Tuesday, March 31, 2009

Will Deferring Social Security Taxes Encourage More Current Consumption?

One of the proposals to encourage aggregate demand is to reduce payroll taxes. One might ask – how would one cover the lost revenue from such a proposal. Greg Mankiw has one answer:

I would institute an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax. I would make the two tax changes equal in present value, so while the package results in a short-run budget deficit, there is no long-term budget impact. Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift.

Amitai Etzioni proposes another:

The government should not collect Social Security taxes for one month — as long as the Obama administration commits the government to collect it for a 13th month once the economy is growing again at a fair pace … Last but not least, the Social Security tax is famously regressive. Hence, cutting it would put proportionally more money into the pockets of people most likely to spend it all in short order, a key goal for any stimulus.

Both proposals have no effect on after-tax lifetime income so if one is a proponent of Friedman’s permanent income hypothesis or the Ando-Modigliani lifecycle view of consumption or the Barro reformulation of Ricardian Equivalence – then deferring taxation would not be seen as encouraging more current consumption according to this theory. Then again - Mark Thoma reminds us that this theory may not work so well in practice.

Monday, March 30, 2009

Misleading Cato Petition Ad On Climate

In today's Washington Post (and I think some other papers) a paid ad appeared from the Cato Institute that has a bunch of signatures by various climate scientists, directed at President Obama "with all due respect" questioning that global warming is happening and asserting that after accounting for population and property value growth, there has been no increase in damage due to climate disasters over time. Citations are provided for some of these assertions.

I shall only note that this last one is rather problematic. A source is claimed to be an article from 2005 in the Bulletin of the American Meteorological Society by Pielke et al. I googled and found no such article, but did find some statement by him addressed to "Stern Review." In that he says that while climate is a factor in rising disasters, they could not necessarily be tied to global warming, and that in the future they might be offset by rising population and property values, hardly what is claimed the petition/ad.

I did some further checking and found a figure showing natural hydro-meterological disasters over time. While 2008 is back down to about 350, about the same as 1998, that is still more than any year prior to then, with such numbers being below 200 mostly in the past, although getting over 500 in 2000 and 2002 and equaling 500 in 2005. In any case, not at all supporting the reported claims by Pielke. This figure is from a chapter by D. Guha-Sapir and F. Vos in a book out from Springer this year, and it can be found down a ways on the right with the full citation on a blog post by Andrew C. Revkin of the New York Times.

Will The SDR Replace The Dollar?

The head of the Peoples' Bank of China has made headlines recently proposing that the IMF's Special Drawing Rights (SDR) replace the dollar as a world reserve currency. An excellent discussion of this issue has been put up by Brad Setser at http://blogs.cfr.org/setser. There are some reasons why it is unlikely without some other very big changes, and that indeed the idea rather conflicts with what has been Chinese currency policy.

The main problem is that despite being created to replace gold as "paper gold," the SDR is not a currency at all. It is strictly a unit of account used by the IMF, currently with a value based on a basket of the US dollar, the euro, the British pound, and the Japanese yen, with the German mark and French franc preceding the euro before it replaced them. Presumably an altered SDR that brought in some other currencies, presumably including at least the Chinese yuan/renmimbi, could serve as a better measure of global value, but unless the IMF starts actually issuing actual SDRs, there is no way it will serve as a reserve currency. As it is, even the reserves of the IMF in other currencies, measured in SDRs, is only $200 billion, likely to be inadequate for dealing with the emerging financial crises in various Eastern European and other "peripheral" countries.

The problem for China is that they have been pegging to the US dollar. They are becoming uneasy about the value of their dollar holdings, but a decline of the dollar would keep their exports competitive with other countries (besides the US), which seems to be a major concern of theirs. If they were to peg to the SDR, whatever is in its basket, they could damage their export competitiveness. As it is, while some countries used to peg to the SDR, very few do anymore, with one of the most recent to abandon doing so being Latvia, which switched to pegging to the euro, big surprise.

A quiz for the idle unemployed.

Who said the following?

"There is no doubt in my mind that this is the greatest problem confronting mankind at this time and that it has reached the level of a state of emergency

Dr ?

[inserting global dimming sulphur into the stratosphere] would change the colour of the sky. It's the last resort that we have, it's the last barrier to a climate collapse. We need to be ready to start doing it in perhaps five years time if we fail to achieve what we're trying to achieve…The consequences of doing that are unknown …"

Professor ?

“We have far less time to minimize dangerous anthropogenic climate change than previously thought. Observations of the climate system indicate that the impacts of atmospheric warming are at the upper end of the range predicted by the IPCC. This puts us in an extremely precarious and urgent situation that compels immediate action”

Professor ?

[Current CO2 levels are 387 ppm] "...leading toward conditions which existed on Earth about 3 million years (Ma) ago (mid-Pliocene), when CO2 levels rose to about 400 ppm, temperatures to about 2–3 degrees C and sea levels by about 25 +/- 12 metres."

Dr ?

Surprisingly everyone who had known the people in the carbon lobby said that they were all polite, kind and intelligent.

Hoover Economics – Czech Style

Is Czech prime minister Mirek Topolánek looking to write for the National Review? While he acknowledges the global recession, he also writes:

Even high-quality medicine, if administered in excessive doses, can be harmful or, if used permanently, cause unhealthy addiction. That's why I have been repeatedly calling on countries, within as well as outside the EU, to be prudent. I used the rather hyperbolic simile of the “road to hell” in my speech to the European Parliament last week to warn against the danger of temporary measures - such as excessively increasing public borrowing, nationalising or subsidising banks and industries, putting up protectionist barriers or enforcing “buy American” clauses - becoming permanent. It was in this context that I referred to the adverse experience of protectionism and state intervention in the US in the 1930s ... I do not need to explain that the welfare states of Europe act as “automatic stabilisers”, sustaining consumer spending even in a slump. This means that Europe does not need such a large fiscal stimulus compared with the US, which does not have such a system of social support. I also believe that as the President of the European Council I do not need to explain that the situation in the EU is different from that in the US in a further way - the EU cannot choose to apply a wide-scale financial stimulus. Even though the Czech Republic is not a member of the eurozone, I do not need to explain the vital importance of the rules of the Stability and Growth Pact that restrict the size of a country's budget deficit and national debt. Or do I?

While I am not in favor of using trade protection to bolster U.S. net exports (something about the prospect beggar thy neighbor retaliation), Smoot Hartley was not the cause of the Great Depression. Nor was the New Deal. As far as a potential defense of the Buy American provisions that Topolánek criticizes, let’s turn the microphone over to Paul Krugman:

And one part of the problem facing the world is that there are major policy externalities. My fiscal stimulus helps your economy, by increasing your exports — but you don’t share in my addition to government debt. As I explained a while back, this means that the bang per buck on stimulus for any one country is less than it is for the world as a whole. And this in turn means that if macro policy isn’t coordinated internationally — and it isn’t — we’ll tend to end up with too little fiscal stimulus, everywhere.

Topolánek now advocates the lack of fiscal stimulus that worried Paul. If the European economy were currently facing excess aggregate demand, this call to adhere to the Stability and Growth Pact would make sense. Otherwise, it is the kind of Hoover economics that Republicans in Washington are also advocating.

Update: Paul Krugman has more:

Like many other economists, I’ve been revisiting the Great Depression, looking for lessons that might help us avoid a repeat performance. And one thing that stands out from the history of the early 1930s is the extent to which the world’s response to crisis was crippled by the inability of the world’s major economies to cooperate. The details of our current crisis are very different, but the need for cooperation is no less. President Obama got it exactly right last week when he declared: “All of us are going to have to take steps in order to lift the economy. We don’t want a situation in which some countries are making extraordinary efforts and other countries aren’t.” Yet that is exactly the situation we’re in. I don’t believe that even America’s economic efforts are adequate, but they’re far more than most other wealthy countries have been willing to undertake. And by rights this week’s G-20 summit ought to be an occasion for Mr. Obama to chide and chivy European leaders, in particular, into pulling their weight. But these days foreign leaders are in no mood to be lectured by American officials, even when — as in this case — the Americans are right.

Ian Traynor reports that the European leaders are likely not going to listen to President Obama:

The case pushed by Merkel repeatedly in recent weeks, and echoed by France and the European commission, is that there is no point now in more tax cuts and deficit spending to boost demand since it is not yet clear whether the huge fiscal stimuli packages already launched are actually going to work … the European leaders are indeed worried that Obama's huge public spending programmes could fuel hyper-inflation and leave Europe struggling to refinance colossal levels of state debt if they followed suit.

Work Time Regulation as Sustainable Full Employment Strategy

by the Sandwichman

Bob LaJeunesse's book, Work Time Regulation as Sustainable Full Employment Strategy has been published by Routledge. A 30-page preview is available online. I tried to paste the widget for the preview on EconoSpeak but couldn't figure out how it worked.

Table of Contents: Introduction 1. The Origins of the Work and Growth Fetish 2. Rethinking the Work Fetish and the Growth Consensus 3. Work Time Regulation as a Macroeconomic Policy Tool 4. The Ecological and Social Sustainability of Work Time Regulation 5. The Employment Effects of Work Time Reduction 6. A Proposal for Reform 7. Conclusion

Sunday, March 29, 2009

A Sign of the Times

New York Times "Room for Debate" blog: Europe’s Solution: Take More Time Off
While many European companies have long turned to shorter workweeks and mandatory time off in economic downturns, the idea has never really caught on in the United States. Despite reports of unpaid furloughs and wage cuts, American companies continue to rely heavily on layoffs to control labor costs...

Is Economic Man Parsimonious?

by the Sandwichman

"Of course we know that this is not so... but we assume it for simplicity’s sake, as an hypothesis."

But of course... For simplicity's sake...

In Narrative Policy Analysis, Emery Roe argued that a counter-narrative must be "as parsimonious" as the policy narrative that it challenges. That word, parsimonious, appeared also in Joseph Persky's 1995 JEP retrospective on "The Ethology of Homo Economicus": "to compete successfully against Economic Man, a new ethology must be parsimonious..." (Nemo contra deum nisi deus ipse!)

Roe and Persky were, of course, referring to Occam's Razor -- the principle that the fewest possible assumptions should be made when explaining a thing. Such theoretical economizing by economists is not to be confused with the economizing done by Economic Man. Or is it? Could there be a strange, self-referential loop that fancies itself parsimonious about parsimony?

There's one way to find out. Build the equally parsimonious counter-narrative that, so to speak, unmans Economic Man.

Doctor Frankenstein's got nothing on the Sandwichman, who has been disposing of his spare time for several weeks constructing the definitive counter-narrative to Economic Man. In an earlier post, I proposed the name Hesci for my creature. Another possibility would be Persona Parsimoniae. Or how about both: "HESCI, Persona Parsimoniae"?

Heschi is a spreadsheet that summarizes the characteristics of an implied economic subject from (so far) 19 texts from the working time literature, spanning 237 years. The idea is to relate those characteristics to the presumed characteristics of Economic Man, i.e., utility maximization, rationality and independent preferences. Inevitably, there is overlap between the working time literature and the 'classics' of political economy and economics with, for example, Adam Smith, J.S. Mill, Marx, Lionel Robbins and J.M. Keynes being represented in both.

Some of the statements don't so much contradict the assumptions of Economic Man as complicate them. Others do contradict them flatly. What I believe the exercise shows is that not only are the assumptions about Economic Man, in the words of Walter Bagehot, trivially "not so" but they are also, more importantly, not so simple. Assuming them "for simplicity's sake" is thus disingenuous, a strategy for deferring, deflecting or evading reasoned analysis rather than for facilitating it.

Friday, March 27, 2009

Reveal Rejects?

Over on Overcoming Bias, Robin Hanson has proposed that journals report the papers that they reject, including names of authors and dates of rejections, possibly even with the referee letters. He argues that this might improve the efficiency of the economics journal publishing process by "raising the bar" so that people will not send papers to journals that they are unlikely to get their papers accepted in.

As a journal editor I disagreed, noting that this would be very humiliating for many would-be authors, with some I know having a hard enough time submitting papers given their fears and unhappiness about rejections and nasty comments by refererees. I also noted that there are other proposals out there along similar "efficiency" lines, but that they go against practices and trends in the hard sciences. Thus one says that lengthening the times to first responses from journals (which has been a trend) would achieve this result also, and there are journals that charge very high submission fees, but then return them if papers are accepted (last time I checked, $650 at the Journal of Financial Economics, with the Journal of Monetary Economics not far behind). As it is, in the hard sciences, very rapid turnaround and publishing times are emphasized, and rather than punishing submitters who get rejected and rewarding those who are accepted, many hard science journals have no submission fees, but make authors pay for pages of papers that are being published, something I am unaware of any economics journal doing, whatever one thinks of that. But it is certainly the opposite of the practice of the J. Fin. Econ. and the J. Mon. Econ.

Thursday, March 26, 2009

The Dithering Society

LBJ gave the US the Great Society. He also gave us Vietnam, but let's put that aside for the moment. A lot of the Great Society was really meant to co-opt radicalism, but some of what he did looks almost miraculous compared to what we have today. I would suggest we have today is the Dithering Society, except for the rapidity with which the administration responds the unmerited demands of finance.

Obama began with some vague ideas, sometimes even suggesting bold measures. Once in office, we got Clinton retreads, with a handful Goldman Sachs alumni placed in strategic positions.

So far we see few breaks with the loathsome Bush administration, either on the international or on the national front. Every time some Obama initiative seems to inconvenience them rich and powerful interest group, it is modified mostly to their satisfaction. All the while, the hammer falls on ordinary people.

One might at least expect competence, but even here disappointment awaits us. So far the bailout seems to suggest little improvement over the Paulson plan.

Even conservative economists recognize why bankrupt financial institutions should be allowed to go bankrupt. Instead, the Obama boys want to bail out the financial market by virtually guarantying hedge speculators who buy the bad debt.

There is one bailout bill waiting for some action. The Los Vegas casinos are hurting. I know: boo hoo. How could the government bail them out? They could lend me money to gamble. I will be obligated to share my winnings with the government, but they agree that I do not have to repay the loans if I lose. So, I would stand to gain a great deal with little risk.

How is my casino plan different from the present plan of creating a market for "legacy" [Isn't that nicer than saying toxic] assets, other than that financial firms will have to put up a wee bit of their investment.

The best we can hope for from Obama would be to continue to embarrass himself with the obsequiousness toward rich and powerful in such a way as to spark a massive protest comparable to the 1960s. Let's stop dithering. Any takers?

Intelligent Design and Evolution

Econospeakers may be interested in my mini-review of Michael Behe's effort to open the door to "Intelligent Design" in his book The Edge of Evolution: The Search for the Limits of Darwinism. (This was originally a letter to a friend.)

Reading Michael Behe's book, I came to the conclusion that even though he's a very clear writer and knows a lot (especially about malaria), it's no accident that none of the blurbs on the covers are from biologists. He doesn't know evolutionary theory very well. There's nothing wrong with chemists such as Behe "doing" doing biology (just as there's nothing wrong with economists such as myself doing it), but they should heed that profession's knowledge.

In his section "the importance of the pathway" (pp. 4-7) of the evolution of beasts and species over time, he wonders about the likelihood of a random process of mutation getting creatures from "biological point A to biological point B." If "you had to walk blindfolded from one side of an unfamiliar city to the top of a skyscraper on the other side -- across busy streets, bypassing hazards, through doorways -- you would have enormous trouble." He adds that this blindness would be "in the spirit of Darwinism, blind drunk."

I agree: there's little possibility of getting to the top of the skyscraper. It's very unlikely that a bunch of amoebae existing billions of years ago would take a random walk through Darwinian natural selection and end up typing these words into Econospeak.

The problem is that Behe looks at evolution backwards from the end result, implying that Darwinism is teleological, working toward a predetermined goal. Darwinism is not that way, as the late Steven J. Gould emphasized again and again. Just because many such as Herbert Spenser have tried to make Darwinism teleological does not make it so.

Behe assumes that creatures such as humans are currently on top of a skyscraper (with very complex organisms, etc.) and then asks how we could have gotten here blindly. But the exact nature of this point B was not predetermined; evolution is an historical, not a teleological, process. We might have ended up with completely different creatures, perhaps even with our planet lacking complex organisms. The amoebae may have evolved to write for Rush Limbaugh's site instead. Or for the Huffington Post. Or wherever -- or not at all. The current end-point wasn't known ahead of time.

It's more as if we stagger starting at one point in the unfamiliar city and we could end up anywhere. We might end up at the top of a skyscraper, but which skyscraper it was not predetermined. Once we get to the top of whatever building we end up, it make look like that was the only option, but it wasn't. History is contingent. It only looks like it was a predetermined process after the fact, just as winning a war seems inevitable only after you've won. Looking back at the process, the alternative paths that could have been taken are easy to forget because they did not actually happen.

After that, Behe misinterprets the randomness in Darwinian theory. It is not the randomness of flipping coins or of the blind drunk. Randomness in Darwinian theory refers to processes that are not explained by common descent or natural selection. (It's randomness relative to these.)

For example, we see that a parasite and its host can actually learn to live with each other, like a lot of the bacteria in our guts. Sometimes the parasite becomes part of the host, the way that organelles in our bodies' cells seem to have done. There's also the case where a large number of almost exactly the same kind of cell can form a "colony" (as with yeast), which turns out to give them all some adaptive advantage. Next, there's the principle of specialization: a hydra is a lot like a colony, but some cells specialize in doing some tasks, so that the entire creature can get an adaptive advantage. Then there are entire organs (such as our lungs) inside more complex bodies; each of these is like a colony which specializes in one or more of the body's function. Etc.

All of this is totally unexplained by selection, and therefore "random" relative to natural selection. But it is not random by other criteria. It is not a drunkard's walk.

On page 15, Behe seems amazed that the malaria microbes haven't figured out a way to get around sickle-cell anemia. But it's not like all types of germs have to be successful in the sense of killing off all of the people, etc. (There's no inherent imperative to kill people.) In fact, if the malaria microbe killed off all of the mammals it infects, it might kill the geese that laid the golden eggs for them: parasites that kill their hosts do not survive to propagate their species.

It's quite possible that malaria and sickle cells have reached a rough equilibrium where malaria continues to be reproduced generation after generation, along with its hosts, and the sickle cells have attained a similar status. It might be somewhat like the continuing relationship between predator and prey.

On page 16, Behe refers to E. coli as devolving: it's becoming simpler over time, so that nothing "of remotely similar elegance has been built." He assumes that one of Darwinism's ideological overlays -- i.e., that evolution produces more and more complex and elegant creatures as part of a unilinear "upward" path toward more and more "improvement" -- is part and parcel of Darwinism. But this is not true: point B might be a cheap motel rather than a skyscraper; it might be a cheaper motel than at point A. (As mentioned, the amoebae might have devolved to writing for Limbaugh.)

It's notable that this increasing complexity is not one of his three components of Darwinism that Behe defines at the beginning of his introductory chapter (mutation, selection, common descent). He sneaks it in after introducing those three pillars. In fact, it's quite possible that the increased complexity we see is only in the eye of the beholder: as Gould stressed, the dominant species on Earth are simple bacteria, not complex humans. We see complexity as so important because we're flattering ourselves.

Also on page 16, Behe wonders why malaria hasn't gone beyond the tropics. Again, what matters in the evolutionary process is survival to propagate, not expansion. It's not a matter of "survival of the fittest," which is often interpreted in terms of "better" species winning over others. Rather, it's survival of those species that are most able to pass their genes on to offspring that can pass them on to their offspring, ad infinitum. In order for this to happen, the species has to fit with its environment, but that does not mean that a species gets "better and better" or spreads to the entire world. It can be like those anaerobic bacteria that persist in volcanic vents. Isolated yes, but they survive for generations and generations. It's the latter that counts in evolution.

Though human beings have altered our ecological niche, the environment in which we live (especially once cultural evolution took over), that isn't true for all species. The expansion of malaria is blocked by other species which compete to use the same resources. We should not expect such a disease to spread all over.

I'm not an expert on malaria, so the details of my criticisms may be wrong. But I decided that it was not worth my while to continue to Behe's chapter 2. He has created his scare-crow figure of Darwin and has started the pre-determined process of knocking it down. In addition to advocating the use of "intelligent design" as an after-the-fact rationalization to fill gaps not yet explained by Darwinism, he has misrepresented the subject of his book.

I am not saying that Darwinian evolution does not have some holes. Rather, it is that trying to fill those holes by reference to intelligent design get us nowhere, adds nothing to our understanding. Standard biology is a much more useful tool.
Jim Devine

The Geithner Plan: Time Is Not on Our Side

Here is the short version of what Simon Johnson, Paul Krugman, Brad DeLong and Mark Thoma said in their discussion of Geithner’s PPIP: no one thinks it is likely to be adequate, Johnson/DeLong/Thoma express varying degrees of optimism that it can lay the political groundwork for more decisive action down the road, and Krugman fears the Obama administration is using up what remains of its political capital and will be unable to take any further action.

I was not asked, but that doesn’t mean I don’t have an opinion. I think these four worthies have all missed the main point: there is a hard limit to the financial resources we will be able to throw at economic recovery. At some point the apparently boundless desire of the world’s portfolios to engorge themselves on T-bills will come to a halt in the form of an interest rate spike and plunge in the dollar. Can I look you in the eye and tell you when this will be? No, at least not if I’m not wearing shades, but I am quite confident the limit is out there. We may hit it in a few weeks or another year or two, or maybe we will be lucky and some how apply a fix before reaching it, but the US is not exempt from the general principle that there is a limit to how much money can be borrowed or quantitatively eased into existence.

The problem with the Geithner plan, as with all other varieties of bailout largesse, is that it depletes our limited resources with no particular likelihood of success. I would ask everyone to consider what our situation will be if the dollar spigot is exhausted before the financial system is back in approximate working order. My candidate adjective: dire.

The alternative continues to be the same: invest public money in a good, new public bank. Make sure the economy has a working, well-capitalized, unencumbered financial infrastructure; then, if you want, sort through the legacy institutions and assets.

A Slight Gap in the Analysis

I finally got around to reading the proposal by Lucian Bebchuk that informed the latest incarnation of the Geithner plan. Recall that a central problem is pricing toxic assets for which no current market exists. The old approach (Paulson) was to have the government simply dictate prices in the course of buying up a few hundred billion dollars of them, presumably to overpay and surreptitiously subsidize the sellers. The new plan is to encourage a multiplicity of private funds, stuffed with mostly public dollars, to bid for the assets. The key paragraph reads:

The existence of such a significant number of private buyers armed with substantial capital will produce a well-functioning market for troubled assets. This will be a market in which many potential sellers (banks) face a significant number of potential buyers (the funds). The profit share captured by the funds’ private managers will provide these managers with powerful incentive to avoid overpaying for troubled assets. At the same time, the profit motive of the selling banks, coupled with the presence of competition among the private funds, will make it difficult for funds to underpay for troubled assets. As a result, we can expect the market for troubled assets to function well, with prices set around the fundamental economic value of purchased troubled assets.

Remember that old Gary Larson cartoon in which two scientists are standing before a blackboard crammed with math? One furrows his brows and says he has doubts about Step 3. Standing apart from all the Greek letters and operators above and below it, Step 3 says, “And then a miracle occurs....”

This paragraph is Bebchuk’s Step 3. With so much tweaking of fund managers’ incentives needed to get them to participate in the program, it is not at all a given that they will maximize expected profits by bidding to the expected value of the assets on offer. In fact, it is easy to show that, the more dispersion there is in their subjective probability distributions around the assets’ expected values, the more distortion there is in price discovery. Paul Krugman picks a maximally dispersed example (all the density at the two extremes) to demonstrate the problem his post from three days ago.

It’s funny how “competition” can take on magical properties for some people. It seems that Bebchuk was so pleased to have found a way to inject competition into the “bad bank” strategy that he didn’t inquire into how well it would perform.

Wednesday, March 25, 2009

Open for Questions: Workweek

by the Sandwichman

Here are questions submitted to the White House website asking about a shorter work week. Sandwichman is intrigued that 60% of the viewers who voted on these questions, "didn't like the question." The numbers in parentheses are the tallies of "like"-"don't like" votes.

"Any way to encourage a temporary 36 hour workweek (except for you and your staff), A 10% cut in regular hours would help deal with 10% unemployment."
RJK, NC - Jobs (361-566)

"Is a 35 hour work week not a solution for the lack of jobs?"
Yoyo, Paris, France - Jobs (199-283)

"What do you think of shortening the work week and job sharing as a solution to systemic unemployment? I would be happy to work fewer hours as long as I could get access to health care."
Kaller, Portland, OR - Jobs (82-75)

"I would like to know if the administration has considered as a possibility to improving our economy by reducing the fulltime work week frrom 40 hours to 30 hours or asking congress to look into revisiting the Black-connery bill of 1932?"
Justasking, Atlanta, GA - Jobs (125-184)

"Have you considered allowing the economy to contract? It seems to me that a lot of our current economic activity (cars, fossil fuel, defense, etc.) is wasteful. Why not make a 3-day work week and stop the wealthy from taking such a big cut?"
Thomas, New York - Jobs (79-136)

Cochrane is Wrong About Fiscal Policy Even if Ricardian Equivalence Holds

John Cochrane continues to show his ignorance of what the Barro reformulation of Ricardian Equivalence suggests:

Robert Barro's Ricardian equivalence theorem was one nail in the coffin. This theorem says that stimulus cannot work because people know their taxes must rise in the future … We cannot return to mechanically adding up today's consumption, investment and export demands, and prescribe the government demand necessary to attain some desired level of output. Every economist now knows that to get stimulus to work, at a minimum, government must fool people into forgetting about future taxes, an issue Keynes and Keynesians never thought of.

Franco Modigliani was generally thought to be a Keynesian and Barro’s theorem is in part a reformulation of the Ando-Modigliani life-cycle theory of consumption. Barro added the sensible proposition that the present value of future taxes must cover the sum of the current government debt and the present value of government spending – but this proposition does NOT lead to the conclusion that any increase in government purchases will be completely offset by a reduction in consumption as Kevin Quinn notes:

Ricardian equivalence, it is true, implies that deficit-financed tax cuts cannot affect demand. Deficit-financed temporary increases in Government spending, on the other hand, can. Consumption falls today, because the present value of future taxes is higher by the amount of the spending increase, but not by as much as G rises. The reduction in the present value of life-time income implies that the [present value of the] sum of reductions in current and future consumption will be equal to the increase in G, so the reduction today will be small.

Kevin’s point has also been recently made by Paul Krugman and yours truly. And yet – Cochrane ignores this aspect of what Brad DeLong rightfully refers to as “Ricardian Consumers and Fiscal Policy Once Again”.

Mark Thoma has a thoughtful post on why the Barro-Ricardian proposition about the ineffectiveness of tax cuts might fail, that is, why giving a tax cut to a borrowing-constrained households might still lead to an increase in aggregate demand. My only misgiving with Mark’s post was his lead:

This discussion at Brad DeLong's makes the point that Ricardian equivalence fails for deficit financed temporary changes in government spending. But what's not clear from the discussion is that there's no reason to expect Ricardian equivalence to hold in any case in practice, even for deficit financed tax cuts where it can be true in theory.

Even if the Ricardian model did fit the real world, Cochrane’s proposition that increases in government purchases did not impact aggregate demand is wrong, that is, simply a failure of his ability to understand the implications of this particular theory.

Price Discovery on the Big Rock Candy Mountain

Willem Buiter nails the latest Treas/Fed PPIP proposal with his usual acuity. His analysis is spot on regarding the relevance of Akerlof’s lemons, the unwholesome mixing of bad and toxic assets, the shabbiness of the measures taken to obscure the true costs to the public, and the colossal waste of the whole enterprise in light of the far superior alternative of establishing a good, new (public) bank. I would differ only with his final sentence, which calls for tax increases and spending cuts in the teeth of an effective demand crisis.

Now three additional observations:

1. The one genuinely beneficial potential of Geithner’s public-private partnership plan is that it can generate price discovery: the market process it jumpstarts will price the toxic assets that are purchased. Buiter and other critics note that this will be a biased subset of the total—this is where Akerlof comes in. I would add one more complication. The subsidy scheme Geithner is putting in place is asymmetric: capping losses on the downside but not earnings on the up. If the subjective probability functions of investors regarding the true value of these assets is normal and reasonably compact, the subsidies will result in minimal pricing distortion. I haven’t looked at Lucian Bebchuk’s analysis (he is the intellectual godfather of this price discovery scheme), so I don’t know if he took a position on subjective probability form, but the proposal makes the most sense this way. My suspicion, however, is that fundamental uncertainty clouds the perception of what complex, toxic derivatives will ultimately be worth. If so, the distribution is neither compact nor normal. With long, fat tails the asymmetry in the payoff structure becomes crucial, and exerts strong upward bias to the resulting bids. If this is true, the prices “discovered” in this arrangement will be a poor guide to what private sector buyers are willing to offer in the absence of subsidies.

2. Much of the evasiveness of the sequential bailout schemes can be traced to a simple political-economic fact: unlike European countries, such as Sweden, whose resolute responses to earlier financial crises are held up as models for the present, the US has a legislative-executive, not a parliamentary, system. Obama’s crew does not possess a guaranteed legislative majority; it has to charm or obfuscate to win support for each new measure. This alone can explain why decisive action, like nationalization, is off the table. (Even worse, of course, is the fragmented authority of the EU, which shows us what the US would be like if we had stuck with the Articles of Confederation.)

3. In the end, even the most comprehensive, expensive program of bailouts will not put the US or global economy back on its feet. We are not building a bridge back to 2006. Financial systems everywhere and households in many countries (including ours) are massively overleveraged and will be consolidating their balance sheets for years to come. There was real misinvestment on a grand scale, encompassing not only housing (and not only in the US), but also a distribution of manufacturing capacity that depended on global imbalances persisting to eternity. The process of writing all this off will be protracted and painful. Finally, a destructive feedback loop has taken hold, in which weak economic prospects dampen investment demand, and weak investment depresses incomes. Even unfrozen banks no longer stuffed with junk will lend gingerly at best.

This is why I think a rapid shift in policy toward public banking is essential. How it can be reconciled with (2) is unclear, however. How can we get from here to there?

Private global corporations. Public and national bailouts.

Questions: How is it that national governments are organising for the protection of deeply-malfunctioning transnational corporations and their global conglomerates? Are these institutions being asked to give their rather considerable (domestic and international) assets to the national taxpayers who are funding them?

Why have the large troubled banks continued to purchase huge overseas enterprises even in the context of their obvious financial vulnerability? Who in the world is responsible for proper oversight of their contemporary acquisitorial dealings?

2001 - Citi became the owner of 23.2% of the Mexican loan market through its acquisition of Banamex. This came about because of the conditions imposed by the IMF and the US on the 1994 Mexican bailout package.[1]

2006 – June. Explaining premiums in restricted DR (depository Receipt) markets and their implications: the case of Infosys. Morgan Stanley has significant investments in this [Indian] firm.

2007 – October 4th. Citigroup lends to KKR to buy Citigroup’s Loans. (snake eating its tail).

2007 - October 9th. Chinese Corporations owned by Goldman Sachs

"...The consortium - CDH Investments has a takeover vehicle called Rotary Vortex in which Goldman holds a 46% stake (2007). Rotary Vortex acquired full control of Shineway Group, owner of China’s largest meat processor, from state-backed interests in China following a year of regulatory scrutiny...[2]

2007 – October 10th. A consortium made up of a fund advised by JP Morgan Asset Management and Australia’s Challenger Infrastructure fund as well as the merchant bank UBS buys Southern Water which is the 7th largest water and sewage company in England and Wales which provides water for 2.3 million people and waste water services to 4.3 million customers. This acquisition involves the taking on of 2.8billion pounds of debt. The consortium is called ‘The Greensands consortium of infrastructure investors and pension funds’. The balance will be held by a series of Australian pension funds, Hermes, which is owned by the BT pension scheme and infrastructure investor Paceweald (linked to Vincent Tchenguiz’s Consensus Business Group which, in turn, has a stake in Challenger). [3]

2007 – October 17th. JP Morgan “has gobbled up Chase Manhatten, Manufacturers Hanover, Chemical Bank, Bank One and more over the past two decades….”

2008 – October 3rd. Mitsubishi UFJ Financial Group Inc.'s $9 billion investment in Morgan Stanley

2009 – January 16th. Carlyle, TPG, KKR Bid for AIG Aircraft-Leasing Unit. The world’s buyout firms are looking for ways to put their estimated $400 billion of committed capital to work after the global credit crisis restricted leveraged lending and reduced LBOs by about 70 percent last year. Forced sales by financial companies may provide some of the best opportunities. “You have a situation where there’s a distressed seller and these are the times when private-equity funds get their best returns.”

2009 – February 5th. Executives at Goldman Sachs Group Inc., JPMorgan Chase & Co. and hundreds of financial institutions receiving federal aid aren’t likely to be affected by pay restrictions announced yesterday by President Barack Obama.[4]

[1] Excerpt from "Wall Street and Immigration: Financial Services Giants Have Profited from the Beginning," Peter Cervantes-Gautschi, December 4, 2007, Americas Policy Program, Center for International Policy (CIP)

[2] By Sundeep Tucker in Hong Kong
Published: October 9 2007 22:18 | Last updated: October 10 2007 05:40

[3] JP Morgan consortium buys Southern Water
· £4bn paid for Kent, Sussex and Hampshire utility
· New owners refuse to rule out job cuts
Mark Milner, industrial editor. * The Guardian * Wednesday October 10 2007

[4] Goldman, JPMorgan Exempt From Exec Salary Caps
Published on 02-05-2009 Source: Bloomberg

Tuesday, March 24, 2009

Austrian Banks, Yesterday and Today

The government of the Czech Republic has just fallen as a result of the economic crisis that is hitting many countries in Eastern Europe hard, such as Hungary, Romania, and Ukraine. In and several of these, many people borrowed Swiss francs or other foreign currencies at low interest rates and are now hurting for repaying as their currencies have collapsed. Many of the banks that have been doing this lending and are now in serious trouble are located in Austria, with Raffeisen, Erste, and Bank of Austria reportedly getting emergency loans from the Austrian government, which is viewed as not able to handle a much worse crisis involving them. At least the Creditanstalt is not reported to be among those getting these loans, which was reconstituted after major problems earlier in its history.

It was the Creditanstalt that failed on May 11, 1931, triggering the worst financial crisis in world history. Founded in 1855, it had become the biggest bank in Central and Eastern Europe by then. Its failure set off a cascade of falling dominos among banks that then also failed, starting in countries formerly a part of the old Austro-Hungarian Empire to the east, many of them in trouble now, including Hungary, Czechoslovakia, and Poland. The next to go was Germany, where the unemployment rate would reach a world high of 30% by the time Adolf Hitler came to power in 1933. Many banks there had links to the Creditanstalt, and many failed in the months thereafter, with ones in France and Britain following suit. US banks were also linked to the ones in Germany because of the many loans made by them to the German ones under the Dawes Plan of the 1920s, worked out to help Germany deal with its debts arising from its reparations payments made under the Versailles Treaty. But the pressure on the US would peak after Britain went off gold in August, 1931. In the US, bank deposits fell by over 10%, and unemployment soared from a bit below 9% in 1930 to over 15% in 1931, higher than anytime since the Great Depression. Indeed, it was this wave of bank failures across the globe that more than anything else made an unpleasant recession into the Great Depression, as described well in such works as A Financial History of Western Europe, by Charles Kindleberger.

Hidden conclusion here.

Correction to 'Outside of the Vortex' article

On the left is an image of current logging in the upper Florentine valley in southern Tasmania. It is termed 'low impact selective harvesting' by the 'forest' industry here.

Please accept my apologies for an error I made in the 'Outside of the Vortex' article earlier this month. I referred to the very large Kinglake-Marysville (Murrindindi) fire complexes converging with the huge Churchill plantation-based fire further South East. These fires did not, in fact, converge. However the arc of fires between them were the most intense and concentrated in the state. (see the list of references below)

The corrected text:
"But the truth is that the Black Saturday fires entailed the convergence of two huge fire balls that erupted in a tree plantation estate at East Kilmore and joined with another fire front that appeared to begin at a timber mill in the Murrindindi complex of heavily logged native forest and extensive industrial tree plantations further east [18], [19].....An ominous line of closely spaced fire fronts stretched all the way from very large East Kilmore/Murrindindi merged inferno through the Bunyip State Forest down to Druoin and Warragul; to within approximately 40 kilometres of the other very large fire complexes around Churchill."

Radar reflectivity image from the Melbourne radar (Laverton) at 1pm EDT on
7th February 2009:

Radar reflectivity image from the Melbourne radar (Laverton) at 8pm EDT on
7th February 2009

Fire map. Overview. 13th February 2009

Noojee-Mount Toorong fire complex (13th February 2009)

Delburn (near Morwell/Churchill. 13th February 2009)

Map of the fires on 23rd February 2009:


There were fires at the following places:


Victoria's bushfires: Fire at Druion.
Photographer: Alex Coppel, Tim Carrafa, Ian Currie, Reuters, AFP


Victoria's bushfires: Jason Adams, Keith Adams and Elizabeth Adams watch
their livestock, and sought shelter near a dam at Pekenham.
Photographer: Alex Coppel, Tim Carrafa, Ian Currie, Reuters, AFP
Glenvale (near Lilydale):

Victoria's bushfires: A grader heads up the hill cutting a firebreak in the
Glenvale area in Victoria.
Photographer: Alex Coppel, Tim Carrafa, Ian Currie, Reuters, AFP

Christmas Hills/Yarra Glen

A koala emerges from the fire at Christmas Hills. Photo: Tina McCarthy

Yarra Valley fire (as seen from Tarrawarra)

A bushfire in the Yarra Valley, as seen from Tarrawarra. Photo: Brent Lukey

Bunyip State Park

Smoke from the Bunyip State Forest fire seen from Warragul. Photo: Debbie

Warragul (Camp Hill)

Victoria's bushfires: Camp Hill in Warragul
Photographer: Alex Coppel, Tim Carrafa, Ian Currie, Ben Swinnerton, Stephen
Harman, Fiona Hamilton, Jon Hargest, Mark Smith, Reuters, AFP

Healesville (Long Gully Road)

Victoria's bushfires: Aftermath of bushfires in Healesville. CFA media
liaison officer Mark Sacco walking along Long Gully Road, at the far end
which is State Forrest.

Photo taken by Cara Frankish from McIntyre Lane, Healesville (Healesville is
east of Yarra Glen and South of Marysville). Taken at 10.15pm on 9/2/09.

"Victoria's bushfires: A fire truck retreats fromthe massive fire front at
Labertouche near Pakenham, east of Melbourne.
Photographer: Alex Coppel, Tim Carrafa, Ian Currie, Reuters, AFP

Victoria's bushfires: The fire front close to Labertouche near Pakenham,
east of Melbourne.
Photographer: Alex Coppel, Tim Carrafa, Ian Currie, Reuters, AFP


"Nationalization" Or Buying Toxic Assets: A False Dichotomy

Furious debate has broken out over the Geithner Plan to use public-private entities to buy toxic assets from troubled banks. Advocates of "nationalization" say the plan is a payoff from taxpayers to the rich, and pose the Swedish plan as superior. But Sweden only nationalized one bank that had totally failed, and then only briefly, with another already state-owned bank getting recapitalization. Otherwise, the government simply guaranteed all deposits in banks. We have effectively already done the Swedish plan, with Indymac and AIG effectively nationalized, and guarantees on deposits increased. This sort of plan just helps the rich using taxpayer funds, just as does the Geithner Plan. These are both ways of using taxpayer money to pay off the rich, who have largely already taken a hit due to the collapse of bank stock prices.

So, the real alternatives would be a true nationalization that would keep ownership and take over management of the banks. This will not happen in the US. The alternative, which is sort of what we did with the S&L crisis, is to liquidate the troubled banks and pay off the depositers. However, the FDIC is not remotely able to do this, even with the $500 billion loan it received in the stimpack. The S&L thing "only" cost the taxpayers $175 billion 20 years ago, and while we think of depositers as "regular folks," the people with the really big deposits tend to be (hack, cough) rich people. Anyway, this is not likely to happen either.

Monday, March 23, 2009

False Scare on “Green Protectionism”

Nothing gets the New York Times into an ideological frenzy like threats to “free trade”. This obsession is worth a study in itself, but we’ll let it pass. For now, let’s just insert a modest correction into the record: there is nothing protectionist about border taxes designed to offset the difference in production costs due to differences in carbon regulation. First of all, the issue is pragmatic: unless such taxes are introduced, no country will unilaterally introduce a carbon cap or any other measure that increases the costs of carbon-intensive goods. And if they did, it is quite possible that the effect could be perverse—with production migrating from more regulated regions to unregulated ones, leading to more emissions overall. So there simply have to be border taxes based on carbon content.

But there is also no friction between practicality and principle. Look at it this way: considering the global emergency posed by climate change, any country that doesn’t begin to restrict its use of fossil fuels is actually subsidizing its producers. And we have the Times to tell us what a monumental threat subsidies pose to the world economy.

Sunday, March 22, 2009

Judd Gregg Predicts That Federal Government Will Go Bankrupt

CNN claims that Judd Gregg is “known as one of the keenest fiscal minds on Capitol Hill”. Known by whom? After the following, one has to wonder how anyone can think he is fiscally keen:

The practical implications of this is bankruptcy for the United States,” Gregg said of the Obama’s administration’s recently released budget blueprint. “There’s no other way around it. If we maintain the proposals that are in this budget over the ten-year period that this budget covers, this country will go bankrupt. People will not buy our debt, our dollar will become devalued. It is a very severe situation.

Admittedly, the President’s own budget predicts that the debt held by the public will rise to around 67% of GDP by 2019, which is the same level it was in 1951. Of course, the U.S. Federal government did not go bankrupt back then either as financial markets saw U.S. fiscal policy as committed to eventually reduce Federal debt. As we eventually exit the current economic crisis, this Administration at least makes the claim that there are also committed to long-run fiscal sanity. What would Senator Gregg suggest – a return to fiscal sanity now ala Hebert Hoover economics.

Of course, the past Administration allowed the debt/GDP ratio to rise each year even when we were near full employment. Funny thing – I did not hear such dire predictions from Senator Gregg when U.S. fiscal policy was clearly irresponsible.

Saturday, March 21, 2009

The AIG Bailout: Preventing a Resolution of Offsetting Claims?

James Kwak admonishes us to move from the nano-picture of bonuses to the big picture of counterparty bailouts in the AIG mess. I agree. Along those lines, I have a thought: perhaps the credit default swaps we the taxpayers are making good on are part of a larger, interconnected network of transactions, whose aggregate value, if you netted them out, would be a lot less than the sum of their individual values. My understanding is that this is true in a general way for the derivatives tangle; I don’t know if the CDS’s link to this in some way. Part of cleaning up the financial gridlock is resolving these offsetting claims, of course. But an arbitrary guarantee to pay out some subset would interfere with that process and virtually require that all obligations be carried out. It is in the individual interest of AIG’s counterparties to put the clamps on the US government to get every penny they can, but it is not remotely in the public interest to do anything that requires each individual claim to be settled separately.

I admit I don’t know the detail here. If any EconoListeners have a better handle on this, can they tell me if my worries are well placed?

Dean Baker's "Third Round"

by the Sandwichman,

Along with Jamie Galbraith, Dean Baker also believes "the economic crisis, and its solution, are bigger than you think." In a report issued Tuesday, Baker "makes the case for a third stimulus package to in the face of economic indicators signaling that the economy is in a deeper downturn than was expected based on previous projections."
To get money into the economy effectively and quickly, the report proposes a stimulus package consisting, in part, of two tax credits: an employer tax credit that would extend health care coverage and another per worker credit for employers increasing the amount of paid time off.
Excerpt from The Housing Crash Recession and the Case for a Third Stimulus after the jump.
The other obvious mechanism for quickly boosting demand is employer tax credits for giving workers paid time off. The paid time off can take a variety of forms, such as paid family leave, paid sick days, paid vacation days or a shorter workweek. The idea is that the government would give an employer a tax credit of up to $2,500 per worker per year to cover the cost of a reduction in work hours of up to 10 percent of their work time.

This tax credit, like the health care tax credit, could be implemented with very little lead time and little bureaucracy. To qualify, an employer would need to post on a public website the reduction in paid work time that they have put in place. Since workers could see the work-time reduction claimed by their employer, they would be able to verify that the policy has in fact been put into place. The arithmetic on this is straightforward. Suppose that employers of 60 million workers reduce their work time through family leave, sick days, or shorter hours by an average of 5 percent, at an average cost of $2,000 per worker. Since demand will not have changed (workers are getting paid just as much as they had previously), employers will in principle want to hire an additional 3 million workers to make up for the lost labor hours. This would imply 3 million new jobs, or jobs saved (in many cases, it may prevent layoffs that would have taken place otherwise), for an expenditure of $120 billion.

The great virtue of this sort of tax credit is that it is both boosting GDP and also increasing the number of jobs for every level of GDP. If everyone in the economy worked 5 percent fewer hours, and we had the same level of output, then we would have 5 percent more people working. For this reason, it is the most efficient mechanism for bringing the economy back to full employment.

Friday, March 20, 2009

Republicans Tag Cap&Trade a Tax but That’s a Good Thing

Elana Schor presents us with a letter from the Senate Republicans on the environment committee:

Specifically, the President's 2010 Budget proposal asks to collect $646 billion dollars in new "Climate Revenues" from the American people. The government will collect these new revenues through a cap and trade scheme in which " allowances" are sold to the highest bidder. The government won't tax consumers directly, but it will impose new costs on energy producers and users who will in turn pass those higher costs on to consumers, which will result in higher electricity bills, gasoline prices, grocery bills, and anything else made from conventional energy sources. In short, consumers will feel as if they are paying a new tax on energy.

While Elana appears to be critical of how these Republicans have tagged this to be a tax, the Senate Republicans are correct. But as conservative Greg Mankiw has often noted, we should place a Pigovian tax on items such as gasoline.

A Major Statement from Jamie Galbraith

If you haven’t read his sobering analysis in The Washington Monthly yet, read it now, and then come back here. Jamie absolutely nails the limited vision of the Obama economic team, and the lessons he draws from the Great Depression are urgently needed. On the policy front, however, I think there are pieces that need to be shored up.

The most important policy directive is to stop thinking “stimulus” and start thinking about a much larger role for public investment in the long term. The analogy is not stepping off a bus and running to catch up and hop on again, but what to do when the bus breaks down. We are in this for the long haul and have to fashion programs that can employ people who will otherwise have no economic prospects for years to come. Fortunately (in the strange calculus of demand-driven economics) we have crying needs to address, especially in rebuilding our industrial civilization along the lines of sustainability. Galbraith is superb on this.

He also has the measure of our “entitlement” situation: with the collapse of private pension systems (and perhaps even many state and local public pension funds), we need Social Security more than ever. Let’s make it bigger and stronger. Jamie’s take on the housing market is also dead-on.

I would have been in reader heaven if two additional elements had been added:

1. This is a crisis of the global economy. AIG’s counterparty list should remove any doubt, and global imbalances were a critical component of what got us into this mess in the first place. Vast sums were invested in a capital stock whose profitability depended on the ability of consumers in the US to borrow without limit to finance their imports; much of this investment will have to be written off. In other words, the collapse of the US credit bubble is having worldwide ramifications, which will ricochet back, and back again, via the mechanism of global financial integration. If we let this process run its course we are in for a long, tough ride.

2. On the domestic front, there is a shortcut to the decades-long rebuilding of private assets that Jamie envisions: public banking. There is an excellent theoretical case, in my opinion, for a financial system dominated by profit-making public intermediaries, and I’m convinced that the German experience (the Sparkassen especially) confirms it. Moving quickly to establish such a system offers the hope that financial impetus can be revived over a much shorter period, and it rescues us from the odious program of bailouts that now poisons both our economy and our democracy.

Incidentally, there are two routes to public banking. The most direct, which I have advocated in this blog since last September, is to simply set up the system from scratch right now and capitalize it with funds redirected from bailouts. I admit there are loose ends to be dealt with, especially having to do with resolving the international obligations of the existing system, but that’s to be expected with any program. The second route is to hang onto the existing banks after nationalizing them. I have argued against this idea, since it would put the liabilities of these institutions on the public ledger. Perhaps this downside could be reduced by giving the banks’ creditors and counterparties a Paulson-style haircut, but this strikes me as very difficult to pull off, and, at the limit, it simply converges with the “good new (public) bank” proposal I have been pushing.

So: (1) This is a fantastic article by Jamie. I hope it is widely read and discussed. (2) I think we need to be willing to go a little further on the financial front and to take more account of how economically interwoven our world has become.

Kudlow on TALF and Inflation

MediaMatters shows Lawrence Kudlow setting a dollar bill on fire during a CNBC show. Let’s see why he decided to do this:

KUDLOW: The Fed is kicking off its highly anticipated TALF program later today. They're just going to throw more money at the economy. This is a day after announcing it will buy long-term treasuries and mortgage-backed securities. Nobody better to report on this one than our great friend, senior economics reporter Steve Liesman. More on the TALF. Are we going to do this in unison? You get your dollar bill? ... This is the value of our money. This is the value of our money.

Kudlow is suggesting that the Federal Reserve is running a very inflationary monetary policy, but what does the evidence say? While it is true that the monetary base was 89% higher as of February 2009 than it was a year earlier, the money supply (as measured by Kudlow’s cherished MZM measure) rose by only 12%. I would trust that Kudlow is aware that the money multiplier has declined.

But how has this translated into increases in the consumer price index? Well, it seems that the CPI in February 2009 was a mere 0.7% higher than it was in February 2008. The Federal Reserve has been trying to increase the money supply to offset a drop in aggregate demand and a deflationary spiral. And yet Lawrence Kudlow is worried about hyperinflation. Go figure.

[Sidenote and thanks to the reader who caught my error made in the wee hours of the morning when I was also listening to the March madness coverage. The rise in the CPI was for the latest 12 months and I have editted the text to make the reported increases in the monetary base and MZM measure of the money supply for the same period. Note to self - wake-up and don't watch basketball highlights when looking over FRED data for a simple blog post. DUH]

Thursday, March 19, 2009

Not Working is Another Subject

by the Sandwichman
Every signifying system, so Zizek claims, contains a kind of super-signifier whose function is just to point to the fact that the system can't be totalized. It is that system's point of internal fracture, marking the point where it doesn't quite gel. -- Terry Eagleton
The point where economics doesn't quite gel is work. Attempts to quantify work fall back inevitably on the mysterious category of hours of labor, an input whose variation is demonstrably not proportional to the resulting output of goods or services.

The point where the human individual doesn't quite gel is the Subject itself. "[W]hat we know as reality is, in Lacan's view, simply the set of fantasies with which we fill in this constitutive hole at the heart of being."

Wrapping the former enigma in the latter riddle, the Subject of economics, homo economicus, 'works' only in the sense of foregoing leisure at some exogenously-determined opportunity cost whose variation studiously disregards the disproportion between productive inputs and outputs.

Clearly this homo economicus cypher is a some sort of bad joke. Political economy, Walter Bagehot argued,
...assumes a sort of human nature such as we see everywhere around us, and again it simplifies that human nature; it looks at one part of it only. Dealing with matters of 'business,' it assumes that man is actuated only by motives of business. It assumes that every man who makes anything, makes it for money, that he always makes that which brings him in most at least cost, and that he will make it in the way that will produce most and spend least; it assumes that every man who buys, buys with his whole heart, and that he who sells, sells with his whole heart, each wanting to gain all possible advantage. Of course we know that this is not so, that men are not like this; but we assume it for simplicity’s sake, as an hypothesis.
The knowledge that "this is not so" has long ago been concealed behind the technical screen of mathematical models. Rather than a "hypothesis," assumed for "simplicity's sake," homo economicus, along with the rest of those fellows -- like Descartes's cogito, Marx's proletariat or the 19th century anthropologists' primitive man -- would be better appreciated as fantasies in the Lacanian sense. They are fantasies because the Real there is unnameable -- it doesn't quite gel -- not merely because the Real is too complex.

Fantasies perform a kind of magic. They authorize a sort of amnesia about matters so fearful and chaotic they would otherwise paralyze us from taking action. But...
The effects of magic must be to weaken intellectual inquisitiveness, to encourage the indulgence in vain procedures for controlling the universe, instead of the profitable application of developing a technique for specific ends; to substitute unreal for real achievement, imagination for action, and to breed an easy fatalism which will prevent the building of fences to keep off crocodiles, or the taking of suitable measures to prevent disease. . . . Magic is indeed a parasitic adjunct to technique which sometimes completely immobilizes it.
Which is to say that sometimes we have to free ourselves from the very same magic that previously may have set us free. So how do we do that if it was the magic of a fantasy that enabled us to overcome the paralyzing void in the first place? The not-so of economic man is hardly a revelation. But one cannot oppose something with nothing, even if that something is somewhat of a nullity. Nemo contra deum nisi deus ipse. No one can stand against a universal Subject unless it is a universal Subject itself.

I stumbled across another Subject a few weeks ago while drafting a short essay for a guest post on another blog. In making "the case for shorter hours," it became obvious to me that the case for shorter hours had been made many, many times before but that it wasn't a single case. The key to understanding the case for shorter working time is to step back from the multitude of objective claims and consider the nature of the Subject implied or constituted by the totality of those claims.

That Subject -- who I will call the historical economic social colllective individual, or Hesci (pronounced he-she, the -sci as in Gramsci) is not the utility-maximizing, extrinsically-motivated rational actor of economic textbook lore. The subject posed by the case is human, acting, as circumstances require and/or permit, either collectively or as a social individual. Hesci is both producer and consumer wrapped into one, not exclusively one or the other. And Hesci simultaneously performs various reproductive roles as citizen, family member, etc.

What I will provisionally call the "working time literature" is an enduring counterstory to political economy and economics. Sometimes it appears within economic analysis but when it does it gets banished because, as a counterstory, it resists and thus cannot be subsumed by the dominant story.


by the Sandwichman

From The Source and Remedy: "Oh, if I dared venture to anticipate the last paragraph of the historian that generations hence shall trace the character of this age and country, it should run thus.—"
The increase of trade and commerce opened a boundless extent to luxury:—the splendour of luxurious enjoyment in a few excited a worthless, and debasing, and selfish emulation in all:—The attainment of wealth became the ultimate purpose of life:—the selfishness of nature was pampered up by trickery and art:—pride and ambition were made subservient to this vicious purpose:—their appetite was corrupted in their infancy, that it might leave its natural and wholesome nutriment, to feed on the garbage of Change Alley:—instead of the quiet, the enjoyment, the happiness, and the moral energy of the people, they read in their horn-book of nothing but the wealth, the commerce, the manufactures, the revenue, and the pecuniary resources of the country; the extent of its navy and the muster-roll of its hireling army:—in honour of this beastly Belial they made a sacrifice of the high energies of their nature:—they hailed his progress with hosannahs, though on his right hand sat Despotism, and on his left Misery:– they made a welcome sacrifice to him of their virtues and their liberties:—to satisfy his cravings they forewent their natural desires:—honour and truth were offered up on his altars:—and the consummation of their hopes was characterised by misery and ignorance; the dissolution of all social virtue and common sympathy among individuals; and by a disunited, feeble, despotic, and despised government!


by the Sandwichman

Helicopter Ben finally hauls out the helicopter: "So there are limits to the Fed's magical powers, and they already began showing up in currency markets this afternoon, with the dollar falling sharply against the euro and other foreign currencies. The adventure continues."
The effects of magic must be to weaken intellectual inquisitiveness, to encourage the indulgence in vain procedures for controlling the universe, instead of the profitable application of developing a technique for specific ends; to substitute unreal for real achievement, imagination for action, and to breed an easy fatalism which will prevent the building of fences to keep off crocodiles, or the taking of suitable measures to prevent disease. . . . Magic is indeed a parasitic adjunct to technique which sometimes completely immobilizes it.

The Unique EconoSpeak

What other blog garners simultaneous advertisements from The Monthly Review AND The Independent Institute?

China is Right about Who Should Pay for Carbon Emissions

In the runup to a new round of negotiations on a global climate agreement, China is calling for a “consumer pays” principle: those who import goods from China should pay for their embedded carbon emissions. According to this Reuters Report, Gao Li, the top Chinese official for climate change policy says, “About 15 percent to 25 percent of China's emissions come from the products which we make for the world....this share of emission should be taken by the consumers, not the producers.”

This is not only correct, it is the natural outcome of a rational climate policy regime.

Suppose China requires anyone introducing a carbon fuel into its economy, such as an oil, gas or coal company, to have a permit, and that it caps these permits to curb emissions. Prices of the fuels rise, and these prices are passed along to direct consumers including manufacturers who use these fuels as inputs. This in turn means that prices rise for the manufactured products, paid by the ultimate consumers—in this case, often US and European importers.

If all the permits are auctioned, their combined value will approximately equal the extra revenues derived from consumers. The government could then rebate this money back to its citizens. Since China is a net exporter (even during the current crisis), the money received by its households will exceed the money they pay in higher prices. This means China could, if it wished, rebate somewhat less than the total auction proceeds, use its cut to finance investments in energy efficiency and non-carbon alternatives, and still protect the real income of its population.

This process, which meets the conditions laid down by Li, can be set in motion by the Chinese themselves, unilaterally. The only need for international coordination concerns the problem of leakage, i.e. how to prevent Chinese domestic and export markets from being captured by producers in countries that don’t require carbon permits. The first-best solution would a global agreement to require permits everywhere with a single, global cap. Such permits would be universally tradeable, which means that artificial barriers to their efficient allocation would be removed. Since there would be a single global price, the leakage problem would be eliminated too.

A second-best approach would be to institute a system of border taxes calibrated to the differences in production costs stemming from different national carbon regimes. Establishing a common set of procedures for calculating and applying this tax should be a high priority for negotiators.

Developing countries with trade surpluses, and particularly China, should be eager to enter a system of carbon emission controls. The rest of the developing world will need other inducements.

Leftist Econophysics

There is a branch of econophysics that has attracted serious attention from some Marxist and other leftist economists. This is the series of studies of income and wealth distributions. Traditionally income has been thought to reflect lognormal distributions, which can arise endogenously from random processes from an initially equal distribution. In fact, labor income appears to follow such a pattern. However, wealth appears to follow the power law distributions of financial asset returns, unsurprisingly, that have fatter tails than lognormal distributions, that is, greater inquality with more people far off into the upper end of the distribution. Econophysics studies of this began around a decade ago, appearing in places like Physica A and European Physical Journal B by people like Levy and Solomon and also Dragulescu and Yakovenko, although John Angle showed some of the things in the early 1990s in the Journal of Mathematical Sociology.

Then it was figured out by people like Yakovenko and some others that income distribution looks lognormal for most of its lower portion, where it is determined by labor outcomes, but that its upper portion looks more like a more unequal power law, a la wealth and financial market returns. The class nature of this then began attracting the attention of some leftist economists such as Allin Cottrill and Paul Cockshott, who have now coauthored a book, Classical Econophysics, with Gregory John Michaelson, Ian P. Wright, and Victor Yakovenko. More of these studies, some done by economists such as Mauro Gallegati and some of his coauthors, including some physicists, have appeared in the 2005 book, Econophysics of Wealth Distributions, ed. by Chatterjee, Yagarladda, and Chakrabarti, Milan: Springer.

Wednesday, March 18, 2009

Outside of the Vortex

Parts of Australia are experiencing unprecedented changes in temperature and rainfall patterns. These changes are associated with an unexpected phenomenon emerging in the Indian Ocean and also in the behaviour of the Antarctic Vortex combined with steadily increasing temperatures from rising greenhouse gases and the depletion of the ozone layer. Observed together they suggest the very strong possibility that Australians are now facing abrupt climate change.[1] This is bringing very prolonged drought and extraordinary heat to the most heavily peopled and treed (mostly Eucalypt) regions of the country. As if this prospect is not frightening enough, it can be seen that climate is not the only threshold that is being crossed. The flashpoint for eucalypt vapour is also being breached by high daytime temperatures. This appears to guarantee the setting off of huge fire infernos in these semi-urban ‘forests’ on a scale that many would simply not be able to imagine.

Southeast Australia has been suffering from a drought over the last 15 years that is of an intensity that has not (as far as we are aware) been experienced before. This has left the landscape very dry. Climatologist Caroline Ummenhofer, a research fellow with the University of New South Wales says that “normally drought conditions over eastern Australia are associated with El Nino, La Nina cycles in the Pacific Ocean (temperature changes that affect the rainfall and circulation over the whole Pacific Ocean and the surrounding areas).” [2]

However, “El Nino is not able to explain this latest drought” says Ummenhofer. “Instead what we found is actually that the cause lies in Indian Ocean temperatures.” “The Indian Ocean has a similar phenomenon to the El Nino, La Nina cycle. It's called the Indian Ocean Dipole, and it's a naturally occurring phenomenon and has been known for some time to influence Australian climate and Australian weather. The dipole oscillates between positive and negative phases and has neutral years in between as well, so the negative and the positive are the two extremes. And the normal wet conditions that you experience over south-east Australia are linked to the negative Indian Ocean dipole event which we haven't seen over the last seventeen years…..the last India Ocean Dipole event of the negative phase occurred in 1992. That is unusual. We haven't anywhere in the record over the last 120 years that we've investigated seen a similarly prolonged period without a single negative event”

Ummenhofer observes that most of the world’s oceans are getting warmer, but particularly the Indian Ocean. “There might be indications that this could lead to changes in the characteristics of Indian Ocean dipole events.” [3]

The Antarctic Vortex near the South Pole is, like its equivalent in the Arctic pole region, a persistent, large-scale cyclone in the middle and upper troposphere and the stratosphere. Polar vortexes are most powerful in the hemisphere's winter, when the temperature gradient is steepest, and diminishes or can disappear in the summer. [4]

The Intergovernmental Panel on Climate Change Third Assessment Report incorporated a chapter [5] on ‘radiative forcing’[6] which noted “several … anthropogenic [man-made] causes for global climate change” These factors, that could be interacting with each other, including rising concentrations of greenhouse gases, the effects of man-made particulates in the atmosphere, and ozone depletion in the stratosphere.

The IPCC noted that scientific studies on these ‘forcings’ observed that the radiative effects of aerosols circulating in the atmosphere, whilst being largely confined to the Northern Hemisphere, may “propagate into the Southern Hemisphere via atmospheric dynamics”. In addition to this, the polar vortex in both the north and south hemispheres were strengthened and the westerly winds in the mid latitudes were contracting and thus moving closer to the poles. These changes, the report noted, may be arising from the rising greenhouse gas concentrations as well as from ozone depletion in the stratosphere.

The implications behind the fact that the westerly winds are moving closer to Antarctica are quite frightening for Australians. “it appears the vortex is shifting gear, and is spinning faster and faster, and getting tighter. As it does it’s pulling the climate bands further south dragging rain away from the continent out into the southern ocean.” [7]. In short, it means that Australia’s unprecedented and horrific drought may not go away!

Climate (like other complex systems) does not behave in a simple linear fashion. That is, simple linear extrapolation is not always possible. Sudden changes in a regime (such as rainfall) can occur over wide areas. This is what’s happened over Australia, even before the 1992 Indian Ocean dipole shift and the contraction of the southern vortex. Around 1945 Australia’s summer half-year rainfall increased over large areas in the eastern part of the continent. However, in 1967-72 there was a sudden decrease in rainfall in south-west of Western Australia which has not reversed since. [8] “Now the same thing is happening to Melbourne.” In 2003 rainfall there had fallen by nearly 20% in the previous 7 years. [7] This dangerous pattern has continued and, at present, almost every mainland capital city is on increasingly severe water restrictions.

Similar examples of sudden changes in system behaviour often arise from an element of the system reaching a limit or threshold at which instability sets in, and the system moves into a new stable state. When the system is close to a threshold even quite small random events or trends can force the system into a different state. Distance from a threshold of this sort is a measure of system resilience or ability to cope with small variations in conditions (Scheffer et al., 2001). [9]

So, indeed it does look like Australia is going through abrupt and dangerous climate change right now.

One very important question comes immediately to mind. How resilient is Australia’s society and infrastructure now? Are they ready to deal with the biggest challenge in the nation’s history? After the most horrific fires ever recorded? After 15 years of intense heat and drought?

What other thresholds, apart from climate-related ones, are Australians dealing with? One critical and almost entirely overlooked threshold is the flashpoint for eucalyptus oil. “The flash point of a flammable liquid is the lowest temperature at which there can be enough flammable vapour to ignite, when an ignition source is applied.” [10] The ‘flash point’for the vapours that rise from Australia’s ubiquitous native trees is a mere 49 degrees Celsius. On Black Saturday this year [11] the temperatures, in the shade, were around 47 degrees Celsius. In the full sun, however, temperatures are about 5-6 Celsius degrees hotter!

Another threshold associated with industrial tree plantations is the level of fuel loads that are amenable to control by our fire departments. The Canberra fire chief reported, soon after that city’s plantation fires encroached and burnt out hundreds of houses in this urban environment, that the fuel load in tree plantations 3-7 years of age was the limit reached before the fires could be brought under control. [12]

Those individuals living in southern Australia have every reason – whether they know it or not - to feel horrified by their prospects for next summer and for many summers after that. After all, “the past decade has recorded the largest expansion ever in [Eucalypt niten and Radiata pine tree] plantation cover in this country” with an average annual planting of 76,000 hectares per year since 1997. [13],[14]. “The majority…is concentrated along the southern and eastern coasts, Tasmania and Western Australia.” [15].

Up until ‘Black Saturday’ Australians had been lulled into a false sense of security. Many families had no knowledge of the need for fire plans or of local geography as “ the hottest day on record on top of the driest start to a year on record on top of the longest driest drought on record on top of the hottest drought on record” approached. [16] Residents are largely oblivious to the enormous hazards the intense and ubiquitous plantings of Eucalypt and Radiata pine monocultures pose to their safety. Residents of the burnt out Victorian township of Marysville saw “what looked like an atomic bomb”[17] coming over the top of the town but had no idea as to the nature of its genesis.

But the truth is that the Black Saturday fires entailed the convergence of two huge fire balls that erupted in a tree plantation estate at East Kilmore and joined with another fire front that appeared to begin at a timber mill in the Murrindindi complex of heavily logged native forest and extensive industrial tree plantations further east [18] [19]. “A two-kilometre stretch of power line in Kilmore East … snapped during strong winds and record heat about 11am last Saturday [7th February 2009]. Within minutes a nearby pine forest was ablaze. Within six hours the fire had destroyed nearly every building in the towns in its path….”[20] . Around 4pm the Victorian Country Fire Authority (CFA) had advised the public that “the fire [was] gaining strength as it head[ed] towards pine plantations near Wandong” [21]where a large bluegum plantation lay within a kilometer of the town. [22] Within 12 hours an ominous line of closely spaced fire fronts stretched all the way from very large East Kilmore/Murrindindi merged inferno through the Bunyip State Forest down to Druoin and Warragul; to within approximately 40 kilometres of the other very large fire complexes around Churchill. The Churchill fire, in turn, began one kilometre south-east of the town in a pine plantation. The flames, out of control, spread rapidly, threatening communities in Hazelwood South and the Jeeralangs. Traralgon South, Callignee, Woodside, Yarram, Carrjung, Gormandale and many more communities came under threat….”[23].

“We have seen the future” says Clive Hamilton. [24]. Some people ask whether Australians will continue to survive living within our tall Eucalypt forest digs. Perhaps the real forests will survive, though the trees may change; become stunted and sparse. With a few more fires the ugly industrial tree plantations will surely disappear. The surviving human residents will learn from the wombat and go underground.

[1] “…A working definition of 'abrupt climate change' is given in Alley et al. (2002): ‘technically, an abrupt climate change occurs when the climate system is forced to cross some threshold, triggering a transition to a new state at a rate determined by the climate system itself and faster than the cause’.

From: IPCC, AR4, WGI, Chapter 10 Global Climate Projections, Future Abrupt Climate Change, ‘Climate Surprises’, and Irreversible Changes.
As quoted in:
Abrupt Climate Change

[2] The El Nino Southern Oscillation (ENSO) is a particular pattern of disruption in the interaction between the ocean and the atmosphere that occurs every two to seven years when strong westward-blowing trade winds over the Pacific ocean subside and warm western Pacific water slowly moves back eastward. The upwelling of the cool, nutrient rich, eastern Pacific water (that supports large fish populations) is interrupted. When this happens fish die and climatic changes kick in that affect many parts of the planet. The possible interrelationship between El Nino and the simultaneous droughts on the Australian and other continents was first realized in 1972-73. See:
El Niño - Southern Oscillation (ENSO). Learning Module.

[3] Behind the big dry
Air Date: Week of February 13, 2009

[4] Polar vortex
From Wikipedia, accessed on 12th March 2009

[5] Houghton et al., 2001, Chapter 6. IPCC Third Assessment Report.

[6] “In climate science, radiative forcing is (loosely) defined as the change in net irradiance at the tropopause. "Net irradiance" is the difference between the incoming radiation energy and the outgoing radiation energy in a given climate system and is thus measured in Watts per square meter. The change is computed based on "unperturbed" values, as defined by the Intergovernmental Panel on Climate Change (IPCC) as the measured difference relative to the year 1750, the defined starting point of the industrial era. A positive forcing (more incoming energy) tends to warm the system, while a negative forcing (more outgoing energy) tends to cool it. Possible sources of radiative forcing are changes in insolation (incident solar radiation), or the effects of variations in the amount of radiatively active gases and aerosols present. Because the IPCC regularly assesses the radiative forcing, it also has a more specific technical definition - see "IPCC usage" section….”
Radiative forcing
From Wikipedia. Accessed on 18th March 2009

[7] Drought Vortex
18th September 2003
* Reporter: Karina Kelly * Producer: Andrew Holland * Researcher: Mark Horstman

[7] Drought Vortex
18th September 2003
* Reporter: Karina Kelly * Producer: Andrew Holland * Researcher: Mark Horstman

[8] (e.g., Deacon, 1953; Kraus, 1954; Gentilli, 1971; Pittock, 1975; Allan and Haylock, 1993). As quoted in ‘Climate Change: An Australian Guide to the Science and Potential Impacts’ Edited by Barrie Pittock. 2003. http://www.climatechange.gov.au/science/guide/pubs/science-guide.pdf

[9] ‘Climate Change: An Australian Guide to the Science and Potential Impacts’ Edited by Barrie Pittock. 2003. http://www.climatechange.gov.au/science/guide/pubs/science-guide.pdf

[10] What is the difference between <>& <> of a material ?

[11] Black Saturday: the day the worst bushfires in Australian recorded history broke out was on 7th February 2009.

[12] Interview ABC TV: ‘7:30 Report. Kerry O’Brien and Phil Koperberg, NSW Fire Chief. After the Canberra Megafire and its later inquiry, it was reported that to have any hope of ‘managing’ such a fire, fuel build up would need to be as low as 4-5 tonnes per hectare or less. This degree of fuel loading is apparently reached in plantations by 3-7 years.

[13] “The major funding channel funding the elevated planting program is via managed investment schemes” (MIS) which is a widely unpopular financial lurk comprised of billions of dollars of taxpayer subsidies, exemption from land planning and environmental laws. Exemption from landtax, lower local rates payments and extraordinary grants, taxpayer funded infrastructure and other extraordinary subsidies. All for a handful of chosen private corporations. See, for instance:
(i) The MIS anomaly is in land tax law’ by John Lawrence. Tas Country. Page 12. 16th January 2009. [John Lawrence is an economist working as an accountant in public practice.]
(ii) “The Weekly Times asked the tax office in the past why it allowed MIS companies to charge more than $9000 a hectare to establish blue gum plantations, when it cost the non-MIS sector $3000/ha...”

End MIS Excesses of the Past
January 7, 2009
(iii) MIS raises hackles by Matilda Abey. January 9, 2009

(iv) for a more complete list see the archives of the Tasmanian Times: www.tasmaniantimes.com

[14] “The schemes raised more than $1.01 billion in 2004-5 [alone] despite wide spread drought conditions.”
Growing the Forestry Enterprise in Australia
Gary Bacon, Centre for Forestry and Horticultural Research, Griffith University. 18th April 2007

[15] Australian forest plantations – a review of ‘Plantations for Australia: the 2020 vision’. Rural and Regional Affairs and Transport Reference Committee. Senate Committee Report. Page 5. September 2004.

[16] http://bravenewclimate.com/2009/02/10/heatwave-update-and-open-letter-to-the-pm/
the heatwave in Australia on 7th February 2009:

[17] ‘Blithe Oblivion’ by Kate Legge. The Weekend Australian Magazine. 7-8th March 2009. Page 20.

[18] Kilmore East Murrindindi Complex fire map. 3rd March 2009


[19] Fire/land tenure map of the Murrindindi fire that burnt through Marysville overlaid onto the latest NASA satellite Infrared Image.25/02/2009 8:46 am

[20] Huge fire class action launched
* Cameron Houston and Michael Bachelard
· February 15, 2009
| http://www.theage.com.au/national/huge-fire-class-action-launched-20090214-87pg.html?page=-1

[21] Townships under ember attack as fires rage
ABC - February 7, 2009, 4:18 pm

[22] Bluegums within a 1 km of Wandong.
Google Earth Image Circa April 2005 of Midway Wandong Plantations. Sunday Creek, Pine Creek and Dry Creek catchments.

[23] Churchill and District News. February 2007

[24] Bushfires: Don’t mention the c word. Clive Hamilton