by the Sandwichman
It's official. Big fiscal stimulus package is the flavor of the day! Let's get fiscal, fiscal. I wanna get fiscal. Let's get into fiscal. Let me hear your money talk, your money talk, Let me hear your money talk.
Sandwichman was wondering, though, "how do they get from $X billion of fiscal stimulus to X million jobs created?"
Dean Baker must have been reading my mind. "Assuming that employment is roughly proportional to output..."
Is that all there is?
Percent of GDP in additional government spending times multiplier equals percent increase in GDP and -- assuming an employment effect roughly proportional to output -- equals percent increase in employment?
Is that actually how economists estimate the employment effect of a fiscal stimulus package? Because if it is, the old Sandwichman has news for you economist folks:
EMPLOYMENT IS NOT ROUGHLY PROPORTIONAL TO OUTPUT.
But you already knew that, didn't you?
Sunday, November 30, 2008
The Second Coming of J. Maynard Keynes
New Deal Economics: George Will Trumps Amity Shlaes for Stupidity
Paul Krugman has busy keeping up with the nonsense from Amity Shlaes and George Will so we should forgive him for not covering every point.
I was going to let the following Schlaes line go even if this graph shows that total government spending and revenues did not significantly rise as a share of GDP during FDR’s first two terms:
New Dealers raised taxes again and again to fund spending.
But then Will had to compound the nonsense with:
But people whose recipe for recovery today is another New Deal should remember that America's biggest industrial collapse occurred in 1937, eight years after the 1929 stock market crash and nearly five years into the New Deal. In 1939, after a decade of frantic federal spending -- President Herbert Hoover increased it more than 50 percent between 1929 and the inauguration of Franklin Roosevelt -- unemployment was 17.2 percent.
One graph in this post does show an increase in Federal spending as a share of GDP during Hoover’s Administration - but for the 1929 to 1937 period, the increase in Federal revenues offset the increase in Federal spending. But could someone tell Mr. Will that Hoover was not President during the New Deal era?
Paying Interest on Bank Reserves
Since Peter Dorman has been questioning the Fed’s decision to pay interest on bank reserves, I thought it would be interesting to note how Real Time Economics posed the case for this decision:
Banks are required by law to hold a certain fraction of their deposits in reserve accounts at the Fed, but receive no interest on these deposits. Having the authority to pay interest would solve two technical headaches for the Fed. If they earned interest from the Fed, banks would have no incentive to lend out excess reserves for less. That would make the Fed’s benchmark federal-funds rate, which banks charge on overnight loans to each other, less likely to plunge below the Fed’s official target — now 2% — on days when the banking system was awash in cash. In addition, the Fed could theoretically combat the credit crunch by buying securities or extending loans without limit without causing the federal-funds rate to fall to zero, something that could fuel inflation or distort markets.
In other words, the concerns were that banks would hold too few reserves and that we would end up with higher inflation. But today’s concerns seem to be that banks are holding onto too many reserves and that we may be in for a deflationary spiral and inadequate aggregate demand.
This post also noted that Congress originally intended for interest to be paid on reserves starting in 2011 out of concern that the government might lose income to private banks. While pumping a few extra millions of dollars into the private sector right now might be good Keynesian economics, perhaps delaying this new policy until 2011 would have been better given the collapse of the money multiplier.
Saturday, November 29, 2008
Conservatives – Relax: Government Ownership of Banks Will Not Be Permanent
Phillip Stevens seems worried that we’re turning into socialists:
We are watching a bonfire of the old orthodoxies as well as of the vanities. This week Barack Obama promised to spend hundreds of billions of taxpayers’ dollars to prop up the sinking US economy. Gordon Brown’s British government announced it would soak the rich to pay for an economic rescue package … "Something big is happening. What started out as a series of pragmatic ad hoc responses by governments and central banks is moving the boundary between state and market. Politicians are now overlaying expediency with ideology. Government is no longer a term of abuse. Things could move still faster in the months ahead. With their myriad rescue schemes and loan guarantees, the US and British governments have nationalised their respective banking systems in all but name. The banks pretend they are still answerable to their shareholders, but it is a charade. They survive only with the explicit financial guarantee of the state. Still, the markets remain frozen, starving business of the oxygen of credit. Unless things change soon, the politicians will have little choice but to take direct control, and quite possibly, ownership, of the banks. Nationalisation could be the first act of an Obama presidency.
Please! The free market is not working that well right now so government has to step in lest we face a major recession. Paul Krugman calmly explains what we should be doing:
What the world needs right now is a rescue operation. The global credit system is in a state of paralysis, and a global slump is building momentum as I write this. Reform of the weaknesses that made this crisis possible is essential, but it can wait a little while. First, we need to deal with the clear and present danger. To do this, policymakers around the world need to do two things: get credit flowing again and prop up spending ... The obvious solution is to put in more capital. In fact, that's a standard response in financial crises. In 1933 the Roosevelt administration used the Reconstruction Finance Corporation to recapitalize banks by buying preferred stock—stock that had priority over common stock in terms of its claims on profits. When Sweden experienced a financial crisis in the early 1990s, the government stepped in and provided the banks with additional capital equal to 4 percent of the country's GDP—the equivalent of about $600 billion for the United States today—in return for a partial ownership. When Japan moved to rescue its banks in 1998, it purchased more than $500 billion in preferred stock, the equivalent relative to GDP of around a $2 trillion capital injection in the United States. In each case, the provision of capital helped restore the ability of banks to lend, and unfroze the credit markets … My guess is that the recapitalization will eventually have to get bigger and broader, and that there will eventually have to be more assertion of government control—in effect, it will come closer to a full temporary nationalization of a significant part of the financial system. Just to be clear, this isn't a long-term goal, a matter of seizing the economy's commanding heights: finance should be reprivatized as soon as it's safe to do so, just as Sweden put banking back in the private sector after its big bailout in the early Nineties. But for now the important thing is to loosen up credit by any means at hand, without getting tied up in ideological knots. Nothing could be worse than failing to do what's necessary out of fear that acting to save the financial system is somehow "socialist."
Exactly. Paul also turns his attention to the need to increase government spending:
The next plan should focus on sustaining and expanding government spending—sustaining it by providing aid to state and local governments, expanding it with spending on roads, bridges, and other forms of infrastructure.
We should also keep in mind that this boost in spending will not be a permanent increase in the size of the government. The President-elect has already told us he intends to find ways of scaling back portions of Federal spending over the longer-term. Conservative critics would do well to stop and think about the difference between the short-term economic crisis versus long-run economics before writing silly things like this op-ed from Mr. Stevens.
Friday, November 28, 2008
Collapse of the Money Multiplier
Paul Krugman writes:
A central theme of Keynes’s General Theory was the impotence of monetary policy in depression-type conditions. But Milton Friedman and Anna Schwartz, in their magisterial monetary history of the United States, claimed that the Fed could have prevented the Great Depression — a claim that in later, popular writings, including those of Friedman himself, was transmuted into the claim that the Fed caused the Depression. Now, what the Fed really controlled was the monetary base — currency plus bank reserves. As the figure shows, the base actually rose during the great slump, which is why it’s hard to make the case that the Fed caused the Depression. But arguably the Depression could have been prevented if the Fed had done more — if it had expanded the monetary base faster and done more to rescue banks in trouble. So here we are, facing a new crisis reminiscent of the 1930s. And this time the Fed has been spectacularly aggressive about expanding the monetary base.
Paul graphs the monetary base, which increased by 72 percent from September 10 to November 19 of this year. We should also note that the money supply – whether measured by M1 or by MZM – has increased by less than 1 percent. Over the same period, this has been a very substantial increase in bank reserves. Much of what the Fed has been doing has been to accommodate this increase in bank reserves so as to avoid a fall in the money supply.
A Better Stimulus Plan
From a quarter millennium ago:
"that they deceived every man into his own ruin; and ruined the nation, to enrich the directors and themselves: They sold their own stock, and that of the directors, under false and fictitious names, contrary to the obligation of their bond to the City, which obliges them to declare the name of the seller to the buyer, as well as the name of the buyer to the seller; for they knew that no man would have been willing to buy, had he known that the brokers and directors were in haste to sell. Thus they used false dice, and blinded men’s eyes, to pick their pockets. “And surely, Mr. Ketch,” says the counsellor, “if he who picks a man’s pocket is to be hanged, the rogues that pick the pockets of the whole country, ought to be hanged, drawn, and quartered.”
Thursday, November 27, 2008
Matter and Antimatter: How to Create a Crisis: A Thanksgiving Rant
Skilled physicists do not know how to take nothing and turn it into matter and antimatter, but finance behaves as if it had the capacity to do something similar. Imagine a simple market economy about to create a bubble. I want to tell the story of this bubble, only to put the current, crazy stimulus package into perspective.
Somebody says to me they have a piece of paper worth $1 million. I can buy for half the price. I borrow the money to cover most of the cost. People are willing to lend me the money confident in the belief that my paper will increase in value. Other people are engaging in the same transaction, spreading confidence that these papers are now increasing in value, say to $600,000.
The seller of the paper now has a half-million dollars, having given up nothing but blank piece of paper. I have a capital gain of hundred thousand dollars. My lenders have a credit with a half-million dollars. We are all better off, even though nothing has been produced.
Feeling secure in the increasing value of our paper, I along with the other "investors" now start consuming more, spreading prosperity for the economy. Virtually everybody is enjoying the benefit of the bubble. Within a short period of time, people throughout the economy making decisions based on the increasing appearance of health and the economy.
At some point, people realize that this paper is nothing more than a blank sheet of writing paper. The bubble may have stimulated some investment that is capable of producing real economic benefits, but mostly it has induced people to consume and commit themselves to pay back debts.
Remember, this prosperity was built out of nothing. In the end, matter and antimatter collided. The lenders have lost their money. The speculators and consumers are in debt. Most lack the wherewithal to repay their debts. But in the case of the current bubble, the economy does not have the productive capacity to put everything together. The loans came from abroad and so did many consumer goods.
At the same time, the government loans are ultimately dependent on another set of loans, also largely from abroad. How will these loans ever be repaid? Will new loans keep coming as the bubble engulfs the rest of the world?
Should the government come in and give me a half-million dollars so that I can repay my loan? Should I be rewarded for my stupidity and naïveté? Will that policy really make the economy healthy? Or will it policy just facilitate the creation of even greater bubbles?
Obviously, the most sensible decision would be to put the money into making a more healthy economy, one less susceptible to speculation -- something impossible under capitalism, but that is another question. Eventually, somebody will have to pay the piper. The policy today seems to be an effort to shield the very people who created the crisis, placing the burden on the most innocent.
The graphic picture of the stimulus package that I posted yesterday suggests a government response just as foolish as the speculations that set off the bubble in the first place.
Happy Thanksgiving.
EU Economic Orthodoxy Stumbles On
In the same survey of stimulus planning, the NY Times reported on the latest EU fiscal initiative, which calls for contributions of 1.2% GDP on the part of most member countries. This infusion, which is much too small relative to the impending output gap, will still bump up against the Maastricht criteria. What to do?
The monetary affairs commissioner, Joaquín Almunia, said that countries that breached the deficit ceiling of 3 percent of G.D.P. would face official reprimands, but would be given longer than usual to bring their budgets back into line because of the exceptional circumstances.
In other words: we know the criteria are absurd under the current conditions, but we will pretend that they still apply.
The EU has been built on a grand compromise, a broadly progressive stance in social and environmental policy and rigid orthodoxy in economic affairs. As in the academic version, the left got the sociology department and the right was given economics, finance and business. It was a bad deal, since misguided economics can do damage faster than the social workers can clean it up. So now Europe has a central bank with hardly any lender of last resort tools and fiscal guidelines that all but rule out serious countercyclical measures.
The current economic crisis should be put to positive political use. You can’t have a “Social Europe” with double-digit unemployment. (You also can’t have a sustainable Europe without getting the economic part of sustainability in place.) There needs to be a shift within the economic regime, and not just in the balance between “economic” and “social” interests. As for fiscal guidelines, they need to be flexible enough to permit rational economic management, and they also have to be responsive to regional trade imbalances. In fact, to constrain fiscal deficits without managing trade aggregates is to put all the recycling burden on private debt, and we are still in the process of finding out where that leads.
China and the US: Stimulus vs Bailouts
In its latest roundup of crisis management from around the world, the NY Times discusses Chinese monetary policy initiatives. Cutting reserve requirements for banks seems counterintuitive to me, but perhaps there are aspects of banking in China that justify it. What really jumped out, though, is this:
To give banks an extra incentive to lend money instead of hoarding reserves, the central bank also lowered by 0.27 percentage points the interest rates that it pays banks for reserves deposited with it.
That does make sense, and it is exactly the opposite of policy in the US, where the Fed has raised the interest it pays on these reserves. But, of course, we need $400 billion in excess reserves to finance the bailout program, so that losses from bad investments can be transferred to the public. This is so much more important than getting new finance out into a frozen economy.
The Absurdity of the Stimulus Package
Here is a graphic from the Wall Street Journal regarding the size of the stimulus package.
2.5 Million Jobs IV
From: AFL-CIO American Federationist | November 1962, pp. 19-21.
ECONOMIC TRENDS & Outlook
CREATING JOBS THROUGH SHORTER HOURS
Employment Effects of Shorter Hours
If the workweek is shortened with no loss in pay, what effect will it have on unemployment? There is no firm answer nor can specific estimates be calculated reliably.
The answer depends in good part on how much the workweek is shortened, how and when it is done, how widely the reduction is applied—and on what other economic developments accompany it. Hours reduction will not take place in a vacuum; its effects necessarily are linked to whatever else is occurring before, during and after the reduction.
No one seriously considers it a magic solution to unemployment or the sole answer by itself. Its strongest advocates claim only that it is but one tool although a fundamental one.
There also are different views on whether its principal value is as a defensive or holding measure— one which prevents increased unemployment—or whether it is equally important as a stimulus, one which generates additional employment.
There is wide recognition, particularly at the individual plant level, that shortening of hours will help prevent layoff of more workers (“cutting hours means less cutting of men”). How effectively it does this depends largely on productivity changes and trends in demand.
The extent to which it will lead to hiring of additional workers is a more complex question. It depends on such factors as management attitudes and its judgment about future needs for labor, the level and trend in demand for the company’s products, the nature of its labor requirements and availability of appropriate types of workers in the area or elsewhere.
But under the most typical and likely circumstances, a company reducing its workweek by several hours ordinarily will have to immediately hire additional workers to provide those hours of work if it wants to maintain approximately the same output or service as before.
The longer-run effects then hinge on productivity movements and whether demand for its products increases sufficiently to enable savings from economies of increased production to finance continued payment to workers. In principle, the combination of the new hiring by this and other companies will build aggregate worker income and, in turn, demand for the products.
The pivotal question, of course, is to what extent, by serving to maintain and often to increase employment, shorter hours will be the dynamic new ingredient needed to bolster demand and increase it to the point where more and more companies have to expand employment further and thereby carry along an accelerating rate of economic and employment growth.
Although no reliable answers can be offered, some rough statistical estimates may be useful to show the potential magnitude and significance of hours reduction in relation to current unemployment levels.
Consider the most recent data available at the time of this calculation. Total employment of non-agricultural wage and salary workers in mid-1962 was 51.3 million (not counting the self-employed, domestic servants or unpaid family workers). Many of these workers (11.2 million) were on workweek schedules under 40 hours for various reasons. This left 40.1 million on workweeks of 40 hours or longer.
For every hour cut from the workweek of this fulltime wage and salary workforce, the number of new employees required to provide the same national total workhours is roughly one million. If 2.5 hours were cut from the workweek, the number of additional employees needed at a 37.5-hour week to maintain the same total workhours would be 2.7 million.
There obviously are many practical limitations in such calculations. It would not be feasible, for example, to reduce hours in all non-agricultural industries uniformly or at the same time.
There also are many factors affecting the actual number of new hires likely to take place immediately upon reduction of hours. The number of new hires would be reduced, for instance, to the extent that some companies made up lost hours by putting involuntary part-timers back on fulltime or by working present employees overtime. Another limitation on hiring is that reduced hours of present employees are not always directly replaceable by new employees. Much would depend on the extent to which work needed in the reduced hours coincided with the skills and geographical location of idle labor. Other significant factors also are involved, some making for even greater hiring. To the extent that new hiring occurs, for example, it would quickly increase demand and touch off additional production and hiring.
But even if the rough ratio of a 1-hour cut in the workweek to 1 million new jobs may be too high for practical purposes, it demonstrates the enormous potential of revision of the workweek as a force for enlarged employment.
If reduction took place for only half the fulltime non-farm workforce, for instance, the rough replacement ratio would be halved: One hour’s cut equals half a million new employed workers. A 5-hour cut to a 35-hour week for only half the workforce would release enough workhours for over 2.5 million jobs. [s-man: the punchline!]
What if similar rough calculations are made for manufacturing alone? There are roughly 14.3 million fulltime wage and salary workers on schedules of 40 hours a week or more (of 16.7 million total employment). The replacement ratio for a 1-hour cut in the workweek for these fulltime workers is 3 65,000 additional workers. For a 2.5-hour cut, it is 950,000 employees. For a 5-hour cut to a 35-hour week, it is over 2 million new employees.
In construction, comparable figures are more difficult to calculate because data on hours worked are often affected by weather and other factors. But very rough estimates indicate about 3 million construction industry workers are on workweeks of 40 hours or more. A 1-hour cut in their workweek would be equivalent to fulltime jobs for about 75,000 additional workers. A 5-hour reduction would be replaceable by over 400,000 new jobs.
In broad summary, then, reduction in hours without curtailment of weekly pay is looked to by the labor movement as a vital new tool to swing into action against excessive and rising unemployment.
Since 1953, after Korea, unemployment has doubled, from less than 3 percent then to nearly 6 percent today. For the decade ahead, with the labor force due to grow at a faster rate and advance in technology gaining momentum, unemployment is threatening to mount even more. If the economy does no better in creating new jobs in the 1960s than it did in the 1950s, the decade would close with an unemployment rate of nearly 10 percent—at least 7 to 8 million fully unemployed.
Wednesday, November 26, 2008
More from the NY Galbraith Conference
More from the Nov. 14 conference in New York organized by James Galbraith, as promised.
Bernard Schwarz called for the government to take over basic R&D for the Big Three automakers to come up with a truly green engine and to help reduce their expenses.
Bill Black supported bringing back the Glass-Steagall Act. I opposed this, but now seeing the collapse of Citibank am more open to the idea.
Pierre Calame called for the formation of regional monetary systems around the world.
Ping Chen called for a new relationship between the US and China in which the US would relax its restrictions on industries and firms that China can invest in, while China invests more directly in the building of US infrastructure and also in financially supporting its educational institutions.
George Papandreou, former foreign minister of Greece and president of the Socialist International, thanked James Galbraith for his father having saved the life of George's father, who was an economist and later prime minister, who was nearly executed by the junta. Papandreou called for a redistribution of wealth and power with green development to combat "barbarism on the planet."
(Happy Thanksgiving everybody)
So Shrink the Beast, Already!
by the Sandwichman
In the past, people trembled in fear of dragons, demons, gods, and monsters, sacrificing anything – virgins, money, newborn babies – to appease them. We know now that those fears were superstitious imaginings, but we have replaced them with a new behemoth: the economy. -- David SuzukiDavid Suzuki is the Canadian counterpart to Carl Sagan -- a renowned scientist turned TV and radio celebrity. He's also an outspoken environmentalist with his own foundation and a weekly column published in newspapers and magazines across Canada. In last week's column, Suzuki highlighted a new book by Peter Victor, Managing Without Growth: Slower by Design, Not Disaster.
A key element of Professor Victor's proposed low-growth economic strategy is reducing work time. Although the discussion of reduced work time doesn't show up until the final chapter, it is hard to imagine a viable alternative to endless economic growth without it. As Suzuki wrote in his column, "This current economic crisis provides an opportunity to re-examine our priorities." (See also the New Scientist on The Folly of Growth).
This current economic crisis... and the political transition in the US. Back in August the New York Times Magazine published an article by David Leonhardt on "Obamanomics." The dramatic climax appeared toward the end of the article when a press aide walked back to Leonhardt's seat on the Obama campaign plane to tell him that Obama had more to say.
"Two things," he said, as we were standing outside the first-class bathroom. "One, just because I think it really captures where I was going with the whole issue of balancing market sensibilities with moral sentiment. One of my favorite quotes is — you know that famous Robert F. Kennedy quote about the measure of our G.D.P.?"
I didn’t, I said.
"Well, I’ll send it to you, because it’s one of the most beautiful of his speeches," Obama said.
In it, Kennedy argues that a country’s health can’t be measured simply by its economic output. That output, he said, "counts special locks for our doors and the jails for those who break them” but not "the health of our children, the quality of their education or the joy of their play."
The second point Obama wanted to make was about sustainability. The current concerns about the state of the planet, he said, required something of a paradigm shift for economics. If we don’t make serious changes soon, probably in the next 10 or 15 years, we may find that it’s too late.
"Something of a paradigm shift for economics" would require a move away from economic growth for growth's sake. Otherwise, it wouldn't be much of a paradigm shift. Managing without growth necessitates the reduction of working time. Otherwise, unemployment and poverty will destroy social stability.
The Sandwichman would like to call attention again to his "American Vision", submitted to the change.gov transistion website, of a Shorter Work Time Jubilee.
Five versions of ‘truth’ for the Three Mile Island nuclear disaster.
I had a phone call from a member of the Australian Citizens' Electoral Council this morning. The CEC is the Australian arm of Lyndon La Rouche's group and, as such, this branch is also heavily involved in the promotion of the expansion of nuclear power across the globe. When I questioned the wisdom of promoting such a dangerous and unsustainable form of energy I was assured by the caller that the science surrounding nuclear power is sound. I decided to have yet another look at some of the studies done. To simplify, I focussed on those related to Three Mile Island and specifically on the way the exposure levels of radiation were determined. What I found was a divergence of 'objective' observations clearly at odds with each other. (References 3, 4 and 5 all refer to the one report, the 1990 Hatch-Susser study.]
Harold Denton, Director of the Office of Nuclear Reactor Regulation ““They are getting 63 curies per second…[in] the order of three times what they were yesterday, which would put us in the 1200 millirems per hour." [1]
Joseph M Henri Chairman of the Office of Nuclear Reactor Regulation: “To a distance of about five miles. I have got a reading. During one of these burst, releases up over the plant several hours ago, up over the plant about 1200 millirems per hour which seems to calculate out, by the time the plume comes to the ground where people would get it, would be about 120 millirems per hour. Now, that is still below the EPA evacuation trigger levels; on the other hand, it certainly is a pretty husky dose rate to be having off-site [2]
The American Nuclear Society: “in every instance, the level of exposure was deemed to be very low” – an average of approximately 10 millirems and projected maximum dose of 100 millirems. [3]
Jan Beyea (nuclear physicist involved in the Hatch-Susser study): He estimates the maximum was 200 millirems. He said the figure could be up to four times that much, but said that was "very, very unlikely." Average doses in the area northwest of the plant - the direction in which the radiation plume traveled - were about 28 millirems, he said….. Some of the gauges simply were not able to measure amounts as high as what was released, said Jan Beyea…"It was insane," Beyea said of the inadequate monitoring. "It was sort of a sign of the optimism that nothing would ever go bad." [4]
Text from the scientific abstract of the Hatch-Susser study as published in the American Journal of Epidemiology: “the model of accident emissions was validated by readings from off-site dosimeters.” [5]
It is alarming to witness the parallels occuring in the fields of enviromental monitoring with that of the pesticide industry. Industry and government technicians seek out the areas where toxins are most likely to be watered down and base their observations and conclusions on studies in those areas. The vulnerability of individuals to narrow swathes of intense bands of poisons is ignored completely.
At this juncture in time I believe that it is justifiable for one to conclude - on the basis of a long history of disasters and accidents - that nuclear technology has been truly tested 'in the field'. Like many other industrial sectors it has been found wanting and so have the associated regulatory and academic institutions. Governance has simply not kept pace with the dangerous technologies employed by the world's transnational corporations.
[1] Pittburgh Post-Gazette Monday, April 16, 1979. The newspaper published a special report from the Associated Press that included excerpts of tape recordings of the proceedings of the Nuclear Regulatory Commission including the transcripts of the taped voices of Harold Denton, Director and Joseph M Henri Chairman of the Office of Nuclear Reactor Regulation. Their voices were taped on 30th March 1979 as they responded to the enormous release of radioactive gases at the Three Mile Island nuclear power plant in the US. As published in ‘SECRET FALLOUT - LOW-LEVEL RADIATION FROM HIROSHIMA TO THREE-MILE ISLAND – Chapter 18 ‘Too Little Too Late’ by Ernest Sternglass.
http://www.ratical.org/radiation/SecretFallout/SFchp18.html
[2] Pittburgh Post-Gazette Monday, April 16, 1979. The newspaper published a special report from the Associated Press that included excerpts of tape recordings of the proceedings of the Nuclear Regulatory Commission including the transcripts of the taped voices of Harold Denton, Director and Joseph M Henri Chairman of the Office of Nuclear Reactor Regulation. Their voices were taped on 30th March 1979 as they responded to the enormous release of radioactive gases at the Three Mile Island nuclear power plant in the US. As published in ‘SECRET FALLOUT - LOW-LEVEL RADIATION FROM HIROSHIMA TO THREE-MILE ISLAND – Chapter 18 ‘Too Little Too Late’ by Ernest Sternglass.
http://www.ratical.org/radiation/SecretFallout/SFchp18.html
[3] Health Studies Find No Cancer Link to TMI. From the American Nuclear Socity website. Accessed on 26th November 2008.
http://www.ans.org/pi/resources/sptopics/tmi/healthstudies.html
[4] Gaps in research have angered some who were there in 1979
TOM AVRIL / Philadelphia Inquirer 26mar04
http://www.mindfully.org/Nucs/2004/Three-Mile-Island26mar04.htm
[5] American Journal of Epidemiology Vol. 132, No. 3: 397-412
Copyright © 1990 by The Johns Hopkins University School of Hygiene and Public Health
research-article
CANCER NEAR THE THREE MILE ISLAND NUCLEAR PLANT: RADIATION EMISSIONS
MAUREEN C. HATCH1,, JAN BEYEA2, JERI W. NIEVES1 and MERVYN SUSSER1,3
http://aje.oxfordjournals.org/cgi/content/abstract/132/3/397
1Division of Epidemiology, Columbia University School of Public Health New York, NY
2National Audubon Society New York, NY
3Gertrude H. Sergievsky Center, Columbia University New York, NY
2.5 Million Jobs III
From: AFL-CIO American Federationist | November 1962, pp. 19-21.
ECONOMIC TRENDS & Outlook
CREATING JOBS THROUGH SHORTER HOURS
The Government’s Role
The government could encourage bargaining to reduce hours, set an example by adjusting hours on government work and/or enact new workweek legislation. A positive policy would require specific announcement that the Administration would not discourage reductions in hours and would welcome this, at least in particular industries, as one of the variety of measures individual industries might use to bolster employment security.
Setting an example, in its role as an employer as it has done in the past. would require establishment of new reduced workweeks for employees to serve as an experiment and broad guide for private industry. It is worth noting that about a third of U.S. municipal governments already have fulltime workweek schedules shorter than 40 hours for their administrative and clerical employees.
New workweek legislation could of course take many forms. The principal approaches suggested have called for a reduction in the 40-hour standard established by the Fair Labor Standards Act, either immediately or in several steps spread over a period of time and either uniformly for all covered industries or through a special industry committee procedure functioning on an industry-by-industry basis. Each of these alternatives has some past legislative precedent.
Another major suggested legislative approach is a flexible workweek to be adjusted according to changes in the unemployment rate. A federal fund financed by a tax on employers could be established to help maintain weekly pay and national consumer purchasing power upon such reduction in hours. If the payments from the fund were scaled according to whether the employer hired more workers when he reduced hours, there would be an additional incentive for increased employment.
Tuesday, November 25, 2008
The Return of Rubinomics
As the President-elect announced the appointment of Peter Orszag as head of OMB, he said something that might cheer up those deficit hawks:
In these challenging times, when we are facing both rising deficits and a sinking economy, budget reform is not an option. It is an imperative," Obama said in the statement. "We cannot sustain a system that bleeds billions of taxpayer dollars on programs that have outlived their usefulness, or exist solely because of the power of a politician, lobbyist, or interest group," he said. Obama said he would ask his economic team to "think anew and act anew" to meet new challenges. "We will go through our federal budget -- page by page, line by line -- eliminating those programs we don't need, and insisting that those we do operate in a sensible cost-effective way," Obama said.
Rubinomics – at least as I understood it – meant that we accelerate Federal spending in the midst of a recession but tell Wall Street over the long-term, we are serious about long-term fiscal restraint. We might also give tax cuts to liquidity constrained people such as the working poor but raise taxes on those who are not liquidity constrained – such as Bill Gates and Warren Buffet. In other words, short-term fiscal restraint to actually REDUCE national savings with some assurance to Wall Street that once this recession is over, we restore a commitment to increasing savings and investment.
While John Taylor seems confused about this one, Paul Krugman gets it:
Thus, John Taylor — a very good economist, when he wants to be — insists that we must respond to the economy’s temporary weakness with a permanent tax cut. Let us reason together. Does it make sense to let one recession dictate tax policy in perpetuity? What happens if there’s a boom; can we increase taxes (no, because then the cut wouldn’t have been permanent.) What if there’s another recession? Do we permanently cut taxes again? Is there a tax-cut ratchet (or maybe racket)? Think this through, and it makes no sense at all. And Taylor’s argument against the obvious answer — government spending as stimulus — is pure gobbledygook
In just a few weeks, we will finally have a President who also gets it even if that lame duck never did.
Greg Mankiw on Obama’s Fiscal Stimulus Proposal
Does Greg Mankiw have a good point here:
Dividing one number by the other, that works out to $280,000 per job. What is going on here? Logically, it must be one of three possibilities: 1. The fiscal stimulus is going to be much smaller than is being reported. 2. The new administration is setting a low bar for itself when it comes to job creation. 3. The Obama team believes in very small fiscal policy multipliers.
Greg is reviewing to this:
Facing an increasingly ominous economic outlook, President-elect Barack Obama and other Democrats are rapidly ratcheting up plans for a massive fiscal stimulus program that could total as much as $700 billion over the next two years ... Obama has set a goal of creating or preserving 2.5 million jobs by 2011.
To be fair, I praised the size of the proposed stimulus and I also wondered why there was such a low bar for job creation over the first two years.
But let me suggest an alternative explanation (as opposed to low multipliers) based on something the President-elect has said about things getting worse before they get better. Could it be that his economic team expects employment to fall even further before this proposed stimulus turns things around? For example – suppose we wake up in the New Year to an 8 percent unemployment rate which would translate into about 3.5 million jobs lost. To get a net increase of 2.5 million new jobs would mean we would have to see 6 million jobs created over the next two years. If the actual fiscal stimulus were $500 million, then we are talking about $83 thousand not $280 thousand. And the implied multiplier would be closer to 1.2 not 0.36.
An Appeal to Reason on Iran
On November 21, the inimitable Juan Cole (http://www.juancole.com) posted an appeal from 20 experts on Iran from both parties with a variety of backgrounds, including three ambassadors, for a more reasonable policy on Iran. One should go to his site to see the full discussion, but the highlights are five recommendations and the deconstruction of eight myths. I list them without details. Cole called for others to publicize this, and so I am doing so here a few days late, and making clear my agreement with and support of this appeal.
The five recommendations:
1) Replace calls for regime change in Iran with a long term strategy.
2) Support human rights through effective international means.
3) Allow Iran a place at the table in determining the future of Iraq and Afghanistan, along with other key states.
4) Address the nuclear issue within the context of a broader US-Iran opening.
5) Re-energize the Arab-Israeli peace process with the US being an honest broker.
The eight myths:
1) President Ahmadinejad calls the shots on foreign and nuclear policy.
2) The political system in Iran is frail and ripe for regime change.
3) Iranian leaders' religious beliefs render them undeterrable.
4) Iran's current leaders are implacably opposed to the US.
5) Iran has a declared intention to attack Israel to "wipe Israel off the map."
6) US sponsored "democracy promotion" can help bring true democracy to Iran.
7) Iran has clearly and firmly committed to developing nuclear weapons.
8) Iran and the US have no basis for dialogue.
2.5 Million Jobs II
From: AFL-CIO American Federationist | November 1962, pp. 19-21.
ECONOMIC TRENDS & Outlook
CREATING JOBS THROUGH SHORTER HOURS
The relative merits of alternative economic approaches are not evaluated here. The points below may be useful, however, in assessing the wisdom of hours reduction as against other measures generally:
1. Shortening of hours does not need pinpoint timing for full effectiveness but is practicality and value diminish once a full-fledged recession is in process. The workweek can best be reduced with no loss in weekly pay while the economy is still comparatively prosperous, before unemployment pressures have mounted to become the dominant economic force. If the shorter hours tool is held in reserve too long and turned to only after the full shock of recession or immense load of unemployment arrives, its practicality and positive benefits will be severely blunted. Shorter hours would likely come then largely in an undesirable worksharing, cut-wage form force by overwhelming unemployment and would not be adequate to the task of contributing substantial momentum to employment upturn.
2. Advocacy of shorter hours does not mean rejection of other measures to increase employment. The choice need not and should not be an either/or proposition. Reduction of hours should be one of many steps applied to control unemployment, with the size of the reduction determined by the effectiveness of the overall program. If other measures prove effective in providing needed jobs, hours reduction can of course proceed more gradually.
3. Shorter hours are increasingly recognized by most workers and the public generally as directly related to the unemployment problem. This is not true to the same extent for other measures, such as government fiscal or monetary policies. Because so many workers would be directly or consciously involved in a general shortening of hours, there likely would be a wide sense of participation and appreciation of the anti-unemployment campaign, with accompanying psychological benefits for the economy.
4. Many of the collective agreement and government measures used to ease unemployment effects are geared to helping the unemployed worker hunt for a new job. These include private public retraining programs, relocation aid, counseling, severance pay and approaches. A major objective of shorter hours, on the other hand, is to reduce the need for layoffs and thereby encourage retention of workers in the type of work and industry to which they are already attached and in which they have already acquired training.
5. There is rather wide recognition that rapid technological strides will enable or force radically shorter hours at some point in the future, perhaps not all distant. Reduction in typical hours of work in the present period are necessary to aid in the economic and social transition to increased reliance on technology in place of manpower.
Monday, November 24, 2008
1979: A Warning and a Prophecy for America
"Washington must realize that the dollar can no longer act as the sole reserve currency in the world. The dependence of the world on the dollar is not a blessing but a curse for America."
.....Nobody knows how Turkey Zaire, Peru and many other impecunious countries will ever pay back their loans to Citibank, Chase or the rest of the big U.S. lenders. The debtor countries, pleading poverty, could indefinitely defer repayment. Then the Federal Reserve Board would have to cover those bad debts, meaning that the U.S. taxpayer would finance the bailout. Says Zombanakis: "We have created a system in which almost the entire debt of the world rests on the Federal Reserve."[1]
These are the words of 'gunslinger' loan shark that sold syndicated loans [2] to the third world at an astronomical rate, according to economic historian and author Michael Moffitt [3].
"...Zombanakis did not invent the syndicated loan, but he is the one who put real flesh and blood in the market. Zombanakis brought numerous countries to the market who had never borrowed in international money markets before. Jetting around the world he dropped in on companies and finance ministries drumming up loan business for Manufactures Hanover, in the late 1960s when the Shah of Iran was virtually unknown outside the Middle East, he was introduced to Europe’s banking elite by Minos Zombanakis. As one banker told ‘institutional investor’ Zombanakis almost single-handedly got Manufacrturers to make a loan to Iran when it did not even have enough reserves to cover a month’s imports.” Loans like these were extremely risky and were sold more on Zombanakis’ bravado than on Iran’s credit-worthines...."[4]
[1]
The Saudis and the Dollar
By Marshall Loeb. Monday, Mar. 26, 1979
http://www.time.com/time/magazine/article/0,9171,916691,00.html
[2] "Rather than assuming the whole risk of, for example, a $100 million loan to Mexico, the lead bank will telex a hundred others and offer them a piece of the loan. Syndicated loans are priced at the going interest rate, known as LIBOR, (London Inter-Bank Offered Rate) plus a margin known as a spread, which is inevitably proportional to the perceived creditworthiness of the borrower. For years, Brazil borrowed a tiny fraction over LIBOR. Once bankers got wind of Brazil’s smoldering debt problems, its spreads quickly soared over 2 percent. "‘The World’s Money – International banking from Bretton Woods to the brink of insolvency’ by Michael Moffitt. Touchstone Book, Simon and Schuster New York. 1983. ISBN: 0-671-50596-3 Pbk.
[3] ‘The World’s Money – International banking from Bretton Woods to the brink of insolvency’ by Michael Moffitt. Touchstone Book, Simon and Schuster New York. 1983. ISBN: 0-671-50596-3 Pbk. Pages 57 - 61
[4] ‘The World’s Money – International banking from Bretton Woods to the brink of insolvency’ by Michael Moffitt. Touchstone Book, Simon and Schuster New York. 1983. ISBN: 0-671-50596-3 Pbk. Pages 57 - 61
Is the US Treasury Getting too Big to Fail?
For an administration based on an ideology of untrammeled capitalism and which demands that all socially useful programs meet cost-benefit calculations heavily tilted toward inaction, the government seems to be getting little bang for its buck. Here is a Bloomberg estimate of a commitment of $7.7 trillion. Yes, the government can recoup some of this money, but probably not a lot.
Pittman, Mark and Bob Ivry. 2008. "U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit." Bloomberg.com (24 November).
The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.
The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.
[...]
The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun Oct. 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started Oct. 14.
Mutual Aid
Recently, I was talking with a bunch of other parents of teens who have high-functioning autism.* We were talking about the massive cut-backs in public services that have been happening and loom on the immediate horizon.
But the dark cloud may have a silver lining. Here in California, it seems, parents spend tremendous amounts of time and effort on the phone and in meetings (due process, etc.) hassling with the care-givers and -financers in order to get appropriate services or something reasonably close to it. In other places (such as Australia or most of the U.S.), it seems, many fewer publicly-provided services are available. But this (bad) situation can encourage a positive response: while in California, the state-sponsored Regional Center used to provide services such as "respite care" (time away from the damned kid), in other places, the parents pool resources to provide respite care to each other. There's less time spent hassling the care-givers and -financers, because they don't do much if anything.
This kind of "mutual aid" (a concept central to libertarian socialist or anarchist thought, according to the Wikipedia) can be immensely liberating. However, I can imagine that a lot of time and effort can go into hassling other participants if feelings of solidarity are weak. If successful, this mutual aid can promote feelings of solidarity, encouraging a virtuous circle. In the US in the 19th century, labor unions were much more involved with this type of activity (in burial societies, providing unemployment insurance) than they are today (where the Andy Stern business union model of dues extraction seems the rule).
If the current recession turns into something more serious, it could combine with the longer-term trend of public-service cut-backs to encourage more mutual aid. This might in turn be the basis for broader "grass roots" political movements, independent of the political establishments (the two-party duopoly).
On the other hand, people might look to (soon-to-be) President Obama as the source of all solutions, sticking to the atomizing electoral model of politics. The latter can have the benefit of providing standardized public services. On the other hand, decentralized mutual aid tends to produce a division between groups having different amounts of income and health, belonging to different ethnic groups, etc. It does not seem to encourage mass grass-roots participation, except in short-lived waves.
I don't know what's going to happen to the economy (though it sure looks bad). What's going to happen with the society is even more difficult. With incomes falling along with public services, people could be driven into each others' arms (mutual aid). On the other hand, we may be split up into warring communities or praying that our benevolent leaders will solve our problems. Ideally, we could see the rise of new mass movements that would change the balance of political power, shifting it to the left, in favor of justice.
* It's the kids who have it, not the parents. That ambiguity is a problem with the "PC" language that prescribes "a person with a disability" to replace "a disabled person." I'm generally in favor of that "person first" language, by the way, because in the latter case the person is identified with the disability instead of having the disability seen as contingent.
--
Jim Devine
Deflation!
Some people in the media are freaking out about the possibility of steadily and/or steeply falling prices, i.e., deflation. So I figured out what kind of deflation was currently being expected by those in financial markets.
I calculated the expected inflation rate implied by the difference between the rates on constant-maturity non-indexed 5-year government bonds and the inflation-indexed version of the same bonds. This number was steady at between 2 and 3 percent per year from 2003 to early July of 2008, which in general fits with the inflationary experience of the time. Then, there was a sudden fall. (What happened on July 2 or thereabouts?) As of November 20, it was –1.79%!! It's not just the media. The finance types are also freaking out.
Why is deflation a bad thing? Part of it is if people expect prices to fall, they delay purchases. Also, if prices are falling steadily, people don't want to borrow because the real value of their debts would rise. It's the opposite of the case of the inflationary 1970s, when people wanted to borrow a lot because the debts would lose value over time.
In looking at loans economists use the "real" interest rate, which is the nominal or money interest rate minus the expected inflation rate. Suppose I pay 4% interest on a loan. At the same time, inflation is barreling along at 2% per year and I expect it to do so in the future. That means the money I'm paying my loans back is losing 2 percent of its purchasing power each year. Thus, I subtract the inflation rate (2%) from the nominal rate (4%) to get the real rate, the interest rate in constant purchasing-power money (2%).
If the inflation rate that people expect goes from 2% per year to -2% and the interest rates appearing on loan agreements stays put at 4%, the real interest rate rises from 2% to 6%. And it's this rate that counts in determining decisions. The nominal rate can fall, of course, counteracting this. But it can't fall below 0. After that, increasing rates of deflation mean rising real rates.
Rising real rates make the recession worse by discouraging borrowing and spending. Recession then encourages further deflation. It can be a vicious circle.
It’s more than a matter of expectations. If people are locked into long-term loans with constant nominal interest rates and amortization rates on principal, and if nominal wages and salaries generally fall with prices, that means that debt service rises relative to wages due to deflation. If general enough, this phenomenon encourages bankruptcy.
Key to the last paragraph is the assumption that nominal wages and salaries fall with prices. A “true” deflation can be distinguished from a minor one by saying that in a true one, we see a wage/price spiral going downward. If wages and salaries don’t fall as quickly as prices, on the other hand, a mild deflation causes profit squeezes. Both are unpleasant in a capitalist economy.
--
Jim Devine
Tyler Cowen on Investment During the 1930’s
Tyler Cowen has been busy opining on macroeconomic policy during the 1930’s including a November 23rd NYTimes oped critiqued by Econoclast but let us turn attention to Tyler’s critique of what Brad DeLong had to contribute. While I am grateful that Tyler pointed out my graph of net investment, I’m puzzled by this:
Only in 1941 did net investment exceed its 1929 level. Here's a chart which seems consistent with these claims and which shows the difference between the net and the gross series for investment. The waves are very similar but at different absolute levels. Can any readers explain what is going on In this time period, using this data, is net or gross investment a better indicator of recovery and economic conditions? Is the pro-New Deal claim that making net investment "less negative" (but still negative) counts as a success or rather that the gross investment series is what matters?
Whether one uses gross investment as Brad did – or net investment as I did (given the George Will tirade) – the measured increase in investment demand was roughly the same. So Tyler’s first question seems silly from a Keynesian perspective, while the answer to his second question is YES.
One might be wondering why I choose to graph exports (EX) minus imports (IM) as a share of GDP (all series in real terms) for the more recent years in a post about net investment during the 1930’s, but this is by way of an analogy. We have had negative net exports (NX) for quite a long time but we are not shy about saying how an increase in export demand had been fueling economic recovery until recently. So I do not see anything odd about Brad showing us gross investment without including the depreciation chart.
Now if Tyler wants to lament that the capital stock fell during the 1930’s, he has a point but a very different point. Incidentally, the net financial wealth of the U.S. has also been eroding during this prolonged period of current account deficits.
Globalised banking 1944 - 1983
The following flow chart describing developments in the global banking and finance industry between 1944 and 1983 has been mostly compiled from information provided in Michael Moffitt's 1983 book 'The World's Money - International banking from Bretton Woods to the brink of insolvency'[1]. The common theme is clear; that the form of globalisation that has taken place over those decades has been largely determined by (mostly) western transnational corporations and with one overriding goal - worldwide profit maximisation.
Bretton woods (1944). -->The birth of the Eurodollar (1949) --> accelerating concentration of industry and banking --> American, Japanese and European corporations extend their global reach. --> the spectacular rise of the intracorporate (nonmarket) economy of the global oligopolies --> increasing intervention of government into the “private sector”--> A common tilt in investment and speculative decisions. US pressures European countries to restore convertibility of their currencies under the provisions of Bretton Woods (1958) --> Marked speculation in currencies begins with the re-emergence of hot money --> Development of the Euromarket (mid 1960s) --> a new generation of young bankers with the desire to go global. --> desire to build a global bank free of government regulation. US government prohibited interest on chequing accounts --> corporations and wealthy individuals transferred money out of these accounts and into financial products that earned interest (eg Treasury securities) --> banks forced to find new ways to attract corporate savings to stop the drain of funds --> negotiable certificates of deposits invented (CDs) by Walter Wriston of Citibank. --> banks bid competitively for corporate funds. --> the Euromarket undermines domestic monetary policy (1966). The 1973 oil shock [usury?] --> Petrodollar recycling 1973 --> bankers court the Saudis for deposits and conglomerate international banks try to drum up loan business from the 3rd world --> syndicated loans -->Growth of 3rd World debt --> Debt extended with eye to natural resources --> Interbank market--> Vast new opportunities to wheeler deal on a global scale --> Governments lose influence over events -->A regime of floating exchange rates is midwifed by massive speculation against the US dollar (1975)--> Despite the IMF the banks soon take over the business of lending to governments --> No way of recognizing a loss on a sovereign loan [Usury] -->European, Japanese and Arab banks take US share of global finance --> East-West Trade increased dramatically. Meaner terms are implemented on 3rd World loans [Usury]--> further debasement of credit standards in loans to 3rd World --> new forms of big business emerge in advisory role on loan reschedules to the 3rd World --> US Government bail out banks that made irresponsible loans to the 3rd World --> House of cards --> Global debt crisis now permanent. Usury in the form of extraordinarily high interest rates is institutionalized to preserve dollar hegemony (Volker, Oct 1979 ) --> IMF is now a supranational agency intervening in domestic politics --> Zero coupon bonds created by banks to avoid Government tax on interest. -->Economic and social disaster in poor countries (1983) --->
“…In the short run, the challenge of the global corporation concerns stability; in the long run, development. There has never been a time since the Great Depression when there has been more economic uncertainty around the world [1974]. But the corporate prospect of a world without borders offers something more distressing than uncertainty. It is a vision without ultimate hope for a majority of mankind. Our criterion for determining whether a social force is progressive is whether it is likely to benefit the bottom 60 percent of the population. Present and projected strategies of global corporations offer little hope for the problems of mass starvation, mass unemployment, and gross inequality. Indeed, the global corporation aggravates all these problems, because the social system it is helping to create violates three fundamental human needs: social balance, ecological balance, and psychological balance. These imbalances have always been present in our modern social system; concentration of economic power, antisocial uses of that power, and alienation have been tendencies of advanced capitalism. But the process of globalisation, interacting with and reinforcing the process of accelerating concentration, has brought us to a new stage…” [1]
[1]‘The World’s Money – International banking from Bretton Woods to the brink of insolvency’ by Michael Moffitt. Touchstone Book, Simon and Schuster New York. 1983. ISBN: 0-671-50596-3 Pbk.
[2]‘Global Reach – The power of the multinational corporations’ by Richard J Barnet & Ronald E Muller. Simon and Schuster1974. SBN 671-22104-3 Paperback. Page 364
Significant Stimulus ASAP
Jack Tapper reports some good news:
Democratic sources tell ABC News that President-elect Obama's transition team is working with lawmakers on Capitol Hill so that on Obama's first day in office, Jan. 20, 2009, an economic stimulus package has passed both houses of Congress and is awaiting his signature … On Monday morning in Chicago, Obama will introduce key members of his economic team -- Geithner and soon-to-be National Economic Council director Larry Summers -- and will reiterate what he said in his Saturday weekly radio address: that he will push for a massive stimulus package proposal, one much larger than the $175 billion he proposed as a candidate, perhaps as high as $500 billion.
The story continues by noting that some Democratic officials argue that $500 billion might be too pricey and would invite a GOP filibuster. What – recessions are costless? My only complaint is that we can’t have this stimulus before Obama takes office. Then again - Gail Collins has an excellent idea:
Thanksgiving is next week, and President Bush could make it a really special holiday by resigning ... Putting Barack Obama in charge immediately isn’t impossible. Dick Cheney, obviously, would have to quit as well as Bush. In fact, just to be on the safe side, the vice president ought to turn in his resignation first. (We’re desperate, but not crazy.) Then House Speaker Nancy Pelosi would become president until Jan. 20. Obviously, she’d defer to her party’s incoming chief executive, and Barack Obama could begin governing. As a bonus, the Pelosi presidency would put a woman in the White House this year after all.
A Greenspan Moment for Summers
So Larry Summers will return to government in a key role on Obama’s economic team. It is said that he has a new outlook, less enamored of markets, more concerned with the fate of the bottom 90%. Fine. I’m all for a second chance, or a fifth or twelfth for that matter. I just want to see a Greenspan moment, with Larry facing the cameras and saying “I was wrong. Not just about a few small things or for a short time. I was wrong about the main thing, the idea that markets can be relied on to regulate the economy in the public interest, and I remained wrong throughout my earlier career in government. I cannot undo all the mistakes I made, but by acknowledging them I hope I can convince you I have learned from that experience, and that I will approach the crucial decisions before us with an open, humble and non-doctrinaire mind.”
I feel petty, oh so petty.
On the Genealogy of Moralism
Once upon a time, the left (or most of it) thought they had history all figured out: they could interpret day-to-day politics in light of the tectonic shifts in social formations, and they had an endpoint to aim at, a model of an alternative, noncapitalist economic system. For some, this became an excuse for amoralism, the notion that the glorious revolutionary ends justified actions that would be morally repugnant by any other yardstick. The intellectual reflections of this amoralism, the writings on this topic by Trotsky, Merleau-Ponty, Fanon and the rest, are now seen as little more than an embarrassment.
Today the problem is more likely to be the reverse. Lacking a convincing view of history or the potential transformation of the existing order—in other words, lacking the basis for a systematic strategy—activists on the left are at risk of embracing an extreme moralism. If we don’t know how to change society, at least we can separate ourselves ethically: we can be the good people in an evil world.
So much political debate today has the unspoken premise, “How can I protect myself from being guilty?” Not in my name, they say, although the horrors are no less when some other name is invoked. Actually, wanting to not be guilty is a fine emotion, but it should be a springboard to effective, strategic action, not a politics of personal virtue.
Don’t Nationalize the Banks
In the latest issue of The Nation, Bill Greider expresses what has become the mantra of the left at this moment of high fiscal drama: nationalize the banks. Rather than just injecting passive capital, we are told to take a decisive position in common (voting) stock, so we can change the management, put our foot down on compensation, and generally change the whole modus operandi. It sounds very radical, harking back to the days when socialists saw nationalization of the commanding heights of the economy as the first step toward nationalization of the minor peaks, foothills and ultimately just about anything above sea level.
But it’s a bad idea. If you want the banks, you can have them. After the hammering they’ve taken in the market the last few months, their combined capitalization is a tiny fraction of the Fed’s new, gunky portfolio. And there’s a reason: they’ve got a solvency gap of trillions of dollars. Buy a bank and its liabilities are now yours. If you happen to be the US government, your full faith and credit is on the line for every penny.
There is nothing radical, not to mention equitable or practical, about underwriting the vast quantities of dubious financial instruments that metastasized during the past decade. You want a publicly owned and managed bank to lend against the tide and finance reconstruction? Start a new one.
2.5. Million Jobs I
Today, I'm posting the first installment of a four-part serialization of an article from the 1962 AFL-CIO newsletter, The American Federationist. See also Unions, Unemployment and Shorter Hours.
From: AFL-CIO American Federationist | November 1962, pp. 19-21.
ECONOMIC TRENDS & Outlook
CREATING JOBS THROUGH SHORTER HOURS
Most opposition to the idea of attacking unemployment by shortening the workweek without loss of pay is based on the view that other policies are more efficient or otherwise more desirable ways of meeting the unemployment problem.
The case for shorter hours does not rest on the notion it is the best way. It is based rather on the view, supported by ample evidence in the past decade of mounting unemployment, that: (1) other economic measures to achieve full employment are not being applied and perhaps cannot be applied; and (2) even if other economic policies are successful in stimulating greater growth in the period ahead, the rate of advance in technology and other labor-displacing changes is gathering such momentum that, unless part of the gains in efficiency are distributed in reductions in hours, it is virtually inevitable that it will show up in persistent and increased unemployment.
Organized labor has not made shorter hours its first choice in the campaign against unemployment. Its first choice has been to apply its most vigorous efforts, all through the last decade, for a range of other public and private actions to stimulate a more rapid rate of economic growth. Shortening of hours has been discussed periodically but a major drive has been held off as a "last resort."
Unemployment has been mounting steadily and is threatening to increase further because of automation and other technological innovations and because of the increased rate of labor force expansion due in the mid-1960s as postwar babies enter the job market. The economic programs relied on thus far to expand economic growth and job opportunities have been inadequate. Additional programs discussed as preferable to shorter hours -- most notably tax reduction, reform of the tax structure, marked expansion in public investment and an eased monetary policy -- are not being put into effect. To oppose hours reduction on the ground that other approaches are sounder and then to fail to apply them is not an acceptable course of action.
Sunday, November 23, 2008
The 18-Hour Workweek
by the Sandwichman
What if, sixty years ago, we had collectively decided to take 1/2 of all future productivity gains as more and better goods and services and 1/2 as reduced hours of work? We would now be working full-time jobs of three days a week, six hours a day -- the 18-hour workweek. And we would have reached that point around 10 years ago.
Of course, my calculation assumes that everything else would have remained the same, which is unlikely. The reduction of working time would have stimulated more rapid technological innovation as well as direct productivity gains from a better rested, healthier, better-educated workforce. Furthermore, the limitation of growth of consumption could have led to a focus on wiser, less wasteful consumption.
A neo-Monetarist perspective on FDR
The conservatives chime in with their vision of the Great Depression and FDR's response. And I clash my cymbals in reesponse, as shown in bold-face. His headlines are in italics.
The New York Times / November 23, 2008
Economic View
The New Deal Didn't Always Work, Either
By TYLER COWEN
MANY people are looking back to the Great Depression and the New Deal for answers to our problems. But while we can learn important lessons from this period, they're not always the ones taught in school.
The traditional story [by whom?] is that President Franklin D. Roosevelt rescued capitalism by resorting to extensive government intervention; the truth is that Roosevelt changed course from year to year, trying a mix of policies, some good and some bad. It's worth sorting through this grab bag now, to evaluate whether any of these policies might be helpful.
If I were preparing a "New Deal crib sheet," I would start with the following lessons:
MONETARY POLICY IS KEY As Milton Friedman and Anna Jacobson Schwartz argued in a classic book, "A Monetary History of the United States," the single biggest cause of the Great Depression was that the Federal Reserve let the money supply fall by one-third, causing deflation. Furthermore, banks were allowed to fail, causing a credit crisis. Roosevelt's best policies were those designed to increase the money supply, get the banking system back on its feet and restore trust in financial institutions.
This is simplistic, to say the least: the adherence to the gold standard (until 1933) prevented the use of monetary policy to stimulate the economy, while banks opposed such policies. The dominant view of the monetary establishment at the time (the Fed's Board, including the Secretary of the Treasury, Andrew Mellon) was that the economy would recover automatically after purging imbalances from the economy. In other words, the Milton Friedmans and Tyler Cowens of that day did not want to use monetary policy. Nature would take its course, automatically solving the economy's problems. The gold standard was part of the solution, not part of the problem.
(These folks were "Austrian" in their temperament: the 1929-33 recession was simply punishment for the sins of over-expansion during the 1920s. Expiation was needed. Interestingly, there are a lot of so-called "Austrian" economists where Cowen teaches. I wonder it he's arguing against them.)
In addition, this story ignores the steep fall in fixed investment and exports in the 1930s, which could not have been counteracted easily: fixed investment is hard to stimulate when unused capacity and/or debt is large (and expectations are pessimistic), while exports are hard to encourage when there's a trade war going on.
Once deflation hits, expansionary monetary policy loses its usefulness. Nominal interest rates can't go below zero, while falling prices raise the real interest rate. When real interest rates (which are what counts in affecting the economy's path) rise, that encourages recession. BTW, this problem is currently on the horizon, cramping Bernanke's style.
MF and A.J. Schwartz's Big Book is totally descriptive, by the way. It's not very analytical at all. They really don't posit any understanding of how the money supply affects the economy or how the Fed controls the money supply. They don't look at the political economy of the era at all. (Along with Capitalism and Freedom, the book is worshiped by the Chicago-schoolers like Cowen. This fits the way that MF is seen as their prophet and the free market as their one true God.)
A study of the 1930s by Christina D. Romer, a professor at the University of California, Berkeley ("What Ended the Great Depression?," Journal of Economic History, 1992), confirmed that expansionary monetary policy was the key to the partial recovery of the 1930s. The worst years of the New Deal were 1937 and 1938, right after the Fed increased reserve requirements for banks, thereby curbing lending and moving the economy back to dangerous deflationary pressures.
The economy was also stimulated by government deficits at the time. It's a mistake to look for only one cause. However, Romer is a good economist, whose research shouldn't be rejected before reading it.
Today, expansionary monetary policy isn't so easy to put into effect, as we are seeing a shrinkage of credit and a contraction of the "shadow banking sector," as represented by forms of derivatives trading, hedge funds and other investments. So don't expect the benefits of monetary expansion to kick in right now, or even six months from now.
Still, the Fed needs to stand ready to prevent a downward spiral and to stimulate the economy once it's possible.
Gee, isn't it doing so already?? Where has Cowen been?
GET THE SMALL THINGS RIGHT It's not just monetary and fiscal policies that are important. Roosevelt instituted a disastrous legacy of agricultural subsidies and sought to cartelize industry, backed by force of law. Neither policy helped the economy recover.
It was Hoover who started the ag. subsidies, while if expansionary fiscal and monetary policy aren't being used (as they weren't), cartels and the like prevent deflation, which was a total disaster. Cowen wants to put all the weight on monetary policy, it seems. Cartels aren't pretty, but they may have been what more sophisticated economists than Cowen call "second best" solutions. That is, when real-world markets don't work as desired and are not likely to work well in the near future, adding non-market elements (what Cowen would call "imperfections") can actually be beneficial. This is well-known to economists outside of George Mason University.
I'm no fan of agricultural subsidies, but why are they "disastrous"? more disastrous than the Depression itself? They seem to be so horrible because Cowen is comaparing an imaginary Eden of the Perfect Market to the one sullied by the Snake of subsidies.
He [FDR] also took steps to strengthen unions and to keep real wages high. This helped workers who had jobs, but made it much harder for the unemployed to get back to work. One result was unemployment rates that remained high throughout the New Deal period.
This is silly! Serious macroeconomists know that the main factor determining employment in a depression is aggregate demand and the amount of production, not the wage. Suppose real wages fall, as Cowen recommends. Why would an employer hire more workers, if the extra output can't be sold??
In any event, falling wages make matters worse on the demand side, as Keynes pointed out. Among other things, falling wages cause deflation, which even Cowen admists is a bad thing, encouraging depression.
Today, President-elect Barack Obama faces pressures to make unionization easier, but such policies are likely to worsen the recession for many Americans.
That's Cowen's opinion; he's anti-union.
DON'T RAISE TAXES IN A SLUMP The New Deal's legacy of public works programs has given many people the impression that it was a time of expansionary fiscal policy, but that isn't quite right [as has been known for a very long time, i.e., since E. Cary Brown's path-breaking research]. Government spending went up considerably, but taxes rose, too. Under President Herbert Hoover and continuing with Roosevelt, the federal government increased income taxes, excise taxes, inheritance taxes, corporate income taxes, holding company taxes and "excess profits" taxes.
Right. We should note, however, that raising taxes and government spending at the same time can stimulate aggregate demand, as in the famous but Cowen-forgotten "balanced budget multiplier" theorem.
When all of these tax increases are taken into account, New Deal fiscal policy didn't do much to promote recovery. Today, a tax cut for the middle class is a good idea — and the case for repealing the Bush tax cuts for higher-income earners is weaker than it may have seemed a year or two ago.
Right. In fact, at this point it looks like Obama is not going to abolish the Bush rewards for being wealthy and well-connected. Instead, he's just going to let them lapse. If he abolished them (a good thing to do), the middle-class tax cut or (even better) working-class tax-cuts would have to be larger to counteract the depressive effects of immediate abolition.
WAR ISN'T THE WEAPON World War II did help the American economy, but the gains came in the early stages, when America was still just selling war-related goods to Europe and was not yet a combatant. The economic historian Robert Higgs, a senior fellow at the Independent Institute, has shown in his 2006 book, "Depression, War, and Cold War," just how much the war brought shortages and rationing of consumer goods.
Right. We knew that: WW II started before the US got in -- as did the stimulative effects on the US economy. Cowen seems to be eliding the fact that the shortages and rationing happened only when the war became a total war.
By the way, even if war wasn't "the weapon" back at the cusp of the 1940s does not mean that it can't be so now. We can learn from history, but when dealing with the present it's a mistake to rule out alternatives that didn't actually happen in the past. Cowen could just as well say that monetary policy "isn't the weapon" because it wasn't used successfully during the 1930s.
While overall economic output was rising [once it had been stimulated by military spending], and the military draft lowered unemployment, the war years were generally not prosperous ones. As for today, we shouldn't think that fighting a war is the way to restore economic health.
War does promote the demand side, which is what the US economy needed at the time (in the late 1930s). In the long run, I think that war and military spending are bad for supply side growth (i.e., for long-term trend of real GDP) because they are tremendously wasteful.
On the other hand, WW II and the early Cold War may be the exceptions. The working class was strong enough to win the GI Bill (partly because our rulers remembered the negative effects of soldiers being abandoned after WW I), which helped supply-side growth. That, plus Cold War related infrastructural investment and subsidies for housing, helped create the so-called "golden age" of the US economy. Also contributing, of course, was US dominance in the manufacturing, financial, and military realms.
YOU CAN'T TURN BAD TO GOOD The good New Deal policies, like constructing a basic social safety net, made sense on their own terms and would have been desirable in the boom years of the 1920s as well.
Now there's an irrelevant point! Was Cowen around back in the 1920s to convince Coolidge and Hoover of this point? Can he guess why they opposed a social safety net?
The bad policies made things worse. [well, duh! ] Today, that means we should restrict extraordinary measures to the financial sector as much as possible and resist the temptation to "do something" for its own sake.
I don't know who it is who is proposing to "do something" simply for its own sake. This seems the old ruse of seting up a scare-crow, just to knock it down.
In short, expansionary monetary policy and wartime orders from Europe, not the well-known policies of the New Deal, did the most to make the American economy climb out of the Depression. Our current downturn will end as well someday, and, as in the '30s, the recovery will probably come for reasons that have little to do with most policy initiatives. [That's Cowen's faith.]
Tyler Cowen is a professor of economics at George Mason University.
Copyright 2008 The New York Times Company
--
Jim Devine / "Nobody told me there'd be days like these / Strange days indeed -- most peculiar, mama." -- JL.
Saturday, November 22, 2008
Why a New New Deal is No Deal
by the Sandwichman
The New Deal came about, according to historian Benjamin Hunnicutt, because Roosevelt needed to "do something" to ward off the Black-Connery 30-hour bill.
UPDATE: The new New Deal stimulus spending bandwagon is getting ready to roll, with cheer leading from Paul Krugman, Robert Reich, Brad DeLong, Eric Rauchway. But this time around is it sustainable?
In a letter to Arthur Schlesinger dated April 9, 1958, Leon Keyserling stressed that Roosevelt came to Washington without a "systematic economic program." The "highly experimental, improvised and inconsistent" programs of the first New Deal defy categorization. They were the products of "schools of reformers" that had been promoting diverse programs that Roosevelt, higgledy-piggledy, picked up.
According to Keyserling, the PWA, CWA, NIRA, and the rest were not parts of any systematic plan or overall purpose. The only coherence given these events came from outside the administration. It was the "desire to get rid of the Black bill" that prompted the administration to draw up such things as the NRA, "to put in something to satisfy labor." This same point was made by other notables in Roosevelt's administration, among them Raymond Moley.
Throughout the depression, 30-hour legislation goaded Roosevelt to action. The Black-Connery bill, introduced in each depression Congress until passed in highly modified form as the Fair Labor Standards Act [FLSA] in 1938, with all the work-sharing teeth pulled, continued to function as a sort of reverse polestar, enabling Roosevelt to chart his course by the simple expedient of sailing in the opposite direction. Roosevelt's instinctive reaction against 30 hours matured to positive approaches to industrial stabilization and reemployment. They were built on work creation, not work spreading, founded on industrial growth and increased spending as the wellsprings of progress. In the process, he and his administration discarded the century-old notion that work reduction had the potential for social and individual advancement.
From the point of view of someone like Representative William Connery, who pushed for 30 hours from 1932 to 1937, the New Deal had a coherence, a reason for happening when and as it did, that was lost on others not so positioned. From Connery's perspective, the New Deal was what it was because of its opposition to 30 hours. -- Hunnicutt, Work Without End, pp.248-49
Another Greenspan Gem
Here Greenspan describes the new technologies that have revolutionized banks' "basic business ... to measure, manage, and accept risk ... permitting ... the unbundling of risks, improvements in the measurement of risk, and revamping of risk management process."
"There are some who would argue that the role of the bank supervisor is to minimize or even eliminate bank failure; but this view is mistaken in my judgment. The willingness to take risk is essential to the growth of the free market economy …. [i]f all savers and their financial intermediaries invested in only risk-free assets, the potential for business growth would never be realized."
Greenspan, Alan. 1994. The New Risk Management Tools in Banking: Address to the Garn Institute of Finance, University of Utah, November 30, 1994.
http://fraser.stlouisfed.org/historicaldocs/ag94/download/27991/Greenspan_19941130.pdf
Why Only 2.5 Million New Jobs?
The good news is that Obama wants to push fiscal stimulus ala public investment, but this seems way too conservative:
American workers will rebuild the nation's roads and bridges, modernize its schools and create more sources of alternative energy, creating 2.5 million jobs by 2011, Obama said in the weekly Democratic address, posted on his Web site.
With the employment-population ratio at 61.8% and population at 234.6 million, creating 2.5 million new jobs NOW would still leave the employment-population ratio below 63%. Over the next couple of years, we would new about 2.5 million new jobs just to be around a 62% employment-population ratio. I hope his goals for a recovery are more ambitious than this sounds.
Healthcare Debate: So This is Why Conservatives Hate Social Security
Michael Cannon of Cato comes out against Obama’s health care plan – no surprise there. James Pethokouskis makes it explicit as to Cannon’s real concern:
Passage would be a political gamechanger. Recently, I stumbled across this analysis of how nationalized healthcare in Great Britain affected the political environment there. As Norman Markowitz in Political Affairs, a journal of "Marxist thought," puts it: "After the Labor Party established the National Health Service after World War II, supposedly conservative workers and low-income people under religious and other influences who tended to support the Conservatives were much more likely to vote for the Labor Party when health care, social welfare, education and pro-working class policies were enacted by labor-supported governments."
As Hilzoy notes:
An honest conservative might accept this claim and say: well, I guess our ideas are unpopular, so we'll just have to make our case more persuasively. But that's not the conclusion they draw. Pethokoukis and Cannon say: because people will like health care reform, if we do not block it, our party will lose support. So precisely because people would like it if they tried it, we need to make sure that it fails. At least they're honest about it.
Truth be told – this is a major reason why conservatives want to undermine the Social Security program. Yes – they do try to tell us it’s some sort of Ponzi scheme, which of course, is just blatant dishonesty. But the real reason that they hate Social Security is that it is popular – as well as good policy from the perspective of those who care at least as much about the working class as the investor class.
Update: Steve Benen takes us back to late 1993 and the Kristol memo:
Leading conservative operative William Kristol privately circulates a strategy document to Republicans in Congress. Kristol writes that congressional Republicans should work to "kill" - not amend - the Clinton plan because it presents a real danger to the Republican future: Its passage will give the Democrats a lock on the crucial middle-class vote and revive the reputation of the party. Nearly a full year before Republicans will unite behind the "Contract With America," Kristol has provided the rationale and the steel for them to achieve their aims of winning control of Congress and becoming America's majority party. Killing health care will serve both ends. The timing of the memo dovetails with a growing private consensus among Republicans that all-out opposition to the Clinton plan is in their best political interest.
Kristol does belong to the wing of the Republican where good policy and good politics have been at war for years.
My Lecture on the Economic Crisis
I have posted my talk for the San Francisco Peace & Freedom Party on the economic crisis at
http://www.archive.org/details/perelman-econ-crisis
Friday, November 21, 2008
Has Monetary Policy Been Contractionary?
Greg Mankiw and Paul Krugman have been providing graphs of certain interest rates and the exchange rate with a little commentary. Greg poses this query:
You observe an economy sinking in recession. As this occurs, real interest rates are rising, and the currency is strengthening. What shock, or set of shocks, could have caused these events?
Paul notes:
Bernanke’s problem, and ours. This picture shows the target Fed funds rate, the usual tool of monetary policy; the 10-year Treasury rate; and two rates that actually matter to the private sector, the mortgage rate and the rate on Baa-rated corporate bonds. The Fed has had no success in reducing mortgage rates, and corporate borrowing costs have gone up, not down. Add in falling expectations of inflation, and in real terms monetary policy has gotten tighter, not easier.
House Slaves and Hidden Imams
Ayman al-Zawahiri, the #2 of al-Qaeda, has issued a tape denouncing Obama. The headlines have screamed "racial slur!" and the "official" translation had him describing Obama as a "house negro." The actual term was "abd al-bayt," which literally means, "house slave," not flattering, but not a racial slur, and also inaccurate, given that he is about to become the house master, arguably, something that makes the al-Qaeda crowd unhappy.
Now while Obama has promised to go after Osama, I think the fact that al-Zawahiri has been doing these tapes since 2004 with no appearances by Osama means that the latter is either incapacitated or dead. If dead, I can see them keeping the illusion of him still alive going. Although they are Sunnis, this sort of resembles the Shi'i cult of the missing 12th Iman, who supposedly went into Occultation and will reappear in the world as a messianic savior at some point, with various current leaders claiming access to him. Osama could be the radical Sunni Hidden Imam, with Obama chasing a Hidden Imam Osama.
Thursday, November 20, 2008
Now That's Leverage!
"Tangible assets, which don't include goodwill or intangibles, are 55 times the bank's tangible equity .... Citi's leverage worries some investors. Furthermore, possibly making matters worse are proposed accounting-rule changes that, if adopted, will prompt banks in 2010 to bring some off-balance-sheet assets back onto their books.
Tangible assets rise to nearly 59 times tangible equity if Citi has to bring about $120 billion in credit-card assets back onto its books in 2010, as is likely. Citi also may have to consolidate some of the roughly $670 billion in mortgage assets currently held by off-balance-sheet vehicles.
If the bank had to consolidate just 20% of these mortgage assets, tangible assets would rise to about 63 times tangible equity.
Reilly, David. 2008. "Job Losses Won't Cut It for Citigroup." Wall Street Journal (18 November): p. C 10.
Unions, Unemployment & Shorter Hours
by the Sandwichman
What's up? Unemployment is up. What to do about it?
Samuel Gompers said, in 1887, "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.'"
In 1932, President William Green of the A. F. of L., "estimated that if the hours actually being worked at the present time were distributed on the basis of thirty hours a week among the working population the 12,000,000 now unemployed could be put to work."
In 1962, the AFL-CIO Federationist put the case this way:
"There's no question that the long-term salvation of work lies in reducing working hours," said Thomas R. Donahue, secretary-treasurer of the AFL-CIO in 1993.
The case for shorter hours does not rest on the notion it is the best way. It is based rather on the view, supported by ample evidence in the past decade of mounting unemployment, that: (1) other economic measures to achieve full employment are not being applied and perhaps cannot be applied; and (2) even if other economic policies are successful in stimulating greater growth in the period ahead, the rate of advance in technology and other labor-displacing changes is gathering such momentum that, unless part of the gains in efficiency are distributed in reductions in hours, it is virtually inevitable that it will show up in persistent and increased unemployment.
So today, 2008, with unemployment on the rise, what's the word from the AFL-CIO on shorter hours?
Bailouts and JAWBS
by the Sandwichman
Presumably... implicitly... tacitly... these bailouts are all about saving JAWBS.
I mean, is there any other rationale for them that would pass political muster? So can someone direct the Sandwichman to an econometric study that estimates just how many net JAWBS are saved or created per Billion Bail Dollars (BBD)? Note I said net JAWBS -- I don't want to hear any lump-of-labor silliness about the amount of work being fixed so that if someone gets laid off from CitiBank there won't be any new dog-walking or paid blogger positions opening up.
Obviously, economists have studied this matter thoroughly and there's a consensus out there about this stuff. Right?
Unemployment in the Automobile Industry
PS: Dan Becker also told me that he just testified before Congress in the automobile hearings, shocking the politicians are telling them that there are now more unemployed automobile workers than employed.
Did Al Gore Almost Save the Automobile Industry?
The automobile industry is on the ropes, dying a death of 1000 cuts, most of them self-inflicted. Virtually everybody knows about the stubborn reliance on SUVs and other gas hogs, as well as the foray into non-automobile finance. I heard an interview with Dan Becker, the director of the Safe Climate Campaign, described another angle that in my ignorance I had not heard before.
I contacted Dan for some more information. What follows are my rough notes from my phone conversation regarding The Partnership for New Generation of Vehicles:
Vice President Al Gore told the Big Three that he wanted them to develop a sedan-size car that could get 80 miles a gallon. What is surprising is that they complied. Each one produced a prototype -- a single prototype and then left the project to die. What was striking about Dan's presentation was that the prototypes seem to have been relatively solid.
Word of Detroit's success helped to spark Japanese interest in developing something similar. Coming from an island far from its oil supplies, MITI was interested in transportation alternatives. Of course, California's requirement for zero emission vehicles (which my neighbor was instrumental in squashing) also played a role in interesting the Japanese, but the Gore angle and the successful prototypes were new to me.
Amity Schlaes Criticizes Lord Keynes Only to Display Her Own Ignorance
Why did Bloomberg print this nonsense?
The Great Society of that period was the ultimate Keynesian experiment, and it didn't work very well ... The jobs that Keynes emphasized were AWOL: America became accustomed to high levels of unemployment.
Paul Krugman objects:
The Great Society wasn’t deficit spending, it wasn’t intended to create jobs, and the economy of the 1960s wasn’t depressed. It was social engineering; we can talk about how well or badly it worked, but it had nothing whatsoever to do with Keynesian economics. Now, LBJ did engage in some Keynesian economics: namely, he imposed a contractionary fiscal policy in the form of a tax surcharge in an effort to cool an overheating economy.
Paul is basically correct but let’s go further. The big Keynesian fiscal experiment was that 1964 tax cut, which did seem to work fairly well as the economy returned to full employment by late 1965. While Paul and I were both too young in 1965 to have been included in the discussions between the Council of Economic Advisors and President Johnson, I have had the pleasure of hearing from those who were what kind of macroeconomic advice the CEA gave the President during December 1965. Realizing that the economy was at full employment and seeing the triple whammy of tax cuts, proposed Great Society domestic spending, and the run-up in Defense Department spending from the Vietnam War, the CEA strongly urged the President to push for fiscal restraint lest the Federal Reserve would have to raise interest rates to choke off excessive demand. The President fired back that the Great Society was important to him and that he was not ready to pull out of Vietnam. The President also noted that getting a reversal of the 1964 tax cuts would be politically difficult. The Federal Reserve did raise interest rates in 1966 leading to the 1966 Credit Crunch, which held inflation at bay. However, the Federal Reserve later reversed course unfortunately. So we eventually got a delayed and lukewarm version of the fiscal restraint that the CEA recommended way back in late 1965 – as Paul noted. Too little and too late.
For Schlaes to blame the run-up in inflation on the Keynesian economists that advised President Johnson only shows she has absolutely no clue. But then we knew that already.
Wednesday, November 19, 2008
Force Them to Lend?
My restful sleep continues to be disturbed by Willem Buiter, who writes
I am in Slovenia today, talking to bankers, entrepreneurs, managers, politicians, government officials and academics. The story is the same here as in every country I have visited since mid-September 2008: the banks aren’t lending. They don’t lend to each other. They don’t lend to non-financial businesses and they don’t lend to households....The macroeconomic consequences of this lending paralysis are potentially disastrous. It could turn a global recession into a global depression, with many years of stagnation and cumulative declines of GDP of 10 percent or more.
His solution?
I propose the following form of forced lending by banks to non-financial businesses. Every loan that matures during the coming year gets extended/renewed for another year on the same terms as the maturing loan. This applies to both secured and unsecured loans. Likewise every credit line or overdraft facility that expires during the coming year gets extended/renewed for another year. Expiring loans, credit lines or overdraft facilities that had an original maturity of less than a year or more than a year will have the same interest rate for the one-year extension/renewal as the original arrangement.
Yes, force them to lend. This is a rather blunt instrument, I would say. It would roll over some loans that should absolutely not be renewed, and it would not direct financing to new, previously unfinanced projects. I think bankers won’t like it. They wouldn’t like my “Plan B”, creating a public competitive financial entity, either. So which one should it be?
Buiter’s approach has the advantage of using the existing institutions: the same personnel, the same chains of command, the same office layouts—nothing new that could create friction or delay at a time when we particularly don’t need it. My approach would be vastly less expensive for the public (and therefore more feasible in direct financial terms) and would be capable of making more rational distinctions at the micro level. But one way or the other, we have to shift the narrative quickly. What needs to be rescued are not the financial markets but the real economies, the incomes and employment, that are the substance of our standard of living.
Report from the Galbraith Conference in New York, 11/14
I previously posted what I was planning to say, which I did, at the Conference on "The Financial Crisis, the US Economy, and International Security in the New Administration," organized by James Galbraith at New School University on Nov. 14, and sponsored by Economists for Peace and Security. They will have a full video up at some point on their website at http://www.epsusa.org, and currently have the full program. I shall focus on main points presented by others, with an emphasis especially on new policy proposals, and will not cover the remarks by quite a few who spoke. I may add more later.
Galbraith indicated he would be presenting many of the ideas to the Obama economic transition team this week, as well as in a keynote address he gave yesterday to Congressional Democrats at EPI.
Galbraith was the first speaker and recounted points that have appeared in an article by him in this month's Challenge magazine. His main proposals were to revive the New Deal Housing Ownership and Loan Corporation (HOLC), strongly supported by others as well, to reinstitute general revenue sharing to support state and local governments, to institute an infrastructure investment fund, with emphasis on green technologies, and to increase social security benefits.
Joseph Stiglitz called for converting the housing tax deduction to a tax credit for poorer homeowners, for the government to make mortgage payments for those who become unemployed, and to institute a law forbidding US banks from dealing with foreign ones that do not conform to global banking standards.
Pierre Calame supported establishing global commodity buffer stocks to moderate price fluctuations of basic commodities.
Allen Sinai forecast a 24 month recession, which he considers to have begun in January 2008, and called for a $350 fiscal stimulus package. Others called for larger such packages.
Teresa Ghilarducci supported Galbraith's proposal on converting tax deductions to credits, and also supported having the government pay employers' contributions to fica for the duration of the recession, and finally a much-discussed proposal to lower the medicare eligibility age to 55.
Perry Mehrling provided an insightful account of how the Fed has become effectively the world's central banker, taking much of the world's dodgy paper onto its books. He proposed establishing an insurance scheme for credit-default swaps that would involve them providing appropriate collateral, and would also requiring turning them into operating with transparency through an exchange rather than over the counter.
Gary Dymski supported my proposal for using shared appreciation mortgages and called for more direct efforts to prevent "exploitative" housing lending, as well as directing some of the infrastructure spending towards housing, high speed rail networks, and such social support services as child care.
John Eatwell called for increasing the regulatory authority of the IMF, noting that the Forum for Stability has many ideas that it could use. This did not come out of the G-20 summit, but another idea he supported did, that of establishing "colleges of supervisors" (Eatwell said "regulators") in which the regulators meet and coordinate their activities from the main nations that a particular multinational financial entity operates.
Paul Davidson supported establishing the 1944 "Keynes Plan" that would have a strong central bank, with international clearing units, and a responsibility placed on surplus nations for making adjustments. With the large stimulus plan in China happening, this may be occurring to some degree at this time, especially as the Chinese seem to be allowing some RMB appreciation.
Missing: the strange disappearance of S. J. Chapman’s theory of the hours of labour (13)
Conclusion
In his article on the canonical labour-supply model Derobert (2001) mentioned Chapman's theory in connection with Hicks's description of it as "the classical statement of the theory of 'hours' in a free market." Derobert dismissed Chapman's theory as "excessively complicated" and as "more of an amalgam than a synthesis" (p. 204). He also described it as lying "somewhere between Jevons's analysis and the canonical model" (p. 204). Chapman's theory lies between Jevons and the current canonical model only in a narrow chronological sense. Although Chapman's analysis did indeed develop Jevons's earlier discussion of the hours of labour, it bears little resemblance to the income-leisure choice model. Instead, it incorporates the opportunity-cost concept without at the same time abandoning the idea that work provides intrinsic satisfactions and dissatisfactions.
Perhaps Chapman's theory could indeed be considered "excessively complicated" in the non-pejorative sense that life itself is too complicated to describe in a mathematical model. The income-leisure choice model simply ignores Chapman's theory, it doesn't refute, refine, simplify, adapt or transcend it. In its ignorance of Chapman's theory, it tacitly assumes proportionality between hours worked and output produced. In the bargain, mainstream analysis implies an identity between market goods purchased and economic welfare. Leisure time disappears – even as a commodity. The hypothetical purchase of leisure time leaves behind no receipts to be reckoned in the calculation of national income. Thus Barone's book-keeping artifice involves writing entries in disappearing ink – a practice that might elsewhere be reckoned as fraudulent.
Sydney Chapman's theory of the hours of labour was both insightful and authoritative. It was widely accepted by eminent English economists of its day. It buttressed the novel conclusions that the ideal hours of work for maximizing social welfare would be shorter than those for maximizing profits and that the hours of work set in a competitive market may be too long even from the standpoint of maximizing output. Yet that acknowledged authoritative theory was displaced by what? A simplifying assumption? A semantic device? A book-keeping artifice? An absent-minded lapse of theory? In place of an established theory has sprung up a mathematical model of income-leisure choice in which the face of actual work is unrecognizable. With the centennial of its original presentation fast approaching, it is fitting that economists should re-examine what opportunities have been sacrificed and what – if anything – has been gained by this remarkable instance of theoretical substitution.
BibliographyAbstract: Sidney Chapman's theory of the hours of labour, published in 1909 in The Economic Journal, was acknowledged as authoritative by the leading economists of the day. It provided important insights into the prospects for market rationality with respect to work time arrangements and hinted at a profound immanent critique of economists' excessive concern with external wealth. Chapman's theory was consigned to obscurity by mathematical analyses that reverted heedlessly to outdated and naïve assumptions about the connection between hours and output. The Sandwichman is serializing "Missing: the strange disappearance of S. J. Chapman's theory of the hours of labour" on EconoSpeak in celebration of the centenary of publication of Chapman's theory. (To download the entire article in a pdf file, click on the article title.)
Missing: the strange disappearance of S. J. Chapman’s theory of the hours of labour (bibliography)
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Marshall, A. (1961) Principles of Economics, 9th edition, London: Macmillan for the Royal Economic Society.
Nyland, C. (1989) Reduced Worktime and the Management of Production, Cambridge: Cambridge University Press.
Pagano, U. (1985) Work and Welfare in Economic Theory, New York and Oxford: Basil Blackwell.
Pencavel, J. (1986)'Labor Supply of Men: A Survey', in (O. Ashenfelter and R. Layard, eds.), Handbook of Labor Economics, Amsterdam: North Holland. pp. 3-102
Philp, B., Slater, G. and Harvie, D. (2005) 'Preferences, Power, and the Determination of Working Hours', Journal of Economic Issues, vol. 39, pp. 75-90.
Pigou, A.C., (1920) The Economics of Welfare, London: Macmillan.
Robbins, L. (1929) 'The economic effects of variations of hours of labour', Economic Journal, vol. 39, pp 25-40.
Robbins, L. (1930) 'On the elasticity of demand for income in terms of effort', Economica, No. 29 (Jun., 1930), pp. 123-129
Robbins, L. (1930) 'The conception of stationary equilibrium', Economic Journal, vol. 40, pp. 194-214.
Scitovsky, T. (1992) The Joyless Economy: The Psychology of Human Satisfaction, New York and Oxford: Oxford University Press.
Scitovsky, T.(1951) Welfare and Competition, Chicago: R.D. Irwin.
Spencer, D. A. (2003) 'The labor-less labour supply model in the era before Philip
Wicksteed', Journal of the History of Economic Thought, vol. 25, pp. 505-513.
Spencer, D. A. (2004) 'From pain cost to opportunity cost: the eclipse of the quality of work as a factor in economic theory', History of Political Economy, vol. 36, pp. 387-400.
Tribe, K. (2004) 'Sydney Chapman', Oxford Dictionary of National Biography, Oxford University Press.
Walras, L. (1954) Elements of Pure Economics: or, the Theory of Social Wealth, translated by William Jaffe, Homewood, Illinois: Richard D. Irwin.Abstract: Sidney Chapman's theory of the hours of labour, published in 1909 in The Economic Journal, was acknowledged as authoritative by the leading economists of the day. It provided important insights into the prospects for market rationality with respect to work time arrangements and hinted at a profound immanent critique of economists' excessive concern with external wealth. Chapman's theory was consigned to obscurity by mathematical analyses that reverted heedlessly to outdated and naïve assumptions about the connection between hours and output. The Sandwichman is serializing "Missing: the strange disappearance of S. J. Chapman's theory of the hours of labour" on EconoSpeak in celebration of the centenary of publication of Chapman's theory. (To download the entire article in a pdf file, click on the article title.)
Tuesday, November 18, 2008
Clown on Wall Street
Maybe a picture is worth a thousand words. Here are clowns -- not the ones in the executive suites, but real clowns -- ringing the opening bell on the New York Stock Exchange.
From Financial Crisis to Currency Crisis: Is Britain Next?
The suggestion by Willem Buiter that Britain may already be on its way to a collapse of its currency and possible sovereign default has been making waves in the UK, but deserves attention here as well. First of all, the mechanism he describes is exactly the one I have been harping on for the US:
If there is doubt in the markets about whether the solvency gap of the banking system is smaller than the fiscal spare capacity of the government, we could have a UK public debt crisis. Fear of default would cause an across-the-board rush of out sterling assets. Fear that the authorities would choose to monetise the UK public debt and deficits rather than defaulting, would also cause a sharp decline in the value of sterling.
There are fiscal limits to what governments can do, and pledging to bail out all investors who have claims on the financial system is not the same as being able to actually carry out this pledge. Moreover, a run on sterling would not only signal the failure of the British bailout plan; it would set in motion currency shockwaves that would ricochet through the global economy. Money fleeing the pound would have to go somewhere else, but this somewhere would then find itself on a hair trigger, as fears of currency and default risk escalate. My reference period for the earlier Depression is not 1929, for which there were domestic solutions, but 1931-32, when a cascade of currency runs rendered national monetary policymakers helpless.
Having signed on to Buiter’s main point, I want to emphasize some divergences:
1. Britain’s risk is, like Iceland’s, a function of the size of its banking sector liabilities relative to the economic size of its currency area. It can crank up the denominator by joining the eurozone—if it can. The political impediments in this environment are simply too great, however. If Britain starts to melt, would the euro powers risk their own solvency to save it?
2. The US has a far larger GDP, but its numerator is also much larger, since the epicenter of the crisis was in US-generated assets, all of which matter because the Fed has committed itself to making good on all claims on US financial institutions, whatever their country of origin.
3. The dollar is a reserve currency as the pound is not. This gives the US much more breathing space, and the amount of claims needing to be satisfied would not be altered by a potential devaluation, since it’s all in dollars. What this means, though, is simply that the dollar can hold on longer than the pound; it doesn’t mean the dollar is invincible. It is ultimately subject to the same constraints laid out in Buiter’s analysis (and mine).
4. The British exposure is somewhat less than meets the eye. The City is the repository for an undisclosed but certainly very substantial pool of mideast petro-profits. Their placement is essentially a political, not a market-based choice. No doubt the failed occupation of Iraq has reduced the geopolitical subservience of the Gulf potentates, but it is hard to believe that they would simply withdraw their funds in a crisis. They remain vulnerable domestically—even more so as oil prices fall—and still depend on Anglo-Saxon guarantees of their continued rule.
5. Buiter’s solution, to move first on trimming the claims (haircuts) before assuming public liability for them, is entirely sensible, and roughly equivalent to the asset window I briefly described in my own proposal two months ago. The problem is that he gives no attention to the collapse of the real economy. In fact, he would exacerbate it by cutting back fiscal stimulus, which he sees as unaffordable. Here I think he misses perhaps the most important point: that a principle reason for reversing the bailout strategy is to have the resources to sustain employment and income. Moreover, the finance for renewed growth is essential, and if the strict austerity Buiter (rightly) seeks to impose on financial markets only dulls the private appetite for assuming new risk, a public financial entity must pick up the slack.
Federal Revenue Sharing & NYC’s Mass Transit System
I woke up this morning to hear that New York’s Metropolitan Transit Authority (MTA) may lay off 1500 workers in order to address a projected $1.2 billion deficit. Maybe it is because I live on the Upper East side of Manhattan but every morning’s subway ride (the Lexington line) involves pushing and shoving just to get into the subway car. The thought of service cutbacks strikes me as just absurd. MTA says it was hoping for funds from the state of New York but I know Governor Patterson is also trying to address a revenue shortfall.
Of course, we could avoid the layoffs and the service cutbacks if Congress decides to expand Federal revenue sharing. It would be one way to counter the usual pro-cyclical nature of state & local fiscal policy that we noted here. I just hope this is on the agenda of President-elect Obama.
Missing: the strange disappearance of S. J. Chapman’s theory of the hours of labour (12)
The days are gone…, Part III
The canonical labour-supply model, based on the analysis of income-leisure choice, differs from both Walras and Hicks in establishing the constraint of 24 hours as the sum of the hours of leisure and of labour. In very general terms, the formula for such a calculation was stated by David I. Green (1893). Green argued that "the laborer stops work at a certain hour, not simply because he is tired, but because he wants some opportunity for pleasure and recreation" (p. 222) and further, that "the economic opportunities which a man sacrifices by pursuing a certain course of action are more capable of objective measurement. These sacrifices of opportunity are what constitutes the principal part of the costs of production which determine normal exchange values" (p. 223).
Although Green made explicit a trade-off of limited hours between labour and leisure, he didn't take the obvious next step of dividing the day into 24 hours to be apportioned between the two activities, nor did he specify an hourly wage. Enrico Barone (1908/1935) did, however:It is convenient to suppose – it is a simple book-keeping artifice, so to speak – that each individual sells the services of all his capital and re-purchases afterwards the part he consumes directly. For example, A, for eight hours of work of a particular kind which he supplies, receives a certain remuneration at an hourly rate. It is a matter of indifference whether we enter A's receipts as the proceeds of eight hours' labour, or as the proceeds of twenty-four hours' labour less expenditure of sixteen hours consumed by leisure. (pp. 248-249).
Barone's "simple book-keeping artifice" constituted a second, not entirely congruent, version of opportunity-cost doctrine. The first version, as articulated by Green, was vague enough about time to defeat the pain-cost argument as an explanation of prices. Barone's version was precise enough about the division of the 24 hours in a day to be incorporated into mathematical formulae. Such precision came only at the (unexamined) cost of resurrecting what Robbins called the 'naïve' assumption that "the connection between hours and output is one of direct variation."
Abram Bergson (1939) adopted Barone's framework as a basis for his "Reformulation of certain aspects of welfare economics." Although it may have seemed a matter of indifference to Barone whether to count the receipts of labour as eight hours or as twenty-four hours minus sixteen hours of leisure, the book-keeping artifice was essential to the flourishing of the indifference-curve analysis, unhampered by the essentially unquantifiable spectres of worker fatigue, unrest or even intrinsic enjoyment of work. The founding myth of the new orthodox approach thus passed unannounced into the canon. Chapman's theory was rendered expendable not by an explicit simplification but by the quiet revival of a naïve and anachronistic assumption about the connection between hours and output.
Chapman theory appears to have covered both the opportunity-cost and pain-cost bases. In a technical footnote, he drew two dotted-line curves to describe the effects of the length of the working day on the worker (see appendix). The first curve, labelled I, clearly indicates an opportunity-cost analysis of the value "of the leisure destroyed by the addition of [an] increment of time" (p. 364). The second curve, labelled L, retains the notion of absolute satisfaction or dissatisfaction involved in working. There doesn't seem to be a suggestion that this curve L directly determines the cost or value of labour, only that it affects the welfare of the worker. To paraphrase Chapman, what curve L addressed was not "the quantity of external wealth produced" but rather the "balance between internal and external wealth" (p. 373).
NextAbstract: Sidney Chapman's theory of the hours of labour, published in 1909 in The Economic Journal, was acknowledged as authoritative by the leading economists of the day. It provided important insights into the prospects for market rationality with respect to work time arrangements and hinted at a profound immanent critique of economists' excessive concern with external wealth. Chapman's theory was consigned to obscurity by mathematical analyses that reverted heedlessly to outdated and naïve assumptions about the connection between hours and output. The Sandwichman is serializing "Missing: the strange disappearance of S. J. Chapman's theory of the hours of labour" on EconoSpeak in celebration of the centenary of publication of Chapman's theory. (To download the entire article in a pdf file, click on the article title.)
Monday, November 17, 2008
Bretton Woods, a failure timeline.
Michael Moffit, in his 1983 book 'The World's Money - International Banking from Bretton Woods to the Brink of Insolvency'[1] has been very helpful this week. He presents an economic history that makes it clear as to why national economies started to come under pressure. This happened virtually as soon as their currencies were made fully convertible with each other under the obligations of the IMF's Article VIII. The Post-World-War-Two boom appeared to have much more to do with the stimulative boost of the Marshall Plan afterall.
1944 - Bretton Woods conference
1949 – Birth of Eurodollars
1945 – 1955. Europe’s capital markets remained largely closed to international capital flows. The US dollar was stable and other currencies were weak. Exchange controls in Europe were heavy. This combination discouraged speculation.
1950s – Growing concentration in international trade and investments leads to a small number of networks from which impressions and advice is received. This leads to a ‘common tilt’ in multinational corporations decisions and processes that courts instability in the global economy.
“Multinational enterprises in the ordinary course of operations dispose of vast quantities of money across international exchanges….Most of that flow is concentrated in forty or fifty multinational networks that draw their impressions and their advice regarding the relative stability of different currencies from common sources – half a dozen banks, and even smaller number of financial journals, and an incestuous round of lunches and conferences. Viewed in the abstract, the situation is set up for disaster; a common tilt in the group becomes a source of irresistible pressure on any currency.”[2]
1955 – European nations make their currencies convertible to the US dollar (defacto) in response to pressure from the US.
1958 – Currency convertibility of European currencies announced. “The [global economic] system begins to sputter after 1958….”
Late 1950s – The Euromarket emerged. This new capital market entailed the free flow of U.S. dollar- denominated assets without supervision or control by any national government. It expanded substantially over the following three decades. The US and the UK rescinded capital controls on short-term capital flows. Other countries were compelled to rescind their own capital controls because they became too costly to sustain; especially in the light of the rapid growth of multinational corporations (MNCs). MNCs could simply avoid controls by borrowing and lending through foreign affiliates in the Euromarket. MNCs could also shift operations to other countries with looser restrictions so as to preserve their competitiveness. Countries that tried to retain tight controls faced capital outflows and a consequent loss of investment, employment and income.[3]
1960 – The US gold pledge weakened under pressure of the dollar overhang, leading promptly to speculation in the London gold market during the 1960 US presidential election. The volume of hot money circulating in the world’s money markets was increasing.
1960 – March. ‘Operation 40’ created by Allen Dulles (Director of the CIA under President Eisenhower) from the ‘group of 40’ of the US National Security Council. It was presided by vice-president Richard Nixon. The Cuban revolution had occurred the year before. This group was designed to respond to the threat of left wing governments in Latin America (in general) affecting US corporate holdings. Operation 40 not only was involved in sabotage operations but also, in fact, evolved into a team of assassins. Frank Sturgis, claimed: "this assassination group (Operation 40) would upon orders, naturally, assassinate either members of the military or the political parties of the foreign country that you were going to infiltrate, and if necessary some of your own members who were suspected of being foreign agents... We were concentrating strictly in Cuba at that particular time." [4]
1961 – On January 17th. Outgoing US President Eisenhower warned against the “acquisition of unwarranted influence by the military industrial complex.” Australia becomes viewed as a geopolitical asset by the US.
1964 – The exchange rate for sterling (one pound = $US2.80) became obsolete.
1967 – The British Pound was the first currency to succumb to international speculation.
1971 - Bretton Woods dismantled after the US dollar comes under heavy speculative attack.
-------oOo--------
[1] ‘The World’s Money – International banking from Bretton Woods to the brink of insolvency’ by Michael Moffitt. Touchstone Book, Simon and Schuster New York. 1983. ISBN: 0-671-50596-3 Pbk.
[2] Harvard economist Raymond Vernon in his book ‘Storm Over the Multinationals’ (Cambridge, Mass: Harvard University Press, 1977), p.121. As quoted on page 76 of ‘The World’s Money – International banking from Bretton Woods to the brink of insolvency’ by Michael Moffitt. Touchstone Book, Simon and Schuster New York. 1983. ISBN: 0-671-50596-3 Pbk.
[3] Global Neoliberalism and the “Fate of the State”
George DeMartino, Assistant Professor of International Economics
Graduate School of International Studies.University of Denver
Denver, CO 80207 USA. 23rd May 2002. [1(1)DeMartino.pdf]
project.iss.u-tokyo.ac.jp/nakagawa/members/papers/1(1)DeMartino.pdf
[4] Allen Dulles' Operation 40 Brainchild
http://theselloutofamerica.blogspot.com/2007/08/allen-dulles-operation-40-brainchild.html
Net Investment Under FDR: Krugman v. Will and a Chart
Brad DeLong, Ian Welsh, and Steve Benen treat us to an exchange between George Will and Paul Krugman that Steve captures this way:
On ABC's "This Week" earlier, George Will explained his belief that FDR financial/regulatory policies discouraged investment and created an environment in which the "depression became the Great Depression." Fortunately, Will was sitting next to Paul Krugman. To hear Will tell it, the Roosevelt administration stood in the way of investors. In a fairly devastating 45 seconds, Krugman not only set the record straight, but explained that it was FDR's desire to balance the budget and cut federal spending that contributed to a decline in 1937.
Will not only tried to claim that FDR somehow spooked investment demand but he also suggested that net investment was negative during the 1930’s. Krugman’s counter was that investment demand tends to be pro-cyclical so it fell during the 1929 to 1932 period but rose from 1932 to 1937 as real GDP rose. Fortunately we can turn to this source for the NIPA tables. Table 1.1.6, line 6 provides us with gross investment, while table 1.7.6, line 5 provides us with private depreciation. The difference is net investment, which we have graphed from 1929 to 1941. The pro-cyclical nature of net investment that Krugman noted is rather clearly shown. We also see that net investment was positive in 1936, 1937, and 1939.
If some pundit like Will is going to mention an economic time series such as net investment, shouldn’t he be required to get the facts straight? Maybe such pundits should also be required to bring along correctly drawn charts of the series that they mention.
[Footnote: all series in real terms ala 2000$ (billions), INV-g = gross investment, INV-n = net investment, Depr. = private depreciation]
Missing: the strange disappearance of S. J. Chapman’s theory of the hours of labour (11)
The days are gone…, Part II
In Value and Capital, Hicks's treatment of work and leisure is laconic. It appears virtually as an aside in his discussion of the difference between the consumer's demand, if it is assumed to be fixed in terms of money, and what happens if the consumer is also a seller with a fixed stock of some commodity, who might hold back some of that commodity for his own consumption depending on the market price. "Thus a fall in wages," Hicks wrote,
may sometimes make the wage-earner work less hard, sometimes harder; for on the one hand, reduced piece-rates make the effort needed for a marginal unit of output seem less worth while, or would so, if income were unchanged; but on the other, his income is reduced, and the urge to work harder in order to make up for the loss in income may counterbalance the first tendency (p. 36).
The salient detail to note about Hicks's 'wage-earner' is that he is being paid by piece-rates, not on an hourly wage. That is to say, his income presumably varies in proportion to his output, not as a function of the number of hours he spends on the job or the number of hours of leisure he sacrifices to do so. The possibility that he may "work less hard" could thus mean either that he would exert less effort or that he would reduce the amount of time he worked. Or it could mean some combination of the two.
The dichotomy of working harder or less hard also introduces a certain ambiguity into exactly what is being traded-off, particularly if the wage-earner's hours at work remained unchanged. In the latter case, working less hard could be interpreted as a way of making work time more enjoyable (or less painful) and thus would be a backdoor re-introduction of the rejected pain-cost theory of value.
Next
Abstract: Sidney Chapman's theory of the hours of labour, published in 1909 in The Economic Journal, was acknowledged as authoritative by the leading economists of the day. It provided important insights into the prospects for market rationality with respect to work time arrangements and hinted at a profound immanent critique of economists' excessive concern with external wealth. Chapman's theory was consigned to obscurity by mathematical analyses that reverted heedlessly to outdated and naïve assumptions about the connection between hours and output. The Sandwichman is serializing "Missing: the strange disappearance of S. J. Chapman's theory of the hours of labour" on EconoSpeak in celebration of the centenary of publication of Chapman's theory. (To download the entire article in a pdf file, click on the article title.)
Sunday, November 16, 2008
Who Will Speak Out to Stop the Bailouts?
Here is the problem in a nutshell: our economic well-being depends crucially on the provision of finance for all sorts of useful purposes—to move goods, launch new enterprises, retool old ones, pay college tuition, buy things like houses and cars that would otherwise take decades of savings. Most of the financial system is privately owned and operated for profit. The profit paradigm of the past generation was based on a systematic bias toward risk, a bias built into all limited liability institutions but compounded by deregulation and hubris. Now the system is reeling under the weight of trillions of dollars in losses. This has led to a seizing up of credit supply and has turned a typical recession into a potential economic abyss.
In the spirit of London Banker, let’s keep our eye on the ball. The financial losses incurred by banks, hedge funds, insurance companies and those who invested in them are their problem. The breakdown of the financial system is our problem. The bailout solutions being pushed in the US and elsewhere are based on the premise that we have to solve their problem first in order to deal with our own. Throw enough money at the financial sector, turn their red ink to black, and some day they will be willing to lend to the rest of us.
How to begin with what’s wrong with this?
1. This is a program for a systematic looting of the public. The 90+% of us who never enjoyed the profit bonanza of the last 20 years are going to pay through the teeth so that the rich get to stay rich. This is perfectly clear in the case of AIG, for instance. We hear about a $150B “investment” of public funds into this company, as if the money were going to, oh, upgrade their computer networks. The word is dishonest: this very large sum, which could do a lot of good things if spent intelligently, is going right through AIG to those it sold credit default insurance (asset swaps) to. Institutions leveraged themselves to the max in order to rake in profits by investing in high-risk, high-return mortgage-backed securities, insuring themselves against default risk by buying CDO’s from a company (AIG) that never had the capacity or intent to actually follow through if defaults became widespread. Seen in its entirety, the process was a scam. Now extraordinary amounts of public money are being transferred to the jilted investors who bought this insurance. We will never see this money again. The value of our public “investment”—80% of AIG’s ultimate capitalization—will be a few percent of what we have paid in, if the firm even survives.
2. By solving the problem of the financial institutions first, the bailout is making our problem worse. It isn’t just a question of banks who get public cash infusions not lending enough, although this is important. Finance that ought to be supporting the real economy is being diverted to the bailout. This sentence is in italics so you will read it two or three times. It is very, very, very important. You can see this in the Fed’s decision to pay competitive interest rates to attract excess bank reserves, which now amount to more than $400B. This is money that, in normal times, would amplify itself through the money multiplier and find its way to borrowers in the real economy. Now it finances the Fed’s acquisition of troubled assets at far above their market value—in other words, bailouts of private investors. Similarly, the Treasury has been selling hundreds of billions of dollars in new issues to finance the bailout, and much of the money it is sopping up would otherwise be available for normal lending.
2a. The corollary is that the world economy is sinking fast and deep. This will mean great hardship, especially in less developed countries were the margin between prosperity and penury is all too thin. It also means that the epicenter of financial crisis will shift toward sectors now being decimated by the downturn, particularly consumer credit and corporate debt. (A side note: this is the real fear about GM. Honda and Toyota can make our cars as energy-efficient as technology allows, and they can do this in their US plants. If GM is allowed to go belly up, however, it could trigger a run on a wide range of corporate debt.) Hence the bailouts, by soaking up credit and bleeding the economy, are adding to the losses that they seek to defray.
3. The resources available for these bailouts are not endless. You wouldn’t know this by following the discussion in the media. Commentators do complain about how expensive it all is, but there is no sense that a limit exists, and that we are at risk of reaching it before the financial system is repaired. But this is exactly what makes people close to the situation very nervous. The rest of the world is buying vast amounts of treasuries. The Fed takes this money and hands it to investors facing losses, receiving in return paper assets that might have value, maybe, sometime well into the future. If those holding treasuries should change their mind, this process cannot be run in reverse. The Fed is in no position to sell its damaged portfolio in order to buy back even a fraction of the huge overhang in public debt. Monetization—settling claims by simply creating new bank reserves—is not an option, because it would almost certainly trigger a run on the dollar, a threat for which no institutional antidote currently exists. What this all means is that the bailout strategy puts us in a race: will we reach our financial limit before the losses that paralyze the system are erased? It is extraordinary to me that this question is not being asked in public.
If these arguments are correct, the bailout agenda needs to be challenged. We are following a course of action that is indefensible from a social justice perspective and at best extremely risky on its own terms. An alternative exists: rapidly putting into place a public system that can make available the finance needed by the real economy. This would mean allowing a large swath of existing wealth-holders to be ruined. Such an option would be unthinkable to those who inhabit the existing world of finance: for them, repairing the system means first of all restoring the profits of investors. There is also a bit of class interest at stake, I would guess. For these reasons, it would take a mighty movement to change the way governments are responding to the financial crisis. I don't know where this will come from, but for starters it would be nice to see some real live public debate.
Work Less Insurgency
by the Sandwichman
Campaigning on a shoestring and with minimal coverage in the mainstream media, Work Less Party candidates for Vancouver City Council received 10% of the votes in the civic election Saturday.
SHAW, Chris.............Work Less Party......11237...10.8%
GREGSON, Ian.........Work Less Party......10493...10.1%
TRAMUTOLA, Geri...Work Less Party.......8619....8.3%
WISDOM, Timothy...Work Less Party.......7435....7.2%
In the election, there were ten council seats to be filled. The tenth-place seat was won with 44.2% of the votes. The lowest vote total for a major party candidate was 27.8%.
The centre-left coalition of Vision Vancouver and COPE swept 9 of the 10 seats on council. Three of the Work Less Party candidates garnered vote totals higher than the margin of victory between the sole NPA victor, Susan Anton, and Vision Vancouver's highest polling losing candidate, Kashmir Dhaliwal.
(Vote percentages were calculated based on total votes cast for all council candidates divided by ten, the number of council seats to be filled)
Saturday, November 15, 2008
Chinese Fiscal Stimulus and the US Economy
It was almost two years ago when several of us were hoping for more Chinese domestic demand stimulus and less Chinese mercantilism. OK, we were also advocating US fiscal restraint on the hope that more US exports would make up for the reduced US domestic demand. In today’s environment, the smart call seems to be for a large US fiscal stimulus.
Ariana Eunjung Cha reports that the Chinese may be about to be consuming a lot more:
Long known for high saving rates, China’s middle-class consumers are starting to spend like their American counterparts ... Increasing consumer spending is a key goal of the $586 billion economic stimulus package unveiled Sunday by China’s leaders ... James E. Quinn, global president for New York-based Tiffany, said in an interview that Chinese customers are the “fastest-growing segment” of its business. “A lot of American customers have a complete wardrobe of jewelry, passed down from previous generations. That’s not the case in China. Chinese consumers are at the early stage of acquiring a sense of style and appreciation for design in jewelry.” U.S. companies have been so successful in China because “Chinese consumers have a ‘look up to the rich’ attitude and the United States is the world’s top developed country in their eyes,” said Gao Tao, a consultant for the International Brand Association in Beijing
But before we anticipate an export led boom, check out what Brad Setser has to say:
the non-petrol goods deficit is now moving in the wrong direction. It increased from $29.3b in June to $35.6b in August. Non-petrol exports fell by $9.9b over the last two months, while non-petrol imports fell by “only” $3.7 billion. The sharp fall in exports shows up clearly in a chart showing “real” non-petrol goods exports and imports.
The Chinese fiscal stimulus is certainly good news as it may soften the bleak news on US export demand, but we will still need to increase US domestic demand even if that means living with a large current account deficit for several more years.
Friday, November 14, 2008
Missing: the strange disappearance of S. J. Chapman’s theory of the hours of labour (10)
The days are gone…, Part I
Further questions concerning the coherence of the Walrasian leisure device, beyond those identified by Pagano, are raised by examining the context in which Walras first introduced it and the form it took in the John Hicks's influential Value and Capital (1939), which is cited by both Pencavel and Scitovsky (although disputed by Derobert) as the source of the now orthodox model. Walras introduced the argument in Elements of a Pure Economics as part of his definition of the role of the "services of persons" (i.e., labour) in his theory of production. There, Walras discusses "the pleasure enjoyed by the idler" as constituting the income of "those who do nothing but travel and seek amusement"(p. 214). Walras's use here of the word "income" is metaphorical. No money changes hands. The rewards enjoyed by Walras's idler are what normally would be considered intrinsic whereas income refers to an extrinsic reward. Thus Walras's usage of the term 'income' is not just metaphorical but more precisely ironic.
There is no indication in his treatment that Walras intended such pleasure of the idler to also include the after-hours (non-monetary) "income" of someone who was a worker for the other 8 or 10 hours a day. On the contrary, Walras explained that "the idler who has wasted today will waste tomorrow; the blacksmith who has just finished this day's work will finish many more..." (p. 215) Doing nothing for Walras thus would appear to be the specialized occupation – the vocation, so to speak – of the idler, not something the blacksmith or the lawyer does in the hours after he or she has finished the day's work.
NextAbstract: Sidney Chapman's theory of the hours of labour, published in 1909 in The Economic Journal, was acknowledged as authoritative by the leading economists of the day. It provided important insights into the prospects for market rationality with respect to work time arrangements and hinted at a profound immanent critique of economists' excessive concern with external wealth. Chapman's theory was consigned to obscurity by mathematical analyses that reverted heedlessly to outdated and naïve assumptions about the connection between hours and output. The Sandwichman is serializing "Missing: the strange disappearance of S. J. Chapman's theory of the hours of labour" on EconoSpeak in celebration of the centenary of publication of Chapman's theory. (To download the entire article in a pdf file, click on the article title.)
Thursday, November 13, 2008
The Bank of Michael Perelman
I am happy to announce that I have changed my name. As of now, you may address me as The Bank of Michael Perelman.
I am not greedy. If Secretary Paulson would grant me only a couple hundred million, I would not trouble him for one of the billion dollar bailouts.
Applying to Work for Obama Administration – Anonymous Blogging Preferred?
Jackie Calmes reports:
A seven-page questionnaire being sent by the office of President-elect Barack Obama to those seeking cabinet and other high-ranking posts may be the most extensive — some say invasive — application ever ... They must include any e-mail that might embarrass the president-elect, along with any blog posts and links to their Facebook pages.
Whether any of my blog posts might embarrass the president-elect or not, the name on my application isn’t going to be the name I blog under. Not that I’m a serious candidate for any of the high-ranking economic positions. But what about that other vowel-less economist blogger?
Missing: the strange disappearance of S. J. Chapman’s theory of the hours of labour (9)
The eclipse of work in neoclassical economics. Part III
In tracing the emergence and triumph within economic theory of the income-leisure trade-off model, Ugo Pagano (1986) gave an account of a compromise between English and Austrian marginalist circles about what could be regarded as the "ultimate standard of value": pain cost or opportunity cost. The English side of the debate, argued by F. Y. Edgeworth (1894), featured Jevons's calculus of pleasure and pain whereby, after a certain point, increased units of work time produced an increasing amount of pain or disutility while additional goods purchased with the income from those extra hours supplied diminishing increments of utility. At some point the increase in disutility from work matches the increment in utility from additional income and the worker will choose to stop working. The Austrian perspective, argued by Eugen von Böhm-Bawerk (1894), regarded cost as being wholly constituted by the sacrifice one had to make, given scarce resources, to be able to consume any particular bundle of goods. One had to allocate one's scarce resources between wants that were, in principle, unlimited. The Austrians considered the hours of work to be institutionally fixed by custom or law and thus any hypothetical pain or disutility of work was, for them, not a factor in the individual's utility calculus.
Eventually, a compromise between these two positions was achieved by adopting what Pagano referred to as a "leisure semantic device". This device originated in the work of Leon Walras (1954) and bridged the differences between English and Austrian approaches by finding a way of including work and leisure in the opportunity-cost equation. It did so by defining the "disutility of work" to consist solely in the fact that the worker had to sacrifice leisure time in order to obtain income. According to Pagano, the adoption of the device underlies modern economic theory's "almost complete ignorance of the difference between human labour and the other resources" (93).
According to this leisure device, labour can be divided into two parts, the first part of which is self-consumed as leisure. The second part is sold and used in the production of goods for other people. Pagano notes two advantages of the leisure device for treating labour: first, it enables the treatment of labour in the same way as other consumption goods and thus greatly simplifies the analysis. Second, because the amount of time available to each individual for working is constrained (there are only 24 hours in a day), the system does take into account – or at least seems to take into account – the fact that labour expended in production affects the welfare of individuals. The more time the individual works to obtain income, the less leisure time he or she is left with.
Despite those advantages, Pagano viewed that leisure device as very misleading because it assumes that workers are only affected by the total amount of labour time expended and not by the way in which that time is allocated to the performance of different tasks.
NextAbstract: Sidney Chapman's theory of the hours of labour, published in 1909 in The Economic Journal, was acknowledged as authoritative by the leading economists of the day. It provided important insights into the prospects for market rationality with respect to work time arrangements and hinted at a profound immanent critique of economists' excessive concern with external wealth. Chapman's theory was consigned to obscurity by mathematical analyses that reverted heedlessly to outdated and naïve assumptions about the connection between hours and output. The Sandwichman is serializing "Missing: the strange disappearance of S. J. Chapman's theory of the hours of labour" on EconoSpeak in celebration of the centenary of publication of Chapman's theory. (To download the entire article in a pdf file, click on the article title.)
Wednesday, November 12, 2008
State/Local Fiscal Policy During the Great Depression
When I discussed government purchases during FDR’s first two terms as President, I opened with something from Paul Krugman. Alex Tabarrok graced our blog with this comment:
Here from HSUS is Federal Spending by year - note by 1934 spending had more than doubled in nominal terms.
Maybe I should acknowledge something else Paul had to say:
So I caught Governor Schwarzenegger on TV, talking fiscal crisis, and found myself thinking about fiscal stupidity. Economists may remember that the president of the European Commission once called the eurozone’s “stability pact,” which was supposed to set a rigid limit on budget deficits, the “stupidity pact” - because it would have forced tax hikes and spending cuts in the middle of a recession. Well, we’ve got our own stupidity pact: state and local governments operate under fiscal rules that lead to booming spending and tax cuts when the economy is strong and the reverse when the economy is weak. This is bad governance: services are cut precisely when people need them most. It’s also bad macroeconomics: it exacerbates the business cycle. Right now, we’re seeing a sharp drop in state revenues, which is going to lead to big cutbacks in spending and tax increases at exactly the wrong time.
While Alex is focused on Federal expenditures and revenues, my original graph looked at total government purchases. Expenditures include both purchases and transfer payments but looking at Federal figures omits what was happening at the state & local level. But let me give even more credit to Marmico who sent us to a series of Federal expenditures and revenues as percentages of GDP, which our first graph depicts for the 1930 to 1941 period. Expenditures (outlays) rose relative to GDP from 1930 to 1934 but this was more due to a drop in real GDP than skyrocketing real spending. Federal receipts (taxes) did rise as a share of GDP from 1932 to 1938 while outlays as a share of GDP fell from 1934 to 1938. Federal fiscal policy wasn’t exactly doing what Keynes would recommend in his 1936 General Theory until after the 1938 recession.
Our second graph – which represents the reason for this post – shows a historical example of what currently concerns Paul – falling state & local revenues (as a share of GDP) combined with the tendency for state & local governments to annually balance their budgets, which translates into reduced expenditures (as a share of GDP). And given the fact that state & local expenditures were often greater than Federal expenditures before World War II, the pro-cyclical nature of state & local fiscal policy could have easily dominated any timid attempt at countercyclical fiscal policy from the Federal government – even if FDR had more wisdom and courage to try what Keynes came to recommend.
Missing: the strange disappearance of S. J. Chapman’s theory of the hours of labour (8)
The eclipse of work in neoclassical economics. Part II
Pencavel (1986) concluded that, considering the consistency with which empirical research produces values that violate the model's predictions, "the scientific procedure is surely to regard the theory as it has been formulated and applied to date as having been refuted by the evidence" (p.95). Other criticisms point out that the income-leisure choice model "cannot provide any substantive analytical predictions on the course of labor supply by an individual or a group" (Altman, 2001, 199) and takes no account of the non-pecuniary benefits of working (Farzin and Akao, 2006).
Derobert (2001) questioned the pedigree of the model, noting the paradoxical disappearance of labour, documenting bibliographical anomalies in the model's transmission and finding that the model's formal consecration by Tibor Scitovsky (1952) was accompanied by a warning about its pitfalls – specifically, that regarding leisure as a commodity may lead us to mistakenly assume there is a "conflict between the efficient specialization among workers and the efficient distribution of leisure" (p. 107). "It is much safer," Scitovsky went on to explain, as well as more natural, to look at the face of the medal and concentrate our attention on work and the burden it involves, rather than on freedom from work and the satisfaction this yields. We can, if we like, think of work as a negative commodity, of its burden as a disutility or negative satisfaction, and of the earnings received for work as a negative price... (p. 107).
Scitovsky's 'safer' and 'more natural' approach, however, would require abandoning the opportunity-cost value theory at the foundation of the income-leisure choice model, without which the model itself would cease to have any meaning.
NextAbstract: Sidney Chapman's theory of the hours of labour, published in 1909 in The Economic Journal, was acknowledged as authoritative by the leading economists of the day. It provided important insights into the prospects for market rationality with respect to work time arrangements and hinted at a profound immanent critique of economists' excessive concern with external wealth. Chapman's theory was consigned to obscurity by mathematical analyses that reverted heedlessly to outdated and naïve assumptions about the connection between hours and output. The Sandwichman is serializing "Missing: the strange disappearance of S. J. Chapman's theory of the hours of labour" on EconoSpeak in celebration of the centenary of publication of Chapman's theory. (To download the entire article in a pdf file, click on the article title.)
Tuesday, November 11, 2008
Why Markets Fail
Markets fail for many reasons. With all the attention to the current financial crisis, the time has come to look at another part of market failure -- the reluctance to invest in long-lived plant and equipment. I'm not merely thinking about the deindustrialization of the US economy, but a more general reluctance.
The commitment of funds for fixed capital entails taking a risk. In the words of John Hicks, one of the earliest economists to win a so-called Nobel Prize, pointed to the obvious problem: "an entrepreneur by investing in fixed capital gives hostages to the future" (Hicks 1932, p. 183). Unfortunately, neither Hicks nor virtually any other economist has explored this fear of investment.
The most popular response to this reluctance to invest came from a very conservative Austrian economist, who once served as a socialist minister of finance, before landing at Harvard. Joseph Schumpeter was indeed one of the giants of 20th century economics. Here his reputation to his personal brilliance, as well as a willingness to learn from Karl Marx.
I have posted the rest of the piece as a pdf at
schumpeter
It was written to help me focus my thoughts for my talk in San Francisco tomorrow. Any comments will be appreciated.
Government Purchases: 1932 to 1941
Let’s return to the discussion of New Deal economics, that is the role of fiscal policy during the first two FDR administrations and look at the discussion from Alex Tabarrok:
Thus, an accurate portrayal of fiscal policy during the Great Depression - entirely consistent with Krugman - is that we had much greater spending, much greater taxes and not much economic stimulus.
Raising tax rates during a period when aggregate demand falls far short of potential GDP does seem silly but I have to challenge this notion that we tried a massive increase in government purchases. Using BEA data, I have provided graphs of real government purchases (G/Prices in terms of 2000$) and the ratio of government purchases to GDP (G/GDP). Before 1941, the increase in government purchases roughly mirrored the increase in GDP so this claim of “much greater spending” sounds a bit suspicious. Of course, government purchases did increase substantially starting in 1941 but then as the graph of output to potential output provided by Paul Krugman notes – that is when fiscal stimulus did restore full employment.
Update: Marginal Revolution reader Marmico challenges the notion that tax collections rose substantially during FDR’s first two terms providing us with this link. As Marmico notes:
Conflating high individual marginal tax rates with much greater taxes is bunk.
To be fair, Marmico’s graph shows only a subset of Federal tax revenues as a share of GDP so I have added a graph of total government revenue (Rev) relative to GDP.
Missing: the strange disappearance of S. J. Chapman’s theory of the hours of labour (7)
The eclipse of work in neoclassical economics, Part I
The approach to the analysis of individual labour supply that replaced Chapman's theory took no notice of the effects of technological change on fatigue or on the subjective experience of the worker. It treated labour itself as a residual of the individual's consumption preferences. According to the new orthodoxy of income-leisure choice, leisure is assumed to be a normal good. Work is something featureless that takes place in the weeds behind the billboard of consumption and disposable time. Because this commodity-leisure itself lacks any definitive quality other than not being work, work is reduced to the hollow double negative of 'not not-working'. There is no pain in this hollowed-out work, neither is there joy.
A chorus of criticism surrounds the income-leisure choice model. Spencer (2003, 2004) objected that the model ignores the qualitative dimension of both work and leisure, a dimension that was specifically addressed in the approaches of Jevons and Marshall. Philp, Slater and Harvie (2005) disputed the epistemological coherence of the model's microfoundations, concluding that, "the indifference curves which underpin labour-leisure preferences are themselves founded on axioms which have been shown to be problematic elsewhere in neoclassical economics" (p. 80). Jennings (2004) analyzed the dead metaphors that signify measurement in the labour supply model, pointing out that measurement already requires a metaphor but that unmeasurable homogenous units of labour are a metaphor for a metaphor – a catachresis (literally "wrong use"). She cited Barthes's criticism of such speech forms as foundational for mythologies that "falsely universalize by removing the historical referents of signifiers" (p. 137) and noted his warning about the disingenuous "depoliticization" inherent in such speech.
Next.Abstract: Sidney Chapman's theory of the hours of labour, published in 1909 in The Economic Journal, was acknowledged as authoritative by the leading economists of the day. It provided important insights into the prospects for market rationality with respect to work time arrangements and hinted at a profound immanent critique of economists' excessive concern with external wealth. Chapman's theory was consigned to obscurity by mathematical analyses that reverted heedlessly to outdated and naïve assumptions about the connection between hours and output. The Sandwichman is serializing "Missing: the strange disappearance of S. J. Chapman's theory of the hours of labour" on EconoSpeak in celebration of the centenary of publication of Chapman's theory. (To download the entire article in a pdf file, click on the article title.)
Monday, November 10, 2008
How to Deal with Housing: Speaking for Galbraith IV
Finally, I have a few suggestions regarding dealing with the current crisis associated with the decline of the housing bubble and the distress this is causing to individuals, especially those facing foreclosures or difficulties in paying their mortgages. I would support two proposals that have been floating around.
The first is that of foreclosure vouchers, a proposal due to David Colander. The idea is to have the government (Treasury? HUD?) distribute to taxpayers mortgage foreclosure vouchers, based on income, with lower income persons receiving larger vouchers. These can either be used to pay off a mortgage for those facing foreclosure or to buy a house that has been foreclosed. Otherwise, they can be sold in a secondary market. This will help those in most danger and may help to stabilize the housing market as well, although there will probably need to be some further declines in housing prices as they continue to remain some 10-30% above historical norms, if the Case-Shiller index is to be believed. While falling housing prices are creating many problems, ultimately lower housing prices will make it easier for younger and poorer people to buy houses without relying on exotic mortgages, which should be sharply limited.
Another idea is that of a shared appreciation mortgage (SAM), which have been used in the past as well as in the UK. In this case, a borrower gets a lower mortgage rate, but must share any appreciation of the value of their house with the lender. This may provide a way for renegotiating mortgages to make them easier to pay, while preserving the stability of the lending institutions as well. Apparently this sort of mortgage is technically available for use right now, but has been not used in recent years due to an IRS ruling against them because of problems keeping debt and equity separate for tax purposes. As has been noted by proponents, this rule could be changed "by the stroke of a pen" used by the Treasury Secretary.
As a final note, I point out that Canadian banks are currently rated the safest in the world and have been relatively unharmed during this current crisis. Their regulations are clear and straightforward, with the Canadians having a nationwide, branch banking system. So, it is possible to improve how the financial system works through appropriate rules and regulations.
Relax the Mark to Marketing Accounting Rule: Speaking for Galbraith III
The real source of the problem with mark-to-marketing accounting rules has been international, coming out of the Basel II rules that have only recently been fully adopted in the world's banks. In any case, banks must revalue their assets according to current market conditions, which in itself is not such a bad thing. However, the minimum capitalization rules in conjunction with this method of accounting aggravate downward spirals. If a bank's assets decline in value, it may be forced to sell some to raise its capitalization, which has a clearly negative multiplier effect on the markets in general.
The SEC has reportedly been considering some variation of this rule. I would suport a change that has been reported to have been adopted in Germany. Banks that declare a willingness to hold onto an asset to maturity, may value it at its original face value. Thus, promises to hold certain assets to maturity takes them out of being subject to the mark to marketing rule and stabilizes their capitalization, and hopefully, the financial markets more broadly.
Battling Bubbles: Speaking for Galbraith II
Probably the most difficult proposal I shall make will be to advocate a much more vigorous role by the government in preventing bubbles from getting too large. I understand that the Fed is thinking about this, but I think this is a function that should be spread across various agencies, with perhaps the CEA being the one to try to advocate for something being done. Different bubbles may require different tools, with very precise ones that influence the relevant markets the best. Thus, for an oil bubble, use selling oil from the Strategic Petroleum Reserve. Paul Davidson has long advocated using buffer stocks of commodities to regulate excess price volatility in some markets. This can be done for some agricultural commodities as well, presumably by the USDA. In housing markets, limits on certain kinds of mortgages can be imposed, perhaps by the Fed, no interest only or other mortgages that encourage prices of housing too high for most buyers. In broader financial markets, the SEC or the Fed can use margin requirements to slow the rush to buy and push up prices, and clearly various derivatives not now under such regulations should be brought under them. So, a flexible policy not focused on one tool or approach should be used.
In this regard, let me issue a warning. While many have sneered at Alan Greenspan for his reluctance to do anything about bubbles, it should be kept in mind that, aside from margin requirements, the main tools available or the Fed are probably too blunt. Thus, no one should forget that the overly tight monetary policy of 1929-30 was substantially driven by a desire to squeeze down the stock market bubble of the late 1920s. Clearly a tool can be overused. And, while many also sneer, it is also not always that easy to know when a bubble is going on, although I think this can be done. In this regard, Greenspan himself jumped the gun with his famous remarks in 1996 cautioning against "irrational exuberance," which caused the stock market to drop the next day, but then to start climbing again, with the main market indices not ever getting down that low again (although I think the NASDAQ has, which was the bubbliest).
No New Bureaucracies: Speaking for Galbraith I
This Friday, November 14, I shall be participating in a public forum at the Theresa Lang Student Center, New School University, 55 West 13th Street, Room 1202, 1203, that has been organized by James K. Galbraith, a senior Obama economics adviser, under the sponsorship of the Economists for Peace and Security, and entitled, "Financial Crisis, the US Economy, and International Security in the New Administration." Besides Galbraith and myself, a few of the other participants will include Joseph Stiglitz, Lord John Eatwell, Allen Sinai, Paul Davidson, Perry Mehrling, Ping Chen, and Dimitri Papadimitriou, among others. I will be on a panel devoted to proposing new regulations for the domestic financial system. I shall discuss what I intend to talk about in four postings here, this the first one.
So, my first remark will be to urge that there be no new regulatory bodies or other bureaucracies created. What is needed are better rules and better people in the relevant positions. There may be (and already have been) changes in the powers of particular bodies, but any effort to create some new, grand oversight body will be just a waste of time and effort. Unfortunately, Democrats sometimes like to d0 this. So, in the wake of 9/11 they were stronger advocates than most Republicans of creating the Department of Homeland Security to combat terrorism. This was supposed to centralize and simplify decisionmaking, but it simply made things more confused and worse. Burying FEMA in this body did not help with its ability to fight against hurricane disasters and damages. I see no reason for Obama to revive Clinton's National Economic Council either. What did it ever do that the CEA cannot do? And for that matter, do we really need the Comptroller of the Currency? Cannot its functions be taken over by the Fed? In this time in which government will necessarily be increasing its role in the economy, let us at least hold back on increasing its overblown bureaucracy. Keep it lean and clean and mean.
Cutting Defense Department Pork
Conservatives wanted to paint Barack Obama as a big spending liberal but maybe he will propose reducing DoD spending says Bryan Bender:
A senior Pentagon advisory group, in a series of bluntly worded briefings, is warning President-elect Barack Obama that the Defense Department's current budget is "not sustainable," and he must scale back or eliminate some of the military's most prized weapons programs. The briefings were prepared by the Defense Business Board, an internal management oversight body. It contends that the nation's recent financial crisis makes it imperative that the Pentagon and Congress slash some of the nation's most costly and troubled weapons to ensure they can finance the military's most pressing priorities.
I’m all in favor of a strong military but there has always been room to make our Defense Department leaner without sacrificing national security. According to this source, overall Federal spending rose from 18.99% of GDP in 2000 to 20.86% of GDP in 2007 with defense spending leading the way as it rose from 3.77% of GDP in 2000 to 4.8% of GDP in 2007. Defense spending represents 23% of the total Federal budget even if we include Social Security benefits. Defense spending is also more than double nondefense Federal spending. While you may her talk among Republican circles that we can balance the budget without raising taxes, this talk is pure fantasy unless one is willing to curb DoD spending. Yet – Republican support for the type of proposals outlined by this advisory group has historically been quite rare. Let’s hope things change over the next few years.
Fiscal Policy and the 1938 Recession
Paul Krugman has a few economic history lessons for the President-elect and the rest of us:
Everybody’s talking new New Deal these days - and, predictably, the FDR-haters are out in force, with all the usual claims about FDR having actually made the Great Depression worse.
These rightwing FDR-haters also seem to think that the General Theory written by Lord Keynes is one of the most evil books of all time. Paul notes, however, that real GDP rose impressively relative to potential GDP from 1933 to 1941. But wasn’t there a recession in 1938? Paul continues:
you might say that the incomplete recovery shows that “pump-priming”, Keynesian fiscal policy doesn’t work. Except that the New Deal didn’t pursue Keynesian policies. Properly measured, that is, by using the cyclically adjusted deficit, fiscal policy was only modestly expansionary, at least compared with the depth of the slump.
Today Paul adds this:
there’s a whole intellectual industry, mainly operating out of right-wing think tanks, devoted to propagating the idea that F.D.R. actually made the Depression worse. So it’s important to know that most of what you hear along those lines is based on deliberate misrepresentation of the facts. The New Deal brought real relief to most Americans. That said, F.D.R. did not, in fact, manage to engineer a full economic recovery during his first two terms. This failure is often cited as evidence against Keynesian economics, which says that increased public spending can get a stalled economy moving. But the definitive study of fiscal policy in the ’30s, by the M.I.T. economist E. Cary Brown, reached a very different conclusion: fiscal stimulus was unsuccessful “not because it does not work, but because it was not tried.” ... F.D.R. wasn’t just reluctant to pursue an all-out fiscal expansion - he was eager to return to conservative budget principles. That eagerness almost destroyed his legacy. After winning a smashing election victory in 1936, the Roosevelt administration cut spending and raised taxes, precipitating an economic relapse that drove the unemployment rate back into double digits and led to a major defeat in the 1938 midterm elections. What saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.
In other words, that 1938 recession cited by rightwingers as evidence that fiscal stimulus is bad, bad is actually evidence that we should not turn to fiscal discipline just now. Let’s just hope the 2009 fiscal stimulus package does not come at the point of a gun – just as another idiotic invasion of a Middle East nation.
The Financial Meltdown and the “Meltdown Meltdown”
Bill McKibben reminds us that we can’t put climate change on hold until we think it’s economically convenient; the natural world has its own priorities, and we don’t get to vote. If you understand why putting a lid on carbon emissions is urgent, you know why it can’t be pushed back to the middle of the to-do list.
But there is another point to be made, crucially. In the end, there is only one resource constraint the government faces in its effort to contain the financial crisis and prevent recession from morphing into depression: the requirement that external deficits be financed. The Fed can wave its wand and create finance out of thin air—so long as this doesn’t lead to a panicked flight from the dollar. As it was in the beginning of the crisis, so it shall be in its long unfolding: dollars going out must find their way back in.
This constraint is invisible at the moment, because treasuries are seen as the safest asset in an unsafe world. In fact, money is flowing in at such a pace that the Fed has had to set up a network of currency swaps to make sure other central banks have enough dollars. But that sentiment will change at some point, perhaps suddenly, and when it does the feasibility of the current free-spending bailout will be in question.
There is no single solution to this problem (although I’ve argued in the past that bailing out the private sector’s old losses to generate new finance makes it worse). One significant step, however, is to push down the US oil import bill as far as it can go. A carbon cap along the lines Obama the candidate advocated last winter would be just the ticket. If we jack up the price of oil through a hard-nosed cap, imports will fall. And, as I also argued in an earlier post, households would benefit if the auction revenues were returned to them more or less in full. Rather than paying out to oil companies and petrostates and never seeing their money again, their payments would be captured by the auctions and handed back to them. Importance for the financial crisis: less oil imports mean a lower current account deficit, and therefore less reliance on external financing. It pushes the resource constraint out.
Missing: the strange disappearance of S. J. Chapman’s theory of the hours of labour (6)
...now you don't? Part IV
For Hicks, then, thinking back his argument to a "more cumbrous but more realistic form" involved making an unexplained leap from the observation in Chapter V, consistent with Chapman's theory and historical evidence, that "[p]robably it had never entered the heads of most employers that it was at all conceivable that hours could be shortened and output maintained" (p. 107) to the claim in Chapter XI that, "[a] very moderate degree of rationality on the part of employers will thus lead them to reduce hours to the output optimum as soon as Trade Unionism has to be reckoned with at all seriously" (p. 218). It is not a question of whether Hicks's assertion was right or wrong. His claim simply didn't follow from his own premises and, in key respects, contradicted them.
Although Hicks's non sequitur feat of "realism" may be one element in the disappearance of Chapman's theory, surely it can't be held solely responsible for its eclipse. For an explanation of that, we need to turn to a subsequent general shift in formal economic analysis (in which Hicks was deeply involved) that took place in the 1930s. This shift inherited some of its fundamental premises from the thought of Leon Walras, Vilfredo Pareto and Enrico Barone, proponents of the Lausanne school of economics.
NextAbstract: Sidney Chapman's theory of the hours of labour, published in 1909 in The Economic Journal, was acknowledged as authoritative by the leading economists of the day. It provided important insights into the prospects for market rationality with respect to work time arrangements and hinted at a profound immanent critique of economists' excessive concern with external wealth. Chapman's theory was consigned to obscurity by mathematical analyses that reverted heedlessly to outdated and naïve assumptions about the connection between hours and output. The Sandwichman is serializing "Missing: the strange disappearance of S. J. Chapman's theory of the hours of labour" on EconoSpeak in celebration of the centenary of publication of Chapman's theory. (To download the entire article in a pdf file, click on the article title.)
Sunday, November 9, 2008
Johnathan Swift on The Bubble
No commentary needed:
The Bubble
Ye wise Philosophers explain
What Magick makes our Money rise,
When dropt into the Southern Main;
Or do these Juglers cheat our Eyes?
Angels and Pins
Sandwichman asks Dr. Reich: So, just how many stimulus angels can dance on the head of a fiscal pin?
Shorter Work Time Jubilee
by the Sandwichman
An American Moment: Your Vision
Start right now. Share your vision for what America can be, where President-Elect Obama should lead this country. Where should we start together?
Here's Sandwichman's Vision:
On November 2, 1865 – one month before the adoption of the Thirteenth Amendment to the US Constitution, abolishing slavery – the great antislavery activist and orator, Wendell Phillips, proclaimed his American vision from the platform of Faneuil Hall in Boston:
"Today one of your sons is born. He lies in his cradle as the child of a man without means, with a little education, and with less leisure. The favored child of the capitalist is borne up by every circumstance, as on the eagle's wings. The problem of today is how to make the chances of the two as equal as possible; and before this movement stops, every child born in America must have an equal chance in life."
The election of President Obama symbolizes progress that has been made in a century and a half toward fulfilling that vision. There is still far to go, though, before every child born in America has that equal chance in life. Wendell Phillips's devotion to the cause of labor shows the way – the "more American way."
In his Boston speech, Phillips addressed the Boston Eight-Hour League, which advocated adoption of an eight-hour working day. Seventy-three years later, the Fair Labor Standards Act of 1938 made the eight-hour day and the 40-hour workweek the law of the land. Another 70 years have passed since passage of the FLSA but the standard workweek remains frozen at 40 hours despite immense improvements in productivity and profound demographic shifts in labor-force participation.
The great eight-hour movement didn't aspire to an eight-hour day merely for its own sake or as the ultimate goal. Eight hours was envisioned as a step on the path to a higher ideal. More leisure would allow for education and uplift, which would lead to more effective citizenship and political participation. Through higher wages and lower unemployment, eight hours would bring about a more equitable distribution of the products of industry. Achievement of the eight hour day would inspire a movement for the six-hour day and, eventually, to industrial co-operation: "In this final arrangement, every man will combine in his own person the laborer and the capitalist." (While Phillips's usage conformed with the old convention of "men" and "sons" his colleagues in the Anti-Slavery Society and the Eight-Hour League included the women's rights pioneers, Susan B. Anthony and Elizabeth Cady Stanton).
The eight-hour theory articulated by Ira Steward, also an antislavery activist, was a uniquely American theory of social economy. It provided the philosophical foundation for the American Federation of Labor during its formative years. In the Depression of the 1930s, economist Dorothy W. Douglas considered the theory to be "strangely apposite" to the economic problems of that time. Historian Lawrence Glickman credited the eight-hour theorists with establishing the concepts of a living wage and a high standard of living for working people.
Ironically, in the 1930s big-business opponents of the Roosevelt New Deal hijacked Wendell Phillips's terminology of the better, nobler, "more American way." On 60,000 billboards erected across the country, the National Association of Manufacturers claimed credit for the "World's Highest Standard of Living", "World's Highest Wages" and "World's Shortest Hours of Work." A decade later, their Republican allies in Congress passed the Taft-Hartley Act to enable rolling back those higher wages and shorter hours.
A century ago, Sydney J. Chapman, a star pupil of Alfred Marshall, the "father" of modern neoclassical economics, presented his theory of the hours of labor. That theory overturned what Lionel Robbins called "the naïve assumption that the connection between hours and output is one of direct variation." Coincidentally, it confirmed key elements of the theory proposed by the Boston machinist, Ira Steward. In the 1940s, economist John Maynard Keynes argued that reducing the hours of work was one of three ingredients of a cure for unemployment and, furthermore, that it was the "ultimate" cure.
Economists today, though, shun discussion of shorter hours like the plague. They disparage policies for reduced working time as being based on an imaginary "lump-of-labor fallacy." Few of them have heard of Ira Steward's theory or have any idea that respected economists like Sydney Chapman, John Maynard Keynes or John R. Commons also supported progressively reducing the hours of work. A veil of ignorance and arrogance has descended in textbook economics over the issue of the hours of work. Is it any wonder then, that in the face of the greatest economic challenge since the depression, economists can think of nothing better than to call for yet another fiscal stimulus package, yet another interest rate cut and yet more bailouts of banks and corporations?
It is unrealistic to think that the Obama administration would consider implementing a policy of reducing the hours of work in the absence of strong popular support for such an action. It would be my hope, though, that the new administration could at least research the notion and review, with an open mind, the historical and economic case for shorter working time. Then, as the same-old, same-old economic policies of fiscal stimulus, interest rate cuts and bailouts prove their futility – which they will – and as unemployment continues to mount month after month, an in-depth understanding of the "strangely apposite" theories of Ira Steward and Sydney Chapman might ultimately prove useful in formulating substantive, innovative responses to the economic emergency.
Inscribed on the Liberty Bell in Philadelphia is the Bible verse, "Proclaim LIBERTY throughout all the Land unto all the inhabitants thereof." The phrase comes from Leviticus 25:10 in the Old Testament and refers to the ancient custom of the Jubilee year in which slaves were freed and land returned to former occupants who had lost it through indebtedness. Abolitionists in the 1830s adopted it as their slogan and gave the bell its current name. In 1868, when Congress passed a law establishing an eight-hour day for laborers, mechanics and other workers in federal government employment, it was hailed a a "Jubilee of Labor."
My American vision foresees resuming the progressive reduction of the hours of work – with its associated increases in leisure and wages and decreases in unemployment and insecurity, as the surest way to "Proclaim LIBERTY throughout all the Land unto all the inhabitants thereof" and to ensure that "every child born in America must have an equal chance in life."
Saturday, November 8, 2008
“A global jobs crisis of mammoth proportions…”
Before this calamitous global economic unwinding, economists at the World Economic Forum in Davos in early 2006 expressed major concern about the growing crisis of unemployment around the world. “Growth of the past many years has not been translated into enough jobs in many countries…. Despite a robust growth of 4.3 per cent in 2005, the world economy did not deliver the 40 million jobs needed annually over the next decade for people entering the workforce.” The ILO report showed that in 2005, of the more than 2.8 billion workers in the world, 1.4 billion still did not earn enough to lift themselves and their families above the $2-a-day poverty line - just as many as 10 years ago…."Economic growth alone isn't adequately addressing global employment needs," said [the International Labour Organisation's director general Juan] Somavia. "We are facing a global jobs crisis of mammoth proportions. We need new policies." [1]
Two years previously Luke Exilarch wrote on the growing unemployment in the US associated with national economic ‘growth’:
"The number of men between 16 and 64 [in the US], ... was 93 million. . . Of those 93 million men, the government admits that 4.4 million of them are unemployed. And when I say unemployed, I mean utterly and completely inactive. The government considers someone “employed” if they work as little as one hour a week. People who do not even work one hour a week are still considered “employed” if they are “temporarily absent” from work.
But in addition to the 4.4 million men who are officially “unemployed” the government admits that 28.7 million men over 16 are “not in the labor force.” Subtracting from this 28.7 million the estimated 11.9 million men 65 and over belonging to that group, results in 16.8 million men between the ages of 16 and 64 who are “not in the labor force.” Adding the 4.4 million officially unemployed to the 16.8 million who are factually unemployed yields a total of 21.2 million unemployed men between the ages of 16 and 64...." [2]
Why is this happening?
How much of this loss of global opportunity can be attributed to the alarming degradation and depletion of the world’s biosphere over the last few decades. The economic consequences of this wholesale rape were hidden from public scrutiny by fraudulent forms of cost-benefit analysis, worthy only of "a damning indictment” [3] and performed by mainstream economists.
Other factors:
Higher energy prices.
Global corporate conglomerates were able to use capital far more intensively.
The emergence and dominance of uneconomic forms of profit seeking such as the excessively-leveraged (private equity) buyouts of public corporations followed by the associated asset-stripping and rationalization of the workforce that are now unfolding into predictable bankruptcy or taxpayer-funded bailout. [4]
To what extent did the ‘recruitment’(often forced and incorporating land eviction [5], [6], [7], [8], [9] ) of an extra billion people into the global workforce have on rising global unemployment. [10]
It's hard to see this social crisis being addressed by a simple reduction in working hours. I agree with the sentiments of Mikhail Gorbachev as he expressed them this last month. We need "a serious reconsideration of the very foundations of our socio-economic model of modern industrial society"[11]...but that is another article.
[1] Global Trends by Martin Khor
Thursday 2 February 2006
Problem of “jobless growth” highlighted
http://www.twnside.org.sg/title2/gtrends90.htm
[2] The Real Unemployment Rate is 23%: How and Why Jobs are Vanishing from America
Luke Exilarch. March 20, 2005
http://www.exilemm.com/e-sub-realunemployment.shtml
[3] Rober F Kennedy Jr’s commentary on the book ‘Priceless: On Knowing the Price of Everything and the Value of Nothing’by Frank Ackerman and Lisa Heinzerling.
[4] The Bust of the Private Equity and LBO Bubble
Nouriel Roubini | Feb 22, 2008
http://www.rgemonitor.com/blog/roubini/245686#readcomments
[5] ‘Abahlali baseMjondolo: The South African Shack Dwellers Movement’
May/June 2008. The Body, the complete HIV/AIDS resource website
http://www.thebody.com/content/art47450.html
[6] Human Rights Watch 2006 Report on Indonesia, III. Background
http://www.hrw.org/reports/2006/indonesia0906/3.htm
[7] Special Exploitation Zones [India]
By Tejal Kanitkar & Puru Kulkarni. 18 October, 2006
http://www.countercurrents.org/ind-kanitkar181006.htm
[8] Inside China Today
Archive for the 'Forced Eviction' Category
http://insidechinatoday.net/category/forced-eviction/
[9] SOHNews Archive for the 'Forced Eviction' Category
http://sohnews.com/category/forced-eviction/
[10] This process was stepped up heavily in the 1980s in India, China and South America (in particular) and continues to present day.
[11] 'Mr Capitalism, tear down that immorality' Australian Financial Review, page 65. 31st October 2008.
Who Abroad is Challenging Obama First?
Lots of people, including Joe Biden, have said that some foreigners would be challenging Obama early on. I see two candidates at the front of the pack, one a nominal ally. The first is Russia, which has arguably already done so with its announcement of moving missiles next to the Polish border in response to Poland accepting an anti-missile shield. It could be that they did not mean this as a challenge to Obama, but rather had been waiting until after the election to do this so as not to influence the election. However, this looks all too much like the half-baked thinking of Putin who somehow thinks that threatening others will make things go Russia's way. Obama had long expressed reservations about the shield, and the Poles had been resisting Bush's pressure to install it. Obama also initially had a nuanced view of the Georgian-Russian conflict. But then, Putin invaded Georgia proper. This pushed Obama to support Shaakashvili unreservedly, and also triggered Poland to accept the anti-missile shield. Putin (or more likely, Medvedev) might have been able to negotiate with Obama to withdraw the shield or put it on hold, but with this missile move there will be no way that Obama can do that. He will have to show that he can stand up to the Russian bear and support the shield. Just plain dumb on Putin's part.
The other likely challenge may come from Israel, which has been very weak in its congratulating Obama. This may be the flip side of all the enthusiasm for Obama in the Arab and Muslim world, with even President Ahmadineja