EconoSpeak: April 2009

Thursday, April 30, 2009

If There’s a Difference in Means Among White v. Black – Byron York Thinks the White Mean is the Actual Number

Byron York offended a lot of us with the following:

the president and some of his policies are significantly less popular with white Americans than with black Americans, and his sky-high ratings among African-Americans make some of his positions appear a bit more popular overall than they actually are. Asked whether their opinion of the president is favorable or unfavorable, 49 percent of whites in the Times poll say they have a favorable opinion of Obama. Among blacks the number is 80 percent.

Goldberg himself was offended by the criticism noting:

It seems worthwhile to point that out that there are differences within the group -- something that is done all the time with political polls.

No Byron – we were not offended by your noting that there is a difference between the mean responses of blacks v. whites. Let me turn the microphone over to Brad DeLong for an explanation of what offended us:

For York, "actually" means "what white people think."

He later decides to qualify what he was trying to say with this “actually”. Maybe Mr. York should take remedial writing lessons before he is allowed to pen another op-ed.

Wednesday, April 29, 2009

Hail Fellow, Well Met

Oh this is more braggadocio, but what the heck. I have been invited by James Galbraith, Chair of the Board of Directors of Economists for Peace and Security to be one of their Fellows. I have accepted the invitation. They were founded in 1989 originally as Economists Against the Arms Race, with Kenneth Arrow and Lawrence Klein as their original chairs.

While I am blathering about such stuff, one of the founders and still much involved with the group is the Father of Regional Science, Walter Isard. He served on the thesis committee of my major professor, Eugene Smolensky, at Penn. The chair of that committees was the Father of Happiness Studies, Richard Easterlin. He and I have discussed our common "intellectual ancestry." So, his major prof was Simon Kuznets, whose major prof was Wesley Clair Mitchell, whose major prof was Thorstein Veblen, whom I do not mind being intellectually descended from at all. It was only quite recently that he and I sorted this out.

Final Sales of Domestic Products Fell Dramatically Too

Via Brad DeLong, CNBC gives us a bad news, good news story on the economy:

The U.S. economy contracted at a surprisingly sharp 6.1 percent rate in the first quarter as exports and business inventories plummeted. The drop in gross domestic product, reported by the Commerce Department on Wednesday, was much steeper than the 4.9 percent annual rate expected by economists and followed a 6.3 percent decline in the fourth quarter … But the sharp drawdown in inventories is good news as it suggests that manufacturers and retailers have reduced the stock of unsold merchandise to manageable levels and could be instrumental in pulling the economy out of recession.

Brad similarly notes:

That means that production this spring will be a full 3.5% below what it was in the second quarter of last year, when it ought to be 3.0% above. The only bright sign is that so much of the decline was a fall in inventories.

To their credit, Brad and CNBC also noted that BEA reported that real final sales of domestic product ,that is GDP less change in private inventories, fell by only 3.4 percent on an annualized basis during the first quarter. The decline during the previous quarter, however, was 6.2 percent. Pardon me – but I don’t see much of a silver lining or a bright sign.

Tuesday, April 28, 2009

My Problem with Kornai

Actually, he seems like a very nice guy, a scholar in love with economics and with a mild social democratic inclination. As mentioned in a previous post, I have just (belatedly) read his memoirs, By Force of Thought. He went through a fascinating transformation in the years leading up to and following the revolution of 1956 (Hungary), and I’m sympathetic to many of his insights into economic theory and methodology. By any standard, he is a giant within the discipline.

Nevertheless, I also found that his self-examination revealed for me the source of his dogmatism during the crucial transition period of the early 1990s. Readers may recall that Kornai was one of the loudest voices for the view that there could be no middle way, that ex-communist countries had to embrace private enterprise capitalism without holding back, so that one day they might be in a position to soften the edges and introduce the elements of a more mixed economy. As one of those labeled naive by Kornai, I tried to imagine a different path.

Now I understand where he was coming from. The man had fallen out of love with Marx, his teenage crush, but he kept faith all his life with the platonic impulse in Marx—the inclination to see the world as simply the special case of essences like capitalism, socialism, or other overarching orders. Just as Marx wanted us to exit from the universe of capitalism into the alternate realm of socialism, Kornai wants us to go in the other direction. For him there could be no in-between; it is a matter of replacing one mode of production with another.

In my view, this compartmentalist perspective is one of Marx’ most pernicious creations. Before his time, only utopians imagined such ruptures; after Marx it became respectable social science. Here is not the place to dispute it, but I strongly question the premise on which this approach is based; I do not see any fundamental discontinuities between social systems. Lumpiness, yes, but that is the case within as well as between. For me, a public library is a communist institution in a capitalist world. Organize more goods into the form of libraries and you shift the balance between communism and capitalism. I see nothing to be gained from positing that a library in capitalism is a different beast from a library in some other mode of production. I’m not arguing against system-level forces, just against the view that there are just a few predetermined configurations of economic and political life, hardened against the step-by-step alteration of detailed institutions and policies. But Kornai explicitly takes the opposite stance and credits Marx for it.

It’s a shame. He threw out much of the good stuff in Marx, his many insights into production and financial systems earned from long hours at the British Museum, and kept the most questionable. But he seems like someone you would like to discuss this with over a good meal and a bottle of wine.

Monday, April 27, 2009

Lower Manhattan Residents “Sensitive” to Planes Flying Over

I had to leave my office at 10:15 this morning and stroll around Battery Park for a while. Reuters explains why:

An Air Force fighter jet and one of President Barack Obama's official planes on Monday flew low over the Statue of Liberty in an approved photo opportunity that startled some New Yorkers who have memories of the September 11 attacks. New York City officials notified some businesses but not all city agencies or the general public. People in New York remain sensitive to such incidents in lower Manhattan, site of the 2001 attacks involving hijacked airliners that destroyed the Twin Towers of the World Trade Center.

We are sensitive? Well yea. At least it was a nice day to take a stroll.

The Economics of Delusion and the Delusion of Economics

by the Sandwichman

"Mutually Assured Delusion" is a great name for it. Interesting that the paper by Roland Benabou that Peter Dorman cited only mentions climate change in passing:

The types of enterprises that are most prone to collective delusions are thus:

(a) Those involving new technologies, products, markets or policies that combine a highly profitable upside and a potentially disastrous downside. High-powered incentives, when prevalent throughout the organization (e.g., performance bonuses affected by common market uncertainty) have a similar effect.

(b) Those in which participants have only limited exit options and, consequently, a lot riding on the soundness or folly of other’s judgements. Such dependence typically arises from irreversible or illiquid prior investments: specific human capital, professional reputation or network, company pension plan, etc. Alternatively, it could reflect the large-scale nature of the problem: state of the economy, quality of the government, global warming, etc.

Benabou's work, however, offers an intriguing theoretical model to back up Tim Jackson's assertions in Prosperity Without Growth about delusional expectations for a technological fix to climate change:

Never mind that decoupling isn’t happening. Never mind that no such economy has ever existed. Never mind that all our institutions and incentive structures continually point in the opposite direction. The dilemma, once recognised, looms so dangerously over our future that we are desperate to believe in miracles. Technology will save us. Capitalism is good at technology. So let’s just keep the show on the road and hope for the best.

We can’t entirely dismiss the potential for technological breakthroughs. In fact we already have at our disposal a range of technologies that could begin to deliver effective change. But the idea that these will emerge spontaneously by giving free reign to the competitive market is patently false.

This delusional strategy has reached its limits. We stand in urgent need of a clearer vision, more honest policy-making, something more robust in the way of a strategy with which to confront the dilemma of growth.

So, that's the choice: mutually assured delusion or prosperity without growth.

UPDATE: Maybe we shouldn't be using the word "growth". It's a misleading euphemism, like "national security". When the components of "growth" are divorced from any definite relationship to human well being and conservation of the natural world, then what "grows" is primarily delusion. The more accurate title for the Sustainable Development Commission's report would then have been "Prosperity Without Delusion."

I realize economists like to have it both ways with economic growth. On the one hand, there is "nothing new" in critiques of GDP. They "know it's not perfect." On the other hand, they insist on the serviceability of the measure for estimation and goal setting purposes -- as if there is some 'essence' of utility in the measure that escapes its structural defects. There is no such essence. What grows faster than GDP itself as GDP growth becomes the target of policy is the proportion of GDP that does not contribute to or even detracts from welfare and conservation. That "it's not perfect but it's still useful" dodge fits precisely the definition of cognitive dissonance.

Sunday, April 26, 2009

The Tax Debate: Is High Income Due to Effort or Luck?

With hat tip to Mark Thoma, Robert Frank offers us this:

Contrary to what many parents tell their children, talent and hard work are neither necessary nor sufficient for economic success. It helps to be talented and hard-working, of course, yet some people enjoy spectacular success despite having neither attribute. (Lip-synching members of boy bands? Money managers who bet clients’ retirement savings on subprime-mortgage-backed securities?) Far more numerous are talented people who work very hard, only to achieve modest earnings. There are hundreds of them for every skilled, perseverant person who strikes it rich — disparities that often stem from random events.

The role that this observation plays in the debate over how progressive the tax system should be was explained by Hal Varian:

In the simplest version of the Mirrlees model, taxpayers differ only in their ability: how much they can produce with a given amount of effort. One striking result of this model is that those at the very top of the income scale should face low marginal rates. This result emerges from a detailed mathematical analysis, but the intuition is not hard to explain. Let us assume, for the sake of argument, that Bill Gates made $1 billion in 2000, an amount larger than any other American taxpayer. Suppose further that despite the best efforts of his accountants, he ended up paying 40 cents of the last dollar he earned to the Internal Revenue Service. Consider the following thought experiment: drop the marginal tax rate from 40 percent to zero for all incomes above a billion dollars. The I.R.S. won't lose any revenue from this reduction, since no one has an income larger than $1 billion. And who knows -- the lower marginal rate might encourage Mr. Gates to work a little harder in 2001, producing new products that would make him, and the rest of us, better off. Of course, the fact that it pays to reduce the marginal tax rate for billionaires doesn't say much about what tax rates should be like for mere millionaires, a point that has been emphasized by Professor Mirrlees himself and confirmed by subsequent researchers, like Peter Diamond of the Massachusetts Institute of Technology and Emmanuel Saez of Harvard. But the intuitive argument presented above is pretty compelling: if income depends only on ability, those at the very top of the income-ability distribution should face low marginal tax rates. But perhaps this model is too simple. One might well argue that Mr. Gates, as productive as he is, doesn't owe his success entirely to ability: there was a lot of luck involved, too. And, if truth be told, that's probably true even for mere millionaires. So let's consider a different model: one in which differences in income are a result only of luck and have nothing to do with ability. In this case, the optimal income tax may well involve taxing billionaires at very high marginal rates. True, aspiring billionaires won't work quite as hard, since the after-tax reward from hitting $1 billion has been reduced. But the chances of becoming a billionaire are pretty low anyway, so taxing billionaires at a high rate won't really discourage much effort by those hoping to become one. Thus a model where luck is the driving force tends to yield a more progressive optimal tax than a model where ability is the driving force. This is about as far as theory can take us, but it highlights the critical question: How much income results from ability and how much from luck?

A Different Housing Crisis

Here is a hint of a different dimension of the crisis -- not a main cause, but something that could be significant.

When we would drive through West Virginia back in the late 50s & early 60s, I was struck by the unemployed coal miners sitting on their porches. Their houses were quite nice, but nobody wanted to buy them because the economy was dead.

Later, my brother moved to Youngstown, Ohio after then steel mills had shut down. I remember when he called me bemoaning that a tornado missed his home by only a few hundred yards. At the time, arson was the most important industry in the town.

Theoretically, we might expect that many people would respond to unemployment by searching for better opportunities. But the steelworkers in Youngstown and the coal miners in West Virginia would take such a large capital loss in selling their homes if they chose to relocate.

Later, I read an article that seemed to validate my intuition.

Andrew Oswald's proposed that home ownership was the most reasonable explanation for differences in unemployment rates between countries. The scatter graph has a very impressive fit.

Oswald, Andrew J. 1999. "The Housing Market and Europe's Unemployment: A Non-Technical Paper."
http://www2.warwick.ac.uk/fac/soc/economics/staff/faculty/oswald/homesnt.pdf

A new census report found that the rate at which people change their residences has declined. Perhaps someone will investigate the interaction between the downturn in mobility and the effect on the pace of recovery.

http://www.census.gov/Press-Release/www/releases/archives/mobility_of_the_population/013609.html

Here is the New York Times' take on the subject.

Roberts, Sam. 2009. "Slump Creates Lack of Mobility for Americans." New York Times (23 April): p. A 1.
http://www.nytimes.com/2009/04/23/us/23census.html?_r=1

"Stranded by the nationwide slump in housing and jobs, fewer Americans are moving, the Census Bureau said Wednesday. The bureau found that the number of people who changed residences declined to 35.2 million from March 2007 to March 2008, the lowest number since 1962, when the nation had 120 million fewer people."

"Experts said the lack of mobility was of concern on two fronts. It suggests that Americans were unable or unwilling to follow any job opportunities that may have existed around the country, as they have in the past. And the lack of movement itself, they said, could have an impact on the economy, reducing the economic activity generated by moves."

"Joseph S. Tracy, research director of the Federal Reserve Bank of New York, said the lack of mobility meant less income for movers and the people they employ and less spending on renovation and on durable goods like appliances. But, Dr. Tracy said, the most troubling prospect is that people were no longer able to relocate for work. "The thing that would be of deeper concern is if job-related moves are getting suppressed and workers are not getting re-sorted to the jobs that best use their skills," he said. "As the labor market started to improve, if mobility stays low, you can worry about the allocation of workers"."

"The American Moving and Storage Association said the number of people changing residences had been dropping for four years and fell 17.7 percent from 2007 to 2008. The first quarter of 2009 is likely to be even worse, the trade group said. "We saw a standstill in new home construction, so there was no domino effect from people moving," John Bisney, a spokesman, said. "People are a little nervous about getting a mortgage. And the recession is so broad-based it's not as if you can pull up stakes and move to a part of the country that's growing." Jed Smith, a research director for the National Association of Realtors, said that on average it took a homeowner 10.5 months to sell a house in 2008 compared with 8.9 months in 2007."

"In its report Wednesday, the Census Bureau said that Americans' mobility rate, which has been declining for decades, fell to 11.9 percent in 2008, down from 13.2 percent the year before and setting a post-World War II record low. Moves between states dropped the most, to half the rate recorded at the beginning of this decade."

Saturday, April 25, 2009

Cognitive Dissonance and Groupthink

No sooner do I rail against the avoidance of cognitive dissonance theory by behavioral economists than a major paper employing CD in new and powerful ways appears: "Groupthink: Collective Delusions in Organizations and Markets" by Roland Benabou. This paper places CD in a social context, where a club good is being produced, and individual effort depends on estimations of the future, but there is also utility or disutility from the state of expectation (influenced by information). Individuals “choose” to accept or reject new information (or combine the two in mixed strategy form), as in most formalizations of CD. The result is a social process that exhibits less or more CD at the individual level. Here is the abstract:

I develop a model of (individually rational) collective reality denial in groups, organizations and markets. Whether participants’ tendencies toward wishful thinking reinforce or dampen each other is shown to hinge on a simple and novel mechanism. When an agent can expect to benefit from other’s delusions, this makes him more of a realist; when he is more likely to suffer losses from them this pushes him toward denial, which becomes contagious. This general “Mutually Assured Delusion” principle can give rise to multiple social cognitions of reality, irrespective of any strategic payoff interactions or private signals. It also implies that in hierarchical organizations realism or denial will trickle down, causing subordinates to take their mindsets and beliefs from the leaders. Contagious “exuberance” can also seize asset markets, leading to evidence-resistant investment frenzies and subsequent deep crashes. In addition to collective illusions of control, the model accounts for the mirror case of fatalism and collective resignation. The welfare analysis differentiates valuable group morale from harmful groupthink and identifies a fundamental tension in organizations’ attitudes toward free speech and dissent.

Jewish Economists

I just finished reading Janos Kornai’s memoirs (By Force of Thought). I’ll have more to say about it later, but first I want to mention my surprise at finding out that Kornai is yet another Jewish economist. A disproportionate number of economists appear to be Jews. The precise number is undetermined, but I’ll bet if we had a complete data set, we could reject the religion-neutral null at a really low p-value.

This calls out for an explanation. I think we can ignore antisemitic stupidities about Jews and money or conspiracies to control the world’s wealth. There isn’t an obvious political angle either, since Jewish or half-Jewish economists come in all stripes, from Hayek and Friedman to at least two of the contributors to this blog and, of course, Marx himself.

My approach to this is to think about the other fields in which Jews are or have been overrepresented. This appears to include theoretical physics, mathematics and depth psychology, and, in the non-academic universe, top-level chess. On the other hand, one does not see this tilt in natural history, chemistry or experimental psychology. (I could be completely wrong about these estimates; I have no actual data, only a few scattered bits of knowledge.) A valid explanation should apply to all of these, shouldn’t it?

Here is a hypothesis: the fields in which Jews are concentrated tend to be those that look for hidden patterns, as opposed to those which are mainly concerned with describing the visible world more clearly. The reason has to do with the difference between Christian and Jewish cosmology.

The Christian perspective is that the worlds of god and man were bridged initially by Jesus and have remained in communication since then, via either the intermediation of a church or direct introspection by believers. It is enough, according to this perspective, to simply observe, study and follow the path. In particular, nature is said to be an open book, revealing god’s wisdom to all who pay attention.

The Jewish view is nearly the opposite. God issues clear instructions, but the logic that underpins them is beyond understanding. The essential problem is that there is no bridge between the infinite mind of god and the frail, context-bound mind of human beings. We are commanded to comprehend, but comprehension is beyond us. So we read and reread the sacred texts, looking for hidden clues that can bring us a little closer to a knowledge that will ever remain beyond reach. Nature, like the sacred text, is in code, an endless puzzle.

Of course, both Christians and Jews have been extensively secularized, but perhaps this is the point. A deep cultural orientation remains, even as minds turn to worldly problems. Habits of decoding linger on with Jews, who then go into the decoding professions like economics and chess. (A note to non-chessplayers: a professional in this game is someone who is hooked on the question, “What is really happening in this position?”—and has become good at answering it.)

I first glimpsed the outlines of this argument when I read Ricardo’s unpublished essay on “Absolute and Exchangeable Value”. This is a cultural text as much as an economic one, an obsessive peeling away of layers that stands worlds apart from the contented common sense of Adam Smith. And this urge to dig deeper can also be found in Kornai, especially as he documents his thought process during his crucial formative years. The goal remains to discover the true meaning of events, obscured beneath the veil of appearances.

This heightened Jewish presence in the “deep-pattern” fields is transitory. It begins only with the widespread secular assimilation of Jews into mainstream European culture in the nineteenth century, and it is gradually fading away as ancient cultural legacies dissolve, and as disciplines and professions become globalized, increasingly populated by people from countries beyond the Christian/Jewish dichotomy.

Friday, April 24, 2009

On the Foundations of Mathematical Economics

So, here I am doing something way off the usual track here of political economy and all that. In effect, this is a followup on a post I did about a year and a half ago about the centennial of the birth of my mathematician father (1907-1989). So, I have just written a paper with the same title as this post, available at my website, http://cob.jmu.edu/rosserjb (scroll down to the bottom). It comments on a paper written by Kumaraswamy Vela Velupillai that is entitled, "Taming the Uncomputable, Reconstructing the Nonconstructive and Deciding the Undecidable in Mathematical Economics," (yeah, I know, sigh... ). In the opening section of that paper he cites work of my late father in connection with this hairy topic, and says nice things about his work, noting it as homage for his centennial (yes, the paper has been floating around for awhile).

So, there is a special issue of the journal, New Mathematics and Natural Computation coming out to honor Professor Velupillai, and he and the editor of the special issue requested of me that I write a commentary on this specific paper of his, which will be the lead article of the issue, and that I also comment on my father's work in connection with all this. I had never before in my life written professionally about either my father's life or his work, and in the end I was way overdue with this. However, I did finish it finally, and for those of you more interested in what I have to say about my somewhat controversial late father, that is largely in the section prior to the Conclusions, with most of the personal observations in the footnotes. The paper will be the final one in this forthcoming special issue.

An Infinite Loop

Barack Obama tells us we should not investigate American intelligence agents or their overlings who are responsible for torturing hundreds of suspects in their custody. We have to forget about the past, he says, to concentrate our attention on the future. That might be a convincing argument if Obama were going all out for an ambitious program to remake our economy and our relationship to the rest of the world. But the future is on hold because the number one job today is bailing out the financial system, so we can preserve the money moguls who juiced our economy in the past.

Thursday, April 23, 2009

Chrysler, Solved

OK, call me a genius, but I think I’ve figured it out. Here’s the situation: there is a small, but nevertheless quite large, car company called Chrysler. Their revenues can’t possibly keep pace with their operating costs and their contractual obligations to retirees and bondholders. They face imminent bankruptcy. This would be costly for many parties, so the government has been trying to find a way to avoid it. The UAW has agreed to substantial concessions, but the bondholders are holding out. Even though Chrysler’s debt is trading at 15 cents on the dollar, the bondholders are demanding 4+ times this. Unless an agreement with them can be hammered out, Chrysler is headed for the junkyard.

So who are these bondholders? Financial institutions primarily, most of whom are recipients of direct or indirect bailout support from the taxpayer. This suggests a solution: give the bondholders all they want, 100% if need be. Then deduct that money from the bailouts in some way that roughly distributes the cost across these same firms, and give it to Chrysler. You want shell games? We can do shell games.

Yes we can.

The Paternalistic Bias of Behavioral Economics

I find I’ve been waking up each morning with the outline of an essay in my head. Each time it’s a different topic, but the routine is the same: I stare groggily at the alarm clock as one part of my mind proposes objections and the other answers them by drawing out finer distinctions. This is terrible for my sleep, and it hasn’t led to anything productive because there is no way to write a new, worked-out essay each day. I’ll use this blog as a place to file these ideas away.

Today’s subject is what behavioral economists study, what they don’t study, and what this tells us about their underlying prejudices. And, as I realized at 6 am, this all goes back to the exchange between Walter Lippman and John Dewey in the 1920s, although I may not get to that here.

The domain of behavioral economics is the failure of individuals to process information according to the dictates of rational goal achievement, the idealized maximization routines one learns in microeconomics. The list is long and includes such issues as probability bias, accounting bias, availability bias, hyperbolic discounting, loss aversion (status quo bias), etc. All of these cognitive traits have been documented beyond dispute by psychologists, and there is now a vast literature demonstrating that they have nontrivial effects on economic decision-making.

But those familiar with psychological research will know that the behavioral insights gleaned by economists are not exhaustive. In particular, it is interesting that one of the biggest research fields in psychology, cognitive dissonance, has barely made a dent in the BE agenda.

The basic idea of CD is that people experience discomfort from holding two contradictory thoughts at once. The main application has to do with the reception of information that violates an individual’s self-conception: if you have chosen to do something, and this choice plays even a modest role in how you think about yourself, you will have a tendency to ignore or reject information that goes against it. The vernacular version of this is “denial”, which we see every day in real life.

I first became aware of the importance of CD in my studies of occupational safety and health. Of all the psychological impediments to rational thinking about work and health, surely denial is the most significant. There was a flurry of interest among economists in this topic following the publication of “The Economic Consequences of Cognitive Dissonance” by Akerlof and Dickens in 1982; I presented a much simpler but also sharper model in my book Markets and Mortality (1996). Researchers in health behavior took note; they had long had CD on their minds and were predisposed to see it in economic dress.

But read the current literature on BE and you will be hard-pressed to find any mention of CD at all. There is no end to studies of defective information processing, but the initial acceptance of information doesn’t make the cut. We have nuanced policy advice in books like Nudge, but the much larger questions posed by CD are off the table. Am I mistaken in thinking that denial, the refusal to acknowledge information that calls into question our economic behavior, is central to the disconnect between environmental knowledge and anemic or nonexistent policy?

So how to explain this? To put it bluntly, I sense bad faith. The topics researched by BE all have this in common: they point to traits that are likely to disappear with enough exposure to decision theory. We don’t succumb to loss aversion, probability bias or these other flaws. This means we can come up with clever schemes to fix them. But CD is another kettle of fish altogether; there is no reason to suppose that the experts (us) are any less likely to be subject to denial than the lay folk (them). In other words, I think behavioral economists find the paternalistic stance of their discipline congenial; there is less interest in pursuing questions that apply equally to their own judgment.

Ah, but what has this to do with Lippman and Dewey? That will have to wait.

Wednesday, April 22, 2009

Cheney Turns To HooverEconomics

A couple of months ago, I suggested that Dick Cheney actually got something right – see We’re All Keynesians Now. Maybe I spoke too soon:

President Barack Obama's expansion of the federal government into the financial sector is likely to have "devastating" effects in the long term, former Vice President Dick Cheney said in his latest salvo directed at the new White House administration. In an interview on Fox News — portions of which aired Tuesday night — the former vice president said he is "very concerned" about where the Obama administration is taking the country economically. "I worry very much that we're in a situation now where there doesn't appear to be any limitation whatsoever in terms of the spending commitments that this administration wants to make," he said. "Vast expansion in terms of the deficit, but it also says a lot about what they intend for the role of government in this society."

This kind of flip-flop might land the former Vice President a position at the National Review assisting Lawrence Kudlow write copy on economic matters!

Monday, April 20, 2009

Ideological Discrimination in Economics?

Sometime ago I remember reading a study that indicated the way that publications from Chicago trained economists clustered in the Journal of Political Economy and those from Harvard, in the Quarterly Journal of Economics. (Maybe someone recalls the reference.)

I recently came upon an article about the respective hiring patterns of departments of economics, comparative literature, of mathematics. A similar type of clustering occurs in economics, but far more modestly in mathematics, where presumably ideology would not play much of a role.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1347002

Economists commonly describe the ideological clustering is a division between freshwater and saltwater economists -- because the conservative departments tend to be in the interior and the more liberal along the East and West coasts.

The author does not attribute the clustering to ideological influences, but one might suspect a reluctance of Chicago to dilute its ideological purity with an excessive influx of people who do Harvard or MIT style economics. Admittedly, the difference between these schools is much more modest than it has been in the past.

If one can accept the possibility of mutual discrimination on account of relatively modest intellectual differences, might one be forgiven for suspecting the long-denied discrimination against radical economists?

Another Step Toward Bank Nationalization (Without the “N” Word)

There are two theories about this latest announcement from the Obama administration about bank capitalization, in which unnamed officials tell a New York Times reporter that converting government-owned shares from preferred to common will stretch public resources at no cost to taxpayers. You could take it at face value, as Paul Krugman does. In this case, the government officials (described as “top economic advisors”—is that Larry on the other end?) are amateurs, unaware that both types of share ownership constitute a capital cushion, for the reasons Krugman lays out. I have questioned team Obama’s judgment in the past, but I don’t think this is likely.

The other explanation is that this is a misdirection play, not-so-secretly concealing a significant step toward nationalization. Real nationalization means control, not just ownership, so the switch to common stock is potentially very consequential. Of course, much of the political and financial establishment is terrified at this prospect, so some other explanation was needed. Hence the (absurd) claim that this conversion is simply a technical move that economizes on scarce federal dollars. Of course, you need a compliant press to pick up the decoy and run with it, and the Times is doing its part. Since no reputable economist would make such a goofy alibi publicly, the article has to be anonymously sourced. Check, check and check.

Should proponents of nationalization be dancing in the aisles, or in the lobbies of their favorite financial institutions? While the political deftness of the latest move can be praised, from a policy point of view it continues the flawed process of piecemeal response. Real nationalization has profound impacts on existing private shareholders and creditors. If it is introduced slowly or one bank at a time, it can set off a panic throughout the system, causing financial chaos and severe political blowback. This is why the stress tests are so problematic: there is no immediate action implied if a bank fails—on the contrary, it has half a year to raise more capital after being branded a proto-zombie. No wonder the banks have been waging a preemptive battle to convince us that they shouldn’t be given a failing grade. A real stress test as part of a coherent, comprehensive policy would result immediately in seizure for those who come up short. The same can be said about the scheme to tiptoe gingerly into nationalization via step-by-step share acquisition: there is too long a gap between the banks’ awareness they being eaten and their actual ingestion. During this pause of several months many nasty things may happen.

For what it’s worth, I repeat here my criticism of nationalization as a strategy for rebooting finance. By acquiring the banks, the government acquires their liabilities. The evidence (amplified by rumored forthcoming revisions in IMF estimates of financial losses) is that the public cannot afford to make these claimants whole. This means in turn a complex round of negotiations over how much of a writedown should be imposed on which classes of claims, a politically messy business with system-level consequences. Until these questions are resolved, the banks and other institutions cannot function in a remotely normal fashion. In other words, nationalization isn’t a solution, only another framework in which to grope for one. Granted, it’s a better framework, but there is a superior option. Specifically, it makes much more sense to use scarce public funds to immediately establish public banking facilities that can finance economic recovery, and to allow existing firms to fail. There would still be an ugly season of resolving legacy claims and parceling out defaults, but at least we would have a working financial system humming in the background. I have also made the case for the long term desirability of a public banking sector modeled loosely on the German Sparkassen, so the “good new bank” idea can also be a stepping stone to a brighter future.

The Economy, or is that Moses's Shoe?

Hundreds of thousands of economists around the world pour over their subject. A good number attempt to reduce the economy to scientific laws, which can be expressed as mathematical theorems. Laws are passed and people are taxed, subsidized or even punished in order to promote the economy.

Just what is this economy? Before dismissing this question as naïve or impertinent, consider an almost unintelligible sentence from John Selden (1584-1654), a polymath, whom the poet, Milton, described as "the chief of learned men reputed in this land." Selden wrote: "We commonly are at What's the Reason of it? before we are sure of the Thing." The two short sentences that follow makes Selden's meaning clear: "sure of the Thing. Twas an excellent question of my Lady Connon, when Sir Robert Coggon was magnifying of a shoe, which was Moses's or Noah's, and wondering at the strange shape and fashion of it: But, Mr Cotton, says she, are you shure it is a shoe?"

Just what is this economic shoe? What we call the economy is just an abstraction. We just rope off part of our lives and call it an economy.

Imagine encountering a person totally unfamiliar with our way of life who is hungrily inquiring about his surroundings. Having heard a great deal about our society, our visitor asks to be directed to see the economy. We should we point him?

Is a nursing mother lavishing love on an infant part of the economy? Her child may well turn out to be a scientist whose work will increase the Gross Domestic Product by billions of dollars. But then, we know that adversity helps some people develop. Is someone tormenting a child part of the economy?

Artists squatting in a blighted part of town may be planting the seeds of the next trendy neighborhood, making some property owners fabulously wealthy, while displacing others who cannot afford the gentrified rents. Are these artists part of the economy?

Also, when disaster strikes, people put aside their thought of the economy.

As you might expect, normally inexpensive goods might cost a great deal in the wake of a disaster. For example, after Hurricane Hugo hit South Carolina in 1989, portable generators that normally cost a few hundred dollars sold for thousands. However, most people find the behavior of such profiteers repellant. For example, a Newsweek article of October 30, 1989 described the doubling of bottled water prices after the 1989 San Francisco earthquake as "mind-bending audacity" (p. 10; cited in Samuels and Puro 1991, p. 62).

What was mind-bending? Isn't that what business is supposed to do? Sometimes firms do hold prices steady in the wake of disasters, despite the profits that they could earn by charging what the market might bear (Samuels and Puro 1991, p. 62). For example, Safeway refrained from raising prices immediately after the Alaskan earthquake of 1964 and continued to do so through the month of April. It raised prices in May, only after management decided that the emergency period had passed (Dacy and Kunreuther 1969, p. 116). Truck rates were lowered, but only for those commodities that could not be conveniently shipped by boat -- the competitive mode of transport (Hirshleifer 1987, p. 141).

Wal-Mart burnished its image by delivering supplies in the wake of Hurricane Katrina, but why would the public applaud such actions that violate the logic of the economy? Maybe economists' attention is misdirected and it is not Moses' shoe after all.

Apologies in advance. This is a very hasty and preliminary stab. Comments will be appreciated.

Sunday, April 19, 2009

Water and Energy

Finding a solution to the energy problem will not be easy. Water is an even more challenging problem. In my Hainan talk, I mentioned the tension between water and power. Here is another article on the subject, noting the tension between water and solar energy.

http://michaelperelman.files.wordpress.com/2009/04/hainan1.pdf

Beamish, Rita (AP). 2009. "Future Cloudy for Desert Solar Drive." Sacramento Bee (19 April): p. A 4.

"A westward dash to power electricity-hungry cities by cashing in on the desert's most abundant resource -- sunshine -- is clashing with efforts to protect the tiny pupfish and desert tortoise and stinginess over the region's rarest resource: water. Water is the cooling agent for what traditionally has been the most cost-efficient type of large-scale solar plants. To some solar companies answering Washington's push for renewable energy on vast government lands, it's also an environmental thorn. The unusual collision pits natural resources protections against President Barack Obama's plans to produce more environmentally friendly energy."

Animal Cracker

by the Sandwichman

"Picture a square divided into four boxes, denoting motives that are economic or noneconomic and responses that are rational or irrational."George Akerlof and Robert Schiller are doing narrative policy analysis in their book, Animal Spirits. The 'square divided into four boxes' is also known as a semiotic square and is related to an Aristotelian square of opposition.

If they were writing a dissertation...

If they were graduate students writing a dissertation, one of the requirements would be a literature review situating their own work within the established tradition of the methodology they propose to use. There is scant precedent for narrative policy analysis in the contemporary economic literature. So their literature review would have to be interdisciplinary. Authors such as Emery Roe, Hayden White, Paul Ricouer, Roland Barthes, A. J. Greimas and Kenneth Burke would be appropriate references. They might also detour into historical tidbits involving Goethe's Faust and Giambattista Vico's New Science.

The disadvantage of a literature review is that it may appear to many readers as a digression that delays chomping into the meat of the authors' analysis. The benefit is that, presumably, the authors get and demonstrate a more solid grounding in the analytical techniques they are using.

Akerlof and Schiller correctly point out that standard macroeconomics focuses on only one corner of the economic box. They claim that goal of their book is to fill in the other three boxes. The way they attempt to do this, though, is both simplistic -- 'it's the animal spirits, stupid!' -- and overly complex and convoluted: animal spirits is confidence, fairness, bad faith, money illusion and stories. This is not adding apples and oranges. It's adding coconuts, pineapples, broccoli sprouts, condensed milk and hockey pucks.

What Akerlof and Schiller are trying to do here -- propose a counter-narrative to the traditional rational actor model in economics -- is laudable and timely. However, it is also awkwardly executed. The rule is a counter narrative must be at least as parsimonious as the dominant story it seeks to displace (Occam's razor). Akerlof & Schiller's "animal spirits" is a loose and baggy monster made even looser and baggier by the catch-all category of "stories". It's also a doubtful stretch to try to pin credit for their concoction on Keynes. Sure, he referred to animal spirits somewhere but he also talked about green cheese (in reference to money illusion). So what makes money illusion an 'animal spirit' rather than a 'green cheese'? Instead of applying Occam's razor to their animal spirits, the authors have tied themselves up in a Gordian knot.

Previously I have proposed an appropriately parsimonious alternative to the rational actor model. I call it Persona parsimoniae. Instead of rational calculation, Pp's behaviors are guided by habit and custom. Pp has two distinct kinds of needs, absolute or relative, material or symbolic, subsistence or status, necessary or superfluous. And instead of maximizing individual utility through market transactions, physical and social limits to production necessitate non-market social co-ordination of consumption to avoid excessive waste and deprivation. See how simple that is? Three elements, not five, each of them keyed to a characteristic of the dominant model.

Getting back to Akerlof and Schiller's square divided into four boxes, there is a way to label the elements more substantively. They opt for 'noneconomic motives' and 'irrational responses' as the alternatives to 'economic motives' and 'rational responses'. Their alternatives are too vague as a consequence of an over-reach by the standard set. My alternative suggestions would be positional vs. material motives and habitual vs. calculated responses.

There is, in my view, a third element that needs to be incorporated into the semiotic square analysis: outcomes. Makes sense? 1. motives; 2. responses; 3. outcomes. The semiotic square thus becomes a semiotic cube with eight nodes instead of four but potentially six faces instead of only one. Akerlof and Schiller's more limited square is convenient for arguing that there really is only one alternative to the prevailing conventional wisdom of the last 30 or 40 years. They advocate exchanging one set of blinkers for another that perhaps enables a bit more peripheral vision but still blocks out depth perception. I would draw a picture of the semiotic cube but I have a headache. Maybe some other time.

Mankiw: This Has to Be a Joke, Right?

Nominal interests rates have a zero bound, because it is preferable to hold money rather than lend it if rates go negative. But Mankiw and his clever grad student have a solution: let the Fed randomly pick an integer from 0 to 9 once a year and invalidate all currency whose serial number ends with it. Then people would gladly accept negative interest rates to unload their disintegrating cash.

Um, no. I don’t know what they teach at Harvard, but where I work we don’t postpone past grad school the following rather elementary observation: most money is not currency. The most recent Fed data put the monetary base at just under $1.6T, of which about half is in the form of reserves held by member banks at the Fed. M2, which includes the deposit accounts you and I have at our banks and represents a more relevant measure of the money supply, is a bit over 8.3T (not seasonally adjusted). In other words, about 90% of the money supply under a reasonably conservative definition is not cash and bears no serial numbers.

Imagine that.

And even if we could force everyone to trade in the coin of the realm and abjure those newfangled bank accounts, there would still be the international dimension to consider. About half of our dollars circulate abroad; whole countries are even dollarized. Now here’s something for Mankiw to consider: Panama, to take one example, pegs its currency to the dollar but prints the stuff itself to put a local face on legal tender. Can you foresee a spike in demand if they decide to not play the self-destructing digit game?

All of this is bonkers, of course. The more serious proposal in Mankiw’s column is for the Fed to target a particular rate of inflation, but effectively, by publicly opposing deflation, they are already doing that. Money growth has been ample so far (for instance, a 9.4% growth in M2 over the past year); there has been no repetition of the monetary contraction that accompanied the early stages of the Great Depression, just like Bernanke promised. The Fed’s toxic asset buying spree has been a form of open market operations, and monetary expansion has been one of the main sources of its bailout finance. There is general agreement, however, that this particular spigot cannot be opened much further. Enough money creation can always crank out high rates of inflation, but this would set off a run on the dollar, and the willingness of portfolios to accept ungodly amounts of dollars, and dollar-denominated T-bills, is the underpinning for the entire bailout strategy. Surely Mankiw must know this too.

So what’s the point?

Saturday, April 18, 2009

Finance Question

What happened what happened with the debate about whether speculation or market manipulation could affect oil prices? I'm wondering because of the recent discussion about the urgency of preventing shortselling. Why would shortselling in stocks have an effect, but not speculation in oil?

Friday, April 17, 2009

The Somali 'pirates' another media lie?

In 1991, the government of Somalia - in the Horn of Africa - collapsed. Its nine million people have been teetering on starvation ever since - and many of the ugliest forces in the Western world have seen this as a great opportunity to steal the country's food supply and dump our nuclear waste in their seas. Yes: nuclear waste. As soon as the government was gone, mysterious European ships started appearing off the coast of Somalia, dumping vast barrels into the ocean. The coastal population began to sicken

.

You Are Being Lied to About Pirates
By Johann Hari
April 12, 2009 "Huffington Post"
http://informationclearinghouse.info/article22399.htm

Isn’t Cash Income is Taxed at the Same Rate as Direct Deposits to Your Checking Account?

Steve Benen reviews the political fuss over Senator Richard Burr’s calls to his wife to have their own run on their bank. Steve also notes the following from Brian Walsh, the communications director for the NRSC:

The Democrats' response highlights perfectly the competing views of the two parties when it comes to strengthening the economy.... In just the first three months of this year, Senate Democrats have voted for more spending than the previous Administration spent on Iraq, Afghanistan and Katrina recovery combined so it's little wonder Americans want to keep their hard earned money away from the grips of Washington.

Steve thinks makes no sense. It might make sense if cash income were not taxed. But I have sad news for Mr. Walsh – if your employer pays you in cash, you still have to pay taxes on that income. I’m beginning to wonder if any of our Washington Republicans know anything about even the basic notions of economic policy.

Micromanagement: Medicine and Education

A few months ago, I commented on a New York Times article bemoaning efforts to micromanage medical care -- medicine by the numbers:

http://michaelperelman.wordpress.com/2008/09/19/two-vignettes-of-regulation-i/

A few days ago, Wall Street Journal published a similar article, arguing that good medical care requires considerable discretion on the part of doctors and that micromanaging is destructive.
Groopman, Jerome and Pamela Hartzband. 2009. "Why 'Quality' Care Is Dangerous: The Growing Number of Rigid Protocols Meant to Guide Doctors Have Perverse Consequences." Wall Street Journal (8 April): p. A 13.

http://online.wsj.com/article/SB123914878625199185.html

Yesterday's New York Times informed its readers that the Obama administration is going to continue the No Child Left Behind nonsense of the Bush administration.

http://www.nytimes.com/2009/04/15/education/15educ.html?_r=1&em

While tens of thousands are getting fired and schools are cutting back vital programs, mandating multiple-choice tests will somehow save public education. Of course, the schools that cannot afford teachers who have to lay out money for tests and to waste valuable teaching time teaching toward the test.

My own university is asking us to us provide some sort of quantitative measure of our success in educating students. Because we teach a broader mix of subjects, we are not faced a cookie cutter approach as extreme as K-12, education. The demand is that we devise our own metric. Are economics students to demonstrate the quality of their education by regurgitating market fundamentalism?

Wouldn't it be nice if finance and other forms of business were held to strict standards?

Thursday, April 16, 2009

Growthaholics Anonymous

by the Sandwichman

The UK Sustainable Development Commission's Prosperity without Growth report even contains a 12-step program for overcoming our addiction to economic growth. Personally, I think the first step should be to admit that the growth imperative is an addiction that it has made our society and unjust and unstable and ecologically unsustainable:

12 Steps To a Sustainable Economy

Building a Sustainable Macro-Economy

Debt-driven materialistic consumption is deeply unsatisfactory as the basis for our macro-economy. The time is now ripe to develop a new macro-economics for sustainability that does not rely for its stability on relentless growth and expanding material throughput. Four specific policy areas are identified to achieve this:

1. Developing macro-economic capability
2. Investing in public assets and infrastructures
3. Increasing financial and fiscal prudence
4. Reforming macro-economic accounting

Protecting Capabilities for Flourishing

The social logic that locks people into materialistic consumerism is extremely powerful, but detrimental ecologically and psychologically. A lasting prosperity can only be achieved by freeing people from this damaging dynamic and providing creative opportunities for people to flourish – within the ecological limits of the planet. Five policy areas address this challenge.

5. Sharing the available work and improving the work-life balance
6. Tackling systemic inequality
7. Measuring capabilities and flourishing
8. Strengthening human and social capital
9. Reversing the culture of consumerism

Respecting Ecological Limits

The material profligacy of consumer society is depleting natural resources and placing unsustainable burdens on the planet’s ecosystems. There is an urgent need to establish clear resource and environmental limits on economic activity and develop policies to achieve them. Three policy suggestions contribute to that task.

10. Imposing clearly defined resource/emissions caps
11. Implementing fiscal reform for sustainability
12. Promoting technology transfer and international ecosystem protection.

Wednesday, April 15, 2009

Rush Leads A [Socialist] Revolution?

In today's Washington Post, Harold Meyerson reports on findings of the Rasmussen poll, which find that while overall Americans favor "capitalism" over "socialism" by 53% to 20% (rest undecided), among those under age 30, that ratio is only 37% to 33% (rest undecided). This leads Meyerson to speculate that partly this is due to the end of the Soviet Union, and the shift in terminology of "socialism" to mean the "social capitalism" of the Social Democratic parties of Western Europe. Or, as he puts it, "the left bank of the Seine in Paris does not invoke the same terror that Stalin's gulag did." I note that rather than "social capitalism," the much older term is "social market economy" from the German "sozialmarktwirtschaften," which was cooked up after WW II in West Germany by such Ordo-liberals as Walter Eucken, who, ironically, were friendly with Friedrich Hayek.

Meyerson goes on to speculate that besides the fading away of the Soviet threat, and the apparent capitalism of the still-officially "communist" China, another reason why younger people might have a more favorable impression of "socialism" than their elders is because of Rush Limbaugh and his cronies in the right wing nucase media. They have been loudly denouncing Obama as a "socialist," and his popularity ratings among younger people is much higher than the 60+% one finds overall in the US. So, by linking this very popular president among young people with the term "socialism" so deeply, Rush and company are leading the "socialist" revolution!

Who Will Bear Those Deferred Taxes?

Mark Thoma blogged on the issue of tax progressivity and received a lot of comments. My two cents on this ended with this:

Besides – a lot of Federal taxation was deferred under the previous Administration. Who will pay those deferred taxes? It seems that the past White House wanted to claim no one had to. Now that was very dishonest.

Economist’s View reader Blissex made this important point:

over time the take of the federal level is around 20% of GNP and the take of the local level is around 10%. Higher incomes contribute a bit more to the federal level and lower incomes a bit more to the local level. Overall for most incomes the total tax take is around 30%, and very much flat, except perhaps for the top 10% and the bottom 10%, where various funny things happen.

His point is that the total tax bite including deferred taxation is around 30 percent – the ratio of government spending to GDP. If all income groups ended up paying an effective tax rate equal to 30 percent, then we would have overall balanced budgets. While the Republican Party pretends to be about limited government so everyone can have lower tax rates, the reality is that Republican governments spend as much if not more than Democratic governments. What the Republican Party is really about is seeking ways that the burden of these deferred taxes be shifted onto lower income groups so the higher income groups will not have to pay for them. Alas – we rarely hear Republican politicians and their apologists admitting that this is their real agenda.

A conversation with the US ambassador

I said `what would you do if our government decided to nationalise the Australian subsidiaries of the various American multinational corporations?' and he'd been caught by surprise, he wasn't accustomed to a minister asking that sort of question whilst he was in the process of taking his seat, and he blurted out: `oh, we'll move in'. I said, `oh, move in? like bringing the marines in?. He said, `oh...' he looked a bit uncomfortable by now, although he's a senior man he didn't expect being caught off guard, he was very uncomfortable and he said, `oh, no, the days of sending the marines has passed but there are plenty of other things we could do'. I said, `for example?'. He said, `well, trade'. And I said, `do you realise that if you stop trading with Australia you would be the loser to the extent of 600 million dollars a year', that was the balance of trade figures at that time. He said, `oh, well, there are other things'.

A conversation between Australian Labor Minister Clyde Cameron and US Ambassador Marshall Green before the Whitlam Coup of November 1975.

"It is of vital importance that, with not one day's delay, we decide to take matters out into the wider field, establishing and developing now, the means fully to research the causes of authoritarian human behaviour; to educate and to publish our results; and to begin to establish here and now those forms of 'life style' which are alternatives to the acquisitive, alienated, conflict-ridden society which we have inherited from the past."

Jim Cairns [See image], former Deputy Prime Minister in the Whitlam Administration of 1975.
Final paragraph in is 1976 book entitled "Oil in Troubled Waters".

Tuesday, April 14, 2009

Does Anyone Only Pay Federal Taxes?

Mark Thoma treats us to an important analysis from Citizens for Tax Justice with hat tip to Catherine Rampell who writes:

Data released last week by the Congressional Budget Office underscored the progressive nature of the federal tax system. And in an op-ed article today in The Wall Street Journal, Ari Fleischer, who served as President George W. Bush’s press secretary, used that data — in particular, the income tax numbers — to argue that the wealthiest Americans bear an unfair share of the tax burden. Other research has found that many states and local governments have more regressive tax systems, though, that might offset the progressiveness of federal tax rates.

Ari Fleischer is not the only member of George W. Bush’s Administration to argue that the tax system is highly progressive by presenting only Federal taxes paid as if you and don’t pay state and local taxes too. Greg Mankiw has highlighted the CBO data on Federal taxes many times.

While I think this is an incredibly silly exercise, Mark got this comment from cynicalone:

Can you please explain how this rebuts the CBO. The CBO looked at the effective average federal tax rates. This throws in state and local taxes and you somehow imply that this proves federal taxes are not progressive. If you believe that your state and local taxes are not progressive enough then go complain to the state legislature or your local council. This has nothing to do with the progressivity of federal taxes and certainly has no bearing on the CBO report. The entire argument is disingenous. i.e. I don't like this CBO report so I am going to include some completely irrelevant data until I get the outcome I desire.

While we should tell cynicalone that his argument is disingenuous, we hear this a lot from certain conservatives. The problem with this argument is that we citizens really don’t care which government services we get from Washington versus which ones we get locally (in my case, New York City and Albany, New York). We also pay more attention to our total tax bill rather than where we end up sending the various checks. Besides, the Federal government has this habit of mandating that the local governments do certain things and only often only partially fund these mandates. To slice and dice tax obligations in the fashion that Ari Fleischer et al. do is either just or dishonest in my opinion.

Besides – a lot of Federal taxation was deferred under the previous Administration. Who will pay those deferred taxes? It seems that the past White House wanted to claim no one had to. Now that was very dishonest.

Interview with Michael Perelman

Politics and Culture, an excellent online publication, just posted an interview with me.
Michael Perelman. 2009. "On Globalization, Economics, and the History of Food Crises: An Interview with Michael Perelman by Max Haiven." Politics and Culture, No. 2. Special Issue on Food and Sovereignty."
http://aspen.conncoll.edu/politicsandculture/page.cfm?key=720

Monday, April 13, 2009

Parsing Prosperity

by the Sandwichman

Here is a quick narrative analysis of the Prosperity without Growth report from the perspective of the proposed Persona parsimoniae counter-narrative to Economic Man:

As the economy expands, so do the resource implications associated with it. These impacts are already unsustainable....

A world in which things simply go on as usual is already inconceivable. But what about a world in which nine billion peole all aspire to the level of affluence achieved in the OECD nations?

Absolute limits? Check. The means for satisfying material desires are limited absolutely, not just transiently, by physical laws and/or social institutions.

Material possession do play an important symbolic role in our lives, allowing us to participate in the life of society.

Two kinds of preferences? Check. Persona parsimoniae has two different kinds of preferences -- organic needs and aspirations for social distinction, the latter of which is referred to in PwG as the symbolic role of material goods.

...the current turmoil is not the result of isolated malpractice or simple failures of vigilance... It was undone by growth itself.

The growth imperative has shaped the architecture of the modern economy...

This model was always unstable ecologically. It has now proven itself unstable economically. The age of irresponsibility is not about casual oversight or individual greed. If there was irresponsibility it was systematic, sanctioned widely and with one clear aim in mind: the continuation and protection of economic growth.

Habit rather than calculation? Check. Utility "maximization" is mostly a function of habit [and emulation] rather than calculation. The key term here is "imperative". Growth is thus not seen as an option but as a compulsion. The system imposes this compulsion, not individual motives of greed.

Conclusion: Prosperity without Growth contains a virtually ideal instantiation of the Persona parsimoniae model.

Why am I doing this? Because 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. And because no one can stand against a universal Subject unless it is a universal Subject itself. What I am proposing is an more plausible, but at least as parsimonious, alternative to the faux simplicity of ~~Piltdown~~ Economic Man.

Reparations

A couple of months ago I was invited to give a guest lecture in a class on colonialism at Evergreen. My topic was North-South relations, and after I had finished, several students asked me what I thought about the concept of reparations. I expressed some doubts, and this resulted in quite a bit of angry response. As a white male, wasn’t I morally compelled to give reparations to those who had been oppressed?

My answers must not have been very convincing. I’ve continued to think about the question and have come up with these two general thoughts.

First, the feasibility of reparations depends on how much time has passed and how diffuse the relations of exploitation or dispossession have become. I think, for instance, that the United States certainly owed reparations to Vietnam at the conclusion of the war, and that reparations are still warranted today. If we delay for several generations, however, this imperative will diminish, and the rights and obligations of future Americans and Vietnamese will be more difficult to sort out. We saw this process at work in the various attempts to compensate families whose property had been seized in Eastern Europe with the installation of Communism after WWII. Those who benefitted from restitution often had tenuous connections to those who were dispossessed. Worse, it turned out that some of the properties returned to them had even earlier been taken from Jewish owners: stolen goods were being returned to thieves. On the other hand, America as a nation continues to owe reparations to the Indian tribes whose land and livelihood were taken by force. In part this is because the tribes are still relatively well-defined entities (although fuzzy around the edges), but mostly because the dispossession is ongoing.

Reparations for slavery are more complicated. There is a general duty of everyone in the US to combat racism and poverty, but what about monetary reparations in particular? Some students told me I had a personal responsibility because of my “ancestors”. Now, it happens that my particular forebears were in Europe until the late 19th century, but does that change anything? Do I have any more or less responsibility than anyone else in my social position? Here I think the ravages of time do matter. It is true that the effects of racism—advantages for some, hardships for others—linger on, but they are impossible to parse at an individual level. In fact, many of the descendants of slaves are now also in ways beneficiaries of slavery; think of a black student at Brown University, for instance. I have absolutely no doubt that white America owed the newly freed slaves enormous reparations after the Civil War, and the failure of Reconstruction to take even the smallest steps in this direction cast a dark shadow over our subsequent history. But there is no going back to that moment, and who owes whom how much is no longer discernable.

The second point is one I made at the time, but which didn’t seem to register. The rhetoric of reparations centers on the responsibility of those who benefitted at the expense of others. It summons a sense of guilt and offers an opportunity for expiation. This is certainly better than apathy, cynicism or callous neglect. But it still suffers from the defect of focusing attention on the duties of the well-off rather than the needs of those who were harmed. To put it bluntly, it measures performance by how much is paid and not by how much benefit is actually produced. What I wanted to tell the students is that this is not about you. It’s good that you feel a sense of obligation, but your feelings are ultimately not very important; what matters are the lives and well-being of those who lack the essential resources they need to survive. For this the moral principle of human solidarity is foundation enough.

Which Has the Greater Fiscal Impact: Tax Cuts or Defense Spending Increases?

Paul Krugman noted that Georgia’s Senator Saxby Chambliss has hypocritical views when it comes to the current fiscal policy debate:

"[W]hen it comes to stimulating the economy," Chambliss said, there's no better way to do it than to spend it in the defense community." On Sunday, Paul Krugman appeared on ABC's This Week, and picked up on the same thing, and called out Congressional Republicans for what one might call the "Chambliss hypocrisy". Here's Krugman: What's so wonderful is watching Republican congressmen saying, "But this will cost jobs!" The very same Republican congressmen who were denouncing the stimulus, saying government spending never creates jobs, but cutting defense spending costs jobs. It's wonderful.

It is also standard faire for Republicans to argue for more defense spending and less taxes at the same time. Earlier in this debate, we heard some Republicans telling us that tax cuts would lead to more bang for the buck than increases in domestic government spending as if the marginal propensity to consume were actually greater than unity. So why not argue that the direct impact on aggregate demand for spending a dollar on additional weapons would be greater than the direct impact on aggregate demand for spending a dollar on school buildings? Yes, the proposition is absurd but so is most of the rhetoric coming from the Washingtonian Republicans!

Zombie Banks

Zombie bank [it's a music video] goes something like this:

from my laboratory in the nation's east
comes zombies hungry for some bailout treats
just a little more flesh will keep them alive
they've got much bigger worries than how YOU'LL survive

Sunday, April 12, 2009

Counter-narrative Flow Diagram

by the Sandwichman

I promised media I would post a flow diagram so here is it, ugly (and provisional) as it may be.
The blue green arrows running clockwise show the direction of influence for the Persona parsimoniae counter-narrative(Pp). From the top, it begins at leisure/disposable time, an increase in which results in an increase in Income/consumption, Production and, finally, Accumulation/investment. Because there is an inherent limit to accumulation, the excess not absorbed into further increases in leisure becomes superfluous consumption and overproduction. There could also be an arrow added from the superfluous box to indicate that today's excess could become tomorrow's standard.*

Conversely, the purple arrows running counter-clockwise indicate the flow for the traditional Economic Man model(EM). These start (hypothetically) at Investment/accumulation (the order of priority reversed) and proceed through Production, Consumption/income and back to Accumulation. In this direction of flow, leisure or disposable time is conceived of as a subtraction from the flow.

*As media suggested, such a chart may be thought of as representing a two-way flow, with elements of either Pp or EM coming into play depending on the circumstances. That two-way flow could obviate the need for an arrow leading back into consumption (or production) from the superfluous consumption node.

The organized campaign to suppress the truth and divert our attention continues...

by the Sandwichman

Rather than delete the 18,000 word Anonymous "comment" posted to the original entry previously located at this URL, I've reposted that original entry elsewhere and I'll leave the rant here for the benefit of researchers who might be interested in the phenomena of rant spamming. To view other locations where this rant was spammed, click on this Google link.

"SOMETIMES, I WONDER WHY I BOTHER FIGHTING SO HARD FOR THE LITTLE GUY!" (emphasis added)

Cafe Hack

by the Sandwichman

Riddle me this:

National income accounting was developed as tool for state economic planning.

No one fetishizes economic growth (of GDP) more than classical economic liberals.

What am I missing here?

Saturday, April 11, 2009

On the Sanctity of Contracts

"As the Obama administration completes its examinations of the nation’s largest banks, industry executives are bracing for fights with the government over repayment of bailout money and forced sales of bad mortgages."

"Some of the healthier banks want to pay back their bailout loans to avoid executive pay and other restrictions that come with the money. But the banks are balking at the hefty premium they agreed to pay when they took the money."

"Both large and small banks have pressed the Obama administration to make it less costly for them to exit the bailout program by waiving the right to exercise stock warrants the banks had to grant the government in exchange for the loans. At a meeting last month, the chiefs of three of the largest banks separately asked Mr. Obama to direct the Treasury not to exercise the warrants..."

Labaton, Stephen and Edmund L. Andrews. 2009. "Showdown Seen Between Banks and Regulators." (11 April).
http://www.nytimes.com/2009/04/11/business/economy/11bank.html

A Tiny Step for Labor

In one of the more outrageous financial maneuvers, Sam Zell used the Tribune pension fund to help finance his takeover of the corporation, which let him beat down workers.

Tribune Co. Subpoenaed Over Employee Stock Plan
REUTERS
Published: April 10, 2009

The Labor Department subpoenaed the Tribune Company over its employee stock plan, which was crucial to the purchase of the company by the billionaire Sam Zell, left. The company disclosed the subpoena, issued in March, in a bankruptcy court filing and said it had handed over the documents. A Tribune spokesman was not available for comment.

The agency’s questions relate to the Employee Retirement Income Security Act, a law intended to protect people in employee retirement plans. The stock plan was an important piece of Mr. Zell’s plan to acquire the company in an $8.2 billion deal that involved $13 billion in debt. He intended for the stock plan to become the largest owner of the company, which would let it avoid corporate taxes. That, in turn, was supposed to help a company turnaround.

Introducing the Obamawatch Lottery

I am offering a prize of $1 to the person who comes closest to guessing the date at which BHO first takes a courageous action that significantly challenges the ridh and powerful. I will begin with the date 2020.

The origins of the crisis in the concentration of wealth

In the 1970s the wealth of a select group of rich (in a few places such as Saudi Arabia and Texas in the USA) "swelled so hugely that the English language was scarcely capable of defining it." So said author Stephen Fay in his book on the Hunt brothers and Saudi silver bubble of the late 1970s entitled 'Beyond Greed'.

This new wealth was largely paid for by consumers of oil after OPEC and the oil corporations quadrupled the price of this commodity in 1973. As John Kenneth Galbraith warned at the time, the wealth did not 'trickle down' to the rest of us but instead created what he had feared: inflation, severe recession and unemployment around the world. The international economy became more vulnerable to unexpected shocks than at anytime since the 1930s.

The new super-rich were afraid - not so much of recession - but of inflation and taxation. They preferred therefore to gamble rather than to save. This new attitude reflected the problem money was having as a store of value as the US dollar (the world's reserve currency) lost its value and was no longer backed by gold. [2]

Importantly, the new rich of the 1970s could buy on a scale that had never been contemplated before. C Wright Mills had warned a good decade earlier that the social theories and values of 'liberalism' assumed "a world of small entrepreneurs. But it is quite clear that one of the most decisive changes over the last hundred years is the enormous increase in the scale of property units." [3]

The oil and corporate rich of the 1970s had impeccable credit credentials and they began to focus their purchase on things they believed would increase in value such as other corporations and precious metals; to be purchased with other people's money. They used loans from the world's biggest banks and brokerage houses.

Financialisation was reborn. The global invasion of petro and monopoly dollars on the world economy meant too much cash chased too few goods. Then US Presidents Carter and Reagan administrations made matters even worse when they addressed inflation by hiking interest rates. "The emerging-market borrowers began to suffer..." A strong US banking cartel ensured the loans of these weak and vulnerable nations were denominated in US dollars. "Zaire and Turkey had already defaulted in 1976 and 1977. After 1980 the high interest rates, close to 20% for six-month Libor, shook country after country off its perch." [4]

As we all appear to know now, the global economy continued to deteriorate from there. One public bailout of private concentrated wealth followed another.

The words of C Wright Mills written in the early 1960s resonate with a great deal of urgency today:

The meaning of freedom, positively put" has to be restated now, not as independence, but as control over that upon which the individual is dependent. Security, once resting on the small holding, has become, in the world of large property, anxiety - anxiety produced by the concentration process and by the manner of living without expectation of owning. Positively, security must be group-guaranteed; individual men can no longer provide for their own futures.

."

Should we be content to continue to assume 'the dominance of huge scale property'? If so, where is the counterveiling power to create our new 'group guarantee' of freedom and security?

[1] 'Beyond Greed' by Stephen Fay. Prologue, page 1. ISBN 0-670-644497-8. Viking Press, 1980.

[2] The US had developed a consistent balance of payments deficit due to that nation's pursuance of the Vietnam War as well as other factors such as the flawed nature of the Bretton Woods system and the dominance of US transnational corporations in world banking and trade that left most of the world short of reserve currency.

[3] The essay entitled 'Liberal values in the modern world' from 'Power, Politics & People - The collected essays of C Wright Mills' edited by Irving Louis Horowitz.
Oxford University Press, 1967 (reprint 1969)

[4] Oil, inflation, default
http://marcosaba.tripod.com/30annidiscandali.html

Friday, April 10, 2009

Best Paragraph of the Day

110: "If a period of growth is followed by a period of depression, there are two possibilities: either the ruling group will modify its attitudes and behavior, or it will be replaced by another group. The aristocrat, Tancredi, tells an older-generation aristocrat, Fabrizio, 'we have to change everything in order to keep everything as it is'."

Burke, Peter. 1974. Venice and Amsterdam, A Study of Seventeenth Century Elites (London: Temple Smith).

Academic Repression at Bowdoin College

URPE reports on a case at Bowdoin College where longtime URPE member and 29 year member of the economics department, Jonathan Goldstein, is under investigation for alleged academic misconduct in his research. Reports are now surfacing on the details, which some are comparing to the case of Ward Churchill, although this is a lower key case, with Goldstein's position substantially superior to that of Churchill's. Nevertheless, he has an angry dean out to get him for exposing Bowdoin's to potential incoming students Bowdoin's recent tilt toward athletics and away from academics. The paper he wrote has not been published, and the errors are very minor and would be corrected prior to any publication that the investigative committee are focusing on to charge misconduct. This is simply arbitrary academic repression.

One can access the details through several sources. Inside Higher Education (IHE) has a pretty detailed account at http://www.insidehighered.com/news, and the Foundation for Individual Rights in Education (FIRE) has a column up that its VP has just published in the Boston Globe at http://www.thefire.org. For anyone wishing to protest what is happening there, the email address for Bowdoin's president, Barry Mills, is bmills@bowdoin.edu.

Thursday, April 9, 2009

An Ecological Future: Marx and Wu Wei

I have just written a short paper that I will be presenting in China. Any comments would be appreciated.

Thank you very much

http://michaelperelman.wordpress.com/2009/04/10/an-ecological-future-marx-and-wu-wei/

Prosperity without growth

by the Sandwichman

Prosperity without growth, a report of the UK Sustainable Development Commission (March 30, 2009) concludes:

The clearest message from the financial crisis is that our current model of economic success is fundamentally flawed. For the advanced economies of the western world, prosperity without growth is no longer a utopian dream. It is a financial and ecological necessity.

Step 5 of the report's "12 Steps to a Sustainable Economy":

In a declining or non-increasing economy, working time policies are essential for two main reasons: 1) to achieve macro-economic stability; 2) to protect people’s jobs and livelihoods. But in addition, reduced working hours can increase flourishing by improving the work-life balance. Specific policies need to include: reductions in working hours; greater choice for employees on working time; measures to combat discrimination against parttime work as regards grading, promotion, training, security of employment, rate of pay and so on; better incentives to employees (and flexibility for employers) for family time, parental leave, and sabbatical breaks.

The report's forward:

Every society clings to a myth by which it lives. Ours is the myth of economic growth. For the last five decades the pursuit of growth has been the single most important policy goal across the world. The global economy is almost five times the size it was half a century ago. If it continues to grow at the same rate the economy will be 80 times that size by the year 2100.

This extraordinary ramping up of global economic activity has no historical precedent. It’s totally at odds with our scientific knowledge of the finite resource base and the fragile ecology on which we depend for survival. And it has already been accompanied by the degradation of an estimated 60% of the world’s ecosystems.

For the most part, we avoid the stark reality of these numbers. The default assumption is that – financial crises aside – growth will continue indefinitely. Not just for the poorest countries, where a better quality of life is undeniably needed, but even for the richest nations where the cornucopia of material wealth adds little to happiness and is beginning to threaten the foundations of our wellbeing.

The reasons for this collective blindness are easy enough to find. The modern economy is structurally reliant on economic growth for its stability. When growth falters – as it has done recently – politicians panic. Businesses struggle to survive. People lose their jobs and sometimes their homes. A spiral of recession looms. Questioning growth is deemed to be the act of lunatics, idealists and revolutionaries. But question it we must. The myth of growth has failed us. It has failed the two billion people who still live on less than $2 a day. It has failed the fragile ecological systems on which we depend for survival. It has failed, spectacularly, in its own terms, to provide economic stability and secure people’s livelihoods.

Today we find ourselves faced with the imminent end of the era of cheap oil, the prospect (beyond the recent bubble) of steadily rising commodity prices, the degradation of forests, lakes and soils, conflicts over land use, water quality, fishing rights and the momentous challenge of stabilising concentrations of carbon in the global atmosphere. And we face these tasks with an economy that is fundamentally broken, in desperate need of renewal.

In these circumstances, a return to business as usual is not an option. Prosperity for the few founded on ecological destruction and persistent social injustice is no foundation for a civilised society. Economic recovery is vital. Protecting people’s jobs – and creating new ones – is absolutely essential. But we also stand in urgent need of a renewed sense of shared prosperity. A commitment to fairness and flourishing in a finite world.

Delivering these goals may seem an unfamiliar or even incongruous task to policy in the modern age. The role of government has been framed so narrowly by material aims, and hollowed out by a misguided vision of unbounded consumer freedoms. The concept of governance itself stands in urgent need of renewal.

But the current economic crisis presents us with a unique opportunity to invest in change. To sweep away the short-term thinking that has plagued society for decades. To replace it with considered policy capable of addressing the enormous challenge of delivering a lasting prosperity.

For at the end of the day, prosperity goes beyond material pleasures. It transcends material concerns. It resides in the quality of our lives and in the health and happiness of our families. It is present in the strength of our relationships and our trust in the community. It is evidenced by our satisfaction at work and our sense of shared meaning and purpose. It hangs on our potential to participate fully in the life of society.

Prosperity consists in our ability to flourish as human beings – within the ecological limits of a finite planet. The challenge for our society is to create the conditions under which this is possible. It is the most urgent task of our times.

Tim Jackson Economics Commissioner Sustainable Development Commission, March 2009

Not everyone agrees that the unambiguous goodness of economic growth is a myth. Amity Shlaes (with elocution rivaling George W. Bush's):

"One of the things that we started out this conversation about -- growth with -- was what is humane? So really, being humane and having growth go together -- growth is humane. It's one of the ways -- the most efficient ways to be humane. We all agree on that."

It’s 2009: Why Are We Still Dealing with Voodoo Climate Economics?

You would think the basic facts would be clear by now, but you would be wrong. A New York Times article this morning on Missouri’s fear of higher electricity prices under carbon regulation had lines like:

[Politicians from Missouri] are concerned that the new costs would get passed on to consumers...., to farmers from rural Missouri and to employers like the energy-hungry Noranda aluminum plant in New Madrid in the southeast of the state, which has 1,000 workers. And they worry that in an already wounded economy, increased costs could turn one of the relatively few economic blessings into a blight.

Where to begin? The whole point of issuing permits for carbon is to dramatically raise the cost of burning these fuels; people are supposed to cut back on goods and services that use them, thereby preserving a liveable planet. There is no “would” or “could” about it: if we want to limit climate change we have to get hundreds of millions of people to change their consumption habits (and firms to change their production methods). Since we don’t want to do that with regulations, police and prisons, we will do it with prices.

Given that, the core economic problem is how to carry out this program with the minimum cost to the well-being of our fellow humans. Part of this is about efficiency, getting the most carbon reduction for the lowest cost. Another part is about investment and innovation, building a low-carbon economy that produces a high quality of life for all of us. But front and center are those higher prices that we will have to pay for goods that continue to require carbon fuels.

In the voodoo view of the world, money just disappears down a black hole. Consumers pay higher prices, the economy suffers, and that’s the end of the story. It doesn’t take much economic sophistication, however, to notice that the money has to go somewhere—specifically, it finds its way to the companies that acquire carbon permits in the first place, and that’s why the permits are valuable. Now, either those companies get the permits for free and make out like bandits, or the permits are auctioned. If they’re auctioned, the money from those hard-pressed Missourians is now in the hands of the government agency that ran the auction. At this point we have a new sales tax. But we don’t want a new sales tax. So the government agency can simply rebate all the money back to the public, ideally on a simple, equal per capita basis. This means that the folks from Missouri highlighted in the Times article would be earning carbon revenues and not just paying them. They can stimulate their economy by spending this loot on other items that don’t pump carbon into the atmosphere and whose prices haven’t gone up.

True, on average people in some regions will come out somewhat ahead or behind on the deal, based on the sort of energy infrastructure that’s currently in place, current commuting patterns, climate and such. No doubt a carefully constructed policy package would offer sweeteners to the more impacted areas, like extra investment funds. But these considerations are second-order compared to the voodoo vision of higher prices that just vanish into thin air.

Orthodoxy Entrenching Itself Against Reality At Notre Dame

Mark Thoma at economists view links to a posting at Open Economics about the latest situation at Notre Dame University regarding its economic departments, http://openeconomicsnd.wordpress.com/2009/04/08/the-state-of-heterodox-economics-at-notre-dame. As most know, the original economics department (now called "ECOP") there had many heterodox people in it, and the administration set up a new "econometrics" department to run the econ grad program in an explicitly "neoclassical" way. There was much protest by many, with basically nobody outside of there defending this, and the critics including many prominent conventional economists, such as Robert Solow, who declared, "the last thing we need in economics is another third-rate MIT graduate program." But the Notre Dame people proceeded with this, although the new department's chairman, Robert Jensen, declared a goal of "equality" between the two departments.

This latest posting reports that the goal of equality is being seriously tossed under the bus, with a collapse in teaching for the coming fall by ECOP. Lying behind this is total inequality in staffing. Four people were hired for the coming year for the econometrics department, bringing it to 19 faculty, whereas there are two retiring from ECOP without any replacements being hired, bringing their numbers down to 7. The poster, nkrafft, reports that these decisions are "being made somewhere between the dean's office and the provost's office." But the outcome has been denounced widely, with 200 people showing up for a talk by "Wolff" (probably Robert, but...?), and him denouncing this as ridiculous in the face of how the credibility of the orthodox approach has collapsed during the current crisis situation. Dumping heterodox and hiring orthodox looks very silly indeed, especially for an institution that is supposedly concerned with its social conscience.

Wednesday, April 8, 2009

Kill or Buy?

by the Sandwichman

Anonymous in the comments suggests folks are not getting what the Sandwichman is trying to say because S. is, shall we say, too circumspect. Sandwichman suspects Anon. has a point. Here's how Anonymous sums up the case:

1. Reduction of working hours is what this crisis is all about. You have a choice, reduce working hours, or eat dog food, and buy ammo - it is up to you.

2. 163,000 people are losing their jobs each and every week. Now you may think this is a statistic, but in very short order you will be taught how palpable and real those numbers are.

3. Dirt cookie anyone..

That pretty much sums up what the Sandwichman is trying to say. And has been trying to say for, oh, about 14 years.

During that time it has also become clear that there are lots of propeller heads out in the blogosphere in full-frontal denial. They'll hang their lame-ass, whiny objections on the slenderest threads of textbook technicalities. Like, "If all of the crane operators in the country cut their hours it would not create hours for anyone else, very few people can competently operate a crane."

Oh yeah? Well, if all the crane operators in the country up and quit their fucking jobs and were replaced by newly-minted ones it wouldn't create 12-fucking-million jobs, either, asshole. We're not talking about college textbook exercises and pretty mathematical formulas, here. We're talking about a totally fucked-up economy that is collapsing. "You have a choice, reduce work hours, or eat dog food, and buy ammo..."

Tuesday, April 7, 2009

"The Poor Man's Son, whom Heaven in its Anger has Visited with Ambition..."

by the Sandwichman

And it is well that nature imposes upon us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind. -- Adam Smith, Theory of Moral Sentiments,

The "deception" Smith was referring to in the sentence quoted above was the idea that strenuous effort would bring riches, which in turn would bring ease. He ridiculed that belief on the part of the individual but concluded his parable of the poor man's son by praising the deception from the standpoint of society as the providence of an "invisible hand."

How many people ruin themselves by laying out money on trinkets of frivolous utility? What pleases these lovers of toys is not so much the utility, as the aptness of the machines which are fitted to promote it.... They walk about loaded with a multitude of baubles… of which the whole utility is certainly not worth the fatigue of bearing the burden.

Nor is it only with regard to such frivolous objects that our conduct is influenced by this principle; it is often the secret motive of the most serious and important pursuits of both private and public life.

The poor man's son, whom heaven in its anger has visited with ambition, when he begins to look around him, admires the condition of the rich. He finds the cottage of his father too small for his accommodation, and fancies he should be lodged more at his ease in a palace. He is displeased with being obliged to walk a-foot, or to endure the fatigue of riding on horseback. He sees his superiors carried about in machines, and imagines that in one of these he could travel with less inconveniency. He feels himself naturally indolent, and willing to serve himself with his own hands as little as possible; and judges, that a numerous retinue of servants would save him from a great deal of trouble. He thinks if he had attained all these, he would sit still contentedly, and be quiet, enjoying himself in the thought of the happiness and tranquillity of his situation. He is enchanted with the distant idea of this felicity. It appears in his fancy like the life of some superior rank of beings, and, in order to arrive at it, he devotes himself for ever to the pursuit of wealth and greatness. To obtain the conveniencies which these afford, he submits in the first year, nay in the first month of his application, to more fatigue of body and more uneasiness of mind than he could have suffered through the whole of his life from the want of them. He studies to distinguish himself in some laborious profession. With the most unrelenting industry he labours night and day to acquire talents superior to all his competitors. He endeavours next to bring those talents into public view, and with equal assiduity solicits every opportunity of employment. For this purpose he makes his court to all mankind; he serves those whom he hates, and is obsequious to those whom he despises. Through the whole of his life he pursues the idea of a certain artificial and elegant repose which he may never arrive at, for which he sacrifices a real tranquillity that is at all times in his power, and which, if in the extremity of old age he should at last attain to it, he will find to be in no respect preferable to that humble security and contentment which he had abandoned for it. It is then, in the last dregs of life, his body wasted with toil and diseases, his mind galled and ruffled by the memory of a thousand injuries and disappointments which he imagines he has met with from the injustice of his enemies, or from the perfidy and ingratitude of his friends, that he begins at last to find that wealth and greatness are mere trinkets of frivolous utility, no more adapted for procuring ease of body or tranquility of mind than the tweezer-cases of the lover of toys; and like them too, more troublesome to the person who carries them about with him than all the advantages they can afford him are commodious.

If we consider the real satisfaction which all these things are capable of affording, by itself and separated from the beauty of that arrangement which is fitted to promote it, it will always appear in the highest degree contemptible and trifling. But we rarely view it in this abstract and philosophical light. We naturally confound it in our imagination with the order, the regular and harmonious movement of the system, the machine or oeconomy by means of which it is produced. The pleasures of wealth and greatness, when considered in this complex view, strike the imagination as something grand and beautiful and noble, of which the attainment is well worth all the toil and anxiety which we are so apt to bestow upon it.

And it is well that nature imposes upon us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth. The earth by these labours of mankind has been obliged to redouble her natural fertility, and to maintain a greater multitude of inhabitants. …

The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition. These last too enjoy their share of all that it produces. In what constitutes the real happiness of human life, they are in no respect inferior to those who would seem so much above them. In ease of body and peace of mind, all the different ranks of life are nearly upon a level, and the beggar, who suns himself by the side of the highway, possesses that security which kings are fighting for.

Frivolous trinkets and baubles fit the category of superfluous goods alright and the poor man's son is motivated by a desire to emulate his superiors. In pursuing his ends, the poor man's son relies more on fantasy than rational calculation. But Smith's parable doesn't fit into our counter-narrative entirely. That's O.K. It doesn't fit into the standard Economic Man mold either. Instead, Smith marshals a truck-load of irony and consummate story-telling magic to recuperate a rather paradoxical and sardonic version of Homo oeconomicus.

The poor man's son's striving succeeds only in acquiring for him a body wasted with toil and disease, a mind "galled and ruffled by the memory of a thousand injuries and disappointments which he imagines he has met with from the injustice of his enemies, or from the perfidy and ingratitude of his friends..." and, at long last, the realization that his dogged pursuit of wealth and greatness was a sham.

No matter. It was all for the best! (La di da.) The invisible hand saw to it that the benefits trickled down to the poor -- even including the beggar on the sunny side of the street.

It is easy to be charmed by Smith's eloquence. Thus charmed, the reader is led by a succession of small, seemingly-logical steps to a gross exaggeration and distortion of the futility of riches and the disagreeableness of strenuous effort. In narrative terms, Smith's poor man's son falls down a well but then eventually stumbles upon a hidden door that opens to reveal a magical kingdom. The graphic equivalent is an Escher drawing of a perpetually ascending staircase, exploiting the artifice of perspective drawing to the point of impossibility.

When Smith eventually invokes his invisible hand to pull a redemptive rabbit out of the hat, the enchanted reader gasps with surprise, relief and credulity... and presumably lets pass the preposterous notion that, "the beggar, who suns himself by the side of the highway, possesses that security which kings are fighting for." The deception is neither Nature's nor Providence's but the triumph of Smith's story-telling artifice.

In Wealth of Nations, Smith talks about leisure in radically different terms than he does in these picaresque vignettes of the poor man's son and the beggar sunning himself by the side of the highway.

In Book Five, Chapter 1, Part 3 Article II, "Of the Expense of the Institutions for the Education of Youth," Smith contrasts the common people who "have little time to spare for education... their labour is both so constant and so severe, that it leaves them little leisure and less inclination to apply to, or even to think of, anything else."

By contrast, "The employments of people of some rank and fortune are seldom such as to harass them from morning to night. They generally have a good deal of leisure, during which they may perfect themselves in every branch either useful or ornamental knowledge of which they may have laid the foundation, or for which they may have acquired some taste in the earlier part of life."

So, the common people have little leisure while those of rank and fortune have a good deal of leisure. And what does the invisible hand have to say about that? Here's the argument again from The Theory of Moral Sentiments :

The rich only select from the heap what is most precious and agreeable. They consume little more than the poor... they divide with the poor the produce of all their improvements.... In what constitutes the real happiness of human life, they [the poor] are in no respect inferior to those who would seem so much above them. In ease of body and peace of mind, all the different ranks of life are nearly upon a level...

Now, unless we grant that "little" is nearly upon a level with "a good deal," Mr. Smith is having us on. This difference also has to be viewed in the context of the classical Aristotelean view that leisure is the activity proper to humans in which they find their fulfillment or happiness. In discussing leisure, Smith is not talking about time off to drink or play cards. So, in what constitutes the real happiness of human life -- that is to say, leisure -- the rich and the poor are, by Smith's own admission, not on a level. Therefore, his invisible hand image cannot be on the level, either.

In conclusion, both the dominant narrative of Economic Man and the Persona parsimoniae counter-narrative resonate in Smith's parable of the poor man's son, albeit with strong doses of inversion, paradox and magical thinking. The extravagant nature of the parable's lesson -- and specifically of its recuperative image of the invisible hand -- is made evident by comparing Smith's claims to passages in the Wealth of Nations.

Defense Spending Increases or Cuts – the Role of Nominal Confusion

Brian Beutler thinks much of the press is confused about what Defense Secretary Gates and President Obama want to do with the Defense Department budget:

The big news from yesterday (still settling in across Washington) is that President Obama and Defense Secretary Robert Gates teamed up to propose a sweeping overhaul of the defense budget--calling for the elimination of unnecessary systems and spending the savings on special forces, intelligence equipment, and other tools of counterinsurgent warfare. In other words, by retooling the Pentagon, Obama and Gates plan to move a lot of money around, but they also plan to increase the overall defense budget. In the final year of the Bush administration (and excluding the costs of the wars in Iraq and Afghanistan) the defense budget was $513 billion. In FY 2010, if Gates and Obama get their way, it will be $534 billion--$534 billion that will be spent much differently than last year's outlays were. But you'd never know that from the news coverage.

Brian says the Wall Street Journal gets it right with this:

Mr. Gates's proposed baseline 2010 Defense Department budget of $534 billion is up 4% from last year.

That would be a 4% nominal increase so the natural question would be what is the expected increase in the price-level over the same period? OK, I suspect expected inflation is so low that we are still talking about a real increase even after the adjustment from nominal to real increases. For example, this source notes that the nominal interest rate on 5-year government bonds is 1.65%, while the interest rate on indexed bonds of the same maturity is 0.93% so we are likely talking expected inflation that is less than 1%.

My real complaint is with this reporting, which got a lot of liberal blog attention yesterday:

Obama assigned Gates to rein in spending for the 2010 fiscal year that begins in October. U.S. defense spending is set to reach $654.1 billion for the current budget year, including war costs, a 72 percent gain since 2000.

How do we interpret a 72 percent nominal increase since 2000 in terms of a real increase? Table 1.1.4 from this source provides various price indices both for 2000 and for 2008. While the GDP deflator increased by 22.5% over this period, the deflator for defense purchases increased 36.57%. Interestingly, table 1.1.5 reports a 98.46% increase in national defense spending but in real terms, that translates into only 62% in real spending if we use the GDP deflator. The reported increase according to table 1.1.6, however, is only 45% as BEA uses the specific deflator for defense purchases. While it is clear that reporters should be using inflation-adjusted figures when reporting defense spending increases over time, it is not clear which deflator should be used in their reporting especially when the relative price of defense related spending has increased.

No argument on what we do about climate change

Another industrial burn of native forest. The South Esk catchment in Tasmania this month. Picture taken by Rob Blakers.

Last week Barkley Rosser gave a very brief description on the nature of a debate that occurred at James Madison University campus after a talk given by Pat Michaels from the Cato Institute as well as an economist from the 1970s ‘new right’ Heritage Foundation of the name David Kreutzer.

Barkley mentioned discussion about the possibility of ‘fat tails’ and, what Michaels referred to as the ‘non-trivial possibility’ of a combination of nonlinear effects [in climate change] that would lead to a sharp rise in temperature.

This discussion, as described, is what should rightfully be labeled as ‘academic’. The real debate about climate change is over. Climate change has occurred and no one, apart from business lobby groups and their funded organisations, disagrees about what should be done to address our crisis.

Whether or not global temperatures rise by 2C or 14C in the foreseeable future is quite irrelevant to our immediate challenge. We need to move to clean and renewable forms of energy and other forms of technology and practice as quickly as we possibly can.

"Not even Mills, or Chomsky in his New Mandarins essay, could have anticipated the world of the Heritage Foundation, of "Kissinger Associates," of numberless power-worshipping, power-seeking magazines and institutes interlocking across the dissemination of culture, priority, information, and opinion. But Mills did write, in 1942:

When events move very fast and possible worlds swing around them, something happens to the quality of thinking. Some men repeat formulae; some men become reporters. To time observation with thought so as to mate a decent level of abstraction with crucial happenings is a difficult problem."

The Chorus and Cassandra, Christopher Hitchens. 1985
http://www.vho.org/aaargh/fran/chomsky/cassandra.html

Monday, April 6, 2009

More Larry Summers

"During his senior year of college, Summers was considering graduate school in both theoretical physics and economics. For weeks, he anguished over whether to pursue his passion (physics) or the family business (in addition to his economist parents, Summers has two uncles -- Paul Samuelson and Kenneth Arrow -- who won Nobel prizes in the field). After he finally decided on the latter, he explained his thinking to Rollins: "What does a bad theoretical physicist do for a living? He walks into an office, sits at a desk, and stares at a plain white sheet of paper." "But," Summers added, "there's a lot of work in the world for a bad economist"."

Scheiber, Noam. 2009. "Free Larry Summers." The New Republic (1 April).
http://www.tnr.com/story_print.html?id=aaa57c05-d73e-4321-8893-70d5b45577d1

Summers and the Street

The New York Times has a follow-on story that tracks Larry’s career in exile, when he was a celebrity part-timer at the Shaw hedge fund. Reading between the lines, the piece is eager to do two things: explain how someone with limited investment experience could be worth $5 million for less than 50 days of work per year, and persuade us that Larry’s stint on the street has increased his qualifications to run US economic policy.

Here are a few items missing from the story.

1. Summers’ false confidence in the Street’s risk models surfaced during his presidency at Harvard. According to this story in the Boston Globe, Summers funneled a large chunk of Harvard’s endowment into derivatives and ran a ship intolerant of dissent. This was before his time at Shaw, so perhaps you could excuse the careless investing as the result of being too far down on the learning curve. In any case, the endowment has been hit hard, and the university has been forced to retrench.

2. The Times article repeats the common error of attributing Summers’ foreshortened reign at Harvard to his one ill-considered (but diagnostic) comment about women and science. In fact, there were several contributing factors, and perhaps the decisive one was his unbending support of Andrei Schleifer. For those who don’t know, Schleifer, a star economist and close friend of Summers, was awarded a contract from the US Agency for International Development to advise in setting up financial markets in post-Soviet Russia. To make a long story short, Schleifer and his wife used the occasion to enrich themselves through rigged contracts and insider trading, the Russian economy was damaged, US-Russia relations were ruptured, and Harvard was forced to pay back $26 million to USAID in response to a finding of fraud. In response, Summers not only defended Schleifer, he gave him an endowed chair. This destroyed Summers’ credibility in the eyes of many on the faculty. For more details, see this account by David Warsh and follow the link to the article by David McClintick in Institutional Investor.

3. The deep question underlying US economic policy at this moment is whether the goal is to restore the status quo prior to the meltdown—the players, the institutions, the paradigm—or whether to let the older order collapse and build a different kind of system to replace it. Everything about Larry’s experience on the Street predisposes him to take the first course.

4. At the heart of the matter is an interesting paradox about Summers himself. He has a reputation for ferocious brilliance, largely on the basis of face-to-face interactions. Economists value quickness in understanding complicated models, and Larry is very, very quick. My first-person experience was minimal (we shared a single AEA panel), but enough to see that he must be difficult to keep up with. Despite his reputation, however, he hasn’t really planted his flag in the economic literature. He has coauthored several influential papers, mainly empirical, mainly important because they identified significant patterns in the data before others saw them. In a sense, they constitute a written version of his verbal skills. His name is not associated, however, with any substantive advance in economic theory or method.

For me, the most telling line in the Times story is this:

It was at that time [after his demotion from president to professor at Harvard], to the surprise of some colleagues, that Mr. Summers seriously contemplated his options on Wall Street in part because he believed his chances to return to a prominent position in Washington had dimmed, friends say.

Summers apparently never considered the option of simply remaining a professor of economics and making a more indelible mark on the discipline. There are many ways to interpret this. It could be that a simple professorship felt too “small” after more than a decade spent on larger stages. Perhaps he did not like the academic life—the round of lectures, seminars, writing and reading. Or perhaps he realized that his gifts for quickness and intensity would never yield the highest payoffs in the world of intellectual production, where persistence and depth are ultimately more valuable.

Could Someone Let Robert Lucas Know That The Balanced Budget Multiplier Is Not Zero?

I thought Robert Lucas had a very strong grasp of macroeconomics – maybe not:

But, if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder -- the guys who work on the bridge -- then it's just a wash. It has no first-starter effect. There's no reason to expect any stimulation. And, in some sense, there's nothing to apply a multiplier to. (Laughs.) You apply a multiplier to the bridge builders, then you've got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn't going to help, we know that.

Hat tip to Brad DeLong who is worried that Chicago-School economists believe certain falsehoods such as:

deficit-financed spending increases have no short-term stimulative effects on nominal spending

Since Kevin Quinn noted that Wikipedia’s discussion of Ricardian Equivalence had the same error, let’s see how Wikipedia describes the balanced budget multiplier:

Since only part of the money taken away from households would have actually been used in the economy, the change in consumption expenditure will be smaller than the change in taxes. Therefore the money which would have been saved by households is instead injected into the economy, itself becoming part of the multiplier process. In general, a change in the balanced budget will change aggregate demand by an amount equal to the change in spending.

Not only does this sound much more logical than what Professor Lucas claimed, it is also what is typically described in most economic textbooks. As long as the marginal propensity to consume is less than unity, there is something to apply a multiplier to. So might Professor Lucas explain to us why he thinks the marginal propensity to consume is equal to unity – especially when we are talking about temporary increases in government purchases and their implications for taxation over the long-run?

Sunday, April 5, 2009

"On Luxury, Idleness and Industry"

by the Sandwichman

Having proposed the counter-narrative to Economic Man, I will now undertake to test it rigorously and exhaustively by examining it's presence in numerous and various texts. I begin with Benjamin Franklin because he is indelibly associated with the work ethic and Economic Man's incarnation as "self-made".

In addition to his star performance on the U.S. one-hundred dollar bill, for Max Weber, Franklin personified the "spirit of capitalism". One might say the myth of Franklin (if not the man himself) personified Economic Man. The Weber connection is crucial because it was Weber who argued, in "Marginal Utility Theory and 'the Fundamental Law of Psychophysics'," for the methodological canonization of Economic Man, an argument subsequently pursued by Lionel Robbins in his Essay on the Nature and Significance of Economic Science.

In a letter to Benjamin Vaughn, dated July 1784, Franklin wrote:

It has been computed by some political arithmetician, that, if every man and woman would work for four hours each day on something useful, that labour would produce sufficient to procure all the necessaries and comforts of life: want and misery would be banished out of the world, and the rest of the twenty-four hours might be leisure and pleasure.

What occasions then so much want and misery? It is the employment of men and women in works that produce neither the necessaries nor conveniences of life, who, with those who do nothing, consume necessaries raised by the laborious...

Look round the world, and see the millions employed in doing nothing, or in something that amounts to nothing, when the necessaries and conveniences of life are in question. What is the bulk of commerce, for which we fight and destroy each other but the toil of millions for superfluities, to the great hazard and loss of many lives by the constant dangers of the sea?...

A question may be asked; Could all these people now employed in raising, making, or carrying superfluities, be subsisted by raising necessaries? I think they might....

It is, however, some comfort to reflect that, upon the whole, the quantity of industry and prudence among mankind exceeds the quantity of idleness and folly....

One reflection more, and I will end this long rambling letter... Our eyes, though exceeding useful, ask, when reasonable, only the cheap assistance of spectacles, which could not much impair our finances. But the eyes of other people are the eyes that ruin us. If all but myself were blind, I should want neither fine clothes, fine houses, nor fine furniture.

This is easy! In the counter-narrative post, I wrote, "Persona parsimoniae has two different kinds of preferences -- organic needs and aspirations for social distinction. The means for satisfying those desires are limited absolutely, not just transiently, by physical laws and/or social institutions. And utility is mostly a function of habit [and emulation] rather than calculation."

In the passage cited above, Franklin distinguished between two kinds of wants or preferences -- for the "necessaries and conveniences of life" and for "superfluities" the desire for which arises from "the eyes of other people", that is to say from the desire for social distinction and emulation. With regard to physical and social limits, Franklin is optimistic. He speculates that people could be converted from producing superfluities to producing necessaries and conveniences and he is reassured that there is more industry and prudence among mankind than there is idleness and folly. Note that for Franklin "leisure and pleasure" contrast with "idleness and folly", which constitute the "toil of millions for superfluities".

Economic Man -- complete set of preferences, rationality, utility maximization and all -- might feel some ambivalence toward Franklin's scenario. One the one hand, the "toil of millions for superfluities" offers untold opportunities for profit. On the other hand, such idle toil occasions "so much want and misery," surely not the ideal picture of utility maximization for the population as a whole. Would that there were yet some other other hand -- invisible, perchance? -- to reconcile the desire for gain with the general well being!

Saturday, April 4, 2009

The Genius of Larry Summers

Casual readers of the press might be put off by the fact that Larry Summers received $2.7 million last year just for giving speeches, including a $135,000 appearance at Goldman Sachs. Maybe they think he was being buttered up by companies whose business plan now consists of siphoning off taxpayer money by the tanker load. They shouldn’t jump to conclusions though.

I have it from a confidential source that Summers’ performance was worth every penny, and then some. What does a speaker have to do to earn four times the median full-time wage in a single night? You name it, Summers did it. “He was awesome, just awesome”, says Monique (not her real name). “You think you’re just getting an economist, but he was so much more than that—an artist, an entertainer and one of the greatest minds of the last 500 years.”

The first thing to realize is that Summers doesn’t just walk onto the stage like any other former college professor turned policy czar. Sure, he has a flashy PowerPoint, but “Inconvenient Truth” doesn’t begin to touch it. “It was like a stadium rock concert,” explained Monique, “with a light show and incredible special effects. I thought I would never be able to actually see the world economy, but there it was. In fact, with the 3-D glasses he handed out, you would swear you were actually in the world economy.” Unfortunately, near the end of the talk the complex circuitry behind the stage shorted out, and the world economy spectacle came to a sudden end. Cleanup crews had to work long into the night to gather up countries that had literally melted down as a result of a series of electrical fires. But the audience loved it, and even the crash-and-burn finale worked brilliantly as theater.

But lets talk about Larry himself. First of all, remember that he is not only an economist, but was president of Harvard University, often walking into classes with a bewildering array of subject matter—physics, archaeology, literary theory—and wowing students with his ability to lead a cutting-edge discussion that their professors could only envy. So don’t assume that Summers simply gave a speech about the economy. “I would call it performance art,” offered Monique. “He gave us poetry, music and insight into emerging economic trends. The highlight came when Larry, who had worked himself into a very funky rap groove, began rapping in tongues so that dozens of languages, some maybe going back to the stone age, were bouncing off the walls. People were going wild. And the amazing thing is that all of it had something to do with managing complexity in a flat world framework.”

For an encore, Summers fielded questions from the audience. Here he demonstrated his legendary capacity for passing quick judgment: he devised innovative business strategies on the fly, identified market niches that no one had noticed before in fifteen emerging economies and successfully predicted the contours of future government bailouts of the financial sector, right down to the tiniest loophole. “He changed my life,” Monique concluded. “It was his entertainment that opened me up and made me receptive, but the economic vision was irreplaceable. I thought I was maximizing wealth before I heard Larry, but I didn’t know the half of it.”

So the bottom line is that, at $135,000 for two hours, Larry was doing Goldman Sachs a big favor. He doesn’t owe them, they owe him.

Unemployment – Worse Than Reported

BLS reports:

Nonfarm payroll employment continued to decline sharply in March (-663,000), and the unemployment rate rose from 8.1 to 8.5 percent

Sandwichman observes:

The 663,000 job losses reported comes on top of a 86,000 downward revision in the January number, making the net loss 749,000. Moreover, the average monthly revision since September 2008 has been 158,000 jobs. There have been no upward revisions.

While the rise in the unemployment rate since September 2008 (6.2% to 8.5%) sounds bad, the fall in the employment to population ratio from 61.9% to 59.9% paints a worse picture. I’ve always been bothered by how BLS reports the unemployment rate in its first sentence leaving the reader to only learn that the participation rate also fell – as in from 66.0% as of September 2008 to the March 2009 level of 65.5%. This participation rate was 66.1% as of November 2007, so as BLS reports that the unemployment rate increased from 4.7% to 8.5%, what this really means is that the employment-population ratio fell from 63.0% to 59.9%.

For those of you who might be following the neo-Hooverite nonsense from the governor of South Carolina, it is interesting (or was that tragic) to know that the unemployment rate for this state reached 11.0% as February 2009.

Friday, April 3, 2009

The Counter-Narrative

by the Sandwichman

The problem with 'critique', as Emery Roe pointed out, is that in practice critique serves to intensify uncertainty because it doesn't offer a clear alternative. Thus critique may inadvertently increase pressure to hold onto familiar scenarios, no matter how discredited they may be. A counter-narrative conceives of a rival hypothesis and policy options.

The case I have been essaying in a pair of recent posts -- Not Working is Another Subject and Is Economic Man Parsimonious? -- is that the working time literature constitutes a counter-narrative to the standard 'story' that dominates economics. That standard story is not an analysis per se, a methodology or even a set of assumptions. It is more like a disposition -- an arrangement of scenic, character and action elements that renders the subsequent argument familiar and believable. The framing narrative determines whether a specific argument will seem reasonable or not. Thus it functions as effectively to exclude non-conforming arguments as to certify respectable ones.

The construct of Economic Man has been defended on grounds of 'simplicity' (or parsimony), even though it is only superficially simple. It has been critiqued to death... but to little avail. HESCI, or Persona parsimoniae, is at least as parsimonious as Economic Man.

Economic Man has a complete set of preferences and chooses rationally the most efficient means to maximize utility. Persona parsimoniae has two different kinds of preferences -- organic needs and aspirations for social distinction. The means for satisfying those desires are limited absolutely, not just transiently, by physical laws and/or social institutions. And utility is mostly a function of habit [and emulation] rather than calculation.

There you have it. The counter-narrative. Did the earth move for you? Or are you asking, "is that all there is?" Just in case it's the latter, I continue...

The characteristics I have just now ascribed to Persona parsimoniae are neither deductive nor arbitrary. They were transmitted culturally in a discourse tradition. That is to say they were told and retold from generation to generation. That doesn't make them 'true' any more than the telling and retelling of the features of Economic Man validates the truth of the latter's features. It does, however, suggest that they are both comprehensible and believable, at least to some audiences.

There are important corollaries to the main features of Persona p. that are specific to the issue of working time. For example, better rested workers are able to be more productive and also both wiser and more expansive in their consumption behaviors. That observation might suggest that Economic Man is more like a sub-species of Persona parsimoniae whose hours of labor have already optimized. Or to put it more panoramically, Economic Man is that lucky duck for whom the basic economic problem of subsistence is "no problem".

The narrative paths taken by Economic Man and Persona parsimoniae, respectively, differ in interesting ways. Each can be represented by a circular flow diagram relating the elements of accumulation/investment, production, income/consumption and leisure/disposable time. The standard story assigns priority to accumulation and investment, which enhances productivity leading to increased incomes and the potential choice of leisure. The counter-narrative posits leisure as the foundation for increased income and consumption, which thus drives productivity gains and, consequently, accumulation and investment.

Each path incorporates its own version of a digression from the circuit. In the standard story, leisure represents a sort of exit from the economic circuit. In the counter-narrative, accumulation beyond some natural limit leads to superfluity: waste, a crisis of over-production or the destruction of value through war or the proliferation of luxury consumption for parasitic functionaries and the idle rich.

Revisionists

by the Sandwichman

March unemployment wasn't as bad as the BLS reported. It was worse. The 663,000 job losses reported comes on top of a 86,000 downward revision in the January number, making the net loss 749,000. Moreover, the average monthly revision since September 2008 has been 158,000 jobs. There have been no upward revisions. So it would come as no surprise if the revised number for March alone (that is excluding revisions of previous months) was closer to that 749,000 figure than to 663,000.

Thursday, April 2, 2009

A Package for Labor

Behind the debate over whether GM and Chrysler should be bailed out or dispatched into bankruptcy is the curious history of the US labor movement. Unlike most other industrialized countries, where unions fought for and achieved a role in economy-wide institutions, the US fashioned its labor movement employer-by-employer and occasionally industry-by-industry. The result was, even in its heyday during the 1950s, a lopsided unionism that had great clout in a few sectors and regions and was virtually absent everywhere else. During the long decades of decline, the remaining union redoubts, like the top tier of auto manufacturing (final assembly and the top rung of suppliers), became islands in a sea of unbridled employer power. This is why the demand that the UAW run up the white flag as part of an auto bailout challenges what is left of the labor movement as a whole.

In fact, autos present us with a paradox. America desperately needs a revitalized labor movement, and smashing the union that has been at the heart of labor’s struggle ever since the sit-downs of the last depression is hardly the way to begin. The retiree benefits that have emerged as the main item of dispute—should the assets that fund them be converted into the funny money of common stock?—are the legacy of this struggle, guarantees that all workers should have but only a few were able to win. At the same time, it makes no economic sense at all for the auto industry to serve as a funding mechanism for a small piece of an otherwise absent welfare state. The sector needs to shrink, and it needs a clean financial slate that only big concessions from bondholders and workers can provide. So how to reconcile these two perspectives?

The only solution is for labor to be able to break out of its bunker mentality and gain a broad presence throughout the economy. There are two parts to this. First, a large portion of the legacy obligations of the auto producers and other unionized manufacturers should be socialized as part of a general reform of social insurance in the US. As Jamie Galbraith has eloquently argued, this is a time for expanding Social Security, not cutting it. And some form of universal health insurance, kickstarted by a fund like the one Obama has proposed, would address the health aspects of auto’s retiree overhang. In fact, this is what UAW pioneers like Walter Reuther wanted all along, but they had to fall back on collective bargaining when the political channel was shut down by resurgent Republicanism after WWII.

The second part has to do with active workers. The tragedy of UAW givebacks is that any other job these workers might find will be so much worse. This points us toward the solution: quick passage of the Employee Free Choice Act and a commitment to worker representation as a central feature of the next economy. The truth is, we are going to see a lot of restructuring once the economy recovers; this is a dreadful economic episode, but it is also a period of creative destruction. To speed up the recovery and accelerate the shift to an economically and environmentally sustainable future, we will need rapid disinvestment in some industries and the creation of new capacity in others. This will also have a geographical side; the new world is always built at some distance from the old. The only way to do this in a labor-friendly way is for workers to have a say everywhere, and this means systematic labor law reform. (The EFCA is just a beginning; there is a much larger agenda that reaches beyond the single mechanism of collective bargaining.)

Politically, we need a package deal: substantial abrogation of the UAW contract benefits combined with pro-labor reforms in labor law and the social safety net. I know this is tricky: you put it all on the table and run the risk that the benefits are eviscerated while none of the reforms go through. Nevertheless, this seems to me to be the only coherent way to think about the situation.

Ward Churchill and Alfred Chandler

How is that for a mixed pair? And what’s the connection?

Ward Churchill has been suing the University of Colorado, claiming that the academic misconduct for which he was fired was a dishonest pretext, and the real reason was to get rid of someone whose political views made the university’s top brass uncomfortable. The central criticism made of Churchill is that he ghost-wrote articles for other academics and then cited them/himself in his own work. The university said such practice is unconscionable, but Churchill says it’s done all the time.

I don’t know about all the time, but I do know about one very significant time. One of classics of business history, My Years at General Motors, supposedly written by long-time CEO Alfred Sloan, was actually ghost-written by journalist John McDonald. McDonald’s research assistant was Alfred Chandler, then a young (but very well-connected) business historian. Chandler, of course, knew all about the ghosting process, and as the team member with serious academic expertise, he probably had a major impact on the final product.

Chandler went on to write under his own name, becoming the pre-eminent scholar in his field, very well worth reading by anyone who cares about the role large productive organizations in our moment in history. Beginning with Strategy and Structure (1962), Chandler made GM one of his key case studies, drawing on the (unmentionable) research he had done for the Sloan book. Interestingly, his first book was published even before Sloan’s, suggesting that his theoretical work may have influenced the content of the published “evidence” for it, in the form of the Sloan memoir. In any case, Chandler continued to cite “Sloan” in several more pathbreaking works, with never a hint that there was something circular about this.

It’s a good thing for his career that Chandler stayed away from smallpox blankets and “little Eichmann’s”.

Wednesday, April 1, 2009

Paul Ryan on the Borrow-and-Spend Philosophy

If you expected a GOP budget today, Steve Benen says they have played an April’s Fool joke on us as all we seem to have so far is this WSJ op-ed:

The plan works to accomplish four main goals: 1) fulfill the mission of health and retirement security; 2) control our nation's debts; 3) put the economy on a path of growth and leadership in the global economy; and 4) preserve the American legacy of leaving the next generation better off. Under the president's plan, spending will top $4 trillion this year alone, and consume 28.5% of our nation's economy ... Instead of doubling the debt in five years, and tripling it in 10, the Republican budget curbs the explosion in spending called for by the president and his party. Our plan halts the borrow-and-spend philosophy that brought about today's economic problems.

Ryan provides a chart that claims that the spending to GDP ratio will exceed 40% in 50 years under “Democratic Budgets” while this ratio will fall below 20% under the “Republican Alternative”. Steve response to this op-ed included:

In reality, the "borrow-and-spend philosophy" did not create the crisis, so Ryan's prescription is automatically based on a misdiagnosis. But even if we put that aside, the alternative budget reflects a political party that embraced a breathtakingly radical worldview. In a nutshell, Ryan proposes a massive tax cut, totaling, by some estimates, around $4 trillion -- on top of the Bush/Cheney cuts, which would remain place. The Republicans plan would voucherize Medicare, and, best of all, impose a five-year spending freeze on non-defense discretionary spending

In my view, Steve is getting Congressman Ryan and the Republicans too much credit. I say this for a couple of reasons. This so-called borrow-and-spend philosophy was the actual fiscal stance of President Reagan and Bush43. Both of these Administrations promised us permanent tax cuts by claiming that they would reduce the ratio of Federal spending to GDP. Under Reagan, this ratio did not fall. Under Bush43, it rose.

We can also take a look at an analysis from the Center on Budget and Policy Priorities entitled Obama Budget Reduces Deficit by $900 Billion Compared to Current Budget Policies:

Contrary to some claims, President Obama’s 2010 budget would reduce federal deficits by about $900 billion over the next ten years compared to current budget policies. The $900 billion is the difference between deficits over the next decade under the President’s budget, as estimated by the Congressional Budget Office (CBO), and projected deficits under a realistic assessment of current budget policies … Some critics charge that Obama’s budget is fiscally irresponsible, and they cite CBO’s estimate that, under it, deficits would total $9.3 trillion over the next decade. They fail to note, however, that these future deficits result from the existing budget policies that Obama inherited — not those that he is proposing … Budget experts have been saying for a number of years that the official baseline departs sharply from reality.

While CBPP rightfully complains about how the official baseline departs from reality, I suspect it is closer to reality that the numbers that Congressman Ryan is using to draw his graphs. But I guess we’ll need to wait until the GOP actually bother to provide us with some actual numbers for their “budget”.

Subscribe to: Posts (Atom)