Friday, April 30, 2010

David Harvey and Ha Joon Chang

BBC has an discussion with them, which I just downloaded.

Wednesday, April 28, 2010

Dark Thoughts in the Gathering Peripheral Europe Storm

Back when governments chose to nationalize dubious private debts, paying top dollar to protect major wealth-holders and their institutional vehicles from ruin, two criticisms were voiced—that this would engender moral hazard, and that it would violate all reasonable standards of social justice. Both had merit, but less attention was given to a third, far more serious criticism, that fiscal space was limited, and that using it up to reflate the financial elites would leave us without options in the event of a future financial spasm.

If the events of the last two days continue and escalate, that spasm is upon us. Will governments have the resources to contain it?


Now that I am beginning to return to civilized (i.e. Pacific daylight) sleep patterns, I can report that I too was held captive by the fulminations of Eyjafjallajokull. A month late, I experienced Ash Wednesday and also Ash Sunday, Monday and Tuesday. The highlight of my European adventure was a 30-hour bus ride from Sofia to Frankfurt, courtesy of Lufthansa. I had the pleasure of sampling cheese sandwiches from across southeastern and central Europe. (Hungary wins.) My favorite comment on the situation comes from the gifted chess scribe Mig, who writes of “Iceland's last wish to have its ashes scattered over Europe...”

The $3 Trillion Dollar War — Stiglitz & Bilmes Were Too Modest

One of the greatest uncounted US losses in our wars in Iraq and Afghanistan has been the mental damage to the young people who have been exposed to the violence and brutality of our war. The recent Wikileaks release of the young people killing Iraqis as if they were playing video games is a case in point.

The number of suicides offers additional evidence.

Maze, Rick. 2010. “18 Vets Kill Themselves Every Day.” Army Times (23 April).

Also, consider the frequent reports of domestic violence and homicides.

The number of troops who have been deployed to Iraq over the last 7 years must have been somewhere around 1 million. Since May 2003, the US has had less than 130,000 in only four months.

Economists like to think of human capital — a stupid expression for the creative capacity of people — as the key to economic growth. Ignoring the economic costs of the war, as well as the consequences for the Iraqis; not even counting the physical destruction of the lives and the bodies of those soldiers who survive, these human losses for the tortured souls and for those who are hurt by them should surely be enough to say that starting such a venture should constitute a crime.

Monday, April 26, 2010

Does Krugman Miss The Point On Epistemic Closure In Macroeconomics?

Paul Krugman has put up a post in which he complains about apparent closed-mindedness of Chicago-Minnesota RBC and ratex macro-modelers who do not like sticky-prices-wages New Keynesian models and are controlling some leading journals. He argues that at saltwater schools students learn about RBC and such like, while those at the freshwater ones do not learn about other approaches. I think there is some truth to this, and, with some exceptions, such as Robert Lucas, some of the people out of the Chicago-Minnesota mafia have made complete fools of themselves with their hysterical attempts at explaining what has gone on, combined with an overbearing arrogance and aggressiveness towards anybody who disagrees with them.

However, I think that once again Krugman is dropping the ball here. In terms of explaining what has gone on the NK sticky-wages-prices gang has not done any better than the fundamentalist loonies out of Chicago and Minnesota (and related places such as Arizona and Rochester and certain regional Feds). They all look pretty silly. After all, the bubble and the crash do not look like they are at all explained by either some exogenous productivity shock or by excessive wage stickiness. Neither is even remotely in the ball park.

Of course, what may have Krugman really upset is that his department at Princeton has hired one of the most overbearing and arrogant of all the Minnesota macro-modelers, Pat Kehoe, who is very loud about stating that "we have all the answers," and reportedly he is attempting to take over grad macro teaching at Princeton. In this case, maybe Krugman has a bone to pick, given that this stuff would probably be displacing the NK stuff, although what they really need to do is get serious about Hyman P. Minsky and agent-based modeling and some other approaches.

Sunday, April 25, 2010

Is The MIT Lock On the John Bates Clark Award Overdone?

I happen to think that Esther Duflo's work (with coauthors) on randomized field trials of practical development policies deserves respect, and I have no particular problem with her being this year's recipient of the John Bates Clard Award for 2010, the award given to the best under 40 American (either citizen or working here) economist. As both a current MIT faculty member as well as Ph.D. from there, she continues a streak that has been in place since 1999. Here is the list (the prize was once every two years before this year, starting MIT's Paul Samuelson in 1947).

1999 Andrei Shleifer, MIT Ph.D.
2001 Matthew Rabin, MIT Ph.D.
2003 Steven Levitt, MIT Ph.D.
2005 Daron Acemoglu, current MIT faculty
2007 Susan Athey, formerly received tenure on MIT faculty (now at Harvard)
2009 Emmanuel Saez, MIT Ph.D.
2010 Esther Duflo, MIT Ph.D. and current faculty

I have bigger problems with some of these people than others, but it must be asked if somehow there is a self-feeding control and domination of this selection process going on.

Thursday, April 22, 2010

Dr Doom's Rooms

Who lives in an apartment that has "walls indented with plaster vulvas"?


Wednesday, April 21, 2010

A Narrative - The Unfolding of the Global Financial Crisis. Part 1 (Update 3)

In 1980 a series of large apparently engineered [1] increases in the global price of oil [2] led to the destabilisation of the global economy, particularly in debt-dependent third world nations. The resultant inflationary-deflationary spiral (stagflation) ultimately contributed to vulnerability in the US national banking system[3],[4]. Of other notable significance was the issuance of extraordinarily large loans issued by big financial institutions to a very small number of individuals - the Hunt and Saudi royal family[5] - for speculation in commodities.[6] The US-dollar devalued quickly. This situation prompted the Fed to take drastic action. It implemented a general credit squeeze throughout the domestic economy, which (in turn and along with the then usurious level of interest rates[7]) led to a record quarterly economic decline. Transnational corporations evaded this squeeze, however, through their global back-channel loan operations.

The public were left largely unaware that the Fed’s credit squeeze and experiment with monetarism had actually failed to control the US money supply.

Milton Friedman, the promoted idealogue of the 1970s, presented economic theories on inflation control. Friedman insisted that monetary authorities should adopt long-run targets for monetary growth and allow interest rates to go where they may in the attempt. The Federal Reserve followed his recipe, targeting effects rather than causes.

Several developments in the world economy confounded the monetarists. First, the velocity of money proved to have created an unreliable trajectory for M-1[8]. Secondly the existence of the large, concentrated[9] and unregulated Eurocurrency markets made domestic control over the US dollar supply unviable for the Fed[10]. Finally, it was observed that the US monetary supply continued to increase under the monetarist regime; in the context of a recession. The CPI index showed a drop in 'inflation', however. Friedman's theories were discarded. No public announcements were made to this effect.

The global shadow banking and finance system had been fueled by the overseas expansion of US banks along with the enormous supply of petrodollars[11] and the invention of new financial instruments . The Euromarket had increased eightfold since 1970 and was already forcing US domestic banks to bear the burden of the Fed’s restrictive policies and “shifting the responsibility of combating inflation to non-international banks and their customers.”[12] These stateless currencies[13] were largely a product US hegemonic control of the global reserve currency[14]. Their oversupply was exacerbated by a number of new developments in the global economy, for example, a mania for the discriminative deregulation of large businesses disguised as ‘neoliberalism’, bigness in capitalism[15] and uncontrolled global currency speculation. The latter was significantly worsened when floating exchange rates were introduced in 1973[16] .

Large corporations continued to borrow on a huge scale. Speculation increased through the leveraged buyouts of weaker corporations.[17] TNCs moved to reduce their costs in response to high input and credit costs and the associated poor consumer demand. US manufacturing labour was discarded through the process of automation and operations were moved offshore where ever feasible to take advantage of low-priced third world wages and resources along with relatively lax environmental regulations[18] . Within the US family farmers were pushed to the wall. In the US Great Plains the negative returns on real goods complicated debt problems for farmers who faced extraordinarily high real interest rates. An inexorable squeeze between farm prices and the price of credit resulted in tens of thousands of farmers experiencing bankruptcy.

Credit drained the resources of the more productive uses of money within the US domestic economy. The process of globalisation as well as the forced deflation in farm, forestry and labour prices covered for excessive inflation caused by debt, speculation and artificial demand around the world.

Prices for consumer items were kept down because governments negotiated below-cost royalties for their nation’s resources directly with transnational corporations. These businesses were permitted to exhaust local supplies of timber, water, minerals and nutrients and then go elsewhere. Production was stepped up to a faster pace and profits became short-term in nature. Local businesses that had to wait for resources to regenerate found themselves disadvantaged. They were forced to compete with privileged corporations that were permiited to “discount waiting time through going elsewhere.” The latter thus quickly gained a stranglehold over regional resources.

[To be continued…]

The Fake Oil Crisis of 1973
James Akins (US Ambassador to Saudi Arabia) testimony to Congress
"U.S. Ambassador to Saudi Arabia, James Akins, later testified in congress on the fact that when, in 1975, the Saudis went to Iran to try to get the Shah to roll back the price of oil, they were told that Kissinger told the Iranians that, “the United States understood Iran’s desire for higher oil prices.”[51] Akins was removed from Saudi Arabia in 1975, “following policy disputes with Secretary of State Henry Kissinger.”[52]

[51] [51] V.H. Oppenheim, Why Oil Prices Go Up (1) The Past: We Pushed Them. Foreign Policy: No. 25, Winter, 1976-1977: page 44

[52] Time, The Cast of Analysts. Time Magazine: March 12, 1979:,9171,948424,00.html

As quoted in: Controlling the Global Economy: Bilderberg, the Trilateral Commission and the Federal Reserve
Aug 04, 2009 - 03:10 AM
By: Andrew G. Marshall,Global_Research.
References to this article are found at:

In 1974, when a White House official suggested to the Treasury to force OPEC to lower the price of oil, his idea was swept under, and he later stated that, “It was the banking leaders who swept aside this advice and pressed for a ‘recycling’ program to accommodate to higher oil prices.” In 1975, a Wall Street investment banker was sent to Saudi Arabia to be the main investment adviser to the Saudi Arabian Monetary Agency (SAMA), and “he was to guide the Saudi petrodollar investments to the correct banks, naturally in London and New York.”[56]

[56] F. William Engdahl, A Century of War: Anglo-American Oil Politics and the New World Order. London: Pluto Press, 2004: page 137

As quoted in:
Controlling the Global Economy: Bilderberg, the Trilateral Commission and the Federal Reserve
Global Power and Global Government: Part 3 by Andrew Gavin Marshall
Global Research, August 3, 2009
MA Adelman (MIT, 1990)
In 1990 MA Adelman from the Massachusetts Institute of Technology wrote:

“A journalist, who was on a first-name basis with Secretary Kissinger, writes: "Nixon gave the Shah carte blanche to purchase any amount of military equipment short of nuclear weapons. This...led him to instigate the steep rise in the price of oil in 1973 to make it possible for him to finance his purchases." [Brandon 1988, p.354].”

MA Adelman observes that it wasn't credible that the Shah of Iran would have no wish for extra revenues in the absence of the purchase of arms by his Government. This, however, does not contradict Brandon's statements. Another reference to Kissinger, Iran and arms sales relating to 1974 makes it clear that the claimed arrangement between Iran and US was for the purpose of bailing out US defence contractors rather than being a response to the Shah of Iran's desire for more and expensive US armaments.

M. A. Adelman
May 1990
M. A. Adelman
Department of Economics and
Energy Laboratory
Massachusetts Institute of Technology
Cambridge, Massachusetts 02139
The Fake Oil Crisis of 1973 (QuestionsQuestions.Net)
The Fake Oil Crisis of 1973
From QuestionsQuestions.Net

Some "peak oil" writers have opined that the crisis of 1972-73 was a kind of "rehearsal" for what is supposedly in our very near future. It is startling to consider, in light of this, the evidence that that crisis was likely a completely contrived affair.

In "A Century of War -- Anglo American Oil Politics and the New World Order" (1992), petroleum industry expert and economist F. William Engdahl presents evidence that the 1973 OPEC "oil shock" and the accompanying oil "shortage" were secretly planned by the highest levels of the US and British elites, with Henry Kissinger playing a key role: more

A concise summary of the entire book can be found here:

Corroboration of Engdahl's account was provided a few years ago by Sheikh Ahmed Zaki Yamani, who was Saudi Arabia's OPEC minister at the time:

“I am 100 per cent sure that the Americans were behind the increase in the price of oil. The oil companies were in in real trouble at that time, they had borrowed a lot of money and they needed a high oil price to save them.”

He says he was convinced of this by the attitude of the Shah of Iran, who in one crucial day in 1974 moved from the Saudi view, that a hike would be dangerous to Opec because it would alienate the US, to advocating higher prices.

“King Faisal sent me to the Shah of Iran, who said: ‘Why are you against the increase in the price of oil? That is what they want? Ask Henry Kissinger - he is the one who wants a higher price’.”

Yamani contends that proof of his long-held belief has recently emerged in the minutes of a secret meeting on a Swedish island, where UK and US officials determined to orchestrate a 400 per cent increase in the oil price.
Henry CK Liu in 2005:
OPEC had been permitted to assume an effective cartel role only at the pleasure of the United States. The existence of OPEC serves several convenient US geopolitical purposes. It deflects political opposition to the international oil regime from the US toward a mostly Arab/Islamic organization, yet the health of OPEC is inseparably tied to the health of the energy corporations of the West that control all the downstream operations. OPEC is an example of how economic nationalism can be co-opted into Western-dominated neo-imperialist globalization….. One of the chief weaknesses of non-US producers is their exclusion from downstream operations.
The real problems with $50 oil
By Henry C K Liu. May 26, 2005

[2] The oil price increases appeared to have been engineered to counter the huge US balance of payments deficit that resulted from the Vietnam War. Economist Michael Hudson claims that “the war was single-handedly responsible for pushing the [US] balance of payments into deficit.” [See: Super Imperialism - The Origin and Fundamentals of U.S. World Dominance. Second Edition
Michael Hudson. ]

[3] 'Bigness' in capitalism provides the open invitation for economic corruption because the lines drawn between ‘private’ and ‘public’ became sufficiently blurred.
[4] The US Fed requested that banks not loan for speculation but compliance was voluntary with its President, Paul Volcker, claiming that the Fed lacked the regulatory power to force compliance of the banks.
[5] “In February and March of 1980 according to former Representative Henry Reuss, the Hunts consumed about 9 percent of all new bank credit in the United States. They consumed nearly 13 percent of new business loans.
‘The World’s Money – International Banking from Bretton Woods to the Brink of Insolvency’ by Michael Moffit. A touchstone book published by Simon and Schuster, New York. 1984. ISBN 0-671-50596-3 Pbk Page 186
[6] Hunt Silver-Related Borrowings
(August 1979 – March 1980)
($ Millions)

Principal Lenders Loan balance Loan balance Loan balance
8/1/1979 1/17/80 (3/27/80)
ACL International $29.8 $80.5 $134.2
Bache $38 $43.7 $235.5
Swiss Bank Corp $70 $150 $200
First Chicago $30 $10 $100*
EF Hutton $100.5 $100
Citibank $25 $90
First National
Bank of Dallas $79.2
Merrill Lynch $54 $169
Placid Oil $110

SOURCE: Securities and Exchange Commission, ‘The Silver Crisis of 1980, October 1982.
*This actually understates the extent of First Chicago’s involvement with the Hunts. The bank had a total of $223 million in loans to Hunt interests, plus another $75 million loan to Bache which lent the money to the Hunts.
‘The World’s Money – International Banking from Bretton Woods to the Brink of Insolvency’ by Michael Moffit. A touchstone book published by Simon and Schuster, New York. 1984. ISBN 0-671-50596-3 Pbk Page 186-187.
[7] These record-high levels of interest rates were made possible by the Carter administrations deregulation of interest rates. They did this because a prolonged period of negative real interest rates arose as a result of the oil-price-driven inflation on the 1970s. The rhetoris in government was for defending the small saver – “the very people the Democratic Party had always spoken for. This was not quite the case, as Senator Robert Morgan of North Carolina and the handful of other dissenters pointed out. “The majority of consumers, with or without savings, particularly families of low income, including one-half of the elderly families, would probably suffer a net economic loss,” Morgan predicted [13]. The “small savers” whom Democrats wished to help were actually a limited group, mostly abvove the median income. First of all, 37 percent of American families had no savings account at all. Another 29 percent had savings balances below $2,000. If these families received another 1 to 3 percent interest on their accounts, that would return at most only $60 a year in additional income. Meanwhile, as borrowers, they would of course pay higher interest rates. As consumers, they would also pay higher prices since business was a major beneficiary of the hidden subsidy of interest-rate controls. When businesses had to pay more for credit, the costs would be passed on to their customers…”
‘Secrets of the Temple – How the Federal Reserve Runs the Country’ by William Greider. Simon and Schuster, 1987. ISBN 0-671-675556-7 pbk. Pages 165-166.
[8] “M-1 was a reliable measure…only if velocity [of money] followed its predicted trend line. If people abruptly changed their spending and money-handling habits, for whatever reasons, then velocity changed unexpectedly and M-1 became grossly misleading. The government, including the Federal Reserve, could do nothing to control this wild card in the economics of money. Perople were not, after all, compelled to circulate their money at a prescribed speed. Velocity was the Achilles’ heel in Friedman’s theory – the uncontrollable variable that could throw his confident prescriptions about money totally offtrack. Nor was this insight particularly new. For years, the critics of monetarism (including those at the Fed) had pointed out that Friedman was assigning a constancy to money relationships that did not, in fact, exist. The alluring simplicity of Friedman’s doctrine – control M-1 and forget about everything else – was also its central fallacy. Except now M-1’s reliability was more than a theory for debate amongst economists. The Federal Reserve was relying on the same fallacy to regulate the entire economy….”
‘Secrets of the Temple – How the Federal Reserve Runs the Country’ by William Greider. Simon and Schuster, 1987. ISBN 0-671-675556-7 pbk. Page 480.
[9] “…The highly concentrated nature of Eurolending magnifies the dangers of failure. Whereas the capital base of all U.S. banks may be sufficient to carry the liabilities involved in the process of recycling petrodollars-- one of the major forces behind the growth of the Euromarket--recycling is largely the province of a select group of international banks. Of the 14,000 banks chartered in the U.S., for instance, only 130 participate in Eurocurrency dealings. And the ten most active, such as Citibank, Chase Manhattan and the Bank of America, account for fully 70 percent of all foreign lending by U.S.' banks. With composite capital-to-asset ratios of only 3.6 percent, there is real question whether the capital bases of these ten giant international banks have been stretched too thin. Given the intertwined nature of Eurobanking, there is even greater question whether the few foreign institutions involved are not even more precariously balanced….”
The Multinational Monitor
Regulate the Euromarket
A U.S. Congressman calls on Western governments to cooperate in supervising the $1 trillion Eurocurrency market.
by Jim Leach
[10] In April 1980, Jim Leach, reported in the Multinational Monitor that “The Eurocurrency market has expanded so rapidly in the last 'two decades that in gross size it now dwarfs every other national banking system and is about the same size as our own. Its growth is largely a function of the overseas expansion of U.S. banks. In 1960, for example, only eight U.S. banks operated international branches, with overseas assets totalling $3.5 billion. By early 1979, over 130 U.S. banks had established operations outside the country, with foreign assets of $306 billion….”
The Multinational Monitor
Regulate the Euromarket
A U.S. Congressman calls on Western governments to cooperate in supervising the $1 trillion Eurocurrency market.
by Jim Leach
[11] “While oil importers accumulated huge bills they could not pay, oil exporters accumulated large amounts of U.S. dollars - more than they knew how to use. These dollars were known as "petrodollars."
Is there such a thing as TOO MUCH money?
Oil-exporting countries found themselves with so much money, they could not spend it fast enough. Some had small populations; many were still at early stages of industrialization. They could not import enough from the countries that bought their oil to keep from piling up enormous dollar surpluses.”
Reinventing the System (1972-1981)
Part 4 of 7
Recycling Petrodollars
[12] The Multinational Monitor
Regulate the Euromarket
A U.S. Congressman calls on Western governments to cooperate in supervising the $1 trillion Eurocurrency market.
by Jim Leach
[13] “…What is now considered the Euromarket encompasses banking activities not only in Western Europe but also in other industrialized countries and offshore centers such as the Bahamas, the Cayman Islands, Hong Kong and Singapore. There, the world's leading private banks hold deposits in and lend the world's major currencies outside their countries of origin. It is largely a -Eurodollar market: about three-fourths of the market's stateless currencies are U.S. dollars, while half of the remainder are German marks….”
The Multinational Monitor
Regulate the Euromarket
A U.S. Congressman calls on Western governments to cooperate in supervising the $1 trillion Eurocurrency market.
by Jim Leach
[14] “As long as Saudi Arabia accepts payment for oil in dollars, other countries must first buy dollars before they buy oil.” Thus, oil price rises tended to strengthen the US dollar’s value in international currency markets.
‘The World’s Money – International Banking from Bretton Woods to the Brink of Insolvency’ by Michael Moffit. A touchstone book published by Simon and Schuster, New York. 1984. ISBN 0-671-50596-3 Pbk. Page 166.
[15] “Between 1950 and 1971 the 200 leading U.S. corporations increased their control of all U.S. manufacturing assets from 46 to 87 percent.” Quoted from: American Global Enterprise and Asia
Journal article by Mark Selden; Bulletin of Concerned Asian Scholars, Vol. 7, 1975
[16] The neoclassical economists and free-traders Gottfried Haberler and Milton Friedman campaigned for a regime of national fiat currencies linked to another by flexible exchange rates. Haberler the resident scholar at the American Enterprise Institute for Public Policy Research [a Republican think-tank in Washington DC] “denounced labour unions as the primary cause of inflation and urged a flood of cheap imports to undercut wages as well as the repeal of minimum wage laws and other ‘privileges’, as he called them, that workers enjoyed.”

Richard Parker’s Bio of John Kenneth Galbraith. Hardcover. Page 483. In the Chapter entitled ‘Galbraith and Nixon: Two Keynesian Presidents.”
[17] 1981 - a large share of the funds raised by US firms in the Euromarket in 1981 consisted of mammoth loan syndications by corporate giants like Mobil, US Steel and DuPont to finance mergers and acquisitions, such as the fabled Conoco and Marathon Oil takeovers. The surge of borrowing to support M&A as it is known on Wall Street, was particularly strong in the summer of 1981

In the three years since the adoption of the October 6 [1979] measures, that is exactly what has happened. The multinationals have had access to all the credit they need, whereas small businesses, home buyers and consumers have been clobbered. Despite the astronomical rise in interest rates, new corporate borrowing has continued at high levels. Moreover, a large share of the funds raised by US firms in the Euromarket in 1981 consisted of mammoth loan syndications by corporate giants like Mobil, US Steel and DuPont to finance mergers and acquisitions, such as the fabled Conoco and Marathon Oil takeovers. The surge of borrowing to support M&A as it is known on Wall Street, was particularly strong in the summer of 1981. though only half of the credit lines were actually drawn
[‘The World’s Money – International Banking from Bretton Woods to the Brink of Insolvency’ by Michael Moffit. A touchstone book published by Simon and Schuster, New York. 1984. ISBN 0-671-50596-3 Pbk. Page 210]
[18] "The 1979 visit of Deng Xiaoping to the US was followed in June 1980 by the equally significant encounter in Wall Street of Rong Yiren, chairman of CITIC, and David Rockefeller. The meeting, held in the penthouse of the Chase Manhattan Bank complex, was attended by senior executives of close to 300 major US corporations. A major agreement was reached between Chase, CITIC, and the Bank of China, involving the exchange of specialists and technical personnel to "identify and define those areas of the Chinese economy most susceptible to American technology and capital infusion."
The people with the endless bios - An introduction to the world we live in. Project for the Exposure of Hidden Institutions website.
[19] ‘Globalisation and its Terrors – Daily Life in the West’ by Teresa Brennan. Routledge, USA and Canada. ISBN 0-415-28522-4. 2003 Page 15

Monday, April 19, 2010

Thoughts on the Tea Party

I was asked by our weekly paper to give some thoughts on the Tea Party movement. Here is what I came up with:

The Tea Party movement combines ignorance, anger, and justifiable indignation. For some, this ignorance reflects a degree of racism and ethnic hostility.

The anger has been nurtured by the demise of journalism along with a cynically crafted rhetoric of hate. Former Speaker of the House Newt Gingrich was a master of this mode of communication. In 1990, four years before Gingrich ascended to his leadership position, his organization, GOPAC circulated a memo instructing Republicans about the most effective method of communication in the political arena. The memo recommended that his fellow travelers adopt a vocabulary built upon confrontational words, such as "decay, sick, unionized bureaucracy, greed, corruption, radical, permissive, and bizarre." Without a responsible media, this strategy went largely unchallenged until it became common practice.

The Tea Party, crafted by Republican interests, cleverly managed to whip the resulting anger into an Astroturf movement. At the same time, the Tea Party anger made sense, although it was misdirected. As I tried to show in the Confiscation of American Prosperity, since 1970 the United States has undergone a more massive transfer of wealth than either the Chinese or Soviet Revolutions. Damn right, people should be angry -- but not at the poor immigrants or racial and ethnic minorities, who are made out to be causing all the trouble.

One of the big complaints of the Tea Party is taxes. Their complaints are partially justified. The partiers are largely middle-class. Poverty precludes the very poor from paying much in taxes, while influence allows the very rich to avoid paying their share. The burden of taxes largely falls on the middle class.

In addition, people are alienated. They know that they have virtually no say in the way the system works. They are absolutely right to call for a more democratic way of governing. Ironically, of course, the same forces that are behind the conditions that generate this anger are manipulating the Tea Party to serve their own ends.

Sunday, April 18, 2010

The Passing Of C. Lowell Harriss

Apparently it happened on Dec. 14, 2009, but his memorial service was only held at Columbia University on April 11, and I only just became aware of it through a posting by Peter Boettke. There are various links there, including to an obit in the Boston Globe. He was 97 years old, and not well known by the time of his death, although quite prominent in an earlier era. He was a specialist in public finance and land use, among many other topics, serving on the board of directors of the Lincoln Institute of Land Policy for many years, where he expressed sympathy with Georgist views and broader tax simplification, while declaring that he did not like the term "land value taxation."

He was not easy to classify. Nominally a Republican and a member of the Mont Pelerin Society, he nevertheless was a close friend of the late William Vickrey, whom he was with when I first met him at an Eastern Economic Association meeting back in the early 1990s. Vickrey was very much on a push for policies to guarantee full employment, and I heard Harriss agreeing with him on this. When Vickrey died three days after receiving the Nobel Prize in economics in 1996, it was Harriss who spoke in his place at the Nobel ceremony in Stockholm and forcefully presented his friend's arguments for vigorous policies to achieve full employment, something that would make both of them very relevant today.

From what I saw and what I have read elsewhere, Lowell Harriss was kind and wise and polite to all he met, a gentleman scholar of the old school, and one who will be missed.

The Logic of Monitoring Workers

Juan Gonzalez published a fascinating article about New York's over-priced, dysfunctional computer system that pointed to a number of problems with the world we live in.

First of all, the system, like many complex computer systems, does not work.

Second, 230 consultants are getting an average salary of $400,000.

Finally, one of the great ironies is that the system is supposed to keep track of ordinary workers to make sure that they are not overpaid.

Gonzalez, Juan. 2010. "'Consultants' getting $722M from city for doomed CityTime computer project." New York Daily News (26 March).
The city is paying some 230 "consultants" an average salary of $400,000 a year for a computer project that is seven years behind schedule and vastly over budget. The payments continue despite Mayor Bloomberg's admission the computerized timekeeping and payroll system -- called CityTime -- is "a disaster"." Eleven CityTime consultants rake in more than $600,000 annually, with three of them making as much as $676,000, city records obtained under a Freedom of Information request show.

The 40 highest-paid people on the project bill taxpayers at least $500,000 a year. These enormous salaries are coming out of a $139 million extension to the CityTime contract that began July 1 and runs to September 30. Some of the consultants have been working at these rates for as long as a decade. Take, for example, Brian Fallon, a CityTime "project manager." The Science Applications International Corp., which employs Fallon and supplies the consultants, charged $653,554 for his services in 2009. When the Daily News approached Fallon, 40, this week outside his home in Belle Mead, N.J., he declined to say what he does to merit such a fat check.

Then there is Constantin Stanca, a "development manager" for CityTime for 10 years. He made $524,000 in 2009. "It's a difficult project," the 43-year-old Stanca said, as he left his New Hyde Park, L.I., home yesterday for work. "Look at this white hair here," he added, pointing to his salt and pepper goatee.

Gerard Denault, 48, of Darien, Conn., has been a "project director" for several years. He got $543,698 from the city last year -- for less than 30 hours a week of work on CityTime. The actual amounts individual SAIC employees took home are most likely lower than their stated rates, since computer firms typically take a cut of each consultant's charges. Nonetheless, these are breathtaking numbers. "In my three decades in the business, I've never seen salary levels like these," said a veteran technology manager who once worked on CityTime.

CityTime's installation started in 1998 and was supposed to take five years. Officials promised that biometric scanners and automatic timeclocks on all personal computers would eliminate the age-old abuse of city workers punching clocks for their friends and save up to $60 million a year. Defense contractor SAIC took over the original contract in 2000, but the firm has managed to roll out the system to only a third of the 145,000 city employees who were supposed to use it.

Costs have skyrocketed. City Controller John Liu said the price tag has reached $722 million -- more than 10 times the original projection. SAIC, by the way, is the company the FBI threw off the job a few years ago after charging the agency $170 million for a virtual file system that never worked.

Bloomberg conceded three weeks ago CityTime is "a disaster," but offered no plans to fix it. He acknowledged the problem only after the Daily News exposed CityTime's spiraling costs and after the paper revealed that more that a dozen consultants supplied by Spherion -- a second firm hired to monitor CityTime's costs -- were racking up salaries of more than $300,000 each.

Several former CityTime workers have told The News city officials have ignored their complaints about questionable consultant timesheets, defective software and possible conflicts of interest between key CityTime managers and subcontractors. In January, Liu rejected an extension of Spherion's contract and began the first-ever audit of the entire project. Liu has since labeled CityTime a "money pit." He urged Bloomberg to suspend payments until the audit is finished. "People who worked on this aren't stupid and aren't lazy," Bloomberg said. "Some projects are so big and the world changes so fast while you're building them, [you realize] maybe that's not a good way to do anything." That cavalier excuse is unacceptable. Our city is facing its biggest financial crisis in years and Bloomberg has decreed major cuts in jobs and basic services.

Last fall, City Hall laid off 510 public school aides to save $12 million. At the same time, the mayor's aides were adding more than $24 million to the operating budget of the office of payroll administration just to help pay for CityTime's consultants. How can anyone justify firing $18,000-a-year school aides while hiring half-a-million-dollar computer geeks who can't even deliver a good product?

Joel Bondy, head of the city's office of payroll and the man in charge of CityTime, told a City Council hearing in December the project would be completed by September. Yet, the fine print in the new CityTime contract shows Bondy plans to keep as many as 100 of the SAIC consultants employed for another four years. There will be "a need for minimal continued consulting support after the implementation of CityTime," an OPA official confirmed. The existing contract, the official said, does "not accurately reflect the level of such support".

It's time to speak plainly. CityTime is a new-age version of feeding at the government trough. It's a luxury employment project for computer geeks with friends and connections in high places. The mayor should fire everyone in charge of it. He should pull the plug on this boondoggle now.

Gates Agrees Iran Only Pursuing Nuclear Latency; Khamenei Repeats Anti-Nuclear Weapons Fatwa

Once again Juan Cole is pointing out important things, Defense Secretary Robert Gates has given a speech in which he worries that the US will not know what to do if/when Iran achieves the ability to make a nuclear weapon, known as "nuclear latency." While he clearly believes they are pursuing such latency, this is very different from saying that they have an active program of constructing nuclear weapons, which many allege despite longstanding US intel findings that they are not doing so. Cole points out that as long as IAEA inspectors are accessing their sites, this will be extremely unlikely.

OTOH, Iranian Supreme Jurisprudent and Commander-in-Chief, Ali Khamenei, has just made a major speech that Cole provides a translation from in which he reiterates his fatwa against obtaining and particularly using nuclear weapons. He denounces the US for being the only nation in the world to have done so, mentioning Hiroshima. Clearly he is replying to the focus on Iran at the nuclear security summit in Washington organized by Obama, even though Charles Krauthammer has been running around declaring that there was no focus on Iran there.

I support the recently signed treaty with Russia and also most of what went on in Washington, such as securing loose nuclear materials. But the focus on going after the currently-compliant Iran remains a bit mysterious. Actually, it is not so much so. The real object of this exercise is Israel, with its reported 200 or so nuclear bombs, who refused to attend the summit in a fit of pique at Obama's efforts to get it to stop building West Bank settlements and to get back into negotiations with the Palestinians. The Israelis view Iran as an existential threat, clearly viewing Khameini as either lying or powerless. Anyway, it would appear that the US is using up lots of its scarce political capital with China because of this problem of trying to convince the Israelis that "something is being done about about Iran."

Saturday, April 17, 2010

Greek Economic Corruption

Today's Wall Street Journal reports on the large burden of corruption in the Greek economy. I posted a brief comment on the Journal website.

I am appalled by the reports of Greek corruption. A civilized country, such as the US, manages to keep corruption in check by redefining it as lobbying.

Wednesday, April 14, 2010

The Disposition to truck and barter

I have been thinking about Smith's claim in the opening arguments of the Wealth of Nations that the source of the Division of Labor is "the disposition to truck and barter." This has always puzzled me. He makes it clear that what he has in mind is disposition to truck and barter for its own sake. Why is such a disposition necessary in order for self-interested individuals to see the advantage of specialization and trade?

I have a suggested answer. In many potted histories of economic thought you may see a comparison of Smith and Ricardo on trade which says something like, " Smith focused on absolute advantage while Ricardo pointed to comparative advantage as the source of gains from trade." This seems to me to miss the point. What is distinctive about Smith on trade is that he makes the the differing advantages, absolute or comparative, that people have a consequence, instead of a cause, of specialization. By specializing we become differently skilled, though prior to specialization we are identical. This in turn reflects the fact that "the division of labor is limited by the extent of the market." A Portugal and England with identical resource endowments and identical increasing return technologies for producing wine and textiles can gain from specializing and trading. And it doesn't matter who makes the wine and who makes the textiles.

So here's my suggestion. If, prior to specialization, we are all pretty much alike, a disposition to truck and barter for its own sake, even where apparent gains from trade are negligible to non-existent, could get the specialization ball rolling.

3.5 Million New Jobs is Not Nearly Enough

CNNMoney and the Vice President must think this is excellent news:

The government's Recovery Act is responsible for between 2.2 and 2.8 million jobs through the first quarter of 2010, according to the latest stimulus report from President Obama's chief economic adviser. The report, from the Council of Economic Advisers, says the economic stimulus is on track to create or save 3.5 million jobs by the end of the year. "From tax cuts to construction projects, the Recovery Act is firing on all cylinders when it comes to creating jobs and putting Americans back to work." Vice President Joe Biden said in a statement.

Job growth is better than job losses and this does seem to be sufficient to lower the unemployment rate by a modest amount. But let’s assume that simply keeping pace with a rising population and labor force means we have to create 100,000 new jobs per month. With the civilian non-institutional population being near 237 million, the projected increase in the employment to population ratio for 2010 seems to be a mere 1 percent. This ratio was 58.2% as of December 2009 and has risen to 58.6% as of March 2010. If it rises to 59.2% by the end of the year, we will still have a very weak labor market.

Tuesday, April 13, 2010

What Letter Defines The Shape of the Great Recession: L, U, V, or W?

And the answer is: None of the above. Maybe somewhere between an L and a V, although the disjuncture between the turning around of GDP growth last summer and the apparent (keep those fingers crossed) turning around of employment last month, could make a sort of argument for a U, except that we have not seen a fast enough upswing on the back end to justify it any more than a V.

Of course, there have been some V's in other countries, especially in East Asia, where some of the former tigers, such as Taiwan and South Korea had among the sharpest GDP declines in the world, but bounced hard and are booming again, probably being dragged along by the hyper growth of China.

Saturday, April 10, 2010

Will More Immigration Save Social Security?

Robert Reich says so, "Why More Immigrants Are An Answer to the Coming Boomer Entitlement Mess", which is also linked to by Mark Thoma. He has been on the Social Security Advisory board and has heard all the tales of coming Demographic Doom due to the impending wave of boomer retirements, even though the adjustments due to the Greenspan Commission in the early 80s were supposed to pay for the boomers' retirements. This year the fund is running a (small) deficit, and so out of all the sources of the broader federal budget deficit (of which rising medical care costs, not to mention high defense budgets) it is social security that is the Big Problem that Something Must Be Done About (along with Medicare). I would agree that more immigrants will help in the short run, but demography is not the main problem here.

I and Bruce Webb have posted only about a million times in the past here and elsewhere on how if the "optimistic" projection of the SSA were to hold, the system would never run a deficit. In many recent years the economy beat that projection. However, in the last few it has plunged far below the pessimistic forecast with fica revenues collapsing as employment has collapsed in the Great Recession. This is the problem, and the simple solution is to get the economy and employment growing again at something like the optimistic forecast rate. Then the system will go back into surplus, possibly even mostly staying there, without any fiddling with or opening the doors to massive immigration (and, no, I am not anti-immigrant at all here, just trying to be clear about what is what).

Indeed, the fallaciousness of this general demographic hysteria is seen in that the US has among the best demographics for this even with low immigration compared with other OECD economies. Germany (and others) have the age distributions the US will have in 2030 when we hear Doom will hit, and they are paying their pensions all right, with Germany's even higher than the ones here. Really, folks, higher immigration may be an OK thing, but it is relatively peripheral to the condition of the Social Security system. Growing the economy and particularly employment is the key to saving the system.

Friday, April 9, 2010

Will DeMint And Inhofe Apologize To Al Gore?

After the biggest of the snowstorms hit Washington this winter, Senators DeMint (R-SC) and Inhofe (R-OK) were mocking Al Gore (and many others) over the supposed end of global warming, hah hah hah! Well, it is cooler today, but this week has seen record high temperatures in the Washington area, and where I am two hours away by car in Virginia, the first time ever that temperatures have topped 90 degrees F in early April. Will we hear them apologize and change their tunes?

Now, of course I do not buy into that this week's temperatures around here show doodley-squat about long-run global temperature trends, just as they should have recognized the same regarding the colder temperatures than seen for quite a few years in this area (but hardly record levels) and the record-setting snowfall levels (actually consistent with global warming due to the greater amounts of water vapor in the air). Oh, and just for the record, the latest report is that January 2010 was #5 in all time recorded global average temperature, Feb 10 was #3, and March 10 was #4, with NASA now predicting that 2010 is likely to beat the all time record for a 12-month period, although I think we'll have to wait on that one and see. In any case again, DeMint and Inhofe are looking pretty silly, but I shall not be holding my breath for their acknowledgement of same or any apologies to anybody.

Tuesday, April 6, 2010

WaPo Worries That The End May Be Near!

Today the Washington Post had a story all worried about ten year interest rates going from around 3.5% on March 4 to nearly 4.0% yesterday. They note that this might reflect expectations of growth, but also worry that it might reflect expectations of rising inflation and dangers of collapse due to rising indebtedness. They did not bring up the earlier worrying that this was due to the Chinese not buying US bonds to punish us since they ran a trade deficit in March and did not have much money to buy foreign bonds with. They also worried about associated increases in housing mortgage interest rates, which tend to track the ten-year bond rate.

Curiously WaPo failed to note that most of this interest rate increase occurred during only a few days after March 22. This did correspond with the "weak" bond sale, but it also corresponded with the final ending of the Fed's support for the MBS market, which in turn had been propping up pretty much the entire secondary market in housing mortgages for well over a year. The winding down of this has been gradual, but in fact the real story here has been that the dropping of this final shoe had many on tenterhooks that there might not be anybody there at all to pick up the slack in the MBS market. If that had been the case, we would have seen mortgage rate increases far in excess of what happened, which was in line with the ten-year bond rate increase. This is one of those stories about how a dog did not bark, and in this case, to really mix my metaphors, we have apparently missed a dangerous bullet that could have thoroughly derailed the nascent recovery.

Friday, April 2, 2010

Another Incremental Improvement of a Bad Labor Market

BLS reports that the economy added just over 160 thousand news jobs during March but the reported unemployment rate remained at 9.7%. This 160 thousand plus new jobs showed up in both the payroll survey and the household survey reporting but we should also note that the labor force participation rate also inched upwards so when the employment-population ratio also inched upwards, the unemployment rate remained the same.

Our graph shows that we have had very modest improvements in the employment-population ratio for the last 3 months – from 58.2% to 58.6% - as we have also seen the labor force participation rate rise – from 64.6% to 64.9%. Note also the tremendous decline in the employment-population ratio from December 2006 to December 2009. The rise in the unemployment during this period understated the decline in the employment-population ratio as labor force participation also declined. While we are making small progress, we are very far away from a healthy labor market.

Thursday, April 1, 2010

Term Structure and Default: April Fool’s

Paul Krugman does a nice job discussing the recent term structure and the competing hypothesis of why it is so steep:

As many people have noticed, the term spread — the difference between short-term and long-term interest rates — is very high. The last time I wrote about this, people were taking this as proof that the economy would recover soon. Now they’re taking it as bad news — as somehow suggesting fears of default. But there’s a reason for a high term spread that has nothing to do with either explanation. As I tried to explain last time, to a first approximation you can think of the long term rate as reflecting an average of expected future short-term rates. Short-term rates, in turn, tend to reflect the state of the economy: if the economy improves, the Fed will raise short-term rates, if the economy worsens, the Fed will cut. So long-term rates can be either above or below short rates. Except that now they can’t. If the economy improves, short rates will rise; but if it worsens, well, they’re already zero, so there’s nowhere to go but up. This implies that there has to be a positive term spread.

Paul continues by noting that the fear of default hypothesis would be reflected in higher inflationary expectations. Our graph, which reflects government bond rates for March 31, 2010, shows the term structure for nominal rates (blue) as well as for real rates (red). The difference (green) reflects the term structure with respect to expected inflation. Not only is expected inflation quite modest even as measured by the 30-year bond rates, the upward tilt of our green line is not as pronounced as the term structure for real rates.