Marginalia

Corey Robin has written a long article arguing that Austrian economic thought and marginalism in general is descended from Nietzsche. Hence, Hayek et al are a bunch of aristocrats dedicated to oppressing society. I'd be happy to be persuaded that the marginalists -- at least as Robin uses the term, which isn't the only way -- are Nietzschean, but Robin's article didn't do it. Too many strong assertions based on tenuous evidence, and Robin is not exactly an impartial observer. This follow-on John Holbo post -- while exceptional in many ways -- doesn't do it either. Partially because it rests so heavily on a peculiar (I think) reading of this quote from Hayek in The Constitution of Liberty:

To grant no more freedom than all can exercise would be to misconceive its function completely. The freedom that will be used by only one man in a million may be more important to society and more beneficial to the majority than any freedom that we all use.

This does not have to mean that "some people’s freedom is a lot more valuable than other people’s freedom", as Holbo wrote in a previous post and quotes here. In light of the rest of Hayek's work (or even the rest of the passage from which this quote is pulled: see below) it is strange to argue that this passage means anything like what Holbo thinks it means: "Ideally, we would find that one man and even make all others his slaves, if that is what it took to let him exercise his freedom to the fullest. Hayek thus affirms a freedom monster argument somehat analogous to the classic pleasure monster reductio."

The Hayek quote refers to the exercise of liberty, which may not be universal even if the liberty is extended universally. Hayek is arguing that it does not follow from the fact that the exercise may be non-universal that the liberty should be restricted. Instead, those who would exercise their liberty should be free to do so. In fact, there are a million liberties. None of us can act on all them, but all of us will act on some of them. Restricting liberties that the majority isn't exercising may be tempting, but it would be wrong to do so since the exercise of liberties leads to the improvement of society. That's the argument.

To get from Hayek to Holbo's interpretation of Hayek you have to take a few steps. First you'd have to ignore the footnote on the very passage Holbo pulls, which contains this quote (from some people I've never heard of): "If there is to be freedom for the few who will take advantage of it, freedom must be offered to the many." How does that imply enslavement of the masses for the benefit of one? Suppose I proposed universal suffrage while acknowledging that many people will stay home on election day. Would that make me anti-democratic? It's a strange argument.

Hayek believes that social progress occurs partially through experimentation, the results of which are ex ante unknowable. The "unknowable" part is extremely important for Hayek. It's how he can simultaneously support a welfare state and public provision of public goods while opposing egalitarian redistribution and social ownership of the means of production. "Knowable" advances can be socially planned, and Hayek was fine with using the power of the state to do so. ("It is the character rather than the volume of government activity that is important.") Unknowable advances cannot be planned but are nevertheless desirable, thus experimentation must be allowed through constitutionalization and encouraged by the preservation of (market) reward for experiments that succeed. Holbo is correct that this is Millian -- J.S. Mill's "utilitarianism" is dynamic, not static: society benefits at time t+1 from the exercise of individual liberty at time t. Whether this is actual utilitarianism or something else is, I suppose, the question -- but wrong when he implies that Mill, by way of Hayek, was Nietzschean.

Hayek seems to believe that the majority of society will choose not to experiment because they are risk averse -- "The freedom that will be used by only one man in a million..." emphasis added -- or because they are exercising some other liberty, but it is socially optimal to have somebody doing some experimenting. Those who are interested in doing so, those who will exercise their liberties while others do not, should be allowed to do so, since society will benefit if they succeed. The rest of the passage in The Constitution of Liberty quote above goes:

The less likely the opportunity, the more serious will it be to miss it when it arises, for the experience that it offers will be nearly unique. It is also probably true that the majority are not directly interested in most of the important things that any one person should de free to do. It is because we do not know how individuals will use their freedom that it is so important. If it were otherwise, the results of of freedom could also be achieved by the majority’s deciding what should be done by the individuals. But the majority action is, of necessity, confined to the already tried and ascertained, to issues on which agreement has already been reached in that process of discussion that must be preceded by different experiences and actions on the part of different individuals. 

The benefits I derive from freedom are thus largely the result of the uses of freedom by others, and mostly of those uses of freedom that I could never avail myself of. It is therefore not necessarily freedom that I can exercise myself that is most important for me. It is certainly more important that anything can be tried by somebody than that all can do the same things… What is important is not the freedom that I personally would like to exercise but what freedom some person may need in order to do things beneficial to society. This freedom we can assure to the unknown person only by giving it to all.

How can one (e.g. Holbo) read this and come away thinking Overman? It's more like the open source movement. Which makes sense, since Hayek's view on this goes back to his 1945 essay "The Uses of Knowledge in Society". He argues there that because much knowledge is local, and centralized planning cannot incorporate local knowledge, that centralized planning will fail. This argument is what he's drawing from to say that the exercise of liberty by some -- who are in possession of local knowledge not available to all -- is not suboptimal.

Now, possibly you could argue that Hayek's view of the masses is too dim (even though he includes himself in them) and that is where the aristocracy comes in and takes us to Nietzsche. Or possibly you could argue that the "knowable" advances are greater than the "unknowable" advances. Indeed, this is the argument against which Hayek dedicated himself to in writing The Constitution of Liberty, which was published in 1960 -- a time after Sputnik when Paul Samuelson was predicting that the USSR's GNP per capita would surpass the US's within a generation or so -- so you'd at least be meeting him where he is. The question Hayek is trying to address is whether society will benefit more from planning or from spontaneous emergence. He obviously believes it is the latter. He may be wrong, but not because he's a Nietzschean.

The better argument is the one made by Amartya Sen: it is not necessarily local knowledge which precludes some from exercising certain liberties, but rather material opportunity. It may not be that some will not exercise their ability but that they cannot do so. In this case they are not free. Hayek says almost nothing about this directly, but does say that just because some are free does not mean that all should be enslaved. Those who can exercise their freedom should do so, as this will provide benefit for society.

This is the point, I think, that Hayek goes astray. His argument about the importance of local knowledge and decentralization falls apart when those with local knowledge cannot employ it and opportunity is centralized. His claim that innovations by the few will benefit the many is empirical: sometimes they do, often they do not. His argument that order is spontaneous is contingent, in other words, not a law of nature. Complex systems can, and do, break down. To simply admit does not require giving anything else up.

But, again, this is not Nietzschean. Which is why Objectivists do not like Hayek. This is an argument that Hayek should revise his beliefs to include a role for a marginally bigger -- although not fundamentally different -- state, or some other redistributionary apparatus. This is doable using Hayekian language, even if Hayek himself and many of his supporters recommend a minimalist state. Hayek is reconcilable with somewhat-modest forms of social democracy, in other words, and social democracy is reconcilable with a deregulated-but-redistributionary political economy.

But to do that you'd have to admit that Hayek was not quite a moral monster. Corey Robin is dedicated to showing that the right wing is authoritarian in all its guises. He believes that when Hayek writes "Why I Am Not A Conservative" he simply cannot be trusted: he's a reactionary like all the rest, and all the rest are motivated first and foremost by a lust for exploitation and oppression. There is nothing inherently wrong with this intellectual project, and I've learned a lot by following it. But it is inherently limiting at the same time, and it commits one to answers before questions have even been asked.

The Conservative Left

Henry Farrell's article on the plight of European democracy in the face of "technocratic" management is very good reading. 

Tangentially related is this bit from Thatcher making a similar argument ex ante: 

Which is not to say she was anti-Europe. She wasn't. Alex Harrowell put it well:

[T]he European Union has not turned out to be the nice alternative to Thatcherism it was sold as in the 1990s. ... 

The policies it delivers – open trade, austeritarian macro-economics, open capital flows, no real redistributive budget, and a permanent war on inflation – are basically nothing Margaret Thatcher would not have welcomed. ... 

Thatcher was a European; it’s Europe that’s the problem.

Except that Thatcher rejected the central bank, which is Europe and thus the problem. Harrowell says truthfully that the UK was pegging to the German mark for much of Thatcher's tenure, but that was a choice which was easily reversible (and was in fact reversed) as soon as it became disadvantageous.

The longstanding left political project -- internationalism plus a strong welfare state funded by capitalism -- contains as many contradictions as capitalism itself. So what's the left to do? It's adopting the tone of the right. By the end of his life Tony Judt couldn't really be more conservative. Farrell's essay suggests that this is the only plausible path forward, and it's not a good one.

There Is No Technocracy: Stop Worrying About Aggregate Demand

Is "aggregate demand" really what anyone cares about? I don't think so. We care about the quality of peoples' lives. And new research is starting to look at what sorts of fiscal policies matter for improving well-being whatever the macroeconomic aggregates say. Evan Soltas describes some of this work and interviews the authors:

Tax revenues fall automatically in recessions, and governments back that up with lower tax rates and/ or new credits and deductions. On the spending side, extra outlays on unemployment benefits and other transfers greatly exceed extra outlays on infrastructure and other purchases. This modern kind of fiscal stimulus is supposed to work by stabilizing disposable income. Stabilize that, the thinking goes, and you stabilize output and employment. 

But is that right? In a new working paper, Ricardo Reis of Columbia University and Alisdair McKay of Boston University say no. They find that stabilizing aggregate disposable income plays a “negligible role” in stabilizing the economy as a whole. Transfer payments can indeed stabilize output, they find, but mainly through a different channel -- not by changing disposable income in the aggregate, but by changing its distribution. Fiscal policy, in other words, is all about inequality.

“It’s the redistribution that has a lot of kick,” Reis said in an interview. “The usual argument for transfers is basically Keynesian. We find that has very low impact in our model.”

More on the fiscal side here. What about the monetary side? Marc Chandler, a Wall Street manager writing in the Jacobin, describes the relationship between monetary policy and distribution.

Central bank independence was never what it was cracked up to be. During “normal” times, central banks protected the interests of the owners of capital. Paul Volcker is often cited as the epitome of the independent central banker, but surely his tight monetary policy, justified in terms of some technocratic money supply target created winners and losers. The owners of capital were among the winners, while those who did not own capital were losers (through such things as higher unemployment and downward pressure on real wages). ... 

The setting of monetary policy was never simply a technocratic exercise as the [central bank independence theory] pretends. There were always those interests that benefited and those who did less well. Few cried of a loss of central bank independence, for example, when the Bundesbank would threaten tighter monetary policy in reaction to unions seeking a sharp increase in wages.

Much more here. Both the commentariat and academia have focused too long on the supposed technocratic features of policy: whether unemployment is at its "natural" rate, whether output is at "potential", whether central banks are "independent", whether inflation is "low and stable". None of these concepts exist in nature. None of them are even definable quantitatively, although they may be described quantitatively. Hence, they are not scientific concepts but terms of art with important distributional ramifications.
 
I have a paper forthcoming which looks at how banks respond to monetary arrangements. It turns out that monetary politics goes well beyond central bank independence. I'll post a link when it's available.

Boston Review Forum on Labor Rights and MNCs

A forum on labor rights and multinational corporations. Here is Richard Locke's lead essay. Here is Layna Mosley's contribution. Many other interesting contributions, too. Have a look.

Rogoff: Not An Austerian

I haven't said anything about the Reinhart and Rogoff affair because I've been busy. It's certainly horribly embarrassing, and not just because of the errors: when your research method is finding means and medians among arbitrary clusters of units across disparate time periods by copy-and-pasting Excel, it doesn't say much about your methodological (or theoretical) chops. I never took the 90% threshold all that seriously, either as a causal relationship or a even a deterministic association. If you'd like to check, here's what I wrote about the paper at the time. I do now flinch at the part where I call R&R "very good empirical economists" but otherwise I think my tone is appropriately blasé concerning the central findings. And, from what I can gather, the follow-up studies make the 90% threshold go away but not the general relationship: high debt is associated with low growth at basically all levels, although it is not statistically significant at very high levels (almost surely because of the small number of observations at very high levels). This of course says nothing about the causal relationship which, I'm quite certain, runs in both directions.

At the same time, I thought then that anti-austerians were pushing R&R into a corner. I never felt that R&R were austerians, but then folks recently dug up some quotes, maybe out of context maybe not, where Rogoff said he thought that beginning to move towards fiscal balance is the right decision for the U.S. Doesn't necessarily make him an austerian, at least of the "expansionary" sort, but I had updated my beliefs accordingly with no regret (I've got nothing at stake here), only to be reminded -- by Robert Kuttner (of all people) in a positive review of David Graeber's book (of all things) in the New York Review of Books (of all places) -- that Rogoff is totally not an austerian:

Carmen M. Reinhart and Kenneth S. Rogoff, whose 2009 book, This Time Is Different: Eight Centuries of Financial Folly, was reviewed in these pages by Krugman and Robin Wells, are best known for demonstrating that the most severe downturns of the entire economy typically follow financial crashes. In passing, This Time Is Different mentioned a provocative concept, “financial repression.” The idea was that when debt is strangling an economy, it may make sense to hold down interest rates, and let inflation decrease debt, or otherwise constrain financial burdens on families and companies to help the rest of the economy realize its potential. The Federal Reserve, under Ben Bernanke, has kept interest rates exceptionally low, incurring criticism that it is risking inflation. Rogoff, formerly chief economist of the IMF, goes further. He would have the Fed deliberately set as a target an inflation rate of 4 or 5 percent as an open strategy of reducing debt burdens by inflating them away, an idea that horrifies the bond market.

Reinhart, in a subsequent paper co-written in 2011 with M. Belen Sbrancia,5 reviewed the experience between 1945 and 1980, and found that there had been continuing financial repression. Real interest rates (i.e., adjusted for inflation), they calculated, were negative on average for the entire period, helping to “liquidate” public debt, partly because the Federal Reserve had a policy of financing the large expenditures of World War II at low costs. During the same era, tight regulation limited speculation by large financial institutions and other investors, so that cheap credit could flow to the real economy without inviting financial bubbles. The 1933 Glass-Steagall Act, for example, prohibited commercial banks from underwriting or trading securities. Yet despite a controlled bond market whose investors suffered negative returns of -3 to -4 percent, the years between 1945 and 1980 were the era of the greatest boom ever.

These findings defy a core precept of conservative economics, the premise that economic growth requires financial investors to be richly rewarded, an idea disparaged by critics as trickle-down economics. The postwar era, by contrast, was an age of trickle-up. Some creditors lost in the short run, but broadly shared prosperity stimulated private business. Eventually, the rising tide lifted even the yachts.

This is not what the Confidence Fairy moralistas are demanding. It is not the position of the GOP. It's not what Alesina's advocating. It would hurt creditors and benefit debtors. It is the sort of monetary policy that center-left folks have been pushing for years. As Scott Sumner continually points out, using monetary policy to re-inflate the economy is a position that Krugman has advanced repeatedly, both in his academic work and in his punditry.

What's the point of this? The same point I've been trying to make in several other recent posts [1, 2] which I hope to extend in the future: if "austerity" is taken to mean anything at any time other than guns-blazing fiscal Keynesianism then it will ultimately lose its usefulness as a political economy concept and therefore its salience as an object of critique. I fear that this has already started to happen.

But more than anything else, I think the obsession with outing anyone to the right of Krugman as an austerian and therefore worthy of public ridicule of the highest sort is making us lose sight of the actual politics. I get the sense of satisfaction that comes from it, but is it really worth it? Krugman could be right about all the economics, although I'm not at all convinced... the US has been posting normal growth rates while he's been saying we're in the 1930s, but he's definitely got the politics wrong. At the end of the day which one is more important?

On Labor Power and Workers' Rights

Hot off the presses from International Studies Quarterly is this article (ungated version) by Darin Christensen and Eric Wibbels, "Labor Standards, Labor Endowments, and the Evolution of Inequality":

Proponents often recommend high labor standards as a means of reducing inequality between and within countries. Opponents suggest that labor standards exacerbate international and domestic inequalities. In this paper, we forward a simple argument whereby the impact of higher labor standards on domestic inequality depends on a country's labor endowment. We hypothesize that where labor is abundant, higher standards will exacerbate inequality. Where labor is scarce, higher labor standards might lower inequality. In both cases, the impact of labor standards on inequality work through an employment and wage effect. Using newly available data on labor standards around the world from 1981 to 2000, we provide evidence largely consistent with our hypotheses. Higher labor standards do, indeed, exacerbate inequality in labor-abundant economies. On the other hand, higher labor standards lower inequality in labor-scarce economies. We discuss the implications of these findings for work on labor market insiders and outsiders as well as the political economy of development.

Bangladesh is quite abundant in labor. Thus, the expectation is that increasing workplace regulations would worsen inequality.

Regulation Is More Complicated Than You Think

Some of my research involves the regulation of bank capitalization, including the use of risk-weights. One of the things I constantly emphasize is that there are many misconceptions in the academic and policymaking communities about the relationship between banks and regulations. Here, for example, is Per Kuwoski complaining about the international Basel capital accords:

The first fact is that since banks are allowed to hold less capital, and therefore to leverage the risk-adjusted margins more on their capital, and therefore to obtain much higher expected returns on equity when lending to what is perceived as “safe” than when lending to what is perceived as “risky”, current regulations are completely distorting our financial system. 

That has caused banks to create excessive exposures to what was erroneously perceived as risky [ed.: I think he means "safe"], like in AAA rated securities, Greece, real estate, and to refrain from lending to those in the real economy perceived as “risky”, like small businesses and entrepreneurs.

The second fact is that the first fact is not even mentioned, much less discussed.

The point is that prior to the crisis banks were doing what they were supposed to do. The epicenter of the crisis was located in some of the safest categories of financial instruments: OECD sovereign debt and highly-rated securities, both of which were privileged in the risk-weighting scheme under the Basel accords. The crisis didn't occur because of junk bond trading; it occurred in part because everyone (including the banks themselves, apparently) thought banks were acting safely when they were actually concentrating evermore risk at the center of the global financial system. This means that increasing capital requirements under the current regulatory structure is likely to increase the exposure financial institutions have to these types of assets, these types of risk, and thus the sort of crisis that we've just experienced.

Was the risk-weighting system gamed? Of course it was*, particularly by the mid-2000s when the world's demand for "safe" financial assets denominated in dollars massively out-stripped supply. Safe financial assets were defined by the regulatory code, so there was quite a lot of money to be made by creating assets which would be considered safe by regulators and selling them. Was there outright fraud? Some, yes, although it's hard to find solid evidence that this was as pervasive a feature of the financial system prior to the crisis as many assume; it's even harder to demonstrate that fraud led to (or even contributed to) the crisis. It's much easier to see how gaming of the system could have.

But what banks were not doing is "racing to the bottom". That is, they were not bumping up against their minimum regulatory requirements by taking on as much risk as they were legally allowed to do*. Instead, they were piling into "less risky" assets because those were rewarded by the regulatory code. And the more that these types of assets are rewarded (or required) by the regulatory code, the more banks will game the system in increasingly opaque ways. It's what they're being asked to do, after all.

What is to be done? Some, like Kurowski and also Vice-Chairman of the FDIC Thomas Hoenig, want to abandon the risk-weighting system altogether. Their views are represented by new bipartisan legislation which was introduced into Congress by Brown and Vitter last week, which has the support of everyone from community bankers to Simon Johnson. The gist: force banks to fund some percentage of their investments with equity rather than debt, but let them (and their investors and counterparties) determine what assets are risky and what are not. Keep the system simple; the more complicated it gets, and the more beneficial it is to pursue profit through regulatory arbitrage, the more it will be gamed.

But so far the political discussion of this has often reduced to a simple lobbying story: banks don't want to be regulated, and they've got the power, so the regulation will be weak. This is both an incredibly simplistic view of regulatory politics, it is also wrong in at least some cases. Banks don't like some kinds of regulation, it is true, but bank preferences are not homogenous. All regulations have distributional consequences, so some firms will support them while others oppose them. We're seeing that with Dodd-Frank and Brown-Vitter and we've seen it in previous rounds of the Basel accords.

The point is that banks (and other financial firms) have asymmetric interests, and that these interests are conditioned by the regulatory environment. Just making the regulatory environment "tougher" won't necessarily punish large financial institutions (it'll often help them), and may concentrate risk in opaque parts of the financial system. This is arguably the worst possible result. Unfortunately, it may be the most likely under current policy.

*If by "game the system" you mean doing essentially what the regulatory code wanted them to do: invest in sovereign debt and asset-backed securities.

**If you doubt me, I can prove it. Part of the work is forthcoming in peer-reviewed form; other parts will hopefully find a home soon.

WTO Head Update

Recent reports have indicated that the new head of the WTO will hail from the Global South. After the latest round of elimination, the two remaining candidates are Brazil's ambassador to the WTO, Roberto Azevedo, and Mexican economist and former Minister, Herminio Blanco.


Read more here.

Zombie Idea: Creditanstalt Did Not Cause the Depression

Brad DeLong and Barry Eichengreen have written the preface to a new edition of Kindleberger's The World in Depression. It is a very good introduction, except for this part:

Kindleberger’s second key lesson, closely related, is the power of contagion. At the centre of The World in Depression is the 1931 financial crisis, arguably the event that turned an already serious recession into the most severe downturn and economic catastrophe of the 20th century. The 1931 crisis began, as Kindleberger observes, in a relatively minor European financial centre, Vienna, but when left untreated leapfrogged first to Berlin and then, with even graver consequences, to London and New York. This is the 20th century’s most dramatic reminder of quickly how financial crises can metastasise almost instantaneously. In 1931 they spread through a number of different channels. German banks held deposits in Vienna. Merchant banks in London had extended credits to German banks and firms to help finance the country’s foreign trade. In addition to financial links, there were psychological links: as soon as a big bank went down in Vienna, investors, having no way to know for sure, began to fear that similar problems might be lurking in the banking systems of other European countries and the US.

In the same way that problems in a small country, Greece, could threaten the entire European System in 2012, problems in a small country, Austria, could constitute a lethal threat to the entire global financial system in 1931 in the absence of effective action to prevent them from spreading.

I've covered this before, so rather than restate it all I'll just point you to that and mention the gist here. Regarding the first paragraph, Creditanstalt was the largest and most well-connected bank in the Austro-Hungarian empire. Following World War I, it remained one of the most important banks in continental Europe. It was not "relatively minor". More importantly, the Depression was already underway before the Viennese institution went under. The New York Bank of the United States had collapsed several months before along with more than 600 other American institutions. It is just not the case that everything was fine right up until Creditanstalt went under. It is much more likely that the Depression caused the collapse of the Austrian bank and not the other way around.

Why is this important? Because contagion cannot emerge from anywhere. So the ramifications for the present day are not that Greece could destroy the entire European system, as Thomas and I wrote last year in Foreign Policy. The underlying research which motivated that article has now been released in Perspectives on Politics. We were right then, and the same intuition helped us to understand why the Cyprus meltdown was going to remain localized while others were talking about how it could drag down the entire global economy.

This matters because very smart people keep saying that contagion can emerge from anywhere at any time. At the recent International Studies Association annual meeting I heard one of the most prominent scholars in IPE say to a large audience that financial contagion worked like it did in the movie Contagion: anyone can become infected at any time. This was based on no research, just an intuition. Here are some other recent examples (1, 2).

But the intuition is false. This is not how the world works. The fact that the claim keeps being made is evidence that we in the social sciences really do not grasp dynamic complexity well at all. This clearly has major consequences not only for how we view the world, but how we govern it. We need to do better.

Poor Timing: Military Spending and the Business Cycle

First quarter GDP growth figures for the US released yesterday were disappointing, and the Commerce Department pointed to falling military spending as an important contributing factor. This is interesting from a broader perspective. My research on the economic consequences of military buildups indicates that the timing of large changes in military spending bears little relationship to prevailing economic conditions. Military spending rises in response to unexpected foreign military challenges and falls when the threat has diminished. As a consequence, large changes in military spending typically have been pro-cyclical.

Consider the three postwar military buildups since Korea (Vietnam, Carter-Reagan, and War on Terror). In these buildups, defense spending increased by between 25% and 50%, with most of the increase paid for by borrowing, and the deficit-financed buildup persisted for three to four years. The persistent deficits imparted a substantial demand shock, transforming ongoing economic expansions into economic booms.

Similar dynamics might characterize post-conflict demobilizations. Cuts in military spending should weaken macroeconomic activity and there is little reason to expect wars to end just as the economy requires restraining with a counter-cyclical fiscal policy. Military build downs might thus cripple an already limping economy.

We seem to be experiencing just such a pro-cyclical build down currently. Reports yesterday on first quarter growth indicate that reduced military spending--a fall of only 11.5% on an annualized basis--as the US disengages from Afghanistan and Iraq is undermining economic recovery. As the Washington Post reports

That shift in foreign policy is still trickling through the real economy. Compensation for military and civilian employees working in defense have fallen every quarter since 2012. Major contractors such as Lockheed Martin have laid off or bought out hundreds of employees, including top executives, and consolidated facilities in recent years.

Indeed, defense spending cuts (even prior to the impact of sequestration, which kicked in only on March 1) appear to have shaved .6 percent off GDP growth. This appears to be the second consecutive quarter in which large defense cuts have weakened the recovery. The current post-conflict military build down is thus poorly timed from a macroeconomic perspective.

There is a broader point. In the US, the logic of national security overrides the logic of rational macroeconomic management. Variation in US military spending has been driven by the perceived need to respond urgently to foreign challenges regardless of prevailing economic conditions. Because military spending constitutes so large a share of national income, the resulting variation in military spending has substantial macroeconomic consequences. We recognize these consequences at the extremes (e.g., WWII and the end of the Great Depression) and we recognize them when military spending falls. We don't seem to recognize this "military Keynesianism" as a more general phenomenon. We ought to, for national security has been the primary driver of US fiscal policy--and thus a major policy driver of US macroeconomic performance--since 1965. I am puzzled why this is not more broadly recognized.