Wednesday, March 30, 2011

Obama's Oil Speech

Why write a new speech when an old one will do? Here is the relevant section from a speech I wrote for Obama on this site when he was running for president. For some reason I can't fathom, he didn't use it.

"We should begin with a sobering fact: while energy prices will continue to fluctuate unpredictably, in the long run they are headed up, up, up. In part this is because the supply of scarce resources like petroleum is starting to reach its limit. Experts disagree about just when this peak supply will occur, but they agree that the day is not far off. In the meantime, the demand for oil and other energy products is rising quickly in countries like China and India. We are happy to see anyone anywhere move out of poverty and into a more comfortable lifestyle, but we should also recognize that this means they will be able to afford to buy more cars, heat their houses to a more comfortable temperature and in general use more energy. Between a plateau of supply and a rising curve of demand, we are facing a future of scarce and expensive energy.

"But there is another side to energy prices. In previous speeches I have talked about the urgent necessity of weaning America from its dependence on oil and other fossil fuels. Avoiding conflict over oil supplies is central to our national security, whether it is about getting drawn into battles in oil-producing countries like Iraq and Iran, or finding a way to end warfare where oil fields and oil pipelines are at stake, as is now the case in the conflict between Russia and Georgia. The less reliant we are on these supplies, the more we can focus on the true threats to our security, like groups that would commit wanton acts of terror against our population. The fixation on oil is distorting our priorities and fomenting violence around the world.

"Just as urgent is the demand to prevent catastrophic climate change. Already the concentration of carbon in the earth’s atmosphere is entering the danger zone, and every day our factories, power plants and automobiles are pushing that number up higher and higher. No one knows where the tipping point is, the level of greenhouse gases that can trigger a process of self-reinforcing climate change that we will be powerless to stop. We must drastically reduce our consumption of fossil fuels, and quickly, if we are to keep faith with future generations that will inherit whatever world we leave them. And there is little we can do as a country that would more restore our standing in the world than to shoulder our share of the burden in preserving a liveable planet.

"For all these reasons, we have to kick the fossil fuel habit. And this will mean higher prices, much higher than today. So, not only are we unable to repeal the law of supply and demand to bring down these costs, in fact we need higher prices to achieve our core national objectives. What then can we do?

"Here is where I will ask you to think outside the box. What I will propose to you today is that the problem is not the price of oil and other energy products as such, but where the money goes. When you pay four dollars or more at the pump for a gallon of gas, your hard-earned money is on its way to a foreign country or a fabulously profitable oil company. It’s gone: you will never see it again.

"But suppose we did something different. Instead of paying high prices to far-off governments or oil profiteers, suppose we paid it to ourselves, so that we could actually get it back. This is what I’m going to suggest.

"The way to do this is by actually raising the price of oil. You could do it through a tax. The way I’ve proposed, in my climate change plan, is to have a limited number of permits for bringing fossil fuels into the economy, and to make energy companies pay for every one of these permits. Of course, they will pass this cost along to you, the consumer. This is how a market economy works. It will lead to innovation, as businesses and households find new ways to conserve energy. But the bottom-line result is that, to kick the fossil fuel habit, we will be paying a lot more for whatever we continue to use.

"Yet here is the key point: the extra cost you will pay will not go to a foreign government or an oil company. It will come right back to you. Specifically, I am proposing to put all of these revenues from higher energy prices into a big pot, and then pay out the money in equal amounts to every American citizen. This is the simplest and fairest solution. I want to be very clear: this money will not be kept by the government. It is yours. I promise, here and before all of you, that at least 95 cents of every dollar collected in selling fossil fuel permits will be given back to the people, quickly, efficiently, fairly. Economists who have studied this idea estimate that the amount each of us would receive would be something like $1000 per year. Any additional public programs for energy research or conservation would be financed out of tax revenues as they are, or more accurately as they should be, today. The extra money you pay for energy would be earmarked, virtually all of it, to return to you.

"This plan has many benefits. It will do more for our national security than any other single step we can take. It will restore America’s leadership role in the fight against climate change. It will be an added benefit for the most vulnerable Americans, those who are at the bottom of the economic ladder and use the least energy already: they will get back much more than they pay. But what I want to emphasize is that this is the only meaningful long run solution to the problem of runaway energy costs. Energy costs will rise, and in some respects we even need them to rise. But the problem is that, under the current system, every dollar we pay for energy is a dollar lost. The solution is to change the system so that we get this money back, literally, every one of us. It is the responsibility of government to set up this system and then get out of the way, so that the money can return to the public in the simplest, fairest and most direct manner. On the international front, if we can convince enough other countries to take a similar stand, and I think we can, the overall effect will be to bring down global demand substantially, so that much less of our energy bill ends up in foreign or corporate hands.

"Unlike offshore drilling, the proposal I’ve just outlined is not in the news. The pollsters aren’t asking you what your position is on it. But, also unlike offshore drilling, it gets to the heart of the problem. We can’t legislate energy prices down and we shouldn’t try. But we can protect the budgets of our families and our economic health as a nation by turning Americans into recipients of energy money as well as payers of it. So this is my answer to out-of-control energy costs: let’s get this money back. Let’s take control of our energy problems and protect our standard of living at the same time. Let’s have a future in which, when you read headlines about higher energy prices you think, “That’s more money in the bank, for me.” Let’s get the energy money back."

Monday, March 28, 2011

Open Records Requests

UPDATE: The madness has percolated over to Michigan, where conservatives are demanding emails of labor studies faculty.....about the situation in Wisconsin. This is so clearly against the intent of open records legislation that my post is almost superfluous.

Original post:

A fishing expedition in a Wisconsin professor’s email has been making waves. (I always wanted to say something like this.) The story: William Cronon, the esteemed author of Changes in the Land and Nature’s Metropolis, wrote a blog post tracing Republican initiatives in Wisconsin to a secretive but well-funded national organization for state legislatures. Republicans responded with an open records request, demanding all of Cronon’s emails containing references to their party and to a raft of individual Republican politicians. Some, like Paul Krugman, consider this a threat to academic freedom. The University of Wisconsin promises to balance this concern against the law’s demand for disclosure. For a journalistic treatment, see this; for Cronon’s own account, see this
For me, it is déjà vu all over again. My institution has been the repeated target of such broad records requests, asking for any email by any employee—faculty, staff or administrator—relating to one or another controversial issue. Our public records officer would then dutifully instruct all of us to go through our past emails and forward any that fit the description. What they have not done, fortunately, is to sift through the email record themselves (is that “sifting and winnowing”?) by virtue of their access to the archives, reducing the level of intrusion.

I am not a lawyer. I cannot offer a legal analysis of the language in my state’s (Washington’s) open records law, much less that of Wisconsin or elsewhere. Nevertheless, a basic principle seems perfectly clear to me.

The purpose of all such laws is to make the decision-making and performance of public institutions transparent to the citizenry. We have a right to know how and on what basis decisions are made by those purporting to act on our behalf, and we need to know how well public officials are performing the functions for which they are responsible. That’s democracy.

We don’t need to know their personal opinions on topics over which they have no official influence. I can see no legitimacy to a request for emails of the Commissioner of the Department of Natural Resources on the topic of Lady Gaga, for instance. In this respect, the Commish is simply a private individual and entitled to a general privacy protection. (If he or she is so consumed by Ms. Gaga that essential work goes unperformed, that is a public concern—but it should center on the work, not the details of the distraction.) Indeed, if an official is in charge of water pollution, his or her personal views on, say, wolf reintroduction should also be beyond the scope of an open records request. Only communications bearing on the decision-making or implementing aspects of the individual’s job should be fair game.

So what about a professor? If the professor is on a committee that makes policy, it is vital that communications pertaining to this work be accessible to the public. (There are obvious exceptions for personnel and student privacy matters.) Communications that pertain to the performance of a professor’s teaching duties, or the institutional aspects of her research projects, are fair game. By “institutional aspects”, I mean all those having to do with adherence to institutional policies regarding funding, resource use, human subjects review, public disclosure, etc. The intellectual content of the research should be off-limits.

To be clear, I am not calling for an exception for academic freedom. I regard Cronon’s views of Republican tactics in Wisconsin to be as deserving of protection on privacy grounds as his views regarding Madison’s best car-repair shops or his favorite historians of the Progressive movement. And the people who empty his wastebaskets are entitled to the same privacy protection.

Again, as a non-lawyer, I suggest that the clear intent of open record laws be taken into consideration. Their purpose was not to lay bare as much of the private and mental life of public employees as possible, but to give citizens the opportunity to see for themselves how public institutions are functioning.

Stop worrying and love nuclear power. Fuel rod meltdowns are happening now but they're only temporary. More quotes.

“..the government believes that the meltdown [of fuel rods at No 2 reactor] is only temporary.”[1]
“…the radioactive releases of iodine-131 in Japan had reached about 2.4 million curies by March 22, 2011. That is about 160,000 times the best estimate of the amount released during the TMI accident in Pennsylvania (15 curies) and about 140,000 times the maximum estimate of 17 curies. It is about 10 percent of the estimated amount released during the Chernobyl accident…”[2]
“…radiation-induced cancers do not simply arise immediately following exposure. It's not as though it will be like the Black Plague, where one would see one's neighbors being hauled out of their houses, dead. This damage to human life, these murders, will only be visible -- if they are allowed to be visible -- in statistical data collected long years after the exposure event…”[3]
“Why Fukushima Made Me Stop Worrying and Love Nuclear Power … Atomic energy has just been subjected to one of the harshest possible tests, and the impact on people and the planet has been small. The crisis at Fukushima has converted me to nuclear power.”[4]
“All of the information media are at fault here I think. They are saying stupid things like, why, we are exposed to radiation all the time in our daily life, we get radiation from outer space. But that’s one millisievert per year. A year has 365 days, a day has 24 hours; multiply 365 by 24, you get 8760. Multiply the 400 millisieverts by that, you get 3,500,000 the normal dose. You call that safe?[5]
“Should the public discover the true health cost[s] of nuclear pollution, a cry would rise from all parts of the world and people would refuse to cooperate passively with their own death.” [6]
“Let's not beat about the bush. They have visibly lost the essential of control (of the situation). That is our analysis, in any case, it's not what they are saying.'”[7]
“The mechanisms of the accident would be very different than Chernobyl, 4 where there was also a fire, and the mix of radionuclides would be very different. While the quantity of short-lived radionuclides, notably iodine-131, would be much smaller, the consequences for the long term could be more dire due to long-lived radionuclides such as cesium- 137, strontium-90, iodine-129, and plutonium-239. These radionuclides are generally present in much larger quantities in spent fuel pools than in the reactor itself. In light of that, it is remarkable how little has been said by the Japanese authorities about this problem.[8]
“…there are disputes over whether or not Chernobyl's nuclear fuel still poses a threat of causing another explosion. There is also a teetering reactor core cover and the deteriorating sarcophagus itself that may collapse and send plumes of radioactive dust in all directions. …with tens of millions of lives at stake, nation actors that have the ability to assist in mitigating this disaster now, but choose instead to squander their manpower and resources elsewhere (like in Libya), must remember that their actions today will be remembered and judged for centuries to come.”[9]
“….During the Chernobyl disaster, reactor workers barley prevented a second nuclear explosion that has been covered up to the public for many years. This secondary explosion would have been powerful enough and toxic enough to wipe out the population of half of Europe according to Russian officials.”[10]

[1]URGENT: Radioactive water at No. 2 reactor due to partial meltdown: Edano
TOKYO, March 28, Kyodo

[2]Institute for Energy and Environmental Research
Takoma Park, MD 20912
For Immediate Release Friday, March 25, 2011
'Radioactive Iodine Releases From Japan's Fukushima Daiichi Reactors May Exceed Those of Three Mile Island by Over 100,000 Times'

[3]James Cronin, as quoted in:
CounterPunch Diary
Libya, Oh What a Stupid War; Fukushima, Cover-Up Amid Catastrophe

[4] George Monbiot, the Guardian newspaper. 21st March 2001
As quoted in:
CounterPunch Diary
Libya, Oh What a Stupid War; Fukushima, Cover-Up Amid Catastrophe

[5]Hirose Takashi
As quoted in:
CounterPunch Diary
Libya, Oh What a Stupid War; Fukushima, Cover-Up Amid Catastrophe

[6]Dr. Rosalie Bertell. “No Immediate Danger,” xiii.
[7]French Industry Minister Eric Besson
As quoted in:
'They've lost control': French claim Japan is hiding full scale of nuclear disaster as TWO more reactors heat up. Wednesday, March 16, 2011

[8]Arjun Makhijani, president of the Institute for Energy and Environmental Research in Maryland
As quoted in:
CounterPunch Diary
Libya, Oh What a Stupid War; Fukushima, Cover-Up Amid Catastrophe

[9]When Does a Nuclear Disaster End? Never.
Tony Cartalucci, Contributing Writer
Activist Post. Sunday, March 27, 2011

[10]Fukushima Radiation Found In Massachusetts Rainwater As “Bio-Robots” Fight To Prevent Disaster
(AP / Yomiuri Shimbun, Takuya Yoshino)
The Intel Hub
Shepard Ambellas
March 27, 2011

Sunday, March 27, 2011

Greg Mankiw Confuses Social Security with Medicare Part D

Brad DeLong is not happy with something Greg Mankiw wrote:

The seeds of this crisis were planted long ago, by previous generations. Our parents and grandparents had noble aims. They saw poverty among the elderly and created Social Security. They saw sickness and created Medicare and Medicaid … If we had chosen to tax ourselves to pay for this spending, our current problems could have been avoided.

Brad correctly notes:

Mankiw is talking about President Reagan, his supporters, and his appointees. Mankiw is talking about President George W. Bush, his supporters, and his appointees. And--as one of George W. Bush's cabinet-level appointees, Chairman of the Presidents Council of Economic Advisers in 2003-2004--he is talking about himself. Is it too much for me to expect, from him, an apology to America? A whispered: "I am sorry"? An admission that the unfunded 2001 tax cuts that he cheerled for were a mistake, and that we as a nation would have been better off had they not been passed? An admission that the unfunded 2003 tax cuts that he cheerled for were a mistake, and that we as a nation would have been better off had they not been passed? An admission that the unfunded 2003 Medicare Part D prescription drug benefit that he cheerled for was a mistake, and that we as a nation would have been better off had it not been passed?

Let me simply add this: we did choose to tax ourselves to pay for Social Security benefits.

Friday, March 25, 2011

Why Libyan Partition Will Not Happen: Oil And Geography

Having argued a few days ago that a partition between East and West in Libya might be an outcome based on their long history of disunity and numerous differences, I am now thinking that this is a very unlikely outcome for a variety of reasons, although oil and geography are at the top of the list.

So, for a stable partition, it would probably need to be the case that there would be a relatively even split of the oil revenues between the two sides. However, of the six oil terminals in Libya, four are clustered near each other at the east end of the Gulf of Sidra and have changed hands between the two sides. Currently Qaddafi's forces control three of them, but the most intense front line of the battle appears to be happening at Ajdaibiya (sp?), where according to Juan Cole, the rebels are gaining strength and control. For anything other than a 5-1 or 1-5 division of the terminals, a stable line would have to be established drawn through the middle of these terminals, but this looks extremely unlikely to me. One side or the other will probably take them and whoever does so will win overall.

Another fact is that while in general the rebels are stronger in the East and Qaddafi's supporters in the West, the rebels continue to have support in and control certain locales in the West, with the new Allied air strikes helping them defend those locales, particularly Misurata, the third largest city in Libya, and Zaitan in the southwest. Qaddafi's strongest base, his hometown of Sirte, is east of those cities. There simply is not a neat division and I suspect that there will not be.

Moving beyond this basic oil-geography issue, there are other matters. One is that both sides appear determined to claim total victory. The only way that such a partition will occur is if there is a stalemate after long fighting, but I think other dynamics are at work, with Juan Cole pointing to the volatility of tribal loyalties. In this case, the key tribe is Libya's biggest, the Warfalla, at 1 million nearly a sixth of the whole population, who happen to have a major base in rebel-held Misurata. The Warfalla have long been among Qaddafi's strongest supporters, fellow Arabized Berbers (although with more intermarriage with real Arabs than in Qaddafi's tribe), and long providing many of his innermost staff and guards, despite leading an attempted coup in 1993.

As it is, the Warfalla are reportedly vacillating, possibly having shifted back and forth twice already in this conflict. But they may not wish to have a stalemate, and if they tilt strongly to the rebels, this might tilt things in the rebels' direction, leading to a major move in the military to stop supporting Qaddafi, particularly given the apparent unwillingness of the military to fight too much against the Allied air strikes (and with the Libyan air capapbility reportedly shut down pretty much already). The word of actual Arab support for the Allied force from Qatar and UAE (the only two Arab nations not to have had any demonstrations or uprisings so far in this Arab Spring) may add to this impetus, along with the withdrawal of the US from commanding it to behind the skirt of NATO, with formerly opposed Germany and Turkey now acquiescing.

Adding further to this is that the US and French and others appear to be becoming more enthusiastic about the rebel leadership. There has been much muttering about Islamist influences (and the former king Idris was the grandson of one of the founders of the radical Islamist Salafi movement), but the new leader of the provisional government, which has now established a central bank and oil company, Jibril Mohammed, got a PhD in strategic planning from the U. of Pittsburgh and appears to be a pro-western secularist, even described as a supporter of "neoliberalism" in his newly written (with misspellings) Wikipedia entry. Expect this to encourage stronger external support for the rebellion, which will seek to topple Qaddafi, even if Germany and Turkey mumble unhappily (and Putin and Medvedev argue over whom Russia should support).

However, the key to the outcome will be if the Warfalla and other tribes that have been supporting Qaddafi, as well as their members in the military, decide that it is not worth it supporting him any longer. If they turn on him, it will be all over. But the bottom line looks like it is much more unlikely than I previously thought that there will be any sort of stable partition as an outcome of all this.

Thursday, March 24, 2011

Quotes About the Global Nuclear Emergency

“We have not four but 13 reactors out of control now. Thirteen reactors have lost capacity to cool. Once a reactor loses capacity to cool, they heat and begin releasing radiation. I do not believe they are not leaking.” [1]
“Mitsuhiko Tanaka says he helped conceal a manufacturing defect in the ... steel vessel installed at the Fukushima Dai-Ichi No. 4 reactor ..Tanaka has called [the reactor] a “time bomb,”...When Tokyo Electric sent a representative to check on their progress, Hitachi distracted him by wining and dining him... Rather than inspecting the part, they spent the day playing golf and soaking in a hot spring, he said. The guy wouldn’t have known what he was looking at anyway,” Tanaka said. “The people at the utility have no idea how the parts are made.”…. ... Thirty- six years later, that reactor pressure vessel is the key defense protecting the core of Fukushima’s No. 4 reactor…Two years [after Chernobyl] Tanaka says he went to the Trade Ministry to report the cover-up he’d been involved in more than a decade earlier. The government refused to investigate and Hitachi denied his accusations, he said.” [2]
“So if, for example, one of the reactors at Daiichi goes down, the other five are only a matter of time. We can’t know in what order they will go, but certainly all of them will go. And if that happens, Daini isn’t so far away, so probably the reactors there will also go down. Because I assume that workers will not be able to stay there.” [3]
In 1982, the House Committee on Interior and Insular Affairs received a secret report received from the Nuclear Regulatory Commission called "Calculation of Reactor Accident Consequences 2". In that report and other reports by the NRC in the 1980s, it was estimated that there was a 50% chance of a nuclear meltdown within the next 20 years which would be so large that it would contaminate an area the size of the State of Pennsylvania, which would result in huge numbers of a fatalities, and which would cause damage in the hundreds of billions of dollars (in 1980s dollars). Those reports were kept secret for decades. [4]
“Only one reactor blew at Chernobyl and it was only 3 months old, with new cores holding relatively little radiation; these ones have been operating for 40 years and would hold about 30 times more radiation than Chernobyl’s.” [5]
"There is talk of an apocalypse and I think the word is particularly well chosen. Practically everything is out of control. I cannot exclude the worst in the hours and days to come." [6]
"When I held up samples of the rocks the plant was sitting on, they crumbled like sugar in my fingers. "But the power company told us these were really solid rocks!" the reporters said. I asked, "Do you think these are really solid?' and they started laughing." [7]
[1] Exclusive: Fukushima babies, pregnant women nuclear fallout rescue underway
Deborah Dupre (* Human Rights Examiner) March 23rd, 2011 1:32 pm ET

[2] Fukushima Smoking Gun Emerges: Founding Engineer Says Reactor 4 Has Always Been A “Time Bomb”, Exposes Criminal Cover Up. Tyler Durden, Zero Hedge. March 23, 2011

[3] What They're Covering Up at Fukushima By HIROSE TAKASHI
Introduced by Douglas Lummis. Okinawa
"You Get 3,500,000 the Normal Dose. You Call That Safe? And What Media Have Reported This? None!"

[4] Governments Have Been Covering Up Nuclear Meltdowns for Fifty Years to Protect the Nuclear Power Industry. Saturday, March 19, 2011

[5] Caldicott: Japan may spell end of nuclear industry worldwide. Thursday, March 17, 2011. Helen Caldicott at

[6] Japan nuclear plant disaster: warning of an 'apocalypse’ as fallout hits danger levels. 16th March 2011

Japan's deadly game of nuclear roulette. Sunday, May 23, 2004
By LEUREN MORET. Special to The Japan Times

Wednesday, March 23, 2011

Austerity is no Surprise

This extract comes from The Confiscation of Economic Prosperity. It serves as a reminder that this crazy demand for austerity should not come as a surprise.

Besides, the problem is not the size of the deficit but the policy changes that the right wing can engineer by stoking fears about the disaster that deficits can create. The idea is that with the government facing seemingly unmanageable deficits, the public will be stampeded into a wholesale slashing of government spending.

As a result, regulatory policies that inconvenience the corporate sector as well as social programs that might benefit ordinary people will disappear. The right wing gleefully refers to this situation as the starve-the-beast strategy -- by depriving the government of adequate revenue, its regulatory powers will necessarily shrink.
Traditionally, Republicans represented themselves as the party of fiscal sobriety, insisting that balanced budgets were essential to solid economic performance. In the 1980s, a new strategy began to emerge. Conservatives began to welcome huge deficits.

For example, in 2001, President George W. Bush expressed his support for this tactic, reporting that the government's fast-dwindling surplus (created by his own tax cuts) was "incredibly positive news" because it will create "a fiscal straitjacket for Congress" (Sanger 2001). Similarly, California Governor Arnold Schwarzenegger said that he wanted to use his budget plan to "starve the public sector" without raising taxes, "because we don't want to feed the monster" (Delsohn 2005).

Nobody has been more adamant about pursuing this strategy than our old friend, Grover Norquist, who told an interviewer: "I don't want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub" (Norquist 2001). Conservative economists, such as Milton Friedman, agree, although in less colorful terms. They applaud growing federal budget deficits created by tax cuts, which will eventually create pressure to cut social programs and regulation (Friedman 1988; 2003).

In reality, all except a handful of principled libertarians have no interest whatsoever in thoroughly starving the beast. To the extent that government subsidizes and protects business, conservative class warriors welcome the governments' engagement with open arms. Only when the government lends support to the poor and disadvantaged does the right wing regard state spending as an abomination.

What Kind of Science Would Economics Be if it Were Really a Science?

A nice rant about economists not understanding biology or living up to its intellectual standards has been bouncing around the blogosphere. At the egotistical pleasure risk of blowing my own horn, here's something I wrote back in 2008:

After explaining why I thought the two chief characteristics of "real" science are minimization of Type 1 error and pursuit of causal mechanisms, I point out
Economists have been seduced by a different vision of science, with its roots in those same ancient geometric proofs: that the foundation of science rests on a deductive theory, where “explanation” means “producing a story that can itself be expressed as a deduction from top-level theory”. This is a dream of mathematics and much of physics. It is not characteristic of scientific work in general, however, and its usefulness is limited in fields of research that are extremely complex and dependent on a vast array of contingent factors. Geology would be such a case, where certain general concepts (like plate tectonics) are broadly accepted, but what matters in practice is the knowledge of concrete mechanisms, such as what forces are at work in the subduction of plates or, on a more mundane level, the movement of subsurface water through various soil and rock strata. Geologists cannot give you a general theory of earthquakes, but they can describe rather accurately the process by which the force generated by plate collisions is stored and transmitted in specific formations, and the same can be said for the skills of the hydrologist you might consult before deciding whether you ought to build your house on a particular slope.

Causal mechanisms are the preferred subject matter of science for several reasons. They appease our curiosity. They are more likely to be testable in ways that minimize Type I error than process-independent claims about prior and subsequent states. Above all, they provide knowledge that is frequently useful even when it is incomplete—as knowledge invariably is in complex domains. If you know some mechanisms but not all of them, you still know something about how a system works.
Any my conclusion:
So what would a scientific economics look like? I have mostly answered this already: it would look like other sciences whose objects of study are complex, heterogeneous and context-dependent. It would study mechanisms primarily and end states only for heuristic purposes. It would be predominantly empirical, where this encompasses both statistical work and direct observations on economic behavior (which may also entail statistical analysis). It would ruthlessly identify potential sources of Type I error and strive to eliminate them in hypothesis testing. Experimentation, in the lab and in the field, would become more common, but even more important, primary data collection of all sorts would be accorded a very high value, as is the case in all true sciences. Its macro models would come to look like macro models in hydrology or biogeochemistry: simultaneous differential equations representing mechanisms rather than static end states embodying (a single) equilibrium. Economists would increasingly find it useful to collaborate with researchers from other fields, as their methodological eccentricities are abandoned. Finally, there would be a much clearer distinction between the criteria governing scientific and policy work, insulating the former from some of the influence exerted by powerful economic interests and freeing the latter to adopt an ecumenical and risk-taking approach to tackling the world’s problems.

Monday, March 21, 2011

Kling’s Misunderstanding of the IS-LM Model and Liquidity Traps

Now I see how Arnold Kling has gotten so confused:

The difference being that you might one day see a unicorn.
A liquidity trap requires
1. Low nominal interest rates. (The nominal interest rate is the interest rate as stated.)
2. High real interest rates, due to low or negative inflation.* (The real interest rate is the nominal interest rate minus the rate of expected inflation. If the nominal interest rate is 5 percent and the expected inflation rate is 2 percent, then the real interest rate is 3 percent.)
3. No way for the monetary authority to escape from (1) and (2). Hence the term trap.
(*In this post, Paul Krugman surprises me by stating implying (as far as I can tell) that high real interest rates are a sign that we are not in a liquidity trap. That is completely the opposite of my understanding.

Kling must be assuming away the possibility that the IS curve has shifted inwards. But isn’t the message here that the demand for investment has fallen and/or the national savings schedule has risen so much that even with very low interest rates, investment would not equal national savings at full employment?

Sunday, March 20, 2011

De Facto Partition Of Libya Coming?

The new war in Libya is so new and fluid that it is hard to determine what is really going on or will go on, but I think a highly likely outcome will be a de facto partition of Libya. While the mandates from the Arab League and the UN Security Council only supported a no-fly zone to prevent Qaddafi's forces from killing civilians from the air, and this is the official position of the US, many leaders in the US and more openly in France and Britain, which are very prominent in the military action, have stated that the goal is to support the rebels and remove Qaddafi, with both Obama and Clinton effectively supporting this with statements that Qaddafi has lost legitimacy and should step down. Some observations I have not seen made elsewhere follow.

That a partition that could become semi-permanent may be the result arises from the obvious possibility of a military stalemate. Without the move to no-fly zone, it is likely that Qaddafi's forces would have fully defeated the rebels, having reached the outskirts of Benghazi, the rebel capital, after having retaken most of the major oil towns to the southwest of Benghazi, although one major city in the west, Misurata, continues to be held by the rebels. Even with his air force subdued, Qaddafi retains the superior edge in ground military force. It is unlikely the rebels can defeat him without outside ground support, and it is increasingly looking like there will be no active support from any Arab country in the air, and much less likely on the ground. Obama has stated the US will not deploy (and there will be major resistance to doing so from the US military), leaving only maybe the Brits and French to do so, but my guess is they will be reluctant to do so in sufficient force to overthrow Qaddafi without the US or Arabs involved, and parts of the rest of the world becomning more critical (both Russia and China have expressed "regret" over this new military action, despite their abstention in the UNSC vote because of the Arab League resolution). So, a likely outcome is a military stalemate after some further shuffling of the positions on the ground.

If Misurata falls to to Qaddafi's forces while the rebels control much of the east, what will emerge will look like the longstanding historical division between Tripolitania in the west and Cyrenaica in the east, the names of Roman provinces in those areas (a third province in the southwest, Fezzan, is essentially part of the western zone). Throughout most of history they have not been jointly ruled, and when they have, they have been distinct provinces. There are deep differences, with the population in the west having a substantial Berber element (Qaddafi and his tribe are actually "Arabized Berbers," that is, ethnic Berbers who speak Arabic). The east has often been ruled by whomever was ruling Egypt (and Egypt is the only Arab nation that might or could enter the action on the ground, and the current Arab League president, Amr Moussa, who is the main person responsible for their resolution, is running for President of Egypt and strongly supports the rebels). There have even been religious differences, with the east basically Maliki Sunnis, whereas there continues to be a Khariji Muslim community in the west, mostly concentrated in the Berber areas. More broadly, Tripolitania in the west has had long periods of independence, either de facto or de jure, including during the "Barbary pirates" period when the US warred with Tripolitania in the early 1800s, a period when Cyrenaica was under Ottoman rule (the Ottomans got back into Tripolitania later in the 1800s).

There is a further warning here having to do with history, specifically the fact that among the leading countries involved in this military action are the three European countries that ruled parts of modern Libya prior to its independence as a kingdom in 1951, namely Italy, France, and the UK. Italy began taking over Libya from the Ottomans in a war in 1911-12, although it was not able to subdue Tripolitania until 1923, with Libya as a unified entity under Italian rule declared in 1934. During WW II, the French came in from Algeria and took Fezzan in the southwest in 1943, while the British took control of the coastal provinces in warfare with Germany during 1941-42. Italy formally surrendered control in 1947, and the UN established a mandate under the joint control of France and Britain. In 1949, the British established a kingdom in Cyrenaica (capital, Benghazi) under Idris al-Senussi. When Libya was granted full independence in 1951, Idris was made king of all of Libya, but with the capital in Tripoli, triggering much resentment in the west of this rule by easterners, an important point in the current situation. In 1963 the old provinces were officially dissolved in favor of smaller administrative units. Qaddafi seized control in 1969, and while he is a despicable leader and human being whom I would love to see overthrown, when he falls back on old pan-Arab anti-colonialist rhetoric, he is not entirely talking through his hat in the eyes of many obervers around the world who know their history.

New Interview with Michael Perelman

I had a nice interview at the Left Forum with a representative of very interesting platform. I was mostly covering material from The Invisible Handcuffs. Even if you are not hearing me, you might want to check out the entire site.

Friday, March 18, 2011

Kling Responds to Krugman in a Strange Way

Menzie Chinn agrees with Paul Krugman that real interest rates during the 1980’s were very high, but then he also notes an email from Arnold Kling that tries to defend the original blog post:

The topic was not crowding out. It was liquidity traps.

I would argue that this is an odd way to respond for a couple of reasons. One is simply that we were not in a liquidity trap during the early 1980’s. Secondly – why do we care whether we are in a liquidity trap or not? The reason has to do with whether fiscal stimulus will lead to crowding-out. A lot of the arguments against fiscal stimulus assume either that we are near full employment (which of course we are not) or that the LM curve is not flat. In other words – the fear of crowding-out. While these arguments made sense during the early 1980’s, they do not make sense now. So I would argue that the topic has always been crowding-out.

Thursday, March 17, 2011

Arnold Kling is Not the First Economist to be Confused About the Reagan Deficits and Interest Rates

Arnold Kling confused nominal versus real interest rates here:

Many people predicted that the Reagan deficits would produce soaring interest rates. The deficits appeared, but the 10-year interest rate peaked before the Reagan tax cuts took effect and plummeted in the latter half of 1982, in spite of then-record deficits.

Paul Krugman responds:

The Reagan years were marked by two things: large budget deficits — although much smaller as a percentage of GDP than we’re seeing now — and a huge disinflation, engineered by Paul Volcker. So we need to look at real, not nominal interest rates — and real rates were in fact very high by historical standards during the Reagan years. 10-year bond rates ranged between 8 and 9 percent in the later Reagan years, while inflation generally ran under 4 percent. And may I say, I thought that this was part of what every economist knows — the story of the tight-money loose-fiscal mix of the Reagan era is, literally, a textbook case that’s in just about every undergrad macro book.

Not much to add except to note a couple of other economic papers that fell into Kling’s muddled thinking including something the American Economic Review published in March 1985 by Paul Evans entitled: “"Do Large Deficits Produce High Interest Rates?". His conclusion was no with part of his evidence being the same Reagan years. Alan Reynolds noted this paper and its Barro-Ricardian Equivalence explanation in defense of the Bush43 tax cuts. Reynolds goes onto to assert:

Confronted with this evidence, some began to say that it was not nominal interest rates that were driven up by deficits but real interest rates. But the only way deficits could raise real rates without raising nominal rates would be if deficits caused inflation to fall, which does not make sense.

I guess that since the Volcker tight money policy coincided with the Reagan fiscal stimulus, one could abuse the term “cause” to say deficits caused inflation to fall. I prefer to suggest that Reynolds was just being silly with this paragraph. Let’s also note the reason Barro-Ricardian Equivalence is supposed to make fiscal stimulus something that is not going to impact interest rates even in a full employment economy. The proposition is that households will fully save and not consume their tax cuts if they are not accompanied with at least some expectation of future spending cuts. But we should recall that U.S. consumption did jump after the Reagan tax cuts even though we never saw appreciable spending cuts. In a words – national savings fell, which in the full employment classical world that Robert Barro, Paul Evans, and Alan Reynolds live in means an increase in real interest rates. Which is exactly what we saw during the 1980’s.

Wednesday, March 16, 2011

The Oil Empires Strike Back

It is increasingly clear that the Arab nations with lots of oil to export also have better means to crush their uprisings than the leaders in such non-oil exporters as Tunisia and Egypt. Thus, King Abdullah of Saudi Arabia has sent troops in to Bahrain, allowing the Sunni monarch there to use his police to move harshly against the largely Shi'i dissidents, even though the Shi'a are about 2/3 of the local population (there is a substantial population of expat workers, mostly Hindu Indians). The US has a naval base there, although reportedly the US administration has been unhappy about this move by the Saudis. But the Saudis apparently do not want any infection into their Shi'a, who, only 12% of the Saudi population, are concentrated in the oil-producing Eastern Province (and are heavily active in the oil industry itself).

In Libya we are reminded that the sine qua non of a successful revolutionary movement is when the lower levels of the military turn against their commanders and the national leadership to side with the rebels. That has not happened there subtantially for two reasons. The more widely reported one has been Qaddafi's ability to hire mercenaries given his oil funds. The other is that he enjoys the support of some of Libya's tribes, including the nation's largest one. This means that the civil war component probably does outweigh the revolutionary component, and despite the Arab League voting for a free fly zone (with Algeria and Syria abstaining), it looks that Qaddafi's troops are successfully heading towards the rebel capital of Benghazi. This could be all over soon, and it was never very likely that a free fly zone would have done anything anyway, given that Qaddafi has managed to retain the loyalty of most of the military on the ground (unfortunately in my opinion).

BTW, Syria has experienced its first demonstration, although only a small and brief one. However, given how repressive the regime is and how long it has been in power, plus the fact that the rulers there largely belong to a religious minority that is only about 10% of the population, the Shi'i Alawites (part of the reason they are friendly with Iran), it is a bit surprising there have been none earlier (and they are not oil exporters either).

Unsurprisingly, good reporting on both of these events can be found at and .

Tuesday, March 15, 2011

Job Killing Spending Cuts

Larry Bivens reports on how a few freshmen Republican Congressmen are being criticized by their constituents for voting to eliminate the Workforce Investment Act:

Jim Golembeski, executive director of the Bay Area Workforce Development Board, which administers WIA services at five regional jobs centers and three smaller sites in 10 counties in Northeastern Wisconsin, says he would have to shut down his operation if the cuts are approved. As a result, about 30 people would be out of work, he said, in addition to many others who would not receive needed services it provides. The House-passed bill would eliminate funding for the remainder of the current fiscal year and provide no money for fiscal year 2012, which begins Oct. 1, according to an analysis by the Center on Budget and Policy Priorities. Wisconsin would lose $12.5 million in funding for the program for the rest of the calendar year, affecting 23,700 participants in the programs serving adults, dislocated workers and youths.

As a Keynesian economist, I would argue that the reduction in government spending leads to a further reduction in aggregate demand, which not only means the loss the 30 jobs that Mr. Golembeski refers to but likely some private sector jobs via the multiplier effect. I guess Republican politicians might argue that this Keynesian emphasis on aggregate demand is misplaced preferring to argue that high unemployment is due to a mismatch of worker skills and the needs of employers. Even if one held this view – how does eliminating a program that is designed to enhance worker skills do anything but make the labor market situation worse?

Monday, March 14, 2011

Price Indices: Let Them Eat iPads!

David Taintor notes the backlash that New York Federal Reserve President William Dudley’s received when he said:

"Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful," Dudley said in Queens ... You have to look at the price of all things."

That statement may have gone over well with my neighbors on the Upper East Side of Manhattan where these well to do citizens do purchase all sorts of gadgets such as iPads and where food is not an overwhelming part of their consumption basket. But I would to venture to suggest that in some other New York neighborhoods, their consumption basket does not include gadgets such as iPads. Mr. Dudley should admit that we don’t all have the same consumption basket when he says we have to look at the price of all things.

Sunday, March 13, 2011

Interview with Michael Perelman

Suzi Weissman interviewed me about The Invisible Handcuffs for the last 20 minutes of her show. The earlier guests are top notch.

Frontiers of Price Indexing or Product Placement?

"Let them eat iPad." That was the cry Friday after William Dudley, head of the Federal Reserve Bank of New York, acknowledged to an audience in Queens, N.Y., that food prices had gone up before adding that some prices are lower. "Today you can buy an iPad 2 that costs the same as an iPad 1 that's twice as powerful."

Barley, Richard. 2011. "Comedy Fit." Wall Street Journal (12-13 March): p. B 18

Friday, March 11, 2011

The Attack on Unions in Selig Perlman's Wisconsin

The Wisconsin attack on unions is sadly ironic, given the progressive tradition of the state. One of the progressives who whom I have not seen mentioned was Selig Perlman (1888-1959). He was an important economist at the University of Wisconsin and teacher of the son of Robert La Follette, who was, like his father a governor of the state. Later, I had the privilege of knowing his son Mark, I wonderful man with an amazing breadth of economic knowledge and experience. Putting information together from Mark and my father, our families came from nearby each other. I always addressed him as Cousin Mark.

In an undergraduate class, we read Perlman's book, A Theory of the Labor Movement. I remember my teachers' explanation of the book more than the book itself, which I have not read in the last 50 years. Perlman was a former Marxist, who saw the unions as a bulwark against communism. I don't know whether he influenced later scholars' ideas that, by giving workers a voice, unions dampened their revolutionary spirit. I suspect that his analysis had some influence on Jay Lovestone's CIA-sponsored project to encourage (capitalist-friendly) trade unionism around the world.

Obviously, Perlman was not radical, but he still was sympathetic to the working class. Now that the Soviet Union is gone, unions no longer serve such a purpose. Instead, they are treated as a parasitic force that eats into the profit rate. Hopefully, this nonsense will cause a strong enough reaction to ensure that nothing like this happens again.

Now's the Time

I have been an Obamophile from the get-go and I worked hard for him in both the primary and the general election. I have not been disappointed with him, on the contrary. But I do not understand why he is sitting on his hands while Gaddafi massacres his people. We need a no-fly zone immediately - it may well be too late.

The Ricardian Equivalence Bubble

Suddenly it’s everywhere. Justin Yifu Lin (the chief economist at the World Bank), Tyler Cowen, Paul Krugman, Nick Rowe, our own PGL: hot debate about how Ricardian equivalence applies to the current economic situation. There’s just one minor problem: Ricardian equivalence is an absurd idea, with not a shred of evidence or logic to support it.

Behind the imposing moniker dreamed up by Robert Barro, RE simply says that government debt must eventually be paid down to zero. If the government borrows $1B this year, it must run a surplus of $1B some time in the future. If spending is constant, this means taxes have to go up.

I pointed out the vacuity of this idea in a previous post, so I won’t repeat myself. The question of the day is, why should anyone give RE more than a moment’s attention? In particular, why would smart economists with state-of-the-art training be debating the fine points of what RE would mean if it were true?

The only answer I can give is that the theory can be decked out with lots of math (overlapping generations ratex models of the behavioral response to knowledge of future taxes), enhancing the reputations of all involved. The fact that RE simply assumes a nonexistent and impossible state of affairs plays no role.

That, in a nutshell, is what’s wrong with economics.

Thursday, March 10, 2011

Michael Perelman at the Left Forum

I will be on a panel: The Struggle Against Mainstream Economic Ideology

H. Panel Session 4-Saturday 5:00 p.m. - 6:50 p.m

Michael Meeropol

Doug Henwood

Howard Sherman

Michael Meeropol

Michael Perelman

37 E321

I would enjoy meeting some of you whom I know only via the Internet

Is The Arab Uprising A Revolution?

There is not a definite answer to this as it depends on how one defines a revolution. However, one distinction I keep seeing being made is between a civil war and a revolution, with numerous commentators discussing whether the situation in Libya is more a revolution or a civil war. Hard fact is that most serious revolutions involved periods that were also civil wars: France, Russia, and China for starters.

I think a useful place to start, if not necessarily to end up, is to consider the view of that old revolutionary, Karl Marx. For him it involved the uprising of an oppressed class against a ruling class, these defined in terms of control of the means of production. A full-scale revolution involved a change of the mode of production in his terminology, along with the replacement of one ruling class with another. The archetypal model for Marx was the French Revolution, in which the bourgeoisie replaced the landed aristocracy, and capitalism replaced feudalism, although there was Thermidor and reaction, and Napoleon declaring himself Emperor and naming new aristocrats, with the Bourbon Restoration following. So, maybe it was not so successful after all, even if in fact Napoleon went around Europe smashing feudal institutions all over the place and did create the modern nation state of France. As it is, we may be stuck with Chou En-Lai's reply to Henry Kissinger regarding the outcome of the French Revolution, "Too soon to tell."

What is going on in the Arab world looks to me most like what came in Europe in 1848, an international uprising with some similarities across nations as well as differences, although in the short run a failure, if not in the longer run. In some countries the ruler is a monarch, but so far none of those have been overthrown. Tunisia and Egypt were essentially military dictatorships, overthwrown by would-be democrats, although we need to wait and see what will happen, with some ugly anti-women and anti-Christian demonstrations in Egypt. As for Libya, recent developments suggest that Qaddafi may not fall after all. Too soon to tell.

Critique of Public Investment Based on Another Misapplication of Ricardian Equivalence

Antonio Fatás rightfully blasts the following from Justin Yifu Lin:

But how can the Ricardian trap be avoided, i.e. an outcome where the government stimulus fails to boost aggregate demand because economic agents expect future tax increases to pay for larger deficits and thereby increase savings? To avoid the Ricardian trap, it is important to go beyond conventional Keynesian stimulus of “digging a hole and paving a hole” by investing in projects which increase future productivity."

Antonio notes:

No one can disagree with the statement that if the government can choose between different spending projects, they should select the one with the highest return (in terms of productivity and income). But we need to understand that the advise for the government to invest in productive investment applies at all times (good and bad). What is different when there is spare capacity is that "pure demand" policies can bring the economy closer to potential in a shorter period of time. By doing so they will be increasing the overall output and income of the country. And this additional income is the source of potential increases in private spending and tax revenues. This is the intuition behind the Keynesian recipe for times of high unemployment, which is consistent with the concerns of Justin Yifu Lin.

Let me add one other important element to this critique of this supposed critique of Keynesian policies from the Chief Economist of the World Bank. Ricardian Equivalence might hold that a permanent increase in government purchases would lead to an increase in permanent taxes, which would cause private consumption to fall by an equal amount. But even if a temporary increase in government investment were squandered say on building new pyramids or another damn baseball park for a team like the Yankees (with all due apologies to my neighbors who may be Yankee fans), standard lifecycle models of consumptions (e.g., Ricardian Equivalence) do not predict a fully offsetting reduction in consumption.

Wednesday, March 9, 2011

Compassionate Capitalism

One must admire the extent of compassion expressed by the captains of capitalism. Some people unfairly snickered when George Bush declared himself a compassionate conservative, but he is a passionate advocate of business and his description may have been accurate.

Despite all the talk about greed being the fuel that drives capitalism, profits are virtually irrelevant. As an act of philanthropy, corporations scatter much of their profits in less developed areas, such as the Grand Cayman Islands and Bermuda.

As further evidence, I read today that the Bank of America is reluctant to lower the value of its own loans out of compassion for the people who stayed up-to-date with their payments. After all, one of the motives for subprime loans was to meet the desires for people who wanted enjoy homeownership.

Similarly, business opposes minimum wages out of compassion for workers who might lose their jobs. For the same reason, business reluctantly accepts tax breaks only because it allows them to help unfortunate workers who might find themselves without a boss. The same motives explain why business fights so heroically against regulation.

Cutting welfare or publicly provided health care does a service to the poor almost certainly as a university education. Finding themselves without a social safety net, people receive an education, allowing them to navigate the complexities of the marketplace, assuming that they survive the experience. Should such people meet their maker, their demise will represent a charitable gift to the poor-oppressed taxpayers, who already shoulder excessive burdens.

Taxpayers, in fact, are the most admired agents in capitalism. If corporate leaders were more egotistical, they would be paying more taxes. As an act of modesty, they refrain from showing off in that way, allowing others to win the glory of paying taxes.

The High-Yield Equity Risk Premium Puzzle: Yet Another Market Anomaly?

On p. 18 of the Monday, March 7 Financial Times in an article entitled, "Time to rethink as bonds' golden age comes to an end" Tony Jackson refers to a curiously obscure recent finding in the most recent Credit Suisse yearbook. I shall simply quote from the article, starting with the second sentence of paragraph 8 (I have not been able to track down this part of the Credit Suisse report):

"...there is good evidence that investors do not in fact require better odds on riskier securities, but the reverse. The source is that same Credit Suisse yearbook produced by three London Business School academics who are themselves firm believers in the ERP [Equity Risk Premium] hypothesis.

In the long run, it seems total returns from high-yielding stocks have been higher than on low-yielding or non-yielding ones. That has been true for almost all the 21 countries covered in the study. And high-yielders have also been less risky, on conventional measures such as volatility and beta. How are we to explain this?

According to other work cited in the study, it is not that investors are bad at picking high-growth stocks. In fact, they are rather good at it; but they pay far more than the growth is worth. This matches another finding, that returns from high-growth economies - such as emerging markets - are in the long run no better than the low growth ones."

Jackson goes on to note accurately that this finding violates the rational market (or efficient market) version of the ERP, an apparent anomaly like such things as the basic equity premium puzzle or the home equity premium puzzle, none of which have been satisfactorily explained by standard economic theory, although various behavioral theories appear to do so.

I do not have an explanation for this apparently newly discovered puzzle, although regular readers here will not be all that surprised that the financial markets appear to exhibit yet further failures of the standard efficiency models. In any case, I have googled it and found no label for this phenomenon. So, in parallel with the so-called equity risk premium puzzle (that people get higher returns from investing in stocks over bonds than justified by their risk), I neologistically dub this here as the "HIGH-YIELD EQUITY RISK PREMIUM PUZZLE," that stocks with high yields (dividend per price) give higher returns than explainable by their relatively low risk. Do with this information as you see fit, :-).

McConnell is Partially Right About Government Employment

David Weigel listens to Senator McConnell so we don’t have to:

"Unemployment among government workers is about 4.5 percent," said McConnell. "Most of those government workers work for state and local government. The federal government over the last two years has added 100,000 employees. The only industry in America that's not sacrificing in this current downturn is government employees. I can't tell you some federal worker won't be affected by reducing government spending, but we have largely insulated the federal government from this recession."

I looked at the government employment data provided by the Bureau of Labor Statistics and it is true that most of those working for the government work for state and local government. As our table shows, total government employment during February 2011 was 22.217 million (down from 22.582 million as of January 2009) whereas Federal employment was only 2.856 million (up from 2.792 million as of January 2009). Federal employment grew by only 64,000 which was more than offset by the fall in state government employment. Local government employment fell by 352,000 and total government employment fell by 365,000. Not exactly consistent with the message that the Senator was trying to convey.

Saturday, March 5, 2011

Economic Illiteracy: The Tyler Cowen Conundrum

Tyler Cowen, from what I can gather, is everyone’s favorite George Mason libertarian. His colleagues may be considered beyond redemption, but TC himself is provocative, interesting, worth a look. He throws in references to history and culture. He has a sense of humor. No doubt he is a nice guy and uncommonly smart. In spite of all that, shouldn’t it matter that he doesn’t understand the first thing about economics?

His column in today’s New York Times is a doozy. The subject is “fiscal illusion”, and here’s his example:

Say that you have $20,000 in Treasury bills. You probably believe that you own $20,000 in wealth. This will encourage you to spend and come up with ambitious plans. Yet someone — quite possibly you — will be taxed in the future to pay off the government debt. The $20,000 may be needed in order to do that.

The illusion is this: A government bond represents both a current asset and a future liability, yet for most people, those future tax payments feel less concrete and less real than the dollars they’re holding in a money market account.

What is lacking here is not a subtle grasp of cutting edge theory, but the sort of elementary knowledge my students are asked to learn in the first few weeks of introductory macro.

Except in unusual circumstances, government debt is not paid off. To pay off such a debt would mean running fiscal surpluses equal to deficits. No government anywhere does this. Our grandchildren will not be taxed to pay off the fiscal debt we are accruing today, any more than we are taxed to pay off the debt our grandparents ran up during WWII. Every country in the world has public debt, and there will never come a “year of reckoning” when the whole world has to start running budget surpluses to pay it off.

And suppose we decided to jack up our taxes like TC says we must, and we pay down the whole thing—what then? We would have no treasury bonds out there for people to stuff into their portfolios. The only assets you could buy would be the risky stuff: you know, stocks, commercial loans, mortgage-backed securities. People would be pleading with governments to please, please run deficits again so we can have at least a few low-yielding but safe assets.

You might be tempted to say at this point, isn’t there a limit to how much public debt we can ring up? The answer is a definite yes. We need to monitor the fiscal space available to our economy and avoid getting in over our head. There is a lot of economic analysis dedicated to figuring out what these limits are and how to detect them before it’s too late. The New York Times could perform a public service by publishing thoughtful pieces by economists that discuss these questions in an informed manner.

Alas, that has nothing to do with the column at hand. TC is not making an argument about fiscal space or debt sustainability. He is saying that our treasury bonds are illusory because we will have to be taxed in the future to remove them from circulation. We are not talking about shades of opinion here, but the difference between having a basic idea of how economies work and flat-out ignorance.

Sorry: someone has to say this.

Thursday, March 3, 2011

Update On Oil And The Arab Uprising

So, Qaddafi apparently has lost in his effort to retake the major oil head and refinery at Brega against the rebels against his regime, meaning that they control about 80% of Libya's oil, with the refinery particularly crucial according to the generally reliable Juan Cole at . Needless to say, the uncertainties about oil supplies, particularly since the uprising in Libya began, have helped push up the price of oil, past $100 per barrel on both West Texas Intermediate and the roughly $13 more expensive Brent crude, which is the price most of the world outside the US pays (this gap an oddity only around since December), although the general trend with the world economy growing while world oil production has not risen at all for the last half decade is clearly going to be for prices to rise over the foreseeable future, even if there is a downward correction when these uprisings settle down.

While Libya is a major oil exporter, and fellow OPEC member Bahrain continues to have major demonstrations by the Shi'i majority against the Sunni monarchy, it continues to be the case that generally major oil exporting Arab nations are having fewer and less severe uprisings than non-oil exporters. The main latter ones without uprisings continue to be Morocco and Syria, both of which have had some minor demonstrations, but apparently remain largely calm.

However, some other major oil exporters have either experienced demonstrations or are very nervous about the possibility of there being some. Much attention has focused on the big one, Saudi Arabia, where Shi'a are about 17% of the population and concentrated in the oil producing Eastern Province and have long been oppressed by the Sunni majority. There have been calls for reforms, although no demos yet. King Abdullah has responded with a $36 billion plan to spread around a bunch more money. Key blog on the Kingdom is John Burgess's Crossroads Arabia at . According to his links, probably Abdullah's move will work, and the majority Sunni population remains largely loyal to the royal family.

Another less-publicized but somewhat similar situation has arisen in the United Arab Emirates. There the problems are more with expatriate workers (as in Kuwait also), who make up a substantial portion of the labor force. The UAE rulers, who also have a lot of money, at least in Abu Dhabi (Dubai is banrkupt and kept afloat by the Abu Dhabi folks), are imitating the Saudis and have announced a major money handout. One can follow events there through John Chilton's The Emirates Economist blog at .

Finally, the latest Arab oil exporter to have demonstrations, fairly serious actually, has been Oman at the southeast corner of the Arabian peninsula. Unlike the previous two cases, they do not have nearly as much oil or money, but the traditions there have also been to be much more tolerant of dissnt. Part of the issue there is regional, with most of the unhappiness in the western areas of Dhofar near Yemen (which continues to be perhaps second to Libya in terms of the seriousness of its current uprising), an area much poorer than Muscat in the east where the oil is. There is a potential for greater trouble, as Dhofar rose up in the 1980s militarily and could do so again. However, the Omanis belong to the Ibadi sect of Islam that is neither Sunni nor Shi'i. having split off even prior to the division between those two. The Ibadis seem to be more tolerant and easy-going, in contrast to their more hardline Sunni neighbors (although in Yemen part of the issue is dominant Sunnis against rebellious Zaydi Shi'is in the northern mountains), and ruling Sultan Qaboos seems to be making conciliatory moves towards the demonstraters. One can follow events in Oman at Dhofari Gucci's blog at .