Wednesday, October 31, 2007

Behind the 2007Q3 Preliminary GDP Growth Estimate

The latest news from BEA can be found here. James Hamilton provides some details on this 3.9% annual growth rate bit of goods news and lowers his recession probability. A few more observations are in order.

Consumer demand growth was only 3 percent – which to a Rubinesque bear like myself is sort of good news if this eventually translates into more investment. Investment demand barely grew however as the growth in business investment barely offset the continuing fall in residual investment. Ah but the Federal Reserve did lower the Federal Funds rate by more than inflation dove Brad DeLong would have.

The two other GDP categories are government purchases and net exports. Government purchases grew by 3.7 percent at annualized rate almost entirely because of defense spending growth. One has to wonder why our neocon President had his temper tantrum yesterday morning. But the truly excellent news was the rise in exports. Let’s hope this continues – even if it means Lou Dobbs would have one less thing to complain about.


Eeeeek! Frankenstein's Monster is back on the loose, prowling the landscape chanting "Social Security Crisis! Social Security Crisis! Fix Social Security!" It is bad enough that Obama has joined the Ghoulsbee bunch chanting this nonsense that Goldman Sachs's Robert Rubin's appointees to the Social Security Trustees under Bill Clinton instituted as "Official Projections" back in the late 1990s, since proven drasically overly pessimistic, but continued by the Bushies. Now Kent Conrad (D-ND), Chair of the Senate Finance Committee, along with Judd Gregg (R-NH), in cahoots with Goldman Sachs's current Treasury Sec, Paulson, are creating an "Endowments Commission" supposed to frighten the next president into "doing something about endowments."

This is a bait and switch the enemies of social security have been playing to for some time. Scare everybody with genuine long run problems in funding endowments. However, instead of focusing on medicare and medicaid, the sources of these problems, these entities formed to deal with endowments suddenly start going after untroubled (so far, still running a rising and nearly $200 billion surplus) social security. I understand people like pgl who might go along with this, given that so many people have fallen for the lies about social security's fiscal status, it may well be politically that the only possible tax increase out there is one on social security, sold to Republicans along with a benefit cut as some kind of deal. But, it is based on a lie. Can we not try to educate people and deal with ther real problems, please, without letting Wall Street get its mitts on social security (and some kind of privatization would almost certainly be part of any such deal)?

Introduction to My New Book in Progress

Now that the Confiscation of American Prosperity has been published, I have a new book that is fairly well advanced. I expect that , The Manacles of Capitalism: How Market Control Undermines Productivity, I will have the manuscript ready to send to Stanford University Press in a few months.

Here is my introduction. Any suggestions would be appreciated. Most of all, my title is clunky. Anyone who comes up with a title that works for me, will win a free copy of the book.

Introduction: The Hidden Manacles

Setting the Stage

This book makes the case that the modern economy has matured to the point where markets do not and cannot harness the anything near the full productive potential of society; and even more important, that markets seriously undermine economic performance.

This book will emphasize only one of the many defects of the market that markets rely on a system of incentives that are self defeating. Purely monetary incentives may appear to work effectively when one takes a narrow view of their operation, but from a larger perspective they are counterproductive for the economy, as well as society as a whole.

To make my case, I will concentrate on the United States of America, which is the purest example of capitalism today. Here is the most powerful economy in the world, yet it seems powerless to meet the most pressing needs of society. The current U.S. economy falls short on a maddening array of counts. The list of pervasive problems includes excessive poverty, inadequate health care, environmental damage, pervasive toxins, and an unsatisfying quality of life, just to name a few. Although the United States neglects these problems in order to nurture market relations, the relative economic strength of its economy seems to be eroding.

The contradictory nature of the U.S. economy raises a host of relatively obvious questions about the quality of life. Why has a widening circle of poverty begun to engulf more and more people, even when the pace of technological change began to accelerate in the late twentieth century? Surely, an economy with a communication system that would have been unimaginable only a few years earlier should be able to nurture a sense of community or at least create a satisfying culture. Although the majority of the population may have access to considerable material goods, the current economic system fails miserably in creating a good quality lifestyle.

Such questions, while important, largely adopt the position of people as "consumers" whom the economy affects. This book will take a different perspective looking at how market incentives impact people as producers. To make this focus clearer, this book will, for the most part, leave aside many serious problems that typically tend to be seen from the perspective of people. For example, the market system has the adverse environmental consequences (see Perelman 2003). Most people regard these negative effects of the economy as a quality of life issue.

This producerist focus is doubly important because economists studiously ignore it; instead, they cleverly justify the status quo by arguing that people supposedly benefit greatly from the market through their participation in society as consumers. For example, Wal Mart is to be applauded because its prices are low while obscuring the company's effect on people as producers. Although the consumer perspective is important, the producer perspective should not be overlooked. This book is intended to remedy that neglect.

Some elements of the producer and consumer perspectives merge. For example, the pollution that degrades the quality of life can also seriously affect production through negative health effects on workers. Other seemingly consumer oriented questions have more far reching producerist consequences.

Consider the role of modern technology. Although engineers have devised methods of producing sophisticated electronic devices with virtually no human labor, the market economy has not managed to discover a way of reducing the working day. How is it that virtually nobody stops to ask even the better paid, but harried people if they would prefer to sacrifice some of the stuff that they consume for more leisure?

The producerist implication of this technology are equally important. One must wonder why an economy with such advanced technological capacities does not provide for more fulfilling work. Although this leisure might be used for more consumption, it could also increase the workers' productive capacity by improving their health. More leisure, like the opportunity for more fulfilling work, could also allow workers to develop improved skills.

The Theological Defense of Markets

The responses to anybody who dares to question the market are predictable. In their first strong line of defense, defenders of markets will respond, that any measures to address deficiencies other than the standard knee jerk remedy of expanding market powers even further threaten to interfere with economic efficiency. A second, and even stronger line of defence, will admit that problems exist, but insist that the cause is not the system, but the personal inadequacies of the people. As Margaret Thatcher, the Conservative British Prime Minister, popularly known as the Iron Lady once explained: "Economics (sic) are the method. The object is to change the soul" (Harris 1989). This call for spiritual Procrusteanism inspired the extreme neoliberalism that continues to this day.

The stubbornness of the prevailing ideological rhetoric of today reflects the view that markets are an end in themselves rather than a means to an end. Any challenge to the market, no matter how mild, reeks of heresy. Edmund Burke, perhaps the most famous British statesman of the eighteenth century, famously set the tone for theological defense of markets, declaring: "... the laws of commerce ... are the laws of nature, and consequently the laws of God" (Burke 1795, p. 137). The modern Journal of Markets and Morality continues to promote that theological tradition.

From a less elevated perspective, business and political leaders commonly join the familiar litany of praise for the market, bandying about lofty terms, such as freedom, democracy, and justice, not to mention efficiency and prosperity. While first running for president in 1999, George W. Bush offered a simpler formulation, declaring that "trade and markets are freedom" (Schwartz 2005, p. 6; citing Fischer 1999).

Surely nobody could object to people being allowed to enjoy freedom, democracy, or any of these other positive attributes of the market. Why would anyone be foolish enough to challenge the existing economic system, which supposedly represents the pinnacle of social organization or at least it would be if ill considered taxes and regulations did not interfere with what President Ronald Reagan called "the magic of the marketplace"?

But adults should not believe in magic. Despite Reagan's fanciful rhetoric, the market is a harsh taskmaster. Frederick Winslow Taylor, known as the father of scientific management and who devoted his life to cutting split seconds from workers' tasks, gave a more realistic verdict of the modern situation, observing: "In the past the man has been first; in the future the system must be first" (Taylor 1911, p. 7). But how well does this system serve people's essential needs? This book argues that it does not.

A Different Theology

Turning to a quite different theology than that of Burke according to Greek legend, a bandit named Damastes terrorized people near Eleusis, in Attica. People called him Procrustes, or "The Stretcher" because he compelled unwary travelers who fell into his hands to spend the night on an iron bed. He sadistically murdered his guests by stretching the ones who were too short for the bed, or, if they were too tall, cutting off as much of their limbs as necessary to fit the dimensions. His sadism supposedly turned the surrounding countryside into a desert. Procrustes's reign of terror was eventually cut short. Theseus, famous for his legendary exploits and destined to become king of Athens, subjected Procrustes to his own bed treatment.

This mythological reference might seem out of place in a book on the economy, but the workings of the economy have become so absurd and the language of the economy so perverted that reframing the subject in an unfamiliar context seems appropriate. As Frederick Winslow Taylor, who attempted to use the scientific method to tighten the screws on the Procrustean bed, suggested, the modern economy requires that people conform to its dictates: "the system must be first."

Max Weber, the famed German sociologist, who was hardly a radical, vividly captured this harsh spirit of the Procrustean world. For Weber, "the market is the most impersonal relationship of practical life into which humans can enter with one another .... Such absolute depersonalization is contrary to all the elementary form, of human relationship" (Weber 1921, pp. 636 37).

One of Weber's most famous expressions is his metaphor of the iron cage (actually a mistranslation of a less poetic "shell as hard as steel") (Weber 1904 5, p. 121). Weber described the inhuman consequences of this cage/shell:

Today's capitalist economic order is a monstrous cosmos, into which the individual is born and which in practice is for him, at least as an individual, simply a given, an immutable shell, in which he is obliged to live. It forces on the individual, to the extent that he is caught up in the relationships of the "market," the norms of its economic activity. [Weber 1904 5, p. 13]

Beyond the Procrustean Economy

In the spirit of Weber at least the mistranslated Weber you can think of the market as a Procrustean bed. Those who do not accommodate themselves to the system suffer a cruel fate. Like Procrustes, the market is also destructive of its surroundings.

In describing the economy as Procrustean, I realize that I am distancing myself from conventional economics. Certainly, the story economics tells about the market economy is very different. Markets are supposed to be purely voluntary arrangements. People chose to work where they want and to buy what they want. Nobody tells anybody what to do (except on the job).

Unlike the irrational sadism of Procrustes a parasite that destroyed its host economists present the modern economy as the height of rationality. Contemporary economists are fond of comparing the organizational achievements of a market economy with the efficiency of a computer or even the brain itself.

While I admit that many individual actors in the economy often do act quite rationally in furthering their own short term self interest, this book will show how, taken as a whole, the modern market economy falls quite short of the excellence ascribed to it. How can anyone rationalize that hours of work have not radically decreased despite the proliferation of modern, labor saving technology? How anyone reconcile increasing job insecurity and stagnating wages with market efficiency?

No, the market is indeed Procrustean. The business leaders, politicians, and economists who are quick to explain that the logic of the system is immutable and who come down hard on anyone who dares to question Procrustean rationality, are generally immune from the harsh demands of Procrusteanism.

The position advocated in this book flies in the face of prevailing opinion. Besides the dogmatic defenders of the markt, some well intentioned people acknowledge some shortcomings, but pin their hopes on minor regulatory tinkering. History does not look kindly on those who have expected much from such piecemeal measures in the past. Still others might promise that better technologies will be able to correct existing problems within the framework of market. The underlying problem, however, is not technological inadequacy. Nor is it a material deficiency. For example, people do not go hungry because too little food is produced. After all, food surpluses have long plagued most developed countries.

Viable alternatives do exist, but they might seem impossibly utopian only because the gatekeepers of the Procrustean economy adamantly refuse to accept any dialogue or even the possibility of a dialogue. As Prime Minister Thatcher proclaimed: "There is no alternative." The iron bed must remain in place. Everyone must learn to accept the dictates of the Procrustean economy. Neither individuals nor societies have any choice in the matter. To defy the logic of the market would be suicidal at least in an economic sense.

This book makes the case that this Procrustean ideology is as absurd as it is inhuman. The book shows why markets are incapable of permitting people to use their productive potential, while, at the same time, pointing in a more positive direction. Once people realize that the economy does not have to put the system first, as Taylor suggested, society can tap into people's potential and create a more fulfilling life.

The first step is a critical evaluation of the market. Hopefully, with sufficient intelligence, courage, and imagination we can get the kind of economy we deserve an anti Procrustean one in which the productive system will finally adjust to meet society's most pressing needs.

Military contracting.

George Mason [read: laissez-faire] economist Tyler Cowen wrote in the New York Times that -

Private contractors [such as Blackwater] may not respect virtue for its own sake, but like most businesses, they will respect the wishes of their most powerful customers, in this case governments. What is wrong with Blackwater may, most of all, mirror what is wrong with Uncle Sam.

This article is a useful read and makes some important points (while tending to oppose Bush's Splendid Little War). But as usual with free-market types, Cowen leaves important stuff out.

His basic point makes sense: in the end, Blackwater's sins fall on our government's head, and thus on the voters' heads. (Also, it makes sense in our current capitalist system that at least some government functions will be privatized and that we have to balance benefits and costs of privatization.) But there are two points in addition:

1) No contract is perfect. Given the incomplete information about what the contractor must do and uncertainty about the future, it is (almost?) inevitable that there will be loopholes. Further, profit-seeking companies will look at contracts to find absolutely all loop-holes. Companies such as Blackwater will then exploit all the profit-enhancing ones. This "loop-hole" mining is familiar to students of banking, where financiers are always looking for ways around regulations, even those which ultimately are to their benefit.

This tells us that in addition to contracts with privateers, there must be vigorous direct supervision of them. (This, of course, must be part of the original contract, agreed to by the privateer.) Contrary to the laissez-faire crowd, we cannot rely on the "magic of the market" (to use Ronald Reagan's phrase) to supervise the privateers.

2) The government does not just respond to the interests of the voters. In a capitalist system such as ours, it responds to the concentrated power of money. And it did so before the poorly-conceived campaign finance reforms that now prevail.

In fact, unless people are pissed and actively organized in their anger against the government enough to push against the normal mode of government operation, Big Money trumps voters every time. This was true even under FDR, despite recent efforts to paint the New Deal as some sort of Golden Age. Back then, however, a big fraction of the plutocrats was scared of the popular discontent. So they did the Right Thing (or rather, part of it) for awhile.

Anyway, the power of money means that companies such as Blackwater can arrange for weak oversight of their contracts. They can almost guarantee that there will be loopholes and that enforcement will be feeble and chummy.

Of course, Blackwater was a very small company just a few years ago, so something had to happen first for it to have so much influence. What happened was part of the general neoliberal movement of the last 30 years or so, i.e., the Cheney/Rumsfeld effort to privatize as many military functions as possible. (My dad was in the Navy Supply Corps, feeding sailors during World War II. If he were alive today, he'd be doing his job for some private company.)

This privatization movement -- which involves much more than merely hiring mercenaries -- has created (1) a bunch of companies made rich by government contracts with (2) a vested interest in lobbying the government for more privatization (more business opportunities for them) and (3) providing more campaign contributions for those pushing privatization (not just Cheney & Rumsfeld, but also W. J. Clinton). There's a vicious circle of crony capitalism going on.

The Big Money voters are the ones who are ultimately responsible for the poor contracts and poor contract enforcement that Blackwater et al. have profited from (until they were caught). It's only when the actual voters -- real, live, people -- decide to throw out Big Money that we are responsible (in practice) for what our government does. Until then, the sins fall on the heads of the real rulers of the United States government.

This second point should be obvious to the George Mason folks. Their "public choice" school of economics tells us that we cannot simply take government policies for granted or as representing the "true" interest of the people. What they miss is the power of the capitalist class and the influence of important sections of that class (such as military privateers).

Jim Devine

Tuesday, October 30, 2007

"Saving" Social Security, Obama Style

If this article is correct, the Obama team has a lot of explaining to do.

In particular, they need to tell us whether their guy doesn’t have the chops to understand Dean Baker and Paul Krugman, or if he is serving some other, darker interest. And don’t give me any bull about how virtuous it would be to raise the cap on SS taxes: it all depends on the narrative. If you get to a more progressive tax system by flashing false alarms about Social Security, you feed the beast under the guise of clipping its clawnails.

Monday, October 29, 2007

Globalization -- A New Twist

I just spent the weekend with a pretty high level delegation from China. At the final banquet, some of them were telling my wife that they appreciated the low prices in US stores. They were especially happy with some shoes that cost 6 times more than in China. They were taken aback when she mentioned that the shoes were made in China, where they presumably cost far less than in Los Angeles.

The Best Fit Ever

Krugman on his blog uses Larry Bartel's data, from the latter's *What's The Matter With What's The Matter With Kansas* to puncture the myth that the rich are more likely to vote Republican.

In my forthcoming *What's The Matter With What's The Matter With What's The Matter WIth Kansas* I find a perfect negative correlation between intelligence and a tendency to vote Republican. My inverse measure of intelligence? - the tendency to vote Republican!

Sunday, October 28, 2007

$90 Oil Prices: Is This a New Record in Real Terms?

AP reports:

With the recent gains, the price of oil is closing in on the inflation-adjusted highs hit in early 1980. Depending on the adjustment, a $38 barrel of oil in 1980 would be worth $96 to $101 or more today.

Should we inflation adjust using the GDP deflator or the CPI deflator?

James Hamilton does the latter in a chart entitled dollar price of West Intermediate divide by ratio of CPI. By this measure, we are not yet an inflation adjusted record. WRTG Economics has their own historical price in real terms though 2006. The inflation-adjusted real price record in terms of 2006 dollars was less than $70 per barrel. I suspect WRTG Economics is using the GDP deflator, which has not risen as much as the CPI deflator since 1980. AP was not kidding when they said “depending on the adjustment”. I get the $101 figure if we use CPI but where does the $96 dollar figure come from? The GDP deflator in 2007QIII were only 2.29 times the GDP deflator as of 1980QI so wouldn't the inflation-adjusted oil price been $87 not $96 dollars?

Of course, it also matters which measure of the spot rate one uses for this. WRTG also reports both the WTI spot price and Brent Spot price, which was considerably lower.

Hedge Funds: Ben Stein Finds the Money Machine That Will Eliminate the Federal Debt

While Ben Stein hearts Stephen Cohen of SAC Capital, Dean Baker has a closer look. I sense a tie to the Social Security debate!

Ben Stein writes:

magicians like Steven A. Cohen, founder of SAC Capital in Stamford, Conn., can regularly earn 40 percent a year - often more - on their capital. But why waste our time on envy or disbelief? Let’s put Mr. Cohen to work for the greater good. Let’s have the federal government issue about $10 trillion in Steven A. Cohen National Debt Retirement Fund Bonds. After interest is paid on the bonds, if Mr. Cohen makes 40 percent on the money, the fund will return 36 percent a year. That means that in only two years, he will have made roughly $10 trillion for the taxpayers, with which he can pay off the entire United States federal debt.

As I read this, I had to wonder about my belief in the Efficient Markets Hypothesis. But then Dean Baker brought a little reality to this discussion:

Well Cohen's modus operandi is to make bets ahead of the market. He finds the winners just before they start winning and dumps the losers just before they start losing. The economic benefit from Cohen's actions is that prices adjust somewhat quicker than they otherwise would ... Mr. Cohen's gains come from other shareholders. If he buys IBM stock before it rises, he helps to bring the stock price to its proper level, but he gets the gain rather than some other potential stock purchaser. By being faster and better informed than other traders, Cohen is able to garner earnings that would otherwise have gone to other shareholders. Higher returns for Cohen mean lower returns for everyone else.

OK, this may be a very small departure from a perfectly efficient market but Ben Stein’s 36 percent return is not a measure of the benefits from exploiting inefficiency. Rather it is the benefit to SAC Capital from exploiting others. But isn’t this kind of wealth transfer the real agenda for those who wish to privatize Social Security?

Friday, October 26, 2007

The Fire This Time and The Water Last Time

I see there are no refugees this time - only evacuees. And we don't have Barbara Bush talking about the greater opportunities dislocation offers to the dislocatees. And we do have free massages in the stadium. And so on. Words fail me. I'll take them from Leadbelly: "If you're white, you're alright/ If you're brown, stick around/ but if you're black, oh baby/ Get back, Get back, Get back."

Thursday, October 25, 2007

Speaking of Wal-Mart and Avoiding Taxes

Michael talks about how Wal-Mart has played the transfer pricing manipulation game to reduce its state income taxes. But this is small potatoes when compared to the Federal tax reduction game.

AB readers know that I have had lots of posts on this topic – often giving huge hat tips to Max Sawicky. Here I document the drop in Wal-Mart’s overall effective tax rate. Here I note how part of this play relates to how they source goods from China. As I note – none of this is rocket science so one has to wonder why the tax authorities are not doing a better job at enforcing arm’s length pricing under section 482.

Wal-Mart's Efficiency -- In Avoiding Taxes!

This Wall Street Journal article describes how Wal-Mart is able to pay about half as much state tax as a typical corporation.

Drucker, Jesse. 2007. "Inside Wal-Mart's Bid To Slash State Taxes." Wall Street Journal (23 October): p. A 1.

"In May 2001, Wal-Mart Stores Inc. issued an appeal to big accounting firms: Find us creative new ways to cut our state tax bills. Ernst & Young LLP swung into action. Senior tax experts at the big accounting firm swapped ideas via email and in a series of meetings. At least one gathering, according to an internal Ernst & Young calendar, took place in Wal-Mart's headquarters in the "Tax Shelter Room"."

"Big companies hardly ever discuss how outside accountants, lawyers and investment bankers help them cut their tax bills. But Ernst & Young's contributions to Wal-Mart's state-tax minimization project are outlined in a raft of documents filed in recent months in North Carolina state court, where the state's attorney general is challenging a Wal-Mart tax-cutting structure involving real-estate investment trusts. The material, which includes company emails and memos, provides a rare window into accountants' role in generating tax-reduction ideas at one major company."

"Companies often assert that tax savings are simply happy byproducts of transactions pursued for other business reasons. But documents from the North Carolina case indicate that Wal-Mart, from the outset, had one primary purpose: cutting its state income taxes. Ernst & Young worked to fulfill that goal. In 2002, for example, the accounting firm delivered a 37-page proposal laying out a smorgasbord of 27 potential tax strategies, most tailored to a particular state's tax code. It described one of them as "a very aggressive strategy with considerable risk."

"Publicly traded companies reduced their federal income taxes by about $12 billion in 2004 through potentially abusive tax transactions, according to Internal Revenue Service data. Some experts say companies save far more than that each year through elaborate tax-cutting maneuvers."

"Wal-Mart's 2001 letter to accounting firms got right to the point. It began: "Wal-Mart is requesting your proposal(s) for professional tax advice and related implementation services in connection with minimization of state income taxes in the following states: Arizona, California, Florida, Illinois, Indiana, Michigan, Minnesota, and Pennsylvania"."

"State income-tax rates for corporations average about 6.9%, and come on top of a federal statutory rate of 35%. Tax rates vary from state to state, and some states have no corporate tax at all on certain income. That provides ample opportunity for so-called tax arbitrage, in which companies allocate expenses and revenues between states in order to minimize taxes owed."

"On average, Wal-Mart has paid taxes at a rate equal to about half of the average statutory state rate over the past decade, according to an analysis of the company's regulatory filings by Standard & Poor's Compustat."

"In the early 1990s, it employed an "intangibles holding company," a unit operating in tax-friendly Delaware into which it transferred ownership of its brand names such as Sam's Club. It then made payments to that unit for use of those brands, deducting them as expenses from its taxable income in other states, according to court records. That strategy fell out of favor after several states successfully challenged Wal-Mart and other companies in court over the maneuver."

"Wal-Mart set aside about $526 million for state and local income taxes last year, not including its substantial property-tax bills, according to the company's financial reports. But its various state tax-cutting strategies seem to have had an impact. On average, Wal-Mart has paid taxes at a rate equal to about half of the average statutory state rate over the past decade, according to an analysis of the company's regulatory filings by Standard & Poor's Compustat."

"After Wal-Mart hired the firm in 1996 ..., an Ernst & Young tax executive urged his team to be discreet, according to a staff memo included in North Carolina court records. "We don't think there is much the state taxing authorities can do to mitigate these savings to Wal-Mart, however some states might attempt something if they had advance notification," he wrote. "We think the best course of action is to keep the project relatively quiet .... there just seems to be too many opportunities for it to get out to the press or financial community and we all know they are difficult to control, particularly when we are dealing with a client as well-known as Wal-Mart"."

"David Bullington, Wal-Mart's vice president for tax policy, said in a deposition that he began feeling pressure to lower the company's effective tax rate after the current chief financial officer, Thomas Schoewe, was hired in 2000. Mr. Schoewe was familiar with "some very sophisticated and aggressive tax planning," Mr. Bullington said, according to a transcript of the deposition, taken by the North Carolina attorney general's office in July. "And he ride herds [sic] on us all the time that we have the world's highest tax rate of any major company"."

"As Ernst & Young worked on its proposals, one high-ranking tax partner sent an email to a colleague addressing a concern often faced by companies: how to describe a tax-driven transaction in a way that won't create problems later on with tax authorities. "You asked if we have a document that details how the tax savings will work, how much they will save .... We really don't have anything like that except for the sales document, partly because we have avoided calling this a 'tax' project, to show that we did not have a tax savings motivation, rather it is a 'domestic restructuring' project," he wrote."

"As for Wal-Mart's "Tax Shelter Room," North Carolina officials asked Mr. Bullington about the odd name. In his deposition, the Wal-Mart vice president said the moniker was "a bit of a pun," stemming from the conference room's use by tax-department employees to conduct safety drills for natural disasters such as tornadoes."

Wednesday, October 24, 2007

Fred Thompson Takes Credit for Clinton’s Fiscal Record

This CNN Video is entitled Thompson Talks Immigration but the real whoppers come when Fred talks fiscal policy. Take a listen and then let’s talk.

Fred Thompson mentions cutting taxes and balancing the budget almost in the same sentence. He fails to mention the 1993 tax increase – opposed by all Republicans in the Senate – even though this was one of the two major moves that did lead to fiscal responsibility. The other major move has often been called the “Peace Dividend” where we felt able to sharply reduce defense spending. There is only one candidate running for the GOP Presidential nomination that would once again reduce defense spending. His name is Ron Paul and he tends to be mocked by his colleagues when they are not promising more tax cuts. So it goes in the Spend & Borrow wing that dominates the Republican Party.


The 17th National Congress of the Chinese Communist Party has just ended, with a roll-out of the new members of the Standing Committee of the Poltiburo of the Central Committee of the party. Identified among those as the current leading candidate to succeed newly reentrenched leader, Hu Jintao, is Xi Jinping, identified by news reports (WaPo) as one of many "princelings" in newly powerful positions, in his case, son of Xi Zhongxun, a former Politburo member and Vice Premier. Just as in North Korea, with Kim Il Jong succeeding his father, and the children of the ruling Nomenklatura coming to power in the later stages of the former Soviet Union, we see The New Class reproducing itself in the PRC. (Of course in the US we cannot complain to much with our succession of Bushes.)

Tuesday, October 23, 2007


Here is ranking of top 25 or so countries in real per capita income with their ranks in per capita carbon emissions, with Singapore and Taiwan missing data. Oil producers mostly do badly, but users of nuclear for electricity tend to do well. Real GDP is for 2006, IMF data, per capita carbon emissions from Wikipedia for 2004.

Real per cap GDP in order Per cap carbon emissions rank

Luxembourg 4 (burns lots of coal for electricity)
Ireland 32
Norway 12
USA 10 (third worst on list, big surprise)
Iceland 53 (lots of geothermal)
Hong Kong 72 (don't know why so good, best on list)
Switzerland 69 (don't know its breakdown for electricity production)
Netherlands 43
Denmark 36 (tops in use of wind power)
Qatar 1 (small OPEC oil producer)
Austria 46
Finland 21
Canada 11 (fourth worst on list, oil)
UK 37
Belgium 40
Sweden 66 (lots of nuclear and hydro)
UAE 3 (small OPEC oil producer)
Australia 13
Greece 44
Japan 34
France 63 (lots of nuclear)
Israel 29
Germany 38
Italy 52

Monday, October 22, 2007

Book Announcement


Monthly Review Press Edited by Michael D. Yates

With contributions by John Bellamy Foster, Vincent Navarro, William K. Tabb, Michael Perelman, Richard D. Vogel, David Roediger, Kristen Lavelle and Joe Feagin, Sabiyha Prince, Martha Gimenez, Stephanie Luce and Mark Brenner, Peter McLaren and Ramin Farahmandpur, Michael D. Yates, Angela Jancius, and Michael Zweig.

"Workers in the United States are systematically being allocated a shrinking share of the prodigious wealth we produce, and that's old news. This widening exploitation of workers and communities further exposes the myth of a 'just' capitalist economy. Despite the radical increase in economic and social inequality, we still lack a cohesive popular understanding and consciousness of why and how our market-based economic system facilitates this 'one-sided class war' against us.

"More Unequal: Aspects of Class in the United States is a strategically assembled collection which binds diverse, informed, often compellingly personal explorations of social and economic inequity together into a revealing journey through the scarred terrain of today's working-class reality. This book should be off the shelf and in the hands, and backpacks, of a new generation of working-class activists who can lead the struggle to collectively claim a new direction." -Jerry Tucker, former UAW International Executive Board Member & co-founder of the Center for Labor Renewal

"The shocking data about wealth, income, home ownership, access to health care, education, and political influence cry out for analysis which is driven by the desire not only to understand but also to transform. Fortunately, the scholars and activists who have contributed to More Unequal offer such analysis, and they do so clearly and succinctly. This book will prove useful to teachers, students, researchers, and activists as we struggle to understand how class is working in the twenty-first century United States." -Peter Rachleff, professor of history, Macalester College, and President, Working Class Studies Association

"This excellent collection helps us to further rehabilitate the discussion of class both in the United States and globally." -Bill Fletcher, Jr., writer and activist

"Extraordinarily comprehensive.focuses on the effects of class oppression and exploitation" -Roxanne Dunbar-Ortiz, writer

Table of Contents

Introduction & Acknowledgements - Mike Yates

1. Aspects of Class in the United States: A Prologue - John Bellamy Foster

2. The Worldwide Class Struggle - Vincent Navarro

3. The Power of the Rich - William K. Tabb

4. Some Economics of Class - Michael Perelman

5. Harder Times: Undocumented Workers and the U.S. Informal Economy - Richard D. Vogel

6. The Retreat from Race and Class - David Roediger

7. Hard Truth in the Big Easy: Race and Class in New Orleans, Pre- and Post-Katrina - Kristen Lavelle and Joe Feagin

8. Will the Real Black Middle Class Please Stand Up? - Sabiyha Prince

9. Back to Class: Reflections on the Dialectics of Class and Identity - Martha Gimenez

10. Women and Class: What Has Happened in Forty Years? - Stephanie Luce and Mark Brenner

11. The Pedagogy of Oppression - Peter McLaren and Ramin Farahmandpur

12. Class: A Personal Story - Michael D. Yates

13. Class for a Downwardly Mobile Generation - Angela Jancius

14. Six Points on Class - Michael Zweig

Contributors Notes Index

Michael D. Yates is associate editor of Monthly Review. For many years he taught economics at the University of Pittsburgh at Johnstown. He is the author of Cheap Motels and a Hotplate: An Economist's Travelogue (2006), Naming the System: Inequality and Work in the Global System (2004), and Why Unions Matter (1998), all published by Monthly Review Press.

Sunday, October 21, 2007

Rich and Poor Multipliers Again

Earlier I asked about the multipliers for the consumption of rich and poor people. Let me be a little bit and more explicit. I would assume that rich people spend a lot more on personal services and expensive goods.

Expensive goods tend to have much higher markups. Remember Henry Ford II responding to the influx of Volkswagens observing that mini cars mean mini profits. Expensive branded goods have very high markups, meaning relatively few jobs per dollar of expenditure compared to the spending of the less affluent. Personal services are probably bimodal. Some professional work would probably mean relatively few jobs per dollar of expenditure; some less prestigious work might mean quite a few jobs per dollar of expenditure; for example, underpaid immigrant nannies. Any thoughts?

Saturday, October 20, 2007

Would Redistributing Income to the Poor Increase National Savings and Long-term Growth?

It would seem that Scott Patterson has turned the usual tinkle down argument on its head.

As Michael notes, this WSJ piece is arguing:

The Wall Street Journal suggests that the economy might not be affected by the credit crunch because it will mostly hit the poor. Since the poor don't spend that much, the economy can happily sail along. I was wondering how multipliers might differ by income class.

Exactly the right question. The usual rightwing argument for NIBOR DOOH economics (take from the poor and give to the rich) is that the poor have a high marginal propensity to consume, while the rich have a high marginal propensity to save. My own (maybe too much Ando-Modigliani lifecycle dominated) is that the marginal propensities to consume v. save don’t differ by income class. But if the WSJ wants to tell us that the poor save more – great. I’m all in favor of things that would increase long-term growth such as movements that would reduce income inequality!

Economic Benefits of the Trickle-up?

The Wall Street Journal suggests that the economy might not be affected by the credit crunch because it will mostly hit the poor. Since the poor don't spend that much, the economy can happily sail along. I was wondering how multipliers might differ by income class.

Patterson, Scott. 2007. "Has the Crunch Filtered Down to Consumers?" Wall Street Journal (18 October): p. C 1.
"Dean Maki, an economist at Barclays Capital, expects households to muddle through even as lenders get more strict. He says many of these credit problems have hit lower-income consumers, while wealthier spenders remain largely unscathed. Roughly half of consumer spending comes from the top 20% of the income bracket, Mr. Maki says."

Friday, October 19, 2007

Lieberman-Warner: The Fall Lineup

I haven’t had time to study the new edition of Lieberman-Warner, which bills itself as this fall’s comprehensive political consensus on national climate change policy. The broad outlines provided here make two things clear however:

1. The bill falls far short of what is needed. It covers only a portion of the economy, sets targets that are too low and auctions too few of the permits. It allows too many loopholes, such as offsets and provisions to raise the caps against promises of future tightening. It rebates exactly none of the (insufficient) auction revenues. This last point is important for both political and economic (demand-sustaining) reasons. It micromanages funding for energy alternatives, with several earmarks that are dubious at best. It would take a much longer post to spell out all of the particulars, but I hope we will soon have a thorough analysis. (If you are producing one, or if one crosses your screen, please give us a link.)

2. The bill represents a compromise based on today’s political alignment. If it were to be passed, and if someone could get Bush to sign it as he lay in a hospital post-surgical room fogged out on painkillers, it would be a terrible mistake, locking us into a bad framework for years to come. 2008 should be the year of climate debate, not climate decision. Progressives should put forward a simple, comprehensive, forward-looking bill to focus the discussion, even though it would have no chance in the current congress. After November 2008 we should be in a position to get something on climate that goes far beyond what is possible today.

The U.S. Tax Bite: 1975 v. 2006

Via Greg Mankiw comes a chart provided by David Cay Johnston entitled Increasing Cost of Government. A couple of things strike me about this graph. The first is that the U.S. “tax share” as Greg calls it is #17 out of the 20 nations listed. The second is the statement that the share of GDP has increased in most nations, which includes the U.S. according to this 1975 v. 2006 comparison.

Point in time comparisons can be misleading especially when the measurement of taxes does not included deferred tax liabilities, which is why I have graphed both spending and taxes as a share of GDP for the period from 1967 to 2006 using information provided by table 3.1 from this source. The year 1975 was an odd one to pick for the comparison point. Taxes as a share of GDP may have been less than 27% as compared to 29.8% in 2006, but government spending as a share of GDP was 31% in 1975 as compared to 31.3% in 2006. You see, we had a recession back then followed by Ford’s tax cut designed to offset this recession.

To be fair, government spending as a share of GDP had spiked and then retreated for the next four years. Who knew Jimmy Carter was a small government Republican? President Carter’s term of office was followed by 12 years of Republican leadership where Ronald Reagan and George H. W. Bush promised to keep our taxes low. But it seems government spending as a share of GDP grew over this period. They were followed by big spending Bill Clinton – or so some would have you believe. But our graph shows spending as a share of GDP fell to 29.4% by 2000. Since then – spending as a share of GDP has increased. While George W. Bush would tell you that he cut our taxes, Milton Friedman might rebut with simply “to spend is to tax”.

Raiding Your Social Security Benefits

Mark Thoma demolishes some nonsense from Amity Shlaes so we don’t have to. First the nonsense:

The wage increases mean that newer beneficiaries get a bigger pension than their predecessors, even after adjusting for inflation. Thompson was suggesting that we base the formula upon inflation alone. Then every pensioner gets what his big brother or sister did, adjusted for inflation. But not more.

Mark notes:

Now, as to indexing, here's what happens if you don't adjust for rising living standards. Nominal wage indexing (as is done now) accounts for both changes in inflation and changes productivity over time (see the %Δ equation above), whereas price indexing only adjusts for price changes, it makes no allowance at all for changes in living standards (i.e. for changes in productivity).

True but we need to add one bit to this. Ms. Shlaes is not comparing what my son will receive when he retires some 45 years from now to what my daughter will get when she retires. Fred Thompson’s proposal will make sure that my kids get no more than I get even though they are likely to earn more over their lifetime than I did. Which means they will pay more into the Trust Fund than I did. Yet, they are supposed to get no more than their dad got? Is Amity Shlaes too stupid to understand this? If so, why is Bloomberg giving her a column?

Thursday, October 18, 2007

Schumpeter, War, and the Woeful Deficiency of Economic Theory

Was Schumpeter correct when he wrote: "Economics is a very unsatisfactory science. But it would have to be much more unsatisfactory than it is if such an event as a war, however extensive and destructive, sufficed to upset its teaching."

Was Schumpeter correct when he wrote: "Economics is a very unsatisfactory science. But it would have to be much more unsatisfactory than it is if such an event as a war, however extensive and destructive, sufficed to upset its teaching."

Schumpeter, Joseph A. 1954. History of Economic Analysis (NY: Oxford University Press): p. 1146

During all-out wars when a country's very existence is at stake, only the most foolish leader would rely on markets to run the economy. Also, during wartime, many people (excluding corporate executives?) respond to nonmarket incentives, allowing the economy to produce much more than conventional economic theory would predict.

Here is a short section from my book, Transcending the Economy:

Earlier, we discussed how economies cast aside the market when society mobilizes for war. People too behave differently during wars. Rather than performing work in a perfunctory manner, many people redouble their efforts on the job in order to contribute to the mobilization.

I do not deny that many people are unmoved by patriotic fervor. Nor would I suggest that wartime profiteering is unknown. The point is that such individualistic motives recede during times of war, while more socially-oriented behavior becomes more common.

People even leave traces of this changed motivation in the statistical residue of the times. For example, Robert Lucas, a conservative economist who won the Nobel Prize in Economics for his work in developing techniques that cast doubt on the effectiveness of government policy, estimated the average level of economic efficiency for the United States economy by calculating the trend of the ratio of output per unit of capital between 1890 and 1954. He found that, at times, for instance during depressions, the actual output per unit of capital fell below his trend line. At other times, the actual output per unit of capital exceeded the trend line.

Lucas discovered that during the war years, 1944 through 1946, the output per unit of capital surpassed the trend line by more than 20 percent. At no time, before or after, did the United States economy match this remarkable performance (Lucas 1970, p. 154).

This achievement is extraordinary because during this period, many of the most qualified workers were in the military rather than on the shop floor. The workers who replaced them had considerably less work experience. Because of decades of discrimination, the black workers who came from the South to work in Northern factories had far less education than the workers that they replaced. Similarly, many women without much experience in working for wages effectively "manned" the assembly lines.

Conventional economic theory suggests that industrial efficiency should have suffered dire consequences from this reliance on a supposedly less qualified labor force, yet Lucas shows that nothing of the sort happened. Instead, productivity soared.

Of course, we are accustomed to expecting productivity to increase during war time. War stimulates demand, which makes the economy work more efficiently. In addition, Lucas himself attributes some of the marvelous performance of the wartime economy to the use of overtime in industry.

While increased demand and overtime may have been a factor in stimulating the economy, emotional forces were also at work. War can make people pull together. War can create a sense of urgency. At times, powerful ideals can motivate working during times of war.

In the United States, World War II called forth just such a sense of idealism. People who labored in the factories in the United States during the war often did their best in order to contribute to the struggle against fascism. Such ideals were more compelling than greed for most workers.

Casey B. Mulligan, a colleague of Lucas's at the University of Chicago, found further statistical evidence suggesting the influence of ideals (Mulligan 1998). According to economic theory, only changes in monetary incentives can change behavior. When wages fall, work effort should shrink accordingly.

He found that roughly ten million more civilians were employed during the war than if employment had followed its prewar trend (Mulligan 1998, p. 1040), even though "after-tax real wages of manufacturing production workers were lower in absolute terms (and even lower relative to trend) during the war years 1942-1945 than in the few years immediately preceding and following the war" (p. 1044). Mulligan reported on his efforts to attempt to develop alternative explanations within the confines of standard economic theory to interpret this bulge in employment even though real after-tax wages were falling. In every case he failed, suggesting that patriotic idealism lay behind the rise in labor force participation. In other words, more people were working than would be expected based merely on the desire to earn more wages. Instead, people were coming into the labor force to contribute to the war effort.

Eventually, the patriotic consensus frayed around the edges. Workers became frustrated seeing their sacrifices unmatched by their employers who were enjoying unparalleled profits. As a result, toward the end of the war, strike activity began to pick up. Still, the spirit of community was sufficiently strong to produce the high levels of productivity that caught the attention of Robert Lucas.

Similarly, Israel mobilized 15 percent of its labor force for the Yom Kippur War, but the Gross National Product declined only 5 percent (Maital 1982, p. 114). The decline in production might not seem to be as impressive as the experience of the United States, but remember the United States had time to adjust to the wartime demands, while the Yom Kippur War was a brief affair.

The wartime experiences of Japan and Germany offer even more powerful illustrations of the ability of people to overcome adversity. Jack Hirshleifer, an economist from the University of California at Los Angeles, reported that ten days of bombing raids during July and August 1943 destroyed half the buildings in Hamburg. Yet, within five months the city had regained up to 80 percent of its productive capacity (Hirshleifer 1987, pp. 32-33). The United States government was interested to find out what determined the effectiveness of the Allied bombing attacks. John Kenneth Galbraith, the famous Harvard University economist, assembled a team that included some of the most prominent economists in the world. These researchers found that bombing only made the Germans more resolute. According to the findings of the survey, "the air raids of 1943-4 ... may have kept up the tension of national danger, and created the requisite atmosphere for sacrifice" (cited in Galbraith 1994, p. 131; see also Galbraith 1981, p. 205; and Scitovsky 1991, p. 258).

On August 6, 1945, the United States Air Force dropped an atomic bomb on Hiroshima. The next day, electric power service was restored to surviving areas. One week later, telephone service restarted (Hirshleifer 1987, p. 34).

No doubt the Germans and the Japanese, like their counterparts in the United States, worked overtime to rebuild their economic capacity, but even trebling the average work day would not have sufficed to accomplish what they did. Their success in reconstructing their economy required enormous creativity and ingenuity.

We also see a more intensive development of new technologies during periods of crisis. Ordinarily, the typical large corporation is timid about exploring new ideas, yet the same people, who typically display little creativity within the confines of the large corporations, are more inclined to promote great scientific breakthroughs under the urgency of war.

Based on his reading of Japanese history, Shigeto Tsuru, an important Japanese economist, proposed the concept of creative defeat, meaning that a horrendous defeat can unleash a torrent of energy and ingenuity. The end result can be an even greater level of economic development than would have occurred in the absence of the setback. In his words: "Japan is an example of a fantastically creative response to defeat. One recalls that Schumpeter used to puzzle the students of his 'Business Cycle' course ascribing the Japanese boom of 1924-1925 to the Great Kanto Earthquake of 1923. The defeat in the last war brought about, of course, a far greater scale of devastation in the economy of Japan, necessitating a fresh renovating start in almost every aspect" (Tsuru 1993, p. 67).

Sustainability Is Us

Dani Rodrik wonders whether econ blogging is sustainable. We have the answer.

Rodrik cites Mankiw, who thinks his blog is eating up too much of his time and concludes:

So if economists with high opportunity costs of time start to get out, shall we have a lemons problem on our hands? Will eventually the only prolific bloggers remain the ones that are not worth reading?

Now there is the obvious point that some of the big names in economics (not Dani thankfully) are a bit lemonish themselves, but we won’t go there. No, we will just point out that a shared blog like this one is the sustainable solution. I can’t speak for my co-conspirators, but I can barely find the time to write even short, minimal content posts like this one. If I had to do this every day I wouldn’t. But we have a team to pick up the slack.

The McGovern-Clinton Demogrant

John Hinderaker thought this idea was awful:

McGovern ran on a far-left platform that included a proposal that at the time was deemed risible - the "demogrant." The demogrant program was simple: the federal government would write a check for $1,000 to every American … But the demogrant has returned! Today, Hillary Clinton unveiled her own demogrant proposal: every newborn American baby will get a birthday present from the federal government in the form of a $5,000 check … It occurred to Scott that Hillary's proposal is basically a demogrant, adjusted for inflation. Out of curiosity, he went here and did the math. The result was striking. McGovern's $1,000 in 1972 was worth, in 2006 dollars, $4808.90. Add a few bucks for 2007, and Hillary's baby present is a dead ringer for the demogrant proposal that was laughed off the stage in 1972!

Guess which conservative economist gave this idea some support?

Greg Mankiw directs us to a paper by Jon Gruber and Emmanuel Saez entitled The Elasticity Of Taxable Income: Evidence And Implications. Greg emphasized this portion of their paper:

the optimal system for most redistributional preferences consists of a large demogrant that is rapidly taxed away for low income taxpayers, with lower marginal rates at higher income levels.

He adds:

If I were a redistributionist, here is what I might propose: A large fixed payment to every citizen, paid at the beginning of every month, financed by a proportional tax on consumption, such as a value-added tax.

When Senator Clinton floated her demogrant, Greg wrote:

The big problem with U.S. fiscal policy is that, over the years, politicians of both parties have voted for unfunded entitlements for the elderly, which will (unless scaled back) result in substantially higher taxes on future generations … How might this be funded? There are only three groups that could be asked to pay for the new entitlement with higher taxes (or lower benefits): the current elderly, those currently of working age, or the same future generations who are getting the new benefit and are slated to pay for existing unfunded entitlements. Which group do you think Senator Clinton has in mind?

It’s a fair question – but it does seem, the demogrant is not such a crazy idea if it is done in a fiscally neutral way. Of course, fiscal neutrality never stopped the GOP candidates for President from advocating tax cuts.

Tuesday, October 16, 2007

Social Security: U.S. Treasury Declares Trust Fund Reserves Not To Exist

Mark Thoma reads the latest from the Treasury Department so we don’t have to:

To the extent, however, that Social Security surpluses result in higher deficits in the non-Social Security portion of the budget, then government saving is not increased by higher Social Security surpluses. In that case, future Social Security benefits that would have been financed with higher issuance of publicly held debt will instead have to be financed with reductions in non-Social Security spending or increases in non-Social Security taxes.

Is it that easy for the Republican thieves in the White House? This line was put in context by Kent Smetters as I discussed here.

Check this out:

Today's deficit estimate release by the Congressional Budget Office is good news for American taxpayers. Like the estimates put forward by the Office of Management and Budget, it shows that our government is on a path to meeting the goal I set forth of putting the budget into surplus by 2012.

James Hamilton (exuse me: Jim's capable sidekick - Menzie Chinn) challenges this happy talk and Mark Thoma has more. Both note that the surge in tax revenues may be over so the deficit might not continue to fall. But notice that President Bush is talking about the unified deficit. As noted here, the general fund deficit remains quite large.

Yet George W. Bush and those in the GOP who wish to replace him as President have no intention to either scale down our defense spending (after all, our stupid invasion of Iraq is their priority) or reverse that tax “cuts”. Translation –they wish to squander those Trust Fund surpluses on the Iraq War and income tax cuts for the rich. And now his Treasury Department admits he has looted the Lock Box. Besides ending our stupid invasion of Iraq, the issue during the 2008 campaign should be whether the Lock Box will be honored.


By Barkley Rosser

A front page story in WaPo today reports that the proposed agreement between the US and India for the US to assist in providing fuel for civilian nuclear power plants in India may be going down due to opposition from leftist parties in India to India becoming "too close" to the US, although the right-wing BJP has also joined in opposing this agreement (the leftists are in the coalition government, the BJP is not). This is true on the surface, but the report leaves out important details. One is that the US has been pressing India not to build a natural gas pipeline to Iran, long an ally (neither is too fond of Pakistan), which feeds the complaints of the opposition. Also, there has been opposition in the US over India violating the Non-Proliferation Treaty by actually building nuclear weapons, with vague US pressure on that issue also raising hackles in India.

The further wiggle on this not covered in the story is that many nuclear scientists in India also oppose the plan because they see it bringing to an end India's efforts to develop an alternative, independent, cheaper, and safer nuclear technology, thorium reactors, while putting India into a dependent position on the US for nuclear fuel. Beyond this, failure of this agreement may well make far more difficult any meaningful effort to restrain global carbon emissions over the next few decades. The thorium tech is not really ready to go. India will be massively increasing its electricity production potential over the next couple of decades, no matter what anybody says. Given its poverty, they are only going to go for the cheapest available "off the shelf techs." The hard bottom line is that those alternatives for India in a serious way are coal or nukes (although natural gas from Iran might help a bit). Failure of this agreement may mean that they will go with coal, and that will be that, too bad for the world with respect to global warming.

Conduitry: A Blast from the Past?

It appears that the conduit consortium is simply an extra layer of securitization. It reminds me of the way the lender of last resort function was implemented, sort of, with several noticeable failures, in the era preceding the creation of the Fed. It has the potential to further concentrate risk, like an Army Corps flood control project that can withstand a category 3 but not 4 storm—if there are any buyers.

From an equity standpoint, I think James Hamilton has it right:

In my opinion, part of what created the current problem was the perception that participants were too big and too many to fail. If the government won't let Citigroup fail, could it allow a superconduit to go down?

I am skeptical of any claims for a feel-good, this-will-solve-all-the-problems fix. The reality is that someone must absorb a huge capital loss. The question we should be asking from the point of view of public policy is, Who should that someone be?

My answer is: the shareholders of Citigroup.

Monday, October 15, 2007


One of the more innovative of the George Masonites is Robin Hanson, who runs the philosophy of science-oriented blog, overcoming bias. He is a big fan of the accuracy of prediction markets. But the various betting markets on the Sveriges Riksbank Prize for Economics in Memory of Alfred Nobel, such as, were just way off. The top bets as of yesterday were in order, Fama, Barro, Tullokck, Helpmann, Grossman, Dixit, and Tirole. None of the actual winners: Hurwicz, Maskin, or Myerson, was even in the betting pool. Oooops!

I think what we see here is the hand of the Committee Chair, Juergen Weibull, a game theorist. I had heard scuttlebutt that Myerson and Maskin would be the winners of "the next Nobel in game theory," but figured that was a ways off because of that being it two years ago. So, Weibull figured out to give it to game theory for an application, in this case, mechanism design. A question arises if this is his last gasp before stepping off the committee, or if he is a new Assar Lindbeck, a dominating figure who will be around for years. In any case, for those who are not aware of it, Hurwicz's approach to mechanism design looks an awful lot like a an effort to figure out how to do central planning right.

stock options

Krugman has beat me to the punch on this, but Floyd Norris' article in the Friday Times is interesting. He summarizes a paper looking at the effect of stock options on CEO risk-taking. The paper finds that there is a tendency to take inefficient levels of risk associated with being paid with options. This is what would be predicted by simple theory, but I haven't seen it tested before. Here is an example I use with my classes:

Suppose a CEO has option with exercise prices equal to the current market price of the stock, $20. She has two directions she might take the company in. In one, earnings and therefore the stock price, will more or less certainly increase by 20% over the next year (the "therefore" depending on the heroic assumption that the stock market is efficient). With the other direction, earnings have equal chances of doubling or being cut in half. Unless the owners are insanely risk-loving, the second direction is one they would never take; it has both higher variance and lower (actually zero) expected return. The CEO, on the other hand, makes an expected return of $4 per share taking the first direction, compared to 1/2($20) = $10 taking the second. The point is that, for the CEO, the 2nd direction constitutes a one-sided gamble. If the price doubles he exrecises the option and makes $20 per share. If the pice tanks, the option is worthless - the CEO neither gains not loses: heads, she wins; tails, the stockholders lose. Norris notes that in-the-money options would take away these perverse incentives - then the CEO would lose something if the stock price fell. (Hmm: is this last point destined to emerge as part of an apologia for back-dating options!)

Savings: The Consequence, not the Cause, of Current Account Imbalances

You write stuff and hope people read it. Clearly the recent discussion on this blog and elsewhere of whether there is a savings glut over there or a savings shortage over here ignores completely the argument I made this year in Challenge. Was my case really that weak?

Sunday, October 14, 2007

If Manufacturing Creates a Middle Class, What Does a Service Economy Create?

Dani Rodrik thinks about the Chinese billionaires and has this insight:

I think because incomes from real estate are based on scarcity rents: you buy the right property at the right time, and you get rich very quick. No-one can dissipate your rents. But if you are in manufacturing, you have to compete not only with your international competitors, but also with copycats and imitators at home. So the rents from successful ideas get dissipated quickly. It's not that the overall gains are not large, and even larger than in successful property investments. It's that the innovators can hold on just to a small share. So real estate creates billionaires; manufacturing creates a middle class.

The U.S. is seeing its manufacturing sector decline as job creation seems to be in the service-producing sector rather than the goods producing-sector. This source notes the total nonfarm employment rose from 121.232 million in January 1997 to 138.265 million last month. But the goods-producing sector fell from 23.619 million in January 1997 to 22.324 million last month, while the service-producing sector saw employment rise from 97.613 million in January 1997 to 115.914 million last month. Over this period, we have also seen an increase in income inequality. When I think of the service economy, I think in terms of bimodal distributions:

Bimodality of the distribution in a sample is often a strong indication that the distribution of the variable in population is not normal. Bimodality of the distribution may provide important information about the nature of the investigated variable (i.e., the measured quality). For example, if the variable represents a reported preference or attitude, then bimodality may indicate a polarization of opinions. Often however, the bimodality may indicate that the sample is not homogenous and the observations come in fact from two or more "overlapping" distributions.

Some service sector jobs require few skills and have intense competition. Think of burger flippers and those who clean hotel rooms. Some service sector jobs require an advanced degree and have all sorts of barriers to entry. Think of doctors and lawyers. So how much of the increase in income inequality comes for the U.S. moving from a manufacturing economy to a service economy?

Saturday, October 13, 2007

Government, Corporations, Corruption, Money, Power, and Skirting the Law

I was stuck by three stories today in which the Government, Politicians, and Business used their influence for nefarious purposes.

The Washington Post reports that court documents unsealed in Denver this week suggest that the indictment of former Qwest chief executive Joseph P. Nacchio, who was convicted in April of 19 counts of insider trading, may have not have been guilty. The documents suggest that because Qwest refused to go along with illegal wiretapping, the government retaliated by yanking a lucrative contract that threw the company into turmoil. He is using the allegation to try to show why his stock sale should not have been considered improper.

At the same time, Congressman Jefferson argues that his case should be dismissed because such an act is technically closer to influence-peddling than bribery.

Finally, Kathleen Brown of Goldman Sachs, who is also a miserably failed Democratic for Governor of California and who is also the sister and daughter of other governors of the state, was the person who first broached the idea that Governor Arny lease the state lottery to a private company. Arny is proposing that the proceeds from the lease will help to finance his health care proposal.

The New York Times also estimates if "privatization plans now being considered in four large states -- California, Illinois, Texas and Florida -- were to go through, Wall Street could conservatively reap a minimum of $250 million in fees alone.

Sucking Up the World Savings Glut

If the world has been through a savings glut, Michael raises a very good question as to why wages are not being bid up. Some of us, however, have wondered whether we have gone through a global investment deficiency. To some Americans, the notion of a savings glut sounds foreign as our graphs show that the nation’s “gross savings” as a share of GDP fell from around 14 percent to just over 10 percent – in part because of the Bush spend but do not tax policies. Net national savings, which is gross savings minus depreciation, has barely been above zero. We are thus running a repeat of what happened in the 1980’s when Ronald Reagan’s “save and invest” translated into less of each.

But notice something - the fall in U.S. savings did not translate into a one-for-one decline in investment. At first, U.S. exports declined but have recently returned to the same level of GDP as we saw in 2000. Also, imports as a share of GDP have increased so our current account deficit is doing as much as one nation seems to be able to suck up whatever world savings glut it can. But maybe this is the whole idea behind GOP fiscal policy – less saving means capital-shallowing rather than capital-deepening. Which of course as Michael notes – translates into less long-term wage growth.

Savings Glut Conundrum

If there is a global savings glut, why does capital get such a big share of the pie? If finance is so abundant, why is there not great competition for labor, bidding up wages?

Does Greg Mankiw Think the Long-run Budget Constraint is “Cute”?

In the comment box of this post, Greg Mankiw may have been the first to call this Angrybear cute. Why thank you! The point of Greg’s post is that the Federal income tax is quite progressive. My point is that talking about a subset of taxes is a bit disingenuous. Kevin Drum and the conservative Tax Foundation prefer to look at total taxes. My only complaint with their analyzes is that they did not factor in those deferred tax liability from George W. Bush’s fiscal irresponsibility. But then how could? This Administration is not telling us who will pay these deferred taxes. In their view, no one will.

Update: Greg took his graph from Chris Edwards who claimed:

The Bush tax cuts substantially reduced tax rates for people in every income group. Indeed, those at the bottom had the largest relative reductions in their tax rates … I’m for lower taxes for everyone, but I wish people would look at the actual data first before carping about the rich supposedly being specially favored by recent tax cuts.

So much malarkey, so little time. Chris and Greg know the following two things are true: (1) the long-run government budget constraint holds; and (2) Federal spending rose even as a share of GDP since George W. Bush took office. The implications are clear: George W. Bush has raised – not lowered – the tax bite. But Greg pretended he did not get my “cute” point at first. I find this truly amazing. After all – economists have been talking about deferred taxation ever since the 2001 tax deferral was signed into law.

Friday, October 12, 2007

Irony Alert: Stock Market Punishes American Airline for NOT Going Bankrupt

"During the industry downturn after the September 11, 2001, terrorist attacks, American was one of the most frugal spenders and, in some areas, aggressive cost-cutters as Mr. Arpey avoided the easier path taken by rivals in bankruptcy-court proceedings. Now, investments to improve operations for the long haul, including better customer service and new aircraft interiors, are adding to the carrier's high costs. "They have a lot more work ahead of them than other names because of the fact that they haven't been through bankruptcy," said Standard & Poor's airline equity analyst Jim Corridore, who has a "hold" recommendation on the stock."

Whatever Happened to the Efficient Market Hypothesis?

The Wall Street Journal has a front page story today about the lack of transparency in securities. Remember, one of the great accomplishments of the market is to provide accurate information to allow for something akin to perfect efficiency. Milton Friedman would tell us that there will be inefficient speculators, but the market will ruthlessly purged them, leaving only the great ones who can guide the economy efficiently.

Financialization and securitization was supposed to distribute risk even more efficiently. Unlike most fairytales, I suspect this one will not have a happy ending. Well, here is the article:

Pulliam, Susan, Randall Smith and Michael Siconolfi. 2007. "U.S. Investors Face An Age of Murky Pricing: Values of Securities Tougher to Pin Down." Wall Street Journal (12 October): p. A 1.

"Since the invention of the ticker tape 140 years ago, America has been able to boast of having the world's most transparent financial markets. The tape and its electronic descendants ensured that crystal-clear prices for stocks and many other securities were readily available to everyone, encouraging millions to entrust their money to the markets. These days, after a decade of frantic growth in mortgage-backed securities and other complex investments traded off exchanges, that clarity is gone. Large parts of American financial markets have become a hall of mirrors."

"The hazards of this new age of uncertainty became clear at Dillon Read in March, when rising defaults by homeowners were hammering the value of mortgage securities. John Niblo, a hedge-fund manager at the firm, acted fast. He twice slashed his fund's valuation of securities tied to "subprime" mortgages, knocking them down by about 20%, or nearly $100 million, say traders familiar with the matter. But managers at UBS AG, Dillon Read's parent company, were irate. The Swiss banking giant was carrying similar securities on its books at a far higher price, the traders say. In conference calls, the UBS managers grilled Mr. Niblo on his move. "I'm marking to where I could reasonably sell them," Mr. Niblo responded during one call, according to the traders familiar with the conversations."

"Today, "way less than half" of all securities trade on exchanges with readily available price information, according to Goldman Sachs Group Inc. analyst Daniel Harris. More and more securities are priced by dealers who don't publish quotes. As a result, money managers can no longer gauge with certainty the value of some assets in mutual funds, hedge funds and other investment vehicles -- a process known as marking to market. An official at the Securities and Exchange Commission said recently that some bond mutual funds might be using outdated or unrealistic prices to value their portfolios."

"Billionaire investor Warren Buffett advocates more transparency in pricing. "Some marks can be pretty imaginative," he says. "They call it 'marking to market,' but it's really marking to myth." He says that before funds publish financial statements, they should sell 5% of hard-to-value positions to gauge values."

"Some Wall Streeters have a motive to inflate marks: Their bonuses often are tied to the value of their holdings. A Lipper & Co. hedge-fund manager, Edward Strafaci, earned bonuses of $3.9 million between 1998 and 2001 based on improperly marked convertible bonds, according to the SEC. Mr. Strafaci overstated the value of the bonds he managed, despite warnings from his traders, according to a civil complaint charging securities fraud. The value of a $722 million Lipper hedge fund later was cut in half, and Mr. Strafaci pleaded guilty to criminal securities fraud."


If I were in Congress, I would have voted for the resolution to identify the Ottoman genocide of Armenians a genocide as a matter of principle. However, I share with Juan Cole ( the sense that out of the 92 years since that horrific event, this is probably the most inappropriate year to have passed such a resolution, even though it is totally bizarre that the Republic of Turkey does not simply agree that its corrupt predecessor did indeed engage in such a genocide and then move on. Cole points out that while Turkey has been a super good ally of the US in NATO, ranging from providing troops in the Korean War to its continuing provision of the crucial Incirclik Air base, the US has: a) promised a billion in aid after the 91 Gulf war, only to renege, b) invaded and overthrown Saddam against specific desires of Turkey, thereby increasing the threat of Salafist Sunnis and fundamentalist Shi'is (including in neighboring Iran) and also leading to c) the newly empowered Kurdish Regional Government (KRG) allowing bases for PKK guerrillas who have killed 28 Turkish soldiers in the last few weeks, leading to Turkey threatening to invade Kurdistan, and d) allowing the KRG to control the police in oil-rich Kirkuk and also Turkmen-inhabited Tal Afar, with possible full control passing to the KRG, including of the massive future oil revenues to come out of that area.

Speaking of the KRG, Ben Lando at reports that the KRG has signed two more oil exploration agreements, with two more pending. The new deals are with Heritage Energy of Canada and Perenco S.A. of France. While the KRG has declared that this is "come and get it now or miss out" time, the big oil majors continue to hold back due to the continuing opposition of the central Iraqi government in Baghdad to all these deals. Oh, and btw, Lando also reports that contrary to previous public statements, apparently a rep of Hunt Oil did discuss their impending oil deal with the KRG with State Dept. reps (AID to be precise) in Irbil on Sept. 5.

General Fund Deficit Tops $550 Billion for Fourth Year in a Row

My Angrybear post graphs and discusses the fact that total Federal debt has increased by more than $550 billion over the fiscal year – again! The White House will tout how the unified deficit has declined but since they will not tell you that this is because those Trust Fund surpluses are rising, I will. Please excuse my testiness in this AB post. It seems my old cave has been invaded by some of Karl Rove’s trolls.

Wednesday, October 10, 2007

Free Trade: Bhagwati Takes on the Critics with Harsh Rhetoric

Dani Rodrik makes the following observation about a recent op-ed from Jadesh Bhagwati:

Jagdish Bhagwati is a sweet and courteous man in private, but his writing often makes me cringe. That is not because I frequently disagree with him, but because of the rhetoric he uses to attack his intellectual opponents. It's as if he has an evil twin that sometimes takes control of his writing hand.

The passage that made Dani cringe seems to have been:

But Mr Blinder seemed unaware of the fact that outsourcing via the internet was the mode of service transactions that the US lobbies were keenest about in the Uruguay round of trade negotiations: they saw that they would be the big winners, as no doubt they are. They hugely dominate transactions in high-skill and high-value services in architecture, law, medicine, accounting and other professions. Mr Blinder, when challenged, shifted ground to arguing that, as services became tradeable online, the number of jobs that would become “vulnerable” would rise pari passu, requiring adjustment assistance. However, there is hardly any serious trade economist who has objected to providing adjustment assistance. The first adjustment assistance programme in the US goes back to 1962. Virtually all trade legislation since has tried to improve on it. Many trade economists have written extensively on the subject. Mr Blinder, who started talking poetry, has therefore wound up talking prose. We free traders have no problem with him as he backs into our corner. But if he is to remain the new icon for those who oppose free trade, they have to be pretty desperate.

Something tells me that Alan Blinder can rise above this rough rhetoric. The specific passage that surprised me was the notion that the possibility that compensation might theoretically be possible cures all ills. Professor Bhagwati earlier had noted the 2004 paper by Paul Samuelson:

Autarky real per capita well being, does not deny that new technical Chinese progress in goods that America previously had competitive advantage in can, ceteris paribus, lower permanently measurable per capita U.S. real income. Nor does it deny that technical progress in China's export goods can, ceteris paribus, hurt permanently her own net measurable per capita real income itself when demand inelasticity prevails. Ergo, the winds of dynamic comparative advantage cannot be counted on to create in each region new net gains of the gainers assuredly greater than the new net losses of the losers. However, correct Ricardian theory does imply that worldwide real income per capita does gain net, so that winners' winnings will suffice worldwide to more than compensate losers' losings--some cold comfort in a scenario of many semi-autonomous nations.

Bhagwati would correctly note that the Chinese likely gain more than the losers lose –so in theory – the Chinese winners could compensate the American losers. But seriously – when do we ever see such compensation taking place?

Tuesday, October 9, 2007

The Obama Carbon Plan

2008 will be the year America debates climate change policy, hopefully without descending completely into election-year inanity. 2009 will be the year we get a policy. For an issue of this magnitude, that’s a fairly short time frame, so every turn of events counts.

Today Barack Obama has gone on record with his own approach. By my reckoning he got almost everything right, but there’s one huge missing piece. He is right on:

• setting a serious target: an 80% reduction in emissions by 2050 is the minimum we should aim for, if we take the scientific evidence seriously. We can get there only by starting soon and staying on course.

• capping carbon emissions: a cap is necessary if we are going to try to live within ecological limits, and it is far preferable to a carbon tax, as I’ve argued earlier on this august site.

• auctioning the permits: as Obama said, letting the cows out of the Barnes, “Businesses don’t own the sky, the public does...”

• rejecting offsets: he doesn’t even mention them.

• investing in a non-carbon future: we need basic R&D, infrastructure and other initiatives to turn our economy around.

The only element that’s lacking is a commitment to rebating most of the auction revenues back to the people on a per capita basis. Economically, this is necessary to protect real incomes and avoid a dangerous contraction of consumer demand. (The higher energy prices we will be paying under any reasonable cap will be in the hundreds of billions of dollars.) Politically, it is necessary to win support for tough limits on carbon emissions. After all, if it is true that we own the sky, we should share in the income it generates. Finally, a per capita rebate would constitute the most progressive income redistribution program since the New Deal, a big consideration at a time of spiraling inequality.

So how do you finance those green investments if you give the money back? Answer: by ending pork barrel subsidies to the nuclear and fossil fuel mafias ($24B give or take a few) and rethinking national security, for starters. NB: if rebating the auction proceeds on an equal share basis is highly progressive, withholding a big chunk of it for other uses is highly regressive. Finance public investment out of taxes.

Find me a lyrical economist

From a review in today's Times of a concert devoted to the work of Esa-Pekka Salonen:

(Salonen's music contains) "a recurring impulse to battle its own tendency towards lyricism, quashing a melodic passage in "Prologue," for instance, with a flatulent blat from the oboe."

I suppose "flatulent blat" is otiose - can there be a non-flatulent blat?- which just goes to show that non-otiosity (which may spell-checker says isn't a word) in writing isn't everything.

Would that we had economists with a tendency towards lyricism, to battle or not. Maybe some of Samuelson's history of thought papers would qualify, with elegant derivations undercut here and there with sly wit. Any other candidates?

Monday, October 8, 2007

A Tangled Web of the Old and the New Economy

Franklin, H. Bruce. 2007. The Most Important Fish in the Sea (Washington, DC: Island Press) tells the gruesome tale of the depredation of world's supply of menhaden, a fish that represents the basic feedstock for the carnivorous fish and which keep the overgrowth of algae in check. A single corporation, Omega, owned by Malcolm Glazer is the chief destroyer. Omega got the business from Zapata Oil, a company founded by Bush the First back in 1953. By 1961, Bush sold his stake in the company. By 1998, Zapata became one of the most ridiculous examples of the excess of the world.

Ofek, Eli and Matthew Richardson. 2002. "The Valuation and Market Rationality of Internet Stock Prices." Oxford Review of Economic Policy, 18: 3 (Autumn): pp. 265-87.

275: "As an example, consider our favourite illustration of Zapata corporation. Zapala was founded in 1953 by former US President George Bush as an oil and gas company. However, by early 1998, Zapata had transformed itself into a company, albeit still 'old economy', specializing in meat-casings and fish oil. On 27 April 1998, Zapata's management announced that it was going to form a new company to acquire and consolidate Internet and e-commerce businesses. Its first foray into this sector occurred in May when it bid for Excite, which was the second largest Internet search directory at the time. Zapata's bid was rejected by Excite's management for its 'complete lack of synergy', as quoted in Bloomberg at the time, covering Excite's press release. In July, Zapata made further announcements that it was purchasing about 30 Internet websites. As the market for Internet stocks deteriorated through summer and autumn of 1998, Zapata announced that it was re-evaluating its Internet business strategy and no longer purchasing the websites. On 23 December 1998 the company reversed course again. And stated that it was getting back into the internet business and would be forming the subsidiary, On this news, shares rose 98 per cent in New York stock-exchange composite trading. This type of example is not atypical and is representative of the Cooper et al. (2001) study." Cooper, Michael, Orlin Dimitrov, and P. Raghavendra Rau. 2001. "A by Any Other Name." Journal of Finance, Journal of Finance, 56: 6 (June): pp. 2371-88.

[On 8 October 2007, Reuters reported, "Zap.Com is a public shell company that does not have any existing business operations. From time to time, Zap.Com considers acquisitions that would result in it becoming an operating company. Zap.Com may also consider developing a new business suitable for its situation.