So last week was a pretty interesting one in wonkworld. Whether it was a disturbing week is in the eye of the beholder.

To recap: Last Monday the Heritage Foundation released a report claiming that proposed immigration reforms would cost north of $6 trillion. This report received a lot of pushback from liberal, libertarian, and conservative policy analysts.

As the debate fragmented into myriad sub-debates, one eddy focused on one of the co-authors, Heritage senior policy analyst Jason Richwine. As the Washington Post's Dylan Matthews unearthed, Richwine's Harvard University dissertation was titled "IQ and Immigration Policy." In it, he made the arguments that 1) Hispanic immigrants have lower IQs than white Americans, 2) that difference is partly due to genetic differences between the races, and 3) these differences will not dissipate with successive generations. You can figure out Richwine's policy conclusions for yourself. Dave Weigel at Slate also discovered that Richwine had contributed to a "white nationalist magazine" on the side.

Needless to say, Heritage started backpedaling as furiously as possible from Richwine. They made it clear that Richwine's dissertation was not a Heritage work product and that they didn't endorse it. Then, last Friday, the final boom came: Richwine "resigned" from Heritage. I put that in quotes because, given the circumstances, there's no earthly reason he would have resigned without some serious pressure from those above him at the think tank.

So, what does this all mean? Three thoughts:

1) Hey, so it turns out that ideas do matter in public policy. Not just any ideas either, but the quality of the ideas. This isn't to say that politics aren't involved in what happened this past week -- this is totally about political self-interest as well -- but the incomplete and distorted analysis that Heritage provided left it very vulnerable to pushback.

2) A few immigration skeptics on the right, such as Rush Limbaugh and Michelle Malkin, have decried what they see as intellectual PC-thoughtcrime run amok. Malkin in particular decries the "smug dismissal of Richwine's credentials and scholarship." Now, to be blunt, this is just a little rich coming from someone who has not been shy when it comes to smug dismissals of Ivy League credentials in the past. That said, whenever someone goes from anonymous to the focus of a white-hot media scrum to fired inside of a week, I get queasy. Was there a rush to judgment here?

I'd break this down into two steps: First, whether Heritage acted appropriately, and second, whether Richwine's work merits the mantle of brave truth-teller. On the former, well, this is a key difference between a think tank and a university. Think tanks are trying to influence public policy, and the taint of having someone dabbling with the racist fringe on the payroll is a difficult one to erase. So, yeah, it shouldn't be all that shocking that Richwine is no longer working at Heritage, whereas university professors who say or write controversial things stay on the payroll.

As for the quality of Richwine's dissertation, the primary defense that Malkin et al. offer appears to be the caliber of Richwine's dissertation committee. From Malkin's post:

No researcher or academic institution is safe if this smear campaign succeeds. Richwine’s dissertation committee at Harvard included George Borjas, Robert W. Scrivner Professor of Economics and Social Policy. The Cuban-born scholar received his PhD in economics from Columbia. He is an award-winning labor economist, National Bureau of Economic Research research associate, and author of countless books, including a widely used labor economics textbook now in its sixth edition.

Richard J. Zeckhauser, the Frank P. Ramsey Professor of Political Economy at JFK, also signed off on Richwine’s dissertation. Zeckhauser earned a PhD in economics from Harvard. He belongs to the Econometric Society, the American Academy of Sciences, and the Institute of Medicine (National Academy of Sciences).

The final member of the committee that approved Richwine’s "racist" thesis is Christopher Jencks, the Malcolm Wiener Professor of Social Policy at Harvard's JFK School. He is a renowned left-wing academic who has taught at Harvard, Northwestern, the University of Chicago, and the University of California, Santa Barbara. He edited the liberal New Republic magazine in the 1960s and has written several scholarly books tackling poverty, economic inequality, affirmative action, welfare reform, and yes, racial differences (The Black White Test Score Gap).

The willingness of Republican Gang of 8'ers to allow a young conservative researcher and married father of two to be strung up by the p.c. lynch mob for the crime of unflinching social science research is chilling, sickening, and suicidal.

These are serious people doing serious work.

I must confess that Malkin's lament made me think of this:

This is not to denigrate Richwine's dissertation committee. Still, as someone all too familiar with the Ph.D. life, let's just say that an argument based solely on authority is not convincing. I've perused parts of Richwine's dissertation, and … well … hoo boy. Key terms are poorly defined, auxiliary assumptions abound, and the literature I'm familiar with that is cited as authoritative is, well, not good. It's therefore unsurprising that, until last week, Richwine's dissertation disappeared into the ether the moment after it was approved. According to Google Scholar, no one cited it in the four years since it appeared. Furthermore, Richwine apparently didn't convert any part of it into any kind of refereed or non-refereed publication. Based on the comments that Weigel and others have received from Richwine's dissertation committee, one wonders just how much supervising was going on.

3) This whole affair should be a cautionary tale to Ph.D. students and profs alike. For the grad students -- particularly those planning on going into the policy world -- your dissertation will follow you for the rest of your life. Don't think you can just grind one out barely above the bar and it won't matter. And if you're puzzled why your advisor or a member of your dissertation committee is acting all anal retentive about some aspect of your thesis, there's a good reason. Our dissertation students follow us for the rest of our careers. The last thing we want as advisors is to get a phone call from a reporter asking us why we let some dubious piece of work skate through. It's our asses on the line as well.

Am I missing anything?

A little more than a year ago I blogged that global policymakers had reached a "focal point" moment on the merits of austerity as a macroeconomic policy during a global recession. Namely, central bank authorities had concluded that the policy doesn't really work well at all. If true, this was a big deal. One could argue that from the May 2010 Toronto G-20 summit to the end of 2011 was a period where the austerity policies were widely touted and occasionally implemented. If this was the wrong policy, and there was a shift, that's kind of a big deal.

So where are we now on this? 

On the public commentary side, I'd say we're approaching near-consensus on the failures of austerity for large economies. The passing of time has allowed for a comparative look at the data, and the results are not pretty for austertity enthusiasts. Martin Wolf sums up the indictment rather neatly, riffing off of a paper by Paul De Grauve and Yuemei Li: 

[T]he chief determinant of the reduction in spreads over German Bunds since the second quarter of 2012, when OMT [the ECB pledge to open up its monetary taps] was announced, was the initial spread. In brief, "the decline in the spreads was strongest in the countries where the fear factor had been the strongest."

What role did the fundamentals play? After all, nobody doubts that some countries, notably Greece, had and have a dreadful fiscal position. One such fundamental is the change in the ratio of debt to gross domestic product. The paper makes three important observations. First, the ratio of debt to GDP increased in all countries even after the ECB announcement. Second, the change in this ratio turned out to be a poor predictor of declines in spreads. Finally, the spreads determined the austerity borne by countries.

On the policy output side, there's been a demonstrable but partial shift. In the past year, the European Central Bank, Federal Reserve, and Bank of Japan have rejected austerity policies in favor of greater levels of quantitative easing. Furthermore, contrary to the outright hostility developing countries directed at quantitative easing in the fall of 2010, the reaction to the past half-year of quantitative easing has been far more muted. When the latest G-20 communique said: 

Monetary policy should be directed toward domestic price stability and continuing to support economic recovery according to the respective mandates. We commit to monitor and minimize the negative spillovers on other countries of policies implemented for domestic purposes.

That was code for "hey, G-7 central banks, you gotta do what you gotta do. We get that."  Which is demonstrably different from yelling "currency wars", a meme that seems not to have caught fire this time around. 

Top central bank authorities have also been willing to speak truth to power -- in this case, GOP members of Congress. John Cassidy recounts Ben Bernanke's testimony from yesterday: 

Departing from his statutory duty of reporting to the Senate Banking Committee on the Fed’s monetary policy, Bernanke devoted much of his testimony to fiscal policy, warning his congressional class that letting the sequester go ahead would endanger the economic recovery and do little or nothing to reduce the country’s debt burden.

"Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant," Bernanke told his students, who included a number of right-wing Republican diehards, such as Senator Bob Corker, of Tennessee, and Patrick Toomey, of Pennsylvania. "Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run."

Translated from Fed-speak, that meant that congressional Republicans have got things upside down. Bernanke has warned before about the dangers of excessive short-term spending cuts. But this was his most blunt assertion yet that Mitch McConnell, John Boehner, et al. should change course. "To address both the near- and longer-term issues, the Congress and the Administration should consider replacing the sharp, frontloaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run," Bernanke said. "Such an approach could lessen the near-term fiscal headwinds facing the recovery while more effectively addressing the longer-term imbalances in the federal budget."

So does this mean some additional policy shifts? Alas, probably not. The consensus against austerity seems pretty strong on the monetary policy side of the equation. On the fiscal policy dimension, however, austerity remains the de facto policy for a lot of economies. This includes the United States, which is conventionally depicted as not having embraced austerity. The New York Times' Binyamin Appelbaum outlines the current fiscal austerity in his story today: 

The federal government, the nation’s largest consumer and investor, is cutting back at a pace exceeded in the last half-century only by the military demobilizations after the Vietnam War and the cold war.

And the turn toward austerity is set to accelerate on Friday if the mandatory federal spending cuts known as sequestration start to take effect as scheduled. Those cuts would join an earlier round of deficit reduction measures passed in 2011 and the wind-down of wars in Iraq and Afghanistan that already have reduced the federal government’s contribution to the nation’s gross domestic product by almost 7 percent in the last two years.

The cuts may be felt more deeply because state and local governments — which expanded rapidly during earlier rounds of federal reductions in the 1970s and the 1990s, offsetting much of the impact — have also been cutting back.

Federal, state and local governments now employ 500,000 fewer workers than they did on the eve of the recession in 2007, the longest and deepest decline in total government employment since the aftermath of World War II.

Total government spending continues to increase, but those broader figures include benefit programs like Social Security. Government purchases and investments expand the nation’s economy, just as private sector transactions do, while benefit programs move money from one group of people to another without directly expanding economic activity.

The reason for this split does not require rocket science. Monetary policy is a tool of politrically insulated central bankers. Fiscal policy is a tool for elected politicians. The public might dislike specific budget cuts, but damn if they don't love austerity in theory. 

So, in retrospect, I think early 2012 was a focal point -- but only for central bankers and commentators. As Cassidy notes, there remain elected politicians who are super-keen on austerity: 

Corker, a former builder who is a long-time critic of Bernanke’s expansionary policies, called him "the biggest dove since World War Two." Toomey, a former head of the conservative lobbying group Club for Growth, questioned whether the sequester would have any real impact on the economy. Bernanke shrugged off the criticisms, calmly and methodically laying out the realities of the situation.

Developing...

The term "inflection point" has become one of those overused bits of meaningless jargon in political discourse.  I'm rather more fond of the notion of a "focal point" -- that is to say, an event or cluster of events in which everyone that cares about a particular problem focuses on the same set of stylized facts -- after which, they conclude that, gee, maybe the status quo set of policies ain't working so well and there should be a new status quo. 

The fall of 2008 was one such focal point, during which there was remarkable consensus that a Keynesian boost in public spending was the only way to avert another Great Depression.  At the fiirst G-20 leaders summit in  Washington, there was consensus on expansionary fiscal policy.  Oh, sure, there were grumblings about "crass Keynesianism," but even Germany reluctantly went along. 

The Greek sovereign debt crisis was another such focal point.  Greek profligacy seemed to be a synecdoche for excessive government borrowing and lax fiscal discipline.  With the global economy seemingly still in the doldrums, a lot of Europrean governments climbed on the "expansionary austerity" bandwagon.  By the Toronto G-20 summit in June 2010, the consensus had switched from Keynesian stimulus to fiscal rectitude.  Oh, sure there were mutterings about "short-term austerity makes no macroeconomic sense whatsoever in a slack economy" but even Barack Obama started talking about slashing government spending. 

Are we at another focal point?  Consider the following:

1)  According to the New York Times' Stephen Castle, European leaders now seem to recognize that austerity on its own ain't working: 

Bowing to mounting evidence that  austerity alone cannot solve the debt crisis, European leaders are expected to conclude  this week that what the debt-laden, sclerotic countries of the Continent need are a dose of economic growth.

A draft of the European Union summit meeting communiqué calls for ‘‘growth-friendly consolidation and job-friendly growth,’’ an indication that European leaders  have come to realize that austerity measures, like those being put in countries like Greece and Italy,  risk stoking a recession and plunging fragile economies into a  downward spiral.

2)  The data is starting to come in on governments that have embraced austerity whole-heartedly, and it's pretty grim.  Cue Paul Krugman on Great Britain:

Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries. It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.

Nor is Britain unique. Italy is also doing worse than it did in the 1930s — and with Spain clearly headed for a double-dip recession, that makes three of Europe’s big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.

And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.

3)  Even commentators who would be tempermentally sympathetic with austerity are starting to bash Germany question whether it's a solution.  Consider Walter Russell Mead: 

It takes some truly talented screw ups to come up with a worse plan for Greece than the one the Greeks have developed for themselves, but the Germans have risen to occasion in fine form....

Deep reform is needed if Greece is to stay in the euro, and so far the Greek political establishment — firmly backed by public opinion — is digging in its heels.  Much whining, much talk, many promises and precious little action seems to be the favored Greek approach to the crisis.  On the other hand, the austerity policies the Germans favor are hopelessly biased in favor of German banking interests and are aimed more at the preservation of the reputations of German politicians than at helping Greece.

The German political establishment seems willing to destroy Europe to avoid telling German voters the truth about how stupid it has been. 

[UPDATE:  For exhibit B of this trend, see this Niall Ferguson interview with Henry Blodget.  My favorite part of the interview is this quotation:  "I think the reason that I was off on that was that I hadn't actually thought hard enough about my own work.... My considered and changed view is that the U.S. can carry a higher debt to GDP ratio than I think I had in mind 2 or 3 years ago."]

4)  U.S. 4th quarter data reveals that, consistent with GOP criticisms, the government has been the real drag on the U.S. economy.  Not quite consistent with GOP criticisms:  the reason why the government is dragging down the U.S. economy.  Cue Mark Thoma: 

[P]remature austerity -- cutting spending before the economy is ready for it -- is taking a toll on the recovery. The fall in government spending reduced fourth-quarter growth by 0.93 percent; if government spending had remained constant, GDP growth would have been 3.7 percent, rather than 2.8 percent. 

This is the opposite of what the government should be doing to support the recovery. We need a temporary increase in government spending to increase demand and employment through, for example, building infrastructure. That would help to get us out of the deep hole we are in. Instead, the government seems to be trying to make it harder to escape.

We do need to address our long-run budget problems once the economy is healthy enough to withstand the tax increases and program cuts that will be required. But the idea of "expansionary" austerity has failed. Austerity in the short-term simply makes it harder for the economy to recover and delays the day when you can finally address budget issues without harming the economy. The lesson is that government needs to support the recovery, not oppose it through a false promise that contraction of one sector in the economy will be expansionary.

5)  Central banks are acting more gung-ho on expansionary monetary policy.  The unspoken quid pro quo in Europe seems to the that the ECB will expand its balance sheet and turn on the monetary taps in return for some kind of fiscal compact.  The U.S. Federal Reserve announced a zero-interest rate policy for the next three years.  Even China is showing (halting) signs that its reverted back to monetary easing. 

Given that the United States has been the country to move the slowest on austerity, and given that the United States is doing the best job among the OECD economies (an admittedly low bar) of restoring confidence among investors and paying down non-governmental debt, have we reached another focal point? 

One could argue that Krugman and Thoma are just biased in favor of Keynesianism, that Greece and the other Club Med countries haven't really embraced austerity, that the Euromess is dragging down British economic growth, and that the long-term numbers on developed country debt are really very scary.  There are some large grains of truth in many of those statements. 

It doesn't necessarily matter, however.  Greece was not a genuine harbinger of the fiscal problems of large markets -- but it was a useful hook for austerity advocates to spread their gospel.  What matters now is not whether these perceptions about the failure of austerity are 100% accurate, but whether they are accurate enough to become the new conventional wisdom. 

What do you think? 

Your humble blogger is down in Washington DC to attend FP's Global Thinkers gala, in honor of the magazine's annual Top 100 Global Thinker list.  I look forward to seeing some of the thinkers I know (Tyler Cowen, Joseph Nye) and meeting the many that I don't know. 

This list tends to beget a lot of carping from my friends who erroneously believe that I contol the entire FP-verse like a Muppeteer in the Twitterverse  about who's on the list, and in some ways, that's kind of the point -- to foster debate.  I'd like to ask my readers a slightly different question:  who got overlooked?  Who are the BigThinkers  that FP missed? 

Put your answer in the comments!

My National Interest review of finance books has provoked a few blog responses.  Actually, it's one paragraph in particular of that review that's sparked some discussion: 

[John] Quiggin thinks he’s only writing [in Zombie Economics] about the failure of free-market ideas, but he’s actually describing the intellectual life cycle of most ideas in political economy. All intellectual movements start with trenchant ways of understanding the world. As these ideas gain currency, they are used to explain more and more disparate phenomena, until the explanation starts to lose its predictive power. As time passes, the original ideas become obscured by ideology, caricature and ad hoc efforts to explain away emerging anomalies. Finally, enough contradictions build up to crash the paradigm, although current adherents often continue to advance the ideas in zombielike form. Quiggin demonstrates with great clarity how this happened to the Chicago school of economics. How he can think it won’t happen with whatever neo-Keynesian model emerges is truly puzzling.

Now, this point is not original to me -- this was a combination of Thomas Kuhn's Structure of Scientificd Revolutions, with a dash of Alan Blinder's Hard Heads, Soft Hearts.   But it's prompted something of a blog kerfuffle. 

Tyler Cowen agrees with me.  Quiggin himself* thinks I'm too slanted in my take, though in a follow-up post he allows that, "there are some zombie ideas on the Keynesian side of the fence as well."  

Henry Farrell in particular takes me to task: 

I don’t buy Dan’s arguments here. As with most stage theories (not only Marx, but also Kuhn), the mechanisms of institutional reproduction and change in his account are sorely underspecified. ‘Contradictions accumulate’ isn’t a much more helpful empirical claim than ‘shit happens.’ To really understand what is happening, you need a proper theory of the underlying conditions for ideational retention and reproduction. Why do some ideas decay into self-parody, while others do not? After all – not all ideas decay (or at least: not all ideas decay at the same rate). Some economic ideas have continued for centuries (the limited liability corporation), while others have disappeared completely, while others yet have disappeared and reappeared. We don’t know why – but if we want to make the kinds of claim that Dan is making, we need to know why, or at the least, have some rough idea. Otherwise, what we have is at best a sometimes-observed empirical regularity melded to a smidgen of intuition, which is not enough (in my book at least) to dismiss a counter-claim (that one particular idea may have a longer shelf life than previous versions) out of hand.

I'm not sure that the idea of the limited liability corporation falls into the same category as ideas like Keynesianism or the Chicago school of economics.  The former is an institutional innovation that was designed to solve a well-defined problem limited in scope; the latter set of ideas address a fuzzier but more intellectually ambitious domain of how a national economy functions.  Still, Farrell makes a interesting observation.   

This is a blog and not an academic journal, so I'm not going to be able to satisfy all of Henry's criteria, but here goes: 

First, I do wonder if ideas in political economy function a bit like self-similarity in a Mandlebrot set, in that different sets of ideas have different lifespans but nevertheless follow roughly the same arc.  It is possible that some ideas that appear to persist indefinitely are merely slower-moving in their half-life than the macroeconomic paradigms that Quiggin discussed in Zombie Economics.  Now, that's just intuition -- I have no idea if it's true.  But I think it's an interesting intuition. 

Now, Farrell wants "a proper theory of the underlying conditions for ideational retention and reproduction."  OK, if I were to sketch this out, I'd assume that the demand for ideas comes from living in a causally complex world in which intellectuals and policymakers want cognitive road maps to provide some clarity about what to do and what to say.  I'd further assume that the political and social world in which we live is in a constant state of change, making it difficult to develop "timeless" theories of political economy. 

With those assumptions, I'd postulate the following: 

First, ideas in political economy are more likely to survive birth pangs when:

A)  The theory's predicted effects appear to hold -- not necessarily via causal mechanisms internal to the theory, but the outcome is nevertheless consistent with the theoretial predictions.

B)  The theory yields policy implications favorable to at least one important interest group.  In other words, there's a political incentive for at least one power bloc to support this particular model. 

Second, the longer the predicted effects of the theory appear to hold up, the more entrenched the idea becomes in intellectual and policy discourse.  There are path dependent effects to ideas.  The ones with longer pedigrees will have greater ideational power -- even if the initial conditions that led to the original theory no longer apply. 

Third, the longer that a particular idea appears to explain its particular domain, the greater the incentive for intellectuals to engage in ideational arbitrage and apply the idea to more disparate phenomena.  Indeed, Quiggin's book demonstrates this trend within the Chicago School, in which ideas that seemed to hold up pretty well in microeconomic price theory get applied to a whole range of other range of economic behavior. 

Fourth, the longer a theory stays in circulation and the more cultural cachet it acquires, the greater the incentive for political institutions to appropriate the idea -- and in the process, adjust the content of the idea to fit their own preferences. 

Fifth, the longer a theory stays in circulation, the more likely that propagandists will simplify the content and causal mechanisms of the idea.  This allows for a greater spread of the model beyond intellectuals to more powerful actors:  policymakers with actual line authority, journalists who write about said policymakers, etc. 

Sixth, the longer a theory stays in circulation, the greater the likelihood of underlying conditions in the real world shifting to the point where the original model's empirical claims do not hold up.  This will necessarily require the development of auxiliary hypotheses that might contradict some of the original arguments made in the paradigm. 

The third through sixth postulates increase the likelihood that, over time, an idea's explanatory power will erode to the point when new challengers can potentially overtake it. 

Now, a fully-fleshed theory of ideational change would need to state the conditions under which these dynamics are likely to be more or less powerful.  Some theorie, for example, might develop expectations and behaviors that reinforce the original hypotheses.  These theories would be expected to last longer.  That said, I will leave this part of the model to the commenters. 

*As an aside, I find it fascinating that, of all my book reviews, it's the ones when I provide a largely favorable review with a soupcon of criticism that provokes the author (click here for one past example).  I've also written some not-so-nice book reviews in my day -- but never heard a peep from those authors.