exchange of ideas it allows. This explains the recent spate of
governmental (and intergovernmental) attacks on the Net.

            In all,
Weisberg displays an abysmal ignorance of what libertarianism is, and what
libertarian goals mean to "We, the People." I suggest that he be limited to
reviewing official government pronouncements in the future. This may be the
only arena in which he can operate comfortably.

            
               --Earl Warner
            

            
               A
Libertarian Quilt
            

            Jacob Weisberg has it all
wrong in his review of Charles Murray's What It Means to Be a
Libertarian . He takes the position that he can state and judge "What is a
libertarian?"--as though there were only "one type" of libertarian.

            That's no more true than
saying there is only one standard by which you can call yourself a Catholic,
Protestant, Jew, black, white, Republican, Democrat, or any other philosophy or
race.

            Charles
Murray's view of what it takes to be a libertarian and survive, and hope to
have any impact and success in the current political arena, is far different
and more appropriate than Weisberg's view. Follow Weisberg and you'll be in the
sticks by yourself and getting nowhere.

            
               --Mark Cornell
            

            
               No More
Hot Dogs
            

            In "The Accidental
Theorist," Paul Krugman demonstrates his penchant for naive economic
analogies, ranging all the way back to the classical argument for free trade
that involved wine- and cheese-producing economies. The fact that he recognizes
that people will fault him on the oversimplification of his economic
representations doesn't get him off the hook. The problem with these analogies,
and the reason they are not immediately disposed of, is that, like Afrocentrist
historical revisionism, they are so riddled with problems that one hardly knows
where to begin.

            Perhaps we could begin by
noting that the service jobs replacing manufacturing jobs (i.e., selling hot
dogs instead of making hot dogs) rarely pull the wages of the manufacturing
jobs. In his earlier work he accepts models that don't even make allowance for
the mechanisms of capitalism. Krugman's disdain for evidence is alarming; I can
well hear him telling the hungry to simply eat more hot dogs.

            Krugman
asserts his argument through use of psychology, not economic reasoning. Namely,
if you don't accept my argument then you are a smug, high-minded sophisticate.
He is willing to disregard the growing income inequity in this country
(illustrated in my article), among other issues, and practically admits that
changes in his playful thought experiments would come only after cataclysmic
evidence demonstrates otherwise (i.e., when they are useless). Krugman serves
only himself and business concerns like Microsoft (now with its new
spin-doctoring arm, Slate) that pamper him.

            
               --Jonathan
Imboden
            

            
               Address your e-mail to
the editors to [email protected].