Thursday, January 31, 2008

More on time in a capitalist economy

Part of what interested me in the article was the time requirement to find the best price. Economists tell us that prices are supposed to be signals indicating how utility can be produced with the least opportunity costs. In this sense, exploring alternative prices can be seen as a productive activity. Here, the problem is that business is creating an artificial need to muck around to find the best price.

Parents take eggs out of the refrigerator to hide them on Easter, because children enjoy looking for them. This article suggests that the stores are wasting their own energies manipulating prices in order that they can make potential customers chase around for the best deal.

Tuesday, January 29, 2008

Time in a capitalist economy

The American Economic Review has a fascinating article that inadvertently points to a relatively insecure, but significant negative consequence of capitalism. The authors find: "Specifically, households in their late forties pay, on average, 4 percent more for identical goods than households in their late sixties. This is consistent with the fact that market labor hours, earnings, and time demands from children all decline after middle age. Additionally, we document that higher-income households pay higher prices than lower-income households, and dualworker couples pay higher prices than singleworker couples."

Aguiar, Mark and Erik Hurst. 2007. "Life-Cycle Prices and Production." American Economic Review, 97: 5 (December): pp. 1533-59.

Normally, we hear that higher prices are a form of rationing scarce goods, but the scarcity here is a scarcity of customers. Stores try to draw customers in with low prices in order to make more profits, often using loss leaders, so they can charge more for less inelastic goods. Even assuming that the average price is somehow "fair" or "efficient," this strategy costs people time, jumping back and forth to get the best deal.

This time cost falls outside of the typical economic measures, along with wait time on the telephone, standing around in a store until a clerk comes your way, long commutes, and interminable security checks before an uncomfortable and often late plane ride.

Does Steven Landsburg Believe in Ricardian Equivalence or Not?

The LA Times featured a debate between Jason Furman and Steven Landburg where Jason opened up with a nice discussion of how Lord Keynes might have viewed the current prospect of a US recession and the possible policy reactions. Steven began his reply with suggesting that most people don’t know who Lord Keynes was and then decided to dismiss much of what we economists teach in macroeconomics with what seemed to be a contradictory counterview. Steven starts with:

First, when the government mails you a check, it's essentially making you a loan. That's because they're sending you money that they'll have to recapture with higher taxes in the future.

Hmm – sounds like Robert Barro espousing his Ricardian Equivalence proposition that any change in taxes not accompanied by a permanent change in government spending will be seen as only transitional. As such, the tax cut will be 100% saved and not increase consumption at all. Of course, transitional increases in government consumption could raise aggregate demand even in a Ricardian Equivalence world. Ah, but then that’s what some Democrats have proposed to do.

But then Steven sums up with this:

In sum, you (along with the president and the majority of Congress) are asking us to:

shower people with loans to encourage reckless spending;

somehow expect that the loan recipients will feel both richer and not richer at the same time (so that they'll spend more without working less), and;

do all this in the name of delaying the sometimes painful adjustments that are going to have to get made a year down the line in any event.

I object.

What was his objection? That people don’t behave in the way the Barro-Ricardo model of consumption predicts? That somehow the idle production from the types of recessions that Keynes wrote about is a better use of resources than the consumption from induced by tax cuts? Or is Steven saying such recessions do not occur in the first place? After all, he sees the problem not as an insufficiency of aggregate demand but as the need to let “unhealthy industries” adjust.

Monday, January 28, 2008

Thoughts on Credit in the United States Economy

I'm far from an expert on credit, so I'm posting this, hoping that some of you may contribute to my education.

My understanding is that most families avoided borrowing for consumer goods, except for pianos and encyclopedias, which were considered moral consumption. Then in the 1920s, the automobile industry, facing a stagnating market, encouraged consumers to purchase automobiles on credit.

The Depression and the unavailability of consumer goods during the war left most families in the United States without much of a credit burden. Over time, an increasing share of consumption depended on credit, the absence of which would have limited economic growth.

After the early 1970s, when the great burst of inequality began, the dependence on credit as an engine of economic growth became more extreme.

Regulatory Neglect and the Subprime Mortgage Crisis

Until a recent Washington Post op-ed piece, I was unaware that the federal government, in particular the Treasury Department's Office of the Comptroller of the Currency, had put an end to state regulations that might have prevented many of the subprime mortgage abuses.

Bagley, Nicholas. 2008. "Crashing the Subprime Party: How the Feds Stopped the States From Averting the Lending Mess." Slate (24 January). [op ed from the Washington Post]

"To combat this surge in predatory lending, several state legislatures decided to stanch the flow of easy credit to subprime lenders. In 2002, Georgia became the first state to tell players in the secondary mortgage market that they might be on the hook if they purchased loans deemed "predatory" under state law. This worked a dramatic change. Before, downstream owners of mortgage-backed securities might see the value of their investments drop, but that was generally the worst that could happen. Under the Georgia Fair Lending Act, however, players in the secondary mortgage market could face serious liability if they so much as touched a predatory loan. The AARP, which drafted the model legislation that formed the basis for the Georgia law, explained that imposing liability on downstream owners would "reduce significantly the amount of credit that is available to lenders who are not willing to ensure that the loans they finance are made in accordance with the law"."

That's when the feds came in. Some of the biggest players in the secondary mortgage market are national banks, and the states' efforts to curb predatory lending clashed with the banks' fervent desire to keep the market in subprime loans rolling. And so the national banks turned to the Treasury Department's Office of the Comptroller of the Currency. The OCC is a somewhat conflicted agency: While its primary regulatory responsibility is ensuring the safety and soundness of the national bank system, almost its entire budget comes from fees it imposes on the banks—meaning that its funding depends on keeping them happy. It was unsurprising, then, that the OCC leapt to attention when the national banks asked it to pre-empt the Georgia-like subprime laws on the grounds that they conflicted with federal banking law.

China and US Macroeconomic Policies: More Expenditure Switching and Less Expenditure Adjusting Please

As we worry about a US recession, BusinessWeek says the Chinese are hoping for one:

In China, some people might be looking forward to a U.S. slowdown. That's because an American recession could do what Beijing has not been able to accomplish -- namely, cool off China's overheated economy, which in 2007 grew at its fastest pace in 13 years.

I had tried to summarize an interesting economist blog discussion a while back with a tribute to the Tinbergen condition and Brad DeLong got it right with this discussion of China’s policy conflict:

This policy conflict could end in one of several ways: (1) A sudden large burst of inflation in China, as the PBoC finds that it can no longer maintain both the current exchange-rate peg and a stable effective money stock, and sacrifices the second to the first. (2) A sudden large rise in the value of the yuan, as the PBoC finds that it can no longer maintain both the current exchange-rate peg and a stable effective money stock, and sacrifices the first to the second. (3) Slow and gradual versions of (1) and (2) as holders of nominal yuan assets in the first case and nominal dollar assets in the second let their wealth be gradually but substantially be eroded without ever taking steps to cut their losses. (4) Something more unpleasant.

Tinbergen might look at the problem this way (assuming a 2-nation model with China and US and the two nations). The US is worried about a lack of aggregate demand as well as a current account deficit, while China is worried about excessive aggregate demand. Now China’s current account surplus in a 2-nation model is essentially the same thing as our current account deficit. We have three policy tools: (1) US domestic demand; (2) Chinese domestic demand; and (3) a host of expenditure-switching policies. China is employing tight domestic demand policies, while the US is considering expansionary domestic demand policies. Both will tend to widen the current account deficit as China’s exports to the US will grow, while our exports to China will fall. While China will lament our expansionary domestic demand policies (at least according to Business Week), some American policy makers might be hoping to export more to China and would therefore be cheering against their attempts to control Chinese inflation. But what about policy option (3)? Of course, some American policy makers are advocating tariffs and quotas against Chinese goods as a form of expenditure-switching policy. Those of us who still belong to the free trade bandwagon on the other hand are hoping for more yuan appreciation – which was Brad’s (2). But to sacrifice full employment in the US so as to satisfy what the Chinese wish to do in regards their own macroeconomies strikes me as very short-sighted.

Sunday, January 27, 2008

Jonah Goldberg's "Liberal Fascism": Some Big Problems

Jonah Goldberg is not wrong about everything in his mostly annoying book, _Liberal Fascism_. Thus, the term "fascism" has been too readily thrown about by many on the left; there were racist eugenicists among American progressives, with Hitler particularly copying the forced sterilization laws first pushed in the US by Woodrow Wilson, and indeed Mussolini was originally a socialist, and Italian fascism in particular had some socialist elements about it. That said, the book is crawling with numerous mislabelings and errors. I note only two here, at least one of which has not been pointed out so far by others.

That one involves the Church and corporatism. Goldberg identifies fascism as being against traditional Christianity. However, the central core economic doctrine of fascism was corporatism. The unequivocal origin of corporatism was encyclicals of the Roman Catholic Church in the late nineteenth century. I will also point out that a core concept held by all the fascist parties was to oppose democracy. Goldberg likes to label the American progressives as "fascist," (including Richard Ely, co-founder of the American Econmic Association), but none ever opposed democracy, and I am unaware of any current US politician who might be labeled a "liberal" who does either (or any who ever was who did). On the basis of these two points, Goldberg's book amounts to largely a partisan screed.

Barkley Rosser

Saturday, January 26, 2008

Bank Failures in Second Life

I have never seen how Second Life works, but I am fascinated by the game's connections with the real economy -- often replicating some of its worst aspects. For example, players hire people in China to make play money for them & then sell the play money for real dollars -- a relatively obvious production of surplus value.

The Wall Street Journal just published an article about bank frauds and failures within the game.

Here are some extracts from the article:

Sidel, Robin. 2008. "Cheer Up, Ben: Your Economy Isn't As Bad as This One in the Make-Believe World of 'Second Life." Wall Street Journal (23 January): p. A 1.

"Yesterday, the San Francisco company that runs the popular fantasy game pulled the plug on about a dozen pretend financial institutions that were funded with actual money from some of the 12 million registered users of Second Life. Linden Lab said the move was triggered by complaints that some of the virtual banks had reneged on promises to pay high returns on customer deposits."

"The banks of Second Life were operated by other players, who enticed deposits by offering interest rates. While some banks paid interest as promised, others used depositors' money for unsuccessful Second Life land and gambling deals. Under its new banking rules, Second Life says only chartered banks will be allowed -- though it isn't clear any real chartered banks will operate in the virtual play world."

"The shutdown has caused a real-life bank run by Second Life depositors. Though some players managed to get their Linden dollars out, others are finding that they can no longer make withdrawals from the make-believe ATMs. As a result, they can't exchange their Linden-dollar deposits back into real dollars. Linden officials won't say how much money has been lost, but a run on another virtual bank in August may have cost Second Life depositors an estimated $750,000 in actual money."

"Steve Smith, who runs BCX bank under the avatar name Travis Ristow, yesterday said depositors -- who are owed a total of $20,000 -- will be able to get their money back next week. The bank, which had promised to pay depositors more than 200% in annual interest, is now allowing only small withdrawals."

"When virtual environments first started, they were viewed as libertarian dreams with no interference," says Behnam Dayanim, a lawyer who specializes in Internet law at Paul, Hastings, Janofsky & Walker LLP in Washington. "As companies that sponsor these environments become more accountable to investors or regulators, they are starting to encounter real-world limitations"."

"The banking crisis at Second Life surfaced during the summer, when Linden banned gambling on the site, citing "conflicting gambling regulations around the world." That caused a run on Ginko Financial, a Second Life bank that had invested heavily in the virtual world's gambling operations. Ginko capped withdrawals, and ultimately issued bonds to customers instead. The bank went out of business in August."

"Linden essentially acknowledges that the financial services being offered in its virtual society have evolved to the point that they need to be regulated in the real world. From now on, "proof of an applicable government registration statement or financial institution charter" will be required of anyone collecting deposits in Second Life, according to Linden. The company insists it "isn't, and can't start acting as, a banking regulator." "If this is real money, there is an argument that you need to follow real law," says Benjamin Duranske, a lawyer who runs the Second Life Bar Association and is writing a book on virtual law."

Andy Carnegie and Bill Gates

My recent post about the two faces of Bill Gates brought some comparison with Carnegie. There is an interesting difference between the two. Gates is a recent convert to philanthropy. Carnegie, however, began at an early age. He decided that he would make a fortune and use it to contribute to a better world.

Carnegie came from a family of radical Chartists. Philanthropy was his way of being radical. So, he felt justified in screwing anybody -- even sanctioning the bloody battle of Homestead to promote his philanthropy.

209: "... 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."

Carnegie, Andrew. 1895. "The Best Use of Wealth." in Miscellaneous Writings of Andrew Carnegie, 2 vols. Burton J. Hendrick, ed. (Garden City, NY: Doubleday, Doran & Company, 1933): pp. 203-18.

Friday, January 25, 2008

Bushist Ideology Runs Rampant Over Any Sense Whatsoever

The front page of the Washington Post today reports that the current US Transportation Secretary, Susan Peters, has thrown up impossible barriers to allowing the US government to provide $900 million out of an estimated $5 billion to extend a metro line from Washington through now-unserved Tyson's Corner to the area's main airport, Dulles International, far west of town. This project has been in the planning for 40 years, is supported by local politicians in all jurisdictions of both parties, plus local business people, would help the environment, reduce congestion, and end the absurdity of Washington being the only major capital city in the world from which an international traveler cannot get to downtown from its main airport by public transport. As it is, there is a monopoly on transport for the Washington Flyer, and one hears announcements over the loudspeakers asking people to report to the police anybody daring to offer one a cab or other kind of ride out of Dulles not from Washington Flyer, the only "approved" transport from the airport.

This decision is totally and utterly ideological, with Peters being an advocate of paid toll roads, automobile uber alles. Those involved in the negotiations have complained of "goal posts constantly being moved" with the various local governments having jumped through endless hoops to satisfy the DOT. This is one more sign of how much damage Bush can still do to US society and economy in the year he still has to remain in office as president, and given his appointments to the Supreme Court, for decades to come. (I am not against congestion tolls as are in place in London and Singapore, but those places provide good metro transport from their airports as well)

Thursday, January 24, 2008

The Two Faces of Bill Gates

Gates just gave a speech advocating a kindler, gentler capitalism, posing a good brother to the poor. At the same time, Microsoft is embarking on the most far reaching monitoring of workers ever contrived in which wireless sensors could read “heart rate, galvanic skin response, EMG, brain signals, respiration rate, body temperature, movement facial movements, facial expressions and blood pressure”, the application states. The system could also “automatically detect frustration or stress in the user” and "offer and provide assistance accordingly".

Guth, Robert A. 2008. "Bill Gates Issues Call for Kinder Capitalism: Famously Competitive, Billionaire Now Urges Business to Aid the Poor." Wall Street Journal (24 January): p. A 1.

"In a speech at the World Economic Forum in Davos, Switzerland, the software tycoon plans to call for a "creative capitalism" that uses market forces to address poor-country needs that he feels are being ignored. "We have to find a way to make the aspects of capitalism that serve wealthier people serve poorer people as well," Mr. Gates will tell world leaders at the forum, according to a copy of the speech seen by The Wall Street Journal. Mr. Gates isn't abandoning his belief in capitalism as the best economic system. But in an interview with the Journal last week at his Microsoft office in Redmond, Wash., Mr. Gates said that he has grown impatient with the shortcomings of capitalism"."

Mostrous, Alexi and David Brown. 2008. "Microsoft Seeks Patent for Office 'Spy' Software." The Times (London) (16 January).

"Microsoft is developing Big Brother-style software capable of remotely monitoring a worker’s productivity, physical wellbeing and competence. The Times has seen a patent application filed by the company for a computer system that links workers to their computers via wireless sensors that measure their metabolism. The system would allow managers to monitor employees’ performance by measuring their heart rate, body temperature, movement, facial expression and blood pressure. Unions said they fear that employees could be dismissed on the basis of a computer’s assessment of their physiological state."

"Microsoft submitted a patent application in the US for a “unique monitoring system” that could link workers to their computers. Wireless sensors could read “heart rate, galvanic skin response, EMG, brain signals, respiration rate, body temperature, movement facial movements, facial expressions and blood pressure”, the application states. The system could also “automatically detect frustration or stress in the user” and "offer and provide assistance accordingly". Physical changes to an employee would be matched to an individual psychological profile based on a worker’s weight, age and health. If the system picked up an increase in heart rate or facial expressions suggestive of stress or frustration, it would tell management that he needed help."

Wednesday, January 23, 2008

Why to Tax the Rich: How the Rich Get Richer

The Ken Griffin interview got me to think about some earlier contributions about his thinking.

A Pennsylvania businessman wrote a book with a revealing title.

Farquhar, A. B. in collaboration with Samuel Crowther. 1922. The First Million is the Hardest: An Autobiography (Garden City, NJ: Doubleday): p. 19.

Andrew Carnegie's rumination throws light on this subject:

2 & 15: "wealth has been produced as if by magic, and fallen largely to the captains of industry, greatly to their own surprise ....The community created the millionaire's wealth. While he slept it grew as fast as when he was awake."

Carnegie, Andrew. 1906. "Wealth." in Problems of To-day: Wealth, Labor, Socialism (Garden City, NY: Doubleday, Doran, 1933): pp. 1-39.

The Latest Recommendation from the Washingtoon Ethnic Dining Guide

Anybody interested in a spoof on Tyler Cowen and his Ethnic Dining Guide of Washington, link to: The Latest Recommendation from the Washingtoon Ethnic Dining Guide (.pdf)


Fiscal Stimulus: Little Bang for the Buck

CNN reports on the politics of fiscal stimulus:

A one-time tax rebate is at the heart of an economic stimulus package being negotiated by House leaders and Treasury Secretary Henry Paulson on Wednesday … The tax rebate would be similar to the $300 to $600 checks that were sent out in the summer of 2001.While there is bipartisan agreement that a stimulus package should be moved quickly, Democrats and Republicans still disagree on who should receive the rebates.

As the politicians iron out their differences, let’s think about this from an economic perspective.

Those who preach the Life Cycle Model (LCM) would tell us that that one-time rebates will be mostly saved with very little aggregate demand stimulus. In other words, a big impact on the current deficit but little impact on consumption demand just when we likely need it.

There is a possible rebuttal to this LCM view that goes like this. Lower income households are likely liquidity constrained so a tax rebate is sort of like the loan they could not get from the bank. So if we target this temporary tax relief to lower income types, then maybe we will get a strong bang for the buck.

But back to the politics where it has been standard operating procedure for the GOP to shift taxes onto the young by giving most of the tax breaks to rich older dudes. And these rich older dudes are not likely to be so liquidity constrained, which means the LCM view likely is valid if we let the GOP have its way. But isn’t this the real problem with the use of fiscal policy – partisan agendas tend to trump what most reasonable economists would consider the most effective means of handling our economic issues.

Bush and Crew Lied 953 Times About Iraq

This is probably old news to most, but it is very precise and documented. At today one can find a report on the Center for Public Integrity that documents 953 specific cases of outright lies by Bush, Cheney, Rumsfeld, and Rice about Iraq during the two years following 9/11/01. Some of these lies are simply outrageous and clearly fully conscious that they are lies by those uttering them when they did. Let the record stand.

Tuesday, January 22, 2008

Intelligent Design

In the Times today, the mathematician John Allan Paulos' new book Irreligion is reviewed. It is another critique of theism, a la Hitchens , Dawkins, Harris. While I'm on his side, here is an argument against ID I wish he hadn't used - although I've used it myself. He says, according to the reviewer, that the idea that we can infer a designer from a design is refuted by Darwinian natural selection and "free market economics" (e.a) It's the last clause I take issue with.

Of course the idea is that the spontaneous order exhibited by a laissez-faire economy is an instance of design without a designer. The trouble is that I can't think of any spontaneously ordered economies for which intelligent design (and I don't mean the Deity!) isn't implicated to some degree in the order achieved. A judicial system able to underpin a complex economy doesn't come into existence spontaneously. The Bretton-Woods system had intelligent designers - and so on and so on. The "market" is not a natural fact. It is embedded in institutions and to the extent that it functions with any kind of order, the intelligent designers of these institutions deserve some of the credit. We saw the fallacy of the belief in the spontaneous ordering of the market as a natural fact in the tremendous disorder following 1989 in Russia.

Just sayin'!


by the Sandwichman,

This doofus, Ben Stein, assures his readers that recessions aren't all bad. With the random clarity of an infinite number of monkeys typing at an infinite number of keyboards, he manages to come pretty close to accidentally explaining the collective behavioral cause of recessions in prescribing his individualistic "cure" for them.

"There is some good news in here."

"Even in a recession, more than 90 percent of workers who want to work will be employed. Even in a recession, most businesses will make a profit. Even in a recession in this era, more than 10 million men and women will need cars and trucks. Many millions will need new homes. Tens of millions will need retirement investment products and life insurance. In the United States, even in a recession, there are plenty of people with money to spend.

"Those who tend to their work, who get to the office or showroom or shop early, stay late, work hard, stay on the phones dialing for deals (as my pal, Barron Thomas, puts it), will make money. Those who stay sharp and make a point of befriending their clients will make money. Yes, some extra effort will be needed, but it'll pay off. There's still money to be made, even when the economy itself has slowed down.

"It's the guy or gal who puts in extra effort who stays ahead and even prospers when the economy is in a slowdown. The easygoing, laid-back time-servers get tossed overboard.

"Stay Hungry (Not Literally)

"There's another key truth about recessions: They always end, and the economy always goes on to a new plateau. It may take a while, but the stock market always moves on to a new high.

"So stay hungry. Work harder. Dig deeper. Keep investing in broad indexes. You'll come out all right on the other side."

That's right, sucker, run faster on your hamster wheel and you'll get to where you're going sooner.

The Market Panic in Perspective

Does anyone else see the irony in the ongoing panic in global asset markets? Last week we feared global imbalances; this week we fear they may dissipate.

Don’t get me wrong — the last thing I want to see is global rebalancing by way of a massive US recession. But why are investors from Hong Kong to Frankfurt getting spooked? They are signaling that they don’t think their economies are decoupled from ours, and that a US downturn means the global buyer of last resort is putting away his credit cards. The US will cease to be the bottomless export market, and sellers everywhere will stumble.

Maybe so, but drastically curtailing the US import habit is a necessary part of rebalancing; it is not possible for US exports alone to do the job. So the contagion we’re seeing demonstrates that the current imbalances have become addictive on all sides. (OK, rebalancing via recession lacks a terms of trade sweetener, but is that what the markets are freaking about?)

Monday, January 21, 2008

Why We Should Not Tax the Rich

Here is John Edwards' "employer" on taxes. The last line, as they say, is "priceless." Griffin is an exception, since he is not interested in money, but in creating wealth for the community and the sheer joy of working. Also, he would work less if faced with high taxes, but only as a matter of principle (or is it principal?).

"Kenneth C. Griffin, who received more than $1 billion last year as chairman of a hedge fund, the Citadel Investment Group, declared: "The money is a byproduct of a passionate endeavor." Mr. Griffin, 38, argued that those who focus on the money -- and there is always a get-rich crowd -- "soon discover that wealth is not a particularly satisfying outcome." His own team at Citadel, he said, "loves the problems they work on and the challenges inherent to their business." Mr. Griffin maintained that he has created wealth not just for himself but for many others. "We have helped to create real social value in the U.S. economy," he said. "We have invested money in countless companies over the years and they have helped countless people"."

"The income distribution has to stand," Mr. Griffin said, adding that by trying to alter it with a more progressive income tax, "you end up in problematic circumstances. In the current world, there will be people who will move from one tax area to another. I am proud to be an American. But if the tax became too high, as a matter of principle I would not be working this hard."

Uchitelle, Louis. "The Richest of the Rich, Proud of a New Gilded Age." New York Times (15 July).

Saturday, January 19, 2008

Frontiers of Cost-Benefit Calculations

A little more than a year ago, in response to a Wall Street Journal article on airline travelers' lost luggage, an insightful reader offered a more in depth analysis:

"Airlines lose luggage because there is no incentive to correct the problem. It would cost money to fix the broken systems, and there is no meaningful penalty on airlines that lose baggage because our government allows airlines to pay pennies on the dollar for what is lost. Even worse, the threat of lost luggage actually benefits the airlines by forcing passengers to avoid checking luggage."

Armstrong, Arthur O. 2007. "Perpetual Curse of Lost Luggage." Wall Street Journal (27 January): p. A 5.

I have not heard whether or not the paper ever hired this contributor.

Friday, January 18, 2008

The Efficiency of Publicly Owned Power Companies

Earlier, I mentioned are prolonged power outage. An invaluable article in our local weekly paper reports that our IOU -- the appropriate acronym for Investor Owned Utility -- PG&E suffered much more damage than the publicly owned utilities in the region. Apparently, PG&E has been relatively negligent in maintenance, leaving its infrastructure more vulnerable.

Because of aggressive tree trimming and replacement of ancient power poles, the publicly owned companies experienced virtually no outages.

Here is the link to the article:

When Is Labor Exploited?

Earlier discussions of Joan Robinson on how it is better to be exploited than not to be exploited at all (unemployed) reminded me of the deeper issues involved. Was Marx right that it was working for private capitalists that led to exploitation? Is it a matter of what one is paid, either relative to some marginal product or some broader level? Is it a matter of self-management or being bossed? Were workers exploited in Soviet socialism, as the post-modern, Wolff and Resnick group argues, that the USSR was "state capitalism?" Is a society in which workers are not exploited possible?

In his _Socialism After Hayek_, Ted Burczak argues that such a society would be a decentralized market "socialism" of worker-owned cooperatives, funded through a wealth tax, with a generous social safety net oriented to "personal capacities" a la Nussbaum and Sen, with freedom and democracy. This supposedly avoids exploitation, as well as the sorts of flaws of information and incentives that Hayek found in command planned state socialism of the Soviet type. (I have commented on all this further in a paper on my website at, entitled, "Has Burczak Shown How Socialism Can Survive Hayek?")

Thursday, January 17, 2008

Iraqi oil production may be down again

There was much hullabalooing over a month ago when it was reported that November oil production in Iraq, about 2.4 million barrels per day (mbpd), had surpassed that of the end of the Saddam era of about 2.3 mbpd. Some Iraqi sources were claiming nearly 2.5 mbpd for December. Now, Ben Lando at Iraq Oil Report reports that Platt's estimates production fell back to 2.3 mbpd in December, even though apparently OPEC production overall rose in December. Most of the increase in recent months in Iraq has been out of Kirkuk, whose long run status remains disputed between the Kurds and the rest of Iraq. There also remains no oil law in Iraq, although majors like Shell are now negotiating with the central government on developing the Akkas field, and a slew of minors from places like Canada and Norway are cutting deals with the Kurds, who have their own oil law.

BTW, the recent reports of a new reconciliation law with the ex-Baathists, much trumpeted by Bill Kristol and other war hawks, is baloney according to Juan Cole. Baath allies voted against the law, and apparently it will make it easier to fire ex-Baathists from government jobs and keep them out for good. While there may be fewer US deaths in recent months, there remains no success at all on any of the items that the Surge was supposed to achieve by the end of this past year.

I shall scream, Bumble-Wumble! --

...If I see one more study that purports to tell us the causes of "x" on the basis of some prima facie silly instrument. So autism is caused by TV-watching, eg, since it is correlated with rainy weather.

I'm not an econometrician (nor do I play one on TV) but the naivete with which these guys trumpet their ability to sort causation from correlation on the basis of a statistical technique is mind-boggling. David Hume, call your office!

Nonsense on Imported Stilts

Econ bloggers have really missed the point about Landsburg’s free trade screed. The estimable Dani notwithstanding, the issue isn’t ultimately ethics or even procedural fairness. The problem is that doctrinaire economists understand less about trade than the average person with no academic training in the subject.

Ordinary people in many parts of the world, and not just in the US, worry about trade because they are afraid that jobs lost to imports will not be counterbalanced by jobs gained through exports. They worry that there will be fewer economic opportunities for them and their children. They worry that their wages or working conditions will be pushed downward through competition with even more vulnerable, desperate workers in other countries. They are right to worry about these things. Such miseries are not destined to happen, but they cannot be ruled out either.

Except in standard economic models which begin with the assumption that increases in imports automatically call forth equally valued increases in exports. If trade balances on the margin we live in the happy world of comparative advantage, and it is indeed true, as Landsburg says, that “when American jobs are outsourced, Americans as a group are net winners.” But the assumption that trade balances at the margin is simply a modeling convenience, something that enables Landsburg to regale his students with blackboards full of elegant diagrams and equations. It is not grounded in real experience, and especially not the experience of the US economy since the 1970s.

You have to be very well trained in economics and have high-level skills to make such a brain-dead assumption and not even know you’ve made it. Then you don’t have to give serious consideration to counterarguments because, hey, why pay any attention to the fallacies of economic illiterates and mathphobes?

But let’s get specific. Here’s how Landsburg illustrates his claim that international trade makes us better off: “I doubt there’s a human being on earth who hasn’t benefited from the opportunity to trade freely with his neighbors. Imagine what your life would be like if you had to grow your own food, make your own clothes and rely on your grandmother’s home remedies for health care.”

Notice a problem here? Landsburg assumes that there is no difference between trade within an economy and international trade. (To be more precise, the only difference is that governments interfere more often with trade across national borders.) Worse, he accuses anyone who recognizes the difference of woolly thinking, based of course on his assumption that there is no difference.

This is why the French students complained about autistic economics.

For what it’s worth, my view is that we as a society ought to provide opportunities for as many of us as possible to have a satisfying livelihood. If a community is down and out we should step in and do what we can whether or not trade played a role in creating the problem. We should create rules for international trade that minimize downward pressure on wage, environmental and social standards and that limit dangerous imbalances. These ideas are fairly widespread among the general population, and if economists think really creatively they might just be able to rise to the same level.

Wednesday, January 16, 2008

Bloomberg Interviews Michael Perelman

Tom Keene of Bloomberg Radio interviewed me for an hour on Monday. You can download it here:

Tom is an excellent interviewer, who regularly interviews economists and financial experts.

Their interviews are available at

Economists Who Deny Stopler-Samuelson

Greg Mankiw directs us to Steven Landsburg. I’m not sure why Greg endorses this stuff, however:

All economists know that when American jobs are outsourced, Americans as a group are net winners. What we lose through lower wages is more than offset by what we gain through lower prices. In other words, the winners can more than afford to compensate the losers. Does that mean they ought to? Does it create a moral mandate for the taxpayer-subsidized retraining programs proposed by Mr. McCain and Mr. Romney? Um, no. Even if you’ve just lost your job, there’s something fundamentally churlish about blaming the very phenomenon that’s elevated you above the subsistence level since the day you were born. If the world owes you compensation for enduring the downside of trade, what do you owe the world for enjoying the upside?

Dani Rodrik likely wants to remind us again of the Stopler-Samuelson theorem. And Paul Krugman might add:

What all this comes down to is that it’s no longer safe to assert, as we could a dozen years ago, that the effects of trade on income distribution in wealthy countries are fairly minor. There’s now a good case that they are quite big, and getting bigger.This doesn’t mean that I’m endorsing protectionism. It does mean that free-traders need better answers to the anxieties of those who are likely to end up on the losing side from globalisation

Update: Dani also weighs in.

Tuesday, January 15, 2008

The Law Is an Ass

Two recent decisions confirm that Charles Dickens' Mr. Bumble was correct in declaring, "The law is a (sic) Ass." In the first case, California's Supreme Court dismissed a suit by workers who were damaged by solvents, only because the majority held stocks in the oil companies. In the second, case a federal appeals court dismissed a suit by four British citizens who claimed torture, abuse, and violations of their religious rights at Guantánamo because "Because the plaintiffs are aliens and were located outside sovereign United States territory at the time their alleged RFRA claim arose, they do not fall with the definition of 'person,'" the court ruled."

This decision is surprising, given the importance of religion in determining personhood. After all, a fertilized egg with only a few cells is considered a person in the United States. Surely these unfortunate creatures are more fully developed persons in a newly formed embryo.

The first case suggests that corporations could immunize themselves from legal actions merely by ensuring that judges had some stock in the companies. On second thought, perhaps many of these corporations are not really persons after all, despite the claim that corporations have all the rights of human persons. However, some of these fictitious persons have relocated their fictitious homes to other lands. If people tortured by the government are not really persons because they are located outside the United States, surely the fictitious persons, who currently rule this country, should not be counted as persons.

Sunday, January 13, 2008

Douglas Elmendorf and Jason Furman on Targeted Fiscal Stimulus (Something Stephen Moore Failed to Read)

With a hat tip to Greg Mankiw, let’s turn to If, When, How: A Primer on Fiscal Stimulus - specifically principles 2 and 3 that any fiscal stimulus be well targeted and temporary.

This paper was published on January 10, 2008. On the very next day, the WSJ oped page featured The Right Stimulus. Just about everything claimed by the WSJ was refuted by Elmendorf and Furman. I wish I had cited their paper when I wrote this.

Friday, January 11, 2008

Beware What You Wish For: Kossaks Want Obama Versus Huckabee

This has already scrolled off of daily kos, but yesterday they had a poll of people guessing which were the easiest and the toughest matchups from a Dem perspective in the prez race. While McCain was generally viewed as the toughest opponent, the most popular combo, viewed as easiest, was Obama versus Huckabee. I want to warn that this might be one of those desires one curses having fulfilled.

Key here is my post here earlier on "Who is a 'Populist'?" Among current candidates, they were Edwards, now looking near dead, and Huckabee. Obama is the New Centrist Dem, who does not appeal to poorer people so much, a sucker for a "Reagan Democrat" approach from the guitar playing, Colbert-appearing, Huck. He is ahead of both Romney and McCain in Michigan in the latest polls, and could get the nomination. Nice guy that he is, at least on the surface, he could go all the way. And, lest anybody forgets, his fundamentalism is right in there with the old-timey populists: think William Jennings Bryan. (And, don't forget that lots of Dems in 1980 were hoping for Reagan to get the GOP nomination.)

James Pethokoukis and Rudy Giuliani Must Think Lower Savings is the Key to Long-term Growth

With a hat tip to Cactus, let’s wonder the latest insanity from James Pethokoukis :

To a supply-sider, there is no worse tax than the capital gains tax. One big problem is that budgeteers surely would crunch the numbers and claim the plan would result in $2 trillion to $3 trillion in lost government revenue. Such "static scoring" that does not take into account the economic growth impact of lower taxes may well be bunk.

Ahem! The Reagan and Bush43 versions of “giving people their money back so they can consume” more sine any spending cuts lowers national savings. Abstracting from any Keynesian or short-term stimulus effect (after all, the supply-side school wants us to believe they are interested in long-term growth), lower savings translates into less investment and less long-term growth. But James Pethokoukis does not seem capable of writing something this basic and simple even if it is a key element of the debate. I have to wonder why U.S. News allows him to publish anything on economics at all.

Thursday, January 10, 2008

Bush Says the Economy is Strong But Giuliani Say It is in Peril – But They Agree on Tax Policy

A new ad endorsed by Rudy Giuliani states:

With pundits and politicos handicapping the campaign like the Super Bowl, it's easy to lose sight of what's at stake. An economy in peril. A country at war. A future uncertain.

In the meantime, President Bush discussed the economy in Chicago:

We have a strong foundation in our economy, but we cannot take economic growth for granted. That's what I want to share with you. I understand that while there is a foundation that would be the envy of a lot of other nations, we cannot take growth for granted. We confront economic challenges, from the downturn of the housing sector to high energy prices to painful adjustments in some of the financial markets. Recent economic indicators have become increasingly mixed. Last Friday we learned that our economy has now had 52 months of uninterrupted job growth. That's a record. That's the longest period of job creation on record.Our entrepreneurs are taking risks. Our small businesses are expanding.

To be fair, the President did say there is some mixed news. But whether the economy is strong or the economy is in peril, Bush and Giuliani agree we need to keep taxes low even if they have no real intent on reducing government spending low. More on this theme from Paul Krugman.

New Hampshire

Have people seen Andrew Kohut's Times op-ed today? He argues that the polls were wrong on Obama/Clinton because a) lower income whites are less likely to answer surveys and b), in adjusting for this long-standing fact, pollsters failed to take into account the greater racism of those low-imcome whites who refused to answer compared to those who did.

If he's right, then it would seem there was no late break for Hillary, and all the business about Hilary's showing emotion had nothing to do with the result. What do you think?

Wednesday, January 9, 2008

A Robot Reads from Michael Perelman

Hear a robot reading from my book, The Invention of Capitalism

Arnold Schwarzenegger Has a Brilliant Idea

Our governor is proposing again to automatically reduce spending every time a state has a deficit and in good times to put money away for a rainy day. This last part reminds me of the strategy of Jerry Brown, who put money away for a rainy day. The Republicans, seeing money piling up in state coffers, argued that the savings was proof that the government to need the money. Voilà, the infamous proposition 13.

As a result of the Brown precedent, I assume that the Schwarzenegger plan will effectively ratchet down government spending. During bad times, you will get spending cuts. During good times, you will get saving and then tax cuts, which will create budget deficits requiring less savings. Grover Norquist would be proud that our governor would have turned to state into a bathtub, into which he could shrink the state.

Do We Have to Cut Social Security Benefits?

I was going to pass on the latest from Robert (no relationship to Paul) Samuelson until Greg Mankiw offered the silly oped to his readers without critical comment. The most offensive line in my view was:

Lightening the burden on the young requires cutting retirement benefits for the old - raising eligibility ages, being less generous to richer retirees and making beneficiaries pay more for Medicare. Simply increasing taxes or cutting other programs won't work. The problem is not just closing the budget deficit.

In other words, we must cut Social Security benefits according to Mr. Samuelson. Part of my objection to this silliness has been outsourced to Dean Baker:

Robert Samuelson has yet another diatribe talking about the budget breaking cost of "Social Security, Medicare and Medicaid." As CBO director Peter Orszag has tried to teach those willing to learn, the problem is health care, not aging.

Simply put – the expected future payments to Social Security recipients do not exceed the expected future payroll taxes dedicated to this program by all that much with the really big ticket items coming from things like expected future health care costs and expected future Defense Department costs relative to expected future income taxes under what those in the Republican Party (including that current President that Greg used to work for) wish to have as permanent policy. So when Samuelson makes claim that members of both parties are making false promises, then he must think George W. Bush is a Democrat.

We have all sorts of means for closing the fiscal gap including raising income taxes, cutting defense spending, and yes finding some means for providing for health care at lower costs. While Samuelson may be correct that we cannot simultaneously keep tax rates low, defense and health care spending high AND maintain the current level of Social Security benefits, his oped becomes yet “another diatribe” as Dean puts it when he limits his choice of policy options to slashing Social Security benefits. Now we know Samuelson and the Washington Post have had a slew of such silly opeds in the past, but why can’t Greg Mankiw point out even the obvious to the readers of his blog?

"Where's the Beef?" and the Three Roles of Democratic Presidential Candidates

The line thrown by Walter Mondale at Gary Hart during his comeback in the 1984 presidential race was echoed in recent days, supposedly coming from Hillarians at Obama. This shows their filling the same roles from that era: Hillary as Establishment Dem and Obama as New Centrist Dem. The third role is Leftist Insurgent, now being played by Edwards, with Jesse Jackson playing it in 1984, after George McGovern dropped out. These roles frequently pop up in races for the Dem nomination for president, and I think can be traced back to at least 1960.

Labor's role in this has changed. They used to always be part of the Establishment candidate's support. But, ending of the Cold War, more youth in labor, and greater inequality, have pushed labor left, with it now split itself and also among the candidates. Another oddity is that the Clintons collectively have played in all three roles: supporters of a leftist insurgent with McGovern in 1972, Bill the New Centrist in 1992, and now Hillary as the Establishment candidate.

Tuesday, January 8, 2008

The Wall Street Journal Becomes Underconsumptionist

Hayashi, Yuka. 2008. "Growing Reliance on Temps Holds Back Japan's Rebound." Wall Street Journal (7 January): p. A 1.

"One reason Japan's rebound hasn't gotten traction: companies' growing reliance on temporary workers, who earn less -- and spend less -- than full-time employees. The shift in hiring can be seen at companies like Hino Motors Ltd. The truck-making unit of Toyota Motor Corp. is paying record dividends this year. But it also has been filling thousands of factory jobs with temporary workers, who start at $10 an hour and get few benefits."

"More than a third of the people in Japan's labor force are categorized as "nonpermanent" workers: part-timers, temps on fixed-term contracts and people sent to companies by temporary-staffing agencies. That compares with 23% in 1997 and 18% in 1987."

"Use of temps gives companies flexibility and cost control, helping them succeed in highly competitive global industries like manufacturing. Big Japanese companies have reported earnings growth for five straight years."

"In the past decade, average wages in Japan have fallen every year except two because of an increase in temps and stagnant wages for full-timers. Consumption by working families declined on a year-on-year basis in six of the past eight quarters. This even though the Japanese are also saving less: A Bank of Japan survey showed that some 23% of households had no savings last year, compared with just 10% in 1996."

"The result is sluggish domestic demand and growth that is supported by exports to a lopsided extent. In the July-September quarter, when Japan's economy grew at an annualized rate of 1.5%, exports were rising at an annualized 11% rate and domestic demand was shrinking slightly. Personal consumption is so weak in Japan that it accounts for only a little over half of the economy, compared with 70% in the U.S."

"Until the late '90s, worker-friendly laws forbade temporary-labor contracts except for a few specialized areas, such as computer programming. A change in 1999 allowed temp agencies to dispatch workers to many more types of jobs. And in 2004, manufacturers were allowed to use workers sent by temporary-help agencies."

Preventable Deaths

Reuters reports on more evidence that our health care system is far from the best:

France, Japan and Australia rated best and the United States worst in new rankings focusing on preventable deaths due to treatable conditions in 19 leading industrialized nations, researchers said on Tuesday. If the U.S. health care system performed as well as those of those top three countries, there would be 101,000 fewer deaths in the United States per year, according to researchers writing in the journal Health Affairs. Researchers Ellen Nolte and Martin McKee of the London School of Hygiene and Tropical Medicine tracked deaths that they deemed could have been prevented by access to timely and effective health care, and ranked nations on how they did. They called such deaths an important way to gauge the performance of a country’s health care system. Nolte said the large number of Americans who lack any type of health insurance - about 47 million people in a country of about 300 million, according to U.S. government estimates - probably was a key factor in the poor showing of the United States compared to other industrialized nations in the study.

The Economy is Great But Let’s Cut Taxes Anyway?

Has Paul Krugman turned to forecasting NRO opeds by Lawrence Kudlow? Paul writes:

But the opponents of change, those who want to keep the Bush legacy intact, are not without resources. In fact, they’ve already made their standard pivot when things turn bad - the pivot from hype to fear. And in case you haven’t noticed, they’re very, very good at the fear thing ... When the economy is doing reasonably well, the debate is dominated by hype - by the claim that America’s prosperity is truly wondrous, and that conservative economic policies deserve all the credit. But when things turn down, there is a seamless transition from “It’s morning in America! Hurray for tax cuts!” to “The economy is slumping! Raising taxes would be a disaster!” Thus, until just the other day Bush administration officials were in denial about the economy’s problems. They were still insisting that the economy was strong, and touting the “Bush boom” - the improvement in the job situation that took place between the summer of 2003 and the end of 2006 - as proof of the efficacy of tax cuts. But now, without ever acknowledging that maybe things weren’t that great after all, President Bush is warning that given the economy’s problems, “the worst thing the Congress could do is raise taxes on the American people and on American businesses.”

If you think this was a bit unfair to the Bush cheerleaders, read Larry’s latest:

the Goldilocks economy remains alive and well. It’s still the greatest story never told ... And the reality is that today’s economic weakness is coming from the business side, not the sub-prime/housing/consumer side. We’re witnessing high energy and raw-material prices cause unit costs for businesses to rise faster than prices. That spells weakening profits … Right now the single best thing President Bush and Congress can do is slash the corporate tax rate for large and small businesses. Bush must reach out to Charlie Rangel and move the corporate tax to 25 percent from 35 percent. Then, instead of taxing successful capitalists as an offset, Congress can entirely abolish corporate-tax subsidy loopholes, special provisions, and other corruption-inducing K-Street earmarks. A middle-class tax cut to help families and small businesses would also work wonders.

Times are good? Give everyone a tax cut. Times are not so good? Give everyone a tax cut. In Larry’s world – there is no long-run government But the suggestion that today’s weakness is coming from the business investment side and not the housing investment side sort of ignores the fact that business investment has increased by more than 5 percent in real terms since last year, while residential investment has declined by more than 16 percent in real terms. Does anyone at NRO fact check Larry’s fluff before publication?

New Orleans & My Own Mini-Katrina

Late last week, while attending the American Economic Association meetings in New Orleans and talking to people about hurricane Katrina, we got word of an extraordinary storm hitting Chico. Because we have a huge tree right on top of our house and the reports were that trees were toppling all over -- some almond orchards must have their trees -- we figured that our house was a goner.

We called and neighbors told us that our house was the only one that did not suffer external damage. We were especially relieved driving home last night to see that electricity had been restored almost everywhere as we approached our house. Suddenly, the last two houses were dark. So we are left without electricity, water, or the ability to use our gas stove.

Sadly, until power is restored, I will not be very active here. See you soon.

Monday, January 7, 2008

US Wasting Money on Health Care

At the ASSA/AEA meetings my wife and I picked up the latest UNDP Human Development Report 2007/08. The numbers are really for 2005, but interesting nevertheless. So, the US was then second in real per capita income (has since slipped behind Norway to third), and was first in per capita spending on health, at over $6,000 per person. Only three other countries over $4,000, with highest income Luxembourg a bit over $5,000, and Norway and Switzerland each barely over $4,000. However, more striking is that the US is top in the world in percent of GDP spent on health care (from both public and private sources), at 15.4%. Second is "Occupied Palestinian Territories" at 13.0%, followed by Malawi at 12.9%. There are several other poor countries above 10%, with only two high income ones so, Germany at 10.6% and France at 10.5%.

You all know where this is going. So, US life expectancy, 77.9 years, is now tied for 29th in the world, with places like Costa Rica doing better. Last time I saw these figures, the US was tied for 17th, not so hot, but a lot better than 29th. The US is tied for for 30th on infant mortality at 6 per thousand and tied for 34th on maternal mortality at 11 per thousand. I think that is plenty for this post.

Progressive Fiscal Stimulus and the Fair Tax

Brenda has argued in comments here that any fiscal stimulus should target the poor. Lawrence Summers appears to agree:

fiscal stimulus only works if it is spent so it must be targeted . Targeting should favour those with low incomes and those whose incomes have recently fallen for whom spending is most urgent.

And now Pat Regnier wants us to believe that Mike Huckabee and other Fair Tax fanatics are progressives.

Critics, including conservative commentator Bruce Bartlett, have argued that people generally think of sales taxes in terms of mark-ups - that's how state sales taxes are expressed - and that FairTaxers are just trying to come up with the lowest possible number to make their idea easier to sell. A 30% tax on food and medicine would be hard on the poor, wouldn't it? If that's all there was to the plan, yes. On its own, a national sales tax would be extremely regressive - that is, it would tax everyone who spent everything they earned (and that's a lot of us) at 23% of their income, while those who made enough money to set some aside would, in effect, pay a lower overall rate. But the sales tax plan would partly offset this effect by sending every household in America, from the family of a poor single mother to Warren Buffett, a check to cover the taxes on their spending up to the poverty level. Factor in that cash from the government, and each family's net tax burden goes down, so that the Fair Tax looks more progressive.

Bruce Bartlett and others have argued that the 30% tax would fall short of covering even current government spending even if these checks were never sent out. And yet Mr. Regnier fails to miss the massive fiscal stimulus (or was that irresponsibility) of the Fair Tax replacement plus more transfer payments. As progressive as the Fair tax crowd wish to dress this pig up, this is not a serious policy proposal.

Hat tip to Mark Thoma for his coverage of the latest from Lawrence Summers.

Friday, January 4, 2008

Mark Thoma Slams Edward Lazear “Growth Policies”

Lazear takes note of the dismal job performance news with:

"We have pushed economic growth policies throughout this administration and we're not going to stop doing that now," Lazear said in a Bloomberg Television interview in Washington. "If there are necessary steps that need to be taken, the president will be considering those over the next few weeks."

Now what good Keynesian could object?

Well I might have one objection but let me outsource this one to Mark Thoma:

Unfortunately, it's stabilization policy, not growth policy, that's needed to combat a recession, and Lazear ought to know the difference. The two are not necessarily the same. The administration has pulled this trick before - using stabilization arguments to justify permanent reductions in tax rates

OK, Mark was outsourcing his reporting of the BLS bad news to my Angrybear post, but his update is so well put that it should be front and center on the eventual debate over stabilization policy this year.

Interpreting Iowa

The good news is that Obama campaigned on cooperation and won. The bad news is the same as the good. The Huckabee Moment demonstrates that evangelicals, even though they haven’t paid for it, still own the Republican Party. That makes me nervous. But let’s talk about Obama.

The conventional wisdom, which is probably correct, is that Democrats are more likely to favor cooperative solutions to problems, and cooperation itself as an ethical ideal, while Republicans come down on the side of authority and force. Of course, since a two-party electoral system pushes both parties toward the median voter, those tendencies are often muted in practice. During the past eight years, however, we have lived under a regime whose voting strength came from its base and not the uncommitted middle, and the ideology of force has flourished. Obama proposes the mirror opposite: enthusing the Democratic base under the banner of caring-and-sharing.

There is an aspect of this which is exactly what we need. For me, the political and economic world is, more than anything else, a vast array of collective action problems. From climate change to ending global poverty to human rights to public health, we have to find ways to work together for the common good. This applies even, and perhaps especially, to “national security”, which is really the security of ordinary people to live their lives without fear of being attacked by soldiers, private militias or suicide bombers. I would like to think that the big turnout for Obama reflects a widespread desire to build a more cooperative world.

The mistake, as Paul Krugman has been repeatedly arguing, is to think that we can get to cooperation by being cooperative. On this point Edwards is right: there are powerful interests, corporate and political, who will sabotage the cooperative impulse every step of the way. We have to fight tooth and nail for the right to care and share. Obama wants to lie down with the lions as an opening strategy, and he has signaled his desire to split the difference with the hard right on issues like health care and social security.

To be fair to the guy, his ability to run as a black man for president of a white-run country depends entirely on his being non-threatening. If he adopted even a smidgeon of Edwards’ rhetoric he would sink like a stone. This isn’t his fault; chalk it up to lingering racism. But that doesn’t change the political reality, which is that, to get the friendlier world the Obama voters thought they were voting for, we need the confrontational chutzpah that Edwards pushed.

Thursday, January 3, 2008

The Rationality Divide in Politics?

According to Leonhardt in yesterday’s New York Times, the fault line between Clinton and Obama runs through the rationality postulate. Hilary’s citizenry is rational and responds to precisely calibrated market incentives; Barack’s is guided by impulse and habit and can only be moved by big policy objects in bright colors with thick borders. Is this the revolution in economics we’ve been hearing about?

Leonhardt locates the Obama/Goolsbee strategy in the rise of behavioral economics, an approach that replaces robotic rationality with a psychologically realistic characterization of real-world decision-making. In particular, he is drawing on the field of behavioral law and economics, which emphasizes commonplace cognitive “biases” that prevent people from acting consistently in their own interests. Examples include “availability bias” (attributing greater-than-actual probability to outcomes that are vivid or widely publicized), “status quo bias” (resistance to switching from A to B, or if starting with B, from B to A) and the inability to cope with high levels of complexity (such as public benefits few apply for because the forms are too complicated).

With this view of human fallibility, it is not surprising that practitioners of this sort of economic thinking incline to paternalism. The non-biased minority with impeccable cognitive skills (you know who you are) must take it on themselves to guide their less capable brethren toward more rational choices. I exaggerate, but not too much, as those who have delved into this literature will recognize. Yes, there is elitism in the traditional incentive-based approach too, but it is at least honest and transparent in its methods. The flagship policy innovation of the behavior-wonks, making participation in private savings plans the default option, so that workers would have to choose to opt out (rather than making no savings the default and asking them to opt in), combines the we-know-what’s-best-for-you of the incentive school with a kind of tawdry manipulation. Of course, it may also work better.

But loyal readers of this blog should be aware that behavioral economics is much larger than its portrayal by Leonardt. For one thing, much research now focuses on the differences in behavioral patterns across the population. Rather than fixing on the central tendency, attention has shifted to the dispersion. What this will mean for policy is not clear at this point, but it has to lead to greater diversification and decentralization of the means and ends, don’t you think?

Another important departure concerns the emergence, reproduction and evolution of social norms governing economic (and other) behavior. Many, myself included, think this has enormous potential for changing how we think about politics and human well-being. It reintroduces cultural factors that have been banished from proper economics for generations, not least of which are the gender norms emphasized by feminist economists. And what about the effect that changes in governmental policies and business practices have on the norms governing income distribution? We have begun to see empirical work in this area and it is a safe prediction that we’ll see a lot more.

I hate writing these vague, sweeping posts, but it would take much more than a few paragraphs to properly document the upsurge in behavioral research. The point for now is: the policy space spanned by Clinton and Obama is minuscule compared to the opportunities for new thinking in economics that already exist.


Thomas Carlyle was in many ways a nasty piece of work. (For an eye-full, see Levy and Peart's How the Dismal Science Got Its Name.) He sure knew how to turn a phrase, though. "Benthamee utility," he says, reduces

"the infinite celestial soul of Man to a kind of Hay-balance for weighing hay and thistles on, pleasure and pain."

A Hay-balance, indeed!

Do Higher Gasoline Prices Lower U.S. Income?

Mark Thoma reads Jerry Bowyer so we don’t have to. While Mark wonders why he even bothers reading the incessant stupidity from the National Review, we ponder if there may be a way that Mr. Fuzzcharts has a point.

I think the essence of Bowyer’s argument comes down to the following claim:

Gas-price hikes will never, ever, ever cut into consumer spending. It’s a mathematical impossibility. Here’s why: Gas prices are a component of consumer spending. You see, when gas prices climb from $2 a gallon to $3 a gallon, one of the components of retail spending goes up. Gas stations are retail establishments. People make money working at gas stations (which now generally serve as convenience stores). People make money managing the corporations that own these stores. And, of course, people make money by owning shares in these companies. Sure, if people spend more money on gas, they may very well spend less on soft drinks. But that’s a substitution, not a decrease in overall spending. The spending simply shifts from one retail category to another.

Simply put – higher gasoline prices transfer income from U.S. consumers to the owners of the various chains that lead into the price at the pump. If the sole reason that gasoline prices went up was an increase in the distributor margin – then Bowyer does have a point. Mr. Bowyer’s graph of gasoline prices may have come from this source, which also shows the components of gasoline prices among the price of oil, the distributor margin, the refinery margin, and taxes. Over the January 2007 to November 2007 period shown by Mr. Bowyer, gasoline prices rose from $2.24 a gallon to $3.08 a gallon. While the distributor margin component rose from $0.13 a gallon to $0.27 a gallon, the refinery margin component fell from $0.41 a gallon to $0.31 a gallon and taxes fell from $0.46 a gallon to $0.40 a gallon. The oil price component rose from $1.28 a gallon to $2.10 a gallon. If we summed up all non-oil price components – which could reasonably be seen as domestic income components, the non-oil price components contributed only $0.02 of the $0.84 per gallon price increase.

I trust that Mr. Bowyer understands that much of our oil is imported from abroad. If so, why doesn’t he realize that this increase in oil prices represents a transfer of income from the U.S. to the oil exporting nations? It would seem higher oil prices, which drove up the price of gasoline, did lower U.S. income. Had Mr. Bowyer checked the details from his own source, he would have realized that his claim really was incredibly stupid – even for the National Review.

Wednesday, January 2, 2008

New Interview on The Confiscation of American Prosperity

Kris Welch interviewed me last week on KPFA. I don't come in until the last 25 minutes or so. She is a great interviewer and always makes conversation lively -- well, as lively as I can be.

Did Musharraf Assassinate Bhutto?

Increasingly the answer looks like at least a partial "yes." Juan Cole yesterday provided a summary of unpleasant evidence: officials washing off the murder site immediately, physicians complaining through lawyers of pressure to cover up evidence that she actually was shot rather than broke her neck on the sunroof lever, and the demand by Batibullah Mahsud for a full investigation internationally organized, he being the Taliban-linked individual currently being blamed by the Musharraf regime, along with some other pieces of evidence. While the US thought Bhutto and Musharraf would work together (and refused her request for the US to provide protection for her), Bhutto denounced Musharraf's firing of the Supreme Court and made it clear she wanted to replace him democratically, sufficient for a power hungry dictator like him to do her in.

While he thinks it was more likely an al Qaeda operation, albeit possibly with the connivance of ISI or other elements of the Musharraf regime, one can find a very thoughtful and informative background piece by Barnett Rubin on Informed Comment: Global Affairs.

Diamond in the Rough

Below, I provide some comments on a recent article concerning an anthropology conference concerning the work of geographer Jared Diamond, author of "Guns, Germs, and Steel" and "Collapse."

The New York Times / December 25, 2007

A Question of Blame When Societies Fall


The author mixes travelogue with journalism, so you have to be patient.

As I pulled out of Tucson listening to an audiobook of Jared Diamond's "Collapse: How Societies Choose to Fail or Succeed," the first of a procession of blue-and-yellow billboards pointed the way to Arizona's strangest roadside attraction, "The Thing?"

The come-ons were slicker and brighter than those I remembered from childhood trips out West. But the destination was the same: a curio store and gas station just off the highway at a remote whistle stop called Dragoon, Ariz.

Dragoon is also home to an archaeological research center, the Amerind Foundation, where a group of archaeologists, cultural anthropologists and historians converged in the fall for a seminar, "Choices and Fates of Human Societies."

What the scientists held in common was a suspicion that in writing his two best-selling sagas of civilization -- the other is "Guns, Germs and Steel" -- Dr. Diamond washed over the details that make cultures unique to assemble a grand unified theory of history.

"Collapse" doesn't present a GUTH. On the other hand, "Guns, Germs and Steel" (GGS) gets a bit closer to that description. Even that theory isn't supposed to apply to industrialized societies.

"A big-picture man," one participant called him. For anthropologists, who spend their lives reveling in minutiae -- the specifics and contradictions of human culture -- the words are not necessarily a compliment.

This suggests that there are no "big-picture" anthropologists. But that's not true. For example, the late Karl Polanyi was a big-picture kind of guy.

"Everybody knows that the beauty of Diamond is that it's simple," said Patricia A. McAnany, an archaeologist at Boston University who organized the meeting with her colleague Norman Yoffee of the University of Michigan. "It's accessible intellectually without having to really turn the wattage up too much."

There are real problems with any assertion that begins with "everybody knows."

Dr. Diamond's many admirers would disagree. "Guns, Germs and Steel" won a Pulitzer Prize, and Dr. Diamond, a professor of geography at the University of California, Los Angeles, has received, among many honors, a National Medal of Science. It is his ability as a synthesizer and storyteller that makes his work so compelling.

For an hour I had listened as he, or rather his narrator, described how the inhabitants of Easter Island had precipitated their own demise by cutting down all the palm trees -- for, among other purposes, transporting those giant statues -- and how the Anasazi of Chaco Canyon and the Maya might have committed similar "ecocide."

By the time I approached the turnoff for Amerind's boulder-strewn campus, Dr. Diamond had moved on to the Vikings' fate. But for the moment my mind was in the grip of "The Thing."

Detouring past the conference center, I parked in front of the old tourist trap, paid the $1 admission and followed a path of stenciled yellow footprints to a building out back. Inside a cinder-block coffin lay the subject of my quest, what appeared to be the mummified remains of a woman holding a mummified child.

"The Thing" looked human, or maybe like pieces of human dolled up with papier-mâché. Either way, it seemed like a fitting symbol for the complaints I'd been hearing about Dr. Diamond: that through the wide-angle lenses of his books, people appear not as thinking agents motivated by dreams and desires, ideas and ideologies, but as pawns of their environment. As things.

It's pretty clear in "Guns, Germs, and Steel" that people -- or at least groups of us -- are strivers. This sets up competition among societies. The geographic environment plays a crucial role in limiting and shaping the results of the competition. Diamond's emphasis is on the latter, of course, but that's because people are so unpredictable. After all, having so many "dreams and desires, ideas and ideologies" makes our actions pretty hard to predict.

In "Collapse," on the other hand, "dreams and desires, ideas and ideologies" can play a major role in causing collapse. See, for example, the material about the Vikings in Greenland.

The backlash had been brewing since a symposium last year, "Exploring Scholarly and Best-Selling Accounts of Social Collapse and Colonial Encounters," at a meeting of the American Anthropological Association in San Jose, Calif. Although "Guns, Germs and Steel" has been celebrated as an antidote to racism -- Western civilization prevails not because of inherent superiority, but geographical luck -- some anthropologists saw it as excusing the excesses of the conquerors. If it wasn't their genes that made them do it, it was their geography.

Is there any serious scholar who believes that Europeans are made evil by their genetics? This seems a total straw-man argument.

"Diamond in effect argues that no one is to blame," said Deborah B. Gewertz, an anthropologist at Amherst College. "The haves are not to be blamed for the condition of the have-nots."

She here falls for the excessively-common error of confusing an explanation of an historical event with an excuse for it. Just because the victory of the Nazis over Poland can be explained easily does not mean that it was somehow justified. Similarly, just because the Europeans conquered most of the world does not mean that it was justified.

Dr. Diamond anticipated this kind of reaction. In the epilogue to "Guns, Germs and Steel," he acknowledged that human will was an important pivot in the turning of history, as were freak accidents and chaotic "butterfly effects," in which tiny perturbations are amplified into cataclysms. But the accidents of geography -- the availability of raw materials and crops, a hospitable climate, accessible trade routes and even the cartographical shapes of continents -- step forth as prime movers.

They're not "movers" as much as "shapers." In Diamond's theory, geographical creates barriers, which limit the movement of people, diseases, technology, etc.

While "Guns, Germs, and Steel" explored the factors contributing to a society's rise, "Collapse" tried to account for the downfalls. Here, human agency played a more prominent role. In case after case, Dr. Diamond described how a confluence of factors -- fragile ecosystems, climatic change, hostile neighbors and, ultimately, bad decision making -- cornered a society into inadvertently damaging or even destroying itself.

The main contrast (in terms of approach) between the two books is that "Collapse" does not really have a unifying theory. It's more of a matter of applying a laundry list of possible factors to ask questions about why different societies collapsed. It's more of an empiricist (inductive) exercise, while GGS seems a more balanced mixture of theory (deduction) and empirical research (induction).

The two books don't mesh with each other well at all. The anthropologists that this author describes should be much happier with the method of "Collapse" than with that of GGS. That, of course, does not mean that they automatically agree about the facts.

In his haunting chapter about Easter Island, he weighed the data -- radiocarbon dating, charcoal and pollen analysis and botanical and archaeological surveys -- and concluded that the inhabitants had mined the forests to extinction, setting off a cataclysm. What, Dr. Diamond wondered in an often cited passage, was going through the mind of the Easter Islander who cut the last tree?

But what was intended as a cautionary tale was taken by some readers as blaming the victims. Terry Hunt, an archaeologist at the University of Hawaii, came to the Amerind conference with a different story. Deforestation, he said, was caused not by people, but by predatory Polynesian rats, with the human population remaining stable until the introduction of European diseases.

Dr. Diamond, he said, "shifts all of the burden to people and their stupidity rather than to a complex ecosystem where these things interact."

Good! A fact-based critique. That's what's needed. By the way, the role of European diseases fits well with the theory put forth in the GGS book.

Taken together, the two books struck Frederick K. Errington, an anthropologist at Trinity College in Hartford, as a "one-two punch." The haves prosper because of happenstance beyond their control, while the have-nots are responsible for their own demise.

I think it's a mistake to read a moral argument into GGS. On the other hand, "Collapse" is inherently a moral book, since it's asking what we can do to avoid Collapse, i.e., what are the best things to do?

In addition, as noted, the two books do not really form a whole. They deal with different issues in different ways. One could easily agree with one of Diamond's "punches" while rejecting the other. To my mind, the main thing that unifies them is the identity of their author, not their content.

Dr. Errington and Dr. Gewertz, who are husband and wife, work in Papua New Guinea, a treasure trove of ethnic groups speaking more than 700 languages. Dr. Diamond has also spent time on the island, where he first went to study birds.

Dr. Gewertz still bristles as she recalls picking up "Guns, Germs, and Steel" and seeing that it had been framed around what was called "Yali's question."

Yali was a political leader and a member of a "cargo cult" that sprung up after World War II. By building ritualistic landing strips and control towers and wearing hand-carved wooden headsets, islanders hoped to summon the return of the packaged food, weapons, medicine, clothing and other gifts from the heavens that had been airdropped to troops fighting Japan.

One day Yali asked Dr. Diamond, "Why is it that you white people developed so much cargo and brought it to New Guinea, but we black people had little cargo of our own?"

Thus began Dr. Diamond's tale about the combination of geographical factors that led to Europeans' colonizing Papua New Guinea rather than Papua New Guineans' colonizing Europe. "We think he gets Yali's question wrong," Dr. Gewertz said. "Yali was not asking about nifty Western stuff."

That's hard to tell from what Diamond quotes or from the emphasis of cargo cults on "cargo."

With more of the cargo their European visitors so clearly coveted, the islanders would have been able to trade with them as equals. Instead, they were subjugated.

What Yali was really asking, she suggested, was why Europeans had never treated them like fellow human beings. The responsibility and struggle of anthropology, Dr. Gewertz said, is to see the world through others' eyes.

Diamond's GGS book seems to assume that no-one is inherently better at treating other ethnic groups like fellow human beings. If we accept that assumption, Gewertz's interpretation of Yali's question has already been answered. If the Papuans had colonized Europe, in this view, they would not have treated the Europeans well.

Was it really the "colonists" that cargo cults were responding to? In my understanding, they were responding to the commodities that were dumped on them as part of World War II, which were part of the effort by the US to feed its troops and -- and as a side-benefit, to legitimate its side of the war with the locals. Sure, the US is a (neo)colonizing power, but it was different from the Dutch or the Japanese. And WW2 was not about US neo-colonialism as much as inter-imperialist rivalry. Until the US started supporting France in Indochina, the major U.S. strategy in the Pacific region was anti-colonialism, at least on the surface.

In "Collapse," Dr. Diamond proposed that a precipitating factor in the Rwanda genocide of 1994, in which hundreds of thousands of Tutsis were slaughtered by Hutu compatriots, was Malthusian. The country had let its population outstrip its food supply.

Christopher C. Taylor, an anthropologist at the University of Alabama at Birmingham, saw the tragedy through the other end of the telescope. One afternoon, he sat in the living room of Amerind's old mission-style lodge, which looks out onto the desolate beauty of the Little Dragoon mountains, calmly describing how he and his Tutsi fiancée had fled Rwanda just as the massacres began. Safely back in the United States, he studied the country's popular political cartoons, sensing that for many Rwandans, politics was tangled in a web of legends involving sacred kingship and fertility rites. The king, and by implication the president, was the conduit for imaana, a spiritual current symbolized by liquids like rain, rivers, milk, honey, semen and blood.

In times of droughts, floods, crop failures, infant mortality or other misfortunes, he might have to be sacrificed to spill his imaana back into the soil. "In order to understand the motives of the Rwandans, you have to understand the local symbolism and the local cosmology," Dr. Taylor said. "Because, after all, what Diamond is doing is imposing his own cosmology, his own symbolic system."

It seems that both Taylor and Diamond can be right on the explanation of the slaughter: demographic forces may have caused the starvation, which was then see in the terms that Taylor describes.

It's so typical of academics to set up the competitions among theories, asserting that their theory is better, while ignoring the possibility of synthesis. I guess academics have to strive to attain tenure, promotion, prestige, etc.

By the time I left Amerind, I realized that what I had witnessed was a clash of world views. Central to the "cosmology" of Dr. Diamond's tribe is a principle celebrated throughout the physical and biological sciences -- to understand is to simplify and seek patterns.

In an e-mail message, he said that progress in any field depends on syntheses and individual studies. "In both chemistry and physics, the need for both approaches has been recognized for a long time," he wrote. "One no longer finds specialists on molybdenum decrying the periodic table's sweeping superficiality, nor advocates of the periodic table scorning mere descriptive studies of individual elements."

This is right: we need to have a dialog between "big think" and "small think" rather than having another silly academic war. Theory and empirical research should work together, not clash.

For the anthropologists, the exceptions were more important than the rules. Instead of seeking overarching laws, the call was to "contextualize," "complexify," "relativize," "particularize" and even "problematize," a word that in their dialect was given an oddly positive spin. At some moments, the seminar seemed less like a scientific meeting than a session of the Modern Language Association.

But the anthropologists had a point. As Einstein put it, explanations should be as simple as possible -- but no simpler. Is it realistic to hope, as Dr. Diamond did at the end of "Guns, Germs and Steel," that "historical studies of human societies can be pursued as scientifically as studies of dinosaurs"?

Probably not. But it's good to have some understanding of what went on, rather than rejecting theory altogether. The complaining anthropologists should develop an alternative theory. In my experience, the only way to beat a theory is with a better one.

One afternoon I drove out to Casa Grande Ruins National Monument, about 130 miles northwest of Dragoon. Turning off North Arizona Boulevard near a Blockbuster Video store and KFC/Taco Bell, I saw the Great House, four stories high, loom into view. Abandoned over half a millennium ago by the Hohokam people, the earthen ruins have been incongruously protected from the elements by a steel roof on stilts designed in 1928 by Frederick Law Olmsted Jr.

One suspects that the Hohokam were content to let the place melt. Depending on which eyeglasses you are wearing, Casa Grande is a story of environmental collapse or of adaptation and resilience. When conditions no longer favored centralization the people moved on, re-emerging as the O'odham tribes and a thriving casino industry.

Abandonment as a strategy. Driving back on Interstate 10, past an umbilical cord of eastbound railroad container cars owned by Hanjin Shipping and the latest crests of urban sprawl, I tried to imagine the good people of Tucson or Phoenix bowing out with such grace.

At the seminar, Dr. McAnany suggested that the very idea of societal collapse might be in the eye of the beholder. She was thinking of the Maya, whose stone ruins have become the Yucatan's roadside attractions. But the descendants of the Maya live on. She recalled a field trip by local children to a site she was excavating in Belize: "This little girl looks up at me, and she has this beautiful little Maya face, and asks, 'What happened to all the Maya? Why did they all die out?'"

No one visits Stonehenge, she noted, and asks whatever happened to the English.

Sounds like a good line. But was it the English who built Stonehenge? A simple web-search says that "Theories about who built it have included the Druids, Greeks, Phoenicians..." And since it happened so long ago, there were no "English" at the time. The English had nothing to do with Stonehenge, so the question is silly. Even if it were valid, no-one would ask it, since the English gave us the language that's dominating the world (and passed the imperial sceptre to the U.S.

Copyright 2007 The New York Times Company

January 1, 2008 / When Societies Fail (3 Letters to the NYT)

To the Editor:
Re "A Question of Blame When Societies Fall" (Dec. 25): The conference designed to discredit Jared Diamond highlights the worst of what goes on in contemporary academia. The organizers' failure to invite Mr. Diamond might be attributed to elementary rudeness were it not for a more damning explanation: they were afraid he would give the lie to their glib accusation that because his work is widely read, it must be oversimplified. These anthropologists' beef with Mr. Diamond clearly has less to do with the content of his thesis than with the fact that he tries to understand why things happen rather than writing a morality play conforming to their lefter-than-thou politics. -- Steven Pinker / Cambridge, Mass.

Diamond should have been invited (though we can't trust Pinker as a source saying that he wasn't). And I don't see why the folks at this conference were any more "left" than Diamond.

To the Editor:
What an odd, convoluted perspective displayed by those anthropologists who attack Jared Diamond's "Guns, Germs, and Steel" for "excusing the excesses of the conquerors." The book attempts to account for why, after around 3000 B.C., western Eurasian societies became comparatively more economically, militarily and technologically advanced. It does not claim that they were also more ethically or morally advanced. Moreover, to take just one famous example, the Aztecs were engaging in "excesses" as conquerors before any European sails appeared on the horizon. -- Russ Weiss / Princeton, N.J.


To the Editor:
The words of the historians Will and Ariel Durant might offer consolation to Jared Diamond and the anthropologists who disagree with his theories. In "The Lessons of History," the Durants write: "History is so indifferently rich that a case for almost any conclusion from it can be made by a selection of instances." -- Brad Bradford / Upper Arlington, Ohio

yes, but some theses do die. It's hard to argue that aliens helped the ancient Egyptians build those pyramids.

Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante.