The Catalalunya (Catalonia) Card

According to a column in FT Weekend by David Gardner, sometime this month the annual parade in Barcelona, capital of Catalonia (standard spelling; or Catalunya, the Catalonian spelling, get used to it), honoring the dead from the defeat in 1714 of the Catalans at the end of the War of the Spanish Succession in which they supported the incumbent Hapsburgs against the victorious Borbons, was attended by over a million people calling for Catalan indepence from Spain.  Since then, Catalan Generalitat President, Artur Mas, went to see conservative Spanish PM Rajoy in Madrid trying to negotiate a fiscal agreement that would make Catalunya like the Basque country, able to collect their own taxes.  Currently, Catalunya sends 9% of its GDP to Madrid in revenues net, with that twice the figure in most Eurocountries for rich areas sending funds to poorer regions, with the province also having the largest individual provincial debt (not an issue in the discussion).  The Basques send little.  On top of this, the Spanish constitutional court overturned an agreement passed by the previous Socialist government that granted Catalunya substantial autonomy. Since then the Catalan independence movement has erupted big time.

Mas was long a moderate on all this, supported by the lead author of the 1000 page "Bible" of grad micro theory courses, Andreu Mas-Colell, former Catalan fin minster. They want out.  Mas has now called for a an election in November, with him calling for full independence.  This is viewed as a prelude to a full referendum on the independence issue, even though the Spanish central government says that this would be unconstitutional.  Si, we shall see.

The EU, and particularly its Eurozone part, is unhappy about all this.  It coincides with a broader fiscal and financial crisis in Spain, with bonds now above 6%, triggering all kinds of alarm bells and a renewed slide of the euro after the Bernanke support (Yes, kids, when things look good and the US stock market goes up, the US dollar goes down against the euro).  So, the negotiations by the Spanish central government with the troika of the ECB, IMF, and ESB, with the Germans running the whole show anyway, are seriously muddled by this constitutional crisis, and that is exactly what it is.

This is serious stuff.  I have long been declaring that most of the constantly repeated forecasts of doom and gloom for the euro have been overdone, with US commentators from both the right (mostly), Martin Feldstein and the late Milton Friedman, and the left, most prominently Paul Krugman, with all of these claiming the euro could never get off the ground in the first place and only too eager too trumpet the current problems as showing that they were not total fools in the first place, gag.

Anyway, me the pollyanna on the euro thinks this might be the real banana (the word used to name that which could not be named back in the Ford [or Carter?] administration).  It will take some time to work out, and I can easily see them muddling through yet again; but this one will be much tougher than almost any they have to deal with so far.

Heck, Greece does not involve them trying to beat up on the poor Macedonians or the Turkish Cypriots as they so like to do completely idiotically, given their utter fiscal irresponsibility and outright fraud and lying.  This is more serious.  The Eurozone can dump Greece, but it cannot dump Spain.  That would be the end of the game.

The Thirties: The Arts In Italy Beyond Fascism

Not the usual fare here, but there have been a lot of people claiming that "liberalism is fascism" (and socialism and nazism and communism, all in one) lately, to the point where it is a regularly repeated mantra in certain inane circles. Often cited for this argument is the racism and oppressiveness of Woodrow Wilson, along with certain FDR initiatives being modeled on ones in Mussolini's Italy, and of course the true fact that Mussolini himself was initially socialist.  Indeed, he did engage in nationalizations of some companies, ones that held well into the post-WW II era, in contrast with the "National Socialist" Nazis who in fact nationalized nearly nothing.  In any case, an art exhibit in Florence, Italy with the title of this post sheds both light on the complicatedness of the fascist era and raises more questions than it answers about that tangled period.

First, we must note Mussolini's socialist background. However, at his core he was a militarist nationalist dictator, and his initial fame came from his splitting with the Italian Socialist Party in WW I, with that party taking a pacifist position and opposing Italian entry into the war, in contrast with those in France and Germany.  Mussolini became the leader of the warmongering faction of that party, soon setting off to lead his own.  In the aftermath of the war, he became the champion of frustrated veterans, and these would always be at the core of the Italian Fascist Party, which gradually moved to the right over time, eventually adopting the racism and anti-Semitism of the Nazis in the late 30s, along with a repressive attitude to culture and the arts, pushing forward certain schools and approaches, although, still less repressive than Germany, there remained some room for dissident artists and movements.

There has been very little effort in Italy to straighten all this out, I think due to how deeply embedded fascism was in Italy, ruling for nearly a solid 20 years, from 1923 to 1943.  Movements and individuals moved in and out of favor and few have been made to face up to what they did or did not do.  As it is, this exhibit claims to approach all this "objectively," and I would say it makes a brave effort, helped by the fact that by now all the artists involved are finally dead.

So, certain movements were not favored by the fascists, notably abstract art and metaphysical art, the latter a particularly Italian movement founded by Giorgio de Chirico, who spent the entire period out of the country in Paris.  One 1936 abstract painting shown was vandalized by fascists.  Besides various hackneyed efforts to look back to the Church or the Renaissance or Rome, the leading pro-fascist movement was the monumentalist Novocentisti one, which indeed combined some of these elements, while looking a lot like the "classical" period of Picasso right after WW I.  The most complicated movement was futurism, which in the teens was followed by many on the left, including the later Soviet poet, Mayakovsky, but which came to be used by the fascists as part of the pro-technology and modernization movement, even as they harked back to antique models (the symbolic "fasces" themselves being a symbol from the Roman era).  In the late 1930s the Novecentisti would be glorified, while the metaphysical and abstract schools were vilified at about the same time the Germans were pushing "Aryan art," and also denouncing "degenerate art."  This coincided with the Italians finally adopting the racist laws of the Germans.

Nevertheless, this exhibit raises many loose ends and questions.  These are symbolized by the strange and unexplained case of Carlo Carra.  He was initially a political anarchist and a futurist painter in the mid-teens.  After that he would become one of the most important followers of de Chirico and the Metaphysical School.  Indeed, the only works of his I had previously seen were from this period.  However, throughout the early part of this exhibit it became clear that by the late 1920s he had become one of the leading Novocentisti and was a major influence on other artists to follow this approach.  Despite that, the exhibit showed an article from 1938 denouncing the politically unacceptable schools and specifically denounced the metaphysical paintings by Carra.  No explanation was given regarding whether he then got in trouble or how this related to his later Novocentisti move or any of this.  After seeing the exhibit I went online and found a big fat zero on this, other than one source indeed noting that he followed the Novocentisti approach after his futurist and metaphysical periods.  This complete lacuna in the records regarding this rather important figure simply makes it clear to me that there is a lot more to all this in the broader cultural history of the period, and probably in other areas as well, which simply have not been delved into in any serious way.  Maybe this exhibit is the harbinger of an impending major reexamination of what it was really all about?

Did Matt Ygelsias Really Endorse Lowering the Tax Rate on Capital Income?

Greg Mankiw seems happy that Matt is now educating the rest of us silly economists on the wonders of reducing the tax rate on capital income. While it is true that Matt walks us through a discussion of the incentives to consume now versus save but he also adds this:

Empirically, it's a bit difficult to verify that variations in capital gains tax rates and the like really are making a material difference to investment levels. But then again the data is noisy. What's more the thing we have the most real-world experience with is measures like George W. Bush 2003 tax cut for investment income which was financed with government borrowing rather than higher wage taxes, consumption taxes, or spending cuts. It's not at all clear that the basic theoretical considerations in favor of low taxes on investment income apply to the case of a debt-financed tax cut. This is also separate from the question of whether hedge fund and private equity fund managers should be allowed to pretend their labor income is really investment income by calling it "carried interest" and paying at a low rate.

Indeed we had another experiment with lowering tax rates on capital income that actually increased real interest rates and lowered investment – that being the original Reagan “supply-side” tax cut. Of course, Team Romney keeps wanted to pretend they have found some magic recipe for deficit neutral ways of reducing taxation on capital income. The problem, however, as Howard Gleckman notes is that when Team Romney member Kevin Hassett was forced to defend the revenue neutral proposition he had to basically admit you cannot do that without abandoning the reduction in tax rates for the well to do. But I think there is another fatal flaw in Matt’s defense of lower tax rates on capital income. Let me start with Matt’s example:

You imagine two prosperous but not outrageously so working people living somewhere—two doctors, say, living in nearby small towns. They're both pulling in incomes in the low six figures.

OK – now let’s give the microphone to Dean Baker who was discussing a similar argument by Dylan Matthews:

Matthews rests his case on some arguments in the literature concerning scenarios in which we both look to an infinite future horizon and we have identically situated individuals, meaning that we all have the same wealth and the same opportunity to gain income. When these assumptions are relaxed, the case for preferential treatment of capital income becomes considerably weaker, as argued in a recent Journal of Economic Perspectives article by Peter Diamond and Emmanuel Saez … If we have some individuals who inherit immense wealth so that they can live entirely off their capital income and other individuals who must work for their income, a policy that subjects capital income tax to a lower rate of taxation than labor income means that we are taxing the rich at a lower rate than the middle class and poor. It is difficult to see how this is either efficient (we are giving disincentives to work for middle class people as a result of a higher than necessary tax rate) or fair. Furthermore, as a result of having a lower tax rate on capital income than labor income we are giving people an incentive to game the tax code by concealing labor income as capital income. While most workers may not have much opportunity to play such games, higher end workers, such as doctors or lawyers with their own practices would have ample opportunities for such gaming. This is both unfair and leads to a waste of resources as these people employ accountants to rig their books.

Team Romney can pretend all they want that we all have similar endowments of initial resources and that any change in the tax code will somehow magically be paid for by offsetting fiscal restraint, but actual policy decisions must be made in the real world where things are not nearly as magical.

"How not to go about understanding peasant societies..." (or any society for that matter)

In his study of anthropology journal citations, "Anthropology Journals: What They Cite and What Cites Them," published in Current Anthropology in 1984, Eugene Garfield of the Institute for Scientific Information ranked George Foster's "Peasant Society and the Image of Limited Good" (1965) as the second most cited article -- with 207 citations between 1966 and 1982 (see "Table 6"). As Garfield explained, "this paper discusses the cognitive orientation of peasants. It explains how their social premises and assumptions may prevent rapid economic development in peasant societies." The period from 1966 to 1982 was no doubt the paper's heyday but the latest Social Sciences Citation Index count for it is 370 citations, albeit presumably not all in anthropology core journals.

In one of the several commentaries following Garfield's analysis, Peter Hinton pointed out that Garfield's admirable restraint in interpreting the data "leaves open -- as it must -- the question of the meaning of citation patterns and sounds a timely warning that frequent citation does not necessarily indicate 'dominance' or influence. Foster's paper, one of the most cited pieces in Garfield's analysis, is a case in point. It is ironic that this paper, in which Foster develops the idea of 'limited good' to account for alleged peasant reluctance to accept new ideas, is frequently cited as an example of how not to go about understanding peasant societies." Here is how Foster explained his model:

By "Image of Limited Good" I mean that broad areas of peasant behavior are patterned in such fashion as to suggest that peasants view their social, economic, and natural universes -- their total environment -- as one in which all of the desired things in life such as land, wealth, health, friendship and love, manliness and honor, respect and status, power and influence, security and safety, exist in finite quantity and are always in short supply, as far as the peasant is concerned. Not only do these and all other "good things" exist in finite and limited quantities, but in addition there is no way directly within peasant power to increase the available quantities. It is as if the obvious fact of land shortage in a densely populated area applied to all other desired things: not enough to go around. "Good," like land, is seen as inherent in nature, there to be divided and redivided, if necessary, but not to be augmented.

In short, Foster's paper adopts the lump-of-labor fallacy claim and extends it to non-economic spheres of life. Actually, I would rate Foster's explanation of his image of limited good as more scholarly than any explanation of the lump-of-labor fallacy I have encountered. It is more conscientiously qualified and observational data are presented as supporting evidence. Nevertheless, as Hinton's commentary suggested, the model has been controversial, to say the least. In a 1975 article offering an alternative explanation for Foster's field observations, James R. Gregory summarized the critical reaction to Foster's article to that date. I have previously posted Gregory's summary in "Trickster Makes This Lump". As I mentioned there, I can find absolutely no evidence of disciplinary 'cross-pollination' where economists recognize the image as their own fallacy claim or anthropologists note the fallacy claim as the image's progenitor.

Two solitudes. What does this total silence say about the compartmentalization of thought in academia over the last 47 years? What does the lively controversy in anthropology suggest about the teeth-gritting conformism and groupthink in economics? What does it say about the 'cognitive orientation' of economists? And who the fuck cares other than the unemployed 'peasants' that the economist-lords dismiss with a pseudo-mathematical shrug?

i-Side Multipliers for the Job Creators

Andy Kessler shows his ignorance of Keynesian economics and puts forth perhaps a new low in supply-side stupidity:

This myth—that you can just give money to the middle class and good things happen—is widely shared and is at the basis of a lot of government policy. And it is why the recovery is stuck between lack and luster. Let's go back. Henry Ford is popularly credited with inventing the middle class by doubling his workers' salaries to $5 per day in 1914. A multiplier for the economy, right? Wrong. The year before, Ford revolutionized manufacturing with the moving assembly line, slashing automobile build times to just 90 minutes from 14 hours. That's productivity. It allowed Ford to reduce the price over time of his Model T to $290 from $950. Demand took off because it was far cheaper than the cars made by his 88 competitors.

While I’ll grant that the Model T is not be an example of the Keynesian multiplier that most macroeconomist talk about. As far as explaining to Mr. Kessler how this economy is indeed suffering from a lack of demand - Martin Sullivan does the heavy lifting. So let me present Kessler’s other two examples of the i-Side multiplier:

Investor Peter Thiel put $500,000 into Facebook in August 2004, a company now worth $50 billion based on its prospects for transforming the media industry. What multiplier would you put on his investment? This month, after investing billions over the years on R&D, Apple released the iPhone 5. The company is worth $666 billion based on prospects that hundreds of millions of users will lower their cost of doing business with the latest iPhone and iPad mini and whatever else is coming. What is that multiplier?

Kessler is a hedge fund manager. Does he really think every R&D project has incredibly high returns? There are no losers? I would think a hedge fund manager would understate the need to present the expected return to R&D which most research in financial economics shows barely covers the additional systematic risk that investors undertake. If Mr. Kessler does not understand this – I have a suggestion for how you can get rich. Figure out which stocks Kessler is buying and then sell them short.

Presidential Candidate Who Refuses To Release Tax Returns Disses Those Not Paying Fed Income Tax

So, now we have it.  The secret tape of Romney speaking to a bunch of wealthy donors in which he says that those supporting Obama include a base of the 47% of "deadbeats" who pay on federal income tax, while he continues to refuse to release all but his most recent tax returns.  Needless to say, he forgot to mention that most of those people are paying fica, state sales taxes, and a lot of other taxes as well.  Indeed, when one looks at the total tax system of local, state, and federal, it is only barely progressive, and goes regressive at the very top end due to there being no increase in the amount of fica someone pays beyond a wage income a bit above $100,000, while even the poorest wage earner pays at the same rate.  Fica remains the largest tax paid by a strong majority of the population, but somehow Romney thinks those paying fica but not federal income tax are "deadbeats."

To keep things in perspective, the rich whiners who keep talking about only the federal income tax cite the large proportion of federal income tax the top 20% of earners pay, when one takes all taxes into account, they barely pay more than the share of income they earn, 61% to 59%.

Kudlow – QE is the Achilles Heel of the US Economy

Larry Kudlow explains why he thinks QE3 will hurt the economy by noting QE2 devalued the dollar. You see – inflation soared! OK – those of you who understand reality will ask – what inflation? And maybe we should remind Larry that dollar devaluation tends to increase net exports, which of course, tends to raise aggregate demand. I pity those who watch CNBC thinking they are gaining wisdom. Of course, Kudlow's graph left off earlier periods including the Bush years which were dominated by dollar devaluation. I don't recall him complaining about Bush's inflation. Then again, the dollar appreciated towards the end of Bush's second term. I trust Larry knows that was the beginning of the Great Recession.

Reform

Chicago teachers are on strike, and the issue is school reform.  What does “reform” mean in education?  It means the end of tenure for teachers, so that they are always at risk of losing their jobs.  Teachers should be evaluated by productivity (output) metrics, like student test scores, rather than effort or skill-upgrading (inputs).  Schools themselves should lose “tenure”: if the test scores or graduation rates of their students don’t improve, they should be downsized or go out of business completely.  In any case, tax money should shift away from the protected realm of traditional public schools to the competitive, entrepreneurial world of charter schools.  Chicago teachers don’t like these things, so they’ve gone on strike.  What Paul Ryan and Rahm Emanuel can both agree on is that teacher unions should not be allowed to stand in the way of reform.

As an economist, I feel a certain resonance in this word “reform”.  There is a program of economic reform too, and the word is used by a broad spectrum of economists to refer to a set of institutional and policy changes that all countries should adopt—and would adopt if it were not for the obstructionism of special interests.  Here are some of the key items:

Entitlement reform: Reduce public pensions by cutting benefits and raising the retirement age.  Public health insurance should require substantial co-payments for all but the most essential services.

Monetary reform: Insulate the central bank from political pressure, above all the pressure to loosen monetary policy when politicians want to increase the fiscal deficit.

Labor market reform: Reduce impediments to firing or laying off workers; cut unemployment insurance benefits; eliminate rules that restrict entry into certain occupations by requiring apprenticeship or training; reduce the ability of unions to standardize wages across employers or industries.

Legal reform: Strengthen property rights by reducing the ability of courts or other institutions to impose restrictions, obligations or encumbrances on property owners and their transactions.

Public sector reform: Privatize public enterprises to the maximum possible extent; reduce regulation; eliminate subsidies.  Get rid of anything that looks like industrial policy.

There was a time, back in the 1980s and ‘90s, when these items would be put forward explicitly and arguments made on their behalf.  For the most part, those days have vanished.  Today, it is enough to just say “reform”.  Deficit countries in the Eurozone will be supported, but they have to agree to reforms.  Will the slowdown in China convince its leaders that they finally have to undertake reforms?  Populism in Latin America is putting at risk the reforms accomplished over the past 25 years.  Does sub-Saharan Africa need more foreign aid, or is the main problem the lack of reform?

Reform is a word that is difficult to resist.  It carries not only a connotation of progress (reforming something makes it better), but also a certain virtue for the reformer.  Reforms are resisted by entrenched interests, who can be dislodged only through idealism, perseverance and moral courage.  It is good to be a reformer and bad to stand in the way of reforms.

What underlies all these conceptions of reform, from central bank independence to education’s “Race to the Top”?  I would say it comes down to a single, all-encompassing notion of how the world works and a corresponding approach to policy.  The notion is that people are motivated primarily by material self-interest, so that effective institutions depend on engineering appropriate material incentives.  The policy implication is sink or swim: each individual must prosper or face hardship based on the outcome of their choices.  This will be hard for some, but in the long run it is the only way to ensure that the best choices are made and society progresses.

To put it negatively, reform is against insurance, group guarantees of security and other means to insulate from or patch up losses.  If you don’t earn enough money during your working life and save enough of it for retirement, tough luck when you’re old.  If an enterprise can’t earn a profit without government support, it should shut down.  If governments can’t or won’t balance their books, they should be disciplined by financial markets.  If teachers can’t figure out a way to improve their students’ test scores, cut their pay or fire them.

Intellectual historians will recognize this philosophy as a return to the “system of natural rewards and punishments” that was promulgated in England during the eighteenth and nineteenth centuries.  In practical terms, it signifies that institutional developments, especially in the harnessing of political parties, have reversed the effect of extending the franchise, which was responsible for moderating competitive individualism in England and elsewhere.  (Note: it is a commonplace of international political economy that the gold standard, which depended on deflation to achieve adjustment, was rendered obsolete by the emergence of modern democracy.  The imposition of deflation as an adjustment mechanism for the euro suggests that this democratic obstreperousness has abated.)  In fact, it is not clear that majority opinion has shifted on these topics in any country, only that majority opinion is less consequential.

And as for elite opinion, there is much to be said.  A thorough analysis would have to examine the arguments in favor of putting material incentives at the center of policy, and this is a topic for another day.  Here I would just like to take note of the psychological attractiveness of sink-or-swim to those who are already successful: it explains why they are where they are.  Just as those facing poverty and bankruptcy are the victims of their own failures, those who have high incomes and wide social influence are reaping the fruits of their own skill and ambition.  It’s difficult to think of a less threatening narrative than “If you’ve got a problem, try being more like me.”

So When Will Jeb Hensarling Support Fiscal Stimulus?

The headline news is that the Federal Reserve has finally adopted QE3. But let’s focus in on what one prominent Republican member of the House of Representatives said:

Republicans were swift to criticize the development, and characterize it as a consequence of Obama’s poor stewardship of the economy. “There is no clearer indication than today’s Fed action that after 3 ½ years, the president’s economic policies continue to fail,” said Rep. Jeb Hensarling (R-TX), chair of the House GOP conference, in an official statement. “At a time of negative real interest rates and trillions in excess reserves, there is little which monetary policy can achieve today to promote economic growth and much the Fed risks by today’s announcement…. There are limits to what monetary policy can achieve, and it’s clear the Fed has reached them.”

Maybe there are indeed limits to what the Federal Reserve can achieve when an economy is so depressed that we have nominal interest rates near zero. Of course, this means that we desperately need fiscal stimulus. President Obama understands this and has proposed stimulus measures. Alas these same Republicans have yet to pass such needed measures.

Ethnic Stereotyping and Class: Two Ways to Look at the Eurozone Crisis

Hats off to Darian Meacham who says what needs to be said: it is absurd to speak of countries as if they were single individuals (much less “representative agents”) and explain the problems of peripheral Europe on the failings of entire peoples or cultures.  In every instance, and not only Greece, the focus of Meacham’s post, the “national” crises of corruption and barriers to initiative can be traced to an elite class that benefits from them.  Taxes are automatically deducted from workers’ paychecks, while the rich pay nothing.  A tangle of red tape insulates business owners from competition and provides opportunities for insiders to harvest a never-ending flow of bribes.

Meacham could have gone on to point out that, if any interest group is blamed in the media, it is labor.  The key to progress, we are told, is liberalizing labor markets—removing certifications, restrictions on firing, centralized wage bargaining and so on.  What this argument conveniently overlooks as that the most regulated labor markets can be found in the social democratic countries of the north, which nevertheless regularly enjoy trade surpluses.  It is not labor that has failed in the deficit countries, but capital.

Meacham’s attack on euro-neoliberalism might seem strident to you, but consider the demands imposed by the Troika on countries like Greece and Spain—demands that will have even more force as prerequisites for ECB bond purchases.  They are blind to asset-stripping and capital flight.  They call for higher taxes on those who already pay and give only lip service to fighting tax avoidance.  (Indeed, if the EU were serious about getting the rich to pay their taxes they would take aggressive action against tax havens, which of course they don’t.)  Budget cuts are concentrated on education, health care and social protection.  (Greece was allowed, even forced, to continue wasteful military purchases during the first years of the oversight program.)  Privatization of public enterprises is demanded irrespective of whether they perform well or not, and without consideration for the depressed prices they will command in a fire sale.  (Or perhaps that’s the point.)

Returning to Greece, the implicit logic of the Troika program is that the Greek state is too large and provides too many public services, despite the fact that the aggregate numbers for Greece are hardly out of line by European standards.  This is what Meacham means by neoliberalism.  In fact, the real problem is endemic clientelism, the use of the public sector as a well of resources that can be granted or withheld by political grandees in return for votes and other expressions of loyalty.  Yet the Troika has never identified the problem by its real name, and the measures they call for would, in many cases, make it worse—for instance by removing civil service protections and giving politicians more discretion, down to the individual level, over who gets to keep their job.  If this were about actually helping the Greek people to move to a higher level of productivity, not to mention democracy and human dignity, you could call it an error, but the matter is never discussed in the first place.

What is tragic is that, not only are nightmares being visited upon low and middle income people in countries like Greece, Italy and Spain, but the entire discourse surrounding the “problem” and its supposed causes has been poisoned by the ugliest form of ethnic stereotyping.  In some ways the crisis has served as a vehicle to bring Europe closer together: this is true of economic institutions, although the pace is maddeningly slow and the content crudely neoliberal.  On the level of popular politics, however—the rhetoric of political parties, political coverage in the media and conversations in pubs and cafes—the crisis is tearing Europe apart, undoing decades of patient consciousness-building.  In the end, it really is about nationalism versus class: if you ignore one, the other metastasizes into a monster.

One final point, not mentioned by Meacham but logically connected: when the time comes to cut the budget, a promise is made that every attempt will be made to cut the fat, not the bone.  The reason this promise is broken is that the fat holds the knife.

Faux News Must Be Really Confused About the Unemployment Rate

Credit goes to Media Matters as they watch Faux News so we don’t have to:

Fox used a dishonest comparison of two different measures of unemployment to suggest the unemployment rate has nearly doubled since President Obama took office. During a segment criticizing the Obama administration for its messaging on the economy, a Fox & Friends graphic claimed that the "real unemployment rate" had increased from 7.8% in 2009 to 14.7% now ... But in order to make the claim that unemployment had increased from 7.8% to 14.7% during Obama's time in office, Fox had to conflate two different statistics and completely distort Obama's jobs record.

Media Matters displayed how the U-6 measure jumped after December 2007 but has been coming down since it peaked during late 2009. Our graph simply shows the U-3 measure as well, which also jumped after December 2007 but has been coming down since it peaked during late 2009.

Things More Worthy Of Remembrance Than 9/11

Yes, what happened 11 years ago today was awful and tragic, and there is much that can be said about and it is worthy of remembrance.  However, it seems to me that it is being way overdone.  Osama bin Laden is dead, but we are allowing both political parties to continue to use this event to justfiy an everincreasing national security and surveillance state that is taking away our liberties.  Numerous other nations have had more die than we did from terrorism on 9/11, but managed to keep some perspective and treat the matter as one of policing rather than national hysteria, which was already manipulated once to get us into the utterly stupid war in Iraq.  Even though the Bush admin officially admitted that Saddam had nothing to do with 9/11, Cheney kept on claiming that he did, and 64% of those voting for Bush 8 years ago believed that he did.

Here are some things more worthy of remembrance than 9/11, but which will not get even remotely as much attention:

1)  Monday, Sept. 17 will be the 225th anniversary of the adoption of the US constitution.
2) That same day will also be the 150th anniversary of the Battle of Antietam, the bloodiest day in US history, with over 23,000 dead on its battlefield, which inspired President Lincoln to issue the Emancipation Proclamation, which freed (most of) US slaves.  Needless to say, that is a lot more dead than on 9/11 and with a much more worthy and important outcome.

Then in terms of sheer numbers of pointless dead, with us arguably being possibly able to do something about them, if not all that likely:

3) Between 2000 and 2009, 298,000 Americans died of gunshot wounds.  Many of those were suicides, others were homicides, others were family accidents.  We have half the world's guns and are far ahead of any other country on this matter (with some competition from a few with war happening on their soil).
4)  During the same period, 417,000 Americans died in automobile accidents.

So, let us remember 9/11, but let us keep it in perspective compared to more important things, and let us not allow it to be used for evil purposes.

Cheney’s Questioning of Obama’s Handling of Terrorist Threats

Wonkette rightfully rips Dick Cheney for this:

Former Vice President Dick Cheney took a shot at President Barack Obama late Monday night after it was reported that the president has attended fewer than half of his daily intelligence briefings. “If President Obama were participating in his intelligence briefings on a regular basis then perhaps he would understand why people are so offended at his efforts to take sole credit for the killing of Osama bin Laden,” Cheney told The Daily Caller in an email through a spokeswoman.

Oh good grief – the wounds from 9/11 still haven’t healed here in New York City so let’s just talk in general about Presidential management style, which is the approach that National Security Council spokesman Tommy Vietor took. Legend has it that Jimmy Carter was a micromanager whereas Ronald Reagan was more of a delegator. Is Dick Cheney suggesting that Carter was a better President than Ronald Reagan? When I Googled Carter and micromanager, this discussion of President Obama’s approach to economic discussions came up:

Many presidents have directed policy from on high, shunning the details of most issues. Mr. Obama has adopted a different style, particularly when it comes to economics, as he and his team wrestle with the worst financial crisis the nation has faced since the Depression. In a White House ritual new with this administration, the president gathers with his advisers every weekday morning for an Oval Office update and debate on the economy. The breadth of topics is wide, from the underemployed to childhood obesity, and Mr. Obama often dives into the minutiae. In the sessions, according to those who attend, the president sometimes chafes at his advisers' limitations, quizzing them on points raised by critics or asking them to do justice to a view other than their own. At times he quotes from letters sent to the White House to counter a stance taken by his team.

And rightwing critics argue that this President hasn’t focused enough on the economy! But the clincher comes from a Republican Senator:

Sen. Judd Gregg, a New Hampshire Republican who briefly flirted with joining the Obama cabinet, says the president's style matters less than the outcome of the deliberations.

Shall we discuss the outcomes of those deliberations during the first few months of the Bush Administration? Does Dick Cheney REALLY want to go there?

My Bid for Immortality: Dorman’s Law

Why do writers get to name laws after themselves, when explorers can’t put their own name to mountains, and field biologists can’t do it for new species?  I don’t know, but I’ll take advantage of the loophole to promulgate my own deep discovery:

The sum of a reliable number and an unreliable number is an unreliable number.

Commentary on the law would emphasize that the extent of joint unreliability depends on how unreliable the second number is and how large relative to the first.

This bit of wisdom, hidden in plain sight for eons, has particular relevance to the practice of economics.  Economists are constantly estimating the size and value of bundles of things, whether direct and indirect employment effects of a program, the benefits and costs of a particular project, or the value of the output of an entire economy.  When they do this they encounter some items that they can put a fairly precise number on and others where even the most sophisticated techniques offer little more than a wild guess.

What my eponymous law says is that, when faced with this situation, an economist should distinguish between reliably and unreliably measured elements in the bundle and, as one output, provide a composite total for just the first set.

Here is an example.  A miracle feed supplement is developed that increases a cow’s production of milk by 25% but leads to a greater incidence of coronary disease in the dairy-consuming population.  As an economist, you are asked to provide an estimate of the total cost of this excess disease.  Some aspects can be measured precisely, like additional costs of hospitalization and medication or the excess work absences that will result from more widespread illness.  Others are unavoidably loosy-goosy, like the subjective disutility of those suffering heart conditions or the disutility induced in their friends and family.

My law doesn’t tell you not to try to put numbers on the ineffable.  What it does say is that, if you do a good job on the first set of outcomes, add them to the second and report the total, you lose the benefit of the precision with which you measured the “hard” items.  The message is, whatever else you do, report the subtotal of reliably measured costs separately.  If you want, you can also throw in the other stuff, total up a composite estimate, and let the reader decide what to do with it.

Being clearer about what we know pretty well and what we don’t is a first step toward winning, and deserving, respect for the way we do economics.

The Rosen-Laffer Curve: The Steady State Does Not Appear Overnight

Brad DeLong is still unhappy with a paper from Harvey Rosen with one of his many legitimate complaints being:

starting with what seems to me to be an overstated supply-side boost (3%) and then considering only even larger effects (5%, 7%) rather than smaller effects

Rosen says he got this 5% from John Diamond who claims that a tax reform that combined base broadening and reductions in marginal tax rates could boost national savings such that output would eventually be over 5 percent higher with eventually being defined as a decade from now. Rosen also references a paper by David Altig et al. that we noted here. Permit me to quote just one paragraph:

The model predicts significant long-run increases in output from replacing the current U.S. federal tax system with a proportional consumption tax. For our base case, output would rise eventually by more than 9 percent. For middle- and upper-income classes alive in the long run, this policy is a big winner. But older transition generations suffer from the imposition of an implicit capital levy, and low-income individuals, even in the long run, suffer a significant loss as growth fails to compensate for the decline in tax progressivity.

Note that both of the papers cited by Rosen as evidence for significant output effects specify that they are referring to eventual increases in output not immediate increases. Anyone even remotely familiar with standard long-term growth models should recognize that obtaining faster growth rates requires a current sacrifice of consumption – that is an increase in national savings. Output slowly grows over time, which allows the economy to enjoy the eventual fruits of its current sacrifice. As I noted, the paper by Altig et al. envisioned:

the kind of supply-side experiment reasonable conservatives such as Bruce Bartlett advocate, which include not only reductions in marginal tax rates but base broadening changes in the tax code so as to effectively pay for revenue losses from the reductions in those marginal tax rates, that is, a fiscal policy change that is deficit neutral even before we worry about any alleged supply-side benefits.

Team Romney, however, wants us to believe that these supply-side benefits can come immediately and that lower income people do not have make sacrifices in the form of paying higher taxes. These conclusions, however, do not follow from any form of reasonable economic analysis that recognizes that long-term growth occurs only slowly over time. That Greg Mankiw apparently endorsed this incredibly sloppy and misleading application of growth theory should have both Harvard University and Cengage Learning (his publisher) worried. If he does not understand that growth effects take considerable time, then is he really qualified to teach macroeconomics? If he does understand this critical point, then why would he endorse Rosen’s paper with its table entitled “Revenue Consequences of the Romney Tax Reform” that included “Additional tax revenue from rise in incomes due to higher incomes” since that “macro-dynamic behavioral responses” would not fully materialize for several years?

ID Cards Will Soon Be Passé

We have lots of ID cards in this country, but none of them are comprehensive, in the sense of really identifying you, universal and mandatory.  The reason is political opposition.  Every time someone suggests a system of universal identification, such as for voting or enforcing immigration laws, there is an uproar, and the idea is canned.

But now we are told that the FBI is moving to a biometric ID system that will almost certainly extend to all of us.  It can be used for surveillance and police work and also normal administrative functions.  As with every technology that has ever been developed, sooner or later it will do everything it can do.

But no uproar (yet).  Why?

Woodward "Corners" Obama, Only To Crash Into The Debt Ceiling

Top headline in Washington Post today reads, "A President Cornered," an extract from Bob Woodward's book due out Tuesday, _The Price of Politics_, from which leaks of various sorts have already been floating around.  Much as in a story in WaPo earlier this year, the focus seems to be that Obama blew the negotiations with Boehner and Congressional Republicans over last year's raising of the debt ceiling (although according to that report, the crucial blow came from the the "Gang of Six" who held a badly timed press conference, with Obama publicly praising them).  In this account, Woodward quotes Boehner that Obama was "moaning and groaning" at one crucial point, and new "hero" emerges, Harry Reid's Chief of Staff, David Krone,who gets much praise for lecturing Obama to his face about not having a "Plan B" besides his demand that there not be another round of raising the debt ceiling prior to the election, with Krone apparently responsible for the Plan A that did involve such a second round increase before the election.  In the end,Obama got his way on not having such second round, although we do face the idiotic "fiscal cliff" after the election as the price for the ceiling increase, but somehow he is nevertheless depicted as some hapless whining loser who does not know simple things that some Senatorial Chief of Staff knows.

Needless to say, Woodward is not an economist and specializes in these sorts of inside accounts from various players in big negotiations or situations who provide supposedly fascinating or devastating tidbits about presidents in particular, but in this case he seems to really miss several points about this, quite aside from trying to make Obama look stupid for insisting on his point about not wanting to have a second argument over this before the election, something that at this point looks to have been a very wise thing to insist on, given that the GOPsters are blaming him for all those public sector jobs being lost when they blocked his request last year to provide funds to state and local governments that would have largely stopped those layoffs from occurring.  The main point is that Woodward does not seem to understand how ridiculous the whole debate was to begin with.

This gets back to something I have pounded on here repeatedly: the US is the only nation in history to have had a nominal debt ceiling.  It should be abolished. We passed it in 1917 in the wake of the adoption of the income tax, and it has been raised over 70 times since with never anything more than a staged and nominal fuss, with everybody always knowing that it needed to be raised, given that Congress had passed a budget accepted by the president that entailed violating it.  So, there was always a constitutional conundrum that if a debt ceiling was smacked into of either violating the ceiling or violating the authority of Congress and the president to tax and spend as they voted and signed to do.  The thing has always been ridiculous and probably unconstitutional (14th Amendments says government must pay proper bills it owes).  Even conservative observers have noted this since the 80s, such as Bruce Bartlett.

 Woodward never mentions this issue, although there was much public discussion of it during the debate, with even Bill Clinton calling for Obama to simply declare the debt ceiling unconstitutional and proceed forward accepting whatever the judgment of the markets that happened, which quite likely would not have amounted to much.  There might have been a downgrade, but there was anyway due to the Republicans threatening to hold up raising the ceiling and triggering an outright default (with markets blithely ignoring that anyway, some US government securities rates going so low as to become negative in some cases recently).

What is depressing in the story, aside from such stupidities as the reporting of this whiner Krone lecturing Obama about not having a Plan B to back up his hard work on the worthless Plan A, is that there seems to have been no discussion at all by the insiders of this option to declare the ceiling unconstitutonal.  The heavyweight seems to have been Treasury Secretary Geithner, who pressured Obama to sign the Plan A if it passed Congress in order to avoid a default.  Woodward pompously quotes Geithner as saying this was a moral issue as well as just being a political and economic one, but if Geithner thought that, he should have taken seriously the option of declaring (with good reason) the ceiling unconstitutional.  Clearly he did not view that as an option, but why he did not is not reported in this account by Woodward.

So, as this will come up again, I think Obama and whomever he replaces Geithner with, assuming he is reelected, will seriously reconsider the constitutional option.  Obama himself is reported as having provided crucial arguments for doing so, that the political opposition has become so irresponsible that they are willing to play blackmail for their demands by threatening to engineer an actual default.  This irresponsibility must be confronted fully and brought to an end. Only declaring and enforcing the abolition of the debt ceiling on constitutional grounds will achieve this, which almost certainly would involve an eventual trip to SCOTUS.

BTW, I hope the rest of Woodward's book is not as biased and stupid as this selection put into WaPo today, but I suspect it will be.

Are Lower Gasoline Prices Worth More Pollution?

Apparently Paul Ryan thinks so:

She asked him how he was going to "improve the situation" of sky high gas prices. "This is not just something that squeezes family budgets, it squeezes businesses," Ryan answered. "It also gives us a bad foreign policy in that we are so dependent on other countries for our oil imports, it's the biggest part of our trade deficit and so what's frustrating about the Obama administration's policies are they've gone to great lengths to make oil and gas more expensive." ... The House Budget Chairman told the questioner not to "forget" that President Obama "tried to grant, jam through congress, a national energy tax designed to make energy more expensive." "Don't forget the fact that he has tried lots of things to try and prevent drilling for natural gas and oil on public lands," Ryan said. "Lets not forget the fact that the regulations coming out of the EPA are making it harder for us to harness home grown American energy." A national energy tax is another term for cap-and-trade legislation that is usually used by opponents of the measure. Supporters say the legislation forces companies that pollute to pay, but opponents like Ryan say it is simply another tax on businesses and makes energy pricier for the average American. Ryan then moved on to how he would lower gas prices in a Romney/Ryan administration, but stayed away from specifics, instead saying domestic production of energy should be increased, something he mentions on the stump daily.

In other words, Ryan’s only answer to the woman’s question was basically “drill, baby, drill”. This article did not we are domestically producing more oil and importing less – consistent with what President Obama has been saying and contrary to the spin from Paul Ryan. Given that Romney economic advisor Greg Mankiw has often called for a Pigou Club tax on carbon emissions, I’m wondering if he will comment on this Ryan spin?

Robert J. Gordon is STILL a Buffoon!

"By definition, whenever hours per capita decline, then output per capita must grow more slowly than productivity." -- Robert J. Gordon, "Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds."

At the Globe and Mail Report on Business, Ian McGugan discusses Gordon's NBER Working Paper in "A heretic's view of the growth dogma." The Sandwichman responds:

Dear Mr. McGugan,

I was very interested to read your column today about Robert Gordon's NBER Working Paper, "Is U.S. Economic Growth Over?" and downloaded Professor Gordon's paper from the NBER site. Although I would agree with Professor Gordon that the expectations -- based on past experience -- of future growth may be questionable, I must note a critical flaw in his analysis. On page 16 of the paper, Gordon states, "By definition, whenever hours per capita decline, then output per capita must grow more slowly than productivity." The problem with this "definition" is that it is a tautology that conceals the distinction between two potential feedback loops in the ratio between hours per capita and productivity.

Arithmetically, total hours is both the numerator in "hours per capita" and the denominator in "productivity." Output is the numerator in both "productivity" and "output per hour" and thus can be factored out by multiplying both sides of the equation by the reciprocal of output (1/output). So, yes, by definition output per capita MUST grow more slowly than productivity. So what? This is a tautology that obscures more than it explains. By such ultra-Malthusian logic, any increase in productivity, given a stable or growing population, must be a "bad thing" because the increase in output per capita will always be slower!

What Professor Gordon overlooks is that reductions in the hours of work per person can lead to gains in total output when current work-time arrangements are not optimal. Those work-time arrangements can include overwork of some people combined with unemployment and underemployment of others. Such disparities are not well captured in such indicators as "hours per capita", which are averages based on dividing one aggregate by another. Even so, even if large reductions in hours per capita led to massive increases in output per capita, the tautology expressed by Gordon would still be trivially "true". That is, it would be arithmetically correct but irrelevant and misleading for all practical purposes.

A similar confusion between arithmetical results and practical outcomes leads Gordon to prescribe immigration as the panacea to the growth dilemma he purports to uncover. And what could be more logical than a purely arithmetical solution to a purely arithmetical problem? Professor Gordon overlooks the possibility that the number of immigrants that could be productively absorbed by a given economy might be constrained by such other factors as fixed capital investment (including infrastructure), natural resources and social and cultural factors. Treating immigration as "numbers" that can be increased or decreased at will like turning on a water tap is an exercise in academic wool gathering.

Traditionally, economists, including Professor Gordon, have routinely dismissed proposals for work-time reduction as being based on a "lump-of-labor" assumption that allegedly presumes an arithmetical solution to unemployment without considering the practical constraints. They make the perennial claim even where no such fallacious assumption can be demonstrated. It is therefore a delicious irony to see Professor Gordon himself plucking both his "problem" and his "solutions" out of the arid arithmetical void. To be blunt, Professor Gordon here commits precisely the "lump-of-labor fallacy" that he elsewhere glibly (and unjustifiably) accuses others of!

Cheers,

Tom Walker

P.S.: In answer to Gordon's question, would I rather have an Ipad or a flush toilet, I would much rather have a flush toilet with the capability of disposing of the "heretical orthodoxy" of pedantic scribblers like Professor Robert J. Gordon.

Tax Cuts Are Not Revenue Neutral By Assumption – What May Be Missing with Rosen’s Analysis

Greg Mankiw reads Harvey Rosen and emphasizes this:

I analyze the Romney proposal taking into account the additional income that might be generated by economic growth. The main conclusion is that under plausible assumptions, a proposal along the lines suggested by Governor Romney can both be revenue neutral and keep the net tax burden on high-income individuals about the same. That is, an increase in the tax burden on lower and middle income individuals is not required in order to make the overall plan revenue neutral.

Brad DeLong reads the same paper and notes:

If raising the net-of-tax rate for the upper class from 65% to 72%--an increase of 10% in the natural log--raises national income by between 3 and 7 percent, then wouldn't… • Reagan's ERTA raising the net-of-tax rate for the upper class from 30% to 50%--an increase of 51% in the natural log--have raised national income by between 15 and 35%? • Reagan's raising in 1986 of the net-of-tax rate for the upper class from 50% to 72%--an increase of 36% in the natural log--have raised national income by between 11 and 25%? • Clinton's lowering in 1993 of the net-of-tax rate for the upper class from 72% to 60%--a decrease of 18% in the natural log--have lowered national income by between 5 and 12%? • Bush's raising in 2001 of the net-of-tax rate for the upper class from 60% to 65%--an increase of 8% in the natural log--have raised national income by between 2 and 5%? We simply do not see such supply responses in the historical record, do we? To propose that they exist is wholly inconsistent with the fact that American growth 1938-81 was faster than since 1981, right? What am I missing here?

Maybe what is missing is something Harvey wrote that Greg forgot to mention:

Another important issue seems to have gotten short shrift in the debate over the proposal. To assess the effects of moving from tax system X to tax system Y, one needs to know what X and Y are. In this case, X is the status quo, and Y is the Romney proposal. Much of the current controversy has arisen because the Romney proposal is not fully articulated, and therefore analysts can disagree about what kinds of tax preferences would be eliminated.

I submit that Harvey was really modeling something we should call tax system Z – especially if he wants to follow in the tradition of the 2001 AER paper written by David Altig et al. That paper was the kind of supply-side experiment reasonable conservatives such as Bruce Bartlett advocate, which include not only reductions in marginal tax rates but base broadening changes in the tax code so as to effectively pay for revenue losses from the reductions in those marginal tax rates, that is, a fiscal policy change that is deficit neutral even before we worry about any alleged supply-side benefits. The tax system Z clearly differs from the Romney proposal (Y) as Romney has not proposed any offsets either in the form of elimination of tax preferences or spending reductions. In fact, Romney rejects the Medicare savings that used to be discussed by Paul Ryan so as to criticize Barack Obama for wanting to implement Medicare savings. Romney would also spend more on defense that would a President Obama. Greg Mankiw used to get why this mattered:

I used the phrase "charlatans and cranks" in the first edition of my principles textbook to describe some of the economic advisers to Ronald Reagan, who told him that broad-based income tax cuts would have such large supply-side effects that the tax cuts would raise tax revenue. I did not find such a claim credible, based on the available evidence. I never have, and I still don't.

If you read what Mankiw’s first edition said about the initial Reagan tax cuts, you will see a very traditional description of classical crowding-out. The fiscal stimulus from Reagan’s tax cuts sine any substantive reductions in government spending (domestic cuts yes but offset by increases in defense spending) lowered national savings which increased real interest rates and lowered investment demand. So whatever small favorable supply-side benefits we may have received were overwhelmed by crowding-out effects. Is there any reason fiscal policy will be different under Romney? I don’t see it. One might argue that having Greg Mankiw and Glenn Hubbard as economic advisors would change everything but recall they were also advisors to George W. Bush. How did that work out?

The Worst Misrepresentation

I am reacting to watching Bill O'Reilly's coverage last night of the Dem convention.  He was bloviating loudly in his inimitable way about four supposed reasons why nobody in their right mind should vote for Obama because they indicate how terribly worse off people are than we were four years ago, the question du jour.  The facts in all of these are on their face undeniable, but for most of them there is the simple matter that on Jan. 20, 2009 the trends on them were awful, whereas now they are improving, if not in all cases as fast as we would all like.  The four are unemployment, gasoline prices, per capita income, and national debt.  However, the one that appeared to have the biggest gap between then and now was gasoline prices, and O'Reilly was particularly bloviatory about it.  How could any sane person vote for Obama when gasoline prices have risen from $1.82 per gallon to $3.87 per gallon!?!?!?

Well, that is easy.  Prices were $4.11 per gallon on July 7, 2008, higher than now or at any time since or before then (at least in nominal terms; over a century ago they were as a high as the equivalent of $10 per gallon).  But then a funny thing happened.  Not only was there probably a speculative bubble in oil going on at that time that was peaking out, but we were heading into this massive financial collapse that led to the massive real economic collapse that we were in the middle of when Obama took over.  The price of crude oil peaked about then at $147 per barrel, higher than anytime since, and then crashed hard to nearly $30 per barrel by about the end of the year, with an accompanying decline in prices at the pump. Indeed, ironically, the bottom had passed and those prices were going back up again on January 20.

In any case, nobody should take remotely seriously any commentator getting all huffy and puffy about that particular datum in the tale of supposed woe regarding this four year comparison.

Drill, Baby, Drill as Fiscal Stimulus

Digby quotes the part of Romney’s Thursday speech where he laid out his five point plan to create 12 million new jobs and provides this summary:

So, they are going to create jobs by opening up drilling, privatizing schools, off-shoring business, slashing government, cutting taxes and cutting regulations. In other words, the same exact agenda they always have. Well except for the war-as-stimulus he might have to start.

The traditional fiscal part might be confusing to those who think standard arithmetic applies to the Republican promise to balance the budget as Romney want to cut taxes – and as Paul Krugman notes increase defense spending:

OK, so deficit spending hurts the economy — unless it’s spending on the military (or on the medical-industrial complex), in which case cutting spending destroys jobs. Leave on one side the fact that those possible defense cuts are the result of a Republican ultimatum, not Obama policy. And where exactly is deficit reduction supposed to come from? The GOP wants massive tax cuts; but spending on defense must rise, as must health care spending.

Wait – I thought Paul Ryan wanted to slash Federal health care spending but I guess Romney wants to restore the Medicare spending growth that President Obama hs strived to curb. So how to score the Romney plan on the traditional fiscal side strikes me as something on the order of impossible. I’m also confused on whether President Romney would increase our commitment to education or continue the path of less resources for public education. I’m sure all of us wish he’d stop contradicting himself on these various fiscal issues. There have been several claims as to the wonders of the drill, baby, drill aspect of the Romney plan including a White Paper from Mark P. Mills of the Manhattan Institute:

An affirmative policy to expand extraction and export capabilities for all hydrocarbons over the next two decades could yield as much as $7 trillion of value to the North American economy, with $5 trillion of that accruing to the United States, including generating $1–$2 trillion in tax receipts to federal and local governments. Such a policy would also create millions of jobs rippling throughout the economy. While it would require substantial capital investment, essentially all of that would come from the private sector.

While this all sounds wonderful – one has to ask why the private sector has not embarked on a drill, baby, drill strategy. Investing now for the future would normally require the private sector to weigh future benefits against the cost of capital today but that cost of capital is currently near zero. The Republican claim is that environmentally friendly regulation increases the cost of a drill, baby, drill approach, but then it is standard economics that the social marginal cost of exploring for oil likely does exceed the private costs. I guess the Republicans want us to just ignore the possibility of another Gulf oil disaster. But I would suspect the main reason we don’t see drilling in everyone’s backyards right now is the uncertainty of whether that drilling will produce a gusher versus a dry oil. Then again – leave it to Mr. Romney to propose all sorts of subsidies for such drilling, which of course, would have no effect on the deficit per his new fangled arithmetic. Actually, I think Keynes said it best:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing. The analogy between this expedient and the goldmines of the real world is complete. At periods when gold is available at suitable depths experience shows that the real wealth of the world increases rapidly; and when but little of it is so available, our wealth suffers stagnation or decline. Thus gold-mines are of the greatest value and importance to civilisation. just as wars have been the only form of large-scale loan expenditure which statesmen have thought justifiable, so gold-mining is the only pretext for digging holes in the ground which has recommended itself to bankers as sound finance; and each of these activities has played its part in progress-failing something better. To mention a detail, the tendency in slumps for the price of gold to rise in terms of labour and materials aids eventual recovery, because it increases the depth at which gold-digging pays and lowers the minimum grade of ore which is payable.

Drilling for oil whether it is really there or not has become the replacement for digging for gold. Who knew Mitt Romney was such a Keyensian? Of course, Keynes also noted that building houses and the like (such as new schools and other useful infrastructure) would be more sensible.