Inequality and Sabotage: Piketty, Veblen and Kalecki (for anne at Economist's View)

One of Thomas Piketty's central concerns in Capital in the 21st Century is the inequality between the rate of return on capital (r) and the growth rate (g), which he expresses as r>g. In a recent opinion piece in the Financial Times, "Save capitalism from the capitalists by taxing wealth," Piketty wrote:

Even if wage inequality could be brought under control, history tells us of another malign force, which tends to amplify modest inequalities in wealth until they reach extreme levels. This tends to happen when returns accrue to the owners of capital faster than the economy grows, handing capitalists an ever larger share of the spoils, at the expense of the middle and lower classes. It was because the return on capital exceeded economic growth that inequality worsened in the 19th century – and these conditions are likely to be repeated in the 21st. 

Piketty's proposed (admittedly Utopian) remedy for the current tendency for returns to capital to accrue faster than the economy grows is a global wealth tax, which he describes as "difficult but feasible." One only needs to look at global climate negotiations to be skeptical of that feasibility assessment. There is a global consensus among governments on the need to limit greenhouse gas emissions but they still can't agree on a means for doing so. How likely is it that governments would even agree on the need to limit returns on capital?

A more realistic proposal may be developed from consideration of the mechanism that underlies the r>g dynamic. Nearly a century ago, Thorstein Veblen offered insights into this mechanism in his The Engineers and the Price System. To Veblen r>g (although he didn't use that term) was a strategy pursued by business, not simply a statistical finding. As Veblen points out, "this is matter of course, and notorious. But it is not a topic on which one prefers to dwell." Accordingly, economists have preferred not to dwell on it. They have pretended it doesn't exist:

The mechanical industry of the new order is inordinately productive. So the rate and volume of output have to be regulated with a view to what the traffic will bear — that is to say, what will yield the largest net return in terms of price to the business men who manage the country's industrial system. Otherwise there will be “overproduction,” business depression, and consequent hard times all around. Overproduction means production in excess of what the market will carry off at a sufficiently profitable price. So it appears that the continued prosperity of the country from day to day hangs on a “conscientious withdrawal of efficiency” by the business men who control the country's industrial output. They control it all for their own use, of course, and their own use means always a profitable price. In any community that is organized on the price system, with investment and business enterprise, habitual unemployment of the available industrial plant and workmen, in whole or in part, appears to be the indispensable condition without which tolerable conditions of life cannot be maintained. That is to say, in no such community can the industrial system be allowed to work at full capacity for any appreciable interval of time, on pain of business stagnation and consequent privation for all classes and conditions of men. The requirements of profitable business will not tolerate it. So the rate and volume of output must be adjusted to the needs of the market, not to the working capacity of the available resources, equipment and man power, nor to the community's need of consumable goods. Therefore there must always be a certain variable margin of unemployment of plant and man power. Rate and volume of output can, of course, not be adjusted by exceeding the productive capacity of the industrial system. So it has to be regulated by keeping short of maximum production by more or less as the condition of the market may require. It is always a question of more or less unemployment of plant and man power, and a shrewd moderation in the unemployment of these available resources, a “conscientious withdrawal of efficiency,” therefore, is the beginning of wisdom in all sound workday business enterprise that has to do with industry. [emphasis added] 

Veblen didn't attribute this strategy of sabotage to evil motives on the part of individual firms, on the contrary it is a imperative for survival:

Should the business men in charge, by any chance aberration, stray from this straight and narrow path of business integrity, and allow the community's needs unduly to influence their management of the community's industry, they would presently find themselves discredited and would probably face insolvency. Their only salvation is a conscientious withdrawal of efficiency. 

Veblen was referring, as his title indicates, to the effects of the "price system" -- the interaction in the market of supply and demand. The withdrawal of efficiency kept prices at profitable levels by limiting supply. But what about government intervention to ameliorate those effects through a full-employment policy of demand management (a government spending program)? Michal Kalecki's analysis in "The Political Aspects of Full Employment" addressed that prospect:

Clearly, higher output and employment benefit not only workers but entrepreneurs as well, because the latter's profits rise. And the policy of full employment outlined above does not encroach upon profits because it does not involve any additional taxation. The entrepreneurs in the slump are longing for a boom; why do they not gladly accept the synthetic boom which the government is able to offer them? 

Kalecki outlined three categories of business objection to a full employment by government spending: "(i) dislike of government interference in the problem of employment as such; (ii) dislike of the direction of government spending... (iii) dislike of the social and political changes resulting from the maintenance of full employment." It is the first and third of these objections that have the most direct bearing on the issue of r>g:

Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of 'sound finance' is to make the level of employment dependent on the state of confidence.
 ...  

It is true that profits would be higher under a regime of full employment than they are on the average under laissez-faire, and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and thus adversely affects only the rentier interests. But 'discipline in the factories' and 'political stability' are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the 'normal' capitalist system.

For "state of confidence" substitute r>g; for "bargaining power of workers" substitute r<g. Veblen borrowed his term from the subtitle of Elizabeth Gurley Flynn's I.W.W. pamphlet, Sabotage: The Conscious Withdrawal of the Workers' Industrial Efficiency. Flynn's pamphlet was published in 1916 but the idea of workers deliberately restricting output is much older.

One of the most persistent objections to trade unions during the 19th century was that their principal mode of operation was to restrict production. Veblen simply turned this perennial complaint into a question about the 'innocence' of those making all the indignant accusations. Adam Smith had long ago observed famously, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

The missing link here, though, is the recognition that the particular efficiencies that the workers withdraw are not the same ones as those that the business firm withdraws. There are different modes of efficiency and those differences result in different effects on the rate of return to capital. In other words, there are r>g efficiencies and there are r<g efficiencies. An example of an r>g efficiency would be a new machine that uses less fuel and less labour to produce a given amount of output. An example of an r<g efficiency would be a reduction in the length of the standard working day that improves worker productivity by reducing fatigue and increasing overall well being. Both are examples of efficiencies but they differ as to whom the benefit of the efficiency gain primarily accrues.

Ironically, business has historically raised its most shrill objections to r<g efficiencies by making the false claim that they are intended as restrictions on production. The distinction between r>g efficiencies and r<g efficiencies also has profound implications for Say's Law (the vulgar version), the Jevons Paradox and Chapman's analysis of the effects of a reduction in the hours of labor, which I discussed in an earlier post.

Keynes: Cultural Rebel

Paul Krugman’s column today on the psychology of Very Important People, their inability to accept a simple answer to the slump (spend more!) and their urge to pin it on a moral failing like too much public debt and too little skill acquisition, has reminded me of a thought that struck me several years ago when I read Skidelsky’s magnificent three-volume biography of Keynes (especially this and this).

Keynes was an innovative thinker in economics, but he was far more than that.  His other great passion in life was his love for art, theater, dance, good food, and finely made things of all description.  He liked travel.  He liked entertaining and a stimulating conversation.  He liked sex.  In short, he was an aesthete, a man with intense and finely developed tastes who lived for enjoyment.  And ever since his student days, his greatest political commitment was to create a world in which as many others could enjoy these things as possible.

You could pigeonhole him in various ways.  This was very British, of course, and characteristic of a tendency that marked the social and political radicals of the upper-middle class during the late nineteenth and early twentieth centuries.  Without getting all Ferguson about it, this was also representative of a gay cultural milieu that emerged during the same period (and was linked to the larger cultural radicalism).

In crude terms, it was a backlash against the stifling moralism and (ostensible) self-denial of the Victorians, the Very Serious People of their day.  For a VSP, progress depends on investment, which depends on saving, which depends on self-denial.  This is what we learn from the Robinson Crusoe parable, the sermons on poverty delivered by Nassau Senior, and popular fiction of Samuel Smiles.  If people are enjoying themselves too much, it must be a sign that something is wrong.

As I thought about it, the economic dispute between Keynesians and “classicals” was the tip of a much larger cultural iceberg.  Keynes thought that the slump could be surmounted by more spending, and more pleasure, and to his opponents this was not only wrong but monstrous.  Surely economic breakdown represents moral breakdown at some level, and the remedy of further borrowing and spending can only deepen this descent into moral failure.

Nearly a century later, has it really changed?  Do we see a rational debate over different economic policies based on reasoning (and that includes models) and evidence?  Or are deep-seated cultural biases—economics as a Victorian morality tale—still what it’s all about?

Back to Econ 101: Costs versus Transfers

Isn’t it interesting how the most rudimentary concepts supposedly covered in the first weeks of an economics principles course keep coming back to us mangled beyond recognition in expert debate?

Take this post by Uwe Reinhardt, as leading a leading authority there is on US health economics.  He shows us this rather typical graph portraying the number of Quality Adjusted Life Years (QALY’s, a measure that consolidates all health impacts into a single metric derived from utility theory) people can enjoy as a function of how much they spend to get it.  A low-cost medical intervention buys us one year, the next year requires a little more cost and so on until the marginal cost of providing a bit more healthy living zooms up out of sight.

He’s interested in seeing to it we position ourselves at an efficient point along the curve rather than one above it, and he also raises the question of how far along this curve we should be willing to travel:

Is there a maximum price above which society no longer wishes to purchase added QALYs from its health system, even with the most cost-effective treatments (e.g., Point C)?

This issue is crystallized for him a recent report from an insurance advisory panel in California that determined a new hepatitis C drug “low value” compared to older drugs even though it is somewhat more effective—because it is being sold by its producer at $1000 a pill.  Here, says Reinhardt, is an example of society, or at least a portion of it with MD’s and financed by the insurance industry, saying enough is enough; we can’t climb that cost curve all the way to the top.

Just one problem though.  Reinhardt’s graphic is about cost, presumably social cost.  As we should have learned in our first econ textbook, this refers to the opportunity cost and disutility entailed in producing a good or service.  The $1000 charged for a single pill, while it covers resources consumed in R&D and direct production, in all probability has a hefty element of monopoly markup.  That’s the whole point of the patent system, after all.  And this markup is a transfer, not a cost.  We could well be on the flatter, left end of Reinhardt’s cost curve even as we shell out vast sums for this latest medical marvel.

Now I suppose you could argue that such transfers are needed to induce people to take up medical research as a profession, other people to provide their labs, etc.  That was apparently the topic of a debate between Reinhardt and Dean Baker, which Reinhardt refers to in his post.  But that’s a separate question.  It does not overturn the wise judgment of elementary economics on the distinction between a cost and a transfer.  It’s amazing that I even need to write this.

"Figure Eight": Another Jevons Paradox

In The Coal Question, William Stanley Jevons argued that "It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth." As Jevons himself pointed out, the same principle was generally recognized with respect to the effects of labour-saving machinery on employment. Classical political economist John Ramsey McCulloch had stated the latter view emphatically in an 1827 Edinburgh Review essay on the progress of the British cotton industry, "There is, in fact, no idea so groundless and absurd, as that which supposes that an increased facility of production can under any circumstances be injurious to the labourers."

The Jevons Paradox remains a complex, ambiguous and controversial idea. In a nutshell, Jevons argued that an improvement in energy efficiency reduced the cost per unit of output, which in turn led to an increase in quantity demanded and ultimately to a rebound of energy consumption beyond what it would otherwise have been in the absence of the efficiency gain. This essay will return to the rebound debate in a later section. First, though, is the matter of introducing another Jevons paradox – one that has crucial bearing on the scientific status of neoclassical economics. Jevons was not the author of this other paradox, rather it's a paradox about the reception of his work.

In chapter five of his Theory of Political Economy, Jevons presented his theory of work effort that relies on a concept of the disutility of excessive toil.

"A few hours' work per day may be considered agreeable rather than otherwise; but so soon as the overflowing energy of the body is drained off, it becomes irksome to remain at work. As exhaustion approaches, continued effort becomes more and more intolerable."

Following those remarks, Jevons quoted extensively from Richard Jennings, whose statement of "this law of variation" he praised for its clarity. "There can be no question," concluded Jevons, "of the general truth of the above statement," which he then illustrated with a diagram, labeled Figure VIII. "We may imagine the painfulness of labour in proportion to produce to be represented by some such curve as abcd in Fig. VIII.":

In this diagram the height of points above the line ox denotes pleasure, and depth below it pain. At the moment of commencing labour it is usually more irksome than when the mind and body are well bent to the work. Thus, at first, the pain is measured by oa. At b there is neither pain nor pleasure. Between b and c an excess of pleasure is represented as due to the exertion itself. But after c the energy begins to be rapidly exhausted, and the resulting pain is shown by the downward tendency of the line cd.

Jevons went on to describe how the curve Pq in his diagram represented the diminishing utility to the worker of the wages earned as the duration of work increased. He concluded that there will be "some point m such that qm = dm, that is to say, such that the pleasure gained [from wages] is exactly equal to the labour endured."

"Despite its strengths," mused Robert Kerton 100 years after its publication, "recent textbooks ignore Jevons' theory while elevating to supremacy indifference curve analysis." In a footnote he added that "A survey of six recent textbooks on labor economics found no mention of Jevons' approach."

In the intervening years, though, one of Alfred Marshall's star pupils, Sydney J. Chapman, added a few wrinkles – and several curves and letters, to be exact -- to Jevons's diagram. Curve L in Chapman's diagram is clearly analogous to Jevons's curve abcd. While the Jevons diagram described the decision faced by an individual worker, Chapman's sought to capture both the immediate and long period effects of changes in working time on both workers and employers in the economy as a whole. He simplified the model by assuming a single industry and workers who had uniform income preferences and endurance.

Chapman's general conclusion from this analysis was "that progress may be expected to be accompanied by a progressive curtailment of the working day." Along the way, though, he observed that in a competitive market, progressive employers who invested in the future well-being of their workers by voluntarily reducing the hours of work would risk having those workers poached by other employers willing to pay higher wages without having invested in their improved well-being.

As the Sandwichman has pointed out -- repeatedly -- Chapman's analysis of the hours of labour was acknowledged as canonical by such Cambridge and LSE luminaries as Alfred Marshall, E. C. Pigou, J. R. Hicks and Lionel Robbins. Both Pigou and Hicks presented comprehensive summaries of it in The Economics of Welfare and The Theory of Wages, respectively. In fact, Chapman's theory of hours was one of the conceptual pillars of Pigou's analysis of externalities in The Economics of Welfare. So, it seems somewhat strange that Chapman's analysis is virtually forgotten by modern economists.

By "forgotten," I mean economists routinely rely on the assumption that "the given (presumably market-determined) hours of work are optimal" -- usually without even being aware that they making an assumption.

So here is what is so paradoxical: while the formally-labeled Jevons Paradox describes the relentless pursuit of both labour and energy efficiency driving expanded consumption of both through lower unit costs, Jevons's other paradox has to do with the relentless resistance put up against an alternative method of labour efficiency associated with resource conservation. This would not be at all out of place in Thorstein Veblen's analysis in The Engineers and the Price System of the ubiquitous restriction of output imposed by business to obtain higher prices.

Another Reason Why the Realism of Assumptions Matters

Mark Thoma has wisely directed us to a new paper by Stanford’s Paul Pfleiderer that makes the case for distinguishing between models that do and don’t have realistic assumptions.  It’s a great read and makes a number of points I would heartily endorse.

Meanwhile, I’d like to add one more argument into the mix.  I take it as axiomatic that the economic world is far too complex and variegated to be comprehended or forecasted by any single model.  Sometimes one set of factors is paramount, and particular model captures its dynamic, and then another set takes over, and if you continue to follow the first model you’re toast.  There are complicated times when you need a bunch of models all at once to make sense of what’s going on, even when they disagree with each another in certain respects.

So how do you know which model to use when?  The answer has to be that you observe as carefully as you can the conditions that obtain right then and there to determine which are the most salient, and then you pick the model(s) that are best fitted, by their assumptions, to those conditions.  This of course is precisely what me mean by the realism of assumptions: are they reflective of the reality to which they might be applied?

The doctrine that the realism of assumptions doesn’t matter could be defensible only in a world in which it is axiomatic that only a single model, the one that wins the empirical prediction game, will be used in all circumstances to the exclusion of all the rest.  That axiom underlies the canonical Friedman formulation in particular.  Pfleiderer’s contribution is to show that even this is not enough: given the limited power of real-world tests, some filtering of models according to their assumptions is mandatory.

Mankiw’s Philosophical Case Against Taxing Capital Income

Isaac Chotiner provided a wonderful rebuttal to something Greg Mankiw write about minimum wages and Obamacare. For me – the takeaway line was:

Notice that Mankiw first claims there is no way to compare people's happiness, and then he goes ahead and...makes a comparison, just in the opposite direction.

The reason this is my takeaway line as that Mankiw is at it again with a criticism of something Paul Krugman wrote. Up first – Paul:

most people realize that today’s G.O.P. favors the interests of the rich over those of ordinary families. I suspect, however, that fewer people realize the extent to which the party favors returns on wealth over wages and salaries. And the dominance of income from capital, which can be inherited, over wages — the dominance of wealth over work — is what patrimonial capitalism is all about. To see what I’m talking about, start with actual policies and policy proposals. It’s generally understood that George W. Bush did all he could to cut taxes on the very affluent, that the middle-class cuts he included were essentially political loss leaders. It’s less well understood that the biggest breaks went not to people paid high salaries but to coupon-clippers and heirs to large estates. True, the top tax bracket on earned income fell from 39.6 to 35 percent. But the top rate on dividends fell from 39.6 percent (because they were taxed as ordinary income) to 15 percent — and the estate tax was completely eliminated.

Greg’s only rebuttal was to present the literature on the alleged optimality of not taxing capital income. The argument simply put is that not taxing capital income is one way to encourage savings and a higher level of steady state output per capita. Of course, this simple argument known since Frank Ramsey made it in 1927 ignores several things including the fact that current generations must by definition consume less. It also ignores the distributional effects that Paul was stressing. The biggest omission, however, was the fact the Bush’s fiscal policies in general actually reduced national savings through what some would argue was reckless fiscal policy. Of course, Greg Mankiw tried to defend this fiscal stimulus by saying it was necessary to head off a recession – or something like that. But hey - we do know that Bush's fiscal policy made very rich people better off and as Isaac notes, Greg loves rich people.

Has Janet Yellen Given Up On Her 2% Inflation Target?

Or, more precisely, has it become a ceiling rather than a target?  Among those who see Janet Yellen's first press conference as Fed Chair and the reports of the first FOMC meeting she chaired as indicating that 2% is now a ceiling to be approached from below rather than a target that could be approached from above are Tim Duy and Dean Baker.  I am not sure if it is true, but that would suggest that the initial reaction of the market that interest rate rises may be coming sooner than previously thought may be true, despite the welcome abandonment of a 6.5% unemployment rate trigger point, given the continuing declines in labor force participation by working age persons.  If indeed the ceiling argument is correct, what might lie behind this?

First we need to remind ourselves where this 2% inflation target came from and Yellen's crucial role in its initial policy adoption by the Fed and its subsequent spread.  Inflation targeting had been going on in various countries since 1990, beginning with New Zealand.  But until 1996 it was mostly smaller nations that were doing so and the targets they adopted were rarely 2%.  However, in that year her husband, George Akerlof, and two  others at Brookings, Dickens and Perry, published a paper that suggested that a 2% inflation rate might balance off the need to control inflation with the need for microeconomic labor market adjustments by changing real relative wages.  That a positive rate of inflation was needed for this was due to the empirical ubiquity of downward stickiness of nominal wages.  In the face of this the only way to get changes in real relative wages was to have wages for relatively scarce kinds of labor nominally rise.  There was in fact no rigorous derivation of a specific rate of inflation that would be optimal for this balancing act, but 2% was essentially thrown out as a possible level that might do the trick.  In that year, Janet Yellen convinced Alan Greenspan of this argument in private conversation only revealed later as Fed transcripts became public, with Greenspan shifting from a zero rate of inflation target to the 2% level, even though throughout his Fed chairmanship, there never was any official target level, with this holding even well into the chairmanship of Ben Bernanke, even though it was widely known from not long after 1996 that 2% was effectively the de facto Fed target inflation rate.

Given that decision, this target gradually spread throughout most of the other leading central banks, so that in recent years to varying degrees it has been either the official  or de facto target of the Bank of England, the Bank of Japan, the Bank of Canada, and the European Central Bank, among others.  It has effectively become the world target inflation rate, and in fact inflation rates in both the US and Canada tracked it fairly closely over quite a few years, whether due to the effects of conscious monetary policy or for other reasons.

However, in recent years the rate has drifted downward in many of these countries, including the US as well as the Eurozone, closer to 1% than 2% in the latter.  In practice, the rate has been in the 1-2% range for  many of these countries for several years.  Clearly, if 2% is the target, this suggests that expansionary monetary policy should be followed, and while indeed this has largely been the case, we have now seen several months where this stimulus has been gradually scaled back in the US with the "taper" policy that is steadily reducing the rate of QE3 expansion of the Fed base, with this expansion targeted to stop by the end of the year.  The push to move to a 2% inflation rate seems to be taking a back seat to fears of inflation rising too rapidly, perhaps through asset bubbles.

As it is, while the ECB does not seem to have been pushing too hard to be expansionary, some other central banks have recently been making dramatic efforts to be more expansionary, notably in Japan with Abenomics, however while failing to get to the 2% target.  As it is, the 2% target remains in place pretty much in all these countries, even as none seem to be achieving it.  What is going on?

One possible explanation is that in effect there has been a loophole to the downward nominal stickiness of wages.  It is not that lots of workers are now accepting nominal wage cuts in their current jobs, although more have done so to some extent .  Rather what has been going on has been the phenomenon of workers getting laid off and then rehired at other jobs at lower wages.  Few in place wages have fallen in nominal terms, but many actual workers have experienced nominal cuts due to being laid off and rehired at lower wages.  This may have become the loophole that is making it hard to achieve the 2% target.  This is regrettable, but it may be that Yellen and her colleagues have observed this and that it is what lies behind this shift to making the widely publicized 2% target into a ceiling, with that suggestion by Akerlof, Dickens, and Perry now having been effectively revised, if not so loudly in a public way.

Barkley Rosser

When the Scientist is a Bad Philosopher: Some Thoughts on Mankiw

I have let Greg Mankiw’s latest piece for the New York Times simmer in my brain for a few days, and now I have to let some of the noxious vapors escape.

Here’s what he says.  Most economic choices are complex, with positive and negative effects on many parties.  The utilitarian calculus, the greatest good for the greatest number, doesn’t work, because it means helping some people by hurting others.  Unless there is a clear case of market failure—externalities—it is best to defer to the voluntary choices made by individuals in a free market.

What makes it difficult to respond is the multitude of errors and omissions in the Mankiw formulation.  It’s hard to know where to begin, so let me just make a list.  All of these are interconnected, of course, so the whole list is more than the sum of its elements.

1. Externalities are not the only market failure!  It’s scary that one of the planet’s most widely read undergraduate textbook authors could say this.  For the record, you’ve also got imperfect competition, public goods and asymmetric information, and together they apply to a lot of economic terrain.

2. A different issue, not yet classified under market failure, is multiplicity of equilibrium.  I’ve written a lot on this in the past and won’t repeat myself here, but interaction effects between economic agents, as well as the goods and services they produce, routinely make possible potential returns to collective action.  To not see this is to not see the “social” in social science.

3. It is true that market transactions, if participants are self-interested and rational, filter out possible actions that make some better off at the expense of others.  But surely to rule out all social change that is not voluntarily accepted on all sides is to commit to an extreme conservatism.  The world we live in is the product of the past, with all the irrationalities and inequalities that have been transmitted to us by history.  Maybe, just maybe, we might want to rectify some of them, even if history’s beneficiaries are against it.

4. Embedded in Mankiw’s quasi-libertarianism is a profound distrust of democracy.  No one, he says, can reasonably weigh the competing claims of the winners and losers from a policy proposal.  Well, that’s what democracy is supposed to do.  In theory, we discuss it.  We ask people to not simply assert their interests but give reasons why society should defer to them, and then we assess these reasons.  Obviously, actually existing democracy falls far short of the ideal, but its performance is not completely worthless, and there is untapped potential even in existing institutions to do this job a lot better.  It isn’t hard to find examples from modern history where democracies have risen to the occasion and brought about social change that, in hindsight, most of us now endorse.  I sentence Mankiw to 40 hours of mandatory service to his own brain, in the form of reading John Dewey on democratic theory.  He can get started here.

I can see the value in giving people plenty of scope to make voluntarily arrangements with one another.  There is real freedom involved, and it’s important that there be lots of opportunities for individuals to take initiative as they see fit.  But this is one value among several, and its weight varies from one policy context to the next.  Knee-jerk libertarianism is simply lazy philosophy.

The Poverty of Marginal Utility

"Ricardo, the head of the school which determines value by labor time, and Lauderdale, one of the most uncompromising defenders of the determination of value by supply and demand. Both have expounded the same proposition..." -- Karl Marx, The Poverty of Philosophy

The proposition was that machinery which displaces labor does so by diminishing the value (per given quantity) of the commodities produced. The proposition itself may seem unremarkable but what is intriguing is its uniform derivation by two presumably contentious schools of thought. Here is what Lord Lauderdale wrote about the idea of using labour as a measure of value:

The opinions [regarding supply and demand], that are here stated, concerning the nature and the causes of the variation of value, are nowise new. They have been hinted at by many; and by some they have been long ago explained with tolerable accuracy. They do not, however, appear to have been so clearly understood as to destroy the idea of any thing possessing a real and fixed value, so as to qualify it to form a measure of value. After this philosopher's stone, many have been in search; and not a few, distinguished for their knowledge and their talents, have imagined that in Labour they had discovered what constituted a real measure of value.

If labour does not possess a "real and fixed value," how is it that one can conclude that introducing labour-saving machinery will diminish the value of the commodities produced? My explanation for this uncanny convergence is no doubt too "simple" and too "obvious" to be believed. A proper exposition would lead the reader on a suspenseful and convoluted excursion to interrogate all the historical opinions, detours, evasions and possible objections,

But why bother? It is this simple: marginal utility theory of value is an embodied-labour theory of value in disguise. The disguise consists of not stating the obvious assumption and getting away with it because the assumption is so obvious as to be taken for granted.

The assumption is that the two parties to an exchange have a legitimate right to conduct that transaction.

I said it was simple but the legitimacy of the transaction is perhaps a bit more difficult than it may seem at first. For two parties to legitimately exchange goods, it is necessary for those goods to be their property. But as John Locke pointed out, the private ownership of property poses "a very great difficulty" given that God "hath given the world to men in common."

Fortunately for us, Locke resolved that difficulty by concluding that 1. "every man has a property in his own person..." 2. "The labour of his body, and the work of his hands, we may say, are properly his..." and 3. "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."

Voila! The labour theory of property! Of course there are a few further steps to get from Locke's legitimation of the private ownership of property to the constitution of labour as a measure of value -- from the qualitative to the quantitative. But the rationale is also there in Locke's chapter, "Of Property," having to do with limited capabilities and appetites (e.g., "no man's labour could subdue, or appropriate all; nor could his enjoyment consume more than a small part...") and the injunction against spoiling ("He was only to look, that he used them before they spoiled, else he took more than his share, and robbed others. And indeed it was a foolish thing, as well as dishonest, to hoard up more than he could make use of."). For Locke, the legitimacy of private property was explicitly constrained by its measure, which was -- directly or indirectly -- derived from the expenditure of labour.

So "the school which determines value by labor time" and the "defenders of the determination of value by supply and demand" expound "the same proposition" in more ways than one! One group imagines they have discovered the philosopher's stone, the other pretends they can perform the transmutation out of thin air -- as long as no one peeks at the elixir of life concealed behind the curtain.

Roll over Böhm-Bawerk and tell Carl Menger the news!

The Geopolitics of Carbon

Menzie Chinn has a useful post today on the impacts of US sanctions on Russia.  He notes in passing that “oil conservation measures in the US would have an impact” on global oil prices and the Russian economy.  This points to a consideration that is often overlooked.

Serious measures to combat climate change—to drastically reduce the extraction of fossil fuels—would be a blow to all petrostates.  This includes not only Russia, but Saudi Arabia, Iran, Nigeria, Venezuela, and so on.  That’s a mixed bag, but given the tendency for hydrocarbons to foster corruption and authoritarianism, it’s mostly a good thing.  The main drawback I can see is that oil wealth has created political economic space for challenges to the power centers of North America and Europe.  These challenges are not always progressive and reasonable, but they have served to decentralize geopolitical influence somewhat over the past four decades.

Meanwhile, those who campaign for a serious response to the carbon crisis should realize that their opposition includes not only the fossil fuel sector but the states that sit on top of the major deposits.  Thought should be given to a strategy that challenges these states but does not simply rely on the hegemony of the US and its European allies to crush them.  (Not that there is any great push currently coming out of Washington, Brussels, London or other such places to impose carbon restrictions on the petro-potentates, but it’s the principle of the thing.)

Tim Kane: "Overtime, rooted in the LOL fallacy"

Tim Kane is "chief economist at the Hudson Institute" "an economist and research fellow at the Hoover Institution at Stanford University" and co-author, with Glenn Hubba-Hubbard, of Balance: The Economics of Great Powers from Ancient Rome to Modern America. Wikipedia is his idea of an authoritative source:

Fact is that this overtime effort is deeply flawed according to mainstream economics. It is based in a theory of human labor as a muscle commodity, which was relevant in, economists say, 1861. This notion that raising the overtime threshold will create jobs is so wrong that it has a nickname among economists. It’s called the “Lump of Labor Fallacy” and even has a Wikipedia entry. Look it up!

It "...even has a Wikipedia entry..." Gosh, a Wikipedia entry! That must be way more authoritative than a peer-reviewed economics journal article -- you think?

"Why economists dislike a lump of labor." Tom Walker, Review of Social Economy, 2007, vol. 65, issue 3, pages 279-291

Abstract: The lump-of-labor fallacy has been called one of the “best known fallacies in economics.” It is widely cited in disparagement of policies for reducing the standard hours of work, yet the authenticity of the fallacy claim is questionable, and explanations of it are inconsistent and contradictory. This article discusses recent occurrences of the fallacy claim and investigates anomalies in the claim and its history. S.J. Chapman's coherent and formerly highly regarded theory of the hours of labor is reviewed, and it is shown how that theory could lend credence to the job-creating potentiality of shorter working time policies. It concludes that substituting a dubious fallacy claim for an authentic economic theory may have obstructed fruitful dialogue about working time and the appropriate policies for regulating it.

Whatever Happened To Regional Science?

Frankly, I fear that it is all but dead, even though organizations and even journals continue to exist that have either that name or its close relative, regional economics, in their titles.  However, I am teaching a course called Regional Economics right now, as I have for decades, and there has not been a textbook bearing the title of either "Regional Economics" or "Regional Science" now for several decades.  Yes, there is one by Philip McCann just out in a second edition from Oxford University Press, which I am using, titled "Urban and Regional Economics," but that is what it as been reduced to, a tail on the dog of the definitely thriving Urban Economics, not to mention that it is a book published in Britain.  But as for the broader "regional science," it has gone the way of the dodo, I fear.

To a substantial degree "regional science" was the invention of a single  man, Walter Isard, whose death in 2010 at age 91 may have been the final death knell of the field, even though he had himself drifted from it several decades earlier into another invention of his, "peace science" after he moved to Cornell University in 1977.  He founded the Regional Science Association in 1954, drawing on the older location theory coming particularly from the German language tradition that began with the 1826 publication of Der Isolierte Staat (The Isolated State) by Johann Heinrich von Thunen.  This was followed by the establishment of the Journal of Regional Science in 1958, which still exists (I published a book review in it a couple of years ago), with Annals of Regional Science starting in 1967, and at the behest of Isard in 1971, Regional Science and Urban Economics, perhaps the most respected of these journals today, although this may reflect its having that "urban" part tagged onto it.  Others began as well during this period, but most of them are thoroughly obscure by now, such as Papers in Regional Science and the International Regional Science Review.

Also, in 1956 after Isard moved from MIT to the University of Pennsylvania he founded the Regional Science Department, which began granting PhDs in that subject (I note that he served on the dissertation committee of my major professor, Eugene Smolensky, who got a PhD in econ at Penn).  A sign of the decline of the field  came with the closing of that department in 1993, mourned publicly by Paul Krugman, whom many had thought had given the field a new life with his work on the "new economic geography" a few years earlier, which had been preceded by similar work in RSUE by Masahisa Fujita.  And while their approach received much attention during the following decade, including with the excellent book they coauthored with Anthony Venables on The Space Economy at the end of the last millennium, that effort seems to have spread into international  trade, economic geography, and urban economics, without reviving or sustaining either regional economics or more particularly the inherently multi-disciplinary regional science all that much (Please note that I am not blaming Krugman for what has happened regarding this in the least).

I am not really sure what happened here, although the disintegration of regional science back into its core disciplines in rump form as urban and regional economics, economic geography, as well as related versions in political science and sociology seems to have played a role.  Certainly there are many interesting issues in regional economics in my mind at least, with foundational issues in nonlinear and complexity economics first being addressed certainly in the broader urban and regional economics, with Krugman among others noting this.  Many would argue that the foundational paper in agent-based modeling was in urban economics, the 1971 paper in the Journal of Mathematical Sociology by Thomas Schelling on urban residential segregation, a paper and model that continues to attract much study, although again, it is viewed as being urban economics more than regional economics or regional science.  The link between regional economics and international economics has long been recognized, with Bertil Ohlin's classic work bearing the title International and Interregional Economics, with some arguing that why Krugman was the first to win a Nobel Prize in international trade since Ohlin was due to his also applying the same ideas to regional economics as did the Swedish Ohlin, even if one of the inventors of what he applied, Avinash Dixit, still has not made that trip to Stockholm as has neither Fujita, who preceded Krugman in applying the same ideas.

Maybe it is because regional economics is a sort of meso-field.  With the exception of when people look at multi-national regions such as the European Union or Eurozone, it generally deals with sub-national entities that may or may not be well-defined.  But it also tends to deal with entities that are above the very well-defined entities known as cities, where microeconomic issues tend to predominate and with policy issues strongly linked to political entities that are distinct in the form and focus from others due to their greater density of population and reliance on highly developed infrastructure, such as water and sewer systems that may be of less importance in "regions."  However, as sub-national entities they do not have the institutions that national economies have, such as those that deal explicitly with macroeconomic policies, fiscal or monetary.  To focus on state governments, they do not have monetary policies at all, and at least in the US, their fiscal policies are highly limited due to their facing strict balanced budget rules.  They are macroeconomically subject to what goes on around them at higher levels, but lack the peculiar fiscal issues associated with managing urban infrastructure as well.  Their meso level nature leaves them in a sort of no-man's land, even though such things as export base multipliers and input-output models are highly relevant to them, with Isard in particular  working on the latter as a student at Harvard under Leontieff.  It may also be the decline in the use of the latter with the fall of central planning after 1991 that has contributed to the demise of the broader field of regional science.

In any case, when I look around now, it is very hard to see even regional economics per se as a field in the US, much less the broader regional science, although I do not have a definite reason why this is the case, and I personally continue to think that the field, or at least the idea of it, is still important, maybe even of renewed importance, which makes its absence all the more disheartening.

I close by noting that the late Walter Isard may have invented another field, one now labeled as "transdisciplinary," but has received nearly zero credit for doing so.  That would be ecological economics, which has a thriving journal of that title founded by Robert Costanza.  Costanza and some of his associates view themselves as having coined this term and invented this field, under the influence of Herman Daly, in the late 1980s, and I cannot disagree that they did so independently at that time.  However, in 1972 Isard published a book that I not only bought a copy of at the time but still possess that uses input-output analysis as its central tool, which also inspired Daly in his first paper from 1973 in the JPE on "Economics as a Life Science," this book bearing the title Ecologic-Economic Analysis of Regional Development from Free Press, which promptly dropped into complete obscurity.  It was Isard's last book on regional science.  I note that it initiated what Daly advocated: thinking of the broader system as an input-output one in which there are quadrants of economic-to-economic, our usual I-O matrix, but then ones of economic-to-ecologic, which includes pollution (among other things), of ecologic-to-economic, which includes agriculture (among other things), as well as a strictly ecologic-to-ecologic, with many pure ecologists dating from the work of Eugene Odum in the 1950s using such matrices to study ecological communities.  I find it unfortunate that along with the death of his field of regional science, Isard's role in foreshadowing modern ecological economics has also largely been forgotten.

The Long and Short of Kurzarbeit

An op-ed in this morning’s New York Times extolls the virtues of Kurzarbeit, the German system for promoting shared work rather than unemployment.  This isn’t the first time we’ve heard of this program; it’s a common theme among labor-oriented economists and pundits, who want for the US what Germany has achieved, a low unemployment rate despite the downdraft from 2008.

First, what’s Kurzarbeit?  It means “short work”, and it’s a public program to subsidize shorter work hours at the discretion of employers.  Rather than lay off workers altogether, a firm can offer them part-time work, and the government will subsidize a portion of the cost.  The exact amount of the subsidy varies depending on how long the part-time work continues, whether retraining is provided and other details, but a common figure for the average contribution is two-thirds.

The fact that the cost of keeping workers on the payroll is split between the employer and the government is important, and it explains why Kurzarbeit works better in Germany than it would in the US.  The bottom line is that businesses have to want to retain their workers and be willing to  pay a price to keep them in order for the system to be taken up.  This is true in Germany because of the entire economic model: the skill and involvement of the workforce is seen as the central asset on which business depends, and workers are key to the identity of firms—they are part of what the firm is, not outsiders who happen to do business with it.

The list of elements that make up this model is long.  It includes the apprenticeship system, which is paid for jointly by the government and business associations.  It includes works councils and co-determination, the representation of workers on the supervisory boards of firms.  It includes the public provision of credit to small and medium-size enterprises, which reduces labor market segmentation and promotes a “social” perspective on economic development.  And it also rests on longstanding cultural assumptions about work and livelihood that go back to the guild system of centuries past.  (Kurzarbeit itself is almost a hundred years old.)  German firms support Kurzarbeit because they want to keep their workforce through thick and thin—and the “they” includes worker representatives themselves.

I’m all for trying to introduce some replica of Kurzarbeit in the US, but how effective would it be?  How much of the extra cost of keeping redundant workers on the books would have to be paid by the government in order to convince firms to play along?  The increasing trend in this country is for firms to regard workers as interchangeable, offered minimal job security, training or career ladders.  It’s telling that the calls for an American Kurzarbeit come primarily from the left, not from the business community, which is not at all the case in Germany.

Don’t take this post as a criticism of work-sharing; that’s not my point at all.  Rather, to make the pieces of a better employment policy program work we need to address the whole anti-labor framework.

Hard Thoughts About Nuclear Weapons And Ukraine

The most important foreign policy initiative President Obama is trying to achieve against great odds is a nuclear agreement with Iran.  Central to this is having credibility that any promises made regarding Iranian security if they do not pursue acquiring nuclear weapons (which I do not think they are currently doing) must be credible.  It may be that he may have to engage in drastic action in the near future in order to maintain that credibility.

The New York Times top story today is that Russian troops are massing on the border of Eastern Ukraine, presumably threatening an invasion, either to carve off heavily ethnic Russian areas or to run all the way to Kyiv to reinstall former President Yanukovich, whom Putin claims was illegally an inappropriately removed from office.  It may be that he is planning a strategy like that he pulled a few years ago in Georgia.  How to get South Ossetia?  Invade Georgia proper and whomp their military, after which everybody is relieved that they retreat while holding on to South Ossetia.  Could be just the trick for pulling off the apparently impending annexation of Crimea after Saturday's referendum.

Now let me be clear.  I think the case for Crimea to be a part of Russia rather than Ukraine is strong.  Quite aside from the fact that probably a majority of the population prefer that outcome for this autonomous republic, it was a part of Russia prior to 60 years ago when Soviet Premier Nikita Khrushchev gave it to Ukraine on the 300th anniversary of the unification of Russia and Ukraine, he of of mixed ancestry, supposedly feeling guilty about his role in what went on in Ukraine in the 30s and egged on by his likely mistress and former Party leader in Crimea, Yekaterina Furtseva, who wanted to keep Tatars and Greeks and others from returning after being deported by Stalin in 1944.  All that was part of an implicit deal:  Ukraine would get Crimea but would remain part of the same nation as Russia, the Soviet Union.  Probably Yeltsin should have insisted on the return of Crimea when the USSR broke up, but he did not do so.  In any case, while it is hypocritically sneaky, one must recognize that Putin is maintaining a legal cover by asserting that all those pro-Russian militias running around in Crimea are really just local Crimeans rather than actual Russian military, even if we all know better.  He is maintaining the facade of not invading Ukraine.

Here is why that is important, and why an outright invasion of the rest of Ukraine would be very bad news.  In 1994, Ukraine had the third largest store of nuclear weapons in the world.  It gave it up in an agreement signed by Russia, Ukraine, the US, and the UK, which I understand France and China also later signed on to, this agreement guaranteeing the territorial integrity of Ukraine in exchange for sending all those nukes to Russia.  Russia is the last nation on the planet that should be violating this agreement, but this apparently what it may be about to do.

I hate to come on like this, I really do, but I am about to come on as more hawkish than John McCain, more so except for that nutcase wanting to put nukes on planes in Poland.  Anyway, I think if Russia openly invades Ukraine proper, the appropriate response is not just economic sanctions, which Putin will simply laugh at.  This is very dangerous, but Putin has clearly gone completely off the deep end of power mad egomania, surrounding himself by an inner circle of sycophants.  For the future of any nuclear peace, he cannot be allowed to get away with violating this agreement.

Workers do not compete for jobs!

Arise, ye prisoners of starvation! Giles Merritt, editor of Europe's World and head of the Brussels-based think tanks "Friends of Europe" and "Security & Defense Agenda" has just announced that the suggestion workers compete for jobs is nonsense. I kid you not. Nor am I exaggerating. Mr. Merritt himself performed the reductio to his own absurdum at the Project Syndicate site:

Politicians and journalists often suggest that people compete for jobs, the implication being that bringing more women into Europe’s workforce would deny jobs to men. That is not true, of course: economists deride the idea that there is a given number of jobs to be divided up as the “lump of labor fallacy.” We need as many people working as possible, generating economic activity and paying taxes.

A careful reading of the above paragraph would show that the error resides in the transition -- or lack of one -- between the suggestion that people compete for jobs and the alleged implication that more women in the workforce denies jobs to men. Mr. Merritt has pulled that implication (along with the projected "idea that there is a given number of jobs to be divided up") out of his... "hat" This is the point about the so-called "lump-of-labor fallacy" that I have been trying to draw attention to for a decade and a half.

What are the implications for standard economic theory of the idea that workers do not compete for jobs?

Tesla v. the New Jersey Motor Vehicle Commission

Tesla is not happy with Governor Christie:

Since 2013, Tesla Motors has been working constructively with the New Jersey Motor Vehicle Commission (NJMVC) and members of Governor Christie’s administration to defend against the New Jersey Coalition of Automotive Retailers’ (NJ CAR) attacks on Tesla’s business model and the rights of New Jersey consumers. Until yesterday, we were under the impression that all parties were working in good faith. Unfortunately, Monday we received news that Governor Christie’s administration has gone back on its word to delay a proposed anti-Tesla regulation so that the matter could be handled through a fair process in the Legislature. The Administration has decided to go outside the legislative process by expediting a rule proposal that would completely change the law in New Jersey. This new rule, if adopted, would curtail Tesla’s sales operations and jeopardize our existing retail licenses in the state ... We strongly believe it is vital to introduce our own vehicles to the market because electric cars are still a relatively new technology. This model is not just a matter of selling more cars and providing optimum consumer choice for Americans, but it is also about educating consumers about the benefits of going electric, which is central to our mission to accelerate the shift to sustainable transportation, a new paradigm in automotive technology.

In fairness, we should note that Arizona and Texas have also decided to side with the established retailers of automobiles in restricting competition. And any economist might note that if a citizen of Ft. Lee, New Jersey wanted to buy a Tesla, he could simply cross the George Washington Bridge and buy one in New York City. Of course, I’m assuming that the Port Authority does not decide to limit access of the bridge again.

Some games ARE zero-sum games

Mark Thoma featured an NYT commentary by Harvard economist, Sendhil Mullainathan, which Mark described as not his favorite article of the day. In the commentary, Mullainathan mused, "we shouldn't let these arguments serve as handmaidens to our emotional outrage — or to a misguided belief that the economy is a zero-sum game."

"The economy" may or may not be a zero-sum game. It really depends on what scale it's being evaluated. Cosmically speaking, the first law of thermodynamics rules out perpetual motion machines. But even if we assume that at a more mundane scale the economy is a non zero-sum game that doesn't mean that none of its component parts may be zero-sum games. That would be a fallacy of division.

"...it is fallacious to conclude (distributively) that each or every member of a class has a property from the premise that the class (collectively) has that property. Thus, the whole class collectively may be [non zero-sum], but a part of that class may not necessarily have that property -- i.e., may not be [non zero- sum]."

Did Khrushchev Cause The New Crimean War To Please A Mistress?

That is what one well-informed source tells me, so I have investigated the matter.  The woman involved was one of the most important and powerful of the Soviet era, Yekaterina Furtseva, the first woman to join the ruling Soviet Politburo in 1956, who was also a powerful Minister of Culture who famously banned certain movies and ruined certain actors.  On the Politburo she was at least at first a strong supporter of Nikita Khrushchev, providing crucial support for him in some of the battles that went on in the Politburo during the late 1950s, most importantly against an effort in 1957 by Stalinists led by Molotov who wanted to overthrow him.  However, in 1960, she turned against him and joined a failed effort to have him removed.

Prior to her elevation to the Politburo, she served as the leader of the Moscow Communist Party, with Khrushchev responsible for putting her into that position after Stalin died in 1953.  It was in 1954 that Khrushchev gave Crimea to Ukraine from Russia as a "gift," with the reasons for doing so still a matter of much debate, although ostensibly at the time it was in celebration of the 300th anniversary of the original union between Russia and Ukraine.  It has also long been argued that Khrushchev had long dreamed of doing this as a way to please the Ukraine and also  to keep the Tatars from returning by offering their land to Ukrainian peasants, and indeed the ethnic Ukrainian population of Crimea did increase after this gift, although they are still only in third place in the autonomous republic behind ethnic Russians and Tatars.

I note that the ethnic composition and history of this in Crimea is far more complicated than most recognize, with Stalin in 1944 removing not only the Tatars who gave it its name, but also Armenians, Bulgarians, and a group that had long predated the Tatars, Greeks, whose presence dated back 2500 years and who called the place "Taurica," or initially "Tauris," after the even earlier Tauri inhabitants, an apparently Indo-European group reputedly descended from the Cimmerians.  While Tatars returned starting in the 1980s, the Greeks have only recently begun to return there.

One can make the argument that Khrushchev was motivated in this also because of his personal connections to Ukraine, and undoubtedly this played a role.  He was born in a Russian village, but one near the Ukrainian border, and while most sources identify his parents as Russian, some say that he had some Ukrainian ancestry as well.  In any case, he was sent by Stalin to  run the Ukrainian Communist Party in the late 1930s, and oversaw purges and much else there.  It is  fully understandable  that he may well have become sympathetic to the republic during this period, thus leading to his actions on Crimea in 1954 shortly after he became Premier and before he had fully consolidated his power, still struggling with Malenkov for control, with the latter initially identified as Stalin's successor upon his death.

However, it may well be that Furtseva contributed to this decision.  While she was an ethnic Russian born north of Tver who initially joined the Communist Party while working in a Moscow textile mill, she would be sent to Crimea in the early 1940s where she was in charge  of an oblast level Communist Party unit there, equivalent to a county in the US.  It is likely she first got to know  Khrushchev at that time.  In any case, he became her patron after the death of Stalin, and she was in Moscow running its party at his behest at the time of the "gift."  However, as a Stalin appointee in Crimea in the early 1940s, she may well have supported the deportations of the Tatars, Greeks, et al, and agreed with or even been the source of the idea by Khrushchev to populate the place with more reliable Ukrainian peasants to keep these banished groups who were scattered across Central Asia from returning.

Now, to get to the juicy part. While it is not known for sure to be true, the rumors that the two of them were having an affair at that time were widespread, being reported by the BBC among other sources.  While this source is tainted in my view for overdoing conspiracy theories, _The Man Who Knew Too Much_ by Dick Russell provides accounts from other sources reporting this rumor on p. 118, including supposed CIA sources and others beyond the BBC report, the latter a matter of public record.  Russell reports on other matters that may or may not be true.  One that appears to be true is that she was apparently the main defender in the Politburo of letting Lee Harvey Oswald stay in the Soviet  Union when he first arrived there, with this being corroborated by other sources as well.  "Oswald's defender" she was called.  However, Russell pursues even murkier suggestions that I have not seen reported elsewhere that include claims that she was actually a CIA agent herself and that Khrushchev knew this and used her as a backdoor link for certain negotiations, particularly during the 1962 missile crisis.  What undermines the credibility of this last claim is that he had apparently turned against her in 1960, but perhaps she had been rehabilitated, and she was still on the Politburo.

However, in 1954, whether or not they were actually having an affair, Khrushchev was clearly very close to this powerful woman whom he would raise into the Politburo and had already raised to the ruling position in the city of Moscow, who had previously served as a Communist Party oblast chief in Crimea.  It is not out of the question that she may have crucially and substantially encouraged and supported this decision of his.

Barkley Rosser

Later Correction:  It appears that Furtseva was sent to Crimea in 1949 after he met her for the first time.  Thus, her experience there would have been more immediately on her mind in 1953-54 when she was closest to Khrushchev and he was making this decision.  She would have been aware of the issue that after the death of Stalin, the deported Tatars and others would want to return to Crimea, and so would certainly have supported a scheme to encourage immigration by "loyal" Ukrainians."  In the early 1940s she was married to a military man who left her in 1942 after she bore him a daughter.  She was later married to a Soviet diplomat, but later in her life he was reportedly cheating on her and she took to the bottle, dying in 1974 at the age of 63.

Fiscal Stimulus Deniers: John Versus John

John Taylor argues:

The very word “stimulus” has become a dirty word because so many Americans view it as a failure ... At best, there is divided opinion among economists about the stimulus. Indeed, there has always been great deal of disagreement among economists on the efficacy of these temporary “Keynesian” stimulus packages. And during the 1980s and 1990s there was a huge amount of skepticism of their usefulness. How do the new pro-stimulus arguments deal with the fact that there is clear disagreement? Some ignore it and simply assert that there is agreement.

John Taylor’s suggestion that he and John Cochrane agree that the 2009 fiscal stimulus package was doomed to fail misses the point that the two Johns presented incredibly different reasons why they argued that the stimulus was doomed to fail. Taylor’s argument is classic Ando-Modigliani life cycle thinking – give people a permanent tax cut and they consume more of it than they would if it were a one-time rebate. Cochrane was pushing the Ricardian Equivalence line that since the government budget must be balanced in the long-run, tax cuts not financed by eventual spending cuts would have to be later reversed by tax increases. For households not borrowing constrained, such temporary cuts are effectively loans they don’t need and as such would not be consumed at all. Advocates of Ricardian Equivalence such as Robert Barro would argue the same effect would exist if policymakers tried to claim their tax cut was permanent. Let’s put an end to this charade by noting two things. Households facing borrowing constraints do consume tax cuts and transitional increases in government spending – such as the public infrastructure proposals from many economists (including Martin Feldstain) – do increase aggregate demand. OK, John Cochrane seems not to understand this point. Whether John Taylor understands it or not – he is staying silent on this important distinction. But to suggest that John Taylor and John Cochrane have the same views on this topic is disingenuous in the extreme.

A Transparency Paradox At The Fed

In musing on the recently released 2008 transcripts from Federal Reserve meetings, Brad De Long ends up suggesting that maybe having a collegial Chair like Ben Bernanke may not be such a good idea.  He notes that while Bernanke was a deep student of what happened in the Great Depression to  the banking and finance systems, he seemed unable to use this knowledge in dealing with that bizarre and silly arguments being made by various people in the FOMC meetings at the time that inflation was a much more serious threat than financial breakdown and deep recession.  Brad ends by invoking the more secretive past when FOMC participants (which includes all the Fed bank presidents, not just those who formally vote) said what they had to say without there being any later reporting, or only minimally such, and the Chair would then go into privacy to decide what to do and did it, with the rest keeping their mouths shut, including publicly (Brad did not add that last, but it is implicit).  He suggests that if this model were used, BB would have been able to use his deep knowledge of the GD to overrule the rantings of the anti-inflation hysterics and done the wise thing.

Aside from whether or not the wise thing was done or not (certainly looks unwise in retrospect), I am not sure that going more secret would help here.  Indeed, it is only because we now have access to these transcripts that we understand fully how silly these folks were.  Some of them are still in place and shooting off their mouths quite prolifically, with Richard Fisher of the Dallas Fed coming particularly to mind, although Plosser has been pretty vocal recently as well.  If they are not duly embarrassed by this revelation of their past wrongheadedness, they certainly should be.  The paradox remains that eventual revelation of stupidity may be necessary to keep people in line.  It is not clear that returning to complete secrecy would overcome stupidity.  It might just protect it and encourage it.

Barkley Rosser