Wednesday, December 8, 2010

FLG Knows He Said He'd Shelve His Time Horizons Theory

...but James Hanley asks:
Does Obama Lack a Sense of Irony?

"This is a long game, not a short game."

That’s President Obama talking explaining why he accepted extension of the Bush tax cuts in exchange for extension of unemployment benefits. So if he’s playing a long game, why does he keep sacrificing long-term wins to get short-term ones, instead of sacrificing short-term wins in pursuit of long-term ones? He seems to have twisted the old saying, “we lost the battle but won the war” into “I can’t focus on winning the war until I’ve won this battle.” In addition to lacking a sense of irony, he also appears to be a president with precious little sense of strategy.

The reason he confuses the short-term and the long-term is because he is liberal. Therefore, he discounts the future very steeply. Therefore, to some extent the long-term doesn't even exist. Therefore, he wouldn't know a long game if it smacked him in the face.

10 comments:

nadezhda said...

Sorry. Your time horizon flunks again. To the extent the labels mean anything, Hanley isn't a liberal. I'm a liberal. Obama's a liberal. And I already pointed out to Hanley that he's confusing his economic views about policy efficacy with Obama's. If he had the economic views of Obama and his advisers, he'd understand that Obama aligned his tactics with his longer-term strategic objectives.

FLG said...

Nadezhda:

I knew Hanley isn't a liberal. And fair enough, maybe Hanley and I are blind to something because of our political stances.

So, I went over to LOG and read your comment, which I'll post here for those who don't venture over there:
"If you don’t believe the stimulus will have any positive impact on GDP or employment rates, then I suppose you could see a disconnect — he got a tiny give-away to a whole lot of people that will automatically expire by giving up a big give-away to a small number of people which will take a huge political battle to sunset.

But Obama thinks he got the biggest win he could get on a (temporary) stimulus that will not only do what he was elected to do — promote recovery towards wide-spread long-term prosperity — but better position him to fight the medium-term budget battles coming up, which are going to open up the tax code and during which the “Bush tax cuts” are going to disappear in a wider restructuring debate. Seems to me that’s a classic case of aligning tactics with strategy."

Can you please explain your argument how temporary stimulus turns into long-term prosperity?

I'm not being smart. I can see arguments for it (large multiplier, etc), but I'd like to know what yours is.

Can you also explain how this sets Obama up better for the medium-term budget battles? Wasn't the inevitable restructuring debate going to swamp the Bush tax cuts anyway?

FLG said...

Also, nadezhda, don't you acknowledge that the idea of stimulus spending is a matter of valuing the present over the future? Or having a higher discount rate?

If Ricardian Equivalence holds, then stimulus doesn't work. Now the question is whether Ricardian Equivalence holds, which seems to me is a question of one's discount rate of the future. So, it's a bit circular.

Stimulus makes sense if Ricardian Equivalence does not hold, which somebody who discounts the future sharply is going to believe it doesn't hold, and so the stimulus makes sense. And vice versa.

But the question is not really whether we believe it, but whether other people act according to Ricardian Equivalence. And FLG contends that we all think, deep down, that everybody else thinks like us. So, if the extent to which you or I discount the future is the extent to which we believe stimulus will or will not be effective.

BTW, that we all think everybody else really thinks like us is part of, surprise, surprise, another FLG theory called The Big Assumption.

BTW part deux, I give you two weeks before you throw your hands up in exasperation and stop reading this blog. There's theories out the ying yang and all will probably drive you up a wall.

nadezhda said...

But that was exactly my point -- I (and Obama) apparently have different assumptions about stimulus efficacy than Hanley does. If it boosts GDP by, say, 1%, then when the stimulus expires, GDP doesn't drop by the amount by which it was increased but by a small fraction, and the employment gains don't suddenly go up in smoke. Stimulus expiration just produces a small decline in what is now a higher GDP and growth rate that's been shifted back closer to trend. The stuff Obama got in exchange for (low multiplier) tax cuts for the upper 1% has much bigger multipliers. The bulk of macroeconomic models work that way. See Ezra Klein for Marc Zandi's and Macroeconomic Advisers' models. You may not like the models, but they're the ones that the bond markets use. So it's not like Obama and his advisers just pulled some bizarre theory out of their hats.

And in the meantime, thanks to the deal Obama got from the GOP, consistent with Democratic Party priorities, a whole lot more people either will be employed or won't wind up literally without food and shelter when their UI benefits ran out.

Since how people experience macro conditions has a great bearing on election outcomes, Obama will be in a better position to win re-election and implement his "long game" if the stimulus works to avoid a double-dip or otherwise improves how people view their economic prospects in November 2012. You can believe the stimulus won't make a bit of difference (or worse) and therefore he chose bad tactics, but you can't accuse him of not having tactics he thinks are consistent with how he views the long game.

His longer-term strategy re the budget is to produce something that is a whole lot closer to counter-cyclical structural balance without gutting safety net programs. That's going to call for a grand bargain on both the revenue and spending side. I doubt it will look all that much like the Deficit Commission's proposal, but we'll certainly see an attempt to shift away from so much reliance on individual and corporate income taxes, where trying to get more revenue out of higher marginal rates at the top end gets less and less efficient not because it discourages work (and therefore reduces taxable income -- the Laffer curve is only "real" at an extraordinarily high marginal rate) but because of the ability of companies and rich people to -- perfectly morally and legally -- avoid taxes.

In that grand bargain, the "Bush tax cuts" for the wealthy are going to disappear as a political issue. There's still going to be a huge argument over the progessivity of any tax reform program. But the "Bush cuts" are going to cease being a "line in the sand" for either side.

The assertion, whether from the left or the right, that agreeing to an extension to the upper-income "Bush cuts" now makes them permanent assumes that, if Obama is re-elected, we won't see a medium-term budget deal that involves tax reform. Or in other words, that Obama won't be able to implement his strategy. Fine. But it's inaccurate to say that he doesn't have a strategy. Or that the deal he struck isn't consistent with his "long game."

nadezhda said...

Plato AND Ricardian Equivalence. Yikes! If I was allergic to Plato, Ricardian Equivalence makes me break out in hives.

btw, my previous comment just got lost in Blogger's ether. If you can extract it, I'd appreciate it.

nadezhda said...

FLG -- You wrote: "that we all think everybody else really thinks like us is part of, surprise, surprise, another FLG theory called The Big Assumption."

On that we are in perfect agreement. Which is why from the get-go I challenged what I identified (I believe correctly) as some powerful normative assumptions in what you were rather smugly asserting was descriptive. And why I think you need more than a single dichotomy for your "time horizon" theory to work.

You may note, I'm far from rejecting your theory out of hand. I also think there are some interesting potential applications beyond economic policy (e.g. my earlier example of important shifts in perceptions of sacred and profane time). But I think you're missing important variables and have suggested several which have been important historically and which you might want to consider.

As for rejection of Ricardian Equivalence, I suspect you're projecting your way of thinking onto others. It doesn't imply preferring short over long-term. You don't have to accept RE to think the stimulus won't work. I'm rather agnostic because of depressed animal spirits from balance sheet restructuring, the fact that the mortgage finance industry appears to have broken our titling and transfer system (and possibly some more systemic shocks like from the EU) that have nothing to do with the potential future size of the US government deficit. I have my fingers crossed, though I expect it will be better than nothing and may give Bernanke's QE2 a bit more traction.

However, re RE, I simply don't believe, nor have I seen much evidence, that the majority of humans obtain and process information that way. Nor that, even if their individual psychology doesn't match RE assumptions, that somehow in the aggregate, collective behavior matches RE's predictive values. In short, little if any explanatory power at either macro or micro. And that has nothing to do with my relative weights on present and future values.

nadezhda said...

FLG -- You wrote: "I give you two weeks before you throw your hands up in exasperation and stop reading this blog. There's theories out the ying yang and all will probably drive you up a wall."

Depends on your theories and whether you have interesting things to say about them. Your "time horizon" theory has enough plausible merit on its face, and leads to thinking about other interesting things, that it's worth puzzling about for a least a couple of days. ;)

Re our previous discussion on "time horizons", I gave you the Maggie Thatcher example not that I think she belongs in one clear box or another, but to push you out of what looks to me like a lazy assumption that "left" equals empirical short-term (and anti-market, or pro-government or pro-regulation, etc etc) and "right" equals rationalist-idealist long-term (and all the other concepts which have a positive emotional valence for you). Himmelfarb's comparative 18thC Enlightenments also challenges how you're applying your typology.

If you're elaborating universals, at least figure out how they "work" when we look at history, please. Otherwise, you're just inventing rationalizations for which tribe you belong to. (Not that we're not all guilty of that from time to time, but you've at least set higher standards for your own thinking.)

So I have the following to add to your quote collection: "On some positions, Cowardice asks the question, "Is it safe?" Expediency asks the question, "Is it politic?" And Vanity comes along and asks the question, "Is it popular?" But Conscience asks the question "Is it right?" And there comes a time when one must take a position that is neither safe, nor politic, nor popular, but he must do it because Conscience tells him it is right."

Which is why, although you label him a short-term empiricist consequentialist, Martin Luther King, Jr believed in "the fierce urgency of now" within "the long arc of history."

Anonymous said...

All this time horizon shit distracts from object sex. As I remember, the entire Thanksgiving season passed without an FLG post about pumpkins. dave.s.

FLG said...

Nadezhda:

The origins of the time horizons theory go back to when I was trying to figure out why people who were smart came to vastly different conclusion than me given the same data. The explanation that I came up with and seem to explain much of the variation was varying time horizons. It wasn't meant to be a normative theory, but a positive one.

Since I do think it makes more sense to sometimes be more focused on the short-term, .i.e. times of crisis, than the long run, perhaps the entire thing flowed out of a normative position. But that wasn't the intent.

I think it is perfectly reasonable to value the future differently than me.

Doctor Syntax said...

I think it is perfectly reasonable to value the future differently than me.

On a brighter note, I am highly confident that Miss FLG will take a different view.

 
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