"They wonder why they are working longer hours for lower wages..."

Should we tell them?

Because,

Whether you work by the piece 

Or work by the day 

Decreasing the hours 

Increases the pay.

-- Mary Steward

EXPERT DECRIES CUT IN WORK WEEK

Study Finds Reduction Won't Necessarily Create Jobs 

Special to The New York Times

ITHACA, N. Y. Jan. 4—A reduction in the number of working hours a week in American industry will not necessarily create more jobs, a study recently completed by a former research assistant at Cornell's New York State School of Industrial and Labor Relations has found.

In a bulletin, "The Shorter Work Week," issued by the school, Marcia L. Greenbaum has reported that the 40-hour work week is likely to disappear, but much more gradually than many labor leaders seem to want. 

Miss Greenbaum notes that many of the nation's labor leaders believe that a 35-hour week with the same weekly pay now earned for 40 hours of work and double time for overtime will help to solve the problem of unemployment. However, she has pointed out that to maintain take-home pay will require a 14.3 per cent wage increase. 

In turn, she reported, this will mean an increase in management's labor costs that, in highly competitive industries will require the laying off of workers, increasing productivity and a passing on of costs to consumers. 

Her study, she reports, found that management and Government officials contend that a shorter work week at the same pay would probably mean a drop in living standards. 

"The 14.3 per cent wage increase is almost five times more than the normal annual productivity increase of 3 per cent," Miss Greenbaum said. "Productivity would have to increase as much as wages increase to prevent inflation." 

She added that, as a result, "real wages would be less since rising prices would mean higher living costs." The shorter work week would also lead, Miss Greenbaum reported, to a probable increase in moonlighting and an increase in the labor force of secondary workers such as housewives and retired workers. 

"There are other ways of decreasing hours of work, such as longer weekends, longer vacations and' earlier retirement ages," Miss Greenbaum reported. She also suggested sabbatical leaves for older employes.

The above article appeared on page 94 of the January 4, 1964 New York Times. Here is how the "former research assistant" Marcia Greenbaum summarized her chapter on the economic implications of the shorter work week:

If this chapter has painted a gloomy picture of the economic implications of the shorter workweek, it is simply reflecting the nearly unanimous opinion of economists outside of the labor movement. Every other labor proposal for coping with unemployment -- such as the AFL-CIO's recommendations concerning tax cuts, public works, aid to depressed areas, and retraining the unemployed-receives support from at least some economists and public officials. In their plea for shorter hours, however, union leaders stand alone, attacked even by the leading officials of a friendly Administration. 

Labor's arguments are simple and straightforward. If the government can not solve the severe unemployment problem, then unions must devise some method of inducing individual employers to hire more workers. If an employer can work each employee only 35 instead of 40 hours a week, then it is believed that he will hire more employees to make up the lost production. At the same time, labor claims, purchasing power can be maintained, or even increased, by requiring that weekly pay be kept at the 40-hour level. 

The objections to the shorter workweek, we have seen, center almost entirely on its cost impact. If hours are reduced in one large jump, labor's insistence upon maintaining weekly take-home pay means that the employer is faced with a huge hourly wage increase and perhaps some other costs as well. In that event, it is assumed that the employer will attempt to offset these increased costs by raising prices or taking other action that will most likely result in no net employment increase and might even cause a loss of more jobs. On the other hand, if labor asks only that shorter hours be introduced gradually, in step with productivity increases, then again the employer has no incentive to hire any additional workers, for nothing has happened either to his costs or to his demand. 

As labor leaders point out, the majority of economists have often been wrong before and perhaps they are wrong again on this issue. Until experience proves otherwise, however, prevailing opinion is that the shorter workweek is not the answer to the very real problem of unemployment which has plagued our economy in recent years.

The April, 1966, Labor Law Journal carried an article by Howard G. Foster, "a Teaching Assistant at the New York State School of Industrial and Labor Relations" that quoted the first paragraph of the above passage from Greenbaum's bulletin. Rather than simply citing what "management and Government officials contend" and the "nearly unanimous opinion of economists," Foster did the math. There was no report on Foster's findings in the New York Times. Not even on page 94.

The Saudi Royal Family Shakeup

So, new Saudi King Salman, using the official channel  of the 35-member Allegiance Council, has shaken up the top leadership of the royal family, most particularly the kingship succession itself.  Out as next in line is now former Crown Prince Muqrin, the youngest of the "First Generation" of sons of  the kingdom's founder, Abdulaziz, aka "Ibn Saud."  The second generation now former Deputy Crown Prince (the #2 spot), Prince Mohammed bin Nayef, a full nephew of the king, and the first of the Second Generation to be put in line for the throne, has replaced Muqrin as Crown Prince.  His position has now been filled by the much younger son of Salman, Mohammed bin Salman, currently Defense Minister.  It is unclear what is behind this, although reportedly Muqrin "requested" to step down.  Somehow I doubt that.  There has been so far no speculation on why this has happened anywhere that I have seen, including the highly knowledgeable blogs, Crossroads Arabia, where only the bare facts have been reported, or Juan Cole, who has so far had nothing to say about this at all.

So, my quick speculation is that this involves cementing the royal succession into the hands of descendants of the so-called "Sudeiri Seven," of whom Salman is the last one living.  Always very powerful, they were the sons of the favorite wife of the late Abdulaziz, Assa as-Sudeiri, reported to be his first cousin, or at least some sort of relative.  It was rumored that near the end of her life in the early 80s she was actually running the country from her deathbed through her powerful sons, whom she reportedly totally dominated.  This just goes to show that in a totally sexist society, a woman can achieve great power by having powerful sons whom she dominates, an iron matriarch, and she was it, sort of like the dowager empress of China, Cixi, in the late 19th century.

Muqrin's weakness on this front was reported even back when he was first appointed at the time of the succession of Salman on the death of former King Abdullah a few months ago.  His problem?  A low class concubine mother, no match for the formidable, if long dead, Assa as-Sudeiri.  I suspect that there were other factors, with the general closeness of Salman of the newly appointed.  But Muqrin was clearly vulnerable due to his mother. I presume we shall learn more sometime eventually about what other factors may have been involved here, although some observers note that both of the guys now in line are more or less hardliners in the burgeoning conflict with Iran and such places as Yemen (indeed, I think that Muqrin had some sort of Yemeni links, which probably did not help him).

Another shift is the final stepping down after  40 years as foreign minister, Saud bin Faisal bin Abdulaziz al Sa'ud, aka "Saud al Faisal."  This was for health reasons, and in his last public appearance about a month ago, he was using a walker and looked in pretty bad shape.  However, he is  not gone form the scene, apparently now being appointed a minister without portfolio and senior adviser to King Salman.  Many thought he should have been the first of the Second Generation to be king, but he was too old and ill, not to be.  He is  being succeeded by the current ambassador to the US, Adel al-Jubeir, not a member of royal family.

A curious fact is that since the official formation of the Saudi foreign ministry in 1930, either Saud or his late father the former King Faisal, served as foreign minister for 83 of the 85 years since that time.  Indeed, while it had not been officially formed, Faisal had effectively held that position for the 11 years prior to the formation of  the ministry, having represented his father at the Versailles Treaty conference in 1919 when he was all of a whopping 16 years old.  If you see a photo of him then, you will be looking at just about the oldest and most serious looking 16 year old you will ever see.

The only two years they were not in that position was 196-62, when Faisal was trying to overthrow his older brother, the corrupt and incompetent Saud, who had succeeded their father.  When he succeeded, he retook that position even as he became king, holding it until his assassination by a nephew in 1975, when his son, Saud, succeeded him, lasting in it until today.  Many consider Faisal to have been the most intelligent and competent of  the 43 sons of Abdulaziz, and Saud may well  be the same for all of his grandsons.  (The guy who served as FM in 60-62 was an obscure non-royal family member, Ibrahim bin Abdullah al-Sowaiyel.)

Barkley Rosser

Update:  Based on press reports, a bit mroe is clear.  Probably the main reason Prince Muqrin is out is that he had been chosen by the former king, Abdullah, and is clsoe to sons of Abdullah.  Hence, this is very much about putting the line of succession into the hands of the Sudeiris and especially keeping the sons of Abduallah out of the line of succession.  There have also been reports about how strong the new guys are on national security and how independtne of the US they are.  But, this is a joke in that Muqurin also has strong national security credentials, and when the new Crown Prince was first named Deputy Crown Prince after Abdullah's death, his closeness to US officials was stressed.  This is internatl family politics, pure and simple.

Another Update:  WaPo has an editorial for May 4 I largely agree with on all this.  They again fail to note the intra-family politics of this, but they do accurately note that no one should expect improvements in human rights in Saudi Arabia from this shakeup.  The only woman in the cabinet, a deputy minister of education, has been removed, and the highly repressive religious police have had restrictions on their activities removed.  This probably reflects the elevation of the new Crown Prince, who is Minister of the Interior, following his later father, both of them noted as hardliners on such issues.   

Puzzling in America

Technology and Jobs: Should Workers Worry?

Responding to a question from Maryland at 46:20:

Barro: "...you could have a gradual decline in hours worked per week by a full-time employee and a gradual decline in the number of years that people participate in the labor force and that would do a lot on the labor supply side to deal with declines in labor demand..."

Delong: "And in America it's puzzling we haven't... right? That we've been stuck at forty hours a week as full time or so since world war II even though there's been 75 years since then..."

Writing in Fortune magazine 61 years ago, Daniel Seligman predicted achievement of the four-day week by 1980. He based that prediction on projection of historical trends. It didn't happen.

The future of work has a chequered past.

"And in America it's puzzling we haven't... right?"

Wrong. It's only puzzling if you don't know anything about the role of American economists in opposing, castigating and ridiculing proposals for work time reduction ("economists call it the lump of labor fallacy -- the idea that there is only a fixed amount of work to be done").

Larry Summers remembers: "when I was an undergraduate at MIT in the 1960s there was a whole round of concern about this -- will automation displace all the employment? And what I was taught as an undergraduate was that basically the people who thought it would were a bunch of idiot Luddites and that obviously there would eventually be enough demand and it would all sort of work itself out, and if people got more productive they'd be richer and they'd spend and maybe we needed some transition assistance, but that it was all basically going to be okay. That was what I was taught."

Puzzle solved!

Lowballing Estimates of Potential Output

Simon Wren Lewis notes one of the Cameron excuses for fiscal austerity:

As I noted in my previous post, the very big government budget deficit in 2010 was largely the result of the recession. That fact is difficult to square with the myth that the coalition government rescued the economy from an impending financial crisis, so it is important to push another explanation for the large deficit: that it reflected the profligacy of the previous government.

The Great Recession increased the deficits for a lot of nations including those that undertook the Herbert Hoover economics of fiscal austerity during a period of weak aggregate demand. Over 60 years ago, E. Cary Brown noted that an analyst needs to separate the automatic stabilizer effects on the actual deficit from changes in fiscal policy. This is often accomplished by examining the structural surplus (deficit). Simon also notes:

The only way you can sustain the myth that Labour was fiscally profligate is by suggesting that immediately before the recession the UK was experiencing a massive boom. In an economic boom tax receipts are high and spending on transfers low, so the budget should be in surplus. If it is in fact in significant deficit, that indicates serious fiscal laxity.

He continued with a criticism of how the IMF changed it estimate of the UK’s potential output, which we also noted. Simon’s latest continues the discussion:

The first point is to stop talking about GDP, and start talking about GDP per head ... As the chart shows, we have failed as yet to make up for any of the ground lost not just in the 2009 recession, but also ground lost as a result of fiscal austerity in 2010 and 2011 … So we have not really seen a recovery. Maybe the pessimists are right, and we will never recover any of that lost output, but still you do not call it a recovery. I can put it another way. Quarterly growth in GDP per head since the beginning of 2013 has averaged about 2% at an annual rate. That is below the average growth rate since 1955. A recovery from a deep recession would have growth rates well above the long term average … the prosperity of the average citizen in this country has hardly increased over the period of this coalition government - a result that is totally unprecedented since at least WWII. As recoveries from recessions go, this does not seem like a recovery worthy of the name. Yet we keep being told by mediamacro that the Coalition’s strong card is its economic record!

As we noted when we presented Bill Martin’s aggregate demand explanation versus the productivity pessimist story: Bill comes down on the latter explanation as does Paul and Simon. The former view is a Real Business Cycle tale of negative productivity shocks. We heard those stories 30 years ago but the US economy finally did fully recover. Let’s hope the same occurs for the UK economy. But let’s suppose for a moment that the productivity pessimists are correct. Then Cameron’s government should cease gloating how well the UK economy is doing as a permanent fall in real income per capita is not good news. Let me just add that if this productivity pessimism argument was valid, the expansionary monetary policy from the Bank of England should have been inflationary. But the record shows it was not. Paul Krugman adds a lot more but I found this part of interest:

Chart 3 shows estimates of our old friend the cyclically adjusted primary balance since 2009. I’ve included three sources – the IMF, the OECD, and Britain’s own Office of Budget Responsibility – just in case someone wants to argue that any one of these sources is biased. In fact, every one tells the same story: big spending cuts and a large tax rise between 2009 and 2011, not much change thereafter.

Paul’s chart 3 were drawn from three measures of the cyclically adjusted primary balance that assumed the UK output gap was severely negative in 2007 even if Paul noted why these measures were likely low balling potential GDP. Of course, fiscal impact is about the change in fiscal policy but leave the UK for now. We are having a few debates about U.S. monetary policy and inflation that revolve around low ball estimates of potential GDP. Our two graphs show how I would estimate the output gap for two 7 year periods, which is by using the CBO estimate of potential GDP. John Taylor has been at this argument for way too long:

the Fed has returned to its discretionary, unpredictable ways, and the results are not good. Starting in 2003-05, it held interest rates too low for too long and thereby encouraged excessive risk-taking and the housing boom.

There have been a lot of effective rebuttals to this claim. Our first graph suggests that we did not see the output gap disappear until the end of 2005 and the period of excessive demand was very short lived and was already being offset by the FED’s increase in interest rates. Yet we see this canard:

There are multiple measures of the output gap that show the U.S. economy overheating during this time. Below is a figure from this article that compares the real-time and final measures of the U.S. output gap. Everyone shows ex-post an overheating economy during the housing boom.

David Beckworth had earlier argued we were witnesses a series of positive productivity shocks and yet he wants to argue the CBO overestimated potential output. Something does not add up. Our second graph relates to something from perhaps the last honest supply-sider - Bruce Bartlett:

In this article, the author reviews the continuing controversy over the Reagan tax cut. Republicans often assert that it was so expansionary that there was no revenue loss, something the Reagan administration itself never claimed. The truth is that the tax cut lost a lot of revenue, but helped the economy transition from high inflation to low inflation at an unexpectedly low economic cost.

Paul Krugman rightfully points to the first part of this as evidence that the three stooges (Lawrence Kudlow, Art Laffer, and Stephen Moore) misrepresent the 1980’s record but I would question Bruce’s claim that the economic cost of the disinflation was low. In fact Paul noted that the cost was expected:

Keynesians came into the Volcker disinflation — yes, it was mainly the Fed’s doing, not Reagan’s — with a standard, indeed textbook, model of what should happen. And events matched their expectations almost precisely.

Using the CBO measure of potential GDP during the 1980’s, the Volcker disinflation involved what Paul calls a PLOG – a prolonged large output gap.

Truthiness, media framing and the political economy of economics

Concealed deep in the bowels of the ivory tower is this little-known academic endeavor sometimes referred to as "political economy of communications." These guys study "media bias" or "media framing." They've even done content analysis that goes beyond harping at the very serious personhood of this or that individual columnist or newspaper.

For example, in Framed! Labor and the Corporate Media, Christopher Martin identified Five Dominant Frames in the media coverage of labor disputes:

(1) The consumer is king;
(2) The process of production is none of the public’s business;
(3) The economy is driven by great business leaders and entrepreneurs;
(4) The workplace is a meritocracy; and
(5) Collective economic action is bad.

Stated somewhat more evasively, these also happen to be the tenets of the dominant frame in contemporary economics  -- the "equilibrium price-auction view of the world" (aka subjective preference theory or conservative ideal). Surprise, surprise!

Has it ever occurred to anyone that the dominance in elite economics of a particular economic ideology may owe more to the dominance of a congenial corporate media frame than to any inherent theoretical elegance or empirical support? Of course not.

There is this peculiar rhetorical mise en abyme in which editorial punditry takes its Delphic authority from what "economists say" while what they say simply regurgitates something they read (over and over again) in the press.

"I'm an economist and I'm O.K. I say what I've been told that 'economists say'."

Wouldn't it be worthwhile to ask whether the economics practiced today is, in effect, a subsidiary of the corporate mass media rather than an independent academic discipline?

"Let’s stop making a fetish of national income statistics and percentage rates of growth”

by Henry Hazlitt.

Allan Sloan Joins The WaPo VSP Truthiness Gang On Social Security

Allan Sloan, semi-retired from the Washington Post wrote a report today entitled "Soaking the 'rich' won't fix Social Security."  In it he announces that he is "launching what I hope will become a series of Social Security truth-teller articles."  He poses himself as in the obviously Very Serious Center between "conservatives [who] agitate to cut benefits and liberals [who] agitate to raise them."  Unfortunately his first outing makes it look like he is engaging more in truthiness like so many other VSPs at WaPo whom he seems to be joining, such as Fred Hiatt, Robert J. Samuelson, and Ruth  Marcus, all of whom regularly bloviate obsessively on all the things that should be done to Social Security because it is so awful and messed up.  Sloan appears to be joining their Truthiness Gang.

His targets in this article are Chris Christie on the right who wants to reduce benefits for those earning over $80,000 per year, with those earning over $200,000, and Elizabeth Warren on the left, who wants to raise benefits and also raise the maximum wage cap for paying the fica, currently at $118,500.  What has him really steamed is a general idea he claims they both share that "the rich" are getting too sweet a deal out of Social Security as of now.

His evidence in his "fact-filled" report for this is an estimate he had done by Social Security actuaries on his and his wfe's own situation, with them having been at the max wage cap for 35 years.  Apparently according to this, no details on how this was calculated, the current value of their future [expected] benefits is only 75% of what they paid in, with this lowered further by his working longer and having in the future to pay taxes on his benefits.  While one could argue about this calculation, I shall not do so.  Let this be his big fact from which he argues that "the rich," or those whose wage incomes exceed the max wage and thus do not pay more in fica than anybody else at the max wage or above, are actually getting the shaft.

Now, I shall give him credit that in fact he agrees that it is not unreasonable that the Social Security system be on net a moderately progressive system, taking account of both taxes and benefits, and in fact this has been known for decades based on studies by people like my major professor, Eugene Smolensky and others dating back at least to the 1970s and re-confirmed since.  This is not really news, even if  Sloan thinks it is.

The problem comes later, in particular when he conflates in the end the political bottom line of what Christie and Warren propose.  His final  paragraph declares, "Either of these  turns Social Security from an earned benefit that is subtly means-tested into welfare.  And we all  know what tends to  happen to welfare in this country."  Ooops!

Clearly what is involved here is a matter of perception above all, and on how Christie's proposal will be perceived, simply paying no benefits at all to  people above a certain income level, that is indeed how it will be perceived: that Social Security will have become "welfare."  Indeed, this is why liberals have consistently opposed doing that, with it not at all surprising that is someone on the right, even if on the center-right, who has put this forward.  It is a recipe for draining support from the program over time.

But the proposal of Warren, with or without a benefits increase, and with or without some general lowering of the fica tax rate that could be done if the max wage cap is raised so as to still make at  least current revenues, does not lead to that outcome.  As Sloan admits, the program already is mildly progressive, and thus if one wishes to push it, already sort of a "welfare" program.  But it is not perceived as such.  Yes, raising the cap, whatever else is done, pushes the program more in that direction, makes it more progressive, more of a welfare program, but does not fundamentally and qualitatively change it from what it is now.  I would contend, and I really do not see how Sloan can claim otherwise, as long as higher income people get the benefits that they have always gotten, with no reduction in that for them, I  doubt that many of them will view Social Security as having become a "welfare program."  They may not like the tax hike and oppose it,  but as long as they get those benefits, they will not call it a welfare program because they are getting those benefits, and if there is anything a rich person does not like being called, it is a welfare recipient.

Sloan is going to have to do better than this if he is going to avoid simply being another member of the pathetic and egregious WaPo Social Security Truthiness Gang.

Barkley Rosser

So,

Why Varoufakis’ Job Was Impossible

As Greek finance minister, Yanis Varoufakis has had two responsibilities.  First, Greece’s strategy hinged on a public relations effort directed at the citizenry of other eurozone countries, to convince them that austerity has functioned as a downward vortex in Europe, and that human decency requires a resumption of growth and social provision in Greece.  Realistically or not, Syriza has counted on grassroots political pressure to counter the orthodoxy of “the institutions”.  Varoufakis was the main public face of this campaign.

Second, as finance minister, Varoufakis was the point person in negotiations with peers from the other countries.  Diplomatic etiquette, again rightly or wrongly, requires a limited public presence and clubby, consensus-building behavior behind closed doors.  It’s clear that Varoufakis’ effectiveness in the second job was sacrificed to his devotion to the first, but it would have been just as bad—worse even—if he had sacrificed the first to the second.

The two jobs are so contradictory in their demands that it makes sense to divide them between two people.  Varoufakis’ knowledge of economics and intense absorption in it is a benefit to his public role but gets in the way of being the kind of negotiating partner the creditors are looking for.  Let Varoufakis bike around Europe drumming up support for Greece, and have a publicity-shy technician parse the negotiating texts.

Of course, rearranging the personalities on the negotiating team can only go so far.  If the creditors are unwilling to bend on pensions, for instance, and neither is Syriza, even the chummiest personal relations between the parties is not going to be enough.

Banishing Varoufakis

The eurogroup finance ministers can’t take it any more: they want Yanis Varoufakis out of their sight, banished to the netherworld of YouTube and the blogosphere.  He keeps insisting that policy reforms can’t be given fiscal numbers without a credible macroeconomic forecast, which might be something for academic perfectionists, but not for grownups who have to deal with reality, like who is facing default and has to get with the program, pronto.  How can Greece claim it can’t pay its debts when there are still wages and pensions to cut?

So the Greek government said, fine, you don’t want to look at Varoufakis, we’ll make his deputy the negotiating guy, but Varoufakis will still be the team leader.  Maybe the deputy tucks in his shirt.

I wonder why Greece didn't try out this idea: give Varoufakis a new identity.  Change his name to “the institutions”, as in, you don’t have to deal with the Troika any more but now you have to submit to “the institutions”.  OK, that’s a bit strange for a personal moniker, but you could call him Charlie or Wolfgang or, hell, Maynard.  “Dear finance ministers, we have accepted your request to sack Varoufakis.  From now on you will be negotiating with 'Maynard.'”

Morning in America and Cameron’s Productivity Pessimism

I feel over 30 years younger. A recent UK debate reminds me of the infamous Reagan commercial - it’s Morning in America again. You see the Reagan tax cuts saved America from that awful 1982 recession under Jimmy Carter. Oh wait – Reagan became President before the 1982 recession. Of course the macroeconomic mix back then involved Reagan’s fiscal stimulus and a very vigorous monetary contraction with the recovery coming after the Volcker FED declared victory over inflation and eased up. The Bank of England of late has been using monetary stimulus desperately trying to offset Cameron’s vigorous fiscal austerity. And the intellectual garbage coming from Cameron’s government is being documented by Simon Wren Lewis:

The idea that austerity during the first two years of the coalition government was vindicated by the 2013 recovery is so ludicrous that it is almost embarrassing to have to explain why … imagine that a government on a whim decided to close down half the economy for a year. That would be a crazy thing to do, and with only half as much produced everyone would be a lot poorer. However a year later when that half of the economy started up again, economic growth would be around 100%. The government could claim that this miraculous recovery vindicated its decision to close half the economy down the year before. That would be absurd, but it is a pretty good analogy with claiming that the 2013 recovery vindicated 2010 austerity.

This FRED chart shows what Simon is referring to. A deep recession followed by a partial recovery with real GDP at only 1.037 of its 2007 level and real income per capita still below its level from 7 years ago. The UK economy is imitating the US macroeconomic performance 30 years ago. In 1983, we were still far below full employment but Cameron has found a bogus estimate of potential output in the UK that say they are just fine. Paul Krugman explains:

these estimates are now based on estimates of potential output, which purport to show that the British economy in 2006-7 was hugely overheated and operating far above sustainable levels. But nothing one saw at the time was consistent with this view. In particular, there was no sign of inflationary overheating. So why do the usual suspects claim that Britain had a large positive output gap? The answer is that the statistical techniques used by most of the players here automatically reinterpret any prolonged slump as a slowdown in the growth of potential output — and because they also smooth out potential output, the supposed fall in current potential propagates back into the past, making it seem as if the pre-crisis economy was wildly overheated.

Bill Martin has been following this debate for a while:

There are two sharply contrasting explanations for the continuing malaise. The conjunction of weak activity, persistent inflation and disappointing trade performance adds weight to the common view that the economy has become bound to a lower trajectory, the result of a permanent loss of productive capacity. Others believe the economy is primarily constrained by weak demand, the result of a private debt overhang and a contraction in the flow of bank credit, deflationary forces made worse by an upsurge in world commodity prices.

Bill comes down on the latter explanation as does Paul and Simon. The former view is a Real Business Cycle tale of negative productivity shocks. We heard those stories 30 years ago but the US economy finally did fully recover. Let’s hope the same occurs for the UK economy. But let’s suppose for a moment that the productivity pessimists are correct. Then Cameron’s government should cease gloating how well the UK economy is doing as a permanent fall in real income per capita is not good news.

Good To Know Eurozone Negotiations Focusing On The Really Important Stuff

Reports out of Riga about the negotiations between Greece and other Eurozone members have been rather curious.   There has been much emphasis  on how the other fin ministers do not like or get along with Yanis Varoufakis, the Greek one.  He did not go  to dinner with them.  He is the only one not wearing a tie.  Draghi does not look him in the eye.  Djesselbloem calls him by his first name in person and refers to him as "the Greek finance minister" when not in person.  The others do not like him "lecturing" them with his British education and his time in Australia, and, gosh darn it, why does  he not just up and accept their demands for full austerity for Greece!

It looks like this is more about him breaking the rules of a fraternity than about seriously coming to an agreement that most observers think is not that far away. Time for these clowns to grow up.

Barkley Rosser

WSJ on Scott Walker's Lumpy Labor Economiics

"Economists call this the lump of labor fallacy, which holds that the amount of available work is fixed. If one person gets a job, another loses it. But the addition of new workers into a market, especially skilled workers, can increase the productivity of companies in a way that expands the supply of work for everybody." -- Wall Street Journal

Except, of course, when economists "call this the lump of labor fallacy," they do not do so as economists. They are performing as hack propagandists. When "more doctors smoke Camels than any other cigarette," they are not offering a medical opinion.

Muzzling Dissent

"People everywhere confuse what they read in newspapers with news." -- A. J. "Joe" Liebling

Two somber thoughts. First, economics is not only not a science; it is not even a scholarly discipline. It is a subsection of journalism. There is the style section, the sports section, the front pages and economics. The academic jargon mills with their fancy maths are there solely to lend a cachet of prestige to the front line hacks. Case in point: Henry Hazlitt.

Second, the function of a "free press" in an oligarchy is the muzzling of dissent. As Liebling also wrote, "freedom of the press is guaranteed only to those who own one." The most effective way to muzzle dissent is to simply drown it out. That way you get to suppress speech in the name of free speech. Who could object to free speech? Those totalitarians! It's no coincidence that American fascists in the 1930s called themselves "Liberty Lobby."

Connecting the dots (and with one eye on the unexpurgated history of economic thought) the real purpose of economics today is not to foster understanding of how the economy works but to confound and marginalize those who understand even a bit of how it works.

All the flap about the "crisis of economics" and its inability to predict the great recession is so much bunk. Economics is performing exactly as it is supposed to, thank you very much.


Postscript: Having mentioned both Henry Hazlitt and Joe Liebling in one post, I started wondering if they ever crossed paths. Google Scholar produces one item that mentions both of them, a 2006 article in the Canadian Journal of Communications, "'Labor's Monkey Wrench': Newsweekly Coverage of the 1962-63 New York Newspaper Strike."

Viral Gyro Spiral

"We need campaign finance reform. We do not need 'heroes' who take meaningless flights of fancy." -- Marsha Mercer, Richmond Times-Dispatch

Have you ever wondered what politicians do with all that campaign finance money? They don't keep it (or at least not most of it). They spend it. On campaigning. A lot of it on advertising. Which means buying time and space in the media. Including the Richmond Times-Dispatch.

That media is not going to bite the hand that feeds it, is it? So, it's a bit rich when a columnist scolds a citizen for taking a "meaningless flight of fancy." What would Marsha Mercer do?

Labelling Doug Hughes's gyrocopter flight "meaningless" is what Mercer did. So we don't really need to ask what she "would" do. The job of the media is to spin and frame dissent as either trivial or terroristic. In an oligarchy, all dissent is either trivial or it is terror. Thus, by definition, no dissent can be "meaningful" in the sense of being both effectual and legitimate.

This is precisely the eye of the needle that Hughes threaded with his marvelous stunt. Superficially, it is about oligarchy and corruption of democracy by big money. But more profoundly -- and metaphorically -- it is about the hermetically-sealed "closed air space" over Washington. D.C. In his letter to all 535 members of Congress, Hughes quoted John Kerry on the corrosion of money in politics and it's contribution to "the justifiable anger of the American people. They know it. They know we know it. And yet nothing happens."

Kerry went on to point out how the corruption of money in politics "muzzles more Americans than it empowers." How does it do this? Well, for one, those same media outlets that profit from the spending of that corrupting money to buy advertising space also get to pass judgment on the wisdom or folly of dissenting speech: "Sit down, sit down, sit down, sit down! Sit down, you're rocking the boat!"

We need a lot more than campaign finance reform. We do not need minders and muzzlers from the media to tell us what is "meaningful" and what is not.

Are There Any True Laws, Especially Economic Ones?

This is triggered by the recent post by Tyler Cowen and some followups by others.  In it Tyler posits three laws: 1) There is something wrong with everything (no slam dunks, and one only understands something if one knows its flaws), 2) There is a literature on everything, and 3) All propositions about real interest rates are wrong.  The first clearly contradicts itself, and while most laws may be limited or not universally true, some are truer than others, e.g., round earth model closer to reality than flat earth one.  The second is clearly false as some ideas have never even been verbally expressed by anybody, although the real point of this is probably to warn that if somebody thinks they know the full literature on something that has a literature, they probably do not.  The final one is probably empirically correct, although properly stated theoretical models contingent on unrealistic assumptions may be correct if their unrealistic assumptions hold.  More generally, Tyler warns that we should all be wary of thinking we know too much, which is clearly correct.

In a followup he links to Arnold Kling who poses three laws due to his poli sci prof dad, Merle Kling: 1) Sometimes it's this way, and sometimes it's that way (I can think of some things that are pretty much always one way), 2) The data are insufficient (often the case, but maybe not always), and 3) The methodology is flawed (see 2).  He calls these "iron laws of social science," but they do not look  any more ironclad than Ricardo's Iron Law of Wages, which depends on some assumptions holding that are in fact not true, such as there being no technological change.  More like silly putty laws.

OK, so are there really any fully true laws?  Even beyond economics, most "laws" depend on certain assumptions holding for them to hold as well.  In some areas, this is not such a big deal, and thus in chemistry, a lot of its laws hold pretty widely.  Physics gets a bit iffier, with the good old law of gravity the classic example.  Sure enough the equation explains rates of acceleration in a vacuum, but outside of a vacuum, well we even see some things moving away from each other, such as a helium balloon rising away from the earth.  Nevertheless, in many hard sciences it is a lot easier to figure out when the necessary assumptions are holding and when they are not so that one can figure out when the supposed laws will apply to the real world or not, even if those assumptions do not always hold everywhere and at all times (and some physics laws hold simply everywhere at all times, as best we know).

When we get to economics, it looks to me that Tyler's first law holds pretty well.  Most economics laws do not hold universally.  Demand curves do not always slope downwards, even though Misesian a prioristic praxeologists insist so, and socially necessary labor time does not always determine values that equal "natural" long-run prices, even though fundamentalist Marxians might believe so.  The basis "law" of supply and demand, although useful for understanding many real world markets,  does not always hold in its standard formulation for a long list of reasons.  And most of the laws used to study or explicate macroeconomics, such as claims about real interest rates, are by and large wrong or only true in limited cases.

Given all  that, I shall note one economics law that I so far  do not know of any exceptions to.  That is the law of diminishing returns, or diminishing marginal productivity.  Keep in mind that its formulation says that "eventually" marginal product of an input will decline, not that it is always declining, and for many agricultural activities many inputs have increasing marginal productivity for awhile.  If anybody can think of a real world exception to this law, I would warmly welcome learning of it, but so far, it seems to hold universally.

Barkley Rosser

Stamp Out Oligarchy

Never Mind the Bollocks. Here's the Gyro

Hughes on First?

Have to admit, the spectre of mailman flying a gyrocopter onto the lawn of the Capitol building appeals to the Sandwichman's weakness for eccentric idealists.

From the Tampa Bay Times, here is the letter that Doug Hughes was delivering to 535 members of both houses of Congress.

Dear ___________,

Consider the following statement by John Kerry in his farewell speech to the Senate —

"The unending chase for money I believe threatens to steal our democracy itself. They know it. They know we know it. And yet, Nothing Happens!" — John Kerry, 2-13

In a July 2012 Gallup poll, 87% tagged corruption in the federal government as extremely important or very important, placing this issue just barely behind job creation. According to Gallup, public faith in Congress is at a 41-year record low, 7%. (June 2014) Kerry is correct. The popular perception outside the DC beltway is that the federal government is corrupt and the US Congress is the major problem. As a voter, I'm a member of the only political body with authority over Congress. I'm demanding reform and declaring a voter's rebellion in a manner consistent with Jefferson's description of rights in the Declaration of Independence. As a member of Congress, you have three options.

1. You may pretend corruption does not exist.
2. You may pretend to oppose corruption while you sabotage reform.
3. You may actively participate in real reform.

If you're considering option 1, you may wonder if voters really know what the 'chase for money' is. Your dismal and declining popularity documented by Gallup suggests we know, but allow a few examples, by no means a complete list. That these practices are legal does not make them right! Obviously, it is Congress who writes the laws that make corruption legal.

1. Dozens of major and very profitable corporations pay nothing in taxes. Voters know how this is done. Corporations pay millions to lobbyists for special legislation. Many companies on the list of freeloaders are household names — GE, Boeing, Exxon Mobil, Verizon, Citigroup, Dow … 

2. Almost half of the retiring members of Congress from 1998 to 2004 got jobs as lobbyists earning on average fourteen times their Congressional salary. (50% of the Senate, 42% of the House) 

3. The new democratic freshmen to the US House in 2012 were 'advised' by the party to schedule 4 hours per day on the phones fund raising at party headquarters (because fund raising is illegal from gov't offices.) It is the donors with deep pockets who get the calls, but seldom do the priorities of the rich donor help the average citizen. 

4. The relevant (rich) donors who command the attention of Congress are only .05% of the public (5 people in a thousand) but these aristocrats of both parties are who Congress really works for. As a member of the US Congress, you should work only for The People. 

1. Not yourself.
2. Not your political party.
3. Not the richest donors to your campaign.
4. Not the lobbyist company who will hire you after your leave Congress. 

There are several credible groups working to reform Congress. Their evaluations of the problem are remarkably in agreement though the leadership (and membership) may lean conservative or liberal. They see the corrupting effect of money — how the current rules empower special interests through lobbyists and PACs — robbing the average American of any representation on any issue where the connected have a stake. This is not democracy even if the ritual of elections is maintained. 

The various mechanisms which funnel money to candidates and congress-persons are complex. It happens before they are elected, while they are in office and after they leave Congress. Fortunately, a solution to corruption is not complicated. All the proposals are built around either reform legislation or a Constitutional Amendment. Actually, we need both — a constitutional amendment and legislation. 

There will be discussion about the structure and details of reform. As I see it, campaign finance reform is the cornerstone of building an honest Congress. Erect a wall of separation between our elected officials and big money. This you must do — or your replacement will do. A corporation is not 'people' and no individual should be allowed to spend hundreds of millions to 'influence' an election. That much money is a megaphone which drowns out the voices of 'We the People.' Next, a retired member of Congress has a lifelong obligation to avoid the appearance of impropriety. That almost half the retired members of Congress work as lobbyists and make millions of dollars per year smells like bribery, however legal. It must end. Pass real campaign finance reform and prohibit even the appearance of payola after retirement and you will be part of a Congress I can respect. 

The states have the power to pass a Constitutional Amendment without Congress — and we will. You in Congress will likely embrace the change just to survive, because liberals and conservatives won't settle for less than democracy. The leadership and organization to coordinate a voters revolution exist now! New groups will add their voices because the vast majority of Americans believe in the real democracy we once had, which Congress over time has eroded to the corrupt, dysfunctional plutocracy we have.
The question is where YOU individually stand. You have three options and you must choose. 

Sincerely, 

Douglas M. Hughes

See also: WHAT IS OUR ONE DEMAND?

See also: Martin Gilens and Benjamin I. Page, "Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens"

Multivariate analysis indicates that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence. The results provide substantial support for theories of Economic-Elite Domination and for theories of Biased Pluralism, but not for theories of Majoritarian Electoral Democracy or Majoritarian Pluralism.

WHAT IS OUR ONE DEMAND?

Anybody remember what that one OWS demand was? Well... "The most exciting candidate that we've heard so far is one that gets at the core of why the American political establishment is currently unworthy of being called a democracy..."

"...we demand that Barack Obama ordain a Presidential Commission tasked with ending the influence money has over our representatives in Washington. It's time for DEMOCRACY NOT CORPORATOCRACY, we're doomed without it."

As Hillary Clinton said the other day in Iowa, "We need to fix our dysfunctional political system and get unaccountable money out of it once and for all even if that takes a constitutional amendment." (The Guardian observed that "It was a bold stance from Clinton, who has long courted the support of Wall Street hedge funds and is widely expected to benefit from the most expensively financed campaign in US presidential history." I suspect by "bold" they meant "brazen.")

So does that mean Hillary Clinton wants to bring "DEMOCRACY NOT CORPORATCRACY" to the U.S.A.? Uhm. Not so fast. A constitutional amendment is not a slam dunk. Some say it is delusional. What Hillary really has on offer is "hope" (with a capital ). And that rhymes with soap and that stands for soap sell swindle. From the encyclopedia of scams:

The Scam 

A "soap" salesman offers to give away money wrapped in with the soap packages ( $1 to $100 bill) in order to induce the sales of his wondrous product. Using slight-of-hand the money is extracted so that none of the bars have any money. They are sold for $1 at the start. Shills will use palmed $5 and $10 bills to get sales rolling at which time the soap sales man begins to auction off the remaining packages to the highest bidder. 

#OCCUPYPIKETTYHILLARY

Hillary's campaign logo has come in for quite a bit of criticism.

The logo's designer, Michael Bierut, is a graphic design superstar. Maybe he knows what he is doing? Here's what he wrote a few years back on the Occupy Wall Street "communications arsenal":

Consider, on the other hand, the genius of that simple #occupywallstreet hashtag. Three little words, with a call to action built right in. And, also right there was the potential for an articulated brand architecture that any corporate identity expert could envy. "Occupy" sits in the master brand position. Fill in the blanks for a potentially infinite number of user-generated subbrands, from Occupy Amarillo to Occupy Zurich. Elsewhere in the OWS communications arsenal, we find other slogans ("We Are The 99%") and some visual tropes (the Guy Fawkes mask popularized by Anonymous, now an emerging public "face" for the protest). But no typeface guidelines, no color standards, no official logos.

Could it be, as Bierut writes in his final paragraph that "Sometimes, the key to political change isn't designing a logo or poster"? He makes the same point several times in his post: "I suspect that many of its supporters would insist that the last thing OWS needs is something as simple and reductive as a logo." "conventional graphic design seems like an inefficient way to make a point, never mind to create or fuel a political movement"

I suspect there may be a method to the Hillary logo's banality. It is extremely simple to repurpose. Initially, even the Sandwichman had a few yucks:

All of which only serves to commit the blasted thing to memory! But if conventional graphic design is an inefficient way to make a point, what about the conventional political candidate?

The Incredibly Bad Timing of John Wilkes Booth

When John Wilkes Booth assassinated President Abraham Lincoln 150 years ago today on April 14, 1865, it happened to be a Good Friday.  I do not know if he and his associates thought about how this would be viewed by the American people of that time, including even most southerners, much less the longer run view of history, but the timing instantly turned a man who had been quite unpopular in many quarters even in the North into a martyred and sanctified Christlike figures.  Perhaps Booth thought people would view him that way, but he was mistaken.

Barkley Rosser

GE Capital and Repatriation Taxes

Peter Eavis writes:

More than 10 years ago, the kinds of investors who seek out weak companies were circulating presentations on Wall Street that argued that General Electric’s enormous lending business was a ticking time bomb. The financial crisis of 2008 proved those skeptics right, and on Friday, they appeared to have the final laugh. General Electric announced that it was selling most of the loans inside its financial division, GE Capital, leaving a G.E. that will be dominated by industrial businesses. The shift, to be completed by 2018, would end one of the riskiest experiments in finance. It also indicates that regulations intended to limit destabilizing financial practices are starting to bite.

That Dodd-Frank reforms take away the joys of regulatory arbitrage just bites. And I guess paying U.S. taxes also bites as noted by Steve Goldstein:

General Electric’s deal to sell off real estate and get out of most of the finance business contains a little sweetener for the U.S. government, in the form of up to $4 billion worth of taxes on repatriated earnings. The issue of tax repatriation is arguably the hottest one in corporate tax policy. Right now, U.S.-based multinationals are not taxed by the U.S. government on what they earn overseas — until they bring that money back to the U.S.

GE is saying that this repatriation tax might be as much as $7 billion. But the GE Capital alone segment was parking $36 billion overseas. They have paid a modest amount of foreign taxes so they get a Foreign Tax Credit. And its other divisions are still parking a lot of profits overseas, which will likely not be repatriated allowing the effective tax rate for these other segments of their business to remain below 20%. Steve continues:

According to a report in March by Credit Suisse’s David Zion, the cumulative earnings parked by S&P 500 companies overseas is over $2 trillion

Under current law, the repatriation tax would be 35% minus any Foreign Tax Credits. Let’s assume that foreign taxes are 20% of foreign earnings. This would mean the US Treasury could net 15% of this $2 trillion if deferral benefits were ended. And $300 billion could finance a lot of infrastructure investment. But Steve notes that Washington is proposing to change this tax:

President Barack Obama has proposed a one-tax 14% tax on $2 trillion of overseas earnings, followed by a 19% minimum tax on future profit, and former House Ways and Means Committee Chairman Dave Camp proposed a one-time tax of 8.75%.

For companies whose foreign earnings are in tax havens, these proposals would raise at least some tax revenues but for companies where the foreign tax rate is above 19%, even the Obama proposal would effectively eliminate the repatriation tax given the Foreign Tax Credit.

UBI Caritas (the best things in life are free)

The miraculous Max Sawicky resumes wrestling with Universal Basic Income at MaxSpeak. This time the incitement comes from Dylan Matthews at Vox, who argues that a secondary benefit of basic income would be that "it enables a transition to a world of less work and greater leisure."

That would indeed be a good thing. But as the Sandwichman pointed out two weeks ago, advocates for basic income seemingly make exactly the opposite argument. Guy Standing, co-president of the Basic Income Earth Network, cited a recent experiment in India -- and earlier experiments in North America and Europe -- as evidence for the claim that a basic income guarantee "would not reduce labor supply... The simple fact is that people with basic security work harder and more productively, not less."

Guy Standing on top of an airplane

The contradiction between the two arguments is less extreme than it may at first appear. A U.B.I. might reduce the dire incentive to "work or starve" at the same time as it increases opportunities and incentives to pursue the bright elusive butterfly of "meaningful work." That would be good if it was the only consideration. But it is not. There is also an inconvenient truth about the relationship between productivity and fossil fuel consumption. In the industrial economy, larger amounts of better work mean more greenhouse gas emissions. Productivity is a double-edged sword.

Max is right to point out that a Universal Basic Income scheme would involve lots of money sloshing around, creating lots of opportunity for misappropriation. His alternatives -- a family allowance and a retirement floor -- also involve money, albeit targeted to where the need is likely to be.

In my view, that only addresses one side of "the need". The other side is the need to reduce superfluous production and consumption. We have long since passed the point where capital "diminishes labour time in the necessary form so as to increase it in the superfluous form; hence posits the superfluous in growing measure as a condition – question of life or death – for the necessary."

Currently, world-wide carbon emissions per year are roughly double what can be re-absorbed by oceans and plants. This is not to say that the re-absorption by oceans is harmless --it leads to acidification. But clearly more than half of the emissions are superfluous to sustainability. Lo and behold, carbon emission increase in virtual lockstep with hours of work. In the U.S., the  correlation between the two has been about 95% over the last quarter century.

Don't even think of using the "correlation doesn't prove causation" gambit. We are talking about a "water is wet" relationship. Fossil fuel is burned to do work. Period. If you can't fit those two pieces together, go home.

So the bottom line is we either need to cut hours of work at least in half or the remaining hours need to be less productive not more. Does the Sandwichman have a policy proposal for accomplishing such a Herculean task? Of course. The Moon Belongs to Everyone. Just to save you the trouble of clicking on that link from two years ago, I've copied the scheme below.

The Moon Belongs to Everyone

Dorning Rasbotham, Esq., was a friend of the poor. Nay, from the bottom of his heart, he was a friend of the poor! He felt tenderly for the poor man and his family. After all, what would become of the rich if there were no poor people to till their fields, pay their rents and manufacture their goods?

Squire Rasbotham laid down the following principle in a pamphlet he published in 1780: "A cheap market will always be full of customers." Let's not waver from that principle as we consider the facts in the following table:

"Hours" in the above table refers to billions of hours of paid employment in the U.S. in each of the specified years. "GHGs" refers to billions of tons of greenhouse gas emissions. Both totals increased from 1990 to 2011 and those increases were 88% synchronized between the two variables. If one went up, the other went up. If one went down, the other went down -- 88% of the time!

Correlation does not imply causation. In this case, though, the correlation is exactly what theory would predict. The correlation here is not "implying" anything. It is evidence in support of a theory that existed long before people even thought of measuring greenhouse gas emissions.

That theory is an extended version of Squire Rasbotham's principle that a cheap market is always full of customers. In 1865, William Stanley Jevons applied that same principle to the economy of fuel:

As a rule, new modes of economy will lead to an increase of consumption, according to a principle recognised in many parallel instances. The economy of labour effected by the introduction of new machinery, for the moment, throws labourers out of employment. But such is the increased demand for the cheapened products, that eventually the sphere of employment is greatly widened.... 

Now the same principles apply, with even greater force and distinctness, to the use of such a general agent as coal. It is the very economy of its use which leads to its extensive consumption....

And if such is not always the result within a single branch, it must be remembered that the progress of any branch of manufacture excites a new activity in most other branches, and leads indirectly, if not directly, to increased inroads upon our seams of coal.

This theory is known as the Jevons Paradox or the rebound effect. Substitute "fossil fuel" for coal and the theory predicts pretty accurately the results presented in the above table.

Fast forward to today. We want more jobs -- that is to say more hours of work --but we want less greenhouse gas emissions. We face not only a paradox but a dilemma. The horns of this dilemma are yoked together, not just "in principle" but in the physical, mechanical agent of both the economy of fuel and the economy of labor: the machine.

"When we try to pick out anything by itself, we find it hitched to everything else in the Universe." John Muir, My First Summer in the Sierra.

It gets rather tedious watching one group of experts "solve" one side of the dilemma while completely ignoring the other side while yet another group of experts "solves" the other side while ignoring the first. "Crackpot realism" was C. Wright Mills's name for it but there's nothing realistic about it. It's just plain old crackpot.

So what's the solution, then? I'll tell you after the break. Listen to this song first.

The moon belongs to everyone,
The best things in life are free;
The stars all shine for everyone,
They're shining for you and me. 

The flowers in Spring,
The birdies that sing,
The sunbeams that shine,
They're yours--they're mine. 

The sky belongs to everyone...

And that's not just the lyrics to an old song any more. That's the ruling of Judge Gisela Triana, of the Travis County, Texas, District Court in July 2012. From the Boston Globe, July 12, 2012:

The lawsuit was brought by the Texas Environmental Law Center, and is part of a court campaign in a dozen states by an Oregon-based nonprofit, Our Children’s Trust. The group is using children and young adults as plaintiffs in the lawsuits — some state and some federal — filed in Alaska, Arizona, California, Colorado, Iowa, Minnesota, Montana, New Jersey, New Mexico, Oregon, Texas, and Washington.

By relying on ‘‘common law’’ theories, the group hopes to have the atmosphere declared a public trust for the first time, granting it special protection. The doctrine has been used to clean up rivers and coastlines, but many legal experts have been unsure if it could be used successfully to combat climate change.

As David Morris reported in On the Commons, Peter Barnes proposed treating the sky as a public trust in his 2001 book, Who Owns the Sky. Barnes's idea was the basis for a "cap-and-dividend" bill proposed in the U.S. House of Representatives in 2009.

Cap-and-dividend is a variation on the cap-and-trade concept of a market-based emissions regulatory mechanism. Some of the main criticisms of such market-based schemes have to do with enforcement mechanisms, non-compliance, transparency and regulatory capture.

The idea of trading pollution allowances originated in Ronald Coase's "The Problem of Social Cost" and was further developed by J. H. Dales in Pollution, Property and Prices. Coase's article centered on a critique of the "Pigouvian tradition" that advocated a prominent role for the state in taxation to offset the effects of environmental externalities.

In his critique, Coase didn't consider that there was both an environmental and a labor component to Pigou's analysis. Pigou's analysis of the labor question was not reducible to the environmental one and relied at a key point on Sydney J. Chapman's theory of the hours of labor. I have discussed this in detail in "The Hours of Labour and the Problem of Social Cost."

I mention this to emphasize that the hours of work is not just some random, unconnected variable that I've pulled out of a hat. It is fundamental to the analysis of social cost. It stands to reason that it should also be fundamental to the resolution of problems arising from social cost shifting.

I have therefore proposed a friendly amendment to the cap and dividend proposition that I will provisionally call The Lump-of-Labor Rebound GHG Cap and Trade Remedy.

I will just sketch a rough outline of how such a policy might operate followed by some remarks on how it can be integrated with a community-based valuation of the "temporal commons":

According to our table above, there were 6.7 billion tons of GHGs emitted in the U.S. in 2011 and 225.6 billion hours worked. That same year the adult population in the U.S. was about 240 million. Suppose that the government adopted a target of cutting emissions by two-thirds by the year 2040. To do so would require a 3.7% annual reduction in greenhouse gas emissions.

The best greenhouse gas reduction on record (apart from economic fluctuations) in the period 1990 to 2011 was a little less than 2.5%. The average annual reduction was about 0.5%. Taking an average of the two gives a 1.5% reduction as something that is feasible but ambitious. To get from a 1.5% reduction to a 3.7% reduction would then require a reduction in aggregate hours of work of 2.2%.

Dividing the reduced hours number by the adult population produces an annual transferable hours credit of 936. If we assume that the labor force participation remained constant, the hours transferred from those outside of the labor force would raise the average annual hours of those in the labor force to 1460 hours, although it is conceivable that some recipients might chose to neither use nor transfer their credits. In that case, the hours reduction and the associated greenhouse gas reduction would be steeper than planned.

This is not to assume that the benchmark GHG reduction of 1.5% will occur automatically or that the further reduction in GHGs as a result the reduction of work hours will be proportional to the reduction of hours. These are targets only and there need to be programs put in place to try to meet them and monitoring to evaluate how successful those efforts were.

So far the discussion has focused on a policy that could only be implemented by a government with radically different priorities than those that any actually existing government of a wealthy industrial country has. It is a political Utopia. But the gist of this policy proposal is not restricted to a global emissions reduction strategy. My own research project began some 15 years ago by looking at collective bargaining practices and how they might be modified to promote job creation through the redistribution of working time.

One of the fruits of that project, "Time on the Ledger" examined how employment can be considered as a common-pool resource. A different valuation of benefits of leisure time and of unpaid work and of the costs of unemployment and of environmental damage could lead to a very different set of priorities in collective bargaining and those different goals could reignite a labor movement in place of a marginalized, ineffectual and increasingly irrelevant organized labor.

Jeffrey Sachs’ Feeble Defense of David Cameron

Greg Mankiw reads this as a defense of David Cameron:

Finally, there is output growth. In the UK, real (inflation-adjusted) GDP fell by 3.8% from the fourth quarter of 2007 to the second quarter of 2010. It then rose by 8.1% from that point until the fourth quarter of 2014. In the US, real GDP fell by 1.6% from the fourth quarter of 2007 to the second quarter of 2010, and then rose by 10.5% from then until the fourth quarter of 2014. Thus, both countries have experienced moderately high and broadly similar growth rates since May 2010, when Cameron’s government took power.

I have no idea what Paul Krugman did to tick off Jeffrey Sachs so I’ll let him speak for himself. But let’s note the fact that the real GDP in the US was a mere 8.7% higher in 2014QIV than it was in 2007QIV. That is by any measure a terrible economic performance. We should also note that real GDP in the UK has increased only 3.7% over the same period. For anyone to suggest that such a dismal economic record justifies fiscal austerity leaves me wondering where this person learned their macroeconomics.

Of Bathtubs, Bombshells and Boilerplate

The bathtub in question is the analogy Linda Booth Sweeney and John Sterman use to illustrate a dynamic stock-flow system, such as the relationship between greenhouse gas emissions (a flow) and the accumulation of greenhouse gases in the atmosphere (a stock). Gernot Wagner and Martin Weitzman stress the importance of the bathtub analogy in their new book, Climate Shock.

What's fascinating about the bathtub analogy is how consistently people get the dynamics of accumulation wrong. Or at least how often business school graduate students with backgrounds in science, technology, math and economics get it wrong. Sterman has pioneered a cottage industry publishing articles about the inability of large numbers of students to correctly identify the effects of flow variations on stock levels. A frequent source of error is something Booth Sweeney and Sterman call "correlation heuristic": students often expect that changes in stock will have the same shape as changes in flow. 

This common error has implications for people's attitudes about the action and policy needed to mitigate climate change, Booth Sweeney and Sterman point out. According to the correlation heuristic logic, many people would assume that a reduction in greenhouse gas emissions would directly translate into less greenhouse gases in the atmosphere. It doesn't.

A bombshell dud

A few weeks ago, Scientific American called the International Energy Agency's announcement a week earlier that global GHG emissions for the generation of energy were unchanged in 2014 from 2013 a "bombshell" that "flew in the face of established economic wisdom." The article went on to point out that scientists had "mixed opinions" about the long term significance of this momentary and sector-limited decoupling of emissions from GDP growth. Some thought it was a hopeful sign that decoupling is already happening. Others warned that emissions were likely to resume their upward trend in 2015.

The article neglected to mention that even if total global emissions were to remain flat for years to come, the concentration of GHGs in the atmosphere would continue to increase relentlessly. Annual emissions would need to be cut to around half their current levels just to stabilize atmospheric concentrations at current levels. That's the difference between stocks and flows.

Happy talk about decoupling GDP growth from resource consumption and waste generation to achieve "green growth" ignores this crucial distinction. Even the more sober "prosperity without growth" critique that highlights the huge disparity between relative decoupling and absolute decoupling ignores this distinction. Accumulation is the bottom line. No mitigation without disaccumulation.

From shocks to stocks and flows... to lumps

The boilerplate is not Paul Guinan's imaginary steampunk contraption -- shown at left -- but the proverbial "fixed amount of work to be done" which has performed oh-so-much work for lazy journalists and economists assuaging those unfounded fears about unemployment that emanate from the economic illiterati. Come to think of it, though, a make-believe robot makes a good mascot for an oft-told tale about a make-believe fallacy. 

Do the erring graduate students in Sterman's and Booth Sweeney's experiments assume there is a fixed amount of water in the bathtub? No, they don't. They realize that the change in flow of water into the tub affects the accumulation of stock in some way. But they systematically mis-specify the timing and magnitude of the effects.

What happens if we dial back the preposterous "fixed amount of work" assertion of the lump-of-labor fallacy claim to a more plausible "correlation heuristic"? Instead of assuming that there is only so much work to go 'round, the benighted Luddites, trade unionists and other economic populists might be suspected merely of committing the more common error of assuming that job losses in the economy as a whole are homologous to losses in a particular trade as the result of labor-saving technology. From a distance the two fallacies may appear indistinguishable. But there is a difference -- several differences, actually.

For starters, the correlation heuristic has been experimentally documented, not just asserted. Evidence trumps mere allegation. Secondly, the heuristic is not as obviously preposterous as the belief in a fixed amount of work. It seems more likely that people -- even Luddites -- would make a plausible error than an implausible one. But perhaps most importantly, the correlation heuristic error may pertain equally to those who allege the fallacy as to those who are alleged to commit it.

How so? Economists making the lump-of-labor fallacy claim insist that the price mechanism automatically adjusts the demand for labor to accommodate changes in the supply of labor. In terms of the bathtub analogy, this is the same as saying that the outflow of the drain self-adjusts to correlate with the inflow from the faucet. One can indeed imagine a device that could accomplish this feat -- a bulb, floating on the surface of the water, attached by a chain of a given length to a plug in an auxiliary drain, such that when the water rises above a certain level, the floating bulb pulls the plug out of the auxiliary drain.

It could work...

Unfortunately, as Mr. Keynes explained long ago, the propensity to consume doesn't float like a bulb on the surface of income. The economists' cherished notion of equilibrium remains a heuristic and nothing more. The pot has been calling the kettle black.

Out of the bathtub and into the frying pan

Why does the Sandwichman keep harping on this arcane specimen of journalistic and economic boilerplate? Because heuristics aside, there are statistical series that seriously, relentlessly correlate: energy consumption and hours of paid employment. Energy intensity per dollar of industrial production has declined for nearly a century. That's relative decoupling. Energy intensity per hour of paid employment does not decline. Greenhouse gas emissions per hour of paid employment does not decline. There is no relative decoupling, let alone absolute decoupling or -- sustainable pie in the sky -- disaccumulation of GHGs in the atmosphere.

To cut greenhouse gas emissions in half, we must cut hours of paid employment at least in half. What would John Sterman say to that?

With a few important exceptions (the work of Herman Daly and colleagues, e.g., Daly and Townsend 1993 ; see also Princen et al. 2002 ; Meadows et al. 2004 ; DeGraaf et al. 2005 ; Whybrow 2005 ; Victor 2008 ; Schor 2010 ), most of the research, teaching, and popular discourse on sustainability continues to focus on technological solutions—more energy, more resources, more efficient eco-friendly growth—while the actual leverage point—voluntarily limiting our consumption—remains largely undiscussable, particularly among our business and political leaders.

DeGraaf 2005, Victor 2008 and Schor 2010, by the way, all prescribe reductions of working time as key to reducing emissions. Wagner and Weitzman on Sterman's bathtub analogy: "climate scientists -- and the rest of us -- would be well advised to remind ourselves daily of its significance." Paul Krugman on Martin Weitzman's fat tail analysis: "So what I end up with is basically Martin Weitzman’s argument: it’s the non-negligible probability of utter disaster that should dominate our policy analysis. And that argues for aggressive moves to curb emissions, soon "

1. the possibility of disaster...
2. the significance of the bathtub analogy...
3. the actual leverage point... 
4. measured rather than heuristic correlations