Robert Samuelson Sinks Into The End Of Entitlement

Just when one thinks one has seen the worst out of our favorite non-economist wannabe economic journalist, Robert J. Samuelson sinks lower with a column in today's Washington Post entitled, "The end of entitlement: Americans' lofty expectations get a reality check."  Dean Baker has already slammed the basic premise of this piece, that the poor and middle class should just suck it up that they are not going to get "secure jobs...homeownership...ever-more protective government...fixed tax burdens...a college education," because taxes cannot be raised on the rich, http://www.cepr.net/index.php/blogs/beat-the-press/robert-samuelson-tells-the-middle-class-and-poor-that-they-should-stop-expecting-to-have-decent-lives-because-his-rich-friends-want-all-the-money .  Dean criticizes several of RJS's arguments, including his contrasting job growth during 1980-2007 with it since then while failing to note the inadequate use of stimulus policies since then, and also his failure to note that in spite RJS's incessant whining about people failing to pay for their "entitlements," the payroll tax was only 6% and was 15.53% in 1990, along with some other points as well.

I am going to pile on also, while making some modifications of Dean's arguments in particular details, although none of these details will let Samuelson off the hook in the least.  I note that he is continuing to pound on points he has been making forever, citing a book of his from 1995, _The Good Life and its Discontents_, arguing even back then just prior to the main takeoff of the Clinton boom, that people were delusionally expecting "perfection" rather than mere "progress," although by now he seems to think that people should not even expect any progress either.

Now, let me say that at some level RJS is right, but in this he is trivial and out of date.  Basically, the US economy has not performed since 1973 as well during any period as it did between 1945 and 1973, with the possible exception of that late 1990s Clinton boom (which Dean would say was due to the dot.com bubble, although I think there was more substance to that boom than just that).  After bad economic performance in the 1970s after the first oil price shock, the 1980s brought some uptick of optimism during the Reagan years, although careful examination of economic performance in the 80s suggests that the performance was not much better than the 70s.  In fact, the economy has been gradually declerating more or less since 1973, with an occasional upward blip, with the Great Recession simply pounding this poor performance very hard.  Indeed, while Samuelson particularly whomps on Social Security, its future in terms of demography was understood back in 1983 when the Greenspan Commission recommended the changes that would increase fica taxes and reduce the benefits for the baby boomers that are still coming into the system (another round of age eligibilities still to kick in).  But this is not enough for that scourge of entitlements, RJS (who, of course, barely mentions the much more serious matter of rapidly rising medical care costs in all this).

One further point I would like to make on this is that in fact Samuelson fails to recognize that with respect to Social Security in particular, the public has a far more pessimistic view than is realistic, even in the face of the ongoing Great Recession (which will come to an end at some point eventually).  As it is, RJS along with most of the Very Serious People have been going on and on so long and loudly about how the Social Security Administration will "go bankrupt" if nothing is done that we even have Obama caving to this constant drip drip to pose a cut in the form of the chained CPI-W, even as virtually everybody canned this proposal, with even Republicans threatening to run against this from the left, and, more to the point, the majority of young people do not believe that they will get any Social Security benefits at all.  I mean, "bankruptcy"!  That must mean the end of the system.  In fact, such a bankruptcy would leave recipients better off in real terms if it were to happen than current recipients (see discussion of "Rosser's Equation"), but Samuelson and others are not remotely about to sort this out and make clear that things are not nearly as bad as so many think.

In any case, Samuelson's bottom line on Social Security is not that people have been told overly scary stories, but instead, "Sooner or later, the programs called 'entitlements,' including Social Security, will be trimmed because they're expensive and some recipients are less deserving than others."  Would those latter be the well-off?  If so, why not just raise the income cap on fica and have done with all this moaning and false whining?  And, of course, he fails to note that the program was already trimmed back in 1983, that trimming still coming into place.

Another point is one where I think that Dean is not quite right for once.  This involves Samuelson at least partly blaming our supposedly mounting problems on "lifestyle choices," particularly a rising rate of single-parent households.  Dean makes the point that it was the 1970s when there was a high rate of increase of such households, and then makes the completely valid point that such nations as Sweden and Germany have high rates of single-parent households while not having the rising poverty rates that we are seeing in the US.

However, in fact there has been a renewed increase of births outside of marriage in the US, with such births now more than 50% for mothers under 30.  Furthermore, the highest rate of increase in such rates has been among white women with some college education, http://articles.businessinsider.com/2012-02-21/home/31081751_1_illegitimacy-black-children-unmarried-women .  However, besides failing to notice the point made by Dean about performance in other countries, Samuelson also fails to notice the point made by even conservatives such as Charles Murray that what is going on here is not some explosion of irresponsible immorality by white women, what is going on is a collapse of available jobs for working class white males, mimicking what happened earlier for black males.  It is well known that a collapse of male employment tends to lead to a breakdown of families,with mothers having to support their children on their own with little increase in government assistance for them.

Finally, RJS accurately notes that big companies are "squeezing fringe benefits."  He accurately declares that "the private safety net has shrunk," with both health plans and especially pension plans experiencing this shrinkage.  However, somehow his response to this is that rather than having the government step in to offset at least some of this shrinkage, particularly on the pension front, he instead is beating his drum yet again for cuts in Social Security benefits.  I am sorry, but does this man even read what he writes, much less think about it?  The evidence is clear that he does not.

Barkley Rosser

About Those Costly Rescues in Bangladesh

According to this account, rescuers are still scouring the rubble of what used to be several garment factories in Bangladesh, where hundreds are believed to be still entombed.  Large amounts of time and materiel are being devoted to the task, which will no doubt disturb those six-figure American journalists who think that too many resources are being spent on saving lives.  After all, in a poor country officials could just write off the handful of survivors and spend the money on promoting new sweatshops to replace the old.  That’s a tradeoff we think they should be happy to accept.

Seriously, it is often noted that much more is spent per life saved to rescue someone after a disaster than to take precautions beforehand.  Economists justify low investment in precaution by saying that, actually, two different goods are involved, “statistical lives” of workers who might be saved if safety conditions were improved and “identified lives” of those who can be seen to be in imminent danger.  A lower price for the first is compatible with a higher price for the second.

I have always found this to be unconvincing.  What is the difference between these two kinds of lives?  In a word, information.  Before the fact we can forecast a certain number of expected lives lost but we don’t know who they will be.  After the fact we do, and that’s the difference.  Now, I tend to think that more information leads to better judgments—not always, but on average.  If the “value of life” goes up as we gain more information about the life in question, isn’t that saying something?  Media coverage often dwells on the personal details of individuals whose survival depends on rescue dramas—their classmates from school days, their spouses and children, their dreams for the future.  This makes us value them more.  As for the unknown individuals who are statistically expected to be at risk, we don’t know their friends, families and dreams, and so we value them less.  Who wants to cast a vote here for ignorance?

Taking a step back, the root problem for economics is that its value system is entirely ex ante.  Things have value according to our willingness to pay for them, but this approach is situated in time prior to the acquisition or realization of whatever it is we are valuing.  Our experience enters in only to the extent that it informs future willingness to pay valuations.  It’s not that informed, retrospective judgment is downplayed; it has no direct role whatsoever.  There is no place in economic valuation for looking back and asking, “So what did this do for me after all?”  Putting a price tag on risk of injury or death is no different: whatever we learn after the fact doesn’t count.

How To Submit A Paper to ROBE

The url for submitting a paper to the Review of Behavioral Economics (ROBE) is Https://editoralexpress.com/rbe .

Barkley Rosser
Founding Editor-in-Chief

How Weird Is The Weirdness At The WaPo?

Jared Bernstein has issued an estimable blast at the Washington Post called "The Papers: Weirdness at the WaPo," http://jaredbernsteinblog.com/the-papers-weirdness-at-the-wapo , which has been supported by Paul Krugman at http://krugman.blogs.nytimes.com/2013/04/22/building-a-mystery , both linked to by Mark Thoma at http://economistview.typepad.com/economistsview/2013/04/links-for-04-23-2013.html , along with several related jabs coming from good old Dean Baker.  With all this piling on, probably enough has been said about this farce, but I cannot resist piling on with a few more points, particularly as the Washington Post editorial page of Earth Day, 2013 involves idiocies issuing from both Fred Hiatt as Editorial Page Editor as well complete nincompoopery coming from one of my fave whipping boys, that non-economist wannabe economist, Robert J. Samuelson.  Hiatt (anonymously written, but almost surely him) whines that too much is being made of the upending of Reinhart and Rogoff's (RR) finding of a supposed 90% threshold on debt/GDP ratios, and RJS just wallows in silliness about macroeconomics, "the trust in macroeconomic magic has shattered," because there are disagreements among macroeconomists.  Oh my.

First of all, the dustup over RR since the paper by Herndon et al hit cyberspace has been widespread in general.  There have been an enormous number of commentaries by many, way too many to cite now, with this getting picked up by most newspapers and other outlets paying attention to economics, with quite a few observers openly admitting that they were misled by RR's arguments regarding the importance of the 90% threshold.  Even I mentioned it without specifically endorsing it in a local TV interview on fiscal policy not too long ago ("Some people think that 90% is an important threshold," I said.).  While people like Bernstein and Krugman are certainly correct that back in 2010-11 the global austerians probably would have done what they did even without RR, that study clearly was used very widely to support their policies, and this support is now looking extremely embarrassing in the face of the evident failure of their policies to spur economic growth.  The discussion of this has been very prominent in many outlets.

But, until yesterday, this did not include the venerable WaPo, where Hiatt and Samuelson, and some others as well, have been relentlessly pounding for years to support cutting Social Security and Medicare as part of a Grand Bargain, and Hiatt continued to do so at the end of his editorial.  The dustup over RR simply did not get onto their pages, even if Ezra Klein and some others mentioned it in peripheral blogs.  On Sunday in the Business section, Barry Ritholtz mentioned it briefly, but not because it had any importance in itself that was worth talking about, but as an example buried deep in a story about how Twitter has transformed discussion of markets and policy.  Then we get the bizarre editorial by Hiatt and the ludicrous floundering by Samuelson.

Just to pound further on how bad the editorial by Hiatt is, let me note something not commented on by others so far.  In the end, he dismisses the importance of RR, even as he admits that they "acknowledged a coding error."  Right, Fred, but then he proceeds to exonerate them with a massive distortion: "The U-Mass economists' reworking of the data shows an association between a plus-90 percent debt-to-GDP ratio and slower growth, just a smaller one than Mr. Rogoff and Ms. Reinhart found."  He simply cannot let go of the 90% threshold, claiming that somehow Herndon et al confirm it, if more weakly.  That is not what they found.  While there remains a weaker correlation between the debt-to-GDP ratio and slower economic growth, there is no threshold at 90%, none, nada, zip, and what is worse, there never was one in the original RR study itself, even if RR made a big deal about such an alleged threshold.  Hiatt is just a dog who refuses to stop chewing on a nonexistent bone.

Unsurprisingly, RJS is even more pathetic.  Krugman has already noted that he somehow takes seriously Lorenzo Bini Smaghi and Allan Meltzer, both of whom have been massively wrong over the last several years. Old monetarist Meltzer somehow exhibits mystification that monetary policy has its limits in stimulating economies when they are in liquidity traps, and says not a word about spending cuts that have led to several years in a row of steady layoffs by state and local governments in the US, while elevating business fears about Obamacare to a high level of importance, even as the US has grown more rapidly than many nations making no changes in their national health care systems at all. 

While elevating this sort of silliness, even as he admits that George Akerlof argues that at least the policymakers have managed to avoid our falling into a full bore Great Depression, he manages to avoid saying anything substantive about RR.  Only at the very end does he even mention them in his litany of macroeconomic disputes, but not to note that they have been shown to have massively messed up.  No, we get "Last week, a feud erupted over a paper on government debt by economists Kenneth Rogoff and Carment Reinhart. The larger lesson is: We have moved into an era of less economic understanding and control." 

No, RJS, that is not the larger lesson, indeed is not the lesson at all.  This is a feud with a pretty clear outcome.  RR were way wrong, and while those who supported austerian policies are now floundering about making excuses like Hiatt on the opposite page from you, for the vast majority of economists this has been a useful moment of clarity, where people who introduced a lot of silly confusion have been shown to be wrong.  There is not now and never was a 90% threshold, period. Get with it, Robert J. Samuelson, you continue to be more of an embarrassment to your unrelated namesake than ever.

Barkley Rosser

Left Foot Forward? Two Steps Rightward!

At Left Foot Forward, James Bloodworth  wrote:

The first misunderstanding here is that the economy has a fixed number of jobs, sometimes known as the "lump of labour" fallacy. 

In reality, just as immigration may increase competition for jobs it can also create new jobs.

Mr. Bloodworth is perhaps not aware that this fallacy claim is the dumbed-down version of Say's Law -- that supply creates its own demand -- which John Maynard Keynes criticized severely in his General Theory. Both Maurice Dobb and Arthur Cecil Pigou pointed out the non-fallacy of the alleged fallacy, under its Marshallian nickname, the "Work-fund fallacy."

The fallacy claim, under various aliases, has been a staple of anti-labour polemics since at least 1780, when Dorning Rasbotham, Esq. pontificated that "a cheap market will always be full of customers."

Actually, Rasbotham's formula should provide a clue as to what the fallacy argument actually asserts -- i.e., that increased competition for jobs (whether from machines or whatever) will drive down nominal wages, which in turn will spur expanded hiring of labour. Since the products will also be cheapened, so the reasoning goes, real wages will not suffer in the long run.

The New Labourite variation on the old right-wing theme denies even that a nominal wage reduction occurs. "Empirical evidence" for this assertion comes from statistical "association" between, say, immigration and mean income. This is like saying the rooster's crowing makes the sun come up in the morning.

That is to say, Mr. Bloodworth goes the old canard one better! Let's see what some proponents (P) and critics (C) of the fallacy claim have had to say:

Dorning Rasbotham (P):

There is, say they, a certain quantity of labour to be performed. This used to be performed by hands, without machines, or with very little help from them. But if now machines perform a larger share than before, suppose one fourth part, so many hands as are necessary to work that fourth part, will be thrown out of work, or suffer in their wages.The principle itself is false. There is not a precise limited quantity of labour, beyond which there is no demand.

William Stanley Jevons (P):

The economy of labour effected by the introduction of new machinery throws labourers out of employment for the moment. But such is the increased demand for the cheapened products, that eventually the sphere of employment is greatly widened. Often the very labourers whose labour is saved find their more efficient labour more demanded than before.

Arthur Cecil Pigou (C):

Indeed, the reasoning process, which seeks to rebut a conclusion merely by disproving the cogency of a particular argument used in its support, itself involves a fallacy to which logicians have given a name — the fallacy ignoratio elenchi. We are not, therefore, entitled to cut short our inquiry concerning unemployment and the fixed work-fund at the point reached so far. It is still necessary to inquire by direct study whether the extra employment, which would be made available in a particular trade by cutting off the competition of foreigners or prisoners in respect of that trade, would be net extra employment, or would be balanced by a corresponding loss of employment in other industries.

Maurice Dobb (C):

What was implied in the economists' retort to the advocates of the so-called Work-Fund leads to the apparent paradox that the more the workers allow themselves to be exploited, the more their aggregate earnings will increase (at least in the long run), even if the result is for the earnings of the propertied class to increase still faster. And on this base is erected a doctrine of social harmony between the classes. But it does not follow that the workers will prefer to be exploited to a maximum degree, or that attempts to limit this exploitation are based on fallacious reasoning. And if in raising the supply-price of their labour the choice lies between restricting the number of men employed or of restricting the amount of work done by each man, the latter seems clearly the preferable alternative.

Paul Samuelson (P):

To begin with, we note the grain of truth in this viewpoint. For a particular group of workers, with special skills and stuck in one region, a reduction in the demand for labor may indeed pose a threat to their incomes. If wages adjust slowly, these workers may face prolonged spells of unemployment. The lump-of-labor fallacy may look quite real to these workers. 

But from the point of view of the economy as a whole, the lump-of-labor argument implies that there is only so much remunerative work to be done, and this is indeed a fallacy. A careful examination of economic history in different countries shows that an increase in labor suply can be accommodated by higher employment, although that increase may require lower real wages. Similarly, a decrease in the demand for a particular kind of labor because of technological shifts in an industry can be adapted to -- lower relative wages and migration of labor and capital will eventually provide new jobs for the displaced workers.

Here is what one of Mr. Bloodworth's sources (Ruhs and Vargas-Silva) wrote:

Dustmann, Frattini and Preston (2008) find that an increase in the number of migrants corresponding to one percent of the UK-born working-age population resulted in an increase in average wages of 0.2 to 0.3 percent. Another study, for the period 2000-2007, found that a one percentage point increase in the share of migrants in the UK’s working-age population lowers the average wage by 0.3 percent (Reed and Latorre 2009). These studies, which relate to different time periods, thus reach opposing conclusions but they agree that the effects of immigration on averages wages are relatively small.

Notice the "These studies reach opposing conclusions"? Here's how Mr. Bloodworth improved on that unsatisfactorily ambiguous result:

A 2008 study found that an increase in the number of migrants corresponding to one percent of the UK-born working-age population in the years 1997-2005 resulted in an increase in average wages of 0.2 to 0.3 percent.

Period.

Mr. Bloodworth also spelled Jonathan Portes's name wrong. But I suppose there's no time to lose when you've got boilerplate to crank out.

Benjamin Franklin: Grandfather Of His Country

It could be argued that Benjamin Franklin does not need a new label as he has already been called "The First American," which gets at the main point that the idea of uniting the non-Canadian North American British colonies into a United States came from him, apparently as early as 1751, inspired by the Iroquois Confederacy of Six Nations, or tribes, who had banded together to protect themselves against their far more numerous Algonkian neighbors.  However, I shall argue that this new label may serve a useful purpose beyond the older one, which does not need to be displaced by it.  In the meantime, I want to lay the groundwork for this by referring to some more current issues.

I am inspired to this by two recent events.  One is the horrific happenings in Boston, which led to many commentators noting the seminal role of Boston in the American Revolution, which put me in a mind to think about the whole matter of the formation of the US, with this perhaps becoming more of a non-trivial issue now as talk of secession has recently been rearing its head in places such as Texas, where politicians love to vote against aid for natural disaster relief in other parts of the nation, but are quite assertive in demanding that the rest of the nation give them some when some idiot refuses to have his fertilizer plant inspected and it blows up killing lots of people and destroying most of a small town.  Of course this latter tidbit is not surprising from a state that prides itself on having fought for its liberty to own slaves after Mexico banned slavery, something those getting all teary-eyed at the Alamo over Davy Crockett and Jim Bowie rarely mention.

The other is the very insightful recent post by Brad DeLong on the problems of forming nations with particular reference to the current governance problems of the European Union and the prospects for it to move forward to greater unity and possibly better economic management as well, particulary in the fiscal policy sphere, http://delong.typepad.com/sdj/2013/04/europe-fails-to-learn-the-lessons-of-history-notes-on-political-union-for-barry-eichengreens-future-of-the-euro-conference.html .  He notes two ways that initially separate groups can come together to form a functioning higher union.  One is to have a strong leader of the group that enforces the union.  The other is to come together out of fear of a common enemy.  DeLong argues that the EU is currently lacking on both of these fronts.

For the former he uses the example of the 17th century United Provinces of the Netherlands, of which there were seven.  He notes that their union was quite loose, but strong enough to dominate the seas and be the world's leading financial power, even threatening France as a land power for a significant period of time.  The leader of the provinces was Holland, which constituted 60% of the population.  It could take the others along with it, if not by some immediate threat but by its possessing a "long memory" such that any other province not going along with what Holland wanted would pay for it later.  For the EU the leader was essentially the US in the North American alliance, even though the US was not part of the EU.

For the common enemy, DeLong provided the example of the US itself in the development of its Constitution, with the compromise that allowed for states to have equal power in the Senate being needed to bring along the smallest state, Rhode Island, which was the last state to ratify the Constitution as it was.  The common enemy was Mother Britain, and DeLong suggests that the image of Britain building naval bases in Newport, Rhode Island concentrated the minds of the delegates in Philadelphia, the most senior of whom was Benjamin Franklin.  For the EU, the common enemy was the Soviet Union, with DeLong citing those who claim that Stalin was the real father of the EU, with the US being the leader. 

For the EU the current problem is that with the end of the Cold War the common enemy is gone, and the US has withdrawn.  Furthermore, Germany is not strong enough or willing enough to assume the role of leadership that Holland did in the United Provinces.  He invokes Kindleberger's hegemon  theory of the Great Depression that argued that many problems of the world economy arose due to the unwillingness of the US to assume its natural position of leadership during the interwar period.  DeLong sees the current situation in Europe as unpleasantly parallel.

Which brings me back to his example of the American nation at its formation.  To note the Boston link, part of the fear of Rhode Island had long been of its much larger and somewhat arrogant neighbor, Massachusetts.  Rhode Island had been founded as the first colony to assert religious freedom by Roger Williams in contrast to the theocracy from which he fled that ruled Massachusetts and essentially still did even in the aftermath of the American Revolution (celebrating Christmas was outlawed there by its Puritan leaders until the 1820s).  The original American state was a confederation in which the states were supreme, and Rhode Island felt safer in its independence from Massachusetts.  They were reluctant to give that up at the time of the increased unification associated with adopting the Constitution.

Which brings us to the role of Benjamin Franklin.  So, George Washington gets the title, "Father of his country," and this is certainly deserved both for his role as the commander of the revolutionary army as well as his leadership role at the Constitutional Convention (even if the heavy lifting was done by Madison and Hamilton), with it clear that he would become the first president.  It is largely forgotten that there were numerous presidents prior to Washington, but they all bore the title of President of the Congress and did not have the powers that post-Constitution presidents would have, genuine and distinct executive authority and leadership.

But indeed there was this earlier incarnation of the nation, one run under the Articles of Confederation, whose limits and weaknesses led to the Constitution.  While Franklin's role is captured in that label of "The First American," his role is often forgotten as he becomes subsumed as just one among the Founding Fathers, of whom Washington took the title of "Father."  But Franklin was of an earlier generation, born in 1706 while none of the others were born prior to 1730, and many not prior to 1740.  Furthermore, he was by far the best known of them abroad, indeed the only one of them who had a genuine international reputation prior to the Revolution based upon his genuine scientific achievements.  It was the Revolution itself that made the reputations of the rest, even if some of them, particularly Jefferson, would also come to be known for some of their inventions and intellectual achievements.

In any case, long prior to the Revolution Franklin formulated a plan that would become the model for the Articles of Confederation, even though it was not adopted or acted upon then.  This was the Albany Plan of Union developed in Albany, New York in 1754.  The British government brought delegates together out of the need to defend against a common enemy, the French who still ruled Canada at that time prior to the French and Indian/Seven Years War.  While they were supposed to develop coordination for common defense, Franklin chaired a committee that proposed going much further to a limited political union along lines similar to the later Articles of Confederation in the form of the proposed Albany Plan for Union.  However, the British were not supportive and nothing came of it in action.

The inspiration of this plan was indeed the Iroquois Confederacy, who also practiced democracy, an inspiration for what would become the eventual US system.  Franklin first encountered this in printing the speech of Iroquois leader Canassatego given at the Treaty of Lancaster in 1744.  It was in reference to this speech, in which Canassatego invoked the motive of defending against a common enemy for the union of the Iroquois Confederacy, that Franklin first proposed the idea of a union of the colonies in a letter to his printer in 1751, the first known expression of such an idea.  And again, what kept the Iroquois together was the fear of the common enemy, the more numerous Algonkians who surrounded their territories.

So, Franklin was in effect the Father of the original version of the US, while Washington was the Father of its later, constitutional version.  In this regard, it is reasonable to view Franklin as the Grandfather of his country, and not merely one of the Founding Fathers who could be labeled The First American. 

Barkley Rosser

Ken Rogoff and Carmen Reinhart, Meet Marc Hauser

In violation of the solidarity that ought to exist between ex-chessplayers (albeit at very different levels of achievement), when I hear about the errors and dubious data selection and modeling choices of Rogoff and Reinhart, my thoughts turn to Marc Hauser.

Hauser, you may recall, was a leading evolutionary biologist and something of a pop culture star, who cranked out high profile papers from his lab at Harvard.  Eventually it was determined that he had systematically doctored evidence in order to produce the results that fit the theory he was peddling.  There was a formal inquiry, and he left the institution in disgrace.

I bear no personal animosity toward Hauser.  For all I know he may have drifted into the methods that got him into trouble a little at a time, and he may have seen each step as temporary, small and excusable.  A science, however, has to be hard-nosed about this.  As I’ve argued elsewhere (here, here and here), if there’s a core feature that distinguishes science from other human activities and renders it historically progressive (it gets better over time), it is the enormous weight sciences place on Type I error, the risk of false positives, compared to Type II.  This enables a division of labor to flourish, since specialists can rely on the carefully vetted findings of other specialists.  It also means that there will be rarely a step backward, a shift of a scientific field toward greater error over time from which it later has to retreat.  You can’t say this about poetry, politics or palmistry.

Or economics.  As far as I can tell, there are no serious consequences for economists who commit egregious Type I errors.  They get to go on with their careers, and everyone just shrugs it off.  No Marc Hausers here, folks.

So much the worse for us.  Naturally, in applied work the risks of false positives and negatives have to be balanced by their respective costs in good Bayesian fashion, and we can live with a stream of Type I errors if that minimizes the overall cost of poor decision-making.  But in matters of theory, where basic economic relationships are putatively identified, there should be no excuse for errors of the sort R&R appear to have committed.  They were made more culpable by the pair’s long, long delay in releasing their source data.

These economists deserve a formal review—just like Marc Hauser.

Minding Your Alphas and Betas

Martin Khor has an interesting post over at Triple Crisis that speculates on the secret negotiations over a draft Trans-Pacific Partnership Agreement.  He sees grounds for worry that a chapter on state-owned enterprises (SOE’s) will include a requirement that they pursue a commercial rate of return, based on existing Australian guidelines.

The trade lawyers would do well to absorb a bit of economic theory.  Private firms whose sole objective is profit maximization—firms that adhere to the “shareholder” model—will of course do just that, at least if they can avoid being commandeered by insiders.  But there is another model out there, the “stakeholder” model, in which firms are expected to serve a variety of interests, including not only investors but also workers, consumers, suppliers and affected communities.  SOE’s are nearly everywhere run on something like a stakeholder model.

To do its good deeds, a stakeholder firm has to stay in business.  Logically, its maximand should be the likelihood of being profitable over some time horizon.  That’s different from the shareholder maximand of profitability itself.  Given a risk-return tradeoff, SOE’s should generate lower average profit rates than firms run for the benefit of shareholders.  Lower beta, lower alpha.

Or it could be that the negotiators want to use the TPPA as a weapon against the stakeholder approach altogether in favor of a world of frictionless investment opportunities, in which case their ignorance is strategic.

PIESTEIN!

In his Essay Concerning Human Understanding, John Locke affirmed, "I do not question but that human knowledge, under the present circumstances of our beings and constitutions, may be carried much farther than it hitherto has been, if men would sincerely, and with freedom of mind, employ all that industry and labour of thought, in improving the means of discovering truth, which they do for the colouring or support of falsehood, to maintain a system, interest, or party, they are once engaged in."

In Takings: Private Property and the Power of Eminent Domain, Richard Epstein, henceforth Professor Piestein, gave the quintessential demonstration of how to employ "all that industry and labour of thought... for the colouring or support of falsehood." In his "philosophical preliminary" chapter, "A Tale of Two Pies" Professor Piestein purported to illustrate, with a drawing of two pies, a Lockean perspective on "how natural rights over labor and property can be preserved in form and enhanced in value by the exercise of political power."

Here is what Professor Piestein's pies looked like. Sandwichman coloured them in to make them prettier:

And here is what Professor Piestein wrote about his pies:

The larger pie indicates the gains that are possible from political organization. The outer ring represents the total social gains, while the dotted lines indicate the proportion of the gain received by each individual member. The implicit normative limit upon the use of political power is that it should preserve the relative entitlements among the members of the group, both in the formation of the social order and in its ongoing operation. All government action must he justified as moving a society from the smaller to the larger pie.

A couple of questions go unasked and, of course, unanswered by Professor Piestein. Why should we assume that the unequal endowments are the consequence of natural rights rather than a backward projection of the inequalities imposed in political society by its rulers? Second, even if the unequal endowments had been present in nature, why should that make the more fortunate individuals entitled to a proportionately larger share of the social gains, since they are, after all, social gains? In The Natural and Artificial Rights of Property Contrasted (1832), Thomas Hodgskin wrote:

Laws being made by others than the labourer, and being always intended to preserve the power of those who make them, their great and chief aim for many ages, was, and still is, to enable those who are not labourers to appropriate wealth to themselves. In other words, the great object of law and of government has been and is, to establish and protect a violation of that natural right of property they are described in theory as being intended to guarantee.

What would Locke say? I'll not waste your time with a pile of extraneous exegesis and superfluous hermeneutics. Number VIII of Locke's Essays on the Law of Nature was titled, "Is Every Man's Own Interest the Basis of the Law of Nature? No." Number VIII was the source for several of the arguments in Chapter Five, "Of Property," in Locke's Second Treatise on Civil Government.

What part of the word "no" did Professor Piestein not understand?

Review of Behavioral Economics (ROBE) Website Goes Live

Amazingly enough, today on my 65th birthday, the website of the new journal that I am Editor-in-Chief of, the Review of Behavioral Economics (ROBE), has gone live.  So, we are open for business at http://www.nowpublishers.com/journals/Review%20of%20Behavioral%Economics/Preprint .

"Of Property" and the Mercantilist Fallacy

"Though the earth, and all inferior creatures, be common to all men, yet every man has a property in his own person: this no body has any right to but himself. The labour of his body, and the work of his hands, we may say, are properly his. Whatsoever then he removes out of the state that nature hath provided, and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property."

The above is the core of what is commonly referred to as John Locke's "labour theory of property." It is a extraordinarily compelling narrative, resplendent with "self-evident truth" ("We hold these truths to be self evident...) and nearly indiscernible ambiguity (what does "labour" mean? what's "mixing" got to do with it?).

It is widely acknowledged by Locke scholars that his economic views were essentially mercantilist. Keynes suggested that Locke stood with "one foot in the mercantilist world and one foot in the classical world." However that may be, chapter five of Locke's Second Treatise on Civil Government, "Of Property", is relentlessly, incorrigibly, two-footedly mercantilist. And nobody seems to have noticed (except possibly John R. Commons [correction: C.B. MacPherson stressed Locke's mercantilism in chapter 5]).

Why would this even matter?

Greg Mankiw Blasts Another Obama Tax Proposal

I guess we should be used to this:

President Obama's budget is going to include some kind of penalty for people who have accumulated more than $3 million in retirement accounts. The details are not yet known, but I think we know enough to say that this is a terrible idea. A sizable body of work in public finance suggests that consumption taxes are preferable to income taxes. Completely replacing our tax system with a better one is, however, hard. Retirement accounts, such as IRAs and 401k plans, are one way our tax code has gradually evolved from an income tax toward a consumption tax. The use of these accounts should be encouraged, not discouraged. By the way, exceeding $3 million in such accounts is not very difficult for an individual who is financially successful and frugal.

Greg explains by noting some folks can readily put away $50,000 a year. The median worker, however, cannot. But there may be something else afoot here as Brian Beutler explains:

One way experts believe financial managers avoid the current annual contribution limit to IRAs is by using IRAs to participate in investments and assigning those investment interests a nominal value vastly below fair market.

Brian cites as an example some clever tax planning done by a chap named Mitt Romney.

Factor Price Equalization – Outsourcing to China or Mexico?

Twenty years ago, one of the arguments for NAFTA was that free trade would boost the demand for Mexican workers hopefully increasing their real wages. Ten years we opened our markets to Chinese produced goods. Over the last decade, a lot of the demand for Mexican workers shifted towards Chinese workers. Pan Kwan Yuk reports on an interesting analysis by Carlos Capistran, an economist at Bank of America Merrill Lynch:

Not only are average hourly manufacturing wages in Mexico now lower than those in China in constant dollar terms, they are 20 per cent less.

Capistran produced a chart of Chinese and Mexican hourly wages in US$. Back in 2003, Mexican wages were around $2 an hour and are now around $2.50 an hour. Chinese wages ten years ago were around $0.60 an hour and are now almost $3 an hour. The story continues:

But is this necessarily a good thing for Mexico? True, stagnant salaries over the past decade have been credited with reviving Mexico’s manufacturing sector, which was hard hit by China’s entry on to the world stage following membership into the World Trade Organisation in 2001. A study by Barclays last year reckoned that the rise of China as the “world’s factory floor” chipped about 60 basis points off Mexico’s gross-domestic-product growth every year between 2002 and 2006. Some of the biggest casualties in Mexico’s manufacturing sector were textiles, clothing and shoes. And now thanks to soaring wages in China, high transportation costs and the steady recovery seen in the US economy, the tide is turning back in Mexico’s favour ... Optimism over Mexico’s growth prospects has made the country a darling among international investors … By contrast, in Mexico, wage stagnation, under-employment and inflation have eroded the income level of some 31m Mexicans ... as many as 60m people are living below the poverty line. This in a nation of 113m.

We should forgive the Mexican workers for not being overjoyed at this news. Maybe they have gained their competitive advantage but only because wages in Mexico remain very low. Then again – one should have expected the benefits from free trade over the past decade to accrue to two parties – the multinationals hiring low cost foreign workers and Chinese workers with Mexican workers not faring so well from freer trade.

President Obama Breaks His Promise On Social Security

Which was that he would not cut any of its benefits, a promise made during the 2008 campaign and now broken with his proposed budget that will replace using CPI-W for the COLA with the chained CPI-W, the former estimated by many to rise about 0.3% more per year than the latter.  However, nobody should be surprised that he has done so as he has been signaling a willingness to do so for some time now at least since the 2011 budget negotiations with Congressional Reptards over the debt ceiling increase (and, yes, he should declare the debt ceiling unconstitutional and dispense with that bloody thing).  I am not going to comment on the politics of this move, although plenty of people argue that it is not a winner in any way shape or form.

As it is, I weirdly take this sort of personally.  Back during the 2008 campaign, Bruce Webb and I wrote a memo to the Obama campaign at a time when he was supporting some sort of "Social Security Reform," arguing that such was not needed, and he made his promise not to do anything at all to or about SS shortly after our memo was sent, although I suspect that it was broader political forces that were responsible for his change of mind then rather than our memo.  However, I took the promise to heart and am now sad to see it definitely broken (although see more below).  There are many economic arguments for why this new proposal is a bad idea.

The obvious one that has been discussed by many is that it is highly likely to reduce the growth of SS benefits for seniors in an era when arguably they should be increased more due to the collapse of defined benefit private pension plans.  See http://krugman.blogs.nytimes.com/2013/05/desperately-seeking-serious-approval and http://www.theatlantic.com/politics/archive/2013/04/memo-to-president-obama-expand-social-security-dont-cut-it/274728 .  This latter by Steven Hill goes on to propose a major increase in benefits in a two-tier system, funded by raising the income cap and closing certain high income tax loopholes, not a bad proposal.

The other is the point that over a long period of time it appears that the cost of living for seniors has been rising more rapidly than the overall cost of living, so that the experimental CPI-E for elderly should be used after getting it into proper shape.  This higher rate of elderly cost of living increase has been largely due to the greater use of medical care by the elderly, which has risen more rapidly than the general rate of inflation for a long time, and has been 0.2% greater per year between 1982 and 2011 than the CPI-W.  Among those making this point previously have been Dean Baker http://www.cepr.net/index.php/blogs/cepr-blog/thoughts-on-the-chained-cpi-social-security-and-the-budget , Bruce Webb at his own blog http://socialsecuritydefender.blogspot.com , and me http://econospeak.globspot.com/2012/12/retiring-on-price-index-chain-gang , a matter that is getting more personal as I officially become a senior citizen this coming Friday.

I note that Will Wilkinson argues that between 2006 and 2012, the CPI-E actually rose by 0.1% less than the COI-W or CPI-U, although I think his argument that this reflects a deceleration of medical care cost increases does not explain it.  He supports going to a chained CPI-E index, http://www.economist.com/blogs/democracyinamerica/2013/04/barack-obama-budget .  In any case, if the main source of difference between the measures is medical care costs, this is all the more reason to get the rate of medical care cost increases under control and in line with the other sectors of the economy.

Having mentioned my old friend Bruce Webb's blog, I cannot avoid noting his discussion of "Rosser's Equation."  This is simply the empirical observation that after a supposed "bankruptcy" of the system, as much of the media likes to call it, that is projected to happen in the 2030s if nothing is done, recipients would actually be better off in real terms than are current ones although they would experience a cut from what they had been receiving at that point, with me estimating this in 2005 at 120% better, although more recently Dean Baker has it at 125%.  In any case, I must credit Dean with noting this before I did, although it has always been in the Social Security Trust Fund reports for anybody to see who looked closely enough, Anyway, I think I made more noise about it than did Dean then, although I would be fine with it being called the "Baker-Rosser Equation," :-).

All of this reminds me that in 2005 the three of us through the old MaxSpeak that preceded this blog fought long and loud and hard against Bush's campaign to partially privatize Social Security.  Although I cannot say for sure, I think that we were partly responsible for bringing the lack of a need to do anything to or about Social Security to the attention of more widely read bloggers such as Paul Krugman and Mark Thoma, who brought this argument to a wider public, with Bush's campaign failing pathetically. However, this time the threat looks more serious, coming as it does from a Dem president.  The public does not want this, and it is not needed for budgetary reasons in a world of rapidly falling deficits and still stagnating employment growth, but we need to move again to make our voices heard on what a bad idea this is all around.  Obama should go back to keeping the promise he made in his 2008 campaign.

Barkley Rosser

David Stockman and Dark Matter

Paul Krugman has more on the rant by David Stockman:

Well, the $8 trillion number is right. But while it may be EIGHT TRILLION DOLLARS, that’s a cumulative deficit (which began in the 80s, by the way, not the 70s) of only half of this year’s GDP. And if you know anything about the subject, you know that America’s debtor position isn’t actually that deep, because of capital gains (which aren’t counted in the current account) ... But OK, market valuations are one thing, what about income flows? Aren’t we now paying a lot in interest to foreigners? Ahem. Here’s US net international investment income — income from US assets abroad minus income payments on foreign assets in the US — as a percentage of GDP

Yes – massive current account deficit started with that ill advised fiscal irresponsibility when David Stockman served as OMB director. But give Stockman a break as Robert Samuelson thought it started in 1964. As far as our net international investment income, it has been positive despite the fact that we have more foreign liabilities than foreign assets. Which got me thinking – what’s the latest on Dark Matter:

That is, the US is still borrowing from the rest of the world, but at a reduced pace. The value of the US' net foreign assets has been volatile as markets and currencies have gyrated over the past several years, but the official data says the US is even more in debt to the rest of the world now ... Repeating Hausmann and Sturzenegger's calculation today says that (as of the end of 2011) the US was a net creditor by $4540 billion. Relative to the official net international investment position of $4030 billion, that implies a stock of "dark matter" of $8570 billion! … The worry, circa 2005, was that buyers of US debt would run for the exit, leading to a spike in US interest rates and a collapse in the dollar. The crisis we actually got had the opposite effect, as everyone rushed into US debt, which has helped drive yields down. The US' net income is boosted by the fact that its paying very low returns on all those Treasuries being held abroad these days. In Hausmann and Sturzenegger's framework, the financial crisis has been a huge boon to US exports of (unmeasured) liquidity and insurance services.

But something tells me that David Stockman has no clue what this Dark Matter discussion was about.

The Clown Says, "Italy Should Not Be In A Rush To Have A Government"

And Beppe Grillo, the (former) clown, may be right.  Indeed, as of yesterday, Luigi Bersani of the Democratic Party who has been trying to form a government in Italy, gave up.  He has refused to make a grand coalition with Silvio Berlusconi's party, and his efforts to attract support from Grillo's 5 Star Movement have failed.  As a result, while there is a parliament, there is no government.  President Napolitano has appointed a group of 10 Wise Men to work for 10 days to come up with proposals to change how elections are run, five politicians and five bureaucrats.  None are from Grillo's 5 Star Movement, which came in second in the Senate election, which has led to Grillo's statement contained in the subject head of this post.  For more details see http://www.euronews.com/2013/04/02/10-wise-men-try-to-get-italy-s-politics-moving .

While the rise of Grillo and his "Grillismo" and even "Grillonomics" has led many to essentially freak out that this is the end of Western Civilization As We Know It, or at least of any hope for reasonable or sensible government in Italy, with these fears exacerbated in light of the financial crisis in Cyprus and the potential threat to the European and world economies, these fears may well be overblown.  While there has been much reporting of increasing spreads between Italian and German bonds, in fact the movement has been minor, with these well below crisis levels.  In Autumn 2011, 10-year Italian bonds hit 7%, viewed by many as the crisis point, but the latest report has them only at 4.63%, compared with 5.02% in Spain, 6.58% in Portugal, and 12.25% in Greece.  Grillo has made many provocative statements, including in 2007 instituting Veffanculo (Fuck you) Days, or "V-days," but it is far from clear that his actual economic ideas are all that outrageous, even if he refuses to back Bersani or a new government at this time.

Indeed, the 5 stars of the movement's name (it is not a "party"), represents the five planks from its economic platform: public water, sustainable transport, development, connectivity, and environmentalism.  Clearly these are somewhat vague, but they have taken more concrete form in writings and documents coming from Grillo's top economic adviser, Mauro Gallegati of the Polytechnic University in Ancona.  Gallegati is the co-founder with Alan Kirman of the Workshop on Heterogeneous Interacting Agents (WEHIA) and a coauthor of several papers with Joseph Stiglitz and Bruce Greenwald, which has led to reports that Stiglitz would be advising Grillo, although this does not appear to be the case.  Nevertheless, Gallegati has led a group to advise the newly elected Grillini to the Italian parliament on economic policy, and has more specifically advocated taxing the rich, emphasizing happiness over standard economic growth, with a focus on developing culture and tourism as keys to non-corrupt and sustainable Italian economic growth, along with a focus on encouraging green technologies.

What is somewhat unclear is the group's view on the most pressing macroeconomic issues facing Italy.  Grillo like Berlusconi ran at least partly opposing externally imposed austerity coming from Germany in particular.  More than Berlusconi, Grillo also seems to support a departure by Italy from the euro, although this does not seem to have been the central issue in his refusal to support a government led by Bersani.  Of course many observers think that indeed the euro is bad for the periphery and doomed in some longer run, although I have forecast that the euro will probably muddle through.  Nevertheless, the most likely locus of a move to really end the euro is Italy, and the Grillini may be the key to this, even if none of their number are among Napolitano's Wise Men.

(I should note that I have coauthored with Gallegati and consider him a friend, although I have not discussed in any depth his views on all this other than to make jokes about his role in the movement.  He is a big wise cracker who has been known to preface professional presentations with anti-Berlusconi jokes.)

I note trhat critics of Grillo argue that he is overly nationalistic and that there is a lack of internal democracy within his movement, although its candidates for office have been selected by online voting and must have certain educational and "cleanliness" credentials.  Nevertheless, some Grilli critics have been expelled from the movement by him.

In any case, Italy is leading us into interesting times, one of those old Chinese curses, and the Grillini may end up playing a decisive role in how these events transpire.

Barkley Rosser

Doesn’t Liz Cheney Know That Reagan Supported the Brady Bill?

Liz Cheney wrote another rant, which has been ably critiqued by Jonathan Chait, Aaron Carroll, and Paul Krugman. Much of their takedowns relate to Cheney’s batshit insane comments about ObamaCare but let’s also look at this:

The president has launched a war on Americans' Second Amendment rights.

Really? Because he wants to restore what Sarah Brady pushed for – effective background checks? That makes Barack Obama “the most radical man ever to occupy the Oval Office”? Did Ms. Cheney forget about how even Ronald Reagan supported the Brady Bill? Who knew the patron saint of conservatives was such a radical!