Sunday, May 16, 2021

Labor market monopsony and Peter Diamond

 These are some no-doubt under-informed thoughts on monopsony  and labor markets that I've had preparatory to teaching the principles course.  In Peter Diamond's first search article, I believe, he briefly discusses a model of  search-friction-induced monopoly that is simple but provocative.  The idea is (I am embellishing here, so this is loose) take a large number of sellers and we'll say an equal number of buyers. Give each buyer a downward-sloping demand and let marginal cost  be constant and identical for each seller.  In a competitive equilibrium, the good sells for marginal cost and each seller serves one buyer. Now add search costs for the buyers--it doesn't matter how big or small.  If we start from the competitive price, each seller now faces a demand which is downward-sloping in the neighborhood of the competitive quantity at prices between MC +search cost and MC-search cost. Each will then raise price to MC + search cost. But this is not an equilibrium, since with all charging MC+ search cost, each has an incentive to raise price to MC + 2*(search cost).  The only symmetric Nash equilibrium has each charging the monopoly price! And the interesting thing is that this is the unique equilibrium for any value of search cost, however small.  

Now when we teach monopsony, we start with a single buyer. The idea that labor markets are monopsonistic in this sense is obviously a non-starter, as your students, some of them anyway, will tell you!  There are many buyers. But then you might mention search costs on the seller side, and show how they give each buyer a "little bit" of monopsony power, if they are small, which they probably are.

But we can do the analogue to the Diamond idea on the buyer side as well -- or so it seems to me, and get an equilibrium, with positive search costs, however small, in which each firm pays the (low) monopsony wage. So even a little bit of search friction can conceivably produce, for each of many firms, a lot of monopsony power -- in fact, as much monopsony power as a single buyer would have!!

Does anyone know if something like this idea has been applied to labor market monopsony? 

The Public Reappearance Of The Israeli-Palestinian Conflict

 Sigh, so much that is so obvious, and so much that is not, but so much that is so sad, especially as there seems to be little real prospect of any serious improvement or settlement on the underlying issues.  Indeed, it is probably the case we did not see anything happen for a good 7 years because from the Palestinian side things looked so hopeless in the face of ongoing Israeli expansion of settlements in the Occupied West Bank and increasing suppression of their rights, with more and more political figures on various sides declaring that the Two-State Solution was dead, so fuggedaboudit. With Bibi Netanyahu managing to get full control of the GOP line on things Israeli, and getting most of what he wanted from this while Trump was president, including a US embassy move to Jerusalem and recognition of the Israeli annexation of the Golan Heights, not to mention the Abraham Accords diplomatic recognitions by UAE, Bahrain, Morocco, and Sudan, all this supposed to "change history," and without Israel giving up anything to the Palestinians for any of these items, the first two of which had long been bargaining chips held by the US government in order to bring about a sustainable and reasonable Two-State settlement.  But no, Bibi could even bring in screaming racists to his government, people the US government used to formally label as "terrorists."  But now, well, history was changed, and the Palestinians were just going to have take what they were given without any whining or complaining, much less any rock-throwing demonstrations or worse.

But it was not to last.  The long simmering efforts by Jewish settlers to have Palestinian families in East Jerusalem evicted from homes the UN put them in during the 1950s because previously Jews lived in, them, not ancestors of those bringing the lawsuits to claim their own personal ownership, but on behalf of "the [Jewish] Community," clearly aggressive rank nonsense. During the recently ended Muslim holy month of Ramadan these efforts brought about demonstrations in front of the Damascus Gate on the north side of the Old City, with Israeli police and other security increasingly violently putting down these rock-throwing demos, and also blocking Muslims from entering the gate to get to the Haram-al-Sharif, the "Sacred Enclosure,"  aka "The Temple Mount," the most hotly contested piece of real estate on the planet, which sits on top of the ruined base of the old Hebrew temple in the southeastern part of the Old City, and which has two sacred Muslim sited on it, the beautiful Dome of the Rock, which contains a rock that the Prophet Muhammed reportedly ascended to heaven for a consultation from, and nearby to it the al-Aqsa mosque, viewed by Muslims as the third most sacred site in their world after the rock in the Kaaba in Mecca and the Temple of the Prophet in Medina. 

It was specifically to the al-Aqsa mosque that worshippers sought to go for evening Ramadan services and were blocked, which led to demos at the mosque as well. A few days before the end of Ramadan, without any really specific provocation (although I am sure various Israeli commentators would say otherwise), Israeli police and security forces entered the mosque, shooting people with rubber bullets and other forms of force, reportedly injuring 330, although not killing anybody. But this assault on the third holiest site in all of Islam set off massive demonstrations around the world and among the Palestinians, not only in Jerusalem and the West Bank, but in Israeli cities themselves, the first time ever for this, and, of course, Hamas in Gaza began firing rockets into Israel, over 100 so far.  Few of these unaimed missiles went further than 3 miles and 90% were taken out by Isrtael's Rocket Dome defense system. But a few longer range ones hit both Jerusalem and Tel Aviv, killing 9 Israelis.  The Israelis have since hit back with massive bombing of Gaza, with the latest reported number dead at 140, 40 of those children.  They have also taken down large buildings, although warning ahead of time so people could get out.  This could be a lot worse, but it is ongoing, with no clear end in sight, although probably Hamas in Gaza will run out of rockets to fire pretty soon.

A question arises as to why Bibi let the police do something so outrageous and stupid as to invade the al-Aqsa mosque late in Ramadan and shoot a bunch of people, and, although perhaps more understandable, why did Hamas in Gaza think it reasonable after this to start firing rockets into Israel, knowing full well from past experience that the Israelis would bomb them severely, killing many innocent Palestinian civilians.

In the case of Bib, this looks like a last-gasp desperate move to hold onto his position as Prime Minister of Israel.  Israeli President Reuvan had shortly before this attack on the mosque invited the main opposition leader, Yair Lapid, to form a new government, after long gridlock and repeated stalemated elections, as well as Netanyahu himself having just failed yet again to form a government at Reuven's invitation.  It turns out that finally after all these decades, the contending possible PMs have begun looking at and negotiating with members of Arab parties in the Israeli Knesset (Yes, this is one difference between apartheid in Israel and South Africa, at least the Arab citizens of Israel can vote). Apparently Bibi tried, but failed to come to an agreement, and other far right wing partied have become disgusted with him (Lapid is only slightly more moderate than Netanyahu). In any case, Lapid had received his invitation, and many thought the moment had arrived for Bibi finally to be out.  But, aha! with this massive blowup within Israel itself between the Arab and Jewish populations, it certainly looks like any coalition government by any Jewish leader with any of the Arab parties is out of the question.  So this imminent threat that Lapid could form a government and remove him looks to be out for now, although who knows what will come down the road. There has been surprisingly little commentary on this precise matter in the media, aside from vague notes that this was in "Netanyahu's political interest," but this is why specifically.

As for Hamas, it is also seen to be in their interest, if not quite so immediately so as it is for Ben-Yamin Netanyahu. Hamas has been in a long conflict with the al-Fatah-led Palestinian Authority in the West Bank, led by the 85-year old Mahmoud Abbas, who has put off another election (which he and his group were expected to lose to Hamas).  Abbas, clearly a spent political force, has long led the PA government that arose from the now-all-but-dead Oslo Accords of 1993.  Unlike Islamist Hamas, secular al-Fatah was willing to recognize and work with Israel on many matters, and still does.  The Israeli government will be sad to see it go, and this is likely to be another fallout of Bibi's attack on the al-Aqsa mosque.

So, the only hope, really, is the Two-State solution.  But it looks to be deader than evet and beyond hope.  The increasing obviousness of this, along with the increasingly outrageous actions by the slef-confident Israeli government, propped up in that by Trump's policies, have triggered this uprising by Palestinians, including the deadly rocket attacks by Hamas, although Hamas looks to gain in the longer run from this by helping to bring down Abbas and al-Fattah and to become the undisputed leader of the Palestinian people with their refusal to recognize Israel and their ongoing demand that it cease to exist.

I note that so far the US seems to have done little useful in all this. Supposedly an unnamed "ambassador" has arrived in Jerusalem to negotiate a cease-fire, but nothing has come of it.  As for public statements, these have sounded almost Trumpish in their one-sided concern for Israelis facing the pathetic rocket attacks coming out of Gaza, without a word about all those being killed in Gaza.  Oh, there was a mild but brief criticism of the attack on the crowd al-Aqsa mosque, but pretty low key, even as many Dems have called for much more support and sympathy for the Palestinians in this.  At a minimum, Bernie Sanders has been completely right to call for ending the annual $4 billion in mostly military aid the US gives Israel.  Surely they do not need it, much less at this point deserve it.

Two odd personal notes on this.

The best man in my first wedding in 1968 is a guy Peter Dorman may have known whom I shall not name, although he is about to have very serious heart surgery and may die.  Back then he was to my political left, and showed up at the rehearsal dinner from the Dem convention Chicago riots with half his hair shaved off and a lot of stitches where a police billy club cracked his skull open. Later he would go through a lot of changes, including a period of being a Sufi, but evrntually went home to Brooklyn, where he became Orthodox Jewish, although, not Chasid/Chared.  He went to Israel where he married an Israeli-Yemeni woman and had 8 children, half now in Brooklyn, half in Israel.  In 1980 we debated the Israeli-Palestinian issue and he declared that the solution was for the Palestinians "in Judea and Samaria" to be expelled.  I did not speak to him at all for a long time after that.  We later reinitiated our friendship, but have largely avoided politics other than to make jokes about each other's highly different views.  I visited him in Jerusalem four years ago this month, and among other things he took me on a tour of King David City.  I could say much more about him. but I shall for now simply hope he gets through is surgery.  His wife is in Israel, but unable to fly to Brooklyn to be with him for the surgery due to the current situation.  He has expressed worry about his family there, and I have said I hope they are not hurt.

Also in my distant past I spent serious time in an Arab nation.  My Arabic was so good back then that I passed for being an Arab.  Some people though I was Syrian (I have also often passed for being Jewish without trying to do so, although I am very WASPy). I back then heard several people say all those terrible things that Israelis claim Arabs think of them: that they should all be killed, that Israel should be pushed into the sea. It is all true. Both sides have been victims; both sides have been guilty guilty guilty.  The obvious solution was and remains the Two-State one, but the assassination of its Israeli organizer, the late Yitzhak Rabin, began the long slide to today where all the supposedly smart people declare the Two-State solution to be dead.  Well, it had better not be dead, because the only alternative is awful endless bloody war.

Barkley Rosser

Saturday, May 15, 2021

Dilke, Chapman, and Dahlberg Pop-ups

Credits: Reuben Walker, animation and music. Tom Walker, concept and design. Charles Wentworth Dilke, Sydney John Chapman, and Arthur Olaus Dahlberg, analysis and inspiration.

Disposable People Reinstated

Today I learned that my EconoSpeak post, "Disposable People" (which has over 2500 views) has been reinstated by Blogger. I never knew it had been removed. If I was a GOP whiner, this would be a prime example of cancel culture in operation. But of course, it's only an artefact of moderation that has to rely on algorithms to identify potential community guidelines violations.


Thursday, May 13, 2021

"Ambivalence" has dropped!


Two things I am especially pleased about that were sort of incidental at the time: 1. The prominence in the title of "ambivalence" -- the future is ambivalent -- and 2. the ending quote by Benjamin of a quote about stereoscopic vision. 

Friday, May 7, 2021

The Death of Dick Day

I learned a few days ago that Richard (Dick) Hollis Day died about a month ago.  There is no obit yet, so I do not have exact dates of birth or death, but communicating with an old mutual friend who knows his oldest son, apparently he succumbed to dementia and related problems that had him declining over the last several years at his home in Cambria, California.  He was born in 1933, but not sure of exact date, so he was either 87 or 88.  

Dick was somebody I think underappreciated by the economics profession who in my view played an important role on several fronts, both intellectually and in other ways. I shall note a prominent one of the latter being that he was he founding editor in 1981 of the Journal of Economic Behavior and Organization (JEBO), with me replacing him in that position in 2001 (lasting until end of 2010).  This "heterodox but respected" journal was very much his creation, and he published many papers that have since become highly respected although unpublishable in top journals back then.  The first in the first issue was one on new institutional economics by Nobelist Oliver Williamson and the second was the paper on mental accounting that was cited by the Nobel Committee when Richard Thaler received the prize.  It is the case that many ideas he championed back then have now become much more respectable, such as new institutional economics and behavioral and experimental economics, especially after the Nobel awards in 2001 and 2002 respectively for George Akerlof and Vernon Smith.

It was also a major outlet for papers on chaos theory, a matter he himself was an early student of in economics, as well as broader complexity economics and other topics still not fully accepted, such as more heterodox approaches to evolutionary economics and econophysics.  Papers on both Marxist economics as well as Austrian economics appeared in the journal.  Dick had a broad perspective and open mind.

His own life and career followed a non--orrthodox path, although he received some serious recognitions over the years.  Born in Iowa in 1933 he got a BS in General Science in 1955 from Iowa State and with an interest in agricultural economics and development economics probably his earlier (he was on the ed board of the Journal of Development Economics for many decades). He attended Harvard from 1955-58, receiving his PhD from there in 1961 on "Recursive Programming Models for Explaining Investment and Technological Change in Agricultural and Industrial Sectors." This was the base for his first of 4 books in 1963, published by North-Holland.

He served in the US Air Force 1958-62, and then was a special consultant for Richard Reuter iduring 1962, who was leading JFK's Food for Peace program.  In many ways his political and world view reflected his identification with a JFK view of the world, Keynesian in macroeconomics, but with a tendency to a pro-military and hawkish view of US foreign policy.  He was also a deep student of existentialism and always enjoyed standing out in most groups as not fully agreeing with anybody and holding to his positions.  This certainly helped him as he forged into uncharted territory in later years.

He was at the University of Wisconsin-Madison, 1963-76, where I first got to know him.  He co-founded the Social Systems Research Institute there with Guy Orcutt, grandfather of recent JB Clark award winner, Emi Nakamura. In 1976 he moved to the University of Southern California, where he remained for the rest of his career, chairing the department for periods of time and also founding and leading for many years its Modeling Research Group.  There he met his second wife, Barbara, who would later be his Managing Editor at JEBO after he got it going.

In terms of ideas, besides recursive programming and simulation analysis, he was interested in disequilibrium models of economic growth.  This led him to publish early papers on chaos theory in economics and other complexity approaches to economics.  It was this interest that drew us together in the 1990s as I published on such matters, and he brought me on board to do various things at JEBO.  He also from an early time disagreed with fully rational models, admiring the bounded rationality/behavioral economics approach of Herbert Simon, who was on board at JEBO at its founding.

Besides that first book, and 9 edited volumes and 180 articles, I shall mention just three others.  One was an edited volume he produced in 1975 out of a conference he organized at the (Army) Mathematics Research Center, which had been bombed in 1970 when my late father directed it, coedited with Ted Groves. This volume, Adaptive Economic Models, Academic Press, contained papers by various economists who would later publish in the area of behavioral models of firm behavior as well as on complexity economics. The others are a two volume series he published in 1994 and 2000 at MIT Press, on Complex Economic Dynamics. These two, especially the first one, remain central to defining modern complexity dynamics, especially its dynamic type.  

I shall close with a curious anecdote.  He visited at many other places over the years, including MIT, Harvard, U. of Paris, Gottingen, U. of Siena, Athens, and the Institute for Advanced Study in Princeton during 1979. It happens that during that year a large conference was held to honor the centennial of the birth of Albert Einstein.  Somehow I learned about it, and while driving from Harrisonburg to New York I stopped by there and just walked into it uninvited, arriving in time for the main event, a debate between Eugene Wigner and John Wheeler about the cosmological implications of black holes.  I saw Dick, the only person there I personally knew, and so stood with him to watch this heavy duty debate, as they had sharply contrasting views.  In any case, that he was there and for that shows the breadth of his interests. I am proud to have worked with him and shall miss him.

Barkley Rosser

Sunday, May 2, 2021

A Recent Correlation Regarding Political "Leadership" And The Coronavirus

 The recent correlation I have noticed, with others commenting on it also, is that some of the most prominent nations with the most rapidly rising rates of coronavirus infections are led by somewhat authoritarian leaders who have recently dismissed the threat of it and engaged in policies that may have encouraged its spread.  The most dramatic examples are India, Brazil, and the Philippines.  

Last year India did not do too badly. It had only one wave, which was pretty well controlled by vigorous lockdown policies that sent many migrant workers from cities to villages. Increasingly authoritarian Indian prime minister, Narendra Modi, he who is imposing Hindutva on the nation and suppressing various dissident voices. This apparent success led to a lot of complacency, with this marked by Modi holding mass rallies prior to upcoming elections, especially a sensitive one in West Bengal where Modi's BJP is trying to take control of the state government.  But now there has been a dramatic outbreak of the coronavirus, setting records for the most infections in a day of any nation, topping 400,000. Reports have it that hospitals are overwhelmed, and Modi is facing serious criticism.

That said, it must be noted that despite the recent surge in India, it remains 88th in the world in accumulated per capita deaths from the coronavirus.  The situation in India could get a lot worse.  At just over 200,000 total deaths it appears to be about to move into third place ahead of Mexico, whose semi-authoritarian and Trump-loving president who appears not to have pursued vigorous policies against the pandemic and which is 17th currently in the world in per capita deaths overall from the coronavirus, although new cases apparently peaked in January and are now declining there.

Brazil is clearly a serious case, with a leader who went even further than his role model Trump in dismissing the pandemic and sneering at scientific solutions.  With 352,000 deaths it is second behind the US in aggregate and 12th in the world in per capita deaths, with a rate of new infections surging at a rate rising as fast as India's. While Brazil remains a democratic nation, Jair Bolsoanaro has mumbled praise of previous military dictatorships, with his sons chiming in on this, and reports that the actual military is split between those who like such talk and might support a coup versus those who wish to support the democratic constitution. Bolsonaro is quite the poster boy for this current correlation.

Another nation with a rapid rise of cases is the Philippines, led by another authoritarian strongman, Duterte, notorious for simply having large numbers of his citizens murdered on accusations involving drug use.  I am less well informed on policies there, but he also seems to fit the bill.

Now it may be that this curious current correlation is simply an ephemerum, a mere coincidence.  Looking at the longer term data it could be argued in fact that there is a positive correlation between democracy and coronavirus deaths.  All of the top 11 nations in the world on this ranking are in Europe, with Brazil at the top of the non-European ones, and the US at 15th place, with its 570,000 total dead.  What has received little media attention is that the top 7 nations in per capita numbers are all former communist-ruled nations in Eastern Europe, although all currently are nominally democratic. But at the top, with 2800/million deaths is increasingly authoritarian Hungary.  It is followed in second place by the Czech Republic and in third place by Bosnia-Herzegovinia.  The top non-former communist state is Belgium in 8th place, with Italy in 10th, and the UK in 11th.   India in 88th place is at 149/million deaths, although that is clearly rising.

So this current curious correlation certainly does not seem to tell the full story, although in a world where many are now getting vaccinated, and quite a few nations that suffered preciously seem to be beginning to get the pandemic under control, it is indeed curious that the nations leading to the world setting new records for new cases seem to be led by people who have dismissed the danger and been careless in their policies, along with exhibiting egomaniacal hunger for power.

Barkley Rosser

Saturday, May 1, 2021

So Much For May Day

 Today is May Day. An ancient point of the Gaelic calendar marking spring, it was long marked by pagan fertility celebrations and rites, dancing around May poles and the like, with many variations on this in different countries. The day became associated with the worker's movement in 1886 when in Chicago a movement for the 8-hour work day involved many demonstrations and strikes and ultimately a riot in Haymarket Square in Chicago that culminated in a bombing and a massacre (with both police and workers killed), followed by trials and executions of various anarchists and activists. The actual date if the massacre was on May 4, but May1 became associated with the event, and it spread to become the leading International Worker's Day, despite competition from rivals such as Labor Day in September in the US.  Ironically both of them were started by socialists and in the US, but somehow in the US Labor Day came to be favored by more conservative interests and was made the legal holiday, with May Day the day celebrated by socialists in other parts of the world.

In the former Soviet Union May Day was one of the major holidays of the year, one of three on which there were major parades and activities in Red Square in Moscow during the period of rule by the Communist Party, the others being November 7 to celebrate the Great October Socialist Revolution (it was October 25 in the old Julian calendar, still followed by the Russian Orthodox Church), and May 9, Victory Day in memory of the victory of Germany in World War II.  Of course, Victory Day, following over a week of vacations following May 1, featured parading displays of military people and equipment, which also would show up, along with lots of party officials on November 7. However, perhaps recalling its old pagan celebratory past, the May Day celebrations in Red Square features athletes and youth groups.  It was an uplifting celebration, more of a party.

Well, since the end of the Soviet Union things have changed. Victory Day continues to be celebrated, with indeed Vladimir Putin playing it up in recent years, making a bigger and bigger deal of it in his appeal to a militaristic nationalism, with ever larger military parades.  As for November 7, in 2005 it was removed as a holiday, but November 4 was recognized as Unity Day, which has sort of replaced November 7, although without Red Square celebrations. It was in fact a pre-Soviet holiday that celebrated a victory of the Poles and Lithuanians in 1612.

But May Day was also dropped as a holiday, although people still basically take off work from it until the still hugely celebrated May 9 Victory Day.  This year, Sunday May 2 happens to be the Russian Orthodox Easter, given by the still followed Julian calendar.  And also this year Putin has been making a big deal about it, getting lots of publicity for going to church and hanging around with its leaders, presumably to distract people from the uprisings and opposition to his rule that have been happening.  But the old May Day is gone in Russia, only quietly noticed by the remnant Communist Party..

Barkley Rosser

Monday, April 26, 2021

Robert Mundell And Supply Side Economics

 The death of Nobel Prize winner Robert A. Mundell at age 88 has brought forth much discussion about his work and legacy.  Most of this discussion, such as several columns by Paul Krugman, have commented favorably on the work for which he was officially given the prize, several papers he wrote in the late 1950s and early 1960s while he was at the IMF.  These papers, drawing on the experience of his native Canada at the time as a nation with a floating exchange rate and open to capital flows with the neighboring and domineering US at a time when most major economies had fixed exchange rates, laid the foundation for the now textbook Mundell-Fleming model of international open macroeconomics, A crucial insight now universally accepted was of the "impossible trinity" that a nation cannot simultaneously have a fixed exchange rate, and independent monetary policy, and open capital flows. This certainly drew on Canada's experience and explained why it went against the rest of the world to have floating exchange rates.

He also wrote presciently on optimal currency areas, also thinking about the curious dispersion of Canada'a population across contrasting geographical zones while mostly being very close to the US border. He emphsized the importance of free factor flows within an optimal currency area. His writings on this led him to be called "the father of the euro" and curiously he advocated a global currency based on a combination of the US dollar, euro, and Japanese yen.  He also called for the Chinese yuan/rmb to be included in the IMF SDR, which came to pass.  Various people have noted that he may have been overoptimistic about the euro simply based on his own analysis of what is involved in such areas.

However, the item in his history that most have said not much about, although he was reportedly proud of it up to the end, is his role as "guru" of supply side economics. This is a doctrine that is not viewed nearly as favorably by most economists as these other ideas, especially the Mundell-Fleming model.  Indeed, parts of it are viewed as ridiculous by most, notably the repeated forecasts by Arthur Laffer and some others every time we have seen a GOP president or governor cut taxes that this would lead to an increase in revenues so that "the tax cut will pay for itself." From the 1981 tax cut of Ronald Reagan through the 2017 Trump tax cut, none of these delivered this outcome, with several states such as Kansas and Oklahoma suffering severe crises given their balanced budget rules requiring them to cut spending in the face of declining revenues after tax cuts. And Laffer has long claimed that Mundell was his inspiration.

Now as near as I can tell Mundell never participated in any of these specific forecasts that did not pan out.  What he seems to have done is lay out the "possibility" that if tax rates are high enough cutting them will raise revenues.  And it seems that he was the one who first posed this idea to Laffer when they were together at the University of Chicago in the early 1970s.  This would make him the father of the Laffer Curve, and indeed when the curve first made a public appearance in a Spring 1975 The Public Interest by Jude Wanniski labeled the argument the "Mundell-Laffer hypothesis."

Former adviser of Jack Kemp and Ronald Reagan, now a non-Republican, Bruce Bartlett, has posted an account of Mundell's ideas on this and how they developed since Mundell died, . 

Bartlett, who recognizes that some of Mundell's optimism and enthusiasm about the ability of tax cuts to stimulate expansion of aggregate supply has not been supported by more recent events, does think that his arguments held for the initial 1981 Reaganomics, which Bartlett was part of supporting and implementing after working for Rep. Jack Kemp, who was also a fan of supply side economics, which had been heavily publicized by Jude Wanniski in columns in the Wall Street Journal after meeting Mundell at an anti-inflation conference in Washington in May, 1974 that had been organized by Laffer and former Milton Friedman acolyte, David Meiselman.  Mundell's main recommendation was to combine tight monetary policy to combat inflation with tax cuts to offset the contractionary effects of that by stimulating aggregate supply, apparently ignoring the demand-side effects of such tax cuts.  This would be what Reagan would do early in his term, although on the monetary policy side he was inheriting the tight monetary policy started under Carter by Paul Volcker.  But Bartlett praises all that and is proud of his involvement with it and credits Mundell as the man ultimately behind it.  Apparently Mundell first proposed this policy combination in "The Dollar and the Policy Mix: 1971" Princeton University International Finance Discussion Paper #85, May 1971, which never appeared in a journal.

Which brings us to the matter of Mundell and the Laffer Curve. Apparently he got the idea from reading a paper that he got published in the Journal of Political Economcy in 1971 just before he stopped editing that journal, "Ibn Khaldun: A Fourteenth Century Economist," Jean David C. Boulakia, JPE, 1971, 79, 1105-1118. Ibn Khaldun was a historian, geographer, and economist in whose main work, al Muqaddimah, appeared the following line that appeared in this English translation from the Arabic in the JPE paper:

"It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty taxation yields a small revenue from large assessments."

According to Bartlett Mundell made Laffer aware of this argument and then also Wanniski.  Supposedly Reagan read an article in the WSJ in 1978 that Wanniski had put in that quoted this item from Ibn Khaldun, and again according to Bartlett Reagan would quote Ibn Khaldun 10 times during his presidency.  Again, while Laffer went out on a limb, and had done so repeatedly since despite repeated failures of them to come to pass, to forecast that tax cut after tax cut would increase revenues, I am unaware of Mundell having made the mistake to do so as well.

I would note that we have seen some limited examples of tax cuts leading to revenue increases.  Most discussion of the Laffer Curve has implicitly involved average tax rates, and recent studies have suggested that among the major high income nations the average tax rate that would maximize tax revenues might be around 70 percent, we have seen marginal tax rates higher than that.  There has been evidence that revenues raised from top income individuals may have risen when those rates were lowered.

I also note the peculiar case of Russia in the 1990s and the beginning of of the 2000s.  The standard Laffer Curve argument has been that one gets zero revenues at 0 percent and 100 percent.  But in certain locations in Russia in the 90s there were effective marginal tax rates when one added local to higher level taxes exceeding 100 percent. But in fact there were positive revenues collected.  In the real world things are more complicated, and people end up paying bribes not to pay their full taxes, not to mention some people actually paying 100 percent or more on certain parts of their income while making that up in other ways.  As it was this was a period when much of the Russian economy went into a barter mode, especially after the 1997 financial crisis.  It was a supply side success, and one of the few wise things that Vladimir Putin has done, that not long after he came to power in 2000 he simplified the tax code and imposed a flat rate of 20 percent.  Indeed this led to an increase in tax revenues. 

Barkley Rosser

Wednesday, April 21, 2021

Bellwether Bullard versus Sirenic Summers

 So this is about the now getting to be passe topic of what will happen to inflation this year, with Larry Summers having gone out of his way to make a lot of noise in criticizing the expansionary fiscal policy partly passed but partly still under consideration in Congress as threatening a possible outbreak of 60s-70s style inflation at an entrenched much higher rate than we are seeing now.  He has put the probability of that at about a third, but considers this to be high enough to call for the Biden fiscal policy to be cut back in order to avoid that one third chance of a serious increase in the rate of entrenched inflation.

This forecast has not been accepted by the leading economic policymakers, notably Treasury Secretary Janet Yellen and Fed Chair Jerome Powell, as well as the various lesser lights at the CEA and elsewhere in the Biden administration.  Their official line is that it looks like we shall see an increase in the rate of inflation, and the latest monthly report does have it over 2 percent now, but with this likely to come back down later in the year or by early next year. This is seen to be due to much of the uptick aggravated by supply issues related to pandemic, especially in global shipping, although also with some specific sectors hitting bottlenecks, with all this crashing against rising demand with GDP growth projected at over 6 percent for the year.  But they see the supply issues becoming resolved with the fading of the pandemic and there not being mechanisms in place to entrench the higher rate of inflation, with those at the Fed even hoping that inflation expectations might end up "centered around the 2 percent target rate," which the Fed has not been able to get to on a sustained basis.

The originator of this argument is James (Jim) B. Bullard, President of the St. Louis Fed since 2008.  While he is not well known by the public, he has been since roughly 2011 viewed by people at Bloomberg and elsewhere as being "the bellwether" of views and policy at the Fed.  He was the first in late 2009 to call for using quantitative easing to maintain a solid expansionary course to avoid the US falling into deflation.  In 2016 he became the first major figure at the Fed to argue that they should think in terms of multiple equilibria possible paths, an idea coming out of nonlinear dynamical growth theory.  In February of last year he became the first at the Fed to call for aggressively expansionary monetary policy to deal with the upcoming economic collapse due to the pandemic. That had not happened yet, indeed the pandemic was just getting going, but in fact the Fed followed his advice and in retrospect it is clear he really called it at the crucial moment.  A slower or smaller reaction by the Fed could have led to a much deeper and longer economic downturn than we saw in the US.  So his forecast on this year's inflation path is taken very seriously, and I take it serously.  He has more credibility than does Summers with his siren call for cutting back fiscal expansion, with Bullard for staying the monetary policy course with an expansionary fiscal policy.

It was not at all obvious that he would be the person making some of these forecasts and arguments.  He arrived at the Research Division of the St. Louis Fed in 1990 after getting an econ PhD at Indiana University. At the time the St. Louis Fed had a well-deserved reputation as the hardest line classically monetarist of all the regional Fed banks. This was the stronghold of the most faithful of Milton Friedman acolytes in the entire Fed system, and initially Jim went along with it mostly.  Even now it remains a bastion of the most immediate successor of that view in the "new monetarist" school of thought led by people like David Andolfatto who is there. Jim worked his way up to become the Director of the Research Division and the VP in terms of policy prior to becoming president in 2008.

I confess that I have known him for over 20 years, first meeting him at a conference on nonlinear dynamics back in the late 90s.  He was publishing papers on chaotic dynamics in macroeconomies in the Journal of Economic Theory at the time, among other things, not the usual St. Louis Fed stuff.  I found him most interesting and open minded. He was still a rising grunt in the research shop then. He would become a coeditor of the Journal of Economic Dynamics and Control, where he is still on the board, a journal where models of multiple equilibria growth paths would get published regularly, so that when he pulled this stuff out in 2016 for serious policy consideration he was applying serious research onto policy. 

That is sort of funny because about ten years ago I heard him give a plenary talk at a computational economics conference in which he spent a lot of time talking about the conflict between the "front room" (policymakers) and the "back room" (researchers) at Fed and other central banks. Obviously as someone who had moved from one to the other (and several other regional Fed bank presidents have followed this path) he was certainly well positioned to observe this. I note this was not long after the financial crashes and the Great Recession and also when he first argued for using quantitative easing. He made some quite disparaging remarks about the unreality of some of the models being taken seriously in the back rooms, even as he clearly supported vigorous back room research.  

But in the end he seems to have been able to figure out what may be useful from those back room research activities as well as showing an ability to move on from old ideas no longer so useful such as the classical monetarism that dominated the place he now runs when he first got there. 

Barkley Rosser

Tuesday, April 20, 2021

Where's The Beef?

 Well, as we increasingly understand how environmentally damaging producing beef is, quite aside from lots of other issues, the proper issue should probably be, "nowhere."  But back in the early 1980s a fast food outlet, Wendy's (I originally said Arby's) ran an ad with this line that indicated that the beef was at their outlet while their competitors just did not have the real beef, what all potential customers really wanted.  Wendy's has never been all super successful although somewhat so, but many considered this to be an effective ad that appealed to lots of people.

So during the campaign for the Democratic nomination for president in 1984 when "New Democrat" Gary Hart took the lead in polls with his appeal to high tech and a certain sleek cool, his chief rival Walter Mondale threw this ad line at him regarding what he considered to be the superficial nature of Hart's positions and appeal, "Where's the beef?"  It was viewed as an appeal to working class Dems and labor unions not likely to gain from the high tech oriented policies pushed by Hart. His remark made a splash and seems to have slowed Hart's momentum and helped Mondale's campaign, who would eventually get the nomination, although what finally did Hart in for sure was a sex scandal that erupted around him.  In any case, while I have seen some sneer now upon his death at Mondale's use of this ad line, it may well have symbolized that Mondale did have a depth Hart did not.  Of course, many dismiss Mondale because he went down to massive defeat in the election against Reagan, taking only DC and his home stare of Minnesota.  But in that year following the highest rate of GDP growth we have seen since in the US no Dem was going to defeat Reagan's "Morning in America" campaign.  Mondale ran a noble but hopeless campaign.

Anyway, this honorable progressive politician has now died at age 93.  We have not heard all that much out of him since his 1984 loss, but he had an admirable record.  Minnesota produced several highly progressive politicians, including Hubert Humphrey and Paul Wellstone.  But Walter Mondale was part of that tradition.  Humphrey was the one who talked the Democratic Party in 1948 to adopt its first pro-civil rights plank at its convention, a plank that led Strom Thurmond, who would later become a Republican, to walk out of the convention and run as an independent "Dixiecrat."  It is not widely known or remembered that Mondale, who also served as US senator, was the main author of the Fair Housing Act, an appropriate successor to Humphrey's efforts.

Another important thing he did that we now take for granted, although it was ultimately the doing of Jimmy Carter, but Walter Mondale was apparently the first US vice president to be actively and regularly involved in the day to day governing of the United States, which indeed was due to Carter inviting him to do that and supporting him in doing so.  Now we have since seen a case where a VP got out of control, namely Dick Cheney on foreign and intel policy under George W. Bush.  But I must say that in general I think this is better if just for making any VP more prepared to be president if the president dies in office. Prior to Mondale all vice presidents had been pushed aside to attend funerals and inaugurate ships, if even that much.  FDR's first VP, John Nance Garner, famously remarked that the vice presidency was "not worth a bucket of warm spit," although it is alleged that last word was one not quite as polite.  And that was how it had always been.  The now late Walter Mondale changed that.

Barkley Rosser

Sunday, April 18, 2021

The Eternal Sunshine of Spotless Politics

 Protesters trashed windows at the Oregon State Historical Society and left this graffiti: 

Credit: Willamette Weekly

Thursday, April 15, 2021

Keeping Fingers Crossed As US Commits To Removing Military From Afghanistan

 Yes, President Biden has bitten the bullet to remove US troops from Afghanistan by the 20th anniversary of the 9/11 attack that triggered our initial entry into that nation for our longest war.  Of course, we shall not quite be fully out as not only will there still be some Marines guarding the embassy in Kabul, but probably covert CIA forces will continue to operate and drone bombing will probably continue and possibly even continue the expansion that has been going on for some time, with over 7000 bombs dropped on the nation by the US in 2019 according to Juan Cole.  But, hey, still looking good.

Needless to say many are upset and whining and worrying.  David Ignatius in WaPo worries that the Taliban will take Kabul after a bloody war and allow al Qaeda or ISIS to establish themselves there, saying that the worst thing would be for the US to have to go back in again after having left the way we went back into Iraq after ISIS grabbed lots of territory after we left there.  But Biden has been through these discussions and decisions and was long reported to want out from Afghanistan way back when Obama was increasing troop levels up to about 100,000, with them now down to just a few thousand.  Most of the withdrawing has already happened, and with Trump having promised a May 1 withdrawal an effort to go back on that with lots of conditions would probably trigger an upsurge of Taliban attacks on US troops, making a mess of things.

Of course it is quite possible, maybe even likely, that this will lead to a full Taliban victory down the road, which will be awful for the women of Afghanistan at a minimum.  But Juan Cole argues that maybe the danger of all sorts of terror groups setting up shop there in that case may be overblown.  Apparently the Taliban did not approve of bin Laden's original 9/11 operation and have been not at all friendly to ISIS.  They might well keep those groups under more control than when they ran the country before. And Cole also notes that al Qaeda has substantial presence in places like Yemen and Syria without this leading to them organizing 9/11 style attacks on the US.  Even if they get a base in Afghanistan, such would likely be smaller and weaker than these, and in Syria the US has effectively allied itself with al Qaeda allies.

Another point Cole makes is that the chances for this to lead to a stable and peaceful outcome in which the economy and people of Afghanistan can get into better shape would be helped if immediate neighbors would imitate Britain and Russia in the late 19th century and early 20th when they put a stop to their Great Game and effectively declared Afghanistan to be a neutral zone.  Now the nations that should do it are India and Pakistan, with each backing different groups in Afghanistan. Cole suggests that maybe China can play a role in encouraging them, at least Pakistan to make such a move, with the presence of Uighurs in some of the Afghan groups possibly providing an incentive for them to do so, and with major Belt and Road Initiative money in Pakistan, China might even have the clout.  I suspect Cole is reaching for windmills on this matter, but it certainly would be a good thing if this US withdrawal were to be followed by such an agreement by outsiders to leave Afghanistan alone. Maybe peace might really come to this much troubled and fought-over land.

Barkley Rosser

Sunday, April 11, 2021

Congress Steadily Degenerating

 I doubt this will surprise anybody, aside from those who might have hoped that Dems retaking formal control of both houses of Congress, if by narrow margins (with that margin shrinking in the House due to the 2020 election).  But I have a more direct source for this conclusion.

I received a visit today from niece and her family at our house about two hours southwest of Washington.  She is Erica Werner, a longtime reporter for the Washington Post who has covered economics issues that Congress deals with.  She has been high enough up at WaPo that when some of the major budget issues were being debated and passed, she was the lead author of the top front page story for several days in a row there.  She also covered the passage of the ACE at Congress back when that happened.  Anyway, she has been reporting on Congress for quite a few years and knows the people there inside out and really up close.

So she was visiting us because she is moving from Washington this coming Thursday, April 15, and was basically saying good-bye as well as having her young daughters see some family stuff we have.  She is moving to Pasadena where now widowed dad lives and where she lived when young. Will report for WaPo on various west coast things.  A major reason for the move involves family health issues I shall not get into here, but a loudly and publicly stated reason for the move is that she has declared she is "sick of Washington."

So during this visit I questioned her more closely on this.  One thing that really upset her was the attack on the Capitol on Jan. 6. She was fortunately not there when it happened, but apparently several of her colleagues who were there were severely traumatized, something that has not been reported on publicly, although we have heard about some members of Congress and especially their staffs that were.

But she admitted one more factor that has been building up. She has become disgusted with Congress itself, that it is getting worse and worse, just steadily degenerating.  Her bottom line: every time a member leaves they are replaced by somebody worse, and these new ones have been getting really bad.

So there it is, from somebody who really knows Congress up close.  It is degenerating to the point she wants nothing to do with it anymore and is leaving town.

Barkley Rosser

Saturday, April 10, 2021

Of Battenbergs, Brexit, and Brogues

 So, Philip Mountbatten, born Philip Schleswig-Holstein-Sonderbutg-Glucksburg, Duke of Edinburgh, Prince Consort of the United Kingdom, and many other titles, died peacefully at age 99 on April 9 about 2 months shy of making it to 100.  I am not going to either praise him or poke at him, with his long history that contains many things on both sides of that open to judgment.  Certainly he was part of a colonialist monarchy, but them most of its empire broke up and went away during the period he was in his position in the British monarchy.  I am more interested in some related items, noting initially that all sorts of people will be making lots of silly tings out of this ,starting with Brian Kilmeade of Fox News who somehow has decided that it is all the fault of Harry and Meghan having their interview with Oprah Winfrey. Not.

I do not think it triggered his death, which seems to have been coming for some time and almost happened during his recent long stay in the hospital.  But I am noting the odd coincidence that the day before he died saw the worst outbreak of violence in Northern Ireland in decades, possible since the famous Easter Peace agreement came about, which led to a long largely peaceful period between the two sharply split communities in Northern Ireland.  What is sad to me is that I especially saw this coming as an outcome of Brexit since visiting Belfast four years ago, taking a train from Dublin to there and back, no notice of crossing the border at all either way.  We took a tour around the formerly "troubled" neighborhoods, now troubled again.  One does not hear much about them, especially given how quiet they have been for so long. But there are still high walls in places with unpleasant graffiti on them and numerous signs that the people on each side of those walls really do not like each other much and have sharply conflicting memories about what happened back then, even as all then were saying they supported the peace agreement.

An important part of that peace was that UK was in the European Union, which made it easy to have the essentially open border with the Republic of Ireland to the south while remaining part of the United Kingdom, the essential compromise underlying the peace, even as some on each side would prefer different outcomes or situations. It was clear as the negotiations with EU on Brexit proceeded that the Irish question was one of the hardest issues to deal with, and the compromise made has now led to unhappiness and renewed conflict between the communities, with teenagers on both sides engaging in conflict, although it seems to have started with Protestant Unionist ones unhappy with the creeping economic border between Northern Ireland and the rest of UK on the island of Britain in place to keep the border with Ireland open as it has been.  They see this as creeping towards unification with the Republic of Ireland, which has become more likely as the population balance has become more even in Ulster where in the past the Protestant Unionists easily outnumbered the Irish republicans.  It looks like the fears I and others had that Brexit could lead to the end of the peace agreement were unfortunately very well founded.

As for the Battenberg link, well that was what the Mountbattens were called in England prior to World War I, when their blatantly German name came to be an embarrassment, so given that "berg" in Germans means "mountain," changing the name to Mountbatten, with this accruing to Phillip's influential uncle, lord "Dickie" Mountbatten, of whom Prince Charles was reportedly very close to.  Lord Mountbatten was a high commander in the UK navy in WW II and helped arrange the marriage of his nephew to then Princess Elizabeth, who reportedly fell hard for him when they met in 1939. He took the name of his uncle when he became a British citizen on marrying her in 1947.

Anyway, Lord Mountbatten has an estate on the coast of Ireland.  He would be killed along with several other people in 1979 when he was on a yacht off his estate with them in a bomb attack by the IRA, probably their most famous and notorious such bomb attack.  The peace agreement had put all that sort of thing in the past.  But now we may be heading back to such things.  It is indeed ironic that this reappearance of the violence that killed his uncle reappeared on the day before Prince Philip died.

Barkley Rosser