Wednesday, June 30, 2010

The Tragicomedy of Iran Sanctions

"... the 2007 US sanctions against Iranian banks ironically ensured Iran's immunity from the global financial crisis that was about to explode."

Parsi, Massoud. 2010. "The Tragicomedy of Iran Sanctions." (22 May).

The V-Bounce Man On The State Of Modern Macro

Recently the new president of the Minneapolis Fed, Narayana Kotcherlakota, also at the U. of Minnesota, and a longtime advocate of DSGE modeling, "apologized" for the poor performance of "modern" macro models in predicting/explaining the crash and recession of 2008, He said that the models need much more complicated modeling of financial markets and dynamics, duh.

This led to James Morley of Washington University and Macroeconomic Advisers, who last year was forecasting a V-bounce recovery from the recession (which did not work, unfortunately), to write a critique of this paper, with which I largely agree, He points out that it is silly of Kotcherlakota to bemoan policymakers having fallen back on "long-discarded models" when considering such things as the fiscal stimulus, asking "Who is this 'we' who discarded those models?" He accurately points out that the best of these models, such as the one by Smet and Wouters, continue to rely on AR modeling of supposed exogenous shocks that have nothing to do with policy or anything else. In the end, he says that improved models should incorporate the ideas of Hyman Minsky, with which I strongly agree.

Others have commented on this, including Brad DeLong and also the estimable Mark Thoma at economists view, where there are extensive comments after his extensive excepts from Morley's paper,

Monday, June 28, 2010

James Buchanan On Chicago School Thinking: Old And New

At the Summer Institute on History of Economics held a week ago or so at the University of Richmond, 90-year old Chicago Ph.D. (and Nobelist) James Buchanan gave a talk on the topic in the subject head. One can see it and the question and answer period (1 hour, 16 minutes) here. It is not what most regular readers of this blog would expect out of this old pro-laissez faire workhorse and father of the public choice school.

So, yes, he is for free markets, but in the Old Chicago School (of Frank Knight, Jacob Viner, and Henry Simons), it was known that they only work with the right laws and institutions, whereas the New Chicago School (Lucas et al; he views Friedman, Stigler, and Becker as "intermediates"), thinks that markets always work all the time, no matter what. This is not the case, because "rules and laws are Samuelsonian non-partitionable public goods." Yes, the attitudes of the New Chicago School are partly responsible for the recent crises. And Buchanan now has "radical views," wanting to "break up the big banks" and reimpose the Glass-Steagall Act, among other things.

One other thing that was sort of amusing to watch was how he handled incoherent questions, of which there were several. He would say, "I don't understand your question," and that would be that, and, frankly, I did not understand them either. Left the questioners rather hanging with their gibberish. And for others he would answer "I agree," period, although still others he gave long and insightful replies to. I guess when you are 90, you do not feel like wasting yours and other peoples' time.

Sunday, June 27, 2010

Notes on the Epidemic of Privatization

Here are two snippets regarding the replacement of public provision of services with less desirable private sources.
Kaplan University has an offer for California community college students who cannot get a seat in a class they need: under a memorandum of understanding with the chancellor of the community college system, they can take the online version at Kaplan, with a 42 percent tuition discount. The opportunity would not come cheap. Kaplan charges $216 a credit with the discount, compared with $26 a credit at California's community colleges.

For better or worse, the tough times for public colleges nationwide have presented for-profit colleges with a promising marketing opportunity.

In California, the memorandum of understanding also requires each community college taking part to sign a credit-transfer agreement with Kaplan -- and most of the state's 112 community colleges are not eager to do so. Thus far, Kaplan has no takers for its courses. "Faculty from across the state were uniformly irate and disappointed about the memorandum of understanding," said Jane Patton, president of the Academic Senate for California Community Colleges, partly because faculty members were not consulted.

Lewin, Tamar. 2010. "For-Profit Colleges Find New Market Niche." New York Times (24 June): p. A 17.

Where the Metropolitan Transportation Authority sees a sure-fire way to lose money, Joel Azumah sees dollar signs." "Mr. Azumah, the president, owner and sometimes-driver of TransportAzumah, thinks he can make money running buses along three routes that the MTA plans to shut down this weekend as part of deep service cuts to fill a yawning deficit. The MTA says it was losing almost $2 million a year on the X90, X25 and X29 express bus routes.

Grossman, Andrew. 2010. "Route to a Fare Profit? One Private Bus Operator Aims to Benefit From MTA's Pain." Wall Street Journal (25 June).

Friday, June 25, 2010

Austerity: A Prisoner’s Dilemma?

Maybe not, but it’s worth a look. The basic idea is that, leaving aside prices (which are flat or falling out to the horizon), fiscal policy can be viewed as having three macroeconomic impacts: on domestic demand, external demand, and fiscal space itself. Austerity is negative on the first and second, but positive on the third. Details (relatively speaking):

Domestic demand: This is immediate and can be assumed to follow some form of Keynesian determination. As long as the fiscal multiplier is greater than zero, cutting deficits will mean cutting income and jobs.

External demand: Similarly, domestic austerity will have a negative effect on demand among trading partners, depending on their bilateral exports (to you) as a share of their own GDP. So austerity in the US would have a large effect on its NAFTA partners, Mexico and Canada, but not much (directly at any rate) on a country like Hungary.

Fiscal space: Imagine that, in the current environment, the risk that bond markets may abandon your country is a sort of lottery. A sudden stop is the cost to be avoided, since it not only raises your borrowing costs, but also drastically narrows your policy autonomy. At any moment you have a given likelihood of losing this lottery over the relevant, multi-year policy horizon; austerity may lower this likelihood. (Actually, this is not clear, as the example of Spain, which was dropped by the markets just after announcing austerity, suggests. But let us make the assumption for the sake of the model.)

Thus, within a range of parameters, austerity could be a PD. This would be the case if the three PD criteria are met:

1. Incentive to defect: the benefits of greater fiscal space (reduction in the likelihood of being attacked by bond markets) outweighs the perceived direct effects on demand.

2. Disincentive to be the sole cooperator: the bond market costs of being the only country to run large fiscal deficits exceed the direct benefits to be had from greater domestic demand.

3. The superiority of mutual cooperation: each country regards itself as better off in a world in which everyone maintains stimulus rather than one in which every imposes austerity.

All are possible.

The first criterion, of course, depends mightily on the weight given by economic decision-makers on economic growth. At present, every country, save those who have no policy space left, is in the hands of the center-right. (I include Obama in this generalization.) For various political reasons, which differ in each country, this has dampened enthusiasm for the direct effects of Keynesian stimulus. Of course, the degree of openness is also germane. The US, for instance, can expect to have a much larger national income multiplier than the much more open European economies.

The second criterion is guaranteed for most deficit countries, the only exception being the US, which enjoys the privilege (and trap) of printing the world’s principal reserve currency. (The only example of bond markets turning against US sovereign debt was during the Carter presidency, but this was based on an inflationary spike, and inflation is not in the cards at this time.) Whether it may hold for surplus countries is an interesting question. Japan has been able to run up stupendous fiscal deficits at no bond market cost. China is more concerned about domestic prices and asset bubbles than bond traders. Germany—what is Germany worried about?

The third criterion depends in part on the other two, plus the extent to which each country depend on exports for its own demand. It could be true, but it depends on all the parameters described above.

Putting all of this together, it would be a project to assess the extent to which PD dynamics play a role in austerity—whether, in other words, the world faces a problem of competitive austerity. You would have to factor in not only the income multipliers and trade coefficients, incorporating n-round effects, but also the difficult-to-quantify perceptions of the costs of depressed income and employment, as well as the risks of a fickle bond market. It’s at least an article, possibly a book (or a doctoral thesis in IPE). Has it all been done before? I remember similar analyses in which the cost of cooperation (stimulus) was a trade deficit, but not the risk of bond market distress. I don’t recall how formal they were.

Thinking through all of this, I think the case for a PD is weak for most countries, and, even if it can be established, most of the policy interest is not at the level of collective action, but perceptions of the cost-benefit tradeoff of stimulus. In other words, unless one is in a world of uniformly small, highly open economies, I think aggressive Keynesianism can be justified one country at a time.

But I’m in the US, a non-small, relatively nonopen, and up to this point monetarily privileged player.

Record Heat, And Is Climate Control Legislation Dead?

Science Daily reports that May had the highest average global temperature on record with June quite likely to join it. Nevertheless, in his address to the nation about the BP oil spill, while President Obama called for the passage of clean energy legislation, he somehow neglected to add a call for the Senate to pass any sort of climate control legislation, whether of their own construction or some variation on the complicated cap-and-trade bill that Nancy Pelosi managed to barely get through the House of Representatives just over a year ago after a massive effort. It may be that this is due to the end of any sort of Republican support after Lindsey Graham jumped ship after Obama said we needed to pass immigration reform. Whatever the reason, I fear that this means that climate legislation is dead now, and probably for the foreseeable future, as I expect the Congress to become more hostile after this fall's election.

Mark Thoma at Economists View links to an essay by the ever-optimistic Robert Stavins, who runs through a variety of possible policies in the apparent wake of the failure to get the House bill through the Senate this year. In the end, he sides with some sort of market-based approach that "puts a price on carbon," whether a cap-and-trade or a carbon tax. However, in the face of the knee jerk opposition to any taxes by Republicans, he concludes that the best option to a "cap-and-trade bill in 2010" is one in 2011. I fear I agree, but I now fear that we are probably going to get nothing for the foreseeable future.

What is really annoying about this is that I think there was a window last fall or early winter, which got knocked out partly by the long drawn-out fight over health care, but also coincided at the last best moment when health care finally passed with the very snowy and cold winter in the crucial mid-Atlantic states, as well as the fallout from the wildly exaggerated and ultimately phoney "climategate" non-scandal about the emails from East Anglia, which were proven to be no big deal at all. But we had senators with their children making snowmen and houses on the Capitol lawn while the conservative talk machine spewed on and on about the scandal, since dismissed as such. So, now that we are experiencing record heat, funny that we see none of these people saying anything. They are too busy trying to get BP off the hook for the spill and trying to link Obama to Hitler for his efforts to get a compensation fund for the victims of the spill. Controlling global warming has gone by the boards off into the sunset of other political impossibilities.

Wednesday, June 23, 2010

V.I. Arnol'd, RIP

This is a bit delayed, but WaPo only had the obit today. Anyway, on June 3, Vladimir Igorevich Arnol'd died of peritonitis in Paris at age 72. He was arguably the greatest living nonlinear dynamics mathematician and also the greatest still living to have come out of the old Soviet Union. A protegee of the late Andrei Kolmogorov, he finally solved the 13th of the Hilbert unresolved math problems from 1900. It involved the stability of nonlinear dynamical systems, including planetary motion. He wrote on catastrophe theory, never buying into either the excessive hype about it during its fad, while then avoiding the excessive dissing of it that came later.

He was the recipient of the Crafoord Prize, the Shaw Prize, and the Wolf Prize. He would have received the most prestigious of all math prizes, the Fields Medal, in 1974, but was forbidden by the Soviet government. He had signed letters protesting the suppression of political dissidents, although he was not one beyond signing these letters. He was a man of principle as well as of profound intellect.

Tuesday, June 22, 2010

Planet BP on the Gulf Oil Spill and Keynes on Digging Holes

Chapter 16 of the General Theory argued:

If — for whatever reason — the rate of interest cannot fall as fast as the marginal efficiency of capital would fall with a rate of accumulation corresponding to what the community would choose to save at a rate of interest equal to the marginal efficiency of capital in conditions of full employment, then even a diversion of the desire to hold wealth towards assets, which will in fact yield no economic fruits whatever, will increase economic well-being. In so far as millionaires find their satisfaction in building mighty mansions to contain their bodies when alive and pyramids to shelter them after death, or, repenting of their sins, erect cathedrals and endow monasteries or foreign missions, the day when abundance of capital will interfere with abundance of output may be postponed. “To dig holes in the ground,” paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services. It is not reasonable, however, that a sensible community should be content to remain dependent on such fortuitous and often wasteful mitigations when once we understand the influences upon which effective demand depends.

Benoit Faucon has some fun with Planet BP’s attempt to find the bright side of the Gulf Oil spill:

But in Planet BP — a BP online, in-house magazine — a “BP reporter” dispatched to Louisiana managed to paint an even rosier picture of the disaster. “There is no reason to hate BP,” one local seafood entrepreneur is quoted as saying, as the region relies on the oil industry for work. Indeed, the April 20 spill on the Deepwater Horizon is being reinvented in Planet BP as a strike of luck. “Much of the region’s [nonfishing boat] businesses — particularly the hotels — have been prospering because so many people have come here from BP and other oil emergency response teams,” another report says. Indeed, one tourist official in a local town makes it clear that “BP has always been a very great partner of ours here…We have always valued the business that BP sent us.”

OK – we are far below full employment but even Keynes recognized that employment creating activity with a positive marginal productivity were a better way to restore full employment than activities with either zero marginal productivity (digging holes) or ones with negative marginal productivity (polluting the Gulf of Mexico).

Cutting Retirement Benefits May Be a Foolish Way to Reduce Government Deficits

Dean Baker criticizes the Federal deficit hawks fixation on cutting Social Security benefits. Well done! The Federal deficit problem is more of a long-term issue while the states face short-term deficit problems given their typical restriction of annually balancing budgets. Mary Williams Walsh notes, however, that state governments are also proposing to reduce retirement benefits:

Many states are acknowledging this year that they have promised pensions they cannot afford and are cutting once-sacrosanct benefits, to appease taxpayers and attack budget deficits … But there is a catch: Nearly all of the cuts so far apply only to workers not yet hired. Though heralded as breakthrough reforms by state officials, the cuts phase in so slowly they are unlikely to save the weakest funds and keep them from running out of money. Some new rules may even hasten the demise of the funds they were meant to protect.

Ms. Walsh notes that Colorado has tried to cut benefits for current workers and those already retired but the state is being sued over this breach of promise.

Monday, June 21, 2010

Stimulating a Return to Imbalances

We aren’t going to see these stimuli, but even if we did, the status quo ante was and remains untenable. We’re reminded of this by Richard Alford, c/o Naked Capitalism. He writes:

Once one recognizes that the US is contending with structural as well as cyclical problems, then it is clear that a move to sustainable trend growth requires something other than the standard countercyclical stimulus. In order to achieve balanced sustainable growth the US will have to increase savings (relative to income and consumption), increase investment relative to income, and increase the production of tradable goods versus nontradable goods. However current US policy has consisted of efforts to stimulate private consumption (decrease savings), increase public dis-saving, subsidize consumption of nontradable goods (housing) all coupled with perfunctory calls for exports to double.

Which is why

the US does not face a simple choice between lower fiscal deficits and idle resources on the one hand, and temporarily higher deficits and trend growth with full employment on the other.

The first step toward enlightenment is to see that the accounting balances are everywhere and always binding. As long as the US has a substantial current account deficit, over time either fiscal deficits explode, private deficits explode or the economy crashes. In the short run, the main danger is an economic crash, so maintaining stimulus is essential, but in the longer run there is no solution without a structural shift.

The second step is to see that the interlocking constraints facing the US (and other deficit countries) are primarily driven by shortfalls in competitiveness, not national savings behavior. This follows from empirical examination of the channels through which the different variables affect one another. In particular, differences in interest rates due to savings–investment balances have little to no effect on trade balances, as I showed a few years back. So the structural solutions for the US have to focus on policies that demonstrably increase exports and reduce imports.

The third step is to inquire into why it is that the US has systematically adopted policies that have eroded its trade position over time. This opens the door to political economy. A very rough sketch of my view can be found here; I hope I have the chance to develop it further at some point. For now, it is enough to say that the economic crisis has not yet brought about the political shifts we would need to see in order for a different, more sustainable path to open up.

Sunday, June 20, 2010

Fannie and Freddie: The Times Misses the Point

You would think after all the ink that has been spilled over the mortgage meltdown that the Times would get the basic story right. But no. This morning’s piece on the “Cost of Seizing Fannie and Freddie” still peddles the theme of “lenders run amok”. These agencies, which always had implicit government backing, operated in the secondary market. They didn’t make the loans, they bought the loans. By retaking them and continuing to operate them at a loss (the article cites a CBO estimate that the cumulative cost may approach $400B), while sparing holders of agency bonds any losses themselves, the government is using them as a principal vehicle for its bailout of the financial sector.

The word bailout is important here. Readers need to know where and how their tax dollars are being used to protect wealth-holders against reductions in the value of their assets. It is interesting that the federal government spends $80 a month per house to cut grass in a subdivision outside of Phoenix (xeriscaping, anyone?), but really, this is third order.

Saturday, June 19, 2010

Thoughts from 1975 Provoked by Veblen in 1908-09

I am sorting and packing at the moment, and I came across an essay I wrote as an undergraduate at the University of Wisconsin in 1975. (I had returned after several years of sometimes blissful hippiedom.) It’s in response to a pair of articles written by Veblen in the early years of the twentieth century denouncing marginalist economics. Here’s an excerpt:

“Certainly what is not justified is the movement from a descriptive to a normative role for price. Veblen argues persuasively that contracts are situated, that prices are sensible only as adjustments to situations, and that the forces that constitute the situation bias the results. By setting these adjustments up on a pedestal and calling it [sic] “optimality”, economists may unwittingly serve to buttress the constraints operating to define the original situation. Also, as Veblen never tired of pointing out, in no society are human beings only individuals; no theory that fails to accord a prominent place to collective and undifferentiated activity can claim to tell the whole story. In my opinion, this is particularly true of theories of demand.

“...Veblen’s accusation that neoclassical economics is reductionist has much going for it. Again, he was hampered in his effort to develop this criticism by his lack of mathematical training. Modern economics—and modern social science in general—has much to learn from developments in other fields that demonstrate that there is more to quantitative analysis than mere size and rate of growth. Concepts of pattern and sequencing in ecology, molecular biology and information theory, for example, indicate that many matters of “quality” can be understood in terms of quantity. And beyond the ability of mathematical methods to describe, qualitative changes still take place that any science must grapple with as best it can. A specific charge could be made, moreover, that marginal theory relies too heavily on a notion of incrementalism in descriptive methodology; particularly in a social science which concerns itself with people who look ahead and make decisions on the basis of patterned perceptions, the incremental bias may miss as much as it captures.

“The first casualty of a reductionist methodology is an adequate conception of change. This is because, while at any given moment things can be isolated for separate, quantitative analysis, they change as part of an interconnected whole which can only be perceived in terms of what these various things do with and to one another....In economics this becomes a special problem since part of this whole is not human economic behavior, but also the material world, whose “utilities” are regulated by very different sets of laws.”

I’m surprised by how much this essay, written for my first ever economics course, sets the tone for nearly all my thinking since then. I hope I’m more precise now, but in some ways I’m still right there.

Incidentally, my professor’s response at the end was: “Your paper is abstract and difficult to respond to.”

Friday, June 18, 2010

Krugman: Right Result, Wrong Reason

PK continues to fight the good fight for Keynesian common sense in the face of resurgent austerity. The austerity front, which brings together Tea Partiers and Tories, blue dogs and Bundesministerien, wants to snuff out last year’s stimulus and force the North Atlantic economy to sink or swim. It’s chances of sinking are frighteningly large. Krugman says we should keep applying fiscal CPR until economic growth is in full recovery and unemployment has dropped—and until the zero lower bound on interest rates no longer binds, and normal monetary policy becomes an option.

Yes but.

There is an enormous hole in Krugman’s argument. A chief worry of the austeritarians is that their country—Britain, Germany, even the US—will be the new Greece, abandoned by creditors and teetering on default. These fiscal deficits are unsustainable, they say, and debt-to-GDP ratios are drifting up into the danger zone. The risk is that financial markets will lose confidence in governments with so much red ink, leading to a spike in interest rates, the dumping of bonds, and national humiliation at best, meltdown at worst. Why wait for this moment, the argument goes, when you can prevent it by bringing fiscal deficits down now?

Krugman’s response is that the creditor flight threat is imaginary. Speaking of the new budget cuts and tax increases in Germany, he writes, “Nor can they claim that markets are demanding austerity. On the contrary, the German government remains able to borrow at rock-bottom interest rates.” This has also been his pitch for the US, which also enjoys lowest-ever rates on its long-term bonds. The markets aren’t worried, so why should we be?

Does anyone else notice that this argument rests on the assumption that low interest rates today guarantee low rates tomorrow? Yes, the US, Germany and England can borrow long-term at firesale prices, but old debt keeps coming up for refinancing, and if market sentiment changes, the effects will be felt immediately. Do financial markets ever swing radically from favoring one asset or currency to panic buying of its substitute? Is there unpredictable herd behavior among investors? Do we have to ask?

The issue is not what markets “think” today, but how exposed we are to their gyrations in the coming months and years. This is the strongest argument of the austeritarians, and Krugman can’t see it. It is entirely possible that we could be in for a period of cascading panics, with money surging to one apparent safe haven, and then another, and then somewhere else, wrecking whole economies in the process. In other words, we have to worry not only about 1937, when premature austerity put an end to economic recovery in the US, but also 1931, when the failure of Vienna’s Kreditanstalt led to a period of devastating currency runs. Now, as then, there is no sufficient international lender of last resort, and any defense would have to be improvised on the fly. Back then, defense failed utterly.

The solution, however, is not fiscal tightening; Krugman is right about that. The starting point for any intelligent analysis has to be the basic accounting identity, that the sum of private sector deficits plus fiscal deficits equals the current account balance. Surplus countries that choose austerity are choosing some combination of decreasing private sector savings and increasing trade surpluses, most likely through declines in national income. They are making life even more difficult for their counterparties. Deficit countries, like ours truly, are in an even worse situation. Fiscal retrenchment means even greater private borrowing, with the only difference, in the short to medium run, coming from the effect of falling incomes on imports. We got into this situation because the private sector, especially financial institutions, were over-leveraged and badly invested; with deleveraging the debt burden was shifted onto governments that stepped into the breach. To withdraw the fiscal lifeline before private wealth-holders are prepared to lend would be catastrophic. We would have unavoidable crises, first in the deficit countries, then in the surplus regions exposed to them.

This is Scylla and Charybdis territory, to be sure. We got here by a long sequence of institutional failures and policy errors, and it will not be easy getting out. I remain convinced that the bailouts of 2008 were deeply mistaken, and that we are now paying the price. (At the time I instead favored the use of public money to create “good, new” financial institutions.) Moreover, no action was taken to address global imbalances, and without this it is difficult to see how growth can resume: the US will no longer borrow the vast sums needed to sustain global demand. (Recent labor action in China is a sign that bottom-up rebalancing may be gathering force—I hope so.) The Eurozone crisis is itself a dilemma of rebalancing on a regional scale.

In short, there is no obvious way out. Austerity is a sure-fire loser, but the risk of distended fiscal deficits in a low- or no-growth world is real. Time is running out to deal with the underlying causes.

Letter to a German Friend

I just had an insight, and maybe you can tell me if I am right or wrong. It's about Germany mainly, although other countries might qualify, and it comes from reading German academic and political commentary over the past few weeks.

It is common for some people (i.e. most people in your world) to think about the nation as if it were a firm. A firm provides income and security for its workforce by succeeding in competition. It must regularly increase its productivity, innovate and keep abreast of changes in the market. It must keep its costs under control. If costs rise too rapidly, and there is a risk of being priced out of the market, then strong measures may need to be taken. German unions as well as employers and everyone else recognize that competitive reality has to be taken into account.

The problem is that there is an enormous difference between the perspective of a firm and that of a society. A firm does not, and cannot, worry about the others who lose out in competition. If you gain market share and others are pushed aside, this means you are doing something right. You might be concerned for the workers and other stakeholders who are losing, but whatever you do for them, it would not include harming your own competitiveness.

Not so for a country. A country can organize itself to have a trade surplus through enhancing human resources, more productive allocation of capital and keeping wages and other costs down. Such a surplus, however, is necessarily matched by a deficit in trading partners. Deficit countries cannot shrink or dissolve as deficit companies can. Nor can they continue very long as deficit countries, unless they are the US and they export their financial instability to everyone else. But Greece, Spain, Ireland et al. cannot go on with these deficits. There is no solution for the deficit countries that does not imply a reduction in surplus for the surplus countries.

In other words, the "game" of international competition between countries, unlike between firms, cannot really be won. Any victory is only temporary, until its financial consequences become overwhelming. This is why no country ought to seek to outcompete the others. Raising productivity, innovating, and the rest is very good, of course, and should not be discouraged. But if a country is very successful at these things, it has a responsibility to the system as a whole to allow its costs to rise to the point that other countries are not crushed.

Here is a different way to say the same thing, from the other side of the ledger. Germans want to save. Good! But if they save quite a lot, and if their government borrows relatively little, then the only thing they can do with these savings is buy foreign debt. This means that the value of German accounts depends on the financial health of these foreign borrowers. But there we are again: we are seeing what happens to the chronic borrowers when their credit runs out.

In the end, what the surplus countries have to see is nothing more than the laws of accounting, that someone's surplus and savings is necessarily someone else's deficit. Firms do not have to worry about this, but societies do.

But I will agree to this: it is also obvious that there can be no solidarity across the Eurozone unless retirement ages are harmonized!

UPDATE: In a followup conversation, we agreed that the best course for a rich but thrifty country like Germany is to decrease its work hours still further. (I also think that a rich surplus country should consider making large transfers to very poor people in other regions. Just give some of it away. Why not?)

Thursday, June 17, 2010

How is Turning Over Less Than Half of What You Owe a Shakedown?

BP and the Obama Administration came to an agreement that BP would put $20 billion in an escrow account as partial payment for the damages this Gulf oil spill caused – and certain Republicans have screamed “shakedown”. But given the following:

BP and the Republicans have reluctantly agreed to the proposition that BP should pay for all of the damages.

Initial estimates of the damages are around $40 billion.

These estimates were based on evaluation of the amount of oil leaking into the Gulf that have been subsequently shown to be far below reasonable estimates of the amount of oil leaking into the Gulf.

If we take the decline in BP equity value since the oil spill began as the market’s best guess of how much BP will ultimately pay, then the market’s price tag is closer to $100 billion.

Let’s say that you and I have a disagreement as to how much I owe you with you claiming the amount is $100 and me claiming the amount is only $40. If I choose to hand you a twenty dollar bill today with the agreement that we’d settle on the rest tomorrow, could I then scream to the police that you shook me down? Probably not – but that is what certain Republicans are effectively claiming.

Wednesday, June 16, 2010

Richard Epstein Makes Sense

At least before he tears into environmentalists.

Epstein, Richard A. 2010. "BP Doesn't Deserve a Liability Cap: The best way to deter future spills is to expose drillers to the full costs of any mistake and not let any company without proper insurance near an oil derrick." Wall Street Journal (16 June).

"What's needed going forward is a comprehensive legal strategy that addresses the risks though a combination of regulation before the fact and tort liability (and criminal sanctions where appropriate) afterwards. Tort remedies are essential to protect people (and their property) who do not have contractual relations with defendants from harms such as air and water pollution. The legal system should never allow self-interested parties to keep for themselves all the gains from dangerous activities that unilaterally impose losses on others -- which is why the most devout defender of laissez-faire must insist, not just concede, that tough medicine is needed in these cases. The fundamental question here is one of technique: What mix of before and after sanctions will do the job at the lowest cost?"

"The first element in the mix is a no-nonsense liability system that fastens full responsibility on the parties who run dangerous operations, no excuses allowed. Accordingly, we have to be especially wary of statutory caps on tort damages."
"A tough liability system does more than provide compensation for serious harms after the fact. It also sorts out the wheat from the chaff -- so that in this case companies with weak safety profiles don't get within a mile of an oil derrick. Solid insurance underwriting is likely to do a better job in pricing risk than any program of direct government oversight. Only strong players, highly incentivized and fully bonded, need apply for a permit to operate. This logic also suggests that the Price Anderson Act's $375 million cap on damages for each responsible party to cover incidents at a nuclear power facilities should be rethought."

Craufurd Goodwin Steps Down At HOPE

The Society for the History of Economics has just annouced that Kevin Hoover will become the second editor of the History of Politial Economy (HOPE), generally accepted to be the leading journal in the history of economic thought field. He is replacing Craufurd Goodwin, who is retiring after founding the journal 40 years ago at Duke, making him the longest lasting editor of an economics journal out there. He made the journal into the leading journal that it is today, and deserves a respectful thanks from anybody who takes this field seriously. Unfortunately, it is a field that seems to be receding each year further and further from being studied by most economists, although many mistakes of thought and policy might have been avoided if more were better educated in the subject, IMHO. Anyways, thanks, Craufurd, for one of the best performances as an economics editor ever.

New Estimates of the Gulf Oil Spill and the BP Stock Price

CNN reported last night:

Government scientists Tuesday increased the estimate of oil flowing into the Gulf of Mexico to between 35,000 and 60,000 barrels per day, up to 50 percent more than previously estimated. That translates into 1.5 million gallons to 2.5 million gallons per day. The government's previous estimate, issued last week, was 20,000 to 40,000 barrels per day.

If BP is really going to take 100% of the financial responsibility from the damages causes by this oil spill, one would think that such upward revisions would be bad news for its stock price but that price seems to have gone up today. I wonder how much this story has to do with our little puzzle here:

BP will set aside $20 billion to pay the victims of the massive oil spill in the Gulf, senior administration officials said Wednesday, a move made under pressure by the White House as the company copes with causing the worst environmental disaster in U.S. history.

Even the conservative estimates of the damages from this oil spill put the sum at an estimated figure double this $20 billion fund and those estimates were made before the news about the extent of the oil being leaked. I just hope this deal with the government is not a signal that BP will be able to shift some of the burden onto taxpayers.

Update: Haley Barbour does not like this $20 billion escrow account for the following “reason”:

So it bothers me to talk about causing an escrow to be made, which will -- which makes it less likely that they'll make the income that they need to pay us.

So dedicating $20 billion of BP income to pay for the damages is going to mean we will have less funds to pay for these damages? Leave it to Greta van Susteren of Faux News to not question Governor Barbour’s “logic” here!

Tuesday, June 15, 2010

Demanding Democracy: American Radicals in Search of a New Politics

I have just spent an interesting day immersed in this new book by Marc Stears. I was looking for a recent work that combines political history and democratic theory with a radical bent, and I found it. Even better, Stears has insightful things to say about the “paradox of politics”, that the political forms that we would like to live under and the political life we would like to lead in an ideal world are inappropriate to the unequal world we live in today. This is always a central dilemma of radical movements, and it’s helpful to have it illuminated. From a historical vantage point, I like the linkages he draws between the radical Progressives (like Dewey), labor movement radicals of the 1930s, and civil rights and new left activists of the ‘60s.

I have some qualms as well. One criticism I would not make is that Stears was too selective in his choice of movements and political visions. It is true that he leaves out a lot: Marxists of almost every stripe, anarchists, and the fascinating parade of individuals and groupuscules which, even if they had little impact, often had ideas worth considering. If you are an afficionado of twentieth century American radicalism, you will probably find that some of your favorites are missing. But one can only do so much. Stears has arguably centered our attention on a core, continuous strand in American political thought and action. The book benefits from this clarity.

My real criticisms are these:

1. The most visible error in this work is to treat the 1950s consensus theorists as bearers of the radical democratic tradition. Some were reformers, but few members of the flock Stears identifies deserve to be called radicals; nor, more to the point, did most see themselves this way. In the end this does not undermine the book’s arguments, but it feels very wrong.

2. The most important lacuna is the linkage between movements to achieve greater democracy and those in pursuit of narrower ends. One aspect of Westbrook’s extraordinary biography of Dewey is its ability (through remarkable scholarship) to place the man in the context of his (long) times—all the crusades, from education reform to labor struggles to new forms of journalism and all the rest. This makes it possible for us to appreciate the substantive goals that lie behind the abstract formulations. Except for the most general references to the conditions of industrial workers during the ‘30s and segregation in the ‘60s, Stears gives us no indication of the issues around which the radicals were organizing, nor their relationship to those immersed in single-issue causes (immigrant rights, environment, etc.) whose struggles overlapped and gave meaning to struggles for fundamental political change. And, by the way, the women’s movement, both for suffrage and during the revitalization of the ‘60s and ‘70s is missing altogether—which means that feminist political theory is largely absent as well. Not good, brother.

3. The subtler problem is the framing of democratic theory as an “American” issue. This enables Stears to foreground the references that Progressives and later consensus theorists made to so-called American political values. But this is to give acquiescence to a myth, for the problems of democracy in America have never been insular. Every significant thinker/reformer in American history who has pondered democracy is closely tied, knowingly or otherwise, to ideas and experiences from abroad. The civil disobedience tradition has its origin in German idealism (via Thoreau), and nonviolent direct action was undergoing simultaneous experimentation in much of the world at the same time it was being tested in the US. Progressive reformers drunk heavily from European examples, as Dan Rodgers showed in Atlantic Crossings: Social Politics in a Progressive Age. (Everyone should read this book: the history of social policy becomes pure poetry.) The new left was a truly global phenomenon, which most of us in the movement knew in a general way, although we were constantly surprised by how global it turned out to be.

One consequence of the national frame is that Stears tries to shoehorn his analysis of radical democracy into a parochial debate between two camps in current US political science, the “deliberative” and the “realist” democrats. In one sense this is a distraction; in another, it obscures the much stronger connections between radical democratic theory and practice in the US, on the one hand, and the global exploration of radical democracy (particularly in the wake of 1989) on the other. That would have been a better frame entirely.

But I liked this book. I enjoyed reading it, and it helped me see the political issues I first struggled with in the ‘60s in a broader historical context. I think it could do some useful work in the classroom.

Robert Leonard

Robert Leonard's latest working paper, part of his magisterial project on the history of game theory, is "The Collapse of Interwar Vienna: Oskar Morgenstern's Community, 1925-1950." It is, as is everything else of his I have read, brilliant. What Toulmin and Shorske did for culture and philosophy in doomed interwar Vienna, Leonard does for the economic and mathematical community. If you have any interest in the history of economic thought, you must read him!

One focus of the paper is the growing rift between Morgenstern and Mises during the 30's. Morgenstern started out as a self-identified Austrian but pulled away. A big influence here was Karl Menger, the mathematician, not to be confused with his father, Carl Menger, the economist, founder of the Austrian school and indeed one of the troika usually credited with the Marginal Revolution. Anyway, Karl with a "K" thought Mises was presenting his normative libertarianism as scientific description and Morgenstern increasingly agreed. (Menger thought Neurath was doing the same thing on the Left.)

Another fascinating figure in the story is Abraham Wald, the general equilibrium pioneer to be, for whom Morgenstern found money in his capacity as head of the Institute for Business Cycle Research, funded by the Rockefeller Foundation. Here again it was Menger who saw Wald's genius and clued Morgenstern in. Wald was from Romania, Jewish, and made it out of Vienna after the Anschluss to Colorado to work for the Cowles Commission. Eight of his immediate family members were victims of the Nazis in Rumania.

I can't do Leonard justice here, but read him by all means!

Monday, June 14, 2010

Has BP Been Too Careless Due To Its Imperial Past?

There has been much speculation about why British Petroleum has been reportedly slopppier and more careless about safety and the environment than other oil companies. This may not be it, but the company has a past that is probably more tied up with classic imperialism than any other, or at least as much as the top ones. In that regard, its only rivals are probably the old Standard Oil, with the tradition most carried on after its breakup by New Jersey Standard, or Esso, which would become Exxon (and then merge with the old New York Standard to become Exxon Mobil), and Royal Dutch Shell, with its British-Dutch lineage, originating out of a company that sold shells out of the Dutch East Indies.

BP's origin is in the later 19th century D'Arcy oil concession by Persia to Britain, and much of the troubled history of Persia/Iran and the West has focused on BP, which was originally called the Anglo-Persian Oil Company, and then the Anglo-Iranian Oil Company after 1935 when Reza Shah changed the name of the country to go along with his budding alliance with Aryan master race fan, Hitler.

In the early 1950s, the Iranians under Mossadegh nationalized the company, which had been owned by the British government since 1917, when First Lord of the Admiralty, Winston Churchill, had it nationalized to guarantee a supply of oil for the British navy during WW I. The Brits had to bring in the US CIA to help overthrow Mossadegh and restore the Shah, along with BP activities in the country, although the price was that some US oil minors got in on the action there.

Perhaps an appropriate symbol of BP's traditional position as one of the first among the leading oil majors is the meeting that took place at Achnacarry Castle in Scotland in 1928. It was between the CEOs of BP (then APOC), New Jersey Standard (now Exxon Mobil), and Royal Dutch Shell. They made the Red Line Agreement and the As-Is Agreement, with the Red Line Agreement involving drawing red lines on a world map to deliineate which parts of the world would go to which companies. BP got Iran. Royal Dutch Shell got Kuwait. Both of them got into Iraq. Jersey Standard got Saudi Arabia, and even today, ARAMCO is dominated by Exxon Mobil.

The ghost of the Red line Agreement hovers over the world even today, even as their effort to restrict prodcution and prop up the price of oil collapsed when the great Texas gusher came in during 1930 at the beginning of the Great Depression, collapsing the price to about a tenth of what it had been. But, BP and the others would live to see it rise again, along with their fortunes, through thick and through thin, although BP may have overdone it this time with its hubris.

Afghanistan: Rich in Minerals?

There is a mystery to be unraveled in today’s New York Times story that declares that Afghanistan stands on the cusp of untold mineral wealth, almost a trillion dollars in undeveloped deposits. The mystery has nothing to do with the minerals themselves or their economic implications. Readers who think this portends a rosy future for the ravaged country should pinch themselves and remember that no nation—repeat, no nation—has ever become rich from mining. Mine owners, yes, of course, but the sad lands that sit atop mineral wealth, no.

The real question is, why are we reading this? Let’s assume that James Risen, the byline author and a journalist of considerable talents, is in this case a faithful conduit for an Obama administration news feed. What we might ask is, what purpose lies behind this disclosure? Those closest to the scene may already know the answer, but let me speculate:

1. The war is going very badly, and Washington wants to put a more positive spin on things. Hang in there, Afghanistan will become a prosperous, self-reliant nation. There is a light at the end of this tunnel. Or: we can’t let all these riches fall into the hands of the Taliban.

2. The Karzai regime is cutting deals with Chinese or other mineral-seekers that the US wants to squelch. By shining a light on this sector, some elements (rogue? official?) within the US bureaucracy are trying to mobilize the full resources of the government to bring the Afghans in line.

3. The real audience for the Times piece is not in the US but Afghanistan and Pakistan. Elites there are advised: Stick with the Americans, even though your people despise us. We know where the loot is buried. We can make you rich.

What do you think?

Sunday, June 13, 2010

What Should the Price of Gasoline Be?

In today's WaPo Business section, in "Think gas is too pricey? Think again," Ezra Klein reports on a recent study by Ian Perry of Resources for the Future that attempts to estimate the cost of all the externalities arising from the use of gasoline in vehicular transportation. At the time of the report, the average price of gas in the US was $2.72 per gallon, but after adding in (in order of estimated costs), 52 cents for traffic congestion, 41 cents for auto accidents, 30 cents for energy security, 20 cents for climate change, 12 cents for local pollution, and 10 cents for oil dependence, this brings a supposedly more efficient prices of $4.37 per gallon. It is unclear if that 12 cents for local pollution was estimated before or after the BP oil spill in the Gulf of Mexico happened.

The Case Against Home Ownership

I am glad to see Elizabeth Warren come out, sort of, in a way, against the fixation on home ownership. When I give talks about the economic crisis to community organizations, I get, at best, a blank stare when I launch into my diatribe on why most working class people should not be buying their own homes. Warren is worried about the asset market implications, but I am moved, at least initially, by Finance for Dummies. Rule number one: diversify. Don’t put all your savings in one basket. Especially not your home, since if something terrible happens to it, it will also likely put a dent in your living expenses. Buy index funds or dairy futures in Switzerland or anything, but don’t put it all into your home.

Nocera’s commentary is about how the government can reconfigure its interest subsidies, but just as important, if not more so, is strengthening the tenure rights of renters. In areas of Europe where renting is more popular and enjoys higher social status, it is also more protected than it is here. The rules governing rental agreements are local, and we are not likely to federalize them very soon, but imagine a scenario like this: Washington announces that it plans to withdraw subsidies for homeownership, but in doing so it wants to provide a better rental alternative. So, in coordination with academic specialists and various stakeholders, the feds hammer out a new model for local ordinances, perhaps even new language for rental agreements. The withdrawal of subsidies is tied to the uptake of the new rights for renters.

A side benefit is that mortgage balances level off and the nation’s finances become less ragged.

Worried that average folks won’t save enough if they don’t have that monthly mortgage payment demanding their attention? Other countries have used postal savings accounts for this purpose. Postal is too 20th century. How about getting families to play a multi-player internet game, something medieval with armor and magic potions, where you buy kingdoms with game points that you earn by depositing some money in a savings account? As long as our virtual warriors are not borrowing from the moneylenders (with players’ real money), we’re OK.

Saturday, June 12, 2010

A Waning of Controversy among Economists

Yves Smith's terrific ECONned, pointed to an ancient 1961 article from Time. The article suggests "a waning of controversy among economists," which meant that the article reflected the milquetoast economics of the leading democratic economists and the less rabid attitude of the Republicans. Galbraith merited a brief mention in which the author noted that most economists reject his view.

Anon. 1961. "The Economy: The Pragmatic Professor." Time (3 March).,8816,897654,00.html

"Walter Heller is usually tagged as a "liberal," but he departs so often from what used to be liberal cliches that the identity tag is a bit blurred. A more descriptive label, one that he applies to himself, is "pragmatist." That is the vogue word among economists today, the term that most of them use to label themselves and one another. When economists call themselves pragmatists, they mean that they are the opposite of dogmatists, that they are wary of broad theories, that they lean to the cut-and-try approach to public problems, and that they believe it is possible to improve the functioning of the economy by tinkering with it."

Heller said, "My awareness of the seriousness of the situation is balanced by a conviction that we can do something about it -- and without interference in the basic freedom of our capitalist system."

"By broadening the areas of fact, the professionalization has narrowed the areas of theory, of disagreement, and blurred the old boundaries between liberals and conservatives."

The article emphasizes:

"One result has been a waning of controversy among economists. Today, says Kenneth Arrow, "you have to find a real crackpot to get an economist who doesn't accept the principle of Government intervention in the business cycle"."

"A decade ago economists identifiable as liberals were automatically prolabor, rejected the idea that wage increases could be economically harmful. Today Heller, like most other economists, holds that "excessively generous wage bargains'' between unions and management can lead to "cost-push" price upcreep."

Romer’s Charter Cities: A Really Witless Approach to Development

One of the great pleasures historians have is going back through the dead-end schemes of long-ago generations, the ideas, hailed as brilliant at the time, that are perfect fodder for can-you-believe-this curiosities today. You know, strange dietary regimes, inventions that run up against the laws of physics, wacko monetary systems. Smart people dreamed this stuff up, but now all we can do is shake our heads and smile. Surely future historians will find similar boneheadedness today.

Surely, and they can start with this utterly bizarre but characteristic puff piece about Paul Romer and his Charter City fantasy in the latest issue of The Atlantic. If this account is correct, it is all quite simple: Economic development depends on having the right rules in place for the economy. The right rules are privatization, free markets, and the protection of property rights. Investors have to believe these rules will be permanent before they are willing to invest. Therefore the formula for successful development is for governments in poor countries to turn over a portion of their territory to be run according to free market rules under the control of a willing rich country. A return to colonialism? Absolutely, but now it would be voluntary on both ends. Take control of some of our cities, the poor country governments would say, and force us to follow the true path to riches. Romer has set up a little enterprise to market this idea, and he says he has some nibbles.

The article in the Atlantic is pure hagiography, so it’s up to the rest of us to ask a few hard questions. Like: why are you so sure that there is only one correct set of rules, and it’s the one with a University of Chicago economics department logo? Safeguards for property rights in China? What planet are you on? And why would you suppose that the western powers that brutalized and robbed their colonies in olden days would be so virtuous today? In other words, do questions of venality and capture not apply to our governments, only theirs?

One could go on. An example crops up repeatedly in the article: kids in Guinea (they don’t say which one, not that the author seems to care) have cell phones but no electricity at home. The reason given is price subsidies, which reduce incentives to extend electricity to more homes. But how do we know this? Did the US, with a history that includes the Rural Electrification Administration and the Tennessee Valley Authority, and with many municipal utilities today, create its system through market incentives? Do countries with rapidly growing electrical grids, like China, all follow this formula today?

Here is something else: if foreigners are running your city, this means you have no political control over them—no democratic rights. Loss of democracy is a bad thing, right? Not for Romer. He points out that people who migrate in search of economic opportunity are voluntarily foregoing democratic rights in favor of income. He want to make his charter cities magnets of migration too. If migrants put more value on livelihood than the right to vote, that’s their choice, and it is their “preference” for democracy rather than yours that should count.

Actually, why go through all the bother and expense of migration? Why not just pay people to give their vote to someone else? There’s a history to that, too, in rich countries like the US. If democracy is essentially a private consumption good, valued according to willingness to pay, why not let the market rule?

Behind it all, and apparently beyond the awareness of either Romer or his chronicler, is the ghost of Friedrich Hayek. The charter cities idea is warmed-over constitution of liberty à la Hayek. According to this view, a liberal, free market economy is the very embodiment of liberty, but it is under threat from the short-sighted passions of planners, populists and other usurpers. Thus societies need to be placed under a constitutional constraint that protects economic liberalism against the threat of majority rule. Hayek, of course, did not see the need for foreigners to impose this constraint. It could be enforced equally well by elements within one’s own country. He preferred a more legitimate constitutional process, but if the country happened to be Chile, the element could be Pinochet.

UPDATE: I woke up this morning thinking about the Northern Marianas. Why settle for charter cities when you can charter whole islands?

Friday, June 11, 2010

John Boehner and the Laugher Curve

John Boehner has dusted off some Laugher Curve nonsense:

“You equate the idea of lowering marginal tax rates with less revenue for the federal government,” Boehner cautioned. “We've seen over the last 30 years that lower marginal tax rates have led to a growing economy, more employment, and more people paying taxes. And if you look at the revenue growth over those 30 years, you've got a prime example of what we've been talking about.”

Michael Ettlinger and John Irons debunked this nonsense about a year and a half ago. I’d like to simply pick up on this statement:

Economic growth as measured by real U.S. gross domestic product was stronger following the tax increases of 1993 than in the two supply-side eras. Over the seven-year periods after each legislative action, average annual growth was 3.9 percent following 1993, 3.5 percent following 1981, and 2.5 percent following 2001.

Part of the Reagan 3.5% per year average increase had to do with the fact that he inherited an economy below full employment. If you take out the Keynesian effect of returning to full employment – which was mainly from a reversal of tight Federal Reserve policy – average long-term growth during the Reagan years was closer to 3%. For the period from the end of World War II to around 1980 (just before the Reagan tax shift) average growth over this extended period was 3.5% per year. Why? Well in part because national savings as a share of income was higher before the 1981 tax cut than afterwards.

Maybe a reporter should ask the Congressman – how does fiscal irresponsibility and a lower national savings rate lead to more long-term growth rather than less?

Estimated Damages from BP Spill

A couple of follow ups to this. My $23 billion number was part of what Credit Suisse had been estimated but that also included $14 billion in estimated claims on top of the $23 billion in estimated clean-up costs. And this estimate is likely now outdated:

The new estimate is 25,000 to 30,000 barrels of oil a day. That range, still preliminary, is far above the previous estimate of 12,000 to 19,000 barrels a day.

With the estimated damages growing ever higher, this is disturbing:

Administration officials suggested that they had no immediate plans to directly block BP from paying the dividend, even as the White House and its allies made clear that they would pressure the company to ensure that it made paying spill-related claims its top financial priority.

If the debt of BP is now reflecting junk bond status, the government as a potential creditor needs to step in unless it is willing to do what Congressman Boehner and Tom Donohue (Chamber of Commerce) were recommending – have the taxpayers foot part of the bill for this mess.

On a related note - Mark Thoma offers some insights into the debate over regulation especially under a system of rules where companies such as BP might be shielded from much of the downside risks its activities create.

Update: BP stock price has gone up in the two days since the release of the news that the estimated amount of oil being leaked into the Gulf is much higher. So what other news would have offset what one would think to be really bad news? Have the chances that BP can keep its share of the costs from this disaster low gone up for some reason?

Thursday, June 10, 2010

BP Share Price and the Gulf Oil Spill

Much is being made of the decline in BP’s stock price, which has lowered its market equity from around $200 billion before the Gulf Oil disaster to around $100 billion. Some pundits have wondered how the market value of its equity can be this low given that the book value of its assets is around $235 billion while its stated liabilities are around $135 billion. Of course, the book value of either can understate the true market value. The BP balance sheet implicitly assigns a zero book value for the contingent liabilities emanating from this Gulf Oil disaster. One pundit today claims that the maximum estimated amount for what BP will be held liable for is $23 billion. Given all the underestimates of how much oil has been dumped into the Gulf of Mexico, one has to wonder.

Then again – I’m sure the BP attorneys are working hard to make sure they pay only a fraction of the true damage. Paul Krugman had an interesting point:

the libertarian alternative to regulation — just use tort law to make people pay for the damage they cause — doesn’t work in practice, because when push comes to shove politicians will shield the rich and powerful from paying the real cost ... Well, here’s the thing: regulation demonstrably does work where tort law doesn’t. Consider the environmental issue: in reality, the perpetrators of oil spills never pay most of the cost

While the “drill baby drill” proponents of offshore drilling used to tell us that we had the technology to keep oil spills from happening or once they did happen from becoming environmental nightmares - as we have recently learned, technology has not advanced that much. If oil companies are shielded from paying more than pennies on the dollar for such potential problems, it is no wonder they under-invest in this technology. The stock market seems to be signaling that BP shareholders may indeed pay much more than pennies on the dollar. If that does happen, bravo!

Update: John Boehner voices a very different view than mine:

In response to a question from TPMDC, House Minority Leader John Boehner said he believes taxpayers should help pick up the tab for the clean up. "I think the people responsible in the oil spill--BP and the federal government--should take full responsibility for what's happening there," Boehner said at his weekly press conference this morning. Boehner's statement followed comments last Friday by US Chamber of Commerce CEO Tom Donohue who said he opposes efforts to stick BP, a member of the Chamber, with the bill. "It is generally not the practice of this country to change the laws after the game," he said. "Everybody is going to contribute to this clean up. We are all going to have to do it. We are going to have to get the money from the government and from the companies and we will figure out a way to do that." So today I asked Boehner, "Do you agree with Tom Donohue of the Chamber that the government and taxpayers should pitch in to clean up the oil spill?" The shorter answer is yes.

This sounds like the Congressman wants us to subsidize negative externalities.

Tuesday, June 8, 2010

Bolivian Lithium Future

Report on Bolivia's Lithium with maps from my student & basketball friend.

Fred Barnes Must Want a 2011 Recession

Fred Barnes asserts that President Obama is really hoping for a Republican win in the 2010 elections:

If Mr. Obama wants to avert a fiscal crisis and win re-election in 2012, he needs House Speaker Nancy Pelosi to be removed from her powerful post. A GOP takeover may be the only way. Given the deficit-and-debt mess that Mr. Obama has on his hands, a Republican House would be a godsend. A Republican Senate would help, too. A Republican majority, should it materialize, could be counted on to pass significant cuts in domestic spending next year—cuts that Mrs. Pelosi and her allies in the House Democratic hierarchy would never countenance.

Well – we know that a Republican majority would never agree to tax increases. Steve Benen, however, reminds us that having both a Republican White House and Republican majorities in both houses of Congress wasn’t exactly the recipe for fiscal responsibility just a few years ago. But let’s suppose we did get massive reductions in domestic Federal spending. Maybe we should just turn the microphone over to Brad DeLong to explain why “we need bigger deficits” now.

Monday, June 7, 2010

Coming Soon: The Invisible Handcuffs: How Market Tyranny Stifles the Economy by Stunting Workers.

I am happy to report that Monthly Review has announced that the Invisible Handcuffs will appear next January. I am going over Michael Yates excellent copyedits now. Here is the announcement.

Sunday, June 6, 2010

Brief Notes from China

We are getting ready to leave Shanghai. The timing of the trip was fascinating because China seems to be ready to move to a new stage of development.

For example, just today I read that the government is instituting a 5% energy tax in the remote Xinjiang province. The response to the Honda strike and the string of suicides at the Foxconn factory were critical of management. Of course, the ownership of these plants was not Chinese; even so, the China Daily has pushing the line that it’s time to leave the low-wage economy behind. China is also beginning to take more control over the strategic minerals, of which it has large share of the world’s production.

The taxes levied on real estate knocked the Shanghai stock market down quite a bit. The papers have also been taking a critical attitude towards the wanton demolition of neighborhoods to make way for expensive commercial projects.

All of these moves are consistent with intelligent social democratic principles, but I have difficulty in seeing socialism here. At the same time, virtually everybody we encountered treated the Chinese economy and socialist.

I tried to get a feel for the real estate bubble. Real estate construction in Shanghai seems to have calmed down a bit since I was here a few months ago, but the rate of construction Suzhou and Hangzhou was phenomenal.

Manufacturing Discontent

The World Association for Political Economy gave 8 awards for outstanding achievement in political economy in the 21st century. My book, Manufacturing Discontent, received one of them. Here is the brief note, which I wrote for the occasion:

Manufacturing Discontent is a study of social relations, not Marx’s social relations of production, but the social relations — real or imagined — of the people who live and work under the yoke of capitalism. In this sense, the book is meant as a modest supplement to Kapital, which was a deep analysis of the social relations of the extraction of surplus value from the working class.

A longstanding project of capital is to shape virtually every aspect of people’s lives in order to meet its needs. For example, as part of the management of the interaction of social relations inside and outside the workplace, spokesmen of capital tell workers that they should identify themselves as consumers instead of as workers. Rebellion against degrading and debilitating exploitation at the workplace is foolish; instead, intelligent workers should embrace their jobs, by identifying their work as a welcome opportunity to enjoy the benefits of consumption. In effect, the circuits of consumption and reproduction become harnessed to the social relations of production.

These social relations also help to determine the quantity of surplus value. For example, one dimension of this process is the management of the burdens of risk. Today we are reminded that when crises break out, out the same workers are told that their wages, their consumption, or their pensions are problems that must be corrected.

Friday, June 4, 2010

Do All 222 of These Economists Think the Multiplier for Changes in Government Spending is Negative?

John Boehner uses Twitter to claim that economists think reductions in government spending will lead to an economic recovery. He has cited this letter signed by 222 economists as the basis for his absurd claim. Let’s just say this is an opportunity for each of the 222 economists to either distance himself from Congressman Boehner’s absurd remark or to explain why they think the multiplier is negative.

Wednesday, June 2, 2010

Mandatory Arithmetic

I propose that no one should be allowed to comment on current budget issues, or at least be taken seriously, unless they explicitly deal with the fundamental arithmetic, which looks like this:

GDP * (fiscal balance / GDP + net private deficit or savings / GDP) ≡ Current account surplus or deficit

I don’t care whether you say prayers to Friedrich Hayek before going to sleep at night, or whether you wake up at 3 am to make an offering at your hidden shrine to Chairman Mao, this simple identity has to hold. It is true continuously at each moment and also over any time span of interest.

Suppose your country is running a fiscal deficit, as most are right now. There are calls to reduce it. In order to have an intelligent response, you need to view the situation in light of the compulsory arithmetic. Do you see a way to reduce the current account deficit? Are you assuming that GDP will fall? Or are you expecting, or forcing, private borrowing to increase? You can’t fiddle with one term in an identity without dealing with the consequences for the other terms.

I would now puff up my chest and demand that reporters, politicians and everyone else reacquaint themselves with Econ 101, except, of course, that Econ 101, which say almost nothing about this identity or how it applies in real life, is itself a big part of the problem.

What’s a Flexible Labor Market?

Now that countries like Greece and Spain are being asked to engineer an internal devaluation of 20% or more, a scenario that is quasi-apocalyptic in terms of the implicit fall incomes and rise in unemployment it would entail, we may have occasion to mourn the absence of centralized wage bargaining, as in, say, Austria. Once upon a time economists denounced such systems as “inflexible”, because they didn’t reflect, with pinpoint accuracy, the shifting conditions in each firm. Now, however, it is hard to miss the point that they provide flexibility on an economy-wide level that makes adjustment less excruciating. Just mentioning.