As if the health care situation were not bad enough, Business Week has an very good report showing how medical providers are signing unwitting patients up to transfer their bills onto credit cards that charge unconscionable rates. How much further can this crap go?
36: "... hospitals and clinics are bringing in more sophisticated help. They are transferring patient accounts wholesale to finance experts, banks, credit-card companies, and even private equity firms. Many of these third parties use credit scores and risk-analysis software to price the debt and impose interest rates as high as 27% on past-due bills."
36: "A host of nimble firms like CompleteCare in North Little Rock, Ark., began exploring this terrain years ago. Bigger players have jumped in more recently, although the market remains fragmented and reliable market share information isn't available. U.S. Bank, a U.S. Bancorp unit, finances about $2 million in patient debt per month through a medical-benefit firm, charging most customers annual interest of 13.5%, and as much as 24% on late bills. General Electric's powerful financial arm markets its CareCredit card to dentists, plastic surgeons, and some hospitals, with loan volume expected to hit $5 billion this year, up 40% from 2006. Citigroup and Capital One now offer similar cards. "Everybody is saying [medical finance] is the next horizon -- whether it is lines of credit or credit cards," says June St. John, a senior vice-president at Wachovia, which is exploring the business. Whetting all these appetites is the $250 billion consumers pay in medical expenses out of their pockets, an amount that doesn't include insurance premiums. That's an estimate for 2005 from the consulting firm McKinsey & Co. The figure could hit $420 billion by 2015."
36: "Many patients say they don't realize their debts are being shifted to such interest-charging middlemen as GE Money Bank, the unit that issues the CareCredit card."
39: "CompleteCare, the small Arkansas firm ... says it works with 40 hospitals and more than 400 physician practices across the country. Addressing potential health-industry clients, the company boasts on its Web site that it "pioneered the concept that patients become consumers the minute they walk out of your facility"."
39: Patients can sign an admission-consent forms that include a small-print section authorizing the hospital to turn over her account.
Grow, Brian and Robert Berner. 2007. "Fresh Pain for the Uninsured." Business Week (3 December): pp. 34-41.
http://www.businessweek.com/magazine/content/07_49/b4061001.htm
Monday, December 31, 2007
More Health Care Outrages
Leon Walras and the Nobel Peace Prize
Kissinger's nauseating Nobel Peace Prize award might deflate some of the interest in beyond Leon Walras's nomination. Walras wrote his own nomination and had some colleagues submit it.
The basis of his nomination was his work in mathematical economics. Although he wrote almost about free trade, his claim was that his work had produced a scientific basis for free trade and free trade would be certain to establish a regime world peace. Unfortunately, the nomination went to the great advocate of peace, Theodore Roosevelt.
See Sandmo, Agnar. 2007. "Retrospectives: Léon Walras and the Nobel Peace Prize." Journal of Economic Perspectives, Vol. 21, No. 4 (Fall): pp. 217-28.
Holiday Reading
I am currently reading Charles Taylor's A Secular Age. It is making me crazy. I love Taylor - his Sources of the Self was hugely important to my intellectual odyssey (I understand this is not any kind of recommendation!). The theism that was not explicit in Sources is in full force in this new book. What I first learned from Taylor is the what I'll call the autonomy of the normative and the inadequacy, as a a consequence, of naturalistic explanation in the social sciences. Norms have "authority" and part of the explanation of a person's action in accordance with a norm is, I think, the correctness of the norm - just as the explanation of a person's holding a belief is often the truth of that belief - often, not always. I think we can't make sense of science itself without a notion of objective norms (Cf, inter alia, Jean Hampton's The Authority of Reason). But anyway, does a commitment to the autonomy of the normative commit me to theism, as Taylor's later work more and more seems to imply?! Because then I have a major dilemma on my hands, given my long-standing atheism.
Oh well, Happy New Year, everyone!
Economists for Edwards
Sometime today in Iowa the Edwards campaign will release its official list of Economists for Edwards. The leader of the group is James K.Galbraith, and I announce here that I am among the 30 on the list that he has assembled.
I think he is the most consistently progressive among the leading Dem candidates. I also think he is the most electable, with polls suggesting he is the only one of the top three who is solidly ahead of all four of the top GOP contenders in the electoral college. I am concerned that at one point he went after Hillary briefly over social security, but it is not in his platform, and she has promised to appoint a commission. Obama seems more clearly down on social security and also has a health plan that will not cover all Americans. On this important issue, Edwards seems to have the best plan. I also note that while Edwards voted for the Iraq war resolution (he was on the Senate Intelligence Committee at the time, giving him more foreign policy experience than many know he has), he has been strongly against it and a war in Iran since, and probably gave the best followup on the Bhutto assassination of any candidate, actually calling Musharraf up on the phone. I disagree with him on the idea of renegotiating NAFTA, but then all the Dem candidates want to do that. I conclude by noting that it is rate that one gets to support someone who is both the most progressive and the most electable, a winning combo, I say.
Sunday, December 30, 2007
Away with Sarbanes Oxley?
Whatever happened to the rabid calls for eliminating Sarbanes Oxley? Does anybody even Enron, Tyco, Worldcom, etc? After calls for strong regulation to prevent such things from happening again, Congress gave us the weak Sarbanes Oxley. Not long after, the business press was squealing about the excessive requirements of Sarbanes Oxley.
Now that the subprime mortgage scam is imploding, Sarbanes Oxley has fallen from notice.
Any thoughts?
Running on empty....
Fasten your seatbelts, it's going to be a bumpy night!
Los Angeles TIMES
New cars that are fully loaded -- with debt Americans are rolling over loans, often ending up owing more for the vehicle than it's worth.
By Ken Bensinger / Staff Writer
December 30, 2007
When Jennifer and Bobby Post traded in their 2001 Chevy Suburban last year for a shiny new Ford F-350 turbo diesel with an extended cab, it seemed like a great deal. Even though they still owed $9,500 on their SUV after the trade-in value, they didn't have to put a penny down.
The dealership, near the Posts' home in Victorville [California], made it easy; it just added the old debt to the price of the new truck and gave the couple a seven-year, $44,276 loan.
The Posts were a little worried about taking on such a long obligation, but they couldn't pass up a monthly payment under $700. Now they're having regrets.
"I didn't realize how much debt was in it," said Jennifer Post, who has since moved with her family to Iowa. Now, she'd like to get rid of the truck but can't, because there's so much debt that she'd literally have to pay someone to take it off her hands.
"We have no options," she said.
Americans haven't just been taking out risky mortgages for homes in the last few years; they've also been signing larger automobile loans for significantly longer terms than they used to.
As a result, people are slipping into a perpetual cycle of automobile debt that experts think could lead to a new credit crunch extending from dealerships to driveways and all the way to Wall Street.
Aren't you glad that they've tightened consumer bankruptcy laws, making this "perpetual cycle" more like good old-fashioned debt peonage?
Gone are the days of the three-year car loan. The length of the average automobile loan hit five years, four months in October, up more than six months from 2002, according to the Federal Reserve. And nearly 45% of loans written today are for longer than six years. Even some staid lenders owned by the carmakers, such as Toyota Financial Services and Ford Credit, are offering seven-year financing. And a few credit unions, particularly in the West, are tinkering with the eight-year note.
Credit unions, alas, are acting more and more like commercial banks. They used to be more responsible to their members.
At the same time, the amount of money drivers owe on their cars is soaring. In October, the average amount financed hit $30,738, up $3,500 in just a year and nearly 40% in the last decade, according to the Fed. More troubling, today's average car owner owes $4,221 more than the vehicle is worth at the time it's sold -- up from $3,529 in 2002, according to industry analyst Edmunds.
it's an understatement to say that that's much too much!
... It's not just individual consumers who are at financial risk. Nationwide, an estimated $575 billion in new and used auto loans are written every year by auto manufacturers, banks, credit unions and other lenders. About 30% of the loans that are originated by banks, and 100% of those issued by automaker financiers, are, like mortgages, repackaged and sold as securities, according to the Consumer Bankers Assn.
Aha! more securitization, in which spreading the risk around so that people can't perceive it anymore is treated as if it were abolishing risk.
Analysts warn that just as investors didn't comprehend the risk inherent in some of the more exotic home mortgages in recent years, they aren't considering how risky these car loans are. If longer loan terms allow debt on the loans to grow too large, many drivers may simply default, leading to expensive repossessions.
And even those who keep paying their bills may reach a point, like Gerhardt, where they simply can't afford another car. That could send vehicle sales down the drain, a nightmare scenario for an industry that has already taken a hit this year from slower consumer spending and higher gas prices.
It could also lead to serious losses among financial institutions that have invested in car debt. Among securitized auto loans, two-thirds have terms longer than 60 months, a fact that Standard & Poor's, which rates auto debt for sale on the secondary market, calls a "credit concern."
This month, S&P reviewed its ratings on $113.5 billion in auto loan securities it rated in the last two years out of concerns over growing losses. It didn't make any downgrades but predicted that "rising losses will continue into 2008 across all segments of the auto loan market."
S&P has found that delinquencies of more than 60 days on car loans issued this year to borrowers with the best credit are up 20% compared to those issued last year, while delinquencies on loans issued this year to subprime borrowers increased by 16%. Delinquency rates on car loans are still far lower than on mortgages, but there is growing concern in the financial services industry. Indeed, Tom Webb, chief economist of used-auto analyst Manheim Consulting, said he expects the tally for 2007 repossessions to be up by 10%.
Sounds like it's time to crank up that old Emilio Estevez movie, REPO MAN.
Mark Pregmon, executive vice president for consumer lending at SunTrust Bank, is among the concerned. "Any time you extend the maturity of the loan, you take on more risk. The question is whether there's enough assessment of that extra risk," he said. "Obviously, it's a problem. It's a house of cards."
You took that cliché right out of my mouth!
In the 1970s and '80s, car loans hovered between 36 and 48 months, and drivers typically kept their cars longer than the life of the loan. A number of factors changed that.
One key was interest rates, which fell from a high of 17.8% in the early 1980s to lower than 5% today, according to the Federal Reserve. Another was affordability. According to an index tracked by Comerica Bank, cars have steadily gotten more affordable -- as compared to median family income -- since the late 1990s.
With cheap money at hand for more-affordable cars, the temptation to keep buying became huge. Today, according to Pregmon, financed cars are typically turned over in 24 to 36 months.
At the same time they were extending loan maturities, lenders, competing with one another, began offering more money and requiring smaller down payments.
Today, most lenders offer financing on 100% or even 125% of the sticker price, and some offer the most credit-worthy buyers loans for twice the value of the vehicle they're purchasing. Last year, the average amount financed for new cars reached 99%, according to the Consumer Bankers Assn., up from 95% in 2005.
Lenders are beginning to brace themselves; many have said they intend to tighten standards and require larger down payments.
Despite warnings from S&P, the Consumer Bankers Assn., Lehman Bros. and others, there is little sign that the automobile industry is willing -- or, with consumers demanding low payments, even able -- to reduce the lengths of the loans they issue.
"For banks, it's a matter of meeting consumer demand: no money down and extend the term," said SunTrust's Pregmon. "But as a lender, you've got a moral obligation as well. Are we putting the clients in loans they can't afford?"
Here's another reason to have the government standardize loan agreements and then have the financial sector compete over interest rates.
ken.bensinger@latimes.com
Copyright 2007 Los Angeles Times
--
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante.
Saturday, December 29, 2007
The Airport Security Scam
This is exactly right. We are sheep to accept it. The economic cost in terms of direct resources squandered and lost time is massive. The policy doesn’t stop terrorism, it expresses our condition of being terrorized.
Friday, December 28, 2007
Andrew Carnegie
I have just finished an interesting new book: Nasaw, David. 2007. Andrew Carnegie (New York: Penguin), which caused me a bit of embarrassment.
In Railroading Economics, I emphasized Andrew Carnegie's role in paying careful attention to the production process of steel in contrast to they banker-like perspective of the Morgan crew, which took over Carnegie Steel. This Nasaw's story is not entirely different, but the emphasis certainly is. Nasaw totally explains that Carnegie ignored any concern with the minutia of the production process, but merely demanded reductions in cost.
The most important cost for Carnegie was labor. He plowed back about 75% of the company's earnings into reinvestment, often in labor saving technologies. But even more important was the crushing of labor, especially the Homestead strike, which allowed him to increase the working day to 12 hours. This victory probably also greased the skids for the acceptance of new technology.
The book is a magnificent production. Nasaw had access to material that nobody else did.
Nasaw shows how important influence was in accumulating for Carnegie fortune. Carnegie reminds me of Balzac, who wrote:
"At the bottom of every great fortune... , there's always some crime -- a crime overlooked because it's been carried out respectably."
In the case of Carnegie, no great crime seems to have been responsible. Instead, Carnegie left a trail of innumerable crimes. Homestead was the most notable, but it had a number of less bloody precedents in his own company. In his earlier career as a bond salesman, Carnegie engaged in an almost habitual dishonesty along with continual shady dealings, such as kickbacks.
Carnegie was a master of accumulating political influence in the US and in Britain.
The most fascinating part of the book was Carnegie's philosophy. An early age, he anticipated the basic idea of Herbert Spencer, who later became his idol. He decided he would accumulate great wealth, then rather than hoarding it, he would distribute it for noble causes.
Smashing the workers at Homestead was a moral act for him. The workers would not know what to do with any extra money they earned. He wrote:
"... there are higher uses for surplus wealth than adding petty sums to the earnings of the masses. Trifling sums given to each every week or month -- and the sums would be trifling indeed -- would be frittered away, nine times out of 10, in things which pertain to the body and not to the spirit; upon richer food and drink, better clothing, more extravagant living, which are beneficial neither too rich or poor."
Libraries, museums, and concert halls would contribute more to human welfare -- especially for people working 12 hours a day.
Thursday, December 27, 2007
RIP --- Benazir Bhutto
Her two periods of serving as Prime Minister of Pakistan were deeply marred by corruption, and in many ways she was a far from progressive figure. However, her assassination today is a terrible tragedy that bodes horrifying possible outcomes in Pakistan and throughout much of the world, given as I think she may have been the only serious alternative to an eventual fanatical takeover there, a country that actually does have nuclear weapons, in contrast with the fantasies of the Bush administration about Iraq and Iran. She was also personally a courageous and intelligent person. This is a deeply tragic event, and I, for one, shall mourn her loss.
Wednesday, December 26, 2007
An Earful on the Science and Policy of Risk
The New York Times reports that Europe is gradually approaching the point of decision on whether to allow genetically modified corn. Because of WTO rules on such things, the EU is required to base its policy on “science” if it want to keep out mutant corn from the US. This reflects a deep, deep misunderstanding of what science can contribute to policy.
Let’s start with the basics. There are two sorts of error we can make in this uncertain world, Type I (the risk of believing something to be the case when it is not) and Type II (the risk of not believing something to be the case when it is). Science is, among other things, a human enterprise organized around the systematic minimization of Type I error. Experimental protocols are about this, and so are the conventions we follow in determining statistical significance. This obsession comes at the cost of permitting greater Type II error, but that’s OK. Science operates on the basis of a vast division of labor, where each scientist’s work depends on the reliability of the methods and results carried over from what others have done. One false conclusion, if not noticed in time, could invalidate the efforts of an entire research community. This is why a serious Type I error is a potential career ender, whereas an avoidable Type II glitch simply diminishes a researcher’s list of accomplishments.
This single-minded insistence on avoiding Type I error is the reason why science is the one truly progressive human activity. Today’s science is better than yesterday’s, and tomorrow’s will be better than today. You can’t say this about poetry or politics.
(It is also, in the end, why economics is not a “real” science: it is no big deal for an economist to claim something to be true and to later discover that it isn’t.)
Policy, on the other hand, has to take Type II error as seriously as Type I. Take the Bt corn case before the EU, for example. It is a problem if regulators falsely think Bt corn is dangerous and ban it, but it is also a problem if they falsely think it is not dangerous and allow it to be used. A reasonable first cut is the standard cost-benefit approach: value each sort of error in terms of its cost function. Thus the cost of banning Bt corn is the probability of Type I error (falsely believing it to be harmful) times the economic cost of not taking advantage of this technology, whereas the cost of not banning it is the probability of Type II error times the cost of the damage it would do in that case. You go for the lowest cost option.
(There is an even better approach, as I argued here, based on the fullest possible utilization of information.)
The difference should be obvious. Science is radically asymmetric in the way it treats uncertainty: avoiding a false positive is everything. Policy is more balanced: failure to see is potentially as harmful as seeing what isn’t there. If you happen to be the sort of person, as I am, who thinks environmental risks are particularly important to avoid, you might tilt the policy calculus on issues like Bt corn toward less Type II error, even at the expense of more Type I.
Science has one job to do. Policy has another. They follow different rules.
Tuesday, December 25, 2007
Taxes & the Bible
In my revised standard approach, my comments are in bold, while the original is in italics.
The New York TIMES / December 25, 2007
Professor Cites Bible in Faulting Tax Policies
By DAVID CAY JOHNSTON
At a time when some voters are asking how the religious views of candidates will shape their policies, a professor's discovery of how little tax the biggest landowners in her state paid to finance the government has prompted some other legal scholars to scour religious texts to explore the moral basis of tax and spending policies.
The professor, Susan Pace Hamill, is an expert at tax avoidance for small businesses and teaches at the University of Alabama Law School. She also holds a degree in divinity from a conservative evangelical seminary, where her master's thesis explored how Alabama's tax-and-spend policies comport with the Bible.
Professor Hamill says that since Judeo-Christian ethics "is the moral compass chosen by most Americans" it is vital that these policies be compared with the texts on which they are based. Another professor says she is the first to address this head on, inspiring work by others.
Her findings, embraced by some believers and denounced by others, has also stirred research everywhere from Arizona State to New York University into the connection between religious teachings and government fiscal practices.
Her latest effort is a book, "As Certain as Death" (Carolina Academic Press, 2007), that seeks to document how the 50 states, in contravention of her view of biblical injunctions, do more to burden the poor and relieve the rich than vice versa.
In lectures and papers, Professor Hamill has expanded on her theme, drawing objections from some critics who say that the religious obligation to care for the poor is a matter of personal morality, not public policy.
Professor Hamill asserted that 18 states seriously violate biblical principles in the way they tax and spend. She calls Alabama, Florida, Louisiana, Nevada, South Dakota, Texas "the sinful six" because they require the poor to pay a much larger share of their income than the rich while doing little to help the poor improve their lot.
Alabama, Florida, Louisiana, & Texas are usually thought of as links in the "Bible Belt." You'd think that they'd be more obedient to Biblical Principles, all else equal. Nevada, on the other hand, is the official Sin State. Isn't it strange that it finds itself in the same league as the rest. (I don't know what's happening with S. Dakota. Whatever happened to prairie populism?
The worst violator, in her view, is her own state of Alabama, which taxes its poor more than twice as heavily as its rich, while holding a tight rein on education spending.
The poorest fifth of Alabama families, with incomes under $13,000, pay state and local taxes that take almost 11 cents out of each dollar. The richest 1 percent, who make $229,000 or more, pay less than 4 cents out of each dollar they earn, according to Citizens for Tax Justice, an advocacy group whose numbers are generally considered
trustworthy even by many of its opponents.
In Alabama's defense, shouldn't we also look at the benefits that the poor receive?
Professor Hamill said what first drew her to the issue of fiscal policy and biblical principles was learning that Alabama timber companies, which own more than two-thirds of the land in the state, pay an annual property tax of only about 75 cents an acre.
"The Bible commands that the law promote justice because human beings are not good enough to promote justice individually on their own," she said. "To assume that voluntary charity will raise enough revenues to meet this standard is to deny the sin of greed."
Richard Teather, who teaches tax at Bournemouth University in Britain and has written on the moral dimensions of tax evasion, said that governments have publicly raised the issue of morals and taxes.
"The tax authorities say you have a moral duty to pay your taxes, but you cannot look at that in isolation," Mr. Teather said. "Over here in Britain we have a lot of tax breaks for the very wealthy, which are not generally available to most people, and quite high level taxes for the middle and upper-middle classes, so this doesn't look like a moral system."
Professor Hamill, by her reading of the New Testament, concludes that at least a mildly progressive tax system is required so that the rich make some sacrifice for the poor. She cites the statement by Jesus that "unto whomsoever much is given, of him shall be much required, and to whom men have committed much, of him they will ask the more."
Some of her critics, however, say that the tithes described in the Old Testament show that a flat tax, in which everyone pays the same share of their income to government, should be seen as the biblical standard.
doesn't it also say something about what to do about widows, i.e., stone them?
Gary Palmer, president of the Alabama Policy Institute, agreed that taxes on the poor were much too high in the state, but said that the solution was not to raise taxes on the wealthy, but to lower them on the poor. He characterized Alabama's sales taxes on food and medicine as immoral.
Some of Professor Hamill's critics, in letters and e-mail to her and others, argue that she just wants to soak the rich, wrapping what they called her socialistic views in biblical cloth.
hey, wasn't JC a "socialist" of some sort?
Until Professor Hamill focused on fiscal policies in light of Judeo-Christian moral principles, most scholarly work on religion and taxes was largely devoted to the issue of tax evasion. That was prompted, in part, by a 1992 updating of the Catholic catechism that listed tax evasion as a sin and by enforcement actions aimed at pacifists who refused to pay war taxes.
Professor Hamill said her research found that just one state, Minnesota, came within reach of the principles she identified, because its tax system is only slightly regressive and it spends heavily on helping the poor, especially through public education.
Copyright 2007 The New York Times Company
--
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante.
Sunday, December 23, 2007
Could the Spread of Tropical Diseases Make Global Warming Have More Urgency?
Upton Sinclair's Jungle was intended to draw attention to the dirty and repressive conditions in the meat packing industry.
Reflecting on the storm over The Jungle, Upton Sinclair wrote that he was primarily moved by the condition of the workers, not the meat: "I aimed at the public's heart, and by accident I hit it in the stomach."
Upton Sinclair. 1952. American Outpost: A Book of Reminiscences (NY): p. 175.
Similarly, chikungunya, a relative of dengue fever normally found in the Indian Ocean region, has migrated to Italy.
Rosenthal, Elisabeth. 2007. "As Earth Warms Up, Tropical Virus Moves to Italy." New York Times (23 December).
http://www.nytimes.com/2007/12/23/World/Europe/23virus.Html?Ex=1199077200&En=6f19acc84e28278a&Ei=5070&Emc=Eta1
Maybe this is the only way people will become serious.
Mankiw's Monetary Faith
My comments appear below, with Mankiw's original column in italics. -- JD
The New York TIMES / December 23, 2007
Economic View: How to Avoid Recession? Let the Fed Work
By N. GREGORY MANKIW
(N. Gregory Mankiw is a professor of economics at Harvard. He was an adviser to President Bush and is advising Mitt Romney, the former governor of Massachusetts, in the campaign for the Republican presidential nomination.)
The economy is teetering on the edge. Many economists, as well as online betting sites, put the risk of recession next year at about 50 percent. Once we get the final numbers, we might even learn that a recession has already begun.
The question on the minds of many in Congress and in the White House is this: What they should be doing now to keep the economy on track? The right answer: absolutely nothing.
This advice isn't easy for politicians to follow. Because economic downturns mean fewer jobs and falling incomes, they are painful for many families. Voters can confuse inaction with nonchalance and send incumbents packing. But just as patients should avoid doctors who recommend radical surgery for every ailment, voters should be wary of politicians eager to treat every economic ill. Sometimes, bed rest and wait-and-see are the best we can do.
This slam at politicians seems unfair in general, coming as it does from a member of an even lower ilk, an orthodox economic pundit. It ignores the political push in Congress -- mostly coming from Mankiw's GOP -- to do absolutely nothing about recessions, unless it involves tax cuts for the rich or cosmetic "cures" (such as that of 2001-02).
More importantly, it ignores the all-important role of gridlock in DC: many, many different politicos can veto any kind of fiscal action. This includes the President. Indeed, these days the two DP-dominated houses of Congress and the President seem pretty good at blocking each others' initiatives.
Orthocons like Mankiw like to portray the government as chomping at the bit, ready to jump in to mess with the economy. Au contraire. Among other things, the politicians would rather that the Fed get the blame for any economic mess.
Congress made its most important contribution to taming the business cycle back in 1913, when it created the Federal Reserve System. Today, the Fed remains the first line of defense against recession.
Even if the Fed can pull the rabbit out of the economic hat, it should be mentioned that it did not become the "first line of defense" until the end of the fixed exchange-rate system in the early 1970s, which shifted the balance of power from fiscal to monetary policy. Before that, the Fed's job was mostly to keep the US$ at par, as part of a fixed exchange-rate system.
The Fed's control over the money supply is a powerful lever to move overall demand for goods and services. When its trading desk buys bonds and expands the money supply, it lowers interest rates and encourages the private sector to borrow and spend more. The influence of interest rates on the economy is particularly strong in housing, where buyers are rate-sensitive. Because housing woes are the source of the current slowdown, the Fed's tool kit is well suited for the task at hand.
Mankiw presents the "Economics One" (or is it Econ Zero?) version of monetary policy, but the Fed has admitted that it in effect lacks control over the money supply. It does have control over the availability of bank reserves and thus the fed funds (overnight bank-loan) interest rate, a very short-term rate. But in the short run (which is what's important if we're talking an on-coming recession), the fed funds rate is only vaguely connected with the (long-term) mortgage interest rate that Mankiw refers to. If the Fed encourages repeated cuts of the fed funds rate, as Greenspan did, that would likely have an effect of depressing mortgage rates. But the Fed seems loath to repeat Greenspan's policy, because it would encourage inflation and/or a disastrous decline of the US$.
Also, will the banks be willing to lend, especially in the housing market? Due to the "sub-prime" crisis, banks have a lot of "non-performing" (i.e., bad) assets. Do they really want to send good money after bad? Getting beyond such subjective matters, falling asset values hurts the banks' capital (equity). Not only does this upset the banks' stock-holders, but prudent banks would keep their capital from falling too far or too quickly. And the aftermath of a credit crunch seems like a good time to be prudent, if you're a banker.
Finally, with mortgage (and other) debt high compared to potential home-buyers' incomes and assets, they are likely loath to borrow more just to take advantage of lower interest rates. With house prices falling, also, many prospective home-buyers will likely wait for a better deal later on.
If there are problems on both the supply and demand sides, Mankiw's monetary mechanism seems meager at most.
The recession-fighting effects of monetary expansion, however, are not limited to the housing market. When lower interest rates make fixed-income investments [i.e., bonds] less attractive, investors turn to the equity [stock] market and bid up stock prices. Higher stock prices, in turn, make consumers wealthier and more eager to spend. They also make it easier for corporations to expand their businesses with equity financing.
If speculators begin to expect a replay of Greenspan's repeated rate cuts of the early 2000, they would expect bond (fixed-income investment) prices to rise. Those interested in capital gains -- and that means most or all of them -- would thus want to buy bonds (all else constant). In addition, in times of trouble (such as the period after a credit crunch), government bonds are really attractive, since they are quite safe. So again they would be bought up. These forces undermines Mankiw's purported mechanism, because the speculators' money would not be going into equities.
But some speculators and financial investors may turn to the equity market, buying stock shares and driving up their prices. This would make wealthy consumers wealthier and more eager to spend. (Somehow Mankiw ignores the skewed nature of stock ownership. I don't know why!)
The problem is that this is poor compensation for the fall in the prices of homes. It's true that this hasn't hit the rich folks much, if at all. But it's mass consumption that's the rock-bottom (secure) base of economic expansion. It's the mass of consumers -- not the rich elite -- that props up the economy.
It's the mass of consumers who are excessively burdened by consumer and mortgage debt. (It would be a mistake to forget consumer debt (credit cards, etc.) since it's far from the majority of the population that's been doing mortgage borrowing lately.) It's their stagnant consumption spending that will likely drag down the US economy for years to come, even if there is no recession.
In addition, Mankiw should invoke the phrase often used by better economists, "all else equal." The equity market is extremely flaky, subject to speculative booms and busts and impacted by extraneous events. Even if the Fed cuts interest rates more, that does not mean that stocks will automatically go up. For example, Mankiw must ask "what's happening to corporate profits?" if the recession hurts profits -- as usual -- it would depress equity prices (all else equal).
As leftist business observer Doug Henwood regularly observes, Mankiw's story is based on an illusion: corporations do not issue new stock very often as a way of financing expansion. Instead, the main story of late has been that of corporations buying up their own stock. Business expansion, if any occurs in the near future, would be paid for more through retained earnings (profits not distributed to stockholders) and borrowing (bond issuance).
And do corporations really want to "expand their businesses"? Maybe, but a recession discourages expansion. Perhaps Mankiw has heard of the "accelerator effect." It refers to the way that even slow growth of the demand for products can cause a fall in business fixed investment. A recession isn't needed to have this effect. The problem is that fixed investment causes increased ability to produce (potential supply). If fixed investment stays constant in the face of stagnant demand growth, that means that potential supply grows faster than demand. Smart business-types would refrain from further fixed investment, no matter how easy it is to raise funds by borrowing or by issuing new shares.
This effect discourages any kind of business expansion, no matter how financed. In fact, it can cause a recession.
Slow or negative growth also hurts cash flow and profits, all else equal, which undermine retained earnings and self-financing of expansion. With falling or flat rates of utilization of productive capacity, business rates of profit would be hurt, undermining expected profits and the incentive to expand, all else equal.
By making United States bonds less attractive to world investors, lower interest rates from a monetary expansion also weaken the dollar in currency markets. A depreciation of the currency is not in itself to be feared. Treasury secretaries often repeat the mantra of favoring a strong dollar, but these pronouncements are based more on public relations than hard-headed analysis.
True.
A weak currency is a problem if it results from investors losing confidence in a country's economy and currency. The most damaging cases are the episodes of sudden capital flight, as occurred in Mexico in 1994 and several Asian countries in 1997. This outcome is unlikely for the fundamentally sound American economy, but fear of it is one reason that Treasury secretaries maintain public fealty to a strong dollar.
A serious recession would undermine the image of the "fundamentally sound American economy" -- and in finance, it's image that counts. In fact, the image might be sapped by the continuation of US government fiscal deficits and/or by fears of inflation.
But if a weakened currency comes about because the central bank is trying to stimulate a lackluster economy, the story is very different. In that case, depreciation is not a malady but just what the doctor ordered. A weaker currency makes domestic goods more competitive in world markets, promoting exports and bolstering the economy. The dollar's falling value is one reason exports of goods and services have grown more than 10 percent in the past year.
The Fed can go too far, because even a strong currency can be subject to a speculative bust (or boom). This problem is most likely to hit when interest rates are lowered again and again.
Nonetheless, the boost to exports is the most effective result of expansionary monetary policy (interest rate cuts). The problem is that it simply shifts the recessionary problem to the rest of the world, or at least the rest of the world that does not fix its currency to the US$ the way China does. This is an important reason why the fraternity of Central Bankers does not want US rates falling too much. This desire discourages the Fed fully responding to the recession.
The Fed constantly monitors all these developments to ensure that the economy has the stimulus it needs, but not too much. William McChesney Martin, the Fed chairman in the 1950s and 1960s, famously joked that the Fed's job is "to take away the punch bowl just as the party gets going."
As the economy flirts with recession, we need to remember that this aphorism has a flip side. The Fed also has the job of spiking the punch with grain alcohol when the party starts to flag, and that is exactly what it has been doing.
Gee, the economy is like a drunken party? what an analogy!
The Fed has cut its target for the benchmark federal fund rates to 4.25 percent from 5.25 percent last summer. It is a good bet that we will see further cuts over the next few months. And if the chance of a recession turns into a real recession, you can count on it.
What if the financiers' fear of inflation influences the Fed?
Admittedly, monetary policy can sometimes use an assist from fiscal policy. If an economic downturn is deep, if a recovery is anemic or if the Fed is running out of ammunition, Congress can help raise aggregate demand for goods and services. In 2003, the Fed had cut its target interest rate all the way to 1 percent, the economy was still suffering from the lingering effects of recession, and there were increasing worries about deflation. A tax cut was a good complement to monetary expansion to get the economy going again, even though it increased the budget deficit.
Note: the Fed could "run out of ammunition" if the fed funds rate got down very low, like it did when Greenspan drove it down to 1 percent.
The government can't raise spending instead of cutting taxes? In fact, increased spending is a major reason (along with export expansion) why a recession may not happen. It's old-style military Keynesianism: war and militarism breeds short-term prosperity.
Today's situation is different. The Fed has plenty of room to cut rates further, if it deems such cuts necessary. [Right.] At the moment, recession is only a possibility, and inflation is a bigger worry than deflation. In this environment, there is no need for a short-run fiscal stimulus. Congress is better off focusing on longer-term problems, like the looming entitlement crunch [??] or fundamental tax reform. (But don't hold your breath.)
Does the "entitlement crunch" refer to the rich folks' expectation that they deserve regular tax cuts?
IN creating the Fed, Congress wisely made it a technocratic institution free of many of the political pressures that accompany other policy decisions in Washington. Subsequent experience in the United States and abroad confirms that more independent central banks lead to better economic outcomes. That's why, in recent years, many nations have passed reforms to insulate central banks from [democratic] politics.
This "independence" is a sham. Mankiw's statement should be re-stated as saying that the Fed is an "institution largely free of democratic accountability," i.e., free of the need to respond to democratically-elected politicians or to voters.
That's because the Fed is subject to tremendous political pressure from banks and Wall Street sorts. The presidents of the privately-owned Reserve Banks are represented on the Federal Open Market Committee, while the President of the New York Fed is always on that committee. The New York Fed has strong connections with Wall Street. The FOMC's leadership worries a lot about displeasing -- and thus hurting -- financial markets. In many ways, the Fed is nothing but a bankers' cartel that's allied with Wall Street.
BTW, if the banks have a lot of nonperforming loans, they may have to rely on their holdings of government paper (T Bills, etc.) as a reliable source of income. Expansionary monetary policy aimed at fighting a recession would hurt that income. As a result, the banks may oppose rate cuts. Back in the early 1930s, they succeeded in this program, making the economic collapse worse.
By "better economic outcomes," Mankiw means lower inflation. What he's saying is that financier-dominated central banks are pretty good at fighting the financiers' enemy, i.e., inflation. That does not refer to avoiding recessions, though the Fed will try to solve the problem if a recession hurts banks and Wall Street.
The Fed's independence [sic] was created by statute and could just as easily be taken away. The Fed is now coming under heat for not having prevented the subprime crisis, for not fully anticipating it once it was inevitable, and for not responding more vigorously now that it has occurred. Daniel Gross, a financial journalist writing for Slate, has gone so far as to liken the Fed and its chairman, Ben S. Bernanke, to FEMA and its erstwhile head Michael Brown.
The truth is that the current Fed governors, together with their crack staff of Ph.D. economists and market analysts, are as close to an economic dream team as we are ever likely to see. They will make their share of mistakes, but it is too easy to find flaws when judging with the benefit of hindsight. The best Congress can do now is to let the Bernanke bunch do its job.
The staff of Ph.D economists and market analysts are on crack? I learn new stuff every day!
Seriously, Mankiw's conclusion is that we should stop worrying and learn to love Big Brother Ben, even though his institution has messed up severely in the past and tends to reflect the short-term urges of banks and financiers?
Copyright 2007 The New York Times Company
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Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante.
More Housing Woes Ahead? Part 2
In a recent Ohio case. the judge dismissed a number of foreclosure requests because the plaintiffs could not show that they were the legal owners of the properties. This ruling seemed like it was a minor technicality is going to the complicated nature of the securitized mortgages. BusinessWeek published a short article, saying that the ruling was more serious. Although the creditors can rectify the situation, to do so will not be an expensive. Perhaps more interestingly, the article suggests that the failure to do the proper paperwork may open up some parties is to legal liabilities.
Orey, Michael. 2007. "Foreclosures: Not So Fast." Business Week (10 December).
http://www.businessweek.com/magazine/content/07_50/b4062028776327.htm?chan=magazine+channel_news
"The notion that large numbers of homes across the country might one day have to be seized as security for mortgage loans seemed preposterous during the go-go days of the recent housing-market boom. As Wall Street collected millions of mortgages into giant securitization pools, one of the key legal procedures for transferring ownership of the loans appears to have been often ignored. At a minimum this lapse could impose extra costs on the mortgage industry when it can ill afford it. At the maximum it could open mortgage investors to an obscure legal attack by homeowners that in some cases could block foreclosure."
"The problem stems from a shortcut that many players in the fast-moving securitization business have used in recent years. Normally, when a loan is sold, a simple document is prepared showing that the debt and any collateral attached to it has been transferred to the purchaser. That piece of paper is called an assignment. But in buying up thousands of mortgages at a time, Wall Street commonly skips this step, which requires separate paperwork for each loan. Instead, the industry customarily relies on a lengthy contract, known as a pooling-and-servicing agreement (PSA) to spell out arrangements for all of the loans in a pool. But, as some recent court rulings indicate, a PSA may not be good enough when it comes time to foreclose."
In the wake of the Boyko ruling, which came as a surprise to Wall Street, mortgage-industry representatives said it would be easy for players such as Deutsche Bank to fix the technical problems and resume foreclosing on homes. That may be true, but these added steps will introduce costly delays and additional fees to the foreclosure process. Lawyers will have to draft assignment documents, paralegals will have to get them signed and recorded, and filing fees will have to be paid. "These deals operate on very, very thin margins," notes Joseph R. Mason, a finance professor at Drexel University in Philadelphia. Even an extra dollar a loan, he says, is "a huge cost"."
"There also could be a more troubling consequence for investors, says Kathleen C. Engel, a professor at Cleveland-Marshall College of Law. Players in the secondary market for mortgages rely on an obscure but critical legal theory--known as the "holder in due course" doctrine -- to insulate themselves from problems with the underlying loans. "Under the doctrine, a homeowner who believes that a lender deceived him about the terms of a loan can't press such claims against the purchaser of a mortgage, such as a mortgage-backed securities trust. The holder-in-due-course doctrine protects pension funds and the like from having to worry about any misbehavior by home lenders--and thereby greases the wheels for the whole mortgage-securities market. But it's a different story if, as appears to be common practice, the trust waits to complete paperwork transferring a loan until after it goes into default. In that case, the holder-in-due-course protection evaporates, and anybody who tries to foreclose could face defenses from the borrower that he or she was lied to when seeking a loan."
More Housing Woes Ahead? Part 1
The Wall Street Journal reports on the spread of homes with negative equity. As of a year ago, estimates were that 7% of mortgages that originated in 2004 through 2006 the amount owed was more than their homes were worth, but housing prices have fallen nearly 5% since then and are predicted to fall further. [In the comment below, Molnar pointed out that my original commentary was in error. Thanks for keeping me honest].
Hagerty, James R. 2007. "Price Indexes Will Map Out Spread of 'Negative Equity." Wall Street Journal (22 December): p. A 2.
http://online.wsj.com/article/SB119829696940946747.html?mod=todays_us_page_one
"Last March, First American CoreLogic, a housing- and mortgage-data supplier in Santa Ana, Calif., calculated that nearly 7% of 32 million U.S. households studied as of December 2006 owed more than their homes were worth, based on computer estimates of the property values. The homes studied had mortgages originated in 2004 through 2006, around the peak in the housing market. Since the end of 2006, U.S. home prices on average have fallen nearly 5%, said Mark Fleming, chief economist at the firm. That suggests that about 11% of the homes studied now would have negative equity. An additional 5% or so probably have equity of less than 5%. That doesn't leave much cushion at a time when prices are still falling and most economists don't expect the market to hit bottom for at least another year."
"Economists at Merrill Lynch say home prices are likely to fall 10% in 2008 after slipping 5% this year. Mark Zandi, chief economist of Moody's Economy.com, a research firm in West Chester, Pa., recently forecast that on average U.S. house prices will decline about 13% by the second quarter of 2009 from a peak in the second quarter of 2006. Declines will be much larger in Florida, California, Arizona and Nevada, as well as in the metropolitan areas of Washington, D.C., and Detroit, he said."
Friday, December 21, 2007
The WTO, Gambling, and Intellectual Property
The United States Puritanical values collided with its neoliberal ideology in passing a law that prevented online gambling. Several companies -- Microsoft, Google, Yahoo -- just paid fined for posting ads for Internet gambling. Antigua and Barbuda protested since the US allows other forms of domestic gambling. They demanded huge compensation for their loss of business. The WTO judgment offers a much smaller amount, but it gives the country the right to violate intellectual property up to $21 million.
Kanter, James and Gary Rivlin. 2007. "In Trade Ruling, Antigua Wins a Right to Piracy." New York Times (22 December).
http://www.nytimes.com/reuters/washington/politics-trade-wto-gambling.html
"Antigua and Barbuda won compensation from the United States on Friday in a long-running trade dispute about gambling, but the amount was far lower than the tiny Caribbean nation had been seeking. A World Trade Organization (WTO) arbitration panel granted Antigua's request to levy trade sanctions on U.S. intellectual property, for instance by lifting copyright on films and music to sell it themselves, prompting concern from Washington."
"The WTO panel said Antigua was entitled to compensation of $21 million a year from the United States for being shut out of the U.S. online gambling market. The ruling is only partial consolation for the former British colony, which built up an Internet gambling industry to replace declining tourism revenues, only to find itself shut out of the world's biggest gambling market."
"The award falls far short of what Antigua had demanded -- $3.44 billion in "cross-retaliation," allowing it to seek damages outside the original services sector. Washington had argued Antigua was entitled to only $500,000 in compensation."
Words That Could Go Down In History
"But I won't be unsupervised! I'll be with the basketball team!!"
Thursday, December 20, 2007
A Million Refugees from Iraq Since Surge Started
Juan Cole reports through a link to McClatchy that a million refugees have fled Iraq since the surge began, with 500,000 leaving during the July to October period of greatest troop runup, a fifth of these having experienced torture or other violence. This rather offsets the happy talk stories about people dribbling back recently, most of them because they have run out of money and the Syrians want them to leave.
Link is http://www.mcclatchydc.com/iraq/story/23159.html.
While we are at it, after a meeting this past weekend in Baghdad, the Kurdish leaders are threatening to leave the Maliki government. Remains ongoing differences over oil laws and contracts, aggravated by invasion from Turkey of Kurdistan, apparently supported by the US. While still denouncing the Kurdish oil contracts as illegal, the Iraqi oil minister is now negotiating contracts with big majors like BP and Shell under the old Saddam-era oil law (see iraqioilreport.com).
David Wessel and Mark Thoma on The Summers Call for Fiscal Stimulus
Update: At the end of my post, I noted Sudeep Reddy’s argument that state and local fiscal policy will bail us out of this recession. If this claim struck you as odd, Menzie Chinn also found this to be odd as well.
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My EconoSpeak colleague Brenda Rosser seems to more pessimistic than even Lawrence Summers as she argues that a $75 billion fiscal stimulus may not be enough. David Wessel also seems to think a fall in aggregate demand is likely:
That the economy needs help isn't at issue. The issue is whether to mix fiscal stimulus with monetary policy - whether the government should do something more than offer a little help to some struggling homeowners.
The policy mix to boost aggregate demand is indeed the hot topic of the day.
David starts with the usual reasons why we rely on a fast, nimble, and perhaps independent Central Bank and its monetary policy tools rather a sluggish and political Congress and its fiscal policy tools for aggregate demand management. David then makes a few arguments why monetary policy alone may not do the trick. One of these arguments strikes me as very odd:
The Fed can't cut rates because it fears a dollar crash. At the Fed, the gradual decline in the dollar is viewed as a tonic for the economy; it'll help boost exports, though it does exacerbate the central bank's inflation anxiety. But cutting rates too much too fast could trigger a market-rattling, confidence-shaking plunge in the dollar.
To David’s credit, he picks up on the fact that easy money will tend to raise net exports. But given our massive current account deficit, isn’t dollar devaluation on its own not only desirable but necessary?
Mark Thoma seems to have a preference for using changes in government spending over tax policy if we need to turn to fiscal policy for stabilization purposes:
If we are going to use tax cuts as a fiscal policy tool to stabilize the economy, we have to be willing to move the tax rate in both directions, up as well as down. We are quite willing, currently, to move the tax rate down but when people like Martin Feldstein call for a temporary tax cut to stimulate the economy, if such a policy were to be enacted does anyone doubt the difficulty of raising taxes again later even with automatic expiration provisions?
Then there is the view that all will be AOK:
Predicting the economy's path is especially difficult at turning points, and the economy is sending mixed signals. But here are some reasons why the economy might avoid the ditch
Sudeep Reedy offers up five reasons why a recession may be averted. One comes from a usual White House silliness that job growth is still terrific, while another comes from the dubious claim that the slump in residential investment is over. A third – and more plausible - argument is that net export demand will pick up some of the slack. The last two come from the belief that easier monetary policy and increases in government spending are already in the works. Real government purchases for 2007QIII, however, were only 2.7% higher than they were for 2006QIII so Reedy’s claim focused on the increase in state and local spending. Why not also focus on the even larger percentage increase in defense spending while one is at this game? Reedy failed to note the important fact that real nondefense Federal purchases haven declined over the past year. It would seem the new found GOP fiscal discipline campaign is working against using fiscal policy as a stabilization tool.
CGE: Is There a Defense?
I’ve been asked to review an article using computable general equilibrium (CGE) methodology. I’m likely to decline, but before I do I want to ask the vast universe that follows this blog: is there any defense against the argument that CGE and its offspring (DSGE) are simply bad economics?
There are two arguments actually:
1. CGE is an attempt to implement empirically a model that has been blown away theoretically. For 30 years we have known in precise terms why representative agent GE models are hogwash. We also know that the conditions for unique solutions are impossibly restrictive. Finally, while we have models that can translate modern, post-utility understanding of economic behavior into functional form, to do this throughout an economy, in every nook and sector, would be a gargantuan, and probably pointless, project. To put it bluntly, CGE modelers take as their starting point refuted theory.
2. CGE is false empiricism. It claims to generate results based on real-world data, but testing is nil, and I mean nil. Is there any literature out there I have missed in which past models are examined retrospectively against actual economic outcomes? If not, where is the falsifiability?
I will wait to send my rejection email. Maybe one of you can convince me that it is worth a few hours of my time to promote “better” CGE work.
Further Thoughts on Populism, With Application to Criticisms of Edwards’ Fancy Digs
Inspired by Barkley, I have more to say about populism. In a nutshell, the word has multiple connotations, and political opinion-molders manipulate the ambiguities for their own purposes. Let’s disentangle and shed some light.
I think the Wikipedia entry is right in identifying “the people” in populist thought as counterposed to an elite that insults and oppresses them. But what do populists propose as the remedy?
Long ago, in an article for a journal with no web presence and therefore no linkability, I wrote that there are three ways that political movements can claim to be democratic. (1) They can claim that their leading members are “of the people”, that they can be trusted to represent the majority because, by birth and life circumstances, they are part of it. I called this agent-based publicness. (2) They can claim that their programs would benefit the interests of the majority. This is akin to the utilitarianism of mainstream economics, particularly if metrics, such as median income, are used to take distribution into account. I called this interest-based publicness. (3) They can promote programs or institutions that expand the direct role of the majority in deliberation and decision-making in the public sphere: transparency, participation, etc. I called this process-based publicness.
In my view, all three have a role to play, and all of them have blind spots that need to be recognized and offset. What interests me right now is not the question of what mix would be best in general or in the US in 2008, but how these different approaches are confused in our current political discourse.
First, all three can be expressions of populism if they are presented as solutions to the dispossession of the people by the elites.
And what do they look like today?
Agent-based populism: A candidate has a personal style, including a method of speaking, that shows he or she is “like us”. This could mean anything from avoiding complicated academic language to making references to pop music, to going to NASCAR races (OK, not in 2008 any more) or on hunting trips. It can also mean being multi-racial if “the people” are seen as multi-racial. It depends, obviously, on who “we” are. Mike Huckabee’s populism is, as far as I can tell, almost entirely of this sort. South of where I normally sit (in an office in the US), one of the chief populist claims for Hugo Chavez and Evo Morales is that they really understand the poor, nonwhite majority because this is their heritage too.
Interest-based populism: Every reader of this blog knows that America has reached new depths of economic inequality under Reagan-Bush-Clinton-Bush. An interest-based populist in this context should be someone like Edwards who campaigns on this reality and proposes policies on the grounds that they would reverse it. (Whether those policies are adequate to the job is another matter.) It is possible, however, for someone to argue that the true interests of the people are not economic but cultural, the preservation of their prejudices, taboos, etc. This opens the door to populists like George Wallace or, today, Lou Dobbs—to take an example from the media.
Process-based populism: I make a big deal of this possibility because I believe it has much more to offer than it is given credit for, but I have to admit that it is barely visible on the current political landscape. A candidate could take up this mantle by championing democratic social movements, unions and greater direct public participation in government. Civil liberties largely fall within this framework as well, as they provide the foundation for popular activism against the state. There is much discussion of how to expand the capacity and role of civil society elsewhere—in Latin America and the EU especially—but hardly any in the US. Kucinich gives us a small taste of this, when we can find him, and Obama (very) obliquely hints at it.
So this brings us to the use of “populism” as a pejorative, and specifically as it pertains to Edwards. Those who say he is a false populist because he enjoys an upscale lifestyle are relying on populism #1: he is not truly of the people. But he could live in bourgeois luxury of the most extreme sort and still deliver on populism #2. Think FDR.
A second critique of populism goes directly at #2, I believe. It is argued that the immediate interests of the downtrodden are in conflict with sound economic policy. The poor want handouts, but this would bludgeon the budget, wipe out incentives for investment, etc. By appealing too openly to the multitudes, someone like Edwards is seen as being at risk of becoming beholden to their short-sighted demands. Here the underlying presumption is that the poor have little understanding of their long-term interests and are prone to being bought off. Indeed, there is a cynical form of populism, much practiced in Latin America, in which a few highly publicized giveaways are used to win support, while fundamental policies continue to favor the rich.
My judgment, for now, is that Edwards is not guilty of this second sin.
What we mostly lack, I think, is the third dimension, empowerment. Is it accidental that it is historically linked to socialism?
Wednesday, December 19, 2007
The Payoff From Being Too Big to Fail?
The Wall Street Journal had an interesting piece suggesting that banks pay a premium for takeovers that bring their size up $100 billion. Maybe if the writeoffs get a bit bigger, Too Big To Fail status may pay off.
Two Federal Reserve economists, "Elijah Brewer III and Julapa Jagtiani, combed through 13 years of banking merger data to establish whether banks were willing to pay extra premiums to attain TBTF [Too Big To Fail] status, which they concluded was around $100 billion in assets."
"... the researchers found that premiums shot up when a bank did a deal that vaulted it over the $100 billion asset threshold. Overall, the nine banks that did such deals paid an additional $14 billion to $16.5 billion to get to that gold-plated TBTF status."
""It's more than Too Big To Fail. It includes all the benefits of being so big and powerful. These may not just be benefits from being bailed out, but being able to talk to the White House and Congress," Ms. Jagtiani said in an interview. "There is a lot of subsidy provided to really large banks," she added, noting that the study was the opinion of the authors and not the Federal Reserve. "It seems like we may be encouraging misallocation of resources." She did caution that "at the Federal Reserve, we don't have a list of Too Big To Fail banks"."
Cimilluca, Dana. 2007. "Can Banks Grow Too Big To Fail? Research Finds Lenders Would Pay More to Cross $100 Billion Threshold." (12 December): p. C 2.
http://online.wsj.com/article/SB119743338212123099.html
Who is a "Populist"?
In recent election cycles the term "populist" has been applied to such varied figures as John Edwards, Mike Huckabee, Patrick Buchanan, and Ross Perot, arguably sharing a sort of economic nationalism for the poor. Originating in anti-aristocratic agrarian movements in Europe, especially the Russian Narodniki of the late 1800s, the movement in the US attempted to encompass the urban working class as well, as symbolized by the rural Scarecrow marching along with the urban Tin Woodman on the Yellow Brick Road to defeat the Wicked Witch of the East, with populist heroine Dorothy and the Cowardly Lion stand-in for fundamentalist and anti-imperialist populist William Jennings Bryan, he of the "Cross of Gold" speech, in Baum's populist fantasy novel. The movement would be partly absorbed by the later Progressive and New Deal movements.
The movement has always had a deep divide, with race the central issue. So, on the one hand we have the progressive wing, symbolized by the remnant Democratic-Farmer-Labor Party of Minnesota and the presidential candidacy in 1948 of FDR's former Ag Secretary, Henry Wallace for the Progressive Party. On the other, in the Deep South, we got "Pitchfork" Ben Tillman in South Carolina, whose follower, Strom Thurmond, would run as the "Dixiecrat" in the 1948 presidential campaign. Today, this divide most clearly shows up in the struggle over immigration.
Summers: Increase Aggregate Demand Now
When Angrybear introduced me as a ProGrowthLiberal, he speculated that I tended to agree with Lawrence Summers on macroeconomic policy. So one might wonder if I agree with his latest:
Former Treasury Secretary Lawrence Summers, once a fiscal hawk among Clinton Democrats, said the government should consider a $50 billion to $75 billion tax-cut and spending package to stave off a deep recession. Mr. Summers, now a Harvard University professor and investment-fund manager, also urged the Federal Reserve to take more aggressive action to ensure that its rate cuts actually reduce consumers' interest charges and stimulate spending.
I’ve been calling for a more expansionary monetary policy for while, but I have also been calling for long-term fiscal restraint. So do I agree with Larry’s recent call for fiscal stimulus?
When it finally became evident to most economists that we were in the midst of a business investment led recession back in 2001, this Rubinesque Bear suggested that we have a redux of the 1993 Clinton fiscal philosophy – a little short-term fiscal stimulus with a commitment that we would gradually move to long-term fiscal restraint. The hope was that a mix of short-term interest rates – which the Greenspan FED gave us in spades – combined with an acceleration of public and private consumption but the promise of higher national savings in the out years might help reverse the investment and general aggregate demand slump. What we got from the Bush White House was very little in short-term fiscal stimulus and a virtual guarantee that we would have long-term fiscal irresponsibility. It has always been my view that this upside fiscal policy was one reason why long-term interest rates took much longer to decline and why the business investment slump lasted so long. Sure, residential investment rose back then – but that only partially offset the dismal performance of business investment - as well as the export slump.
Today, business investment is stronger but residential investment has plummeted. If Dr. Summers is dusting off the 1993 Clinton fiscal philosophy, which was also what Robert Rubin had convinced a few moderate Republican and Democratic Senators to advocate back in late 2001, then I agree with him 100 percent. And maybe this time – the President might also work towards passing the recommended policy package rather than undermining at every turn like he did six years ago.
Hat tip to Mark Thoma.
Green Gas Emissions, Risks and Uncertainty: When Kenneth Arrow Speaks – Just Listen
Kenneth Arrow explains the general issue thusly:
Two factors differentiate global climate change from other environmental problems. First, whereas most environmental insults – for example, water pollution, acid rain, or sulfur dioxide emissions – are mitigated promptly or in fairly short order when the source is cleaned up, emissions of CO2 and other trace gases remain in the atmosphere for centuries. So reducing emissions today is very valuable to humanity in the distant future. Second, the externality is truly global in scale, because greenhouse gases travel around the world in a few days. As a result, the nation-state and its subsidiaries, the typical loci for internalizing externalities, are limited in their remedial capacity. (However, since the United States contributes about 25% of the world’s CO2 emissions, its own policy could make a large difference.)
While Arrow notes that the critics of the Stern Report cite the role of uncertainty as their rational for taking no action, he fires back with his own analysis of the roles of uncertainty and risk.
There is greater disagreement about how much to discount the future simply because it is the future, even if future generations are no better off than us. Whereas the Stern Review follows a tradition among British economists and many philosophers against discounting for pure futurity, most economists take pure time preference as obvious. However, the case for intervention to keep CO2 levels within bounds (say, aiming to stabilize them at about 550 ppm) is sufficiently strong to be insensitive to this dispute. Consider some numbers from the Stern Review concerning the future benefits of preventing greenhouse gas concentrations from exceeding 550 ppm, as well as the costs of accomplishing this. The benefits are the avoided damages, including both market damages and non-market damages that account for health and ecological impacts. Following a “business as usual” policy, by 2200, the losses in GNP have an expected value of 13.8%, but with a degree of uncertainty that makes the expected loss equivalent to a certain loss of about 20%. Since the base rate of economic growth (before calculating the climate change effect) was taken to be 1.3% per year, a loss of 20% in the year 2200 amounts to reducing the annual growth rate to 1.2%. In other words, the benefit of mitigating greenhouse gas emissions can be represented as the increase in the annual growth rate from today to 2200 from 1.2% to 1.3%. As for the cost of stabilization, estimates in the Stern Review range from 3.4% of GNP to -3.9% (since saving energy reduces energy costs, the latter estimate is not as startling as it appears). Let’s assume that costs to prevent additional accumulation of CO2 (and equivalents) come to 1% of GNP every year forever, and, in accordance with a fair amount of empirical evidence, that the component of the discount rate attributable to the declining marginal utility of consumption is equal to twice the rate of growth of consumption. A straightforward calculation shows that mitigation is better than business as usual – that is, the present value of the benefits exceeds the present value of the costs – for any social rate of time preference less than 8.5%. No estimate of the pure rate of time preference, even by those who believe in relatively strong discounting of the future, has ever approached 8.5%.
Tuesday, December 18, 2007
History Note: Chico Plane Hijacked to Arkansas
My home, Chico, California, is not often seen as the center of the world, but we do have some distinctions. For example, the first airline hijacking on US soil occurred here. It may also be the only time that anyone ever hijacked a plane to Arkansas.
http://blogs.ocweekly.com/navelgazing/main/another-california-first-hijac/
Monday, December 17, 2007
Blood for Oil in Iraq Achieved! Now We Can Come Home!
Great news! As of this past week or so, for the first time oil production in Iraq has exceeded what it was under Saddam Hussein before the US invaded, a whopping 2.3 million
barrels per day!! For a country with the world's second largest oil reserves, this is a great achievement!!! Clearly, our goal there has been achieved, so now our troops can come home!!!
Sunday, December 16, 2007
Radio Interview Today
I was interviewed today on KPFK Los Angles on Ian Masters' Background Briefing for the last 20 minutes of his show. I did not get to discuss the Confiscation of American Prosperity very much because the publisher neglected to send him a copy.
http://64.27.15.184/parchive/mp3/kpfk_071216_110100bbriefing.mp3
Friday, December 14, 2007
Transfer Pricing Enforcement in China- the IRS Should Be Paying Attention!
On my long list of statements from tax officials that strike me as incredibly short sighted comes this:
The China's State Administration of Taxation, emboldened by the Internal Revenue Service's result in the GlaxoSmithKline case, is directing its auditors in appropriate marketing intangibles cases to apply the residual profit split method to recompute royalty income.
The IRS was indeed very successful in arguing that some of the profits that British based Glaxo made on US sales of Zantac were attributable to the marketing efforts of Glaxo’s US subsidiary. But mind you that the tax planners for US based pharmaceutical companies with foreign marketing subsidiaries took notice of the IRS theory to successfully argue that some of the profits from US created drugs belonged offshore under arm’s length pricing. So if the Chinese are about to argue that distribution subsidiaries deserve a large share of the profits – wouldn’t this hold for US entities distributing products manufactured in China. Last year – the US exported only $55 billion of goods and services to China, while China sold almost $288 billion in goods in services to the US. Unless there existed no intangible profits from Chinese exports to the US and there were substantial intangible profits when US manufacturers sold goods to the Chinese, something tells me that China's State Administration of Taxation could come up with the short end of this stick.
It would seem that the Indian tax authorities successfully made a similar argument in a tax dispute with Rolls Royce. If this argument is turned on US based companies selling into India, let’s keep in mind that the India exports twice as much to the US as we export to them. With the US as a net importer of goods, any argument that the local distributor deserves a large slice of the profits is something the IRS should look forward to making in a bilateral way!
Thursday, December 13, 2007
how does Mankiw's right differ from liberals and the left?
Wednesday, December 12, 2007 [by Greg "I worked for Dubya" Mankiw]
How do the right and left differ?
The conclusion of today's ec 10 lecture:
In today's lecture, I have discussed a number of reasons that right-leaning and left-leaning economists differ in their policy views, even though they share an intellectual framework for analysis. Here is a summary. [I replaced his asterisks with "GM," while my comments are labelled "JD."]
JD: first of all, I should note that Mankiw is only talking about one dimension of the political spectrum. I'd define left vs. right in terms of class, with the left siding with the poor and working classes and the right siding with Mankiw's employers. This left vs. right mostly coincides with democracy vs. dictatorship. There's also a centralized vs. decentralized spectrum, which is what Mankiw mostly describes. Finally, there's the tradition vs. modernism spectrum.
GM: The right sees large deadweight losses associated with taxation and, therefore, is worried about the growth of government as a share in the economy. The left sees smaller elasticities of supply and demand and, therefore, is less worried about the distortionary effect of taxes.
JD: Mankiw implicitly assumes that taxes "distort" markets, i.e., that the markets were "perfect" ahead of time. He assumes, for example, that no deadweight loss arises from the business sector. But even in the simplest neoclassical theory, it can do so: monopolies and monopsonies impose deadweight losses.
GM: The right sees externalities as an occasional market failure that calls for government intervention, but sees this as relatively rare exception to the general rule that markets lead to efficient allocations. The left sees externalities as more pervasive.
JD: This might be right, i.e. that the difference is empirically-based. But it should be mentioned that the right also likes to use methodological fiat to rule out the role of an important class of externalities, the pecuniary ones. They'd like to ignore such events as towns being destroyed economically when the major employer shuts down its operations, along with the Keynesian multiplier effect and the like.
GM: The right sees competition as a pervasive feature of the economy and market power as typically limited both in magnitude and duration. The left sees large corporations with substantial degrees of monopoly power that need to be checked by active antitrust policy.
JD: This defines the "left" as antitrust liberals. It ignores those of us who want to replace the capitalist monopoly on political power (unless we make a big noise) with real democracy, both in politics and in the economy.
GM: The right sees people as largely rational, doing the best the can given the constraints they face. The left sees people making systematic errors and believe that it is the government role’s to protect people from their own mistakes.
JD: The right's notion of "rationality" is close to tautological: rationality involves people doing what they want to do. Individual preferences are taken for granted and unexplained. A heroin addict is "rational" according to the right-wing economists. Further, "rationality" is totally an individual thing that can be expressed only in markets. This forgets the role of social values, which typically cannot be expressed through markets (no matter how rational they are) but can be expressed via democracy.
GM: The right sees government as a terribly inefficient mechanism for allocating resources, subject to special-interest politics at best and rampant corruption at worst. The left sees government as the main institution that can counterbalance the effects of the all-too-powerful marketplace.
JD: Again, this "left" is the liberals. It ignores the left which wants to end the artificial distinction between the state (government) and the "market" and to subordinate both of these to democracy.
GM: There is one last issue that divides the right and the left -- perhaps the most important one. That concerns the issue of income distribution. Is the market-based distribution of income fair or unfair, and if unfair, what should the government do about it? That is such a big topic that I will devote the entire next lecture to it.
JD: Is it a "market-based distribution of income"? Not according to the standard economics which Mankiw professes to profess. Standard neoclassical economics starts with the distribution of _assets_. Then the market results reflect that distribution (along with differences in preferences).
At this point, we should bring in non-standard economics: those with the most assets benefit most from the market. This allows them to accumulate more assets, so that they benefit even more from the market.
This kind of snowballing inequality of asset-ownership (and power) can be seen happening during the last 27 or so years of US economic history. This is now being admitted by mainstream economists. See the interview with Frank Levy in the current issue of CHALLENGE.
Jim Devine / "The conventional view serves to protect us from the painful job of thinking." -- John Kenneth Galbraith
Now that's a free ride!
It's that time of year again, time to make the donuts....er, grade final exams. I had a question on the Principles exam asking whether a tunafish entrepreneur - Charley "The Tuna" Sharkspear by name - who knew that consumers value safe dolphins more than the added cost of fishing in a dolphin-safe fashion could make money providing the dolphin-safe tuna. The idea I wanted them to get was that the safety of the dolphins, if accomplished, is a public good. From one student I learn that:
"People will continue to buy a cheaper tuna and still 'free-ride' on the dolphins that Charley is saving."
That sounds like fun. Back to work!
Wednesday, December 12, 2007
CNN Caught Mimicking Faux News with Iran Nuclear Weapons "Speculative Documentary"
CNN was to air today a "speculative documentary" entitled "We Were Warned - Iran Goes Nuclear" with actors playing real officials and hyperventilating on the now discredited non-data about Iran's nonexistent nuclear weapons program. The program has been postponed for now, given the recent NIE report. This shows how CNN has been under pressure to imitate the war hysteria of Faux News. An old friend of mine, who is quite progressive, was involved in helping make this, and had been bamboozled by briefings from unnamed national security officials. Details on this story are available from Bill Gallagher at http://www.niagarafallsreporter.com/gallagher344.html, and if this is not right, you can find it by linking through today's posting by Juan Cole.
Credit Crunch and Sudden Stop: Can We Avoid a Perfect Financial Storm?
Credit markets are all a-jitter again. No one knows how many assets will be nonperforming, which ones they will be, how much total value is at stake. We also know that there has a been a sudden stop, a complete cessation of net long-term private capital inflows to the US; nearly all of the financing burden of the US current account deficit has to be shouldered by central banks and sovereign wealth funds. These two events are related.
It is US debt, mortgage items but perhaps not only, whose quality is in doubt. This is why there is little appetite for such goodies among private investors. But if enough liquidity is pumped in to dissuade investors from wholesale dumping, and if the CB’s continue to do what it takes to keep the dollar afloat, we may continue to muddle through.
The risk is that the two dangers will interact. The Fed and its partners can support asset values by buying into these markets, as they have indicated they will. But if for any reason this effort falls short, it is possible that default risk and currency risk could spiral upward in tandem. Fear of default could push private capital flows into the red; this would ramp up the pressure on the dollar, increasing currency risk, and so on. It is not beyond the realm of the possible that this nasty synergy could erupt within the time frame of a few hours or even minutes. It would be sudden and unexpected: one morning you could go online to scan the headlines and find out we were already in the thick of it.
I’m not saying that a crisis is inevitable, but I’m not saying it can’t happen either.
All We Are Saying is Give Peace a Chance
My view on Iraq was: (a) we never should have started this stupid war, and (b) once we did, we should have declared victory and come home a long time ago. For those who get their “news” from Faux News, it would seem the Iraq war is no more. And now David Brooks says we’ve gotten past this idiotic episode as well:
But the more comprehensive difference between a wartime election and a postwar election is that there is a shift in values. In wartime, leadership traits like courage, steadfastness and ruthlessness are prized. Voters are willing to vote for candidates they distrust so long as they seem tough and effective (Hillary Clinton, Rudy Giuliani). In a postwar election things are different. When Wall Street Journal/NBC pollsters asked voters what qualities they were looking for in the next leader, their top three choices were: the ability to work well with leaders of other countries; having strong moral and family values; bringing unity to the country. Those are cooperative qualities, not combative ones. They require good listening skills, openness and the ability to compromise.
Including the title, I counted five instances where Mr. Brooks used the word “postwar”. There is only one problem, which Greg Mitchell articulates:
Postwar? Peace? Try telling that to the soldiers in Iraq, and the families whose kids are still coming home minus a limb or part of their brain. Last I checked we were still spending billions of dollars a month Over There and I haven't heard about any bases, or the grand embassy, being dismantled. A new Gallup poll (see below) disputes the notion, anyway. Is the issue a little less "hot"? Surely. But to say it is over is an obscenity. With rose-colored glasses still in place, Brooks takes a world tour, finding more reason to relax about Iran, Pakistan (?), even the Palestinian question. My favorite line then follows: "The world still has its problems." Gosh, you think? Later he admits, "Something terrible could happen in the world" to change the hopeful mood. As if little terrible is happening now. This all started last week with Peter Beinart’s self-serving column in The Washington Post -- Brooks cites it today -- which flatly called the war a "non-story." He took as his main evidence that questions about the war were not being asked all that much at the Democratic and Republican debates. The fact that all of the Democrats are much in agreement against the war, and all of the leading Republicans in agreement in support of the venture, apparently did not occur to Beinart as an explanation. Of course, if any of the Democrats faced off against any of the Republicans right now, is there any doubt what would be the hottest issue? But Beinart – an original hawk on the war, like Brooks – had good reason to downplay the disaster he helped cause.
Hawks like Brooks and Beinart were over-hyping the treat of Saddam Hussein as they underestimated the potential costs of invading Iraq back in 2002 and early 2003. So why is Greg surprised that these pundits are at it again with their dismissing the fact that this failed and very destructive adventure continues? Brooks does have not the courage to do what Paul Harvey did in 1970 when Mr. Harvey told President Nixon that the Vietnam War was a mistake that should be ended immediately. As a kid, I had to endure the fact that my parents made me watch Mr. Harvey’s conservative rants on a daily basis. As an adult, I miss the old fashion conservatives. No, having to endure hacks like David Brooks is so much worse.
Tuesday, December 11, 2007
Where Does John Edwards Stand on Social Security?
Barkley accuses John Edwards of drinking the Kool Aid, while Phillip Elliot praises Mr. Edwards for “real leadership” thusly:
Democrat John Edwards yesterday criticized rival Hillary Rodham Clinton, saying candidates who seek the White House should take strong, clear stands on difficult issues like Social Security. Clinton has said she doesn't want to put forward a specific plan now to shore up Social Security, but would wait for recommendations from a bipartisan commission because any plan will need the support of Democrats and Republicans to be enacted. Asked about her stance at an AARP-Divided We Fail lunch on health and financial security, Edwards told seniors: "If you want to be President of the United States, you should lead. Leadership means taking clear, strong positions for the American people. ... I've said very clearly what I would do, not said I'm going to wait and figure this out later."
The last quip seems to confirm Barkley’s suggestion that Mr. Edwards has fallen for the GOP spin that the Social Security system is in imminent danger. We in more of an imminent danger of a mushroom cloud over Manhattan from an Iran nuke that a Social Security meltdown.
But I’m going to try to be fair to Mr. Edwards by asking what he means by this alleged very clear statement of what he would do. It would seem his policy position is basically status quo with the exception that he’d lift the payroll caps. That’s it! And Phillip Elliot calls this leadership? Fine – Senator Clinton hasn’t exactly stated where she’d change the status quo either. OK, the GOP debates are incredibly stupid on just about every issue- but if this is all we Democrats have got, maybe I should go back to watching my Atlanta Falcons pretend to pay football. Ho-hum!
But to be fair – I’m sort of a status quo bear when it comes to this issue. Next topic – please?
Is Kos Drinking Social Security Kool Aid?
Continuing an old tradition from Maxspeak, let me dump on Daily Kos. I just noticed a long post there about "leadership" among Dems and Dem candidates in particular. Much of it was anti-Hillary and mostly focused on her war views. On those, I join in criticizing her. However, this "lacking leadership" is the line being handed out previously by Obama and more recently very loudly by Edwards in attacking her on not proposing changes to social security. I confess that I am not sure what Kos's views on social security are, but at least rhetorically, he, or they, are adding to the rhetoric of those who have drunk the kool aid of "Social Security is in Crisis and we must do Something!"
Sunday, December 9, 2007
thoughts on the Prisoner's dilemma.
While trying to teach my students about the (non-repeated) "Prisoner's Dilemma" (PD) game, I had the following thoughts. I hope some of them are vaguely original -- or at least interesting.
The usual view of this "game" is that it turns Adam Smith's "Invisible Hand" (IH) on its head (or on its heel). In the Greatest Economics Story Ever Told, the IH says that in exchange, individual greed leads to the production of mutually-beneficial gains for all (or almost all) people, especially when organized by a competitive market. On the other hand, in the PD story, individual greed (possessive individualism) leads to mutual destruction of the prisoners. This occurs even though there exists a mutually-advantageous solution for them (collusion, cooperation, conspiracy, other "c" words).
There's another way of looking at the PD. The problem is that the police have set up a special social structure that pushes the prisoners to hurt each other. They aren't allowed to talk to each other. They have to make their decisions (rat[*] on each other or keep quiet) simultaneously (in effect). The cops create incentives that push each prisoner to rat. Thus, the prisoners both "defect" and suffer.
(For simplicity, I'm ignoring degrees between "ratting" and "staying mum." I'm also ignoring the honor among thieves, which can encourage tacit collusion, so that both refuse to "rat" on the other.)
This might be thought of in terms of "transactions costs" which make it extremely expensive for the prisoners to get together and strike a deal. But that would be misleading.
The problem is that exchange can also be like a PD game. Orthodox economists don't tell you that in the act of exchange, the two "players" are colluding to not rob each other. If we drop this usually-covert assumption, we see four possible choices. (Again, the choice is binary, ignoring intermediate choices between the extremes. Again, the two "traders" are assumed to embrace possessive individualism.)
1. Cain and Abel swap their goods with each other, with mutually-beneficial effects (collusion, IH result).
2. Cain slays Abel, stealing his goods. Cain gains in a big way (getting both sets of goods) while Abel obviously suffers.
3. Abel slays Cain, reversing the roles.
4. Both fire their weapons at each other, so both die (both defect, the usual PD result).
As in a PD game, the incentive is there for Cain to kill Abel. Naturally, Abel will fear this event and find that he has an incentive to preempt Cain's dirty deed (done dirt cheap). So Cain may react by shooting first. Mutual destruction ensues...
What's the solution to this mess? Orthodox economics (Orthonomics?) simply assume it away. More seriously, the English political philosopher Thomas Hobbes advocated bringing a very Visible Hand, the Leviathan, the unified state which monopolizes the means of violence. This prevents mutual destruction. It sets up incentives for the two traders to cooperate.
Another English political philosopher, John Locke, naturally enough didn't trust the state. His solution was to advocate merging the propertied class (what we would call the capitalists) with the state. The former should dominate the latter, to the maximal possible extent, natch. In this scenario, Cain and Abel _are_ the state, colluding to prevent the odious option #4.
An incentive problem still exists, however. Suppose that we see trading between the two brothers. Cain could see the benefits of having both of the guys' goods rather than simply getting Abel's goods in exchange for his own. He might then cheat or rob or kill Abel. This unhinges the collusion (or turns the game into a one-person affair, which I'll ignore).
But Locke had a solution: he proposed that people accept each others' property rights as "natural." If they accept this fiat, then trading can occur and both can benefit. It's as if he were proposing that the "honor among thieves" that allows real-world prisoners to collude in real-world dilemmas should apply to all property owners. They should see themselves as a community, with common interests.
Though Hobbes and Locke were a little silly (seeing imaginary "social contracts" as providing insight into what's happening in the real world), they captured the two main elements of what allows the IH to work, at least some of the time. These are the coercion of the state and the generally-accepted legitimacy of property rights.
The latter element, I believe, needs a lot of shoring up. After all, if profits are to be made, why accept the ideology of "natural" property rights? But there are two reinforcing elements that Karl Marx might suggest. The property owners cling to the ideology of natural property rights because it unites them against those who lack significant property rights (capital). The ideology helps maintain ruling-class solidarity. Second, if the capitalists believe it, or at least generally act as if they did, then it's easier to teach to the underclasses.
This analysis says that the mutually-beneficial exchange of the IH story is just as artificial as is the mutual destruction of the PD case. Both are based in human-made institutions. For one, the IH, the structure is created allowing collusion, while for the other, the PD, it's set up to encourage defection.
Those in power decide which activities fit in which box. For example, for you hemp-heads out there, the capitalist state in the US has decided that pot sellers belong in the PD box, while alcohol purveyors belong in the IH box.
To choose a less heady example, the social structure puts purely private goods in the IH box, while purely public goods are in the PD box. (The "public goods problem" is a version of the PD game, with a large number of participants. The "rats" are called free-riders.) Of course, in the real world, almost no products are purely public or purely private.
BTW, if this story is revealing, that indicates (once again) that game theory can say something about the world, as long as we don't obsess with equilibrium situations (Nash or otherwise).
[*] This is unfair to rats. Recent research indicates that those cute and furry creatures are more cooperatively-minded than the stereotypes say.
--
Jim Devine
The Death Grip of Savings Mania on Mainstream Democrats
Bob Frank is a smart guy with progressive instincts. His take on economic policy today is probably what we will see in a Democratic administration in 2009. That’s why it’s worth pointing out that the conventional wisdom he channels is politically and intellectually bankrupt.
He wants us to raise taxes because of “the deficits”, conflating the government’s fiscal deficit with the country’s current account deficit. Aside from sewing the sort of confusion that educators should be pledged to dispel, this argument recycles the discredited “twin deficits” hypothesis of the 1990's. Our external deficit, according to this view, is the product of our lack of savings, particularly public savings. (The fiscal deficit is a deduction from our national savings account.)
Been there, disconfirmed that. Over the course of the 90s the fiscal balance went from negative to positive, but the current account balance went down, down, down. Here’s how it looked:
Both the fiscal and current account balances are expressed as percentages of GDP, with bigger deficits pushing south. Except for a few years in the early 2000's, the two balances move in opposite directions. Shrink the government deficit (or squeeze out a surplus) and watch the current account drop. Of course, simple correlations like this are just the beginning of the story, but even fancy manipulations don’t turn this negative relationship into a positive one.
As I’ve argued before and at greater length, while everything affects everything else, the current account determines savings to a far greater extent than the other way around. The trade deficit is a drag on incomes, made up by the borrowing we do when the money comes back to us in the capital account. That transmission mechanism is obvious and visible. What about the effects of savings on trade?
There are only two routes. Either low savings leads to higher GDP (Keynes) and therefore a higher trade deficit, or it raises interest rates, which boosts the value of the dollar, which feeds the trade deficit. The first is empirically marginal at the present time: the US trade deficit is not driven by faster growth rates here compared to abroad. Even if it were otherwise, fixing trade by inducing a recession is curing a disease by killing the patient. The second route is counterfactual at two crucial points: domestic savings (low) do not drive interest rates (low) in the US, and interest rates do not drive the value of the dollar. Both are controverted by the willingness of foreign central banks and sovereign investment funds to buy dollar assets, thus far without limit.
So there is no compelling economic argument for obsessing on savings.
The political case is even weaker. The Democrats have become the party of sacrifice. They worry about Social Security (yes, that’s mentioned in Frank) because it will become a net draw on savings ten years out, so we have to “fix” it. We have to raise taxes because the fiscal deficit (currently within the Maastrict limit imposed on the Eurozone) is bad for savings. It’s all about savings, and it’s all wrong.
My suggestions: (1) Deal with the current account directly. If we cannot get international cooperation on the dollar, create a system of tradeable import permits. Take urgent action to cut the demand for petroleum, good for our trade balance and the earth’s carbon balance. Take an honest look at industrial policy. (2) Accept a fiscal deficit of 2-3% of GDP, as long as it makes sense as a national income stimulant, and as long as a substantial portion of public spending goes to investment in people and technology. (3) Finance large increases in public investment and energy transition by drastically cutting military spending. With a more modest military we could make more alliances, fewer wars and enjoy greater true security.
Saturday, December 8, 2007
Pharmaceutical Crackup?
The Wall Street Journal has a great article about the big players in the pharmaceutical industry, showing how it is dealing with its lack of progress in developing new drugs -- by more intensive marketing, taking over smaller, more innovative companies, and laying off workers. Even so, Wall Street is looking forward to lower profits. Here is the article & another on the layoffs.
Martinez, Barbara and Jacob Goldstein. 2007. "Big Pharma Faces Grim Prognosis: Industry Fails to Find New Drugs to Replace Wonders Like Lipitor." Wall Street Journal (6 December): p. A 1.
"Over the next few years, the pharmaceutical business will hit a wall. Some of the top-selling drugs in industry history will become history as patent protections expire, allowing generics to rush in at much-lower prices. Generic competition is expected to wipe $67 billion from top companies' annual U.S. sales between 2007 and 2012 as more than three dozen drugs lose patent protection. That is roughly half of the companies' combined 2007 U.S. sales."
"At the same time, the industry's science engine has stalled. The century-old approach of finding chemicals to treat diseases is producing fewer and fewer drugs. Especially lacking are new blockbusters to replace old ones like Lipitor, Plavix and Zyprexa."
"The coming sales decline may signal the end of a once-revered way of doing business. "I think the industry is doomed if we don't change," says Sidney Taurel, chairman of Eli Lilly & Co. Just yesterday, Bristol-Myers Squibb Co. announced plans to cut 10% of its work force, or about 4,300 jobs, and close or sell about half of its 27 manufacturing plants by 2010."
"Between 2011 and 2012, annual industry revenue will decline, estimates Datamonitor, a research and consulting firm. That would be the first decline in at least four decades.'
"Once it hits the market, however, the patent-protected drug is highly profitable: Typical gross margins are 90% to 95%.'
"The rise of generics wouldn't matter so much if research labs were creating a stream of new hits. But that isn't happening. During the five years from 2002 through 2006, the industry brought to market 43% fewer new chemical-based drugs than in the last five years of the 1990s, despite more than doubling research-and-development spending."
""There haven't been any new therapies that are proven to reduce death and disability for atherosclerosis since the introduction of the [cholesterol-lowering] statins" in the late 1980s, said Richard C. Pasternak, vice president of Cardiovascular Clinical Research at Merck. Atherosclerosis, a buildup of arterial plaque, is a major cause of heart disease."
"Biotech drugs are especially appealing because they face no competition from generics: No regulatory pathway yet exists in the U.S. for bringing to market generic biotech drugs. So until Congress creates such a pathway, no generic threat will exist to the $4,400 a month that Genentech Inc. charges for its cancer drug Avastin, or the $200,000 a year that Genzyme Corp. gets for Cerezyme to treat Gaucher disease. And biotechnology products tend to target specialized areas of medicine that don't require mass advertising or armies of salespeople."
"So big pharmaceutical companies have spent nearly $76 billion since 2005 to buy biotech companies, according to Health Care M&A Information Service, a unit of Irving Levin Associates Inc., a Norwalk, Conn., research company. While in 2005 there were 33 deals amounting to $16.5 billion, in the first nine months of this year there were 49 deals totaling $28.7 billion, including AstraZeneca PLC's $15.6 billion acquisition of MedImmune, which followed a bidding war against Eli Lilly, among others."
"The dearth of new products has led the industry to invest heavily in marketing and legal tactics that squeeze as much revenue as possible out of existing products. Companies have raised prices; the average price per pill has risen 63% since 2002, according to Michael Krensavage, Raymond James analyst. Companies raised advertising spending to $5.3 billion in 2006 from $2.5 billion in 2001 and since 1995 have nearly tripled the number of industry sales representatives to 100,000."
"The industry spent $155 million on lobbying from January 2005 to June 2006, according to the Center for Public Integrity, on "a variety of issues ranging from protecting lucrative drug patents to keeping lower-priced Canadian drugs from being imported." The industry also successfully lobbied against allowing the federal government to negotiate Medicare drug prices, the center said. The lobbying has drawn fire from politicians, doctors and payers, and damaged the industry's public image."
==========
Loftus, Peter and Sarah Rubenstein. 2007. "Bristol-Myers Cuts Jobs, Plants to Shore Up Profit." Wall Street Journal (6 December): p. D 6.
"Bristol-Myers Squibb Co. is the latest big pharmaceutical company to announce a restructuring in the face of looming generic competition and pipelines with few potential blockbusters. The New York drug maker said it will cut its work force by 10%, or about 4,300 jobs, and close or sell about half of its 27 manufacturing plants in a plan to save about $1.5 billion by 2010 and boost profitability."
"Bristol-Myers Chief Executive James Cornelius told investors that the company faces a "patent cliff" early next decade, when its popular antiblood-clotting drug Plavix will lose U.S. market exclusivity."
Friday, December 7, 2007
Does Wall Street Lead to Socialism?
It is fun to push Brad Setser's words to suggest that socialism (not real socialism, but the way the public understands it -- public ownership) may be the ultimate outcome of finance capital.
Brad Setser (December 06, 2007)
http://www.rgemonitor.com/blog/setser/230793
It wasn’t all that long ago that Wall Street -- Citi bankers included -- were scouring the emerging world for state-owned companies that could be sold to private investors in the US and Europe. Now the world’s investment bankers seem to be scouring the US and Europe for private assets that can be sold to government investment funds and state-owned companies in the emerging world.
Privatization is out. Selling private companies – or big chunks of a private company -- to another country’s government (partial renationalization?) is in.
Fatal Truck Crashes: A Publishing Opportunity for Economists
From the Pump Handle comes this. I’m too busy to turn these findings into an economics journal article, but I’ll tell you how to do it so you can pad your own CV.
First you need a theoretical model. You can show that, with a fixed salary and positive barriers to mobility (for instance in a searching/matching model of the labor market), truck drivers are unable to optimize on their relative preferences for money income and safety. This welfare loss can be overcome by the payment of piece rates. Now each truck driver can locate his or her own personal optimum in wage/risk space. (We abstract from the welfare benefits/costs of the direct effects of amphetamine use.) But there is also a potential externality, in that other drivers or pedestrians may be killed or maimed in truck accidents. The solution is a nonlinear wage schedule that reduces effective hourly pay by the expected cost of the externality according to increasing effect of work hours on accident rates. If you want to get even fancier, you could throw in the principal-agent dimension and put your solution in the context of optimal contract theory.
For the empirical section you would need the raw trucker data. It would be very simple, really a spreadsheet exercise, to impute the marginal value of an extra hour’s work from the piece rate schedule, and to calculate the marginal increase in the probability of a fatal accident. From this you could determine the VSL (value of a statistical life). The required level of analytical foggery could be achieved by testing for baseline effects, income and substitution effects, lots of stuff.
One thing that would not go into the article would be the observation that all of the above smiles on personnel practices that kill truckers.
It’s really a shame that they don’t let me supervise Ph.D. theses.
Mark Perry and Greg Mankiw Say Bill Gates Can Afford Gasoline
I’m not sure why Greg Mankiw choose to peddle the latest be happy spin from Mark Perry:
Gas today, even at $3, is relatively affordable and is actually cheaper than the decades of the 1940s, 1950s, 1960, 1970s and 1980s, when the price of gas is measured relative to our increasing household wealth. Goldilocks can handle $3 gas.
Fine – Goldilocks, Warren Buffet, and Bill Gates can afford gasoline but what about the average Joe who has little wealth and must live paycheck to paycheck? Perry does compare gasoline prices over time to disposable income per capita. Looking at mean incomes (not median) and ignoring all those deferred tax bills from the Federal fiscal irresponsibility of this Administration, we are in the same relative place as we were in the mid-1980’s. OK, but one has to wonder if this were done relative to median income with those deferred taxes factored into the calculation of disposable income how this spin that Mark Perry puts forth and Greg Mankiw endorses would actually look.
Destroying Science in a Helium Balloon
A few years ago I published a book The Perverse Economy: The Impact of Markets on People and Nature (NY: Palgrave, 2003), which included a short discussion about the dangers created by the right wing of obsession about privatizing helium. The Wall Street Journal just published an article confirming my speculations, that the privatization represents a major threat to science. Campoy, Ana. 2007. "As Demand Balloons, Helium Is in Short Supply." Wall Street Journal (5 December): p. B 1.
http://online.wsj.com/article/SB119682793344314212.html
What follows is first the extract from my book, and then the article itself:
Helium
No matter that present values are generally illusory. Present value calculations serve a vital purpose for economic theory. Once the world is reduced to present values, economists can treat the world as if the future does not exist: each decision becomes a once-and-for-all choice without any regard for the future other than what the price system was already signaling.
Concerns about resources have no place within this framework. If a real danger of resource scarcity were looming on the horizon, markets would recognize that fact. The price structure would induce firms to take action by economizing on the resource and by developing alternatives.
The treatment of the national helium reserves illustrates this troubling relationship between discounting and scarcity. Helium is a remarkable substance. Because it is inert, it does not combine with other substances. Because of its perceived military importance in dirigibles, during the 1920s the United States began to collect helium under a federal monopoly.
Helium has properties other than being lighter than air. No other element can reach the low temperature of liquid helium. This property makes it useful in a broad array of high-tech industrial, research, and medical technologies, such as fiber-optic cables and magnetic-resonance imaging systems (National Research Council 2000).
The government later established a facility in Texas to store crude helium (National Research Council 2000). The Texas location is not accidental. Although atmospheric helium is plentiful, it is dispersed. Extracting this helium from the air is a very expensive proposition since only minute quantities of helium exist within a fairly large volume of air.
The sedimentary rocks that form the gas carry about one part per million of uranium. According to Kenneth Deffeyes, "During the slow decay to lead, each uranium atom spits out six to eight alpha particles. An alpha particle in physics is identical to the nucleus of a helium atom in chemistry. The helium gas that we put in party balloons is simply used alpha particles" (Deffeyes 2001, p. 66).
In contrast to its dispersion in the atmosphere, helium in natural gas deposits is relatively concentrated. Some natural gas deposits have helium concentrations as high as 8 percent, making them the most economical source of this element (National Research Council 2000, p. 40). Separating helium from natural gas costs only about 1/1000 as much as obtaining it from the atmosphere (Koopmans 1979).
In 1960, Congress amended the Helium Act, which had originally authorized the helium depository. This new legislation eliminated the federal monopoly of helium, although the Bureau of Mines continued to collect helium. Several companies in the United States entered the market to collect and sell the gas. These companies sold their excess helium to the federal government, which stored it in the National Helium Reserve in Texas.
Private consumption of helium reached a low point in the 1970s, even though private production was still vigorous. As a result, the government continued to accumulate more helium in the reserves until around 1980. With the build-up of federal stockpiles, conservatives singled out the helium reserves as a particularly egregious example of government waste (see Stroup and Shaw 1985). Christopher Cox, the California Congressman who led the fight to privatize helium labeled the reserve: "The poster child of Government waste" (Verhovek 1997).
In 1996, Congress eliminated the National Helium Reserve, leaving the management of helium to the free market and the likes of Enron, Exxon, and Panhandle Eastern Corporation. Well, not exactly, the free market. The law required that the government dispose of its helium over a couple of decades to prevent privatization from decreasing the price that the private producers charge. The promised cost savings have yet to appear.
The American Physical Society, a prominent group of physicists, has warned that the privatization plan is dangerous, because it has no requirement that a large stockpile will be maintained (Verhovek 1997; Powell 1996). Helium demand is now increasing at about 10 percent per year. The supply may be largely depleted by 2015, the date by which Congress proposes to phase out the reserve.
Indeed, a federal report says that the current trends indicate that shortages will appear within less than 20 years, unless private business develops new technologies. However, these experts are confident that business will somehow meet the challenge, although they give no indication of what this new technology might be (Natioal Research Council 2000).
Discounting Helium
The helium story is interesting in several respects, especially, taken in conjunction with the role of natural gas. As is well known, natural gas is probably the least environmentally destructive fossil fuel. Of course, the consumption of natural gas is not without problems, over and above the damage involved in moving it from its natural state to the place where it is ultimately burnt. In addition to obvious costs of the depletion of the gas itself and the contribution to global warming, the careless consumption of natural gas causes the dissipation of helium.
In this sense, the helium story brings us back to the theme of extraction versus production, but with a twist. Ironically, this same helium, which is being squandered because of the inattention to storing it for the future may well prove to be a vital part of high technology that could possibly lead to significant savings in energy, including natural gas.
In addition, the helium story serves as a useful reminder of the complex pathways of cause and effect typical of most environmental systems. Push in any direction and unexpected consequences crop up. In contrast, the contemporary profit system works with an appallingly simple mindset. Here is a resource that can benefit some corporations. Give it to them to exploit without much thought about the ultimate consequences.
The economist who may have given the most attention to the question of helium is the late Tjalling Koopmans, whom I noted in the discussion of hyperbolic discounting. Koopmans was a distinguished theoretical economist and winner of the 1975 Nobel Prize in economics. He proudly associated himself with the study of pure economics. He violently denounced those economists who relied on empirical data, without first carefully situating it in abstract theory (Mirowski 1989b). He was so fanatically committed to abstract economic theory that he even "seriously opposed ... fine writing in economics, not a common crime in our field. According to his code of scientific honor, mere elegance must not give ideas an unfair boost" (Samuelson 1989).
In 1978, Koopmans delivered the presidential address to the American Economic Association (Koopmans 1979). His lecture concerned the difficulties that economists had in communicating with natural scientists. Koopmans was not speaking out of ignorance of the ways of natural science. In fact, he had earned a degree in quantum physics. Koopmans explained to a meeting of the American Physical Association in 1979 that he initially decided to switch from physics to economics because he "felt the physical sciences were far ahead of the social and economic sciences" (cited in Mirowski 2002, p. 251).
By the time that he gave his lecture, Koopmans seemed to think that economics had advanced to the point where he could confidently recommended that scientists learn to accept the economists' approach.
In effect, harkening back to Adam Smith's account of the complex production process behind the appearance of a single coat, Koopmans attributed a superiority to economics over natural science. Whereas a scientist might be inclined to think of a helium policy in terms of the use or the production of helium, the economist uses monetary values to capture the systemic ramifications of a helium policy. In Koopmans's words:
In the present context, an important trait of the neoclassical (economic) model is that it does not postulate one sole primary resource, be it labor, energy or any other, whose scarcity controls that of all other goods, and which thereby becomes a natural unit of value for all other goods. [Koopmans 1979, p. 7]
Instead, as Lionel Robbins observed in his influential study of economic methodology, the economy is a "complex of 'scarcity relationships'" (Robbins 1969, p. 19). Within this context, prices take into account a wide array of factors, rather than a single objective, such as the conservation of helium.
In his address, Koopmans related his experience working on the report to the Helium Study Committee of the National Research Council. Most of Koopmans's discussion of helium merely dealt with technical questions regarding the supply and the extraction of helium. The one point that Koopmans kept returning to was the scientist's insistence that "Btu's are the same everywhere and at all times" (Koopmans 1979, p. 8). Koopmans wanted to teach the scientists that discounting future benefits, which lay behind the calculations justifying privatization, was rational.
Even if you grant the importance of discount rates, nobody knows how to select the appropriate discount rate for determining whether or not responsibility for collecting and storing helium should be privatized. Some discount rates would have been consistent with privatization. Other lower rates would not. Koopmans never mentioned how to decide on the correct discount rate. Nor did Koopmans indicate that he had any inkling of the possibility of hyperbolic discounting. In fact, the absence of an adequate theory of discounting represents a major challenge that stands in the way of the scientific aspirations of economists.
Tjalling Koopmans, the National Research Council, and most economic and political forces aligned themselves against those who express any concerns about sustainability. Presumably, if a problem occurs, they proposed that the resulting profit opportunities will create sufficient incentives to generate a solution. Their proposed solution is not sustainable, but instead an outcome in which the system efficiently maximizes discounted present values. Unfortunately, they did not have a clue as to what that discount rate should be.
======
Syracuse University physicist Gianfranco Vidali spends most of his time studying how molecules are made in outer space, but a couple of months ago he abruptly dropped his interstellar research to address an earthly issue: the global shortage of helium.
The airy element best known for floating party balloons and the Goodyear blimp is also the lifeblood of a widening world of scientific research. Mr. Vidali uses the gas, which becomes the coldest liquid on earth when pressurized, to recreate conditions similar to outer space. Without it, he can't work. So when his helium supplier informed him it was cutting deliveries to his lab, Mr. Vidali said, "it sent us into a panic mode."
Helium is found in varying concentrations in the world's natural-gas deposits, and is separated out in a special refining process. As with oil and natural gas, the easiest-to-get helium supplies have been tapped and are declining. Meanwhile, scientific research has rapidly multiplied the uses of helium in the past 50 years. It is needed to make computer microchips, flat-panel displays, fiber optics and to operate magnetic resonance imaging, or MRI, scans and welding machines.
The technology explosion is sucking up helium supplies at dizzying rates. U.S. helium demand is up more than 80% in the past two decades, and is growing at more than 20% annually in developing regions such as Asia.
"We've not seen the supply and demand at this imbalance in the past. We're running on the edge of the supply-demand curve," says Jane Hoffman, global helium director for Praxair Inc.
Supplies in the world's largest helium reserve near Amarillo, Texas, are expected to run out in eight years. Finding and developing new helium sources will take years and millions of dollars in investment.
Glitches at some of the world's biggest helium-producing plants have put a further pinch on supplies in the past year. As supplies have tightened, prices have surged in recent months. For one New York laboratory, prices have increased to $8 a liquid liter, from close to $4 at the end of the summer.
The upshot: Helium users -- from party planners to welding shops -- are having to do with less. Large industrial manufacturers are better able to weather the helium shortage, taking steps like installing equipment that can recycle the gas. So it is the nation's cash-strapped scientific community that is getting the worst of the crunch.
Soaring helium expenses could shut the doors of some independent labs, many which have produced important research over the years, and slow down work at bigger research centers. Helium is used in research to find cures to deadly diseases, create new sources of energy and answer questions about how the universe was formed.
Helium is essential to cool the magnets in nuclear magnetic resonance, or NMR, instruments used to map the chemical structure of molecules. Dale Ray, from The Cleveland Center for Structural Biology, an association that groups researchers from several institutions, says he is considering selling or shutting down two machines at the NMR lab he manages. The increase in helium prices is making it unaffordable to run the equipment, which is used to study proteins responsible for Alzheimer's disease, among other things.
Physicists are particularly affected by the helium shortage because their equipment requires more frequent helium refills. After experiencing interruptions in his helium deliveries, Moses Chan, a physicist at Penn State, launched a poll among his colleagues to find out how widespread the problem was. The results: the majority of helium users at 26 different institutions experienced canceled deliveries at least once, as well as price increases, some of them as much as 100%.
Myriam Sarachik, a physicist at City University of New York, might have to shut down her research. Among other things, Ms. Sarachik studies new materials that could bring a quantum leap in computing capabilities. Helium now absorbs most of her lab's budget, leaving little extra for everything else.
"I'm going to retire. That's the handwriting on the wall," says Ms. Sarachik, who has been doing experiments with helium for more than 40 years.
For one project, Ms. Sarachik and her students use 150 liters of liquid helium a week to cool the inside of a four-feet-high metal vessel to temperatures close to zero degree Kelvin, or about minus 459 Fahrenheit. Inside, they place tiny samples of materials mounted on chips and send electric currents to measure their properties. Without the helium, it would be impossible to monitor how the electrons respond because their behavior is masked by heat vibrations.
The National High Magnetic Field Laboratory, home of the world's strongest magnets, also is being affected. Hundreds of scientists travel from all over the world to Tallahassee, Fla., to use its magnets. They use the lab free of charge, but pay for their helium consumption. Many of them are on a very tight budget. To keep them coming, lab director Greg Boebinger will allocate $300,000 of his own tight budget to offer free helium.
"They need whatever relief we can provide," he says. "If they stop coming we're dead in the water."
There are a few helium projects scheduled to come on line in the next couple of years, but experts predict supplies will remain tight in coming years. Despite its higher prices, helium isn't expensive enough yet to warrant projects devoted to its extraction, so it must piggyback on investments made by natural-gas producers.
Additionally, the biggest helium reserve in the world, which is operated by the U.S. government, is in steady decline. Stored in a depleted natural-gas cavern known as the Bush Dome near Amarillo, it supplies 35% of the helium consumed in the world. The government started the reserve in 1925, but by the mid-90s decided to sell it to pay off debt it incurred from stockpiling helium over the years.
Under law, the entire contents of the Bush Dome should be sold by 2015. Helium is very expensive to store because, like a stranded party balloon, it floats up and disappears into the atmosphere. As a result, there is little storage capacity for the gas. Virtually all helium is processed and shipped to its final user as soon as it is extracted from the ground. Once the Bush Dome reserve is gone, there will be no stored helium to supply the market in case of disruptions at production facilities, making for even spottier deliveries and higher prices.
Experts predict this situation will eventually price out many helium users, who will find substitutes or modify their technology. Some party balloon businesses are filling balloons with mixtures that contain less helium. Some welders are using argon. Industrial users are installing recovery systems. In places where helium isn't easily available, like India, scientists already focus on experiments that can be done using liquid nitrogen, says Michael Cuthbert, a sales manager for Oxford Instruments, a company that sells scientific instruments all over the world.
Reem Jaafar, a researcher at Ms. Sarachik's lab at CUNY, says she will go into another area of physics if helium prices stay at their current levels. "If you have a fixed amount in a grant, and you have to spend it all on helium, you don't have anything left over," she says.
Thursday, December 6, 2007
Happy 100th Birthday, Old Man!
Today is the 100th birthday of my late father, John Barkley Rosser, Sr., who died on September 5, 1989. One can learn from his Wikipedia entry that he was a famous logician who proved a generalization of Godel's Incompleteness Theorem, invented "Rosser Sentences," helped prove the Church-Rosser Theorem in computability theory, to discover the Kleene-Rosser Paradox in same, as well as the Rosser Theorem in prime
number theory. He was also involved in the study of rocket ballistics, which led to him advising the US military during World War II, and continuing this later, eventually serving as Director of the US Army funded Mathematics Research Center (1963-73) at the University of Wisconsin-Madison, which was bombed on August 24, 1970 by the anti-Vietnam War "New Year's Gang," resulting in the death of Robert Fassnacht, an anti-Vietnam War physics grad student.
I was a student there in those days, and while I have always disapproved of violence in protesting wars, I came to have strong political disagreements with my father, which ended up being reported in local newspapers ("the irony"), as well as eventually in books (_Rads_, Tom Bates, 1989, Harper Collins). However, later we reconciled personally, while continuing strong political disagreements. I always respected his intelligence and integrity, and this encourages me that it is possible to maintain civil discourse in this world across deep political divides, as long as mutual personal respect can be maintained.
Wednesday, December 5, 2007
The Khamene'i Fatwa: Or, Why I Was Right About Iranian Nukes
The commentariat and many politicians have been unhappy about the prospect of war with Iran, while almost universally they have repeated the mantra that "Of course there is a problem with Iran getting nuclear weapons," somewhat similar to the mantras about social security being "in crisis" that are also widely repeated. I have for some time denied that there was an Iranians nuclear weapons program, on this blog, on Maxspeak, and in comments elsewhere, often to derision and skepticism.
The reason for my argument I learned from Juan Cole, something barely reported on in the US media, and usually to immediately stated skeptical addenda. This was that on August 9, 2005, Head of State, Supreme Jurisprudent and leader of Iranian Shi'i Muslims, and Commander-in-Chief of the Iranian military, Ayatollah Ali Khamene'i, issued a fatwa against nuclear weapons, while supporting a civilian nuclear power program. People who claimed that President Ahmadinejad was in charge were warmongering hysterics, ignorant of their real relationship, and that Ahmadinejad's party got whomped in the last local elections. Although the US media and politicians did not do so, this fatwa was and is to be taken seriously, and it is now clear that it was issued in the wake of the late 2003 cessation of what had been an active nuclear weapons program, almost certainly to cement in that decision.
Tuesday, December 4, 2007
NAFTA Suits Against Governments
This article supports the NAFTA clause that lets foreign firms sue the US governments for redress of trade wrongs. The story is especially interesting because it shows how down and out people may enjoy punishing corporations. The author obviously sympathizes with the Canadian firm, but the story of the trial is entertaining. The Canadian firm was totally outlawyered and maybe even treated unfairly, but if it wins, the precedent will be terribly destructive.
"Nafta Meets the American Torts Process: O'Keefe V. Loewen."
George Mason Law Review, Vol. 9, No. 1, pp. 69-98, Fall 2000
Contact: MICHAEL I. KRAUSS
George Mason University School of Law
Email: mkrauss@gmu.edu
http://ssrn.com/abstract=271265
ABSTRACT: The systematic bias against out-of-state defendants in American tort law is acutely illustrated in the important Mississippi case, O'Keefe v Loewen. This case, which resulted in the bankruptcy of the Canadian defendant, has itself become an international cause celebre because of the NAFTA challenge it has spawned. In this article, the factual backdrop of the case is described, the NAFTA challenge analyzed, and the implications of the challenge for tort reform are discussed.
Bush and Cheney Blocked NIE Report on Iran Nukes for Over a Year
Gareth Porter reports that the NIE had the news about no Iranian nuclear weapons program over a year ago in 2006, but that Cheney and Bush fought to have it revised and kept it suppressed until after they could get summary statements of particular findings blocked in late October this year (which allows for unexamined claims of previous nuke weapons programs to remain in the NIE), being unable to shake the findings of the more independent members of the intelligence community. Apparently John Negroponte was forced out as Director of National Intelligence last year because he refused to go along with this fraudulent scheming by Bush and Cheney, and the earlier NIE also disagreed with the claim that Iran was arming Shi'i militants in Iraq.
Porter's report can be accessed at http://www.ipsnews.net/news.asp?idnews=39978. Juan Cole today also provides lots of interesting and relevant related material on this shocking (if not ultimately surprising) set of lies and manipulations by Bush and Cheney.
On the proper way to learn economics
vi: "We have not succeeded in answering all our problems. The answers we have found only serve to raise a whole set of new questions. In some ways we feel we are as confused as ever, but we believe we are confused on a higher level and about more important things."
Posted outside the mathematics reading room, Tromse University
Oksendal, B., 2007. Stochastic Differential Equations (New York: Springer).
Bush Lies About Iranian Nukes
President Bush lied in his press conference just over a half an hour ago. He stated that he first learned that Iran was not pursuing a nuclear weapons program just last week. However, the front page story on the Washington Post reports that he first learned of it months ago, most particularly, PRIOR to his incendiary remark about how if Iran got a nuclear weapon, this could lead to World War III.
Monday, December 3, 2007
The Elite Universities Play Pacman with the Educational System
Continuing with the discussion of elite universities, Business Week reports on the difference between elite universities and the rest. With massive endowments and donations from the wealthy, these schools can poach the most promising or famous faculty with bloated salaries, while Stanford can provide a nice stable for students to keep their horses and Princeton can build a luxurious mansion/dorm. At the same time, public universities fall further behind.
"It's only fitting that Whitman College, Princeton's new student residence, is named for eBay CEO Meg Whitman, because it's a billionaire's mansion in the form of a dorm. After Whitman (Class of '77) pledged $30 million, administrators tore up their budget and gave architect Demetri Porphyrios virtual carte blanche. Each student room has triple-glazed mahogany casement windows made of leaded glass. The dining hall boasts a 35-foot ceiling gabled in oak and a "state of the art servery." By the time the 10-building complex in the Collegiate Gothic style opened in August, it had cost Princeton $136 million, or $272,000 for each of the 500 undergraduates who will live there."
"Whitman College's extravagance epitomizes the fabulous prosperity of America's top tier of private universities. Princeton and its "Ivy Plus" peers (the seven other members of the Ivy League, plus Stanford University and Massachusetts Institute of Technology) have long flourished as elite institutions, both socially and academically."
"The gilding of the Ivies offers a striking manifestation of the contemporary American tendency of the rich to get much richer."
"Fancifying campus living isn't the half of it. The Ivy Plus schools also are investing huge sums to enlarge their central role in research. Harvard, Columbia, and the University of Pennsylvania are developing whole new science-centric campuses, and Yale just acquired one ready-made, buying a 30-building complex from pharmaceutical giant Bayer. The schools are adding more top-notch faculty members and shrinking class sizes. And they are increasing financial aid outlays for lower-income students who otherwise couldn't afford to attend."
"... the increasingly plush Ivy Plus model casts into sharp relief the travails of America's public institutions of higher learning, which educate 75% of the country's college students. While the Ivies, which account for less than 1% of the total, lift their spending into the stratosphere, many public colleges and universities are struggling to cope with rising enrollments in an era when most states are devoting a dwindling share of their budgets to higher ed. "Policymakers seem to have concluded that flat funding is all that public higher education can expect from the state," says Ronald G. Ehrenberg, an economist who directs Cornell University's Higher Education Research Institute."
"Even the most prestigious of public universities are increasingly hard-pressed to repulse richly financed Ivy Plus raiding sorties seeking to steal distinguished faculty members and their research grants. Public schools are being drained for the benefit of the ultra-elite, says Robert J. Birgeneau, chancellor of the University of California at Berkeley. "The further you project into the future, the more frightening it becomes"."
"It's unlikely that more money has ever been lavished on the education of so few. Even as Ivy Plus budgets have spiraled upward, the schools' enrollments have barely budged. From the 1997-98 academic year through 2006-07, graduate enrollment at the 10 institutions inched up by 10%, to 55,708, while the number of undergraduates actually fell by 1.4%, to 68,492."
"Meanwhile, the wealth gap between the Ivies and everyone else has never been wider. The $5.7 billion in investment gains generated by Harvard's endowment for the year that ended June 30 exceeded the total endowment assets of all but six U.S. universities, five of which were Ivy Plus: Yale, Stanford, Princeton, MIT, and Columbia. Ivy dominance extends to fund-raising. A mere 10 schools accounted for half the growth in donations to all U.S. colleges and universities last year. All of the top five on the list were Ivies, led by Stanford, which set a record for higher education in 2006, collecting $911 million in gifts."
"During 2006-07, the Ivy "Big Three"-Harvard, Yale, and Princeton-collectively spent $6.5 billion on operations, up over 100% from a decade ago. This was more than double the 41% average budget increase for all U.S. colleges and universities over this period and quadruple the 26% rise in the consumer price index. The Big Three sank a further $1.2 billion into new construction and other capital spending last year. "Yale is wealthier now, so we can add resources in almost every dimension," says its president, Richard C. Levin."
"Stanford spent $4 million to restore the Red Barn, a Victorian-era structure that's part of the university's equestrian center and now provides a place for undergraduates to house their own horses at a cost of $500 a month. Seven employees groom and feed the steeds and clean their stalls."
"The $106,496 average salary earned by full professors at PhD-granting public universities in 2006-07 amounted to just 78% of what their counterparts earned at private universities, according to the American Association of University Professors. This figure was 91% in 1980-81."
"One of the many academic areas in which Yale has brought its financial muscle to bear is physics, which until recently was chaired by Ramamurti Shankar. "Yale told us: Let's go after who you want. We will make it happen,'" says Shankar, who is particularly proud of having bested several other top private schools to lure the quantum mechanics expert Steven M. Girvin away from Indiana University, a Big Ten public stalwart. "There was a huge war," Shankar says. "Everybody wanted him." Shankar declines to disclose the price he paid for Girvin in 2002, but says that the going annual rate today for theoreticians of his caliber is $400,000 to $600,000, which includes salary and research support. This is for an assistant professor, the level at which Yale does most of its hiring. The price tag for top experimentalists, who have far more extensive laboratory needs, is $1.5 million to $2 million, according to Shankar, who remains on the Yale faculty."
"To house their enlarged faculties, the Ivies have turned their campuses into continuous construction zones. Each now boasts a new science facility that is its most expensive structure ever. At Stanford, the distinction belongs to the $140 million "Bio-X" building. Designed by the famed British architect Norman Foster, the glass-walled center provides offices and labs for 30 faculty members whose research combines cutting-edge subspecialties in biology and medicine. Over the next few years, says Stanford President John L. Hennessy, the school plans to invest an additional $600 million to put up five more buildings at an astronomical cost of $800 per square foot on average. Under President Amy Gutmann, Penn is launching its expansion onto 24 acres adjoining its Philadelphia campus by building three high-tech medical research facilities at a total cost of $682 million. Harvard is beginning work on a $1 billion complex that includes a new stem cell institute, the first stage of a planned 200-acre adjunct campus in Allston, Mass."
"The research productivity of elite private universities is roughly twice that of their public counterparts, according to a recent study of America's 102 top research universities by economists James D. Adams and J. Roger Clemmons. The study measured volume of academic papers and citations during 1981-99. "You are going to have an edge in research if you have great students, but not too many students; freedom from bureaucratic and political meddling; and generous alums who are more interested in academics than the football program," says Adams, acting head of economics at Rensselaer Polytechnic Institute, a private college in Troy, N.Y."
Bianco, Anthony. 2007. "The Dangerous Wealth of the Ivy League." Business Week (29 November).
National Debt Grows $1 Million a Minute
A lefty friend of mine sent me the following article [and I'm testing to see if I can finally get the formatting right on Econospeak messages].
National Debt Grows $1 Million a Minute
By TOM RAUM, AP
WASHINGTON (Dec. 3) - Like a ticking time bomb, the national debt is an explosion waiting to happen. It's expanding by about $1.4 billion a day - or nearly $1 million a minute.
One problem we have on the left is that we like the idea of crisis so much that we sometimes fall under the influence on non-crises that are disguised as crises. This is one of them.
The national debt is $9.13 trillion, about $30,000 for every person in the U.S. The total is worrisome because interest payments on the debt strain government resources -- and things could get worse if the economy slows down, as some economists predict.
It should NOT be called the "national" debt. It's the _government's_debt and about 75% of it is owed to people in the U.S. So 75% percent of it should be considered part of the nation's assets. If you don't see this, please e-mail me and I will give you my home address -- so you can mail me your government bonds. If they're such a burden, I'll take them off your hands.
The interest payments on the _government's_ debt do represent a problem in the government's budget. (But remember that about 75% are paid to people inside the U.S.!) The problem of interest payments is not a problem in the short run, even if a recession hits, because the Federal government can and does run deficits -- it does not have to balance its budget. Smart economists and politicians don't force a budget balance in a recession, since they know it makes matters worse.
Over the long haul, the economy grows, generating more & more tax revenues for the government. These (along with tax hikes or spending cuts) allow the government to pay interest. The problem occurs only if the government debt grows _faster_ than the economy for several years, so that the government debt to GDP ratio rises. But last time I looked, the government debt was not at its previous peak (67% of GDP in 1996, for gross debt). It was far below its previous peak (122% of GDP) at the end of WW2. It's like 66% now. Note that the US economy did very well during the 1950s, despite the debts left over from WW2.
The government's debt is going to be more of a problem in the future if the medical-cost inflation problem isn't solved (because the Federal government's Medicare costs rise with those of the private sector), if the Bush tax cuts for the rich are not allowed to lapse, if the Iraq war is allowed to continue and grow, and if the "alternative minimum tax" problem (which is pushing more and more middle-class people into rich-people tax brackets)is fixed without compensating tax hikes.
Even so, the government's deficit would not be a problem if the borrowing went to do something productive, i.e., that promotes the growth of the economy. Examples include fixing New Orleans and investing in public health and education. Of course, the government squandered the borrowed money on tax cuts for the administration's rich friends, and the effort to conquer Iraq.
Instead of worrying about the government's debt, worry about:
1. the way the government has wasted its borrowings (see above).
2. the severe debt loads that private consumers have -- and they, unlike the US government, are likely to go bankrupt.
3. the increasing deficits of state and local governments, most of which are forced by law to balance their budgets.
4. the deficit of services that are needed but the government does not provide.
5. global warming.
6. etc.
--
Jim Devine
Has Obama Pulled Back on his Attack on Social Security?
Watching the news I have seen nothing out of Obama lately on social security, and a quick googling shows nothing visible since mid-November, when he went after Hillary on the question, only to get Krugman and a lot of the rest of us on his case. Did he learn to lay low on this, or even maybe change his mind? Or is he still hoping to pander to ignorant youths who think that the probability of seeing a UFO is greater than receiving a social security check? Krugman was on his case on Nov. 30 about the incompleteness of his health care proposal coverage of the population, and compared it to his blunder on social security. All of this has been too bad, given his more reasonable record and position on foreign policy than Hillary or Edwards, if not Richardson.
Again, for the record, anyone who wants to see how totally ignorant American youth is, in this case undergrad econ majors, check out the survey I did with three colleagues up on my website at http://cob.jmu.edu/rosserjb, entitled "Student Ignorance about Social Security." A very serious question is just how did we get into such a situation where American youth has been so badly misled into such extreme and pathetic ignorance on this important issue.?
Unsolicited Advice for the Bali Brigades
The eco-elite have descended on Bali to devise a successor regime to the Kyoto Protocol. I think most of them are asking the wrong questions and are likely to come up with the wrong answers.
To begin with, we should be clear on what the limitations of Kyoto are. They are not primarily the weak targets that were set for carbon reduction, nor were they the forbearance shown to developing countries. Why not?
The targets proved not to matter because they have not been met. In fact, there is no way at present to force a country to act decisively on curbing greenhouse gases, so discussion of specific targets is a sideshow. In any case, no country should pull back from taking aggressive action because an international treaty sets the bar several notches lower.
For the same reason, it was never a problem that Kyoto exempted low income countries from the expectations put on the industrialized world. Aside from the question of equity – climate change is driven by accumulated emissions, most of which came from us and not them – there is no way to force a country like China or India to make its development conditional on reaching carbon goals.
The one thing Kyoto did that “worked” shouldn’t have, carbon offsets. The evidence shows that much of the offsets actually offset nothing at all: they are fictitious carbon reductions. And others take money to mitigate one environmental hazard by creating another, like tree plantations that replace living forests.
So the first thing an enlightened eco-diplomat in Bali should understand is that Kyoto should not be fixed; it should be scrapped. I appreciate its symbolic value, but surely the time for symbolism is past.
What to do then? The starting point for reasonable negotiation is the awareness that the majority of the world’s people will be direct financial beneficiaries of controlling climate change, if the job is done properly. Any country that sets up a system of carbon permits, auctions them off and rebates the money to its citizens on a per capita basis will find that most will come out ahead. This is because climate-bashing consumption is disproportionately done by the rich. Make them pay for it, and distribute the proceeds equally; the lower- and middle-consumption majority will get back more than they pay in. To put it another way, societies have been giving away their crucial environmental resources, like the atmosphere in its role as a waste sink, for free to anyone who wants to take them. Charging a price puts money in the pockets of the owners – us.
Implication: we don’t need a global treaty for countries to set up serious carbon emission controls. That’s not what Bali should be about.
What it can do are two things. First, by far the most efficient point at which to control carbon is where it enters the economy, as oil, coal or gas at the mine or wellhead. This is far less complicated than trying to track it down in its myriad uses, and it leaves the fewest loopholes. For any individual country this will mean requiring permits to bring fossil fuels across the border. Negotiators of a new international framework can work to standardize these permits, so that their markets can be international. This would minimize disruption to cross-border economic life. (I’m a rootless cosmopolitan and favor this sort of thing.)
The most important topic to discuss, however, is how to insulate national economies from the possibility that carbon control could raise domestic costs of production, hurting domestic producers in international markets. (Yes, I know the argument from trade theory that says this is not a problem, and no, I don’t believe it.) It is becoming clear that this will have to take the form of carbon adjustment tariffs (CAT’s), something I weighed in on a few posts back. I think there is a real risk that lobbyists would swarm all over the process of deciding how large a tariff is needed to offset carbon cost differences, and that an internationally negotiated schedule would have more integrity. That, more than anything else, is what Bali should be about, setting up a framework for negotiating such tariff schedules, so that each country can decide for itself how aggressive to be in carbon policy without worrying about getting too far out front.
What Bali should not do is convey to anyone anywhere that local or national action has to wait until a worldwide consensus has been reached.
President For Life
How often recently have you heard from the media that Hugo Chavez was trying with the latest referendum (which he lost) to become President-for-Life, to entrench dictatorship - instead of dropping Presidential term limits from the Constitution? It would seem to follow that prior to the passage of the 22nd Amendment in 1951, the US was a dictatorship.
Sunday, December 2, 2007
The Ethics of Elite Professors
I just read a fascinating study of the way Harvard professor (especially Dershowitz) rely on untrained assistants to do their work for them to allow the elite academics become public intellectuals, while doing shoddy work.
Russell, Jacob Hale. 2007. "A Million Little Writers." 02138 (November/December): p. 78.
http://www.02138mag.com/magazine/article/1763.html
Saturday, December 1, 2007
Thanks regarding The Perverse Imbalances between Town and Country
I wanted thank everybody who commented on the papers. Your contributions were very informative.
Thanks again,
Michael
For ye have the poor always with you
In the news:
December 1, 2007 / New York TIMES
As Always, an Unequal Pie
By DAN MITCHELL
The distribution of wealth lies at the heart of political economics. Nations and empires have risen and fallen, and millions have died, as a result of humanity's struggle to decide how (or whether) to divide wealth.
But for all that, the level of wealth inequality has remained remarkably consistent over the last 2,000 years, according to a recent study by Branko Milanovic, a researcher with the World Bank, and two economics professors, Peter H. Lindert of the University of California, Davis, and Jeffrey G. Williamson of Harvard University.
While "human civilization has advanced by leaps and bounds over the past two millennia, income inequality has stayed relatively the same," Zubin Jelveh of Portfolio.com wrote about the study.
The "inequality extraction ratio" is basically the share of the wealth difference taken by "elites." Since the United States is the wealthiest nation in history, the potential for elites taking a bigger share of the wealth (without allowing mass starvation) is greater.
initial comment: This does not follow logically. Just because total wealth production is larger (making "the U.S. the wealthiest nation in history") does not mean that the rich have the ability to take a larger share. Just because the pie is larger does not mean that the rich automatically have the ability to grab a bigger percentage of that pie.
The way this can make sense is if the "total wealth" is defined by the amount of wealth produced beyond a given subsistence level and the "share" going to the rich is defined as a fraction of total production (including the subsistence level). That is, as the pie grows relative to the minimum size of the pie needed for human survival, there is more room for the rich to grab a bigger piece of the total without cutting into that minimum subsistence part of the pie. The rich can gain while the non-rich do better than subsistence.
[In math: let "total wealth" produced per person be equal to W, the rich elite's per-person part of that total be R, and the production necessary to produce a subsistence living standard for one person be M (standing for "minimum"). The rich elite's percentage share -- also known as the "inequality extraction ratio" -- would equal R/W. Assume that M is constant. Having W be below M would have dire consequences (starvation, plague, revolution, etc.)
As W rises, there is a greater "surplus" above subsistence (S = W - M). Some of this broadly-defined surplus is received by the workers and peasants (call this extra per person income E). Ignoring the rich elite's attainment of subsistence, the total per-person income of the lower classes would be E + M.
On the other hand, the total surplus S would equal the total above-subsistence incomes of both classes, R + E. As S/W rises, there is more room for both a bigger share of total wealth production to go to the rich (R/W rising) and for the above-subsistence incomes of workers to represent a larger piece of the total pie (E/W rising).
Alternatively, note that by definition, total production W = R + E + M. Dividing through by W, this means that (the share of the rich, R/W) plus (the share of above-subsistence wages, E/W) plus (the share of subsistence income, M/W) equals unity. The rise in the surplus relative to W means that M/W falls. So both R/W and E/W can rise.]
In prose (whew!), if a country is at or near the subsistence level, there's no room for the rich to skim the cream. But if the country is far above subsistence, the rich can do so without empoverishing the rest, i.e., pushing them toward or below subsistence.
The role of subsistence is not discussed in the NYT. But this issue does appear in the original article: for example, the authors say that "As hunter-gathers slowly evolved into ancient agricultural settlements with surpluses above subsistence, income inequality must have risen."
This is very revealing. I can't claim to have read the whole (88 page) article which the basis for the pontifications of Mitchell and others, but it seems that "subsistence" is defined according to the standard of living of hunter-gatherers. Then, as we get further and further from producing at that level, the rich have more room to rob. The fact that they have not taken more is then used to praise them for being wise, moderate, or generous (see below). The share of total wealth production going to the rich has not risen, so the workers and peasants have seen their standards of living rise relative to subsistence.
[In math, R/W has been (roughly) constant. So the rising surplus as a percentage of total production (S/W) has been translated into a rising share of above-subsistence incomes of the workers and peasants in total production (E/W).)]
But what if the subsistence is not constant? The rise of civilization (as we know it) has been associated with an increase in all sorts of needs. (Needs, in my book, refer to the costs that must be paid to be a human living in society.) Nowadays, I "need" to have a car to get to work (because I live in Los Angeles), while I "need" to have indoor plumbing (by law). I cannot communicate with others without a telephone or some other electronic system. Living in an alienated society, I must have Prozac or some other drug. Etc. The costs of being a human being always seems to be rising. (It was relatively easy to be a hunter-gatherer.)
Rising subsistence means that the cost of maintaining the workers and peasants has been rising over time. The production of an economic surplus -- which is the source of the income for the rich -- likely has not increased as quickly as total production. The fact that the share going to the rich has not risen may not be a sign of their generosity or moderation at all. It might be the result of a rising subsistence level. As noted below, it might also be the result of efforts by the lower classes to resist the power grab by the rich.
The article continues:
But they have not done so. "Thus," the researchers write, "the social consequences of increased inequality may not entail as much relative impoverishment, or as much perceived injustice, as might appear."
Tim Harford of Slate.com, writing about the same report, called this"faint praise for the United States, perhaps." But, he added: "It is interesting to observe that while modern societies are rich enough to be much more unequal than their predecessors, they show similar patterns of income inequality. Perhaps — I am speculating wildly —human societies have some hard-wired tolerance for inequality?"
Or perhaps, no matter how wealthy a society, there will always be income inequality, whether or not we are "hard wired" for it.
final comment: Or perhaps every time the working and poor classes start raising the share of the product they receive, the "elite" calls in the big guns (General Pinochet and his ilk) to suppress them? And every time the rich elite gets too greedy, it leads to a 1929-33 type collapse, a massive upsurge in class struggle from below, or something similar? But the time scale of this data does not allow anyone to conclude anything at all about the causes of the stability of the numbers. In any event, we cannot assume that society is "hard wired" in any way.
There are also more measurement problems than one can shake A Sunday New York TIMES at. How, for example, is the product of a self-sufficient peasant measured? it may be possible nowadays, but what about for one 1000 years ago? In the original article, the authors quote the SRPE winning economist, Simon Kuznets: “Do you really think you can get good conclusions from bad data?” The question is still apt.
Jim Devine
