Thursday, April 17, 2014

J. M. Keynes Vanishes into the Swamp

Keynes' fixation on the labour theory of value:
"It is much preferable to speak of capital as having a yield over the course of its life in excess of its original cost, than as being productive. For the only reason why an asset offers a prospect of yielding during its life services having an aggregate value greater than its initial supply price is because it is scarce; and it is kept scarce because of the competition of the rate of interest on money. If capital becomes less scarce, the excess yield will diminish, without its having become less productive — at least in the physical sense. 
"I sympathise, therefore, with the pre-classical doctrine that everything is produced by labour, aided by what used to be called art and is now called technique, by natural resources which are free or cost a rent according to their scarcity or abundance, and by the results of past labour, embodied in assets, which also command a price according to their scarcity or abundance. It is preferable to regard labour, including, of course, the personal services of the entrepreneur and his assistants, as the sole factor of production, operating in a given environment of technique, natural resources, capital equipment and effective demand. This partly explains why we have been able to take the unit of labour as the sole physical unit which we require in our economic system, apart from units of money and of time."

Who Owns Unowned Land?

In Nevada, rancher Cliven Bundy thinks that the state of Nevada does, but whether it does or not, he thinks that effectively he can use it if he wants to without paying anybody any fees to do so, although I gather he thinks this because he thinks that his grandfather was given some right to use it in perpetuity back in the 1880s, that is, the federal Bureau of Land Management (BLM) land he has been grazing his cattle on for the last 20 years or so without paying required fees, now piled up to about $1 million or so that he has not paid.  So when his cattle were corralled by the BLM for Bundy's non-payment of said fees, a bunch of his armed friends went and successfully demanded that the BLM release his corralled cattle, which the BLM did, afraid of any violence that might ensue.  So, even though all the other cattle ranchers in Nevada who use BLM lands are paying their fees, Bundy does not.  Does he have any basis for his claims?

No.  But why is that?

The problem is that he and many others, including the followers of the 1970s-80s "Sagebrush Rebellion," are under the impression that somehow unowned land belongs to the states, and that at some point the federal government simply took all that land from the state of Nevada without paying for it.  Needless to say, what is owned by the federal government in Nevada is well over 80% of the land there, so this is nontrivial there, with only Alaska having a higher such percentage.  Of course, the Sagebrush Rebellion, and now Bundy and his friends, have gone further and simply asserted that the federal government has no right to own any of that land, indeed that the federal government "does not exist," (or maybe "should not") although some of the Sagebrush Rebellion crowd went further and agreed with the old Posse Comitatus group that held that the same holds for the state governments also.  For the old Posse Comitatus, the highest level of legitimate government in the US is actually the counties, hence "posse" for those who work with a county sheriff (when I worked for the State of Wisconsin Department of Natural Resources in the 1970s, Posse Comitatus members would make "citizens arrests" of DNR officials attempting to enforce fishing restrictions in state-owned lakes on them).  I gather that Bundy has so far not made that argument, although at times he seems to have suggested that the land he grazes his cattle on belongs to Clark County, where Las Vegas is, and one of his more vociferous followers is a retired sheriff, maybe an old Sagebrush Rebel, the guy who was supposedly going to put his family members in front of the group as "shields" against the supposedly illegitimate BLM agents.

Indeed, the ultimate problem here is pretty murky, but for better or for worse legally speaking, outside the original 13 colonies unowned land, that which has never been legally owned by any private party in the past, belongs to the federal government.  Within the original 13 colonies, it is indeed the states that own never-privately-owned, or "unowned" land.  Why that should be is a matter of how long the entity has existed that initially owned the land, and as the original 13 colonies existed before the United States did, that this is why it is that the states succeeding those colonies are the owners of unowned land in those original 13 colonies, in contrast with the rest of the country.  The claim that these colonies or states owned it rather than the native Indian tribes ultimately comes down to some sort of claim that the tribes never legally organized themselves to "own" it, and that the Crown of England had the right to grant it to the colonies instead.

Thus, outside the original 13 colonies, where one finds land that was owned previously by private parties with that ownership originally established by another European nation besides Britain or the US, then the laws of that other nation determine the land tenure property rights system that underlies  that property, with the notable exception again of American Indian tribes, this reflecting the ultimate fundamental land grab of North America, with the tribal reservations granted to them specifically by the US federal government subsequently on case-by-case basis (although in some special cases such reservations or grants were made by colonies/states, most notably in Virginia where the tribes remain unrecognized by the US federal government, and certain tribes give the VA governor turkeys and other game on Thanksgiving to satisfy a 1680s era treaty between themselves and the governors of Virginia).  It is only European nations and their legal land tenure systems that count.

So, there is land in Wisconsin that is legally governed by French land tenure laws, mostly along the Wisconsin River near Green Bay, where the Fox River dumps into Lake Michigan, and also near Prairie du Chien, where the Wisconsin River dumps into the Mississippi. Such land is organized in long strips that front on the rivers, in contrast with the checkerboard pattern established by the US Northwest Territory laws in 1787.  Such land tenure laws also hold for underground land tenure rights near St. Louis, and also for most land in Louisiana. Likewise, in New Mexico there is land that has been passed down through private owners since prior to the 1848 Mexican War that is held according to old Mexican land tenure laws that descended from Spanish land tenure laws based on the 1390 Alfonsin Code of Spain, later replaced by the Napoleonic Code, but only after Mexico and most of Latin America gained independence from Spain, one of those minor problems with the original "Legal Origins" paper in the QJE by Glaeser and Shleifer that has been cited up the wazoo but that is simply crawling with such historical mistakes.

In any case, this matter of the 1848 transfer from Mexico to the US is what is at issue in Nevada where Mr. Bundy has been making his claims.  When that happened, unowned land fell into the hands of the US government without having to be bought or otherwise transferred from a county or state government.  The Homestead Act under Lincoln in the early 1860s and subsequent ones laid down how private individuals could turn such land into their privately owned property by working such land for sufficient periods of time in certain ways, but over 80% of land in Nevada was so crummy that nobody ever did so, including the sections that supposedly Bundy's grandfather grazed cattle on at times.  So it remained and remains federally owned, even if somehow Bundy thinks that his grandfather ought to have been given title to it, although that is not precisely his claim, which amounts to a muddle between he ought to have usufruct rights and that it is or should be owned by the state of Nevada, or maybe by Clark County, and if so, they would grant him those usufruct rights to graze without paying any fees.  But none of that is true and has been repeatedly ruled as such by the courts.

I note a peculiar example of this matter of unowned land in Virginia, where many years ago I worked briefly on land use management for the George Washington National Forest here in VA.  So, there is an agreement between the US Forest Service and the Commonwealth of Virginia regarding unowned land within the boundaries established for the George Washington Forest regarding such land within those boundaries.  It is that if the Forest Service bears the transactions costs of establishing what the precise boundaries of any such land are and that the land is indeed truly unowned, then the state will transfer its ownership of that otherwise unowned land to the US Forest Service.  I am not sure about now, but as of 30 years ago there was somebody in the office of the George Washington National Forest HQ part of whose job was to do this with this leading to about two pieces of land per year being so transferred, most of these rather small, a few acres, but also mostly odd bits of forest back in the mountains that most people around it probably thought was owned by somebody privately.  But, in fact, by whatever historical fluke, the pieces never did come to be owned by any non-Indian private parties and thus was owned by the Commonwealth of Virginia.

In any case, Cliven Bundy does not have a legal leg to stand on, and the various politicians and commentators jumping up and down and screaming on his behalf should just cut it out.

Barkley Rosser

Wednesday, April 16, 2014

Ants at the Piketty Picnic: What's Wrong with "Inequality"?

"For entirely innocent reasons, the preferences and talents of people will not always produce equality of results. The egalitarian tendency is then to coerce equality of result by law." -- Robert Bork 
Captain Renault: "I'm shocked, shocked to find that gambling is going on in here!"
Croupier: "Your winnings, sir."
Captain Renault:"Oh, thank you very much."
So what's wrong with inequality, anyway? According to conservatives like Bork, inequality is the innocent outcome of innate differences in "preferences and talents." Doing away with inequality would not only be inefficient but would require the exercise of coercion.

Liberals, meanwhile are shocked, shocked to find so much inequality going on in this day and age. Obviously there is a need for a bi-partisan effort to tone down the inequality a bit without too much coercion. Oh, thank you very much.

So what's wrong with inequality? For anybody paying attention, Judge Bork let the cat out of the bag. Inequality is coercive (but don't tell anyone!). That's why conservatives attack equality as coercive.

The move incorporates several tactics associated with Karl Rove: take the offensive, attack your opponents' strengths and steal their thunder by accusing them first of what they might effectively use against you. Libertarians and conservatives have made it their business to "own" the coercion claim and thus deflect its sting. Liberals aid and abet them by conceding a whimsical "efficiency/equity trade-off" and by running interference against normative encroachments on allegedly positive economic methodology.

Why do people want to get rich? Sure, they want nice stuff, but more fundamentally they want to be freed from the coercive everyday insecurity of being poor. How do the wealthy stay rich and get even richer? They use the political power that their wealth accords to keep the game rigged in their favor.

These are not state secrets. Nor are they facts disclosed in data reported by the BLS or the IRS. Just common knowledge -- common sense that doesn't count for beans in the marginal productivity analysis. Inequality is a positive fact; coercion is a normative claim. So let's all talk about inequality as if it has nothing to do with coercion. Let's not talk about the elephant in the room. What elephant?

So what's wrong with "inequality"? Framing the debate to be about "inequality" misses the point that the real problem is coercion. If the inequality conversation leaves the coercion question up for grabs, you can be damn sure the right will seize it and run with it. Loser liberals then will have yet another opportunity to be shocked, shocked that so much inequality is going on.
"Wealth, as Mr. Hobbes says, is power…. The power which that possession immediately and directly conveys to him, is the power of purchasing; a certain command over all the labour, or over all the produce of labour, which is then in the market."  -- Adam Smith, Wealth of Nations
"The distribution of income, to repeat, depends on the relative power of coercion which the different members of the community can exert against one another. Income is the price paid for not using one's coercive weapons. One of these weapons consists of the power to withhold one's labor. Another is the power to consume all that can be bought with one's lawful income instead of investing part of it. Another is the power to call on the government to lock up certain pieces of land or productive equipment. Still another is the power to decline to undertake an enterprise which may be attended with risk. By threatening to use these various weapons, one gets (with or without sacrifice) an income in the form of wages, interest, rent or profits. The resulting distribution is very far from being equal, and the in- equalities are very far from corresponding to needs or to sacrifice." -- Robert L. Hale, "Coercion and Distribution in a Supposedly Non-Coercive State,"  Political Science Quarterly, Vol. 38, No. 3 (Sep., 1923), pp. 470-494

Monday, April 14, 2014

Robert Samuelson Right For Once (About Long Term Unemployed)

I have probably picked on Robert Samuelson of WaPo more times than any other in posts here, most often over his regularly misleading columns on Social Security.  So, I guess I should note when for once he has it right.  He notes today in a WaPo column entiteld, "Idle and unwanted," that the long term unemployed are facing a very difficult situation in the US, with prospects that could lead to many of them simply never becoming employed again, and many of those who have managed to get jobs getting ones far below their previous jobs.  The problem is that prospective employers increasingly just assume that there must be something wrong with these people, and in many cases there is a problem of the degradation of specialized skills over time.  While he does not come out vigorously for demand expansion, he agrees that the economy is not near some inflationary breakout point, thus effectively supporting such an expansion to help these people, even if such an expansion may tend to help them less than others.

All of this may be widely accepted and effectively conventional wisdom almost.  But, I am pleased to agree with RJS for once.  Maybe he will write more that I can agree with in the future, although I suspect that he will continue to be a hopeless case on the Social Security issue.

Barkley Rosser

Suresh Naidu Responds: "Substitutes or Complements: Marx and Brad and Me"

Suresh Naidu at The Slack Wire:
Since Brad Delong has attributed some thoughts on Marx to me, and I have gotten some emails inquiring whether or not I did say them, I thought it would be useful to publically air what I understand to be the context.
Sandwichman was one of the inquisitors. In an earlier post, Return of the Creature from the DeLong Lagoon S. had questioned the accuracy of DeLong's attribution of these thoughts to Naidu. According to Naidu, however:
The context of the long-running conversation [between Naidu and DeLong] has been trying to establish a dialogue between Marx and modern growth theory. Inside the modern production function there is a pretty undifferentiated view of "K" (which leads it into some troubles as bad as any in the labor theory of value). Marx on the other hand distinguishes (at least) machines, technology, and money-qua-productive-input as different from each other conceptually. The fact that these are rolled into an aggregate production function by mainstream growth theory is not Marx's fault. And so when somebody is trying to translate Marx into modern economics, the slippage between what is "K" and "what Marx meant" can get confusing.
This no doubt explains DeLong's comment that Marx, "vanishes into the swamp which is the attempt to reconcile the labor theory of value with economic reality, and never comes out." It is not Marx's fault that he vanishes into the swamp of trying to establish a dialogue between Marx and modern growth theory (inside of which there is a pretty undifferentiated view...) the attempt to reconcile the labor theory of value with economic reality the modern production function. Or something.

Sunday, April 13, 2014

Presentation on Multiple Equilibria

I'm giving a lecture this week in my development class (Small World: Poverty and Development on a Shrinking Planet) on multiple equilibria. We're using Todaro and Smith, and the lecture is intended to provide an alternative approach to the material in Ch. 4 of that book.  Of course, I've been waving the flag of multiple equilibria, especially those arising from interaction effects, for over 30 years.  (My original paper on the topic was written in – gasp – 1982.)

For the pptx version, click here.  For the slightly less jaw-dropping pdf, try this.

Saturday, April 12, 2014

Who Gets To Decide Which Words And Spellings Are OK (Politically And Otherwise)?

Of course, this is an old problem as ongoing discussions about what the football team in Washington should be named and what people of African descent in the US should be called, and so on.  But lately I have seen other situations around the world where there seems to be confusion and also lots of regular insulting of people, with me not knowing how much of this is just ignorance and how much of it is politics, and even who it is who gets to decide these things.

My latest example is seeing the following names/spellings given for four prominent Ukrainian cities: Kiev, Kharkiv, Luhansk, Lviv.  The problem is that while the latter three are the Ukrainian spellings (or their standard English transliteration), the first one is the Russian one.  Ukrainians call it "Kyiv," while Russians call the latter three respectively "Kharkov, Lugansk, Lvov." How is it that we do not use a consistent set of spellings?  Just to really confuse things, I note that the the last one, the major city of western Ukraine, has also been spelled like the Russian way but with the "L" having a slash through it that makes it pronounced "W" more or less, which is the Polish spelling, the Poles having ruled it between the world wars, and before WW I, when it was part of the province of Galicia in the Austro-Hungarian Empire, it was named "Lemberg," obviously German.  The changes for this city's name all reflected who ruled it, but why is Kyiv still being called the Russian "Kiev"?

Here are some other ones that I think that most people simply do not know about, but which involve the people who are called by these names feeling insulted.  One is "Shi'ite."  This is considered insulting by those who follow that tradition of Muslim belief.  It is preferable to refer to such an individual person as a "Shi'i," and collectively as "Shi'a," which one does occasionally see in the media.  Most academic writings get this right, but somehow the insulting "Shi'ite" and "Shi'ites" has become entrenched in our media, although I think that most of those using it do not realize that it is insulting.

Unsurprisingly, there are several more of these in the Middle East.  So, Saudi Muslims do not like being identified as being "Wahhabis" or slightly more correct, "Wah'habis."  Technically indeed their beliefs do follow doctrines established by one Muhammed ibn Wah'hab, who in 1740 converted Muhammed ibn Sa'ud, the founder of the Saudi royal family, that the very strict Hanbali Sunni shari'a is the code that all good Muslims should follow, and ever since the family has followed this doctrine, with it not entirely unreasonable to identify the doctrine with its founder.  However, they consider this insulting.  They prefer to call their beliefs by an Arab word that is usually translated as "Unitarian," however given that this word in English refers to a very liberal religious group and their beliefs are about as strict and conservative as any within the Muslim world, this would be very confusing.  I also note that the Wah'habis are often confused with the Salafis, and they share some views, but the are not identical and disagree on quite a few things, with Salafism being a 19th century doctrine that originated in Egypt.

Finally, I note that some groups manage to get others to stop using insulting names for them, as we have seen sometimes in the US.  So, the religious group that is dominant in western Ukraine may have become winners in more ways than one as a result of recent events involving their nation.  In the past, this religious group were generally called "Uniates," a term that they always considered insulting.  This group adheres to the Catholic Church, and has done so since a long period of  Polish rule in the past.  But they have long been allowed to use Orthodox liturgies and follow certain other Orthodox practices, such as allowing priests to marry.  In this way they are like the Maronites of Lebanon.  In any case, they have  long preferred to be called "Greek Catholics," and lo and behold in recent weeks I have seen press stories talking about priests in Ukraine whom are described as being just that, "Greek Catholics," not "Uniates."  So, maybe something good is coming out of all this mess yet, although I remain unclear who is really in charge of all this.

Barkley Rosser

Friday, April 11, 2014

Value of Life: The Singularity Speaks

Maybe I should, but I can’t let this one go by.  This morning on Economix, the prominent health economist Uwe Reinhardt writes that his view on the value of human life—that it is finite, determinate and should govern health-related policy decisions—“is shared by literally every American economist”.

Well, last time I looked in the mirror I was still there.  The book I wrote on this topic, Markets and Mortality: Economics, Dangerous Work and the Value of Human Life, still exists too.  Originally published in 1996, it was reprinted in 2009.  The argument it develops doesn’t lend itself to being condensed in a paragraph or two in a blog post, so I won’t try.  The book draws on the critique of utility theory, the social embeddedness of risk and health, and similar matters.  (It also goes after the hedonic wage regressions that are often used to put a price on deadly risk.)  I’ll admit my thinking has evolved since then, but not in Reinhardt’s direction.

Another nonexistent economist, by the way, is Frank Ackerman, who coauthored Priceless: On Knowing The Price Of Everything And The Value Of Nothing with Lisa Heinzerling.  He doesn’t buy the value of life business either.

I suppose I need to add that I don’t think that every expense should be borne in every circumstance to reduce the risk of premature death to its absolute minimum.  Obviously there are tradeoffs, but the question is whether attaching a fixed monetary value to “life” (or a life-year or whatever) helps us make them intelligently.  And I can certainly relate to Reinhardt’s outrage over the hypocrisy of politicians who grandstand about death panels but callously sacrifice the life chances of the poor, the military and others by denying them easily affordable protection.  My grumpiness is not about the politics of his piece, but the detail, minor in the larger scheme of things, of seeing myself drummed out of the economics profession.

Monday, April 7, 2014

Poo On Pew's Paul Taylor's Generational War

Dean Baker today has pretty much taken this apart, but I shall throw in a few more cents.  In yesterday's Parade magazine, generally a completely politically bland outlet to accompany comic strips in Sunday papers around the country, Vice President of the Pew Foundation, a supposedly terribly respectable place, Paul Taylor, unleashed a massively misleading hysterical screed about how the baby boomers are going to bust the millennials with all their awful Social Security and Medicare benefits, with him apparently having a book on this, so I must cynically think that Taylor is just lying to push his apparently worthless book.  However, we have really had enough of these misrepresentations.  Taylor's main misrepresentation is to claim that by the time all the boomers are on SS and Medicare, these programs will be broke, gobbling up half the budget.  Fundamentally this assumes that the rate of increase in medical care costs that we have seen in the past will continue, which does not look at all likely now.  Dean points out that SS finances are not in such a bad place given all the tax and benefit changes made in the past such as by the 1983 Greenspan Commission.

Let me note a simple fact that if Taylor knows it, he gives no evidence of doing so and that Dean did not mention, although he noted a number of other relevant issues.  As with so many other screeds of this sort, Taylor makes a big fuss over how by 2030 or so the ratio of workers to SS and Medicare recipients will have fallen to about 2 to 1 in contrast to today's 3 to 1.  This is supposed to make people just fall on the floor in a total freakout, with millennials rising up to demand that boomers head for the gas chambers ASAP, as I see regularly suggested on such anonymous econoblog sites as the abominable EJMR.  So, this simple fact is that right now one finds in Germany roughly this ratio, 2 to 1, with pensions if anything higher than they are in the US.  Is Germany failing to make its payments or suffering from a massive budget crisis?  Obviously not.  Indeed, the fact that all these hysterians routinely ignore is that of the higher income nations, the US is one of the best positioned demographically for dealing with this issue down the road.  Does Japan have a big problem?  Yes.  Does the US?  If it can get its medical care cost increases under control, no.

I want to add that I am increasingly frustrated at how widespread this false story of likely future failure of these programs for millennials has spread.  Anecdotal, but I just heard on a local radio station where several hosts were talking a younger one simply asserting that Social Security and Medicare "will not be there for me."  I constantly hear this from students, almost always asserted with an astounding degree of certainty and self-righteous pomposity.  Needless to say, this makes them susceptible to the games by politiicians who want to cut these programs back.  The irony is that if this happens, it will not happen much to the baby boomers, but will be set up to land much more on these very millennials.  They will be sold accepting definite future benefit cuts because, gosh, if they do not accept them, they might have to accept them.  The incoherence of thought and lack of knowledge about what is going on here I find really frustrating.

Barkley Rosser

Larry Summers CRUSHES the Lump of Lobster!

It isn't everyday the Sandwichman gets the opportunity to praise Lawrence H. Summers. Back in February, Summers tweeted, "The inverse of Say's Law holds today: Lack of demand creates lack of potential supply." At a full employment event put on last week by the Center on Budget and Policy Priorities, Summers elaborated on what he meant by that. Starting at about minute 22:20 of the video, Summers eviscerates the lump-of-lobster fallacy.

What is the lump-of-lobster fallacy? Samuel Brittan was wont to invoke the lump-of-labor fallacy in his columns at the Financial Times but occasionally the compositors would tamper with the copy, once rendering the old canard as the lump-of-lobster fallacy. It seems to me that this was an appropriate reductio ad absurdum of the nonsense claim that unspecified persons believed there was "a fixed amount of work to be done."

As the Sandwichman wrote back in January (Yasraeh's Law), "I have described the lump-of-labor fallacy claim as 'an inverted Say's Law on steroids.'"

Does Glenn Hubbard Want to be President Jeb Bush’s Chief Economic Advisor?

I saw on the news this weekend that Republicans are hoping Jeb Bush runs in 2016 – which may in part due to the latest on BridgeGate. Memo to the Republican Party – Chris Christie is not a good candidate. So that’s the good news. The bad news is that I had to endure another rant from Glenn Hubbard , which included:
But structural changes are plainly at work too, based in part on slower-moving demographic factors. A 2012 study by economists at the Federal Reserve Bank of Chicago estimated that about one-quarter of the decline in labor-force participation since the start of the Great Recession can be traced to retirements. Other economists have attributed about half of the drop to the aging of baby boomers. Baby boomers can't be the whole story, though, since the participation rate has declined for younger workers too. This part of the drop is a function of various factors, including simple discouragement, poor work incentives created by public policies, inadequate schooling and training, and a greater propensity to seek disability insurance.
Dean Baker does the needed clean-up on this canard:
Hubbard noted the sharp fall in labor force participation since the downturn. He attributed it to a lack of incentive for people to work. This is in striking contrast to the more obvious logic, that when people have been trying unsuccessfully to find jobs for 6 months or a year, they eventually give up ... The problem with Hubbard's story is that he doesn't have a good explanation for why people suddenly decided that they didn't want to work. He points to an increase in the length of unemployment benefits, but this happens in every downturn. Furthermore, the maximum duration of benefits has been cut back sharply from its peak of 99 weeks in the first years of the recession with no corresponding surge in employment. The Affordable Care Act will make it possible for many people to get health care insurance without working or without working full time, but that should only have begun affecting the data in the last few months as the health care exchanges came into existence. It would not explain the drop in labor force participation that was already quite evident by the summer of last year.
Dean discusses other reasons why Hubbard’s inward shift of the labor supply curve story does not fit the data. Let me simply add that if it were a lack of labor supply (as opposed to weak aggregate demand) to blame here, then why haven’t real wages increased? Hubbard does note aggregate demand factors:
Does this mean that the Obama administration's "targeted, timely and temporary" stimulus package was the right approach? Actually, no. Increasingly, it appears to have been a poor match for the severity of the downturn and the magnitude of the required boost. After the Great Recession's sharp decline in investment and employment, U.S. business probably needed a more curative jolt to restore confidence. A sustained infrastructure program, rather than a temporary one for "shovel-ready" projects, would have provided more reassurance of longer-term demand. And far-reaching tax reform could have provided both a near-term fillip from front-loaded business tax cuts and a credible prospect for future growth. What we don't know is whether the Obama's administration's activist policies failed to draw more Americans back to work because they were poorly executed or because they didn't do enough to raise aggregate demand. A better designed activist fiscal policy would have made more headway in encouraging growth, but deeper factors behind the downward shift in labor force participation still remain.
Why does this remind me of Romney’s 2012 campaign? Let’s be clear – Christina Romer pushed for a better designed fiscal stimulus back in 2009 with more in the way of government investment spending. And her call for a more sensible fiscal stimulus got zero support from Glenn Hubbard’s side in 2009. No – they pushed for low bang for the buck tax cuts without a clue as to how to pay for them in the long-run. I would hope Jeb Bush – if he does decide to seek the Republican nomination – could do better than Mitt Romney did in his 2012 Presidential campaign. And if he were to become the next President, let’s all hope that his economic policies are not as ill thought out as the economic policies enacted by his brother.

Sunday, April 6, 2014

GDP and Well-Being, Positive and Normative

There’s a review in today’s New York Times of Diane Coyle’s new book on the history of GDP calculation.  Shot through it is a crazy confusion, abetted—nay demanded—by standard economic practice.

It all goes back to the primordial distinction between positive and normative analysis.  Positive analysis is explanatory, predictive, or simply descriptive: what and why.  Normative analysis is evaluative: should.  We economists beat the heads of our poor charges each year in introductory classes with this distinction.  Positive analysis, we say, can be validated by reasoning and evidence, while normative analysis is ineluctably conditional on the values of whoever is doing the evaluating.

Yes and no.  The distinction is important, but it is not ironclad.  There are lots of ways the two types of analysis are connected, and I won’t get into the philosophical issues here, but it is obvious, just from paying attention, that economics wants to have a single analytical framework to answer both positive and normative questions.  Economists don’t want one model to predict what the equilibrium outcome will be and another, using completely different elements and based on different assumptions, to rank that outcome against others according to how beneficial it is.  Most models in economics do double-duty: they support positive and normative analysis equally.

So it is with GDP.  This is indispensable for the heavy lifting that positive economics, especially macroeconomics, requires.  You wouldn’t be able to document whether you were in a boom or a recession without it, or at least not nearly so well.  For instance, our NBER judgments of business cycle dating are surely more accurate today than their retrospective judgments of cycles before GDP measurement was established during the New Deal.  But GDP is also invoked as a measure of economic “success”—our policies are said to work if they crank up GDP growth or fail if they don’t.

Understandably, GDP has come in for a lot of criticism regarding its measurement of economic well-being.  It includes a lot of stuff that doesn’t make us better off (more cops if they’re just a response to an upsurge in crime), leaves out a lot of stuff that does (unpaid labor inside and outside the home), ignores harmful consequences of economic activity (pollution and resource depletion), and utterly fails to price many goods in a way that reflects their actual value to society (such as government-supplied services, which are priced at cost of production).  Finally, consumers (such as you and me) do not always spend our income in ways that maximize our well-being, and in some documented cases (e.g. commuting to work) spending can go up while well-being goes down.  Personally, I’m convinced: GDP is a deeply flawed indicator for normative purposes.

But what of positive analysis?  There I think we’re on much more solid ground.  GDP measures the size of the market economy.  We happen to live in a market economy, so this is a useful measure.  It works well for predicting market consumption, imports, paid employment, that sort of thing.  If you think about it, the very characteristics that people criticize from a normative standpoint—how the selection of traded goods and the prices they trade for misrepresent their true impact on us—are the ones that make GDP work for a well-defined set of positive tasks.  If we priced things according to their “true” value (supposing we could do that) instead of their market value, we would lose the market part.

Alas, it is sometimes necessary to blur this distinction.  For example, we need to have a conception of real GDP so we can tease out the rate of inflation.  Since the qualities of goods are constantly changing, they need to be priced in order to distinguish between price increases that contribute to inflation and those that reflect quality improvements.  (Or maybe prices are constant but should be seen as contributing to inflation because quality has gone down.)  Estimating the value of quality (hedonic regression) brings us closer to the line separating normative from positive.  I think the line is not (necessarily) crossed, however, if the (monetary) willingness to pay for quality is kept distinct from the effect of quality on consumer well-being.

And where does that leave us?  The distinction between positive and normative analysis is important and needs to be maintained.  There should be no presumption that the concepts and models that work for one will work for the other.  We should not sacrifice the fit between model and purpose in one realm in order to be able to shoehorn it into the other.  I think, though I will not follow it up here, that welfare economics has suffered mightily from attempts to squeeze its analysis into the same models that work well for positive—explanatory and predictive—work.

So let’s not visit the same damage on our properly-functioning positive models, like GDP.  Keep and even improve GDP as a measure of the size of monetary flows within an economy, and look elsewhere for appropriate indicators of human well-being.  (I have a hunch that economists, who are good at the first task, will prove to be less well-suited to the second.)  Do positive well, and do normative well, and don’t let either get in the way of the other.

The 'Technology' Trap: "'Permanent' Technological Unemployment: 'Demand for Commodities Is Not Demand for Labor'"

Hans P. Neisser, The American Economic Review, Vol. 32, No. 1, Part 1 (Mar., 1942), pp. 50-71:
The theory of technological unemployment is a stepchild of economic science. The facts seem to stand in such blatant contradiction to orthodox doctrine, according to which no "permanent" technological unemployment is possible, that most American textbooks prefer not to mention the problem itself. This attitude is of recent times. The analysis to which Ricardo subjected the displacement of labor by the machine in the last edition of the Principles had stimulated a lively discussion among the later classical economists, who, as we shall see instantaneously, followed two different lines of thought. With the rise of neoclassical equilibrium analysis, the discussion died down, at least in Anglo-Saxon literature' and only recently the oldest argument against technological unemployment, originally developed by McCulloch, was revised in a little more sophisticated form by two American economists, P. H. Douglas and A. Director in The Problem of Unemployment (New York, 1931). We can, therefore, distinguish three approaches:

1. The "Law of Markets" approach, formulated at first by McCulloch in Principles of Political Economy (first edition, 1825) Part I, chapter VII, and, as pointed out above, revised by Douglas and Director, applies Say's Law of Markets to the Labor Market. As there cannot be a general over-production of commodities produced, so there cannot be a general over-supply of labor. We shall analyze this argument in the first section of this paper, with some supplementary remarks in Section V.

2. McCulloch's argument was not taken up by the other classical authors, because it is at variance with the classical theory of the demand for labor. As John Stuart Mill stated it most pointedly: "Demand for commodities is not demand for labor" (Principles, vol. I, p. 5, para. 9). The maintenance of the demand for commodities according to Say's Law, therefore, does not militate against an over-supply of labor. It is the volume of circulating capital, interpreted as wage fund, that governs the demand for labor. Following Ricardo's lead, the theory of "compensation" of technological displacement of laborers was worked out. In contrast to the Law of Markets approach, which does not allow any exceptions to the denial of "permanent" technological unemployment, the Wage Fund School maintains the occurrence of compensation only as the general rule, exceptions from which are deemed possible though unlikely. In Section III, we shall consider this argument.

3. The neo-classical equilibrium approach differs from the preceding ones by denying the possibility of technological unemployment only as to a state of long-run general equilibrium proper, in which complete adjustment of all the variables of the economic system is attained (size of firm, input, output, prices of goods produced, prices of productive services, interest rate). The difference of the neo-classical approach from the Law of Markets approach is concealed by the use of the terms "temporary" and "permanent" by the latter school. By "permanent," Douglas and Director do not refer to the state of long-run equilibrium proper. This is clear from their definition of "temporary" technological unemployment (op. cit., pp. 113 ff.), which refers only to such obstacles to the reabsorption of laborers as: slow working of competitive mechanism, slow transfer of expenditure from one good to the other, or of workers from one industry to the other. A state of affairs in which these obstacles are overcome (as we shall assume throughout the present paper) still might be in a merely "short-run equilibrium" in the neoclassical sense, which is based on the assumption that all equipment is "given" as to quality and quantity, while long-run equilibrium proper in the neo-classical sense requires, among other things, the adjustment of the size of the firm and of the quality of equipment in such a way that average costs equal price for all firms. Indeed, if the Law of Markets is valid at all, it must be applicable to periods of any length, provided only the period is long enough to overcome the temporary obstacles; and similar considerations apply, as we shall see, to the wage-fund argument.
While there is little merit in the two classical approaches, the neoclassical one stands on much firmer ground, on account of its lesser scope. However, even the neo-classical approach is far from giving the unambiguous answer its adherents ascribe to it. This will be shown in Section IV. On the other hand, while the unqualified denial of "permanent" technological unemployment in traditional theory is not justified, preliminary empirical investigations (which cannot be presented in the present paper) have convinced the present writer that popular opinion vastly exaggerates the amount of unemployment which properly could be called "technological." The relative small size of technological unemployment in history is attributable, partly, to the independent forces increasing employment, which briefly will be discussed in the last section. In no case would it be permissible to use simply the current unemployment statistics as a verification or a repudiation of the theories which affirm or deny the existence of technological progress that creates unemployment. Hitherto the discussion has been marred by a confusion of historical and theoretical statements. ... What would one think of an argument against the law of gravity based on the undeniable truth that only a very small number of people habitually fall against the center of the earth with an acceleration of 33 feet per second? And yet, the reference to unanalyzed observation is not worse than the reference to unanalyzed historical facts. In order to obtain a reliable answer to our question, it is necessary to keep constant the other factors as far as they are truly independent, i.e., not exclusively or almost exclusively governed by the volume of technological unemployment itself.
The Technological Unemployment and Structural Unemployment Debates, Gregory Ray Woirol (1996)
In this mid to late 1940s theoretical literature, a third period of consensus was achieved to add to the consensus periods of 1927—29 (the Say-Douglas purchasing power argument) and 1933—40 (the neoclassical price-flexibility argument). As illustrated by the work of Neisser, Hagen, Lange, Belfer, and Pu, this consensus — built on Keynesian arguments — was that no mechanism existed in the economic system to guarantee the automatic reabsorption of technologically unemployed labor. 
This is where the technological unemployment debates ended. With the full employment of World War II and the spread of Keynesian policy ideas about how to achieve full employment, the pessimism about unemployment and productivity trends that had motivated the debates of the 1920s and 1930s disappeared.... In effect by the early 1950s the state of aggregate professional opinion about technological unemployment had returned to the confident views of the late 1920s.

Picketty, Picketty, Picketty

Well, I just got Capital in the 21rst Century and started in on it. It looks exciting, but I confess to being puzzled by the claim that r>g means that  inequality grows inexorably.  We have the capital share = r (K/Y), and K/Y in the long run equal to s/g (These are Picketty's "fundamental" equations)  where g is the sum of population and per capita output growth rates and s is the net saving ratio . Nothing to quarrel with there. But  then the capital share in the long run will be (rs)/g. Then if r and g are constant ( and s as well) --  the capital share remains constant whether r>g or r< g. What am I missing?

Krugman had a blog post where he spells out Picketty's argument that a decrease in g will increase r/g and thus the capital share: r will fall by less than g if, as Picketty argues, production is CES and  the elasticity of substitution is greater than 1. That makes sense, but this will be so whatever the initial level of r is relative to g, whether above or below unity.


Saturday, April 5, 2014

Return of the Creature from the DeLong Lagoon

Project Syndicate published a version of Brad DeLong's ill-informed anti-Marx mutterings with an odd twist. Where his New York Times commentary had started out "I have long thought that Marx's fixation on the labor theory of value made his technical economic analyses of little worth," the Project Syndicate version attributes the unfounded criticism of Marx to Columbia University assistant professor Suresh Naidu:
The economist Suresh Naidu once remarked to me that there were three big problems with Karl Marx’s economics. First, Marx thought that increased investment and capital accumulation diminished labor’s value to employers and thus diminished workers’ bargaining power. Second, he could not fully grasp that rising real material living standards for the working class might well go hand in hand with a rising rate of exploitation – that is, a smaller income share for labor. And, third, Marx was fixated on the labor-theory of value.
Delong has indeed "long thought" that Marx "vanishes into the swamp which is the attempt to reconcile the labor theory of value with economic reality, and never comes out." People who know Suresh Naidu and his work find it extremely unlikely that the views attributed to him by DeLong are accurate. So what's this business of attributing his muddled misconceptions to something Naidu had "once remarked" to him?