A Supreme Cellphone Moment

The Supreme Court took up the question of whether police can search the cellphones of people they’ve arrested without first obtaining a warrant.  All the argument, according to the report in today’s New York Times, was about criminal cases, remote-controlled bombs or driving without a seatbelt.

Actually, there’s a far more important context, government suppression of peaceful demonstrations.  One of the standard tactics to emerge in recent years has been the mass arrest of demonstrators, scooped up by the hundreds, held in custody and then released a day or two later with charges dropped.  I’d like to see a successful legal challenge to this, but I’m not holding my breath.

If the court, in its wisdom, decides that routine searches of cellphones are permitted, it is only a matter of time before mass cellphone inspection becomes part of the routine.  Why settle for simply squashing a demonstration—why not find out the organizational structure, the informal networks, the pathways by which information and ideas are disseminated?  It’s all there in those little phones.

Minnesota Mafia Challenges Piketty

Let me begin by noting that I have as yet been unable to obtain a copy and so have not read Piketty's smash hit book yet.  However, I think that I know enough about what is in it to post on this particular matter.  Anyway, Tyler Cowen at Marginal Revolution has posted a challenge put to him by Tony Smith regarding Piketty's book that can be labeled as coming from the Minnesota Mafia.  The econ department at the University of Minnesota, along with the closely allied research department at the Minneapolis Fed, which have long had people going back and forth or simultaneously in both, has long been the real fountainhead of new classical real business cycle DSGE macro, even if some of those who initiated that movement there are either not there anymore (Prescott, and many former students) or no longer a follower of it (Kotcherlakota, now Minneapolis Fed President, although for its failure to predict the crash or say much useful about Fed policy) or both (Sargent).  Nevertheless, a major contingent remains in one or both of those places, including Chari, Kehoe, McGrattan, Rios-Bull, and several others, and their former students continue to identify strongly with the place while they are now all over the world.

The centerpiece of  post is a paper by Castaneda, Dias-Gimenez, and Rios-Bull (http://www.econ.umn.edu/~vr0j/papers/maxrefin.pdf) entitled, "Accounting for the U.S. Earnings and Wealth Inequality," published in the Journal of Political Economy in 2003.  Several other papers are linked, with the most impressive by Heathcote, Storeslettin, and Violante
, an overview paper of the broader approach from 2009.

These models are variations of DSGE models, except that they involve incomplete markets, with Heathcote, et al. calling this approach the "standard incomplete markets"(SIM) approach.  The difference from usual DSGE models is what markets are incomplete, in this case idiosyncratic uninsured risks.  So, the missing markets are insurance ones, and these are what eventually explains the development of inequality.  The other part needed is that there are heterogenous agents done in the Minnesota way, an interval on some variable, in this case discount factors.  The main paper also adds a social security mechanism.  With proper calibration, they claim to reproduce the pattern of income and wealth inequality in the US economy up to 2003.  Most controversially they claim that introducing an estate tax will make little change in wealth distribution, only raising the wealth Gini from .79 to .80.  Cowen is impressed.

So, what is going on here?  Heathcote et al lay out the various mechanisms and review the broader related literature.  Various models have thrown in as shocks family and human capital ones, with the missing insurance markets including finance, public, and some others.  There is even a policy claim that being able to separate initial condition effects from later shock effects suggest policies focused on early education to improve human capital or others focused on later "insurance."  Obviously this is very different from the reputed story that Piketty ultimately develops regarding dynastic families emerging in a "patrimonial capitalism" and his focus on the overall return to financial capital compared to the overall rate of growth.  The stories are extremely different.

In the end, what is really driving Minnesota models is this distribution of different discount factors.  So, it is at the bottom line that those on top are patient and willing to abstain while those at the bottom are short-sighted and impatient, tsk tsk.  In this view, obviously the losers deserve what they (don't) get, while the virtuous rich deserve theirs.  This is the Protestant Ethic triumphant!

Barkley Rosser

The Illusion of Marginal Productivity

Page 341:

"As noted, the theory of marginal productivity and of the race between technology and education is not very convincing..."

Class dismissed.

Conditional Minimization of Type I Error and the Emergence of Scientific Sects

I think I've figured out a crucial missing link in the account of science I've long supported, and I want to put it in words while it’s clear in my mind.  What follows will be a quick sketch without much detail or example.

The overarching framework is that the key to science as a progressive human activity is its privileging of the goal of minimizing Type I error (false positives).  Research protocols can largely be explained according to this principle, including elaborate validation of methods and apparatuses and rules for replication and statistical significance.  These protocols are often fudged in the grimy day-to-day reality of research, but the stature of a field as scientific depends on containing these breaches.  There are two practical consequences of the strong bias against Type I error: one is that understanding of the objects of research can be expected to improve over time, the other that an immense division of labor can be supported, since specialists in one subfield can rely on and build upon the validated findings of other subfields.

So far so good, but how do we explain the sectarian division of research communities, much less the periodic Kuhnian emergence and overturning of entire paradigms?  How can science be progressive in the sense of the previous paragraph and yet support mutually inconsistent research programs over long periods of time?

Here is my tweak.  Classical Type I error minimization is unconditional; it seeks to prevent false positives that might arise from any form of mismeasurement, misspecification, misinterpretation and so on.  All potential sources of error are taken into account, and the goal is to reduce as far as possible the likelihood that a false positive could result.  The problem is that this can be a herculean task.  There are a great many potential sources of error, and it typically isn't possible to address each one of them.  A fallback position is conditional minimization of false positives.  This describes a strategy in which a (hopefully sparse) set of assumptions is adopted, and then Type I error is minimized conditional on those assumptions.  A research “sect” is a community that shares a common set of assumptions as a basis for minimizing Type I error from the remaining sources.  This is, I think, what Kuhn meant by “normal” science.

And where do these assumptions come from?  That’s a huge topic, which historians and sociologists of science love to study.  Once they are adopted, a set of assumptions is maintained providing the conditional minimization of false positives it permits looks enough to practitioners like the unconditional kind.  If you do everything you’re supposed to, minimizing Type I error conditional on the assumptions of your community, and your results still exhibit numerous and costly false positives, these assumptions become vulnerable to challenge.  Here too, of course, actual scientific practice can be closer or further from the ideal.  Some fields are aggressive at identifying anomalies; others train their adepts to not see them.

Seeing it this way allows me to acknowledge the good faith of practitioners whose assumptions differ from mine, providing they are honest about the conditionality of their work and willing to consider evidence that calls it into question.  They should expect this of me, too.  But skeptical historians of science tell us that self-awareness at this level is extremely rare, for personal and institutional reasons that are all too obvious.

Recognizing the necessity and ubiquity of conditional Type I error minimization makes me a bit more inclined to see economics as scientific.  I have complained in the past, for instance, about econometric work that doesn't so much test models as calibrate them.  Certain underpinnings of a model, like intertemporal utility maximization, are simply assumed, and then great amounts of statistical ingenuity go into devising and improving their empirical implementation.  I now see that this qualifies, at least formally, as conditional minimization of Type I error, and that, from within this research community, it sure looks like models are being progressively refined over time.  But I still think that economics rather stretches the boundaries of science in its willingness to cling to assumptions that, objectively considered, are extremely weak—inconsistent with the findings of other disciplines and at variance with observable fact.

Inequality and Class Struggle

In his discussion of the Cobb-Douglas production function and the presumed stability of the capital/labor income split, Thomas Piketty references the work of "the young German historian and economist Jürgen Kuczynski" (p. 219). Readers of Capital in the 21st Century may be interested to learn a bit more about this intriguing character, whom Marc Linder profiled in a 1994 monograph, "From Surplus Value to Unit Labor Costs: The Bourgeoisification of a Communist Conspiracy" published in the book, Labor Statistics and Class Struggle.

In the mid-1920s, the American Federation of Labor adopted a new wage policy linking wage demands to productivity gains, which Linder described as "strongly reminiscent of the reasoning that Marx had used in an address to the General Council of the First International in 1865 to refute the claims of one of its members, a carpenter named John Weston, that a general increase of wage rates did not benefit the working class." An excerpt from Linder's book:

The reason that Green’s “Modern Wage Policy” Declaration seemed so curiously suggestive of Marx’s own popularization of the theory of exploitation is that it was, implausibly enough, written by a German Marxist mole in the AFL. That person, who was also responsible for developing the data on relative wages for the AFL, and thus for the organization’s conversion to a crypto-Marxist strategy of holding the line on the rate of surplus value, was twenty-two year-old Jürgen Kuczynski… 

In September 1926… Kuczynski departed for the United States, where his father, who spent half of each year at the Brookings Institution and as late as 1931 was a member of its advisory council, had secured him a stipend at the short-lived Robert Brookings Graduate School of Economics and Government. Through his father, Kuczynski again came into social contact with many scholarly and political leaders in Washington, D.C., including Justice Brandeis, a distant relative. 

Shortly before his departure for the United States, Kuczynski was struck by Paul Douglas’s recent article comparing the movements of real wages, production, and productivity. Although Douglas did not draw the parallel or discuss its significance, he presented data showing that from 1899 to 1923, the real earnings of manufacturing wage-earners had risen 28 per cent whereas their per capita output or productivity had increased 52 per cent. Kuczynski then published a piece in the Finanzpolitische Korrespondenz, which his father edited, in which he methodologically went a step beyond Douglas: by dividing the index of real wages by the index of production, he generated an index of “the share of industrial workers in the total product of industry.” This “social standard of living,” which Kuczynski conceded was very rough and in need of refinements, had declined by 50 per cent between the turn of the century and World War I and remained stagnant thereafter. 

In the course of re-reading Douglas on the boat to the United States, a “fundamental idea” dawned on Kuczynski -- namely, that the relationship between production and real wages was nothing but Marx’s idea of relative wages. Whereas only bourgeois theorists and especially social-democratic revisionists contested Marx’s ‘“theory of absolute immiseration,’” relative immiseration seemed, once the absolute variant was accepted, self-explanatory. The reason that no one had thought of calculating relative wages was the lack of relevant data. When Kuczynski realized on the boat that statistics recently published in the United States had made such calculations possible, he arrived in Washington with his “tongue hanging out.” In November 1926, two months after his arrival, he published two more articles in his father’s journal on relative wages, which were both suffused with a primitive version of ameliorative underconsumptionism. In one, expressly referring to Marx’s distinction between real and social standards of living, he loosely defined the latter as (wage-working) consumers’ share of the national product, In the other he presented the first fruits of his calculations of relative wages in several industries as the result of dividing real wages (measured both by a cost of living index and an index of wholesale prices of the particular industry) by productivity. In 1927 and 1928, Kuczynski published additional articles on the same subject in Germany until the relative wage “had again found its place as a category of Marxist doctrine." 

While refurbishing Marxism, Kuczynski also performed a much more spectacular feat: ventriloquizing President Green. Although Frey’s efforts at the 1925 AFL convention had “given a great movement a great idea,” Kuczynski was disappointed that the Federation had “forgotten” about computing the worker’s share of the product or implementing the new principle. To be sure, Kuczynski overstated his own and underestimated the AFL’s initiative: immediately after the Atlantic City convention, The New York Times had published an interview with Green in which he anticipated by a year Kuczynski’s call for a workers’ share index. Specifically, Green stated that the AFL should do research to show workers and the public “how the purchasing power of wages has varied . . . and what relation that curve bears to the output per worker.”

IPAT: Simple and Useful

Miles Kimball has steered me to Matt Ridley, who gets IPAT completely wrong.  Ridley says he used to be an ecologist, but if he was his training had some gaps.  Here’s what he says about IPAT:

In 1972, the ecologist Paul Ehrlich of Stanford University came up with a simple formula called IPAT, which stated that the impact of humankind was equal to population multiplied by affluence multiplied again by technology. In other words, the damage done to Earth increases the more people there are, the richer they get and the more technology they have.

Nope.  IPAT is simply a decomposition:

environmental impact = population x (real GDP/population) x (impact/real GDP)

The name comes from reading this as impact = population x affluence x technology

Old timers will remember that Barry Commoner used this framework to demonstrate that a number of critical environmental problems were due primarily to the latter ratio, not to the first two terms on right-hand side.  Rather than focusing on population growth (like Ehrlich did) or impoverishing ourselves, what we most needed to do was change the technologies we used to produce things.  Contra Ridley, it was not about “less” technology but different technology.

And it’s still a useful way to frame environmental issues.  Take carbon, for instance.  Us humans need to forego 60-80% of the available fossil fuel reserves if we are to avoid potentially catastrophic climate change.  How can we pull this off?  Simple arithmetic, mobilized by IPAT, shows us that neither population reduction nor shrinkage of GDP per capita can get us anywhere near this, short of some sort of nightmare scenario.  Our only option is to reduce the amount of fossil fuel use per unit GDP, and this we can do rather readily, if the IPCC can be believed.  (I’m not convinced personally, but I could be wrong.)  That’s the T part of IPAT.

I don’t like to spend my time correcting every mistake I find on the internet, but the IPAT formulation is worth preserving.

Piketty for Dummies

You look around.  Some people are rich, even very rich, and others are poor.  Most are somewhere in between.  It’s not equal, but you think this is how it has to be if we're going to reward talent and enterprise so that all of us can ultimately benefit.

It’s third grade all over again.  You look around the room.  Some kids are really smart; they know all the answers and it is obvious they will get ahead.  Others may not be quite as smart but they try very hard, and they'll be successful too.  Some are popular, with the ability to make lots of friends and get others to follow them.  A few of the kids have that special blend of imagination and courage that sets them apart.  They take risks to discover how far they can go beyond their “limits”; they explore hidden places, how toys and gadgets work, different ways of doing things.  Meanwhile, there is the majority, nice kids but ordinary, average ability, average motivation.  It’s already laid out who will be who in twenty or thirty years: you can see society separating into the leaders and followers, the rich and the rest.

This is a certain (conservative) view of inequality and how it comes about.  Liberals and lefties have a different view of that classroom, and there has been a lot of argument back and forth.  But now Piketty changes the story.

You're back in third grade again, and everything you saw is still there.  But now there’s something else: there’s another school across town, one you may never have heard of.  It’s at the end of a long private road, behind a locked gate.  The kids at this school live in a part of town you’ve heard rumors about but have never actually seen, with large houses set back from the road and, like the school, hidden from view.  These kids come from very rich families.  Some of them are talented and do well in their special school.  Others are average.  More or less all of them will stay rich when they’re grown up—richer than even the smartest and most motivated kids at your school.  Their families already own much of the town, and, since they’re making money at a faster rate than the town is growing (Piketty has measured this), over time they will own more and more of it.  The kids at your school, the smart ones and the ordinary ones alike, will mostly end up working for them.  Unless something is done to disrupt the process, your town will have a hereditary ruling class.  Piketty says, you have to tax this upper group to prevent them taking over completely.

What Capital in the Twenty-First Century does is to enlarge your perspective.  For decades, the discussion had all been about the kids at your school and how much to reward the ones who have what it takes to go further.  No one talked about that other school because it was smaller, and above all because it was behind a locked gate and hard to find out about.  Piketty and his coworkers have done the heavy digging to get the facts about this other school—who goes there and what awaits them after they graduate.  He’s found that the families of the kids at that school are getting richer by the year, and that the inequalities in your school pale beside the gap between yours and theirs.  He’s adding new questions you need to ask.

WaPo says "Luhansk" is now "Lugansk"

Not too long ago I wondered about who makes the decisions regarding which spelling is to be used in US media for cities for which there are competing spellings in the Latin alphabet whose names are not spelled using that alphabet originally, in some cases this debate involving actual differences in the names or their pronunciation.  I noted in particular four cities in Ukraine, one of which at that time was being spelled in the Russian way ("Kiev" rather than "Kyiv")) versus three that were being spelled in the Ukrainian way ("Lviv" rather than "Lvov," "Kharkiv" rather than "Kharkov," and "Luhansk" rather than "Lugansk").  Well, now the balance seems to be two to two. This morning in the Washington Post I saw that last one being spelled in the Russian way, "Lugansk."  Whassup?

It may be that this is a judgment about political-military conditions on the ground.  Lviv is firmly in western Ukraine, the very heart of Ukrainian nationalism.  While Kiev is firmly in Ukrainian territory, it may simply be that too many people are used to spelling it that way, including as our sometimes commentator on these matters, Bruce Webb, noted, it may just come down to "Chicken Kiev."  But the situation regarding the other two is very dicey and somewhat similar, but not quite.

So, both Kharkiv/Kharkov and Lugansk/Luhansk are in contested eastern Ukraine. Both of them had masked men seize control of a major public building downtown.   But neither is in the Donetsk oblast where both the capital, Donetsk, and a large number of other towns, have had public buildings seized and where violence leading to deaths has occurred.  A major difference between these other two, is that, while they are both much nearer the Russian border than anything in Donetsk oblast, the Ukrainians were able almost immediately to get the masked men out of the building in Kharkiv and regain control of it, whereas they have failed to do so in Lugansk, where today's WaPo story reported on how they are hunkered down and piling up all sorts of arms to resist an expulsion.  Furthermore, although I suspect this is beyond anybody at WaPo, the former was never a part of the odd "New Russia" (Novorossyia) that Putin has rattled on about recently as a vague claim for much of southern and eastern Ukraine, Kharkiv being in the Northeast.  But Lugansk was in that odd territory, and now it increasingly looks like it may revert to Russia in the longer term, along with (maybe) Donetsk oblast, with Russians and Ukrainians having no disagreement about Donetsk's name.

I also note that we have seen no name changes in Crimea (Krim), as none of the towns and cities there were founded by Slavs of either Russian or Ukrainian or mixed extraction.  The names all predate the arrival of the Slavs in the neighborhood, in some cases by more than 2,000 years, and are all of either Tatar or Greek origin, the older ones the latter.  So, reportedly the place is in complete chaos and a lot of people who voted to join Russia are now regretting having done so, having gotten a an especially stinky pig in a poke, but at least none of the chaos there has anything to do with how to spell the names of the conurbations there.

Barkley Rosser

Rand Paul on the Reagan Fiscal Record

Tom Kludt catches Rand Paul praising Jimmy Carter and calling into question part of Ronald Reagan’s fiscal record:

Paul took his GOP blasphemy even further when he said that Republican punchline Jimmy Carter actually had a better record on government spending than Reagan. "The deficit went through the roof under Reagan," he said while stumping for his father, Ron Paul, at a campaign event in 2007. "So how long did it take Ron Paul to figure out that the guy he had liked, endorsed, campaigned for, campaigned for him? The very first [Reagan] budget. Ron Paul voted 'no' against the very first Reagan budget… Everybody loved this 'great' budget. It was a $100 billion in debt. This was three times greater than Jimmy Carter's worst deficit." Paul's office promptly issued a statement to Mother Jones. "I have always been and continue to be a great supporter of Ronald Reagan's tax cuts and the millions of jobs they created," the senator said in the statement. "Clearly spending during his tenure did not lessen, but he also had to contend with Democrat majorities in Congress."

President Carter was a fiscal conservative and Senator Paul is correct to point out that the Federal debt rose rapidly during President Reagan’s tenure. But as I listened to the video, I heard Senator Paul making a lot of false claims. Total Federal spending as a share of GDP did not rise even as President Reagan oversaw an increase in defense spending relative to GDP. So when the Senator claims that Federal domestic spending increased, that is simply not true. As far as the jobs record, let me turn the microphone over to Paul Krugman:

It’s not just that more jobs were created under Clinton, who raised taxes on the rich, than under Reagan; I wonder how many people know that more jobs were created under Jimmy Carter than under either Bush?

I seem to recall Lawrence Kudlow talking about how real GDP grew by 3.5% per year for the second half of the twentieth century, which is an accurate statement as far as it goes. But that omits the fact that average real GDP growth was only 3.0% over the 1981-1992 period. So much for Voodoo Economics!

"One of the Oldest Mistakes in Economics"

Allister Heath:

One secular shift that has made the plight of the young stand out even more is that our oldest workers have done remarkably well. There has been a boom in folk of pensionable age remaining or rejoining the workforce... Far more jobs have been created for pensioners during that time than have been filled by young people. 

This doesn't mean that older people have "stolen" the jobs of the young; the lump of labour fallacy is one of the oldest mistakes in economics. There is no set number of jobs, to be divvied up between young and old; all should theoretically be able to find work and in many cases an increase in the supply of labour also increases its demand. But the numbers are another reminder of how badly young people have fared.

Shorter Allister Heath: It happened but theoretically it isn't supposed to happen and in many cases it doesn't happen therefore it didn't happen.

Losing American Hearts And Minds

That is the title of a column in the Washington Post of April 21, 2014 (just barely yesterday) by editorial page editor, Fred Hiatt, signed openly, in which he argues that President Obama is doing things that are popular in the short term, but lose him American hearts and minds in the longer term.  He starts on foreign policy, mentioning pulling out of Iraq and Afghanistan and avoiding going into Syria, which supposedly involves "the emerging picture of an America in retreat, and  a leader half-heartedly committed to promoting liberty," which he claims is "not what they [Americans] are looking for."  He may be right, but this is not the part of his piece I wish to dump on hard.

That is when he shifts to domestic policy, which is the main topic of the column.  Here we find that Obama has also failed in the long run, even though he is apparently pleasing public opinion in the short run, by not accepting what "The Bowles-Simpson commission had called for," (higher taxes and slower growth in Medicare and Social Security spending).  Shame on him, even though indeed Hiatt recognizes that his non-acceptance is popular.

Now, I first want to remind everybody of a point that Dean Baker relentlessly emphasizes repeatedly (that is how he does things, good old Dean), that the Bowles-Simpson Commission never actually issued a report.  Talking about what it "called for" or "recommended" or anything else of the sort is simply rank nonsense.  They never came to an agreement because a substantial proportion of its Republican members, led by Paul Ryan, refused to accept the deal of higher taxes for spending cuts or restraints, because of the tax part.  They simply refused to accept any higher taxes, period.  And that was that.  It is true that after this failure of the commission to come to an agreement, Bowles and Simpson themselves issued a set of recommendations that Hiatt accurately characterizes, but this was not a report of the commission, just those two men. But Hiatt simply ignores this and goes on about how Obama somehow missed this great opportunity to "have empowered Republicans in Congress - the Roy Blounts and Bob Corkers - who want to work with Democrats to get things done," even if what they want to get done is silly and unpopular, ignoring that the Paul Ryans outnumbered such folk, to the extent they were really willing to do anything anyway.

As it is, Hiatt grants Obama many points.  He recognizes that indeed Obama supporting something supported by some Republicans may have simply led to that undermining any serious support among Republicans for  such proposals.  He does not mention ACA, but that is the prime example: an originally Republican proposal that in the end received zero GOP votes once Obama came out for it.

He even recognizes that maybe Obama "had no serious Republican partner," which sure as heck looks like it was the case, with again the ACA case paramount.  Obama (and Congressional Dems) negotiated with many GOP congressional members on it, giving them many policy victories, but in the end failing to obtain a single vote from them in its favor. 

Hiatt says he should have been more like LBJ in this time of nostalgia for him as one of those "other presidents would have given it more of a try."  Well, indeed at various times during debt crisis negotiations, Obama even hinted at accepting changes in the Social Security COLA in exchange for some tax increases on the wealthy, the deal that Hiatt so very much wants from his Bowles-Simpson fixation.  But, whenever Obama would float such proposals, they would get shot down by both  sides, Republicans for the tax increase and Dems for the COLA change.  But to Hiatt, he just did not try hard enough, thereby losing American hearts and minds in the long run.

Eventually Hiatt almost throws in his hat on the bottom line, "that Obama was right to steer clear of the 'austerity' of Simpson-Bowles," only then to deny that austerity is what is involved.  He then goes on to paint his picture of doom with baby boomer entitlements gobbling up money for "national defense, national parks, colleges, railroads, Head Start," and so on.  Never does he come to grips with what is really driving the longer term gloomy cost projections, which is health care costs, period.

Indeed, earlier this evening I heard it reconfirmed in a talk by Alice Rivlin, also long one of the VSPs pushing for such bipartisan deals, even praising Bowles-Simpson at one point and also noting her having founded the bipartisan Congressional Budget Office, a fountainhead  of rational and careful budgeteering along VSP lines.  I cannot criticize her on this, particularly as indeed her talk pinpointed health care cost projections as the main issue.  If these can be brought under control, then most of these bogeyman projections of deficit doom pretty much  go away, a point that good old Dean Baker also relentlessly harps on.  Unfortunately, she is not all that optimistic, despite noting some bending downwards of the healthcare cost curve in the wake of ACA, although warning this may be mostly due to the recession now coming to an end, maybe.  I asked her a very Dean Baker question: would not increasing immigration of healthcare professionals help this?  She agreed, but also noted how difficult politically it would be to pass such a reform.

So, I am willing to give Alice Rivlin credit for her tough realism, but Fred Hiatt just continues to wallow in some sort of fantasy land where cutting Social Security benefits is the proof of political manhood, and if only Obama had done this, by gosh by gum, he might even be able to lead the Dems to victory this fall in holding the Senate!  He is simply  a hopeless case, I fear.

Barkley Rosser

Piketty’s Unlikely Path

I’ve only just started K21, so I won't comment on anything substantive, but the mini-autobiography he presents in the introduction got me thinking.  Here’s a guy who was a natural for cranking out theoretical models in economics.  His career was jet-propelled, and at an age when most econ grad students are sweating out their prelims he was already on the tenure track at MIT.  He could spend the rest of his life among the elite of the elite, playing cleverly with algebraic puzzles for a living.  Instead, he quit, returned to France, and spent the next decade digging through archives, laboriously piecing together datasets on income and wealth distribution.

Question: how likely is this to happen?  How many talented modelers, on a fast track to the highest reaches of the profession, would give it up and walk away?  OK, empirically, how many have actually done this?  It is essentially an accident that K21 was written in the first place.

More On Owning Unowned Land

This follows an earlier post by me on April 17 on "Who Owns Unowned Land," which argued that in the US it is the states in the original 13 colonies and the federal government in the rest of the nation, with the precise legal code defining the tenure rights being those of the nation that was ruling the land when ownership was first established.  Which gets us back to this matter of how does this first ownership get established on previously "unowned land," with the implicit question for the US being, "why are not the Indian tribes the original owners?"

So, in a paper by T.W. Merrill from the Yale Law School in 2009, "Accession and Original Ownership," he addresses British common law views on how "original ownership" comes about, finding that the theory presumes that prior to individuals (or sub-national corporate entities) coming to own land, it was presumed to be "held in common," as in traditional medieval grazing commons in England that came to be enclosed, without it quite being clear who ultimately owned such grazing commons.  Merrill cites John Locke on this who wrote, amazingly enough, that we should think of the world as originally "being America," that is a giant commons.  For Locke it was mixing one's labor with the land that established ownership, a labor theory of ownership as it were.  The matter of "accession" is posed as an alternative, but this simply involves a modification of this labor mixing principle, altering it to the first owner is the one who establishes effective control over the land. Once that is recognized, then a chain is established that simply continues, which is why we have this matter of the code holding when land first becomes clearly owned being the relevant one for later property transfers, particularly real estate ones.

Now in fact this does not really answer our question, although it does highlight important details to some extent, particularly when we consider Locke's view of "America."  Why is it that the Indians did not "own" the land, or were not considered to be the owners by the British (and Spanish and French)?  Needless to say, certain areas were used regularly by certain tribes, arguably enough that Locke should have granted them property rights, unless he wanted to argue that they could not due to being subhuman or something like that (am not aware of Locke ever making such arguments).

No, obviously what is involved is recognizing that behind property rights, certainly in land, there is assumed to be some sort of government or state with an organized legal code and system of courts to enforce it, even if it is one that has evolved "spontaneously" a la the common law of Britain, in contrast to the continental codes derived from Roman law, although the argument of  Shleifer and his allies about the differences between these has been way overblown and often full of errors, the famous "Legal Origins" QJE paper by Glaeser and him being notorious for its myriad mistakes, even as it is one of the most heavily cited economics papers of all time.

So, private property comes into play when a government with a legal system recognizes that somebody has "mixed their labor" or otherwise assumed some recognized degree of control over some land with, very importantly, that person recognized as someone with legal rights to do so within the law code of the state involved, with that state itself ultimately having some degree of control or claim to control the land in question.  This gets us back to the question of how America did not come to belong to the Indian tribes, although now reservation lands do, and many individual Indians own land privately in many places.  It was simply a matter of force, although it must be recognized that none of the tribes had organized legal systems of the sort that one found in Europe.  These "commons," in many cases recognized among tribes as being "territory" of one tribe or another, became the property of the relevant European-backed governmental entity that took them from the Indians, one of those acts of "primitive accumulation" of which Marx wrote at length.

In any case, in the eastern US, those entities were the individual colonies, thus allowing them to "own unowned  land," with private ownership being recognized either by the Crown directly or by governors of the colonies assigned by the Crown, and the priority of  their rights continuing into the independence era of the US.  This  also explains how certain areas that had been settled while there was French or Spanish rule with individual properties being established under their rule continued to have their tenure determined by the system of legal land tenure in place when the original ownership was established.  But when the US would take control of these territories by either conquest or purchase, that land not already privately owned would belong to the US federal government, which did the conquering or purchasing, although which agency of the US government might come to have responsibility for such land would depend on acts of Congress.  And, of course, the various Homestead Acts all followed the Lockean principles of mixing labor with the land to assert control and ultimately private property rights.

So, running this back to the matter of Clive Bundy in Nevada and his claim that the "sovereign" state of Nevada owns the BLM lands that he has been grazing cattle on for decades without paying any fees, his argument continues to be completely legless.  If he wants to argue that somebody other than the US federal government is the owner of these lands, then the most legitimate alternative candidates would be either nearby Indian tribes (Shoshones?) or maybe the government of Mexico, from whom the lands were taken by force in the Mexican War.  I am sure he does not want to recognize either of them, who would also presumably demand fees from him to graze his cattle.  I know that he claims that some sort of rights were granted to one of his grandfathers, and maybe he did  "mix labor" with the lands, but the courts have not recognized  that claim.  And the matter of him and his armed friends flying lots of American flags while denying the very existence of the US federal government at all is completely absurd.

Barkley Rosser

Germany and Ukraine: Official and Alternative Views

The official view is on display in today’s New York Times, where a prominent news analysis piece (p. 4) claims that Germany’s pacific attachment to Ruhe and Ordnung (quiet and order) has been shaken by the aggressive behavior of Russia in the last month.  (They also say it’s been undermined by the Snowden revelations, but that is quickly dropped after the opening paragraphs; it’s not why this article was written.)  Quoting an article in Die Zeit and a CDU (conservative) politician, the article concludes that Germany has to face the reality that cooperation and compromise is not how the world works, and that it must rearm and adopt what amounts to a more NATO-friendly foreign policy.

Your first indication that this is about what Germans should think and not what they do think is the fact that both of these “representative” sources are from the right.  Die Zeit, in particular, is an interesting animal: it is literate and thoughtful, the journal whose want ads you would peruse each week if you were an academic looking for a job, but on international matters its tone is set by its editor and boss, Josef Joffe, perhaps Germany’s only high-profile neocon.  (He also holds a visiting post at the Hoover Institution.)  My ninth-grade social studies teacher told me that one of the main ways a newspaper spins the news is by selectively quoting those who agree with them.  (I had to memorize SQECBOP: slanting-quoting-editorial-cartoon-burying-omission-photo.  See, I still remember.)

Now, I’ll admit I’m hardly an expert in What Germany Thinks.  I know a few Germans and have an idea what they think, but I do try to keep up with what’s happening there.  I have an alternative take on how the Ukraine business is affecting most Germans:

1. Germany made a deal after WWII to be “of Europe”; it’s the basis for its return to political and economic power.  This is ingrained in popular consciousness.  The German economy also depends mightily (too much, in fact) on its exports to the rest of Europe.  The mess in Ukraine is seen as a crisis for Europe, and a threat to the European-ness of the other ex-Communist states in the region.  There is also a historical connection: Ukraine has been the home of large communities of ethnic Germans dating back centuries, and many current German citizens can trace their roots to Ukrainian ancestors.  Germans, except on the hard left, want Ukraine to be pro-West.

2. One of the lessons German drew from their disastrous experience before and during the Third Reich is that society must be based on compromise and consensus.  The majority should get the majority of what it wants, but not everything.  All points of view that are willing to join the overall compromise should be respected and have a voice in the final outcome.  I was in Germany during the police invasion of Zuccotti Park, and everyone I talked to was appalled that the government would simply try to wipe out Occupy rather than talk with them and allow opinion and policy to shift a bit toward the Occupiers.

Now we come to the crux: Germany was in the process of negotiating a deal between Yanukovych and the Maidan protesters when the sniper attack occurred that killed over a hundred people, protesters and police alike, and that resulted in a new government in Kyiv.  There is suspicion in Germany that the origin of this breakdown in Ruhe and Ordnung may have had its roots in far-right elements of the protesters themselves.  While Putin himself is unpopular in Germany, there is considerable support for the view that the current Ukrainian government lacks legitimacy.  Its basis was the suppression of compromise and inclusion.  (If you want to be cynical, you could say that there would be more support for the interim government if it included Hamburg’s favorite son, Vitaly Klitschko.)

3. Another lesson Germans learned is that small numbers of armed fascists can cause big problems.  You shouldn't let them form militias, and you shouldn’t bring them into the government, even as junior partners.  There is a much higher level of concern in Germany than in, say, the US over the roles of Svoboda and the Right Sector.  They are less inclined to dismiss the claims by pro-Russian elements that fascism is a real threat.  I’m writing this from the US, but my guess is that most Germans agree with the Russian side that the latest deal requires the Right Sector to disarm at the same time as the pro-Russian militias.  Can anyone back me up on that?

4. The leaked Nuland phone call made a big splash in Germany.  I doubt that most Americans even know what it was.  The only reference to it in the Times in the last month was in an op-ed piece entitled “The Case for Profanity in Print”.  Germans can’t be happy that the US schemed behind the scenes to keep Klitschko out.  Oh, and they didn't like that comment about the EU either.

So do I think Germans are going to abandon Ruhe and Ordnung, compromise and consensus, reliance on diplomacy, because of Putin’s actions in Crimea and eastern Ukraine?  I’d say no, and that there won’t be any rush to rearm and extol the use of force.  We’ll see how this develops.

1914...2014

So, in today's Washington Post, Obama intimate, David Ignatius, argues that the deal announced in Geneva from negotiations between US SecState Kerry, Russian FM, Lavrov, and the Ukrainian FM, which Lavrov called "a compromise of sorts," reflects a joint understanding that this situation resembles the pre-WW I situation from a century ago that led to that unexpectedly catastrophic war that upended a century-long establishment of international peace and relations, and that attempting to achieve a peaceful solution of the current crisis would show that our species has evolved to a higher state of international consciousness and relations that is beyond global conflict triggered by trivial eastern European political/ethnic/social/political/economic/philosophical disputes.

Decades ago I read Barbara Tuchman's _Guns of August_, which laid out the tragic path that led the world into the pointless WW I, which understandably led to communism in Russia and fascism in Italy and Germany, and thus to the even worse catastrophe of WW II, which was not supposed to happen after the "War to End All Wars."  I was convinced, and years later I learned that President Kennedy had read that book along with Thomas Schelling's _Strategies of Conflict_, reportedly on JFK's bedside table during the Cuban missile crisis,and so he understood that we should not repeat 1914, particularly in a world where the Great Powers held massive amounts of nuclear weapons, which is still the case.

So, although I could analyze details of the situation in eastern Ukraine, and even previously suggested that the US should engage in at least threatening a serious military manifestation (and indeed the US is gradually introducing ship by ship into the Black Sea, which I think is a "good thing"), I welcome this development, which many are ridiculing, although I think there is much more behind the move to  peace than is in Ignatius's column, and certainly beyond what is pubically known.  So, while I think that this current agreement out of Geneva has the doubts and limits that the many critics from all sides are pouring out of every sewer, I support that the peace party that has much going for it, not the least of which is that both Obama and Putin have in fact read or know of what Barbara Tuchman wrote about what happened a century ago, which everybody on this planet should hope that we should avoid.

Barkley Rosser

Abstinence Reconsidered II: Beware of Pity

Stefan Zweig was a master of the nested narrative. His novel, Beware of Pity was one of his works that inspired the film, The Grand Budapest Hotel. The narrator's introduction from the novel will be familiar to those who have enjoyed the movie:

Nothing is further from the truth than the only too common notion that the author's fantasy is incessantly at work within him, that his invention has an inexhaustible and continuous fund of stories and incidents upon which to draw. In reality he need only, instead of setting out to find, let himself be found by, characters and happenings, which, in so far as he has preserved the heightened capacity for observing and listening, unceasingly seek him out as their instrument of communication. To the person who has over and over again tried to trace human destinies, many tell their own story.

The Austrian war hero, Captain Hofmiller tells the first of these stories to the narrator, inside of which he relates the story told to him by Dr. Condor, who in turn recounts the confession of the Hungarian nobleman, Herr von Kekesfalva, who was formerly "the narrow-chested little Jewish lad called Leopold Kanitz." Kanitz transforms himself into von Kekesfalva through an audacious swindle that is, in its ultimate consummation, sentimentally touching.

One can only fully appreciate the banality of Ludwig von Mises's The Anti-Capitalistic Mentality through the prism of Zweig's subtle psychological study of self-denial. There is nothing subtle about von Mises's aggressive vindication of the "three progressive classes." The mawkish vehemence of his manichaean hypothesis virtually parodies itself:

Saving—capital accumulation—is the agency that has transformed step by step the awkward search for food on the part of savage cave dwellers into the modern ways of industry. The pacemakers of this evolution were the ideas that created the institutional framework within which capital accumula­tion was rendered safe by the principle of private ownership of the means of production. Every step forward on the way toward prosperity is the effect of saving. The most ingenious technological inventions would be practically useless if the capital goods required for their utilization had not been accumulated by saving. 

The entrepreneurs employ the capital goods made available by the savers for the most economical satisfaction of the most urgent among the not-yet-satisfied wants of the consumers. Together with the technologists, intent upon perfecting the methods of processing, they play, next to the savers themselves, an active part in the course of events that is called economic progress. The rest of mankind profit from the activities of these three classes of pioneers. But whatever their own doings may be, they are only beneficiaries of changes to the emergence of which they did not contribute anything.

The characteristic feature of the market economy is the fact that it allots the greater part of the improvements brought about by the endeavors of the three progressive classes—those saving, those investing the capital goods, and those elaborating new methods for the employment of capital goods—to the non-progressive majority of people. Capital accumulation exceeding the increase in population raises, on the one hand, the marginal productivity of labor and, on the other hand, cheapens the products. The market process provides the common man with the opportunity to enjoy the fruits of other peoples’ achievements. It forces the three progressive classes to serve the non-progressive majority in the best possible way.

Not only are the workers not exploited by capitalists, it is they -- the common folk, the non-progressive majority -- who exploit the "three classes of pioneers" and heedlessly consume the bulk of the fruits of their benefactors' abstinence. "The story of how Leopold Kanitz became lord and master of Kekesfalva," Dr. Condor recounted to Herr Leutnant Hofmiller, as they conferred in one of the alcoves of the Tiroler Weinstube, "begins in a slow train from Budapest to Vienna."

Beware of Pity is, of course, fiction, as are the tales within tales within tales in the novel. It would be as absurd for me to "argue against" Ludwig von Mises's account of the accumulation of capital and the exploitation of the capitalists by the rest of mankind as it would be to challenge Dr. Condor's story about how Kanitz obtained his fortune and became von Kekesfalva.

Theory of Abstinence Reconsidered

"Exactly a year before Nassau W. Senior discovered at Manchester, that the profit (including interest) of capital is the product of the last hour of the twelve, he had announced to the world another discovery. 'I substitute,' he proudly says, 'for the word capital, considered as an instrument of production, the word abstinence.'"
... 

[In a footnote:] "It has never occurred to the vulgar economist to make the simple reflexion, that every human action may be viewed, as 'abstinence' from its opposite. Eating is abstinence from fasting, walking, abstinence from standing still, working, abstinence from idling, idling, abstinence from working, &c." -- K. Marx, Capital

Marx's footnote casually suggests a fertile potential that he didn't follow up on. I propose to use Veblen's notion of "conscientious withdrawal of efficiency" (or sabotage) and Robert Hale's "coercion" to outline what might be termed a "labour/abstinence theory of value" that avoids the pitfalls both of the misplaced concreteness of "embodied" labour and the unreal passivity of the equilibrium view of supply and demand.

Living labour-power is the consummate numéraire good because it is definitively limited by population and physiology at any given time while still being flexibly expandable. Keynes suggested as much in arguing that "we have been able to take the unit of labour as the sole physical unit which we require in our economic system, apart from units of money and of time."

By contrast, there are no such limits on the quantity of labour "embodied" in commodities, including physical capital. However, the value of such embodied labour is subject to depreciation due to obsolescence, wear and tear and over-accumulation (or excess capacity). So the first contrast between living labour power and labour embodied in capital goods is that the former is relatively fixed and the latter is indefinitely expandable -- at least in principle.

But there is also a second contrast, having to do with the perishability of living labour power. The worker who is unable to dispose of his or her capacity to work today can't put "yesterday's labour power" on the market tomorrow. It's gone. The penalty for not being able to immediately sell goods is not as final and can even sometimes result in a windfall. The same distinction applies equally to the conscientious withdrawal from the market.

Thus living labour power is a more or less definitive quantity that is disciplined by its perishability for a temporary withdrawal from the market, while labour embodied in capital goods is, in principle, indefinitely expandable and potentially rewarded by temporary withdrawal (abstinence) from the market. "Abstinence," then, makes its re-entry not in the form of a pious moral justification for profit but of a strategy for leveraging profitability by regulating the "scarcity" of capital relative to labour power.

"Value," in this account is not some mechanical adding up of units of labour power expended and/or embodied. Nor is it the passive intersection of complementary subjective utility functions. Instead it is the outcome of a "higgling of the market," to use Thornton's phrase, constrained by the properties of the labour-power numéraire. Thus it is constituted, in part, by labour-power and embodied labour but alternatively by the withholding of labour-power and embodied labour -- that is by abstinence of production, not in consumption.

The case for such a labour/abstinence theory of value can best be explained by arguing against competing interpretations that address elements of this argument but come to different conclusions. My foils will be Ludwig von Mises and John Roemer, for reasons which should become readily apparent.

J. M. Keynes Vanishes into the Swamp

Keynes' fixation on the labour theory of value:

"It is much preferable to speak of capital as having a yield over the course of its life in excess of its original cost, than as being productive. For the only reason why an asset offers a prospect of yielding during its life services having an aggregate value greater than its initial supply price is because it is scarce; and it is kept scarce because of the competition of the rate of interest on money. If capital becomes less scarce, the excess yield will diminish, without its having become less productive — at least in the physical sense. 

"I sympathise, therefore, with the pre-classical doctrine that everything is produced by labour, aided by what used to be called art and is now called technique, by natural resources which are free or cost a rent according to their scarcity or abundance, and by the results of past labour, embodied in assets, which also command a price according to their scarcity or abundance. It is preferable to regard labour, including, of course, the personal services of the entrepreneur and his assistants, as the sole factor of production, operating in a given environment of technique, natural resources, capital equipment and effective demand. This partly explains why we have been able to take the unit of labour as the sole physical unit which we require in our economic system, apart from units of money and of time."

Who Owns Unowned Land?

In Nevada, rancher Cliven Bundy thinks that the state of Nevada does, but whether it does or not, he thinks that effectively he can use it if he wants to without paying anybody any fees to do so, although I gather he thinks this because he thinks that his grandfather was given some right to use it in perpetuity back in the 1880s, that is, the federal Bureau of Land Management (BLM) land he has been grazing his cattle on for the last 20 years or so without paying required fees, now piled up to about $1 million or so that he has not paid.  So when his cattle were corralled by the BLM for Bundy's non-payment of said fees, a bunch of his armed friends went and successfully demanded that the BLM release his corralled cattle, which the BLM did, afraid of any violence that might ensue.  So, even though all the other cattle ranchers in Nevada who use BLM lands are paying their fees, Bundy does not.  Does he have any basis for his claims?

No.  But why is that?

The problem is that he and many others, including the followers of the 1970s-80s "Sagebrush Rebellion," are under the impression that somehow unowned land belongs to the states, and that at some point the federal government simply took all that land from the state of Nevada without paying for it.  Needless to say, what is owned by the federal government in Nevada is well over 80% of the land there, so this is nontrivial there, with only Alaska having a higher such percentage.  Of course, the Sagebrush Rebellion, and now Bundy and his friends, have gone further and simply asserted that the federal government has no right to own any of that land, indeed that the federal government "does not exist," (or maybe "should not") although some of the Sagebrush Rebellion crowd went further and agreed with the old Posse Comitatus group that held that the same holds for the state governments also.  For the old Posse Comitatus, the highest level of legitimate government in the US is actually the counties, hence "posse" for those who work with a county sheriff (when I worked for the State of Wisconsin Department of Natural Resources in the 1970s, Posse Comitatus members would make "citizens arrests" of DNR officials attempting to enforce fishing restrictions in state-owned lakes on them).  I gather that Bundy has so far not made that argument, although at times he seems to have suggested that the land he grazes his cattle on belongs to Clark County, where Las Vegas is, and one of his more vociferous followers is a retired sheriff, maybe an old Sagebrush Rebel, the guy who was supposedly going to put his family members in front of the group as "shields" against the supposedly illegitimate BLM agents.

Indeed, the ultimate problem here is pretty murky, but for better or for worse legally speaking, outside the original 13 colonies unowned land, that which has never been legally owned by any private party in the past, belongs to the federal government.  Within the original 13 colonies, it is indeed the states that own never-privately-owned, or "unowned" land.  Why that should be is a matter of how long the entity has existed that initially owned the land, and as the original 13 colonies existed before the United States did, that this is why it is that the states succeeding those colonies are the owners of unowned land in those original 13 colonies, in contrast with the rest of the country.  The claim that these colonies or states owned it rather than the native Indian tribes ultimately comes down to some sort of claim that the tribes never legally organized themselves to "own" it, and that the Crown of England had the right to grant it to the colonies instead.

Thus, outside the original 13 colonies, where one finds land that was owned previously by private parties with that ownership originally established by another European nation besides Britain or the US, then the laws of that other nation determine the land tenure property rights system that underlies  that property, with the notable exception again of American Indian tribes, this reflecting the ultimate fundamental land grab of North America, with the tribal reservations granted to them specifically by the US federal government subsequently on case-by-case basis (although in some special cases such reservations or grants were made by colonies/states, most notably in Virginia where the tribes remain unrecognized by the US federal government, and certain tribes give the VA governor turkeys and other game on Thanksgiving to satisfy a 1680s era treaty between themselves and the governors of Virginia).  It is only European nations and their legal land tenure systems that count.

So, there is land in Wisconsin that is legally governed by French land tenure laws, mostly along the Wisconsin River near Green Bay, where the Fox River dumps into Lake Michigan, and also near Prairie du Chien, where the Wisconsin River dumps into the Mississippi. Such land is organized in long strips that front on the rivers, in contrast with the checkerboard pattern established by the US Northwest Territory laws in 1787.  Such land tenure laws also hold for underground land tenure rights near St. Louis, and also for most land in Louisiana. Likewise, in New Mexico there is land that has been passed down through private owners since prior to the 1848 Mexican War that is held according to old Mexican land tenure laws that descended from Spanish land tenure laws based on the 1390 Alfonsin Code of Spain, later replaced by the Napoleonic Code, but only after Mexico and most of Latin America gained independence from Spain, one of those minor problems with the original "Legal Origins" paper in the QJE by Glaeser and Shleifer that has been cited up the wazoo but that is simply crawling with such historical mistakes.

In any case, this matter of the 1848 transfer from Mexico to the US is what is at issue in Nevada where Mr. Bundy has been making his claims.  When that happened, unowned land fell into the hands of the US government without having to be bought or otherwise transferred from a county or state government.  The Homestead Act under Lincoln in the early 1860s and subsequent ones laid down how private individuals could turn such land into their privately owned property by working such land for sufficient periods of time in certain ways, but over 80% of land in Nevada was so crummy that nobody ever did so, including the sections that supposedly Bundy's grandfather grazed cattle on at times.  So it remained and remains federally owned, even if somehow Bundy thinks that his grandfather ought to have been given title to it, although that is not precisely his claim, which amounts to a muddle between he ought to have usufruct rights and that it is or should be owned by the state of Nevada, or maybe by Clark County, and if so, they would grant him those usufruct rights to graze without paying any fees.  But none of that is true and has been repeatedly ruled as such by the courts.

I note a peculiar example of this matter of unowned land in Virginia, where many years ago I worked briefly on land use management for the George Washington National Forest here in VA.  So, there is an agreement between the US Forest Service and the Commonwealth of Virginia regarding unowned land within the boundaries established for the George Washington Forest regarding such land within those boundaries.  It is that if the Forest Service bears the transactions costs of establishing what the precise boundaries of any such land are and that the land is indeed truly unowned, then the state will transfer its ownership of that otherwise unowned land to the US Forest Service.  I am not sure about now, but as of 30 years ago there was somebody in the office of the George Washington National Forest HQ part of whose job was to do this with this leading to about two pieces of land per year being so transferred, most of these rather small, a few acres, but also mostly odd bits of forest back in the mountains that most people around it probably thought was owned by somebody privately.  But, in fact, by whatever historical fluke, the pieces never did come to be owned by any non-Indian private parties and thus was owned by the Commonwealth of Virginia.

In any case, Cliven Bundy does not have a legal leg to stand on, and the various politicians and commentators jumping up and down and screaming on his behalf should just cut it out.

Barkley Rosser

Ants at the Piketty Picnic: What's Wrong with "Inequality"?

"For entirely innocent reasons, the preferences and talents of people will not always produce equality of results. The egalitarian tendency is then to coerce equality of result by law." -- Robert Bork 

Captain Renault: "I'm shocked, shocked to find that gambling is going on in here!"
Croupier: "Your winnings, sir."
Captain Renault:"Oh, thank you very much."

So what's wrong with inequality, anyway? According to conservatives like Bork, inequality is the innocent outcome of innate differences in "preferences and talents." Doing away with inequality would not only be inefficient but would require the exercise of coercion.

Liberals, meanwhile are shocked, shocked to find so much inequality going on in this day and age. Obviously there is a need for a bi-partisan effort to tone down the inequality a bit without too much coercion. Oh, thank you very much.

So what's wrong with inequality? For anybody paying attention, Judge Bork let the cat out of the bag. Inequality is coercive (but don't tell anyone!). That's why conservatives attack equality as coercive.

The move incorporates several tactics associated with Karl Rove: take the offensive, attack your opponents' strengths and steal their thunder by accusing them first of what they might effectively use against you. Libertarians and conservatives have made it their business to "own" the coercion claim and thus deflect its sting. Liberals aid and abet them by conceding a whimsical "efficiency/equity trade-off" and by running interference against normative encroachments on allegedly positive economic methodology.

Why do people want to get rich? Sure, they want nice stuff, but more fundamentally they want to be freed from the coercive everyday insecurity of being poor. How do the wealthy stay rich and get even richer? They use the political power that their wealth accords to keep the game rigged in their favor.

These are not state secrets. Nor are they facts disclosed in data reported by the BLS or the IRS. Just common knowledge -- common sense that doesn't count for beans in the marginal productivity analysis. Inequality is a positive fact; coercion is a normative claim. So let's all talk about inequality as if it has nothing to do with coercion. Let's not talk about the elephant in the room. What elephant?

So what's wrong with "inequality"? Framing the debate to be about "inequality" misses the point that the real problem is coercion. If the inequality conversation leaves the coercion question up for grabs, you can be damn sure the right will seize it and run with it. Loser liberals then will have yet another opportunity to be shocked, shocked that so much inequality is going on.

"Wealth, as Mr. Hobbes says, is power…. The power which that possession immediately and directly conveys to him, is the power of purchasing; a certain command over all the labour, or over all the produce of labour, which is then in the market."  -- Adam Smith, Wealth of Nations

"The distribution of income, to repeat, depends on the relative power of coercion which the different members of the community can exert against one another. Income is the price paid for not using one's coercive weapons. One of these weapons consists of the power to withhold one's labor. Another is the power to consume all that can be bought with one's lawful income instead of investing part of it. Another is the power to call on the government to lock up certain pieces of land or productive equipment. Still another is the power to decline to undertake an enterprise which may be attended with risk. By threatening to use these various weapons, one gets (with or without sacrifice) an income in the form of wages, interest, rent or profits. The resulting distribution is very far from being equal, and the in- equalities are very far from corresponding to needs or to sacrifice." -- Robert L. Hale, "Coercion and Distribution in a Supposedly Non-Coercive State,"  Political Science Quarterly, Vol. 38, No. 3 (Sep., 1923), pp. 470-494

Robert Samuelson Right For Once (About Long Term Unemployed)

I have probably picked on Robert Samuelson of WaPo more times than any other in posts here, most often over his regularly misleading columns on Social Security.  So, I guess I should note when for once he has it right.  He notes today in a WaPo column entiteld, "Idle and unwanted," that the long term unemployed are facing a very difficult situation in the US, with prospects that could lead to many of them simply never becoming employed again, and many of those who have managed to get jobs getting ones far below their previous jobs.  The problem is that prospective employers increasingly just assume that there must be something wrong with these people, and in many cases there is a problem of the degradation of specialized skills over time.  While he does not come out vigorously for demand expansion, he agrees that the economy is not near some inflationary breakout point, thus effectively supporting such an expansion to help these people, even if such an expansion may tend to help them less than others.

All of this may be widely accepted and effectively conventional wisdom almost.  But, I am pleased to agree with RJS for once.  Maybe he will write more that I can agree with in the future, although I suspect that he will continue to be a hopeless case on the Social Security issue.

Barkley Rosser

Suresh Naidu Responds: "Substitutes or Complements: Marx and Brad and Me"

Suresh Naidu at The Slack Wire:

Since Brad Delong has attributed some thoughts on Marx to me, and I have gotten some emails inquiring whether or not I did say them, I thought it would be useful to publically air what I understand to be the context.

Sandwichman was one of the inquisitors. In an earlier post, Return of the Creature from the DeLong Lagoon S. had questioned the accuracy of DeLong's attribution of these thoughts to Naidu. According to Naidu, however:

The context of the long-running conversation [between Naidu and DeLong] has been trying to establish a dialogue between Marx and modern growth theory. Inside the modern production function there is a pretty undifferentiated view of "K" (which leads it into some troubles as bad as any in the labor theory of value). Marx on the other hand distinguishes (at least) machines, technology, and money-qua-productive-input as different from each other conceptually. The fact that these are rolled into an aggregate production function by mainstream growth theory is not Marx's fault. And so when somebody is trying to translate Marx into modern economics, the slippage between what is "K" and "what Marx meant" can get confusing.

This no doubt explains DeLong's comment that Marx, "vanishes into the swamp which is the attempt to reconcile the labor theory of value with economic reality, and never comes out." It is not Marx's fault that he vanishes into the swamp of trying to establish a dialogue between Marx and modern growth theory (inside of which there is a pretty undifferentiated view...) the attempt to reconcile the labor theory of value with economic reality the modern production function. Or something.

Presentation on Multiple Equilibria

I'm giving a lecture this week in my development class (Small World: Poverty and Development on a Shrinking Planet) on multiple equilibria. We're using Todaro and Smith, and the lecture is intended to provide an alternative approach to the material in Ch. 4 of that book.  Of course, I've been waving the flag of multiple equilibria, especially those arising from interaction effects, for over 30 years.  (My original paper on the topic was written in – gasp – 1982.)

For the pptx version, click here.  For the slightly less jaw-dropping pdf, try this.

Who Gets To Decide Which Words And Spellings Are OK (Politically And Otherwise)?

Of course, this is an old problem as ongoing discussions about what the football team in Washington should be named and what people of African descent in the US should be called, and so on.  But lately I have seen other situations around the world where there seems to be confusion and also lots of regular insulting of people, with me not knowing how much of this is just ignorance and how much of it is politics, and even who it is who gets to decide these things.

My latest example is seeing the following names/spellings given for four prominent Ukrainian cities: Kiev, Kharkiv, Luhansk, Lviv.  The problem is that while the latter three are the Ukrainian spellings (or their standard English transliteration), the first one is the Russian one.  Ukrainians call it "Kyiv," while Russians call the latter three respectively "Kharkov, Lugansk, Lvov." How is it that we do not use a consistent set of spellings?  Just to really confuse things, I note that the the last one, the major city of western Ukraine, has also been spelled like the Russian way but with the "L" having a slash through it that makes it pronounced "W" more or less, which is the Polish spelling, the Poles having ruled it between the world wars, and before WW I, when it was part of the province of Galicia in the Austro-Hungarian Empire, it was named "Lemberg," obviously German.  The changes for this city's name all reflected who ruled it, but why is Kyiv still being called the Russian "Kiev"?

Here are some other ones that I think that most people simply do not know about, but which involve the people who are called by these names feeling insulted.  One is "Shi'ite."  This is considered insulting by those who follow that tradition of Muslim belief.  It is preferable to refer to such an individual person as a "Shi'i," and collectively as "Shi'a," which one does occasionally see in the media.  Most academic writings get this right, but somehow the insulting "Shi'ite" and "Shi'ites" has become entrenched in our media, although I think that most of those using it do not realize that it is insulting.

Unsurprisingly, there are several more of these in the Middle East.  So, Saudi Muslims do not like being identified as being "Wahhabis" or slightly more correct, "Wah'habis."  Technically indeed their beliefs do follow doctrines established by one Muhammed ibn Wah'hab, who in 1740 converted Muhammed ibn Sa'ud, the founder of the Saudi royal family, that the very strict Hanbali Sunni shari'a is the code that all good Muslims should follow, and ever since the family has followed this doctrine, with it not entirely unreasonable to identify the doctrine with its founder.  However, they consider this insulting.  They prefer to call their beliefs by an Arab word that is usually translated as "Unitarian," however given that this word in English refers to a very liberal religious group and their beliefs are about as strict and conservative as any within the Muslim world, this would be very confusing.  I also note that the Wah'habis are often confused with the Salafis, and they share some views, but the are not identical and disagree on quite a few things, with Salafism being a 19th century doctrine that originated in Egypt.

Finally, I note that some groups manage to get others to stop using insulting names for them, as we have seen sometimes in the US.  So, the religious group that is dominant in western Ukraine may have become winners in more ways than one as a result of recent events involving their nation.  In the past, this religious group were generally called "Uniates," a term that they always considered insulting.  This group adheres to the Catholic Church, and has done so since a long period of  Polish rule in the past.  But they have long been allowed to use Orthodox liturgies and follow certain other Orthodox practices, such as allowing priests to marry.  In this way they are like the Maronites of Lebanon.  In any case, they have  long preferred to be called "Greek Catholics," and lo and behold in recent weeks I have seen press stories talking about priests in Ukraine whom are described as being just that, "Greek Catholics," not "Uniates."  So, maybe something good is coming out of all this mess yet, although I remain unclear who is really in charge of all this.

Barkley Rosser

Value of Life: The Singularity Speaks

Maybe I should, but I can’t let this one go by.  This morning on Economix, the prominent health economist Uwe Reinhardt writes that his view on the value of human life—that it is finite, determinate and should govern health-related policy decisions—“is shared by literally every American economist”.

Well, last time I looked in the mirror I was still there.  The book I wrote on this topic, Markets and Mortality: Economics, Dangerous Work and the Value of Human Life, still exists too.  Originally published in 1996, it was reprinted in 2009.  The argument it develops doesn’t lend itself to being condensed in a paragraph or two in a blog post, so I won’t try.  The book draws on the critique of utility theory, the social embeddedness of risk and health, and similar matters.  (It also goes after the hedonic wage regressions that are often used to put a price on deadly risk.)  I’ll admit my thinking has evolved since then, but not in Reinhardt’s direction.

Another nonexistent economist, by the way, is Frank Ackerman, who coauthored Priceless: On Knowing The Price Of Everything And The Value Of Nothing with Lisa Heinzerling.  He doesn’t buy the value of life business either.

I suppose I need to add that I don’t think that every expense should be borne in every circumstance to reduce the risk of premature death to its absolute minimum.  Obviously there are tradeoffs, but the question is whether attaching a fixed monetary value to “life” (or a life-year or whatever) helps us make them intelligently.  And I can certainly relate to Reinhardt’s outrage over the hypocrisy of politicians who grandstand about death panels but callously sacrifice the life chances of the poor, the military and others by denying them easily affordable protection.  My grumpiness is not about the politics of his piece, but the detail, minor in the larger scheme of things, of seeing myself drummed out of the economics profession.

Poo On Pew's Paul Taylor's Generational War

Dean Baker today has pretty much taken this apart, but I shall throw in a few more cents.  In yesterday's Parade magazine, generally a completely politically bland outlet to accompany comic strips in Sunday papers around the country, Vice President of the Pew Foundation, a supposedly terribly respectable place, Paul Taylor, unleashed a massively misleading hysterical screed about how the baby boomers are going to bust the millennials with all their awful Social Security and Medicare benefits, with him apparently having a book on this, so I must cynically think that Taylor is just lying to push his apparently worthless book.  However, we have really had enough of these misrepresentations.  Taylor's main misrepresentation is to claim that by the time all the boomers are on SS and Medicare, these programs will be broke, gobbling up half the budget.  Fundamentally this assumes that the rate of increase in medical care costs that we have seen in the past will continue, which does not look at all likely now.  Dean points out that SS finances are not in such a bad place given all the tax and benefit changes made in the past such as by the 1983 Greenspan Commission.

Let me note a simple fact that if Taylor knows it, he gives no evidence of doing so and that Dean did not mention, although he noted a number of other relevant issues.  As with so many other screeds of this sort, Taylor makes a big fuss over how by 2030 or so the ratio of workers to SS and Medicare recipients will have fallen to about 2 to 1 in contrast to today's 3 to 1.  This is supposed to make people just fall on the floor in a total freakout, with millennials rising up to demand that boomers head for the gas chambers ASAP, as I see regularly suggested on such anonymous econoblog sites as the abominable EJMR.  So, this simple fact is that right now one finds in Germany roughly this ratio, 2 to 1, with pensions if anything higher than they are in the US.  Is Germany failing to make its payments or suffering from a massive budget crisis?  Obviously not.  Indeed, the fact that all these hysterians routinely ignore is that of the higher income nations, the US is one of the best positioned demographically for dealing with this issue down the road.  Does Japan have a big problem?  Yes.  Does the US?  If it can get its medical care cost increases under control, no.

I want to add that I am increasingly frustrated at how widespread this false story of likely future failure of these programs for millennials has spread.  Anecdotal, but I just heard on a local radio station where several hosts were talking a younger one simply asserting that Social Security and Medicare "will not be there for me."  I constantly hear this from students, almost always asserted with an astounding degree of certainty and self-righteous pomposity.  Needless to say, this makes them susceptible to the games by politiicians who want to cut these programs back.  The irony is that if this happens, it will not happen much to the baby boomers, but will be set up to land much more on these very millennials.  They will be sold accepting definite future benefit cuts because, gosh, if they do not accept them, they might have to accept them.  The incoherence of thought and lack of knowledge about what is going on here I find really frustrating.

Barkley Rosser

Larry Summers CRUSHES the Lump of Lobster!

It isn't everyday the Sandwichman gets the opportunity to praise Lawrence H. Summers. Back in February, Summers tweeted, "The inverse of Say's Law holds today: Lack of demand creates lack of potential supply." At a full employment event put on last week by the Center on Budget and Policy Priorities, Summers elaborated on what he meant by that. Starting at about minute 22:20 of the video, Summers eviscerates the lump-of-lobster fallacy.

What is the lump-of-lobster fallacy? Samuel Brittan was wont to invoke the lump-of-labor fallacy in his columns at the Financial Times but occasionally the compositors would tamper with the copy, once rendering the old canard as the lump-of-lobster fallacy. It seems to me that this was an appropriate reductio ad absurdum of the nonsense claim that unspecified persons believed there was "a fixed amount of work to be done."

As the Sandwichman wrote back in January (Yasraeh's Law), "I have described the lump-of-labor fallacy claim as 'an inverted Say's Law on steroids.'"

Does Glenn Hubbard Want to be President Jeb Bush’s Chief Economic Advisor?

I saw on the news this weekend that Republicans are hoping Jeb Bush runs in 2016 – which may in part due to the latest on BridgeGate. Memo to the Republican Party – Chris Christie is not a good candidate. So that’s the good news. The bad news is that I had to endure another rant from Glenn Hubbard , which included:

But structural changes are plainly at work too, based in part on slower-moving demographic factors. A 2012 study by economists at the Federal Reserve Bank of Chicago estimated that about one-quarter of the decline in labor-force participation since the start of the Great Recession can be traced to retirements. Other economists have attributed about half of the drop to the aging of baby boomers. Baby boomers can't be the whole story, though, since the participation rate has declined for younger workers too. This part of the drop is a function of various factors, including simple discouragement, poor work incentives created by public policies, inadequate schooling and training, and a greater propensity to seek disability insurance.

Dean Baker does the needed clean-up on this canard:

Hubbard noted the sharp fall in labor force participation since the downturn. He attributed it to a lack of incentive for people to work. This is in striking contrast to the more obvious logic, that when people have been trying unsuccessfully to find jobs for 6 months or a year, they eventually give up ... The problem with Hubbard's story is that he doesn't have a good explanation for why people suddenly decided that they didn't want to work. He points to an increase in the length of unemployment benefits, but this happens in every downturn. Furthermore, the maximum duration of benefits has been cut back sharply from its peak of 99 weeks in the first years of the recession with no corresponding surge in employment. The Affordable Care Act will make it possible for many people to get health care insurance without working or without working full time, but that should only have begun affecting the data in the last few months as the health care exchanges came into existence. It would not explain the drop in labor force participation that was already quite evident by the summer of last year.

Dean discusses other reasons why Hubbard’s inward shift of the labor supply curve story does not fit the data. Let me simply add that if it were a lack of labor supply (as opposed to weak aggregate demand) to blame here, then why haven’t real wages increased? Hubbard does note aggregate demand factors:

Does this mean that the Obama administration's "targeted, timely and temporary" stimulus package was the right approach? Actually, no. Increasingly, it appears to have been a poor match for the severity of the downturn and the magnitude of the required boost. After the Great Recession's sharp decline in investment and employment, U.S. business probably needed a more curative jolt to restore confidence. A sustained infrastructure program, rather than a temporary one for "shovel-ready" projects, would have provided more reassurance of longer-term demand. And far-reaching tax reform could have provided both a near-term fillip from front-loaded business tax cuts and a credible prospect for future growth. What we don't know is whether the Obama's administration's activist policies failed to draw more Americans back to work because they were poorly executed or because they didn't do enough to raise aggregate demand. A better designed activist fiscal policy would have made more headway in encouraging growth, but deeper factors behind the downward shift in labor force participation still remain.

Why does this remind me of Romney’s 2012 campaign? Let’s be clear – Christina Romer pushed for a better designed fiscal stimulus back in 2009 with more in the way of government investment spending. And her call for a more sensible fiscal stimulus got zero support from Glenn Hubbard’s side in 2009. No – they pushed for low bang for the buck tax cuts without a clue as to how to pay for them in the long-run. I would hope Jeb Bush – if he does decide to seek the Republican nomination – could do better than Mitt Romney did in his 2012 Presidential campaign. And if he were to become the next President, let’s all hope that his economic policies are not as ill thought out as the economic policies enacted by his brother.

GDP and Well-Being, Positive and Normative

There’s a review in today’s New York Times of Diane Coyle’s new book on the history of GDP calculation.  Shot through it is a crazy confusion, abetted—nay demanded—by standard economic practice.

It all goes back to the primordial distinction between positive and normative analysis.  Positive analysis is explanatory, predictive, or simply descriptive: what and why.  Normative analysis is evaluative: should.  We economists beat the heads of our poor charges each year in introductory classes with this distinction.  Positive analysis, we say, can be validated by reasoning and evidence, while normative analysis is ineluctably conditional on the values of whoever is doing the evaluating.

Yes and no.  The distinction is important, but it is not ironclad.  There are lots of ways the two types of analysis are connected, and I won’t get into the philosophical issues here, but it is obvious, just from paying attention, that economics wants to have a single analytical framework to answer both positive and normative questions.  Economists don’t want one model to predict what the equilibrium outcome will be and another, using completely different elements and based on different assumptions, to rank that outcome against others according to how beneficial it is.  Most models in economics do double-duty: they support positive and normative analysis equally.

So it is with GDP.  This is indispensable for the heavy lifting that positive economics, especially macroeconomics, requires.  You wouldn’t be able to document whether you were in a boom or a recession without it, or at least not nearly so well.  For instance, our NBER judgments of business cycle dating are surely more accurate today than their retrospective judgments of cycles before GDP measurement was established during the New Deal.  But GDP is also invoked as a measure of economic “success”—our policies are said to work if they crank up GDP growth or fail if they don’t.

Understandably, GDP has come in for a lot of criticism regarding its measurement of economic well-being.  It includes a lot of stuff that doesn’t make us better off (more cops if they’re just a response to an upsurge in crime), leaves out a lot of stuff that does (unpaid labor inside and outside the home), ignores harmful consequences of economic activity (pollution and resource depletion), and utterly fails to price many goods in a way that reflects their actual value to society (such as government-supplied services, which are priced at cost of production).  Finally, consumers (such as you and me) do not always spend our income in ways that maximize our well-being, and in some documented cases (e.g. commuting to work) spending can go up while well-being goes down.  Personally, I’m convinced: GDP is a deeply flawed indicator for normative purposes.

But what of positive analysis?  There I think we’re on much more solid ground.  GDP measures the size of the market economy.  We happen to live in a market economy, so this is a useful measure.  It works well for predicting market consumption, imports, paid employment, that sort of thing.  If you think about it, the very characteristics that people criticize from a normative standpoint—how the selection of traded goods and the prices they trade for misrepresent their true impact on us—are the ones that make GDP work for a well-defined set of positive tasks.  If we priced things according to their “true” value (supposing we could do that) instead of their market value, we would lose the market part.

Alas, it is sometimes necessary to blur this distinction.  For example, we need to have a conception of real GDP so we can tease out the rate of inflation.  Since the qualities of goods are constantly changing, they need to be priced in order to distinguish between price increases that contribute to inflation and those that reflect quality improvements.  (Or maybe prices are constant but should be seen as contributing to inflation because quality has gone down.)  Estimating the value of quality (hedonic regression) brings us closer to the line separating normative from positive.  I think the line is not (necessarily) crossed, however, if the (monetary) willingness to pay for quality is kept distinct from the effect of quality on consumer well-being.

And where does that leave us?  The distinction between positive and normative analysis is important and needs to be maintained.  There should be no presumption that the concepts and models that work for one will work for the other.  We should not sacrifice the fit between model and purpose in one realm in order to be able to shoehorn it into the other.  I think, though I will not follow it up here, that welfare economics has suffered mightily from attempts to squeeze its analysis into the same models that work well for positive—explanatory and predictive—work.

So let’s not visit the same damage on our properly-functioning positive models, like GDP.  Keep and even improve GDP as a measure of the size of monetary flows within an economy, and look elsewhere for appropriate indicators of human well-being.  (I have a hunch that economists, who are good at the first task, will prove to be less well-suited to the second.)  Do positive well, and do normative well, and don’t let either get in the way of the other.