Friday, October 31, 2008

GM and Chrysler - another bailout?

Cerberus Capital Management is the parent company of General Motors and Chrysler. It's a private equity group. GM and Chrysler are suffering from a precipitative decline in US auto demand. The sales are the lowest in 15 years. At the same time GM's debt is $US 43 billion and Chrysler's is $US 9 billion. Their debts have been cut another grade toward junk status by Moodys.[*} Concurrently there are hundreds of billions of dollars of notional insurance on GM debt through the credit default swap market. The US government is expected by some observers to intervene because of a possible domino effect on the wider economy but the bailing- out of a private equity concern is not going to going to go down very well with those that have studied this financial model's nature and behaviour over the last 30 years or so.



* From 'GM and Chrysler downgraded as demand drops'. Australian Financial Review, 29th October 2008.

Thursday, October 30, 2008

Holtz-Eakin on the Latest GDP News Release

BEA released its advance estimate of how real GDP fared during the third quarter of 2008 and it would seem real GDP fell a bit:

The decrease in real GDP in the third quarter primarily reflected negative contributions from personal consumption expenditures (PCE), residential fixed investment, and equipment and software that were largely offset by positive contributions from federal government spending, exports, private inventory investment, nonresidential structures, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.


In short, consumption and investment fell but the blow to aggregate demand was tempered by increases in government purchases and net exports.

Douglas Holtz-Eakin took the liberty of issuing this BS:

Today's announcement that third quarter GDP fell at a 0.3 percent rate confirms what Americans already knew: the economy is shrinking. Barack Obama would accelerate this dangerous course. According to the independent Center for Data Analysis, Barack Obama's new policies will destroy nearly 6 million jobs over the next decade. Barack Obama's ideologically-driven plans to redistribute income will impose higher taxes on families, small businesses, and investors; expensive, rigid, job-killing health mandates on employers; energy policies that fail to promote domestic oil, natural gas, and coal, and will impose a massive Washington-driven regulation of everything from home furnaces to factories; isolationist trade policies that endanger one out of every five jobs; and massive new spending plans that that will burden the economy and saddle our children with debt. Barack Obama is change Americans cannot afford.


Shifting the tax burden away from the middle class and working poor and towards high income individuals may actually reverse some of the decline in consumption. As far as trade policies – McCain wants a stronger dollar which will reduce net exports. Holtz-Eakin also repeats McCain’s assertion that he would lower government spending. The notion that reducing government spending is a cure for a recession must have Lord Keynes rolling over in his grave.

Economic and Social Importance of the Eight-Hour Movement

by the Sandwichman

The serialization on EconoSpeak of the analytical portion of George Gunton's 1889 pamphlet, "The Economic and Social Importance of the Eight-Hour Movement," is now complete. Below the jump is a point-form summary of the argument with each point linked to an expanded excerpt from the pamphlet.

Also categorized under the economic and social importance of the eight-hour movement label are:

1. A post on the place of this eight-hour theory in American labor history and it's aptness to the depression.

2. Another post relating the theory to the present credit crisis.

3. Some thoughts on the treatment of eight-hour theory in economics textbook lore and

4. a brief annotated bibliography.

I conceive of the composite of these posts as a kind of serialized hypertext and will be reviewing and adding further links to related material on, for example, Sydney Chapman's "Hours of Labour," Ira Steward's 1865 pamphlet, "A Reduction of Hours, An Increase in Wages" and Charles Wentworth Dilke's 1821 pamphlet, "The Source and Remedy of the National Difficulties Deduced from Principles of Political Economy in A Letter to Lord John Russell." I will also be serializing point-form summaries of Dilke's pamphlet and Chapman's article.

My guiding hypothesis is that the common thread that runs through all these documents -- about the centrality of reduction of working time to social progress -- has been excised alike from trade unionist thought, neo-classical economics and traditional Marxism. It's too much to be a coincidence. It's too vast to be a covert conspiracy. It may be more usefully thought of as the elephant in the room that we silently agree not to speak about. Why? Because the "civilization" we know is dying and it is very difficult for us to name that death. Denial.

  • There is nothing new or novel in the proposition for a general reduction of the hours of labor. [more…]

  • The opposition of the employing class to this measure has not risen so much from an aversion to improving the laborer's condition as from a misconception of their economic relation to the community, and especially to the laboring classes.... For nearly a century the colleges have taught, and the employing classes have believed, that an increase of wages always means a decrease of profits-that their income moves inversely with that of the laborer's, or, in the language of the economic instructors, that "profits rise as wages fall, and fall as wages rise. [more…]

  • That the labor movement is a natural phase of modern society is too obvious for any careful observer of social phenomena and student of economic history to question. [more…]

  • The end and object of production is consumption. Nothing but the desire for a commodity and a willingness to give an equivalent for it will cause it to be produced. [more…]

  • Capital is not an original but an auxiliary force in production. Capital being merely an implement in the hands of man he will only use it when he can obtain his end better with than without it. [more…]

  • Capital can yield increasing returns – i.e., become a cheaper productive force than labor – only when it can produce on an extensive scale. Since the laboring classes constitute seven or eight-tenths of the community, it is upon increasing their consumption-which means raising the social life and wages of the laborer-that the market for capitalistic productions finally depends. [more…]

  • While no proposition for industrial reform can produce any real improvement in the laborer's condition which does not promote the advance of real wages, even that can only be economic and wise when it takes place without permanently increasing prices or reducing profits. [more…]

  • The price of labor (wages), like that of everything else subject to the conditions of exchange, constantly tends toward the cost of its production. [more…]

  • The general rate of wages, in any given class, group or industry, is determined by the standard of living of the most expensive families furnishing the necessary part of the supply of labor in that country, class, group or industry. [more…]

  • The standard of living in any community is always high or low, according as the social life of the masses is simple or complex; that is to say, as the number of the habitual daily wants of the people is large or small. [more…]

  • The wants of mankind are everywhere simple or complex according to the quality of the habits and Customs of the society in which he moves. Habit not only governs our social wants, but it exercises an important influence over our physical wants also. [more…]

  • Frequent contact with enjoyable conditions creates desire for them, and by repeated satisfaction the desire grows into a taste, and tastes into absolute wants, which ultimately become a part of the habits and fixed character, or second nature. [more…]

  • The first condition for social opportunity which consists of frequent contact with an increasing variety of social influences is LEISURE. So long as one's time is all occupied in the mere getting of a living, the chance for social influences to operate upon him, which creates new desires, is impossible. [more…]

  • The adoption of an eight-hour system would tend to increase wages in two ways: first, by reducing enforced idleness; second, by creating new wants, and raising the standard of living. [more…]

  • Whatever tends to raise wages through increasing the aggregate consumption of wealth, necessarily tends to reduce the cost of production and lower prices. [more…]

  • By the increased aggregate production, the laborer can get more wealth through his higher wages, the general consumer can obtain more through lower prices, and the manufacturer while receiving a smaller per cent. of the total products actually obtains a greater quantity of wealth through the larger productions and extended business. [more…]

  • We are therefore warranted in saying that the economic effects of a general reduction of the hours of labor would be to raise the standard of living and increase real wages; promote the concentration of capital; and the use of improved machinery; will cheapen production, lower prices, and while diminishing the rate, will increase the aggregate amounts of profits. Obviously, therefore, it would tend to improve the economic and social condition of the laborer and the consumer without injuring that of any other class.

  • Wednesday, October 29, 2008

    President Bush Demands Banks Stop Hoarding Money

    And I thought George W. Bush was a free market kind of guy:

    An impatient White House prodded banks and other financial companies Tuesday to quit hoarding billions of dollars flowing into their vaults from Washington and start making more loans ... "What we're trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money," White House press secretary Dana Perino said. While there are limits to Washington's power to affect banks' behavior, the White House decided it was time to use its bully pulpit.


    So what does the evidence show? David Beckworth has some insights:

    When thinking about the credit crisis question, I think it is useful to look at the money multiplier for the monetary base. The monetary base is a measure of money that includes currency in circulation and bank reserves. It is also a measure of money that the Fed controls and uses to alter liquidity in the banking system. In normal times, the Fed can increase the monetary base by injecting reserves into the banking system. Banks, in turn, lend out a portion of these reserves to borrowers who then spend the funds ... Banks' balance sheets are hemorrhaging and the economy is in a recession. Banks are not eager to make loans in this environment and are more likely to sit on the new reserves coming from the Fed. This development means less credit and if pronounced enough a credit crunch. One implication is that if, in fact, there is a credit crunch then the money multiplier should be sharply falling. Thus, it makes sense to look at the money multiplier. The figure below provides the money multiplier using MZM as the broad measure of money and the St. Louis Fed's monetary base measure ... This figure shows the money multiplier peaked the week of 6/4/08 and begin a sharp descent in late August. Compared to the credit crisis of 1990-1991, Y2K, and 911, this drop is huge.


    It does seem that there is an increase in excess reserve demand. Why banks desire to hold more reserves might be an interesting question but I seriously doubt that this Administration are about to mandate maximum reserve holdings.

    Economic and Social Importance of the Eight-Hour Movement

    "By the increased aggregate production, the laborer can get more wealth through his higher wages, the general consumer can obtain more through lower prices, and the manufacturer while receiving a smaller per cent. of the total products actually obtains a greater quantity of wealth through the larger productions and extended business."


    The idea that an increase of wages involves a diminution of profits is a part of the same heresy which teaches that a fall of wages produces a rise of prices. To begin with, the capitalist is not concerned so much about the rate as he is the aggregate amount of profits he will receive. What he really wants is not so much a large proportion as a large actual amount of wealth; nor has the laborer, or the community so much interest in reducing the actual income of the manufacturer as they have in increasing their own. This can only be economically accomplished by increasing the aggregate consumption. Low wages make small consumption and a limited use of capital with slow methods of production inevitable, which, even at a high rate of profits, makes a large aggregate income impossible. For example: Suppose a manufacturer of shoes in order to live according to the accepted standard of his class was forced to charge a profit of ten cents a pair; and if by investing a large amount of capital and using improved machinery he could make the same shoes for one-third less, and be able to sell twice as many, he could reduce the price of the shoes to the consumer, and increase the wages of the laborer, and actually obtain more wealth per day for himself at five cents a pair than he has previously done With his small production at a profit of ten cents a pair. This, however, can only be possible when the aggregate demand for the shoes is increased. That is why the cotton manufacturer of today is actually richer with a profit of two cents a pound on cotton cloth than he was fifty years ago with a profit of more Than double that amount. Thus it is that the large production consequent upon the increased consumption of wealth by the masses makes all classes actually richer. By the increased aggregate production, the laborer can get more wealth through his higher wages, the general consumer can obtain more through lower prices, and the manufacturer while receiving a smaller per cent. of the total products actually obtains a greater quantity of wealth through the larger productions and extended business. This is exactly what has taken place throughout all the stages of industrial progress. It is a natural result of all the influences which tend to increase the market for products and make the concentration of capital in production possible.

    We are therefore warranted in saying that the economic effects of a general reduction of the hours of labor would be to raise the standard of living and increase real wages; promote the concentration of capital; and the use of improved machinery; will cheapen production, lower prices, and while diminishing the rate, will increase the aggregate amounts of profits. Obviously, therefore, it would tend to improve the economic and social condition of the laborer and the consumer without injuring that of any other class.

    Tuesday, October 28, 2008

    Obama at JMU in Harrisonburg, Virginia!

    Almost an hour ago I just finished watching live on the internet Barack Obama speaking at the Convocation Center at James Madison University here in Harrisonburg, Virginia, in the heart of the "red" Republican Shenandoah Valley, although Harrisonburg tracks the state as a whole pretty accurately, meaning Obama is currently leading in the city as in the state as a whole. Many continue to say that Virginia is the marginal state, the one more than any other that will determine the final outcome, and Harrisonburg tracks it. So, he may be the first major party presidential candidate to visit here since Douglas in 1860. His speech was mostly standard stump, with some soaring rhetoric at the end, but the crowd was enthusiastic and way over the 7500 capacity in the center. It started at 5:15, but one of my colleagues gave up trying to get in after getting in line at 12:30!

    Obama has gone to Norfolk in the Tidewater for a speech later this evening. This is the region that may really explain Obama's apparent lead in Virginia. Of course, population increases in "unreal" Northern Virginia is part of the pattern, but the ironic key according to Bob Roberts, a poli sci prof at JMU who is a frequent commentator on local TV is that McCain is not very far ahead in the Tidewater. The irony here is that this is the area that is most chock full of military, with Hampton Roads being the world's largest naval base. According to Roberts, McCain does lead among the military themselves, but their families have turned against him, sick of the long Iraq war. So, if McCain loses Virginia, and thus the election, it may be the ultimate blowback from his support of the awful Iraq war, finally coming home to roost.

    Economic and Social Importance of the Eight-Hour Movement

    "Whatever tends to raise wages through increasing the aggregate consumption of wealth, necessarily tends to reduce the cost of production and lower prices."

    It is commonly assumed that every increase of wages must be accompanied by a rise, of prices. This is a fundamental mistake that is demonstrated by all the facts of industrial history. The last fifty years which have witnessed a greater rise of wages than all the rest of the world's history have shown, has also seen the greatest fall of prices ever known. Whether a rise of wages will involve an increase of prices depends entirely upon how the advance of wages is brought about. If wages were arbitrarily increased without any change in the standard of the laborer's living, and the consequent increase in his general consumption, of course an advance of wages would increase the cost of what he produced. But this is entirely different when the rise of wages comes from the natural consequence of a higher standard of living, and a larger general consumption. The larger the market the lower the price, is one of the best established principles in political economy as well as one of the best attested facts in industrial history.

    The successful use of improved machinery, which is the only means of permanently reducing the cost of production and lowering prices, is impossible without the use of large capital and extensive production. It is equally true that the concentration of capital and extensive production are compatible only with large aggregate consumption of wealth, which nothing but a high standard of living can sustain. Therefore, whatever tends to raise wages through increasing the aggregate consumption of wealth, necessarily tends to reduce the cost of production and lower prices. This explains why the comfort and luxuries of life are cheaper in England now, with labor at five shillings a day, than they were in the middle ages with labor at less than six pence a day, and why wealth can be produced cheaper in America at two dollars a day than in China at ten cents.

    Monday, October 27, 2008

    Fudging Data to Prove Markets Are Fair

    In The Confiscation of American Prosperity, I looked at the career of Martin Feldstein, until recently longtime director of the National Bureau of Economic Research, chief economic advisor during the Reagan administration, and inveterate foe of Social Security.

    In the recent issue of the NBER digest, you can read a short discussion of Martin Feldstein's "proof" that wages have kept pace with productivity.

    http://www.nber.org/digest/oct08/w13953.html

    In case you do not want to purchase the article, you can read an earlier version here

    http://www.aeaweb.org/annual_mtg_papers/2008/2008_111.pdf

    The result is a display of incredible virtuosity. By selecting the appropriate deflators [a measure of inflation], including benefits as part of wages, and comparing wages with National Income rather than the Gross Domestic Product, voila, Feldstein manages to get a relatively constant wage share of national income.




    Using a different deflator is a common tactic for arguing that wages have kept pace with productivity. At the same time, many fees that ordinary people face are not included in any of the deflators. Also keep in mind that wages include multimillion dollar executive salaries as well as those of minimum-wage workers.

    National Income differs from Gross Domestic Product because it includes the depreciation. By subtracting depreciation, the wage share increases.

    The nature of depreciation is changed greatly over the. The Feldstein covers, 1970-2006. During this period, the nature of investment changed, with less long-term investment in fixed capital goods at the same time that software, which has a very rapid depreciation, became counted as part of capital expenditure. If a $1000 were invested in a factory building in 1970 and an equivalent thousand dollars were invested software in 2006, a relatively small part of the 1970s investment would be counted as depreciation. In contrast, a large part of the 2006 investment would represent depreciation. So, between 1970, depreciation rose from about 10% of GDP to 13%. Since National Income rose more slowly, that kept the wage share from declining as much.

    In so far as benefits are concerned, the two most important are pensions and medical care. Since medical care has experienced rapid inflation over the period covered, a careful study would deflate medical care costs to account for inflation -- especially in a paper that is supposedly paying special attention to the appropriate way to account for inflation. In other words, the value of a dollar's worth of medical care in 2006 was much less than comparable expenditure in 1970.

    So, by carefully selecting measures of production, inflation, and wages, Feldstein made the case that wages have kept up with productivity and growth of income. This exercise shows more about the degree to which committed ideologues will go to prove that markets are both efficient and just.


    Ben Stein on the Financial Crisis: Liquidity v. Solvency

    Dean Baker has one problem with the latest from Ben Stein:

    Ben Stein is back, telling people that it is important to save money in order to protect themselves against the sort of downturn that the economy is now seeing. While few would argue with the view that people should try to put some money aside, most people get paid less than Mr. Stein and do much better work.


    Imagine that – during a period where the concern is a lack of aggregate demand, Ben Stein advocates that we consume less!

    I have another problem with Stein’s musings:

    Months ago, one of the greatest of American economists, Anna Jacobson Schwartz, who was co-author with the late Milton Friedman of “A Monetary History of the United States,” accurately said that American banks did not face a liquidity crisis, but that they might soon urgently face a solvency crisis. In other words, banks would have ample reserves to lend but might lack assurances that they could meet all their financial obligations if those loans went bad. She was right. In fact, bankers have had so many losses and faced so much uncertainty that they dared not lend, for fear of killing their banks with bad loans — so we have actually had a solvency crisis.


    Time to turn the microphone over to Brad DeLong:

    So she has become a Mellonist. Back in her (and Milton Friedman's) Monetary History of the United States, she argued that Treasury Secretary Andrew Mellon and company were wrong when they told Hoover, as Hoover put it, to liquidate the economy: “The 'leave-it-alone liquidationists' headed by Secretary of the Treasury Mellon felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate'. He held that even panic was not altogether a bad thing. He said: 'It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people'...” But today she says that Andrew Mellon's policy is the right one.


    Stein continues:

    The solvency crisis exploded when, in mid-September, Mr. Paulson allowed Lehman Brothers to die a sudden death. I would never have believed that it could happen, which shows one of my many limitations as an economist and a human being. I assume that the future will be much like the past, but sometimes it isn’t. After Lehman, I felt sure that the government would realize its mistake and issue blanket solvency guarantees to banks.


    Huh? The Mellonist policy that Stein and Schwartz advocates was to let Lehman Brothers fail. We did and that started the crisis? So Stein recommends we continue with this policy? Ben Stein – Confused R Us!

    Update: Felix Salmon notes that Ben Stein does not even understand the concept of insolvency!

    Economic and Social Importance of the Eight-Hour Movement

    The adoption of an eight-hour system would tend to increase wages in two ways: first, by reducing enforced idleness; second, by creating new wants, and raising the standard of living.


    The adoption of an eight-hour system would tend to increase wages in two ways: first, by reducing enforced idleness; second, by creating new wants, and raising the standard of living. The immediate effect of the general adoption of an eight-hour work day would be to reduce the working time of over eight million adult laborers about two hours a day. This would withdraw about sixteen million hours labor a day from the market without discharging a single laborer. The industrial vacuum thus created would be equal to increasing the present demand for labor nearly twenty per cent. In other words, without increasing either our home or foreign market, but simply to supply the present normal consumption, it would create employment for two million laborers, which is nearly equal to seventy per cent, of the total number of able-bodied paupers and unemployed laborers in America, England, France and Germany. In thus eliminating enforced idleness it would remove the first great Obstacle to industrial reform and social progress

    Again, the employment of two million of new laborers would necessarily tend to increase the number of consumers, and thereby enlarge the market for commodities to that extent. That such a result would tend to increase wages is very clear. Although wages would not necessarily rise in the same proportion that enforced idleness is reduced, all the influences would be in that direction. It is a law in all nature that the power of primary forces increases directly as the opposing forces are reduced. Since enforced idleness is the most powerful obstruction to a rise of wages by removing the unemployed, the direct influence of the social forces which tend to promote the rise of real wages would be increased.

    Manifestly, therefore, the immediate effect of the adoption of this measure would be to remove the greatest obstacle to industrial peace and progress, and prepare the way for increasing the natural influences which tend to enlarge the general consumption of wealth and raise wages.

    The second effect, which would be more gradual, permanent and far-reaching in its nature than the first, would be the result of the increased leisure and social opportunity upon the social character and consumption of the masses. With the removal of enforced idleness, and its degrading influences, over eight million laborers would leave their work each day less exhausted, mentally and physically, and have two hours more leisure. This would mean so much positive opportunity for family life and for general social intercourse, and in a much fresher and more cheerful mood. With increased leisure and less exhaustion, the laborer will be continually forced or attracted into new and more complex social relations, which is the first step toward education and culture in the broadest and deepest sense of the term. In short, it means his gradual introduction into a new social environment, the unconscious influence of which would necessarily awaken and develop new tastes and desires for more social comforts. He would naturally begin to desire more wholesome and better appointed homes, more literature, entertainment, and a greater amount of general social intercourse, not to speak of the intellectual, moral and social improvement that would necessarily result from such conditions. The purely economic effect of this would be little short of revolution. In proportion to the frequency and extent with which the new desires were gratified, the development of which no power on earth could prevent, would they crystallize into urgent wants and necessities. The satisfaction of these would soon become an essential part of the standard of living demanded by the social character and habits of the people, and therefore would make a general rise of real wages inevitable. In fact, these are the only kind of influences which ever did, or ever can, permanently increase the general rate of real wages. This increased consumption and rise of wages means enlargement of the home market, and thereby making a greater concentration of capital and the use of wealth-cheapening machinery possible.

    Sunday, October 26, 2008

    The Elephant's Room

    by the Sandwichman

    My colleague, Peter Dorman wonders:
    And where is the left? They rail against the bailout and the evils of finance capital, but when it comes time for them to put forward a constructive, functional alternative they change the subject.
    To answer Peter's question requires a brief detour to consider the images of the elephant in the room, the emperor's new clothes and the three monkeys: see-no-evil, hear-no-evil and speak-no-evil. In short, what is not said is no coincidence. There is a conspiracy of silence. One has to learn to listen very carefully for the conspicuous absences.

    Here is what the elephant looks like (I paraphrase from an abstract of Moishe Postone's Time, Labor and Social Domination): the core of the capitalist system is an impersonal form of social domination generated by labor itself and not simply by market mechanisms and private property. The industrial production process itself is an expression of this social domination and therefore cannot be a means of human emancipation.

    Social domination in capitalism is something that largely occurs impersonally in the labor process. One sells one's time to make a living. That is to say, the employee accepts payment in return for agreeing to do what he or she is told to do during those hours of the day that one is employed.

    Reducing the hours of work simply reduces the proportion of time during which individuals are under this impersonal form of domination. However, substantially reducing the hours of work not only reduces this period of domination proportionately, it also diminishes it's importance and displaces it from the center of life. That is what Herbert Marcuse meant when he said, "Civilization has to defend itself against the specter of a world which could be free. If society cannot use its growing productivity for reducing repression (because such usage would upset the status quo), productivity must be turned against the individuals; it becomes itself an instrument of universal control."

    Has anyone other than the Sandwichman noticed that, aside from the Sandwichman's unrelenting obsession with the issue, NO ONE talks about reducing the hours of work as part of a policy response to the financial crisis. IT'S NOT IN THE CONVERSATION, FOLKS! It's what we've somehow tacitly agreed not to talk about. Why? Because it's the elephant in the room.

    It's the unspeakable solution to "the unsolved riddle of social justice." It's the unmentionable "ultimate solution" to the problem of full employment. It's the unutterable "preliminary condition without which all further attempts at improvement and emancipation must prove abortive."

    Rather than just passing on to some other topic without acknowledging what I'm trying to say here, can someone please explain to me why I'm wrong? Is there no elephant in the room? Is the emperor clothed in robes woven from silver and gold thread?

    GOP Describes Alleged Perils of a Democratic Win

    David Frum argues that Republican money should be focused on the Senate races as the McCain candidacy is a lost cause:

    the Senate will have to play the same role after this defeat. That's especially true because of two unique dangers posed by the impending Democratic victory. First, with the financial meltdown, the federal government is now acquiring a huge ownership stake in the nation's financial system. It will be immensely tempting to officeholders in Washington to use that stake for political ends -- to reward friends and punish enemies. One-party government, of course, will intensify those temptations. And as the federal government succumbs, officeholders will become more and more comfortable holding that stake. The current urgency to liquidate the government's position will subside. The United States needs Republicans and conservatives to monitor the way Democrats wield this extraordinary and dangerous new power -- and to pressure them to surrender it as rapidly as feasible. Second, the political culture of the Democratic Party has changed over the past decade. There's a fierce new anger among many liberal Democrats, a more militant style and an angry intolerance of dissent and criticism. This is the culture of the left-wing blogosphere and MSNBC’s evening line-up -- and soon, it will be the culture of important political institutions in Washington.


    Steve Benen suggests Frum has an “overactive imagination”. Steve also notes that McCain has another divided government message that assumes the Democrats get to 60 in the Senate and makes this economic prediction:

    McCain said having Democrats in control of the White House, the U.S. House of Representatives under Speaker Nancy Pelosi of California and the Senate under Majority Leader Harry Reid of Nevada, would give Democrats unfettered power. The Democrats are expected to increase their majorities in both houses of Congress on election day. "Senator Obama's tax increase would put even more people out of work," McCain said. "We've seen this before in other countries. It doesn't work. The answer to a strong economy is not higher taxes.


    McCain keeps telling middle class voters that Obama plans to raise their taxes, which of course, is a lie. It’s interesting to note that McCain failed to identify those other countries that raised taxes only to see a rise in the unemployment rate. Why don’t we talk about the United States the last time we had a Democratic White House and Democratic majorities in both the House and the Senate. We did have a tax increase in 1993 and Republicans back then predicted a recession. But it seems the Clinton years witnessed strong economic growth with large increases in employment.

    Mankiw's Contradiction

    Today's New York Times column by Greg Mankiw again shows the limits of orthodox economists' thinking. See my comments below.

    October 26, 2008 / Economic View / New York Times

    But Have We Learned Enough?
    By N. GREGORY MANKIW

    Like most economists, those at the International Monetary Fund are lowering their growth forecasts. The financial turmoil gripping Wall Street will probably spill over onto every other street in America. Most likely, current job losses are only the tip of an ugly iceberg.

    But when Olivier Blanchard, the I.M.F.'s chief economist, was asked about the possibility of the world sinking into another Great Depression, he reassuringly replied that the chance was "nearly nil." He added, "We've learned a few things in 80years."

    Yes, we have. But have we learned what caused the Depression of the 1930s? Most important, have we learned enough to avoid doing the same thing again?

    The Depression began, to a large extent, as a garden-variety downturn. [a big ellipsis here, where Mankiw scetches a conventional story about the onset of the Depression]

    The banking panics put downward pressure on economic activity in two ways. First, they put fear into the hearts of depositors. Many people concluded that cash in their mattresses was wiser than accounts at local banks.

    As they withdrew their funds, the banking system's normal lending and money creation went into reverse. The money supply collapsed, resulting in a 24 percent drop in the consumer price index from 1929 to 1933. This deflation pushed up the real burden of households' debts.

    Second, the disappearance of so many banks made credit hard to come by. Small businesses often rely on established relationships with local bankers when they need loans, either to tide them over in tough times or for business expansion. With so many of those relationships interrupted at the same time, the economy's ability to channel financial resources toward their best use was seriously impaired....

    Less successful were various market interventions. According to a study by the economists Harold L. Cole and Lee E. Ohanian, both of the University of California, Los Angeles, and the Federal Reserve Bank of Minneapolis, President Roosevelt made things worse when he encouraged the formation of cartels through the National Industrial Recovery Act of 1933. Similarly, they argue, the National Labor Relations Act of 1935 strengthened organized labor but weakened the recovery by impeding market forces....<

    Here we see a big contradiction! Above, Mankiw first blames deflation (steadily falling prices) for being a major force pushing the US economy into Depression. Then, he blames FDR for fighting deflation! Note that at the time, many policy-oriented economists were explicitly in favor of preventing deflation (and instead in favor of "reflation"). Though they were often often unorthodox, their reasons were very similar to those of Irving Fisher, a famous and very orthodox economist of the time: to quote Mankiw, "deflation pushe[s] up the real burden of households' debts."

    Now, it may be that if we looked deeper into this question, there's no contradiction here, but he doesn't address the issue at all. He instead seems to be assuming the standard economics BS about falling prices being a good thing at the macro level. This should be called "knee-jerk economics."

    He continues:
    ... three researchers show that the leading economists at the time, at competing forecasting services run by Harvard and Yale, were caught completely by surprise by the severity and length of the Great Depression. What's worse, despite many advances in the tools of economic analysis, modern economists armed with the data from the time would not have forecast much better. In other words, even if another Depression were around the corner, you shouldn't expect much advance warning from the economics profession.

    Let me be clear: Like Mr. Blanchard at the I.M.F., I am not predicting another Great Depression. We have indeed learned a lot over the last 80 years. But you should take that economic forecast, like all others, with more than a single grain of salt.

    It's about time! This Harvard elite economist is actually expressing modesty, something he's never been good at. So the financial melt-down has had at least positive effect.

    Jim Devine

    Economic and Social Importance of the Eight-Hour Movement

    The first condition for social opportunity which consists of frequent contact with an increasing variety of social influences is LEISURE. So long as one's time is all occupied in the mere getting of a living, the chance for social influences to operate upon him, which creates new desires, is impossible.


    The first condition for social opportunity which consists of frequent contact with an increasing variety of social influences is LEISURE. So long as one's time is all occupied in the mere getting of a living, the chance for social influences to operate upon him, which creates new desires, is impossible. Whatever increases the draft upon the physical and nervous energies of man make him less susceptible to the refining, and more disposed to the stimulating and vulgarizing influences. It is one of the characteristic features of modern industrial life that by its division and specialization of labor, it tends to increase the intensity of the strain upon the nervous energies of the laborer. In no country in the world is this fact more prevalent than in America. The persistency with which industrial energies are intensified in this country have come to be almost regarded as a national characteristic. It has become a recognized fact by medical science that the first step toward remedying this condition is more leisure, more physical and mental repose, more and longer periods of relief, from the strain which the specialized industrial life imposes. This has become absolutely necessary for both physical and social reasons. For physical reasons, because it makes wholesome living and normal physical health possible, and socially because without it frequent social contact is prevented or the susceptibility to the socializing influences is destroyed. The great mass of laborers are compelled to work all the year round under the same monotonous condition. This is made indispensable by the very nature of modern methods in industry. Under the factory system the laborers become mere wheels in a colossal machine, in which the presence of all is necessary to the efficient labor of any. Since the conditions under which any considerable number of the laborers work, must necessarily be those of all, nothing can increase the leisure and enlarge the social opportunities of the laboring classes which does not make a general reduction of the hours of labor.

    Saturday, October 25, 2008

    Bailing Out the Banks but Not the Economy

    One of the best pieces of reporting to emerge from the bailout insanity is this gem from Joe Nocera of the New York Times. You must read it: doctor’s orders. It makes it crystal clear that Paulson has a plan for his friends in the financial world, but there is no plan for the economy. You can lead a bank to liquidity but you can’t make it loan. For his chutzpah in listening in on a conference call intended only for JP Morgan staff, Nocera deserves a Pulitzer, a Nobel or something.

    My first thought on reading this exposé was that we just need to hang on for three more months, when the real cavalry will come to push aside this bunch of imposters. But then I realized that there is no guarantee that Rubin, Summers et al. will have the courage or freshness of vision to do what needs to be done. They too have been shouting “Capitalization, Capitalization”, which may rescue them but falls far short of rescuing us.

    I reiterate: we need to put a public financial alternative on the table. Bailing out the financial institutions (a) may not succeed on its own terms and (b) does not deal with the fact that the real economy is plunging. A public entity can step up and provide the credit we need to avoid a suffocating slump, so we are not held hostage to the Jamie Dimons of this world.

    And where is the left? They rail against the bailout and the evils of finance capital, but when it comes time for them to put forward a constructive, functional alternative they change the subject. As far as I can see, it comes down to this: either we bail out the existing institutions and somehow browbeat them into countercyclical lending behavior, which they will resist with all their fiber, or we let them go to their fate and put our marbles into a public institution that can do the job. The first is an ethical swamp, reeking of moral hazard, and may well fail. The second is the straightest, fairest, most reliable route to recovery. Please raise your voice for a public alternative. If the bailout fails to prevent a full-bore economic collapse, by the time we find out it will be too late.

    New Scientist: The Folly of Growth

    Kate Soper: Nothing to fear from curbing growth

    It doesn't help that virtually all representations of pleasure and the life we should aspire to come from advertising, with its incessant message that our happiness is dependent on consuming ever more "stuff". We hear little about the joys of escaping the stress, congestion, ill-health, noise and waste that come with our "high" standard of living.

    In fact, there is plenty of evidence that the work-dominated and materially encumbered affluence of today is not giving us enjoyable lives, and that switching to a more sustainable society in which we work and produce less would actually make us happier. For example, rates of occupational ill-health and depression have been shown to be linked to the number of hours we work, and once a certain level of income is reached further wealth does not correlate with increased happiness.

    The absurdity of our situation is illustrated by the way our economy profits from selling back to us the pleasures that we have lost through overwork: the leisure and tourist companies that sell us "quality time"; the catering services that provide "home cooking"; the dating and care agencies that see to personal relations; the gyms where people pay to walk on treadmills because the car culture has made it unsafe or unpleasant to walk outside. As the economy continues to expand, consumer culture becomes ever more reliant on our willingness to accept this.

    A growing number of people are starting to realise that there may be more to life than working to spend. Troubled by the negative impacts of a high-stress lifestyle, they are simplifying their lives and rethinking their values and desires. If we were to shift en masse to a less work-intensive economy, it would reduce the rate at which people, goods and information had to be delivered, cutting both resource use and carbon emissions.

    Rather than entailing any sacrifice to our lifestyles, this would bring huge benefits. People would reclaim time for personal and family life. They would commute less and enjoy healthier modes of travelling such as walking, cycling and boating. Supermarket shopping would cede to a resurgence in local stores, making town centres more individual and boosting local communities. All this would transform urban and rural living, and provide more tranquil space for reflection, as well as opportunities for sensual experience now denied by harried travel and work routines. These revised ideas of the "good life" might also inspire less-developed countries to reconsider the conventions and goals of development, enabling them to avoid some of the less desirable consequences of the current model.


    My one reservation regarding the above is that Kate Soper finesses the political economy of working less -- that is to say the trade-off between reduced hours of work and unemployment that growth-obsessed economists would rather not acknowledge but rather would actively suppress because it undermines their admittedly flawed "model of how the world works".

    It's co-existence or no existence

    What prospect is there for national forms of economic prudence when we're drowning in a giant global liquid pool of finance capital of which only a tiny fraction derives from the production of real goods and services? [1]

    Doug Nolan this week:

    "....Think in terms of the surge of inflation that forced thoughtful policymakers in economies such as Australia, New Zealand and elsewhere to significantly tighten monetary policy. Rising rates, however, only enticed more disruptive speculative finance flowing loosely from (low-yielding) Credit systems including the U.S., Japan, and Switzerland. Speculation could have been as simple as shorting a low-yielding security anyplace to finance a higher-returning asset anywhere. Or, why not structure a complex leveraged derivative transaction that, say, borrowed in a cheap currency (i.e. yen or swissy), played the upside of rising emerging equities markets, and at the same time had triggers to hedge underlying currency and/or market exposure. And the counterparty exposure for a lot hedges could be wrapped up in collateralized debt obligations (CDOs). And the more loose global finance inflated the world, the more the leveraged speculating community inundated “commodity” economies such as Australia, Canada, Brazil, South Africa and Russia. Of course, speculative inflows ignited domestic asset market and Credit systems, in the process fostering dangerous Bubbles...." [2]

    And some comments from Naked Capitalism in the last few days:
    "a lot of the depression we're all going to get now is because Japan expanded its money supply but held interest rates low for those 15 years in a attempt to duck recession. With low domestic rates, there was no place for the money domestically so it went abroad via the carry trade and blew bubbles all over the planet...

    "...I never saw [Japan's] zero [interest rate] policy as anything but a long-term disaster; one can't get any kind of velocity or domestic economy at long term zero or neg rates, it's madness. The destabilizing impact of dollar debt expansion has mattered far more in this global bubble than the cheap yen, but the irrationality of the Japanese yen bloat backstoped their standard of living for fifteen years at the coast of their _next_ fifteen years, yes, and they have their share of irresponsibility in the global bust. Why didn't Japan, really, take a knock and move on? Hard times would have socially knocked their crony capitalist one-party regime out of authority for something rather more leftish. This wasn't so much about saving the banks but about saving the 'Power System.' Which is why US public authorities are trying the same bad approach: it's all about saving the One Party Capitalist system... [3]




    [1] The title is a quote from Dr Martin Luther King.

    [2] History's Biggest Margin Call
    by Doug Noland October 23, 2008
    http://www.prudentbear.com/index.php/commentary/creditbubblebulletin?art_id=10142

    [3] Richard Kline.

    Economic and Social Importance of the Eight-Hour Movement

    The wants of mankind are everywhere simple or complex according to the quality of the habits and Customs of the society in which he moves. Habit not only governs our social wants, but it exercises an important influence over our physical wants also.


    As wages are governed by the standard of living, and the standard of living is governed by the social wants of the laborer, how then are the social wants determined? A little observation will show that the wants of mankind are everywhere simple or complex according to the quality of the habits and Customs of the society in which he moves. Habit not only governs our social wants, but it exercises an important influence over our physical wants also. While it does not determine whether or not we shall eat, it does decide how and what we shall eat, the clothes we shall wear, the kind of house we shall live in; nay, more, the very language we speak, the morals we adopt, and the religion we profess, are all determined by the habits and customs of those among whom we live. Whether we are Christians, Mohammedans or Buddhists; whether we eat with chop-sticks, or use knives and forks; whether we live upon rice, wear wooden shoes and a cotton frock, or eat black bread and dress in sheep-skins, or enjoy the comforts and luxuries of modern civilization, mainly depends upon the prevailing social habits and customs of the country we happen to live in. In fact, habit is the strongest force in human affairs. It is more powerful than governments, armies or absolute despotism. It is at once the motor force and ratchet wheel of human progress. Wants push the car of civilization forward, the habits and customs prevent it from slipping backward. In short, the habits and customs of a people constitute its real social character.



    Friday, October 24, 2008

    A Pre-Keynesian View of the Current Recession

    Of course in several chapters of the General Theory (especially # 12) Keynes discussed the vagaries of financial markets and how they can crash. But in general that is not the main mechanism for macro fluctuations in Keynes. While there were predecessors to Keynes who can be seen as emphasizing broader shifts in aggregate demand, including Malthus, Sismondi, and Marx, the more common model of macro fluctuations posited by classical economists of the nineteenth century often focused on investment declines after bank failures after the crash of a speculative bubble, with the Panic of 1837 and its subsequent recession in the US an example (due to a crash of a speculative bubble in cotton lands). I shall indulge by quoting at length John Stuart Mill on speculative bubbles, who certainly saw this as the main source of macro fluctuations in the manner described above (J.S. Mill, Principles of Political Economy, Book II, Chap. 9, Section 3, 1848):

    "The inclination of the mercantile public to increase their demand for commodities by making use of all or much of their credit as a purchasing power depends on their expectation of profit. When there is a general impression that the price of some commodity is likely to rise from an extra demand, a short crop, obstruction to importation, or any other cause, there is a disposition among the dealers to increase their stocks in order to profit by the expected rise. This disposition tends in itself to produce the effect that it looks forward to - a rise of price; and, if the rise is considerable and progressive, other speculators are attracted, who, as long as the price has not begun to fall, are willing to believe that it will continue rising. These by further purchases, produce a further advance, and thus a rise in price, for which there were originally some rational grounds, is often heightened by merely speculative purchases, until it greatly exceeds what the original grounds will justify. After a time this begins to be perceived, the price ceases to rise, and the holders, thinking it time to realize their gains, are anxious to sell. The the price begins to decline, the holders rush into the market to avoid a still greater loss, and, few being willing to buy in a falling market, the price falls much more suddenly than it rose. Those who have bought at a higher price than reasonable calculation justified, and who have been overtaken by the revulsion before they had realized, are losers in proportion to the greatness of the fall and to the quantity of the commodity which they hold, or have bound themselves to pay for."

    Economic and Social Importance of the Eight-Hour Movement

    Frequent contact with enjoyable conditions creates desire for them, and by repeated satisfaction the desire grows into a taste, and tastes into absolute wants, which ultimately become a part of the habits and fixed character, or second nature.


    Since the established wants of a people govern its industrial activities and social relations, and these in turn establish its habits or social conduct, whatever effects human wants exercises a commensurate influence upon the character of the people. Accordingly, we find the world over, that the social character of every community is elevated and refined, civilization most advanced, and of course wages the highest, and the well-being of the masses the most complete where the normal wants of the people are the most numerous, and their social life the most complex. Obviously, therefore, the real fulcrum upon which to place the lever with which to lift social character and thereby advance civilization is human wants.

    Nor is the influence of a want confined to its own satisfaction. In accordance with the principle, that the strength of a desire increases with its gratification, does the complete satisfaction of a want tend to give rise to new desires. Each new want calls forth a new effort for its gratification, and thereby enlarges the field of experience by making more frequent and varied social intercourse necessary from which new desires naturally arise. Thus it is that frequent contact with enjoyable conditions creates desire for them, and by repeated satisfaction the desire grows into a taste, and tastes into absolute wants, which ultimately become a part of the habits and fixed character, or second nature. In fact, there is no conceivable limit to the development of man's social wants, and his ability to satisfy them, except those fixed by his opportunities.

    The power of social influences in shaping man's desires, wants, habits and character is everywhere manifest. It is the recognition of this fact that makes us so solicitous about what our children shall hear and see, or where they shall go, the school they shall attend, the company they shall keep, the amusement they shall have, etc. Even parents who are in the habit of frequenting saloons will forbid their children going to such places, and none but the most degraded will allow their children to see them do so.

    Indeed, the whole history of the human race is one continuous stream of evidence of the universal operation of this principle. Wherever man's social opportunities have been the most restricted, his wants, tastes and desires are the most limited and his industrial and political character has made the least progress, and vice versa. For the same reason that the extent of man's wants and the development of his character is the measure of social progress; so, too, the extent of his opportunities to increase those wants and develop that character is the true measure of civilization. Therefore, how to increase the wants, develop the character, and. consequently advance the wages of the laboring classes, ultimately resolves itself into the question: How can the social opportunities of the masses be enlarged?

    The Future is Now!

    In the year 2008:

    * "The single most important item in 2008 households is the computer." Check.

    * "Money has all but disappeared." Check.

    * "People have more time for leisure activities in the year 2008. The average work day is about four hours."

    Thursday, October 23, 2008

    Maestro Finds A Flaw

    by the Sandwichman

    Greenspan: "I discovered a flaw in the model that I perceived is the critical functioning structure that defines how the world works."

    Ira Steward, 1865: "It is but little more than three [now four and a half] hundred years since everybody believed that the sun revolved around the earth. But Copernicus finally exploded this mistake and proved that the earth goes around the sun; and many have been the cases in which men have been forced to admit that the truth was exactly the reverse of all their past opinions or experiences."

    Hey, shit happens.

    Plea for comments

    I need to submit a proposal to a major publication tomorrow. I have had to rush it off. Any comments would be appreciated.

    How is it that the American dream suddenly morphed into a nightmare? The subprime crisis is a symptom of something larger and far more dangerous. Even the meltdown of Wall Street is a symptom of something larger and even more threatening. Without extreme care, the intended cure is likely to make matters worse. Papering over a crisis, even with a trillion dollar bailout, may temporarily eliminate the symptoms, perhaps even making the economy look healthy again, but the underlying problems are almost certain to break out again in a more virulent form.

    A rational response to the crisis requires recognizing the deeper, systemic dimensions of the problem. On the most superficial level, the public face of problem was a group of people buying houses they could not afford. This perspective is misleading, especially because many of the loans were to people who were already homeowners or small-time speculators who were looking to flip houses.

    Like a Russian nesting doll, another face is below the surface: predatory lenders, who were pushing deceptive loans that could never be repaid. Pulling away these predatory lenders exposes a more complex presence: the great banking institutions now on the public dole. These supposedly respectable businesses, protective of their public face, do not allow their corporate names to be used by the predatory lenders, but they represent a very profitable component of their businesses. At the next levels, first a dysfunctional financial system appears and, then, something more abstract -- a political movement fanatically committed to deregulation, which allowed the whole financial system to go haywire.

    Recent scrutiny has exposed most of these actors, but even deeper forces have gone unnoticed. To get a handle of these forces requires looking back at the pattern of crisis and response over many decades. Since comparisons of the current crisis with the Great Depression have become commonplace, that period may be a good place to start.

    The Depression of the 1930s had disastrous human consequences, but it made the economy stronger in the long run. In effect, the depression drew much of the poison from the system. It swept away outdated, inefficient, and obsolete businesses, plant, and equipment. Under extraordinary market pressure, business found ways to improve efficiency. Finally, the Depression wiped out a great deal of debt, while New Deal legislation allowed unions to lift wages. The World War II economy built up considerable wealth in the U.S. while the economies of international competitors were left in ruins. This constellation of forces left business and the public able to purchase goods and services once employment recovered.

    Shortly after the war ended, the U.S. enjoyed what economists call the Golden Age, because of the extraordinary economic performance of the time. Business came to expect that the experience of the Depression had taught government how to make those good times last forever. Obviously, they did not.

    By the late 1960s, falling profits created enormous dissatisfaction for business. Both business and the public tended to hold the Democrats responsible for the faltering economy. In the decades that followed, the Democrats managed to elect only two presidents, both of whom governed like traditional Republicans, while the Republicans became increasingly ruthless about promoting business interests. The underlying obsession of both parties was to resurrect the profitability of the Golden Age.

    I will tell the story of the people and policies that set out to recreate the economic performance of the Golden Age. The reader will see how, instead of a Golden Age, they gave the world a jerry-rigged Gilded Age -- one in which the gilding covered up an increasingly dilapidated economy. Profits still rose, approaching their pre-Depression peak, but their recovery marked deeper problems.

    Normally, one would expect healthy profits to be a payoff from a productive economic structure, based on intelligent investments in plant, equipment, and a well-trained workforce. Instead, the improvement in profits reflected a combination of cheap labor (real hourly wages peaked in 1972), deregulation, low interest rates, and financial manipulation. The driving force of this new Gilded Age was credit rather than income for the majority of workers. Recurrent crises should have signaled the need for fundamental change. Instead, government and business chose to treat the symptoms.

    Tax Progressivity: Adam Smith as a Socialist?

    Steve Coll reminds us of this passage from the Wealth of Nations:

    The necessaries of life occasion the great expense of the poor. . . . The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. . . . It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.


    Coll has also been watching Faux News so we don’t have to:

    Smith’s notion of reasonableness did not anticipate the Fox News Channel, however. Last Tuesday, Wurzelbacher appeared on that network, where he denounced Obama’s comments as “socialist.” He said that Obama “scared me,” because he “wants to distribute wealth.”


    I guess Adam Smith would also scare Joe the Plumber!

    Wednesday, October 22, 2008

    Mussey/Douglas on Eight-Hour Theory

    by the Sandwichman

    From his vantage point in the mid-1920s, Henry Mussey ("Eight-Hour Theory in the American Federation of Labor" in Economic Essays, edited by Jacob H. Hollander, Macmillan Company, 1927) admired the political pragmatism of Samuel Gompers’s use of eight-hour philosophy to nurture the fledgling American Federation of Labor. "No student of American labor history," Mussey wrote, "can fail to be struck with the extraordinary importance of the eight-hour issue in union thinking during the formative years of the American Federation of Labor."
    It is the ideas underlying the movement, especially in its earlier period down to 1892, with which we are concerned. Why did the men who were to unify the American labor movement take up first the question of hours, and for ten years make the shorter workday the central demand in their positive platform? The opinion may be hazarded that it is because the theory of the eight-hour day happened to fit particularly well the practical needs of their situation, and was therefore a tool well-nigh indispensable to them in their hard task of organization.
    Mussey was less convinced of the theoretical soundness of the Federation’s eight-hour philosophy, pioneered by Ira Steward in the 1860s. His apparent skepticism was in keeping with the almost obligatory disdain of academic economists toward populist panaceas for unemployment. Academic economists proclaimed the shorter-hours theory false, most of them apparently without bothering to read it. It didn’t conform to their preconceptions -- so it must be wrong and not worth examining.

    Mussey himself comes across in his article as somewhat agnostic on the matter of that economic orthodoxy. "Any cub productivity theorist," he remarked, "can upset the idea [of increasing employment by spreading existing work among a larger number of workers working shorter hours] by a mere reference to long-time effects on wages, but the unionists were blissfully ignorant of such theories, and confident of the union’s power to maintain living standards and wages, so the theoretical fallacy did not trouble them." Does a "mere reference" by a "cub" productivity theorist add up to a decisive rebuttal of the eight-hour theory or is it a wry commentary on the superficiality of the pro forma academic dismissal of the theory? Was the "blissful ignorance" of the unionists a defect or a blessing? Mussey left it ambiguous as to exactly where his irony stood on the question.

    Only five years after publication of Mussey’s account, Dorothy W. Douglas ("Ira Steward on Consumption and Unemployment," The Journal of Political Economy, August 1932) was extolling Steward’s eight-hour theory as a "philosophy of American wages and unemployment that sounds strangely apposite today." What had intervened decisively between Mussey’s 1927 ambivalence and Douglas’s 1932 enthusiasm was a financial collapse and the start of a deep depression.

    Douglas condensed the two main aspects of Steward’s theory and their interconnection:
    One, the stimulating effect of leisure and leisure-time consumption upon the standard of living and hence the wage demands of the lowest classes of labor... and the other, the stimulating effect of this more expensive labor upon the technique of production itself -- the effect of "driving" labor saving machinery. Finally, uniting the two, is a plea, now familiar to our ears of mass demand as alone making mass production possible.


    What impressed Douglas most about Steward’s theory was his argument that unemployment and low wages lay at the root of economic depressions. According to Steward (in Douglas’s words), capitalists "assume that just a little surplus labor is good for business." Too much unemployment would be an inconvenience and even a scandal. But employers welcome just enough unemployment to discourage demands for higher wages. As an aside, such an attitude is evident in the acceptance in mainstream economics since the 1970s of the idea of a "natural" or "non-accelerating inflation rate of unemployment"(NAIRU).

    The problem with this Goldilocks theory of unemployment (not too high, not too low, but just right), as Steward pointed out, is that there is, in effect, a multiplier effect. "An unemployed man is the most deadly fact that exists outside of a graveyard... Without raising a hand he takes more bread from others than he himself can eat.. more clothes than he can ever wear..." This specter of unemployment makes those who are still employed willing to work for longer hours and lower wages in "the deadly competition between those who have nothing to do and those who do too much for fear of doing nothing." Furthermore, the still employed workers become reluctant to spend what income they have for fear of future unemployment. "The most cautious and calculating laborers, who are not themselves discharged, are sufficiently alarmed by the first few discharges that occur about them to wait before buying." Meanwhile, employers find themselves with no choice but to lay off workers in response to the contraction of business.

    Ironically, though, and again in contrast to Mussey, Douglas judged Steward’s practical proposals to be naive. Mussey had hailed the practical success of a labor strategy founded on Steward’s theory but doubted the soundness of that theory. Douglas admired the theoretical side, while discounting the likelihood of its practical political implementation. As things have turned out, both the theoretical and practical dimensions have been abandoned by economists and unionists, respectively.

    Unbeknownst (apparently) to either Mussey or Douglas, Steward’s theory was given powerful, independent support in the neoclassical theory of the hours of labor expounded by Sydney Chapman, a star pupil of Alfred Marshall. Practically, a policy prescription quite similar to Steward’s was articulated by John Maynard Keynes in 1943. There is no indication that either Chapman or Keynes was familiar with Steward’s theory or its endorsement by the AF of L.

    UNEMPLOYMENT, HOURS & WAGES

    Job Losses Accelerate, Signaling Deeper Distress

    As reports of layoffs continue to pile up around the country, executives at Randstad said they have noticed a shift in psychology among job seekers.

    "Employees are much more willing to work extra hours and to take on additional duties to enhance job security and improve their employability," said Eric Buntin, managing director for marketing and operations at Randstad. "In a changing market, they know that's a valuable resource."

    They are also willing to make less money, even as the cost of living goes up. Cline said some call center jobs that were paying $9 an hour in the Tucson area last year are now paying $8.50. "Their option becomes to take the job or not have the job," she said.
    "Read More" from IRA STEWARD ON CONSUMPTION AND UNEMPLOYMENT by Dorothy W. Douglas (1932)"...a philosophy of American wages and unemployment that sounds strangely apposite today.":

    "The capitalists are unmindful of the first danger signals, the beginnings of a redundant labor supply. Tacitly they assume that a little surplus labor is good for business...."
    Now machinery is only a blessing "provided the wealth more rapidly produced is consumed as fast as days' works are destroyed * . . .but if this blessing is to continue to bless, wages must continue to rise. If wages stop rising, machinery stops blessing." Ultimately "production gains upon consumption." That is the underlying fact. "Wealth is more rapidly produced than consumed in the leading nations ... . This fact combined with the poverty and misery of the rest of mankind [outside the charmed circle] is the mainspring of enforced idleness [within it]. And enforced idleness is the real secret of the financial convulsions and bankruptcy which from time to time sweep over the most prosperous countries of the civilized world." The capitalists are unmindful of the first danger signals, the beginnings of a redundant labor supply. Tacitly they assume that a little surplus labor is good for business. "They do not want the number of unimployed (sic) so large as to occasion inconvenience or the scandall (sic) of starvation, but they are quite alike in the inexpressed wish that the number of unemployed (sic) shall be so large that those employed shall have as little power as possible to dictate the terms of their employment." This is especially their attitude at a time when wages are rising and business is still brisk.

    "An unemployed man is the most deadly fact that exists outside of a graveyard."
    But "when the first laborer is discharged, he stops buying." And from then on his powers for evil multiply indefinitely. Then begins "the deadly but natural competition existing between those who are employed and those who are not." "An unemployed man is the most deadly fact that exists outside of a graveyard. He is the source of all that is bad ... . Without raising his hand, he takes far more bread from others than he himself can eat .... more clothes than he can ever wear .... more opportunities than he alone could improve."

    He makes his fellows, who are still at work, willing to work for longer hours (". . . . the deadly competition between those who have nothing to do and those who do too much for fear of doing nothing") as well as lower wages ("Discharges must occur first, before wages can fall to any appreciable or serious extent"); and besides, he makes them afraid to spend what little they have. "The most cautious and calculating laborers, who are not themselves discharged, are sufficiently alarmed by the first few discharges that occur about them to wait before buying ....... Meanwhile the individual employer is helpless to stem the tide. "The capitalist is forced to discharge today, for the blunders of his class five or ten years ago.'"


    "I Work Hard... I Work 10-12 Hours a Day"

    by the Sandwichman

    "Well, the reason why I ask you about the American Dream I mean, I work hard. I'm a plumber, I work 10-12 hours a day..."
    "Two things have always marked out the financial masters of the universe from the rest of us. First, their souped-up salaries, and then their souped-up working hours. We mortals understood that these were connected. The rewards were so high because the hours were so long."

    Nothing seems to dramatize "The American Dream" quite as insistently as the hard-work-and-long-hours parable. There's just one problem with the parable: long hours of work result in reduced output -- not just reduced productivity per hour but reduced total output. Those who brag about working "10, 12 hours a day" spend the last two to four hours sacrificing their leisure time (and yours) to a false idol. The fact that they get paid -- and sometimes handsomely -- for this conspicuous waste of time is due solely to cultural norms known as "the wage" and "the overtime premium" neither of which is calibrated to actual measures of output or productivity.

    It is "un-American" to point out the baselessness of this myth. That's because the "regular Joe" who works overtime to support his family, buy a house, go into business and put his kid through college is a genuine "American Hero." No, he is not. He's a SCAB. At one time, even conservative American unionists understood, as Samuel Gompers declared: "The answer to all opponents to the reduction of the hours of labor could well be given in these words: 'That so long as there is one man who seeks employment and cannot obtain it, the hours of labor are too long.'"

    Can Destabilizing Speculation Both Be Profitable and Help Obama Win the Election?

    Paul Krugman treats us to a recent rightwing claim that a bunch of rich socialists have generated the recent financial crisis in order to assure that Obama wins the election. Paul reminds us that this same crowd back in 2004 claimed George Soros would do the same in order to help John Kerry.

    OK but aren’t there a lot of rich people who want McCain to win? If the rich lefties are engaged in what amounts to be destabilizing activity – couldn’t the rich righties make money by engaging in stabilizing speculation? Interestingly, Marxist.com brings us the thoughts of Milton Friedman on this issue:

    Milton Friedman asserted that destabilising speculation was impossible. This was supposed to be the case because speculators who ‘got it wrong’ would be buying dear and selling cheap. They would lose money and soon disappear.


    So are these rightwingers saying that Friedman got this issue wrong?

    Economic and Social Importance of the Eight-Hour Movement

    The wants of mankind are everywhere simple or complex according to the quality of the habits and Customs of the society in which he moves. Habit not only governs our social wants, but it exercises an important influence over our physical wants also.

    As wages are governed by the standard of living, and the standard of living is governed by the social wants of the laborer, how then are the social wants determined? A little observation will show that the wants of mankind are everywhere simple or complex according to the quality of the habits and Customs of the society in which he moves. Habit not only governs our social wants, but it exercises an important influence over our physical wants also. While it does not determine whether or not we shall eat, it does decide how and what we shall eat, the clothes we shall wear, the kind of house we shall live in; nay, more, the very language we speak, the morals we adopt, and the religion we profess, are all determined by the habits and customs of those among whom we live. Whether we are Christians, Mohammedans or Buddhists; whether we eat with chop-sticks, or use knives and forks; whether we live upon rice, wear wooden shoes and a cotton frock, or eat black bread and dress in sheep-skins, or enjoy the comforts and luxuries of modern civilization, mainly depends upon the prevailing social habits and customs of the country we happen to live in. In fact, habit is the strongest force in human affairs. It is more powerful than governments, armies or absolute despotism. It is at once the motor force and ratchet wheel of human progress. Wants push the car of civilization forward, the habits and customs prevent it from slipping backward. In short, the habits and customs of a people constitute its real social character.



    Tuesday, October 21, 2008

    Components of GDP Growth Since 2000







    If a picture is worth a thousand words, let’s present three of them – each of them drawing from the real GDP index numbers presented in NIPA table 1.1.3 from this source. Real GDP is about 19.5% higher than it was in 2000, which translates into an annual growth rate just over 2.3%. Not exactly what I would call a Bush Boom. Our first graph shows a couple of things. Private consumption (Con) grew more rapidly than GDP, while government purchases at first grew more rapidly but ended up being only 19.6% higher than we observed in 2000. One could say we got fiscal restraint towards the latter part of the Bush administration just as we had to worry about a possible recession.

    At the end of the day, however, national savings as a share of GDP has declined since 2000 but the components are fascinating. Export demand started weak but rebounded rising by over 40% during the period. Offsetting that, however, was the over 30% increase in imports. Business or nonresidential investment (Nonresid) began with a decline but eventually rose to 16.2% of its 2000 level. So business investment actually declined relative to GDP despite all those tax breaks designed to give us some sort of supply-side miracle. And the big news is that residential investment, which was almost 35% higher in 2005 than it was in 2000, has plummeted to less than 83% of its 2000 level.

    Our last graph shows the components of government purchases. Defense spending is 42.6% higher than it was in 2000, while even Federal nondefense spending is almost 23% higher. So why is overall government purchases not dramatically higher as a share of GDP now versus 2000? Well, it seems that state & local government purchases have gone up by 11.5%.

    And yet, the White House can send Dana Perino out to say this:

    Ms Perino said Democratic leaders in Congress had floated ideas – such as infrastructure spending and help for state and local governments – that “we did not think would actually stimulate the economy, so we would want to take a look at anything very carefully”.


    The election is only two weeks away and then this incompetent crew will be lame ducks!

    Saudis Succeed in Keeping Us Hooked on Oil

    So, the price of oil has now plunged to nearly $70/per barrel, and in most of the US the pump price is below $3 per gallon and falling. In an article in yesterday's Washington Post, one of the designers of the Toyota Prius, Bill Reinert, warned that at $2.50 per gallon, few people are interested in buying hybrid cars, much less the more expensive plug-in electrics that reportedly will cost $8,000 more to purchase than standard cars. Also, it takes five years to "ramp up production" of a totally new automobile. While several automakers are working on plug-in electrics, which looked good at $140 per barrel of oil, it is some years before they will come on line, and one producer, Tesla Motors, has already canceled a project for a mid-cost sedan due to financing problems.

    So, clearly there was a speculative bubble in oil this past summer, but the turnaround has also had fundamental components. Part of it is the oncoming global recession reducing demand, but part of it was due to production increases that were little noted at the time earlier this year. Those came in Iraq, where production has now gotten back up to where it was prior to the fall of Saddam, and in Saudi Arabia. The total between them amounted to about 1 million barrels per day. Needless to say, the Saudis have nothing to offer the world other than their oil, and will do what is needed to make sure that we remain dependent on them. That means killing any serious alternatives to the internal combustion engine before too many of them get on the road by getting production up enough to keep the price of gasoline down enough to do so, even if some other OPEC members are unhappy about it, wanting their oil revenues now.

    Economic and Social Importance of the Eight-Hour Movement

    The standard of living in any community is always high or low, according as the social life of the masses is simple or complex; that is to say, as the number of the habitual daily wants of the people is large or small.


    Wages being governed by the standard of the laborer's living, whatever directly or indirectly effects that must affect wages. The standard of living in any community is always high or low, according as the social life of the masses is simple or complex; that is to say, as the number of the habitual daily wants of the people is large or small. It is lower in Asia than in Europe, lower in Europe than America, lower on Mott Street than on Fifth Avenue, for the reason that the wants of the people in the former places are fewer, and their social life simpler than those in the latter. In proportion as man's wants are limited to his physical necessities, does he remain brutal and barbarous. And only as his desires for things which enter into his social life, and the use of which exercises an elevating and refining influence upon his character, are intensified into wants, does he rise in the scale of social, intellectual and moral development. This is why we always find the quantity of wealth produced is the smallest, the methods employed the crudest, and the scale of civilization the lowest, in those countries where the social wants of the people are the fewest.

    Monday, October 20, 2008

    Economic and Social Importance of the Eight-Hour Movement

    The general rate of wages, in any given class, group or industry, is determined by the standard of living of the most expensive families furnishing the necessary part of the supply of labor in that country, class, group or industry.


    Other things being the same, the cost of his living will be determined by the number of his habitual wants. Thus, the cost of producing labor is ultimately determined by the socially-accepted standard of living; that is to say, the state of material comfort and social refinement which is customary in, and therefore demanded by, the social status of the class to which one belongs, and below which he cannot permanently go without being put to social disadvantage. Again, the standard of living as here stated does not mean that of the individual merely, but of his family. Nor does this mean that the wages of the workers in each family are determined by the cost of living of that particular family, but it means that the general rate of wages, in any given class, group or industry, is determined by the standard of living of the most expensive families furnishing the necessary part of the supply of labor in that country, class, group or industry. The reason for this is very clear. The laborer will not work for less than what will furnish him a living. He will, as experience shows, often work for less than will supply him with exceptional comforts and luxuries, but he will not continuously work for less than will furnish him that which, by constant repetition and force of habit, have become necessities. Rather than forego these he will refuse to work, will inaugurate strikes, tots, and other means to endanger the peace and prosperity of the community. If $2 per day is the minimum amount upon which a certain portion of a given class of laborers can or will consent peaceably to live, then that amount must be paid them in order to obtain their labor; what the. most expensive portion must receive the remainder therefore may and will receive. In other words, the minimum amount that the most expensive laborers will consent to accept, determines the maximum amount any portion of the class can obtain, and therefore fixes the general rate of wages in their class. The reason for this is equally clear. In modern industry; with the concentration of capital and the use of factory methods and the division and aggregation of labor, it becomes economically impossible to pay different rates of wages to different individuals for the same kind and quantity of work, especially where piece-work prevails, which is increasing as the factory methods extend. Consequently, we find that the general rate of wages in the same industry and locality is nearly uniform. We know, for instance, that weavers, spinners, shoemakers, carpenters, bricklayers, painters, etc., in the same shop or factory, or on the same job, get the same rate of pay for work at their respective trades, whether they are single or married, have large or small families, or live more or less expensively than their fellow-laborers. We also know that the most expensive among them must obtain for his service sufficient to supply his family with what to them (as a class) are necessities. What will be sufficient to supply the urgent necessities of the most expensive portion of any class of laborers, and barely induce them to continue to work, will furnish all those whose cost of living is less with a margin proportionate to the difference, which may be spent in what to them are luxuries, dress, amusement, travel, literature, etc.

    This explains why we always find those whose families are the largest, or those who have more cultivated tastes and wants, and therefore a higher cost of living than the bulk of their class, are constantly chafing under the pressure of their unsatisfied demands. This pressure increases in severity in proportion as the standard of living rises above that of the lowest. Consequently, we find in every class of laborers a portion who are in almost perpetual rebellion against the smallness of their wages, while the single men, and those whose families are smaller, or who maintain a lower standard of living, can either save money or use it in dissipation. Indeed, it is a law throughout society which all history demonstrates that every step in progress, social, political, moral, or religious, has always been obtained through the energies of a small portion, seldom 20 per cent, of the class or country who received the advantages. This affords the explanation of what has hitherto been an economic enigma, namely, why the members of the trades unions, and the leaders in strikes, and other forms of agitation for the advance of wages and industrial reforms, are always the most intelligent and best-paid laborers. Why the six-cent-a-day laborers in Asia do not strike half as frequently as do the two or three-dollar-a-day laborers in America, and why in all strikes there is a large proportion of the laborers who are reluctant to leave their work and always anxious to return. The reason is that this portion of the class do not feel the pressure or necessity for an increase because their wages are determined by the twenty per cent. of their class whose standard of living is more expensive than their own. This law also explains the reason why European and Asiatic laborers can come to this country and accumulate wealth (or dissipate) upon wages which will barely supply the laborer's family in America with the necessaries of life. Tue fact that the foreigner can save money while the American laborer can hardly make two ends meet, is frequently cited as the evidence of the superior character of the foreign laborer. But if this be true why did they not give evidence of this superiority by saving money iii their own country? We may be told that it is because the general rate of wages there was so low that no margin was left above what would give them a bare living; but this only raises the next question: Why is there no margin in their own country?

    Why is there no margin for the best class of Chinamen in China, of Germans in Germany, Englishmen in England, and Americans in America, while there is a margin in almost every country in Continental Europe for the Asiatic, a margin in England for both the Asiatic and Continental laborer, and a margin in the United States for the laborers of every other country, but no margin for the American laborer in any country in the world. The answer is very clear. There is no margin upon which the best class of laborers can save in their own country, simply because there the general rate of wages is determined by their own standard of living. They can get wages which will leave them a margin over the cost of living, only by going where the price of labor is determined by the social character and standard of living higher than their own, or, if in their own country, by adopting a standard of living lower than that of the highest of the class to which they belong. Why the foreign laborer who can hardly procure a living at home, can accumulate here, while the American laborer can only obtain sufficient to satisfy his normal social needs, is for the first time explained by the operation of this economic law. And should the standard of the American laborer ever be reduced to the level of that of the European or Asiatic, then it would be as impossible for the foreign laborer to save money here as in his native country, and for the same reason.

    It will thus be seen that the rate of wages is not kept up and promoted by the influence of those whose standard of living is below the average, but by the constant pressure of the unsatisfied desires of those whose standard of living is the highest in their classes. Thus it is, that in accordance with the same principle that production is finally determined by consumption, the laborer's income, under wage-conditions, is governed by his expenditures. In other words, the standard of living is the economic law of wages.