Wednesday, February 17, 2010

Pete Boettke visits Charleston

Pete Boettke visited Charleston yesterday. (I just don't understand why people can't organize these things around the church calendar. Doesn't everyone spend Shrove Tuesday in the parish hall cooking pancakes? Or is it drinking on Bourbon Street or dancing in Rio?)

I had never heard Pete lecture before, and he was very good. The presentation to the undergraduates at the College of Charleston was sponsored by the BB&T Initiative for Public Choice and Market Processes. (Many thanks to BB&T and Pete Calcagno of the College of Charleston's Economics Department.)

Boettke's lecture was about the difference between the mainline and the mainstream of economics. The mainline goes from Adam Smith, through Say, and on to Hayek. (He also mentioned Buchanan sometimes. Go Virginia School!) The mainline is about understanding the market process--methodological individualism and self-organization in markets. The mainstream varies with the times. Sometimes the mainline is the mainstream, but other times, the mainstream goes off in different directions. His example for the current mainstream was Stiglitz, and that it is a bit off the mainline.

The most challenging part of the lecture for me was when he discussed a four by four chart, where the economist is student or else savior and the government is referee or player. The opportunity of the economist to be a savior when the government is a player is one of Boettke's explanations for why the mainstream frequently deviates from the mainline.

Like Boettke, I think that the government should be the referee and the the economist should be a student. Why his lecture was personally challenging is that I am left puzzling over where I stand, calling for the Fed to target Final Sales of Domestic Product at $16.2 trillion in the first quarter of 2011?

My favorite part of his lecture was his discussion of "y" vs. "ics" Boettke pointed out that in the old days, the "mainstream" was described as "political economy." Of course, today, we do "economics" Who do we want to be with? Do we want to be with the "y's," like philosophy and history? Or do we want to be with the "manly" fields, like mathematics or physics?

After a return to the parish hall kitchen, it was off to Bastiat. The Bastiat Society meets once a month for a reception and a speaker--usually from off. (That means, "not from Charleston" in the local lingo.) Boettke's presentation was about the financial crisis, The House that Uncle Sam Built, a paper he had written with Steve Horwitz. Boettke's story was that periods of a negative real federal funds rates in the naughties led to malinvestment in housing. He had a long list of government interventions that directed excess credit into housing.

Recovery involves letting the market heal. He was very critical of bailouts and the fiscal stimulus. He was very concerned about the prospect of deficits, debt, and debasement. In other words, deficits to fund fiscal stimulus will increase the national debt, and sooner or later, government will create money to pay off these debts, resulting in massive inflation.

Unfortunately, we didn't get to his last slide, where he was going to bring up the differences among free market economists regarding the proper Fed response in 2008. (I did very much appreciate his too kind words about my expertise in this area. When I turned around and saw that my associate Dean was at the lecture too, I was even more pleased.)

I still think that the most serious macreconomic problem today is that nominal expenditure is 10 percent below trend, and I still favor having the Fed target Final Sales of Domestic product at $16.2 trillion for the first quarter of 2011. I even am sticking to my odd notion that maybe the real level of very short and low risk interest rates, including perhaps the interbank overnight lending rate, should sometimes be negative.

On the hand, I am more and more convinced that the Fed's policy of interest rate targeting, and especially, interest rate smoothing, is a serious mistake. Promising that the Federal Funds rate will stay near zero for a good long time is a bad idea. While I am not really confident in the Congressional Budget Office's ability to measure the productive capacity of the economy, much less forecast it for the next decade, that their current estimate shows that about 1/3 of the decrease in real output from trend is due to lower potential output and that slow growth will continue, leaving real output 15 percent below its long term trend at the end of the next decade, has made me put more weight on the role of the "hangover" from the malinvestment and more concern about the impact of "regime uncertainty" on long run real investment and productivity growth.

After Bastiat, it was back to the parish hall. Kathy and I got the last pancakes. And then there was clean up. After that great Charleston "carnival," I am ready for Lent.

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