Fuel Oil, Whale Oil and Snake Oil

Not that I’m obsessed with Ms Klein, but consider this passage from her Said Lecture as published in the London Review of Books:

....the thing about fossil fuels is that they are so inherently dirty and toxic that they require sacrificial people and places: people whose lungs and bodies can be sacrificed to work in the coal mines, people whose lands and water can be sacrificed to open-pit mining and oil spills.

Yes, oil spills are very bad, but before we had a world-spanning petroleum industry we had whale oil.  Commercial whaling, on which whole economies were built, was a very nasty business to whale and whaler alike.  Its replacement with petroleum was a big improvement in almost every respect.  If it were not for climate change we could delete the “almost”.

Coal mining has also been a miserable business, but so has every other form of mining, in every part of the world and for all of human history.  Unfortunately, no bronze or iron age without bronze or iron.  And the use of wood as the principal fuel source for heating and industry was unsustainable as populations rose, and it consigned a whole class of people to extreme poverty.  There’s a reason the most pitiable characters in traditional stories are woodcutters.

Climate change is real.  The advantages of fossil fuels are real.  That’s why we have a problem.  You have to rewrite a lot of history to claim otherwise.

Modernity and Capitalism

Well, that’s a heavy title.  I’m not going to say the last word about it in a blog post, but I would like to make a fairly simple observation: for at least a century, defenders of capitalism have argued that the two are inextricably connected.  If you like modernity you have to like capitalism, and if you get rid of capitalism you will lose modernity with it.  By modernity I mean a way of life that is science-based, rational and skeptical, technologically innovative, liberal, cosmopolitan and adapted to markets.

The traditional response of the left was to argue that modernity under capitalism is flawed and that a better, socialist modernity is possible.  In other words, it rejected the identity and saw modernity as bigger than any particular version of it.

That position has been complicated by the collapse of traditional models of socialism that do seem to fail the modernization test: they were clunky and inefficient, closed to the outside instead of open, stultifying instead of dynamic.  Now, I can already hear the cries of paleo-socialists in my ear: No!  Socialism didn’t fail in Russia/China/Cuba/wherever; it was encircled by the forces of capital and betrayed from within.  I don’t agree, but I won’t debate it here; my only point is that most of the left is not paleo-socialist, so they’ve had to figure out what it means to be left wing and anti-capitalist in a world in which capitalism and modernity (in their eyes) largely coincide.

The result that seems to be unfolding is a widespread rejection of modernity on the activist/committed left.  This is obvious in a book like Naomi Klein’s This Changes Everything: Capitalism versus the Climate.  She denounces “western science” and the industrial revolution.  She is against globalization and wants each of us to stay put and cultivate our relationship to the soil—to native plants and local, stable communities.  She has rediscovered spirituality and finds it answers life’s questions better than rational skepticism.  She thinks traditional societies lived better and possessed more wisdom than those swept up in modernity.  And of course, any use of markets (other than carbon taxes) is to be denounced as the sin of greed.

What Klein writes wouldn’t matter so much if they were only her personal thoughts (just like mine don’t matter very much), but the reception her book has received shows she has distilled a worldview shared by much if not most of the left.  Her anti-modernist stance is not even mentioned; it is taken for granted.  Or more precisely, it is how we understand her to be radical and left-wing: that’s what it means to oppose capitalism in the Anthropocene.  (My spell-checker doesn’t recognize Anthropocene yet.  Give it time.)

So that’s how we’ve come full circle.  The identity between modernity and capitalism is no longer offered in defense of the existing order but (or also) as the basis for its rejection.  My prediction is that the benefits of modernity are so obvious and compelling for the vast majority of humanity that anti-modernist leftism will be an evanescent cult, something future generations will look back upon with curiosity.

And I still think we need to consider what form a non- or post-capitalist modernity might take.

(Postscript: If you want to think about how this conceptual turn of events began, you might look at the emergence of postmodernism, which transferred the critique of capitalism to the critique of modernity and arose at about the same time classical socialism/communism lost its intellectual luster.)

(Postscript ^2: This is not about anarchism vs Marxism.  Anarchists used to be modernists.  Read Kropotkin's Fields, Factories and Workshops or, for cultural modernism, Emma Goldman's Living My Life.)

Work-houses the best Charity?

John Graunt's observation, "if there be but a certain proportion of work to be done," was directly challenged by Thomas Cooke in Work-houses the best Charity: "A SERMON, Preacht at the Cathedral Church of Worcester, February 2d 1702."

Cooke's argument was that "another advantage to every community, where all Hands are provided with an Employ, is this, That it enlarges Trade according to the number of the Hands imployed." This is an ambiguous claim and much weaker than Josiah Tucker's "infallible maxim" that "one Man's Labour creates Employment for another." Cooke summarized Graunt's argument and then presented his objection:

The Ingenious Observator of the Bills of Mortality, tho he hath furnished us with many excellent and useful Observations, hath yet one that extreamly Labours, and he seems at once to be mistaken in his Charity, and his Politicks. He tells us that it were better for the State to keep the multitude of Beggars at a publick Stock, tho they earn’d nothing, then let them be maintain’d as they are, by the voluntary Contributions of charitable and pious Persons; and having made this assertion, he explains himself, having begg’d the question, that if there be but a certain proportion of work to be done, which be already done by the not Beggars, as he stiles them, then the imploying the Beggars in this work were but transferring the want from one hand to another, in which the latter by spoiling it, would do more hurt than good.

But this is limiting Men's Labour to one particular imploy, of which indeed he gives an instance, which the curious may have recourse to, which is all the strength of that argument: But our Modern States Men look much further than this Gentleman's Observations. ‘Tis true as to our exported Trade of Manufactures there must be some Limitation and restraint; for we must make no more, then we have demand for, and the Dutch as he very well observes and since them the French, having run away with a considerable part of the Antient English Trade, we will easily allow him, that should all Hands be employed that way only, they would be too many. But when we confider the vast quantities of Forreign Manufactures imported, which are consumed by our own Inhabitants, and the many thousand Families that might be plentifully maintained by the Manufactures of those very Commodities, Should they be brought over unwrought, methinks the Avarice of our Merchants, and the Pride of our Inhabitants Should not be able to prevail against that common good, which the limiting of those Manufactures to our own People would produce…

Unless I am mistaken in reading Cooke's proposal, he was advocating import substitution, relying on the establishment of compulsory workhouses for the poor to manufacture the substituted goods. I'm not inclined to argument the merits of Cooke's scheme but simply want to point out that it is hardly what one would consider a laissez faire, free-market, free-trade proposition.

In fairness to Cooke, his economic case for workhouses was only a secondary consideration. His main argument was a religious one, resting on selected Biblical citations and furious exhortations against the depravity of sloth. His published sermon was crowned with a big shout-out to 2 Thessalonians 3: 10:

A commandment from which, according to Cooke, lazy rich folks were exempt by virtue of their inheritance. But I'm no more interested in Cooke's mean-spirited theology than his stilted economic analysis. Why, then, exhume his archaic sermon? Cooke's sermon offers direct evidence that Graunt's commentary on employing beggars was known in the early 18th century, at a time of agitation for the establishment of workhouses.

A passage in Boswell's Life of Samuel Johnson suggests that Graunt's commentary on employing beggars had become somewhat of a commonplace by the late 18th century. Johnson's Dictionary of the English Language (1755) made frequent reference to Graunt's Bills of Mortality for examples of usage of words. The following quote is attributed to Johnson in 1780:

It may be questioned, whether there is not some mistake as to the methods of employing the poor, seemingly on a supposition that there is a certain portion of work left undone for want of persons to do it; but if that is otherwise, and all the materials we have are actually worked up, or all the manufactures we can use or dispose of are already executed, then what is given to the poor, who are to be set at work, must be taken from some who now have it, as time must be taken for learning, (according to Sir William Petty's observation,) a certain part of those materials that, as it is, are properly worked up, must be spoiled by the unskillfulness of novices.

Pass the Pumpernickel?

Cradles were rock'd in every field,
and food was all their cry,
Till the King's bowels bread did yield
and sent them a supply...

Fascism: The View from Within

The core problem with the discussion of Trump and fascism in today’s New York Times is that it defines fascism solely in terms of what scares liberals.  If the goal of fascists were to be scary, then you might judge how fascist a movement is by how much it scares you.  But that’s not why people support fascism.

What’s necessary is to see fascism from the inside.  Why might people support an authoritarian, chauvinist ruler who attacks minorities and foreigners?

Suppose you have a bedrock belief that people get what they deserve.  The poor are poor because they are inferior, and the rich are rich because they are smart and work hard.  Lots of people feel this way, not as an analytical proposition to be assessed against the evidence but as a preconscious commitment.  This view can work at multiple scales: it enables those who have it to accept the reality of individual, group and national inequality without the discomfort of cognitive dissonance.

But suppose the pattern of winners and losers becomes such that the “natural justice” assumption implies that it is you and your people who are the inadequate ones.  The community (class, racial, religious) you identify with is struggling while other communities seem to get ahead.  Your country is defeated in war or seems to be declining relative to other countries in wealth and power.  How can you reconcile the facts of the world around you with your core beliefs about just desserts?

Fascism’s political appeal is that it solves this conflict.  It tells you that foreign or alien groups—less virtuous than yours but ambitious and sneaky—have undermined you.  They’ve taken your jobs, tied you up in pointless rules that benefit them by preventing your people from getting what they deserve under the false banner of equality, eroded your values and traditions.  Your group has allowed this to happen because it was disunited, even weakened from within by traitors.  The solution is to root out these treacherous elements, throw off the artificial laws and constraints (like political correctness) that prevent true merit from getting its rewards, and get rid of the foreigners and parasites.  The fundamental political question, from the perspective of fascism, is not how to adjudicate disagreements but how to eliminate the dissent and defeatism that stands in the way of your people’s unity and rightful place in the world.

How such a movement foments repression, violence and war depends on the context—the barriers fascists need to overcome to implement their program.  For instance, if there really were a move to expel millions of undocumented residents of the US, this would entail an alarming level of surveillance and force, much greater than anything we’ve seen in this country in decades.  This is not because Trump and his followers want a reign of terror in itself, but because that’s what it would take.  Do I know whether the expulsion theme is a real prospect or just rhetoric?  Do I want to find out?

The proper way to determine the fascist threat from a right wing nationalist movement in the US or elsewhere is to ask (1) do they seek to impose the unity and rule of “the people” (their national or ethnic group) through suppression of minorities, dissent and foreigners? and if so (2) what repressive or violent actions will they need to take to carry out such a program?

The Great P Value Controversy

This quarter I have been part of the teaching team for Research Design and Quantitative Methods, a core class in Evergreen's Masters of Environmental Studies.  Naturally, I had to include a discussion of the debate that has been swirling around the use of P values as a "significance" filter and the role of null hypothesis statistical testing in general.  Because the students have very limited backgrounds in statistics and the course ventures only a little bit beyond the introductory level, I have to simplify the material as much as possible, but this might be useful for those of you reading this who aren't very statsy, or who have to teach others who aren't.

As background reading for this topic, students were assigned the recent statement by the American Statistical Association, along with "P Values and Statistical Practice" by Andrew Gelman, whose blog ought to be on your regular itinerary if you care about these questions.  Here are the slides that accompanied my lecture.

UPDATE: I've had a couple of late-breaking thoughts that I've incorporated into the slides.  One is that the metaphor of bioaccumulation works nicely for the tendency for chance results to concentrate in peer-reviewed journals under p-value filtration (slide 22).  The other is a more precise statement of why p-values for different results shouldn't be compared (slide 25).

Processed Trade, Hong Kong’s National Income Accounts, and Transfer Pricing Abuse

William Thorbecke recently discussed the statistics on China’s process trade balance:

Figure 1 plots China’s processing imports and exports and Figure 2 its ordinary imports and exports. These are China’s principle customs regimes. Processing imports can only be used to produce goods for re-export (processed exports). This regime reflects the operation of global value chains in East Asia. Ordinary imports are destined primarily for the domestic market and ordinary exports are produced primarily using domestic inputs….Figure 1 indicates that the gap between processed exports and imports for processing keeps growing. This implies that more and more of the value-added of processed exports such as smartphones, tablet computers, and consumer electronics goods comes from China.

His figure shows processed exports reaching $900 billion in 2014 with imports for processing reaching $500 billion suggesting value-added (wages and profits) being $400 million. If you are checking your iPhone, remember this is assembled by Foxconn Technology Group (aka Hon Hai Precision Industry). Most accounts of this suggest a model where Foxconn pays $200 per phone for components and then adds $10 per phone in value-added paying $5 in wages and reaping $5 in profits. If you multiply that by 625 phone and then convert US$ to NT$ by an exchange rate of 32, you get something close to their 2014 Financials. You also might get a hot transfer pricing issue in China as noted by Windson Li:

Toll manufacturing is also a popular business model for MNCs that provide products 'made-in-China'. The China toll manufacturer imports most materials and components from an overseas affiliate on consignment basis, completes the manufacturing process, and then exports the finished products to the same overseas affiliate. As the material and product title remain with the overseas affiliate, there would be no (or very limited) Cost of Goods Sold in the P&L of the China toll manufacturer. The China toll manufacturer normally would charge a service fee to the overseas affiliates based on … the total processing cost and expenses on book, plus a mark-up.

What should be the new markup now that the cost based has been lowered from $205 per phone? Multinationals are telling the Chinese government that the new markup should be the old cost plus 2.5 percent markup, which is absurd as the ratio of operating profits to labor costs used to be 100 percent (which is what the Chinese government wants). The difference between these two positions is yuuuge. Who is pushing toll manufacturing structures and why? The Big Four accounting firms are the culprits and the game is to shift income to tax havens like Hong Kong. I was thinking about this as I looked at the 2015 GDP accounts for Hong Kong. Converting these accounts to US$ by an exchange rate of 7.8, we see GDP at $308 billion while total exports were $619 billion and total imports were $612 billion. That is a lot of processed trade and a big potential for transfer pricing manipulation.

A Strategy for Trump

Suppose, as now appears likely, it’s going to be Trump against Clinton.  Let’s think this through from Trump’s side.

Trump’s big disadvantage is that he scares people.  He is crude, aggressive and over the top.  His advantage is that many people find him authentic and authoritative.  It would be a mistake for him to respond to his vulnerability by becoming more scripted and “nicer”, since that would undermine the aspect of his appeal that has played the largest role in getting him to this point.  Rather, he should try to maintain the personal aura he has established while diminishing the fear factor.

Given this, here is what I’d recommend: go after Clinton as a hawk.  She is a hawk.  Her history of support for military interventions and attachment to neocon advisors is there for all to see.  Trump has the opportunity to present himself as the less threatening, more reasonable candidate on the one aspect of presidential power where fear—fear of war and foreign threats—drives public opinion.

At the same time, Trump should, from a political strategy perspective, continue to be Trump.  (He may not be able to change this.)  He should say outrageous things off the top of his head, act macho, and cement his image as an anti-politician.  Combining this with striking a moderate pose on military adventurism would maximize the advantages of his style while minimizing the disadvantages.  He should be grateful that his prospective opponent in the general election gives him this opportunity.

Campaign ad, sometime this summer, Trump in front of a large, cheering crowd: “Let me tell you straight: I’m honest and I’m tough.  I like to set clear goals and make sure they’re met.  But I’m not dangerous.  The other candidate, the one who smiles a lot and whose every word is written by someone else—she’s dangerous.  She’s always looking for new places to bomb, new wars to get into.  That’s not me.  Tough, yes.  Dangerous?  Not for the American people.”

I Confess, Graunt Didn't Invent Economics...

Aristotle did. As Philip Kreager reminded me:

Historians of economics have for some time treated his [Aristotle's] writings as formative, even though relevant passages in the Politics and Ethics amount to only a few pages.

Wait. There's more:

In the Politics, however, population is a recurring topic, extensively discussed and integral to the overall argument. "The first part of a state's equipment," Aristotle says, "is a body of men, and we must consider both how many they ought to be and with what natural qualities,"

The almost obsessive focus on proportionality I noted in Graunt and Locke is no proof of Graunt's influence on Locke. The proportional view was central to Aristotle's Politics and everybody in early modern humanism "up to and including Adam Smith" was doing Aristotle. You didn't have to read Aristotle. The commentaries on Aristotle were ubiquitous. For Aristotle,

The logic of proportional versus numerical relationships also describes the economy of the household in relation to its size, and this in turn shapes the wider demography of constituent groups. Oikos, the household, is the root of oikonomia, the art of household management, from which we derive the modern term "economics."

What Graunt did contribute was a brilliant synthesis of humanist Aristotelianism with the techniques of merchant bookkeeping.

Graunt's work brilliantly synthesized humanist methods of natural history and rhetorical communication that were basic to Aristotelianism with techniques of merchant bookkeeping in which population totals are treated as open or relative accounting balances, rather than closed aggregates; his method arose as a direct response to the need to calculate balances in the body politic.

So no, Graunt didn't invent economics. He did invent the science of population statistics, though, and thus laid the foundation for modern social sciences. As for Graunt's contribution relative to Petty's, Walter Wilcox aptly summed up my own impression, "To the trained reader Graunt writes statistical music; Petty is like a child playing with a new musical toy which occasionally yields a bit of harmony."

"A certain proportion of work to be done": How John Graunt invented economics

John Graunt’s Natural and Political Observations on the Bills of Mortality (1662) is acknowledged as the inaugural text of "political arithmetick." Graunt is ranked along with William Petty, Charles Davenant and Gregory King as a major pioneer of "the art of reasoning by figures, upon things relating to government." 

In their Outline of the History of Economic Thought, Screpanti and Zamagni, however, describe Graunt as a "follower" of Petty. In books and articles on history of economic thought, Petty is mentioned ten times as often as Graunt (JSTOR, Google Scholar). Graunt is more frequently thought of as a pioneer of population studies and vital statistics. Regarding that latter capacity, Philip Kreager has written extensively and wonderfully on Graunt's truly innovative methodology.

It is convenient at this point to recall that to produce, to consume and to trade are actions first, as are supply, demand, value and price – before they can be treated as things and aggregated. People perform those actions and they do them in proportion to their numbers, abilities and appetites. 

Proportion, by the way, is central to Graunt's methodology. Did I mention the word appears no fewer than 68 times in Graunt's Observations? Kreager's article, "New Light on Graunt" contains 48 occurrences of the word. The methodological significance of this word for Graunt cannot be overstated. I am therefore quoting in full Kreager's explanation of the analytical role of proportional checks in bookkeeping and Graunt's Observations:

A population, like a commercial enterprise, must achieve at least an equilibrium of income and expenditure over time, if it is to survive. Graunt noticed that the bills, like a merchant's day-book, provided a continuous record of additions and subtractions in a constantly changing numerical whole. The diversity of transactions in people and trade, however, make such a simple running account difficult to interpret. The 'method of double-entry' bookkeeping, widely promoted in Graunt's time, claimed to provide a solution to this problem by revealing the inherent order and regularity of trade. The procedure may be summarized as follows. On the basis of his daily journal of transactions, a merchant was supposed to classify and tabulate every entry according to a few major types of account. Successive transactions pertaining to an account were then entered twice in a ledger, in parallel columns, one entry showing the changing balance of debt, and the other of credit. The comparison or proportion of the two columns relative to starting and subsequent balances provided the merchant with an immediate evaluation of the current and past status of the account, relative to others. This made it possible to spot accounting errors, to isolate losses, and to distinguish real profits from diverse fluctuations in income.

Therefore, when Graunt wrote, "…if there be but a certain proportion of work to be done; and that the same be already done by the not-Beggars; then to employ the Beggars about it, will but transfer the want from one hand to another…" it is virtually certain that he was not referring to a "fixed amount" of work. Instead he was referring to a regularity. Change happens but disproportionate change may be cause for concern.

It is difficult to think of a economically-significant fact that doesn't involve "a certain proportion" of something to something else. GDP per capita gauges a certain proportion between economic output and population. Productivity measures a certain proportion between economic output and hours of work. Economic growth reflects a certain proportion between one year's output and the next's. The unemployment rate considers a certain proportion between the labor force and the number of people who are looking for work. It is certain proportions all the way down.

Compare, though, Dorning Rasbotham's lament, 118 years after Graunt, about people who say there is a "certain quantity" of labor to be performed:

Stolper-Samuelson Weighs in on the Protectionist Debate

Nelson Schwartz goes after Donald Trump, which in general is fine. But this passage is based on “faulty logic”:

The problem for Mr. Trump — or any president who wants to get tough on trade violators — is that, in the global economy, imposing tariffs on competitors abroad could have serious economic consequences at home by sharply raising prices on imported goods. Cheaper flat-screen televisions, computers, clothes, furniture and other products from Walmart, Amazon and elsewhere have been a rare bright spot for struggling working- and middle-class Americans

Dean Baker explains:

Suppose our trade deals had gone the route of free trade in professional services. Then Donald Trump promised to restrict the number of foreign doctors who could enter the country. The NYT would say that U.S. doctors would be hurt by this restriction since they would be paying more for health care. Of course they would pay more for health care, just like everyone else. However their increase in pay would almost certainly dwarf the higher cost of health care. The same would almost certainly be the case for manufacturing workers and likely a large segment of non-manufacturing workers whose wages have been depressed by competition by displaced manufacturing workers.

Peter Neary wrote nice explanation of the Stolper-Samuelson theorem over 12 years ago. Might we ask our economics reporters to read it?

Econospeak Ranked 68th Among Economics Blogs

I received a message from Prateek Agarwal of  The Intelligent Economist that had a link listing the top 100 economics blogs of 2016.  It has been awhile since I have seen any of these rankings, and when last saw them, supposedly based on numbers of people linking to or looking at or whatever,  we tended to range between 40th and 70th.  So I guess we are still in that range, although Agarwal and his blog did not provide how they came about determining their ranking, which somehow did not have Noapinion on its list.  Krugman's Conscience of a Liberal was Number One.

I also note that I was identified as "the founder" of this blog.  I have sent Agarwal a message correcting him on that and pointing out that Max Sawicky was the real founder of this blog as it replaced the former MaxSpeaks, which sometimes made it into the top ten on those economics blog ranking lists.  It is true that I am one of  the two contributors who moved from MaxSpeak to Econospeak, the other being Sandwichman.  However, I am not "the founder" of Econospeak.In any case, I do enjoy being a part of Econospeak and glad that at least we have some ranking.

Addendudm-Correction:  I have just received a message from Prateek Agarwal informing me that the the numbers in the list do not imply a ranking.  So, all we know is that Econospeak is in the top 100, but where exactly, not known. 

Barkley Rosser

BridgeGate: Is John Doe Chris Christie?

Tim Darragh reports on a twist in the BridgeGate scandal:

"John Doe," the unnamed alleged uninidicted Bridgegate co-conspirator, missed his chance to argue his case to keep his name anonymous, a consortium of news media organizations said in a federal court filing Monday. The news media group, including NJ Advance Media, argued that an appellate court should deny the request by John Doe to halt a ruling ordering the unveiling of the names of unindicted co-conspirators by noon Tuesday. John Doe had "an opportunity to be heard" the latest filing says, and the court "thoroughly considered his privacy interests" in deciding that the names of the unindicted co-conspirators should be made public...John Doe, represented by Jenny Kramer of Chadbourne & Parke in New York, appealed Wigenton's order hours before the court's Friday deadline, claiming his due process rights would be violated and that his reputation would be harmed, among other things.

Are we being too cynical to think John Doe is Chris Christie? The bio of John Doe’s attorney states:

Jenny Kramer is an experienced trial lawyer in the firm’s New York office whose practice focuses on white collar criminal defense, internal investigations, complex commercial litigation, and regulatory enforcement. Prior to joining Chadbourne, Ms. Kramer served as an Assistant United States Attorney in the District of New Jersey.

Chris Christie was the U.S. Attorney for New Jersey from 2002 to 2008, which means Ms. Kramer worked for him. Is she once again working for him?

Child Labor Defended by the Left

Well, some of the left, but they probably represent the main currents of progressive thought among intellectuals.  Those who are not part of the charmed circle of researchers, activists and policy-makers in the realm of child labor may not know that a storm has been whipped up over regulation of children’s work.  A number of academics and heads of NGOs have stepped forward to say that lots of child labor is OK, and the blanket condemnation of it is oppressive.  They want to scrap international agreements that set restrictions on the employment of children, and they support efforts at the national level to repeal child labor regulations.

The flashpoint is Bolivia, where the laws were rewritten to allow children as young as 10 to work alongside their parents and to enter formal employment at 12.  "To eliminate work for boys and girls would be like eliminating people's social conscience," says Bolivia’s president, Evo Morales.  This was the culmination of a campaign led by UNATsBO, an organization representing Bolivian working children, led by children with advice from adults.  One of their adult advisors is Manfred Liebel, a German political scientist.  His writings combine familiar radical tropes with passionate belief in the virtue of child labor.

Here are a couple of representative snippets from one of his articles dating from 2003, the year that UNATSBO was founded:

[Working children’s organizations are] questioning traditional age hierarchies and establishing new, more egalitarian relationships between the generations.  But they also personify a massive criticism of different aspects of the western bourgeois way of thinking and behaviour and pave the way for an understanding of the subject until now unknown or unaccepted in the western world. 

In accordance with other social movements of repressed and excluded population groups in the South, the working children’s organizations reclaim and practise a subject-understanding and a subject-existence based on human dignity and the respect for human life.  (p. 273) 

The subject-understanding and the subject-praxis of the working children’s organizations also go beyond the modern western understanding of childhood. According to this understanding, the children are indeed granted a certain autonomy and given protection from risks, but these concessions happen at the cost of an active and responsible role for the children in society. The children are practically excluded from adult life and assigned to special reservations in which they are ‘raised’, ‘educated’ and prepared for the future. Their possible influence on this future is confined to the individual ‘qualification’ of each person, yet not to decisions about the arrangement of social relationships. These remain reserved for the adults or the power elite. (p. 274)

Well, you get the idea.  The attempt to eliminate child labor denies the essential humanity of children.  It wants to impose a capitalist conception of their role in society which prioritizes their future productivity at the expense of what they can do in the present.  It is hierarchical and expresses a colonial, eurocentric mindset.

Liebel is one of a number of child labor researchers who have banded together under the banner of “child labor protagonism”.  They’ve made it their mission to dismantle regulations that interfere with the choice many children want to make, to earn some money by working.  In January of this year 59 of them sent an open letter to the UN commission that administers the Convention on the Rights of the Child, urging them to disconnect the CRC from other international agreements that set minimum ages for certain types of work.  This provoked a response from Human Rights Watch and a rebuttal from the Group of 59.

You can read the documents and decide for yourself.  I have rather strong feelings about this topic, having spent years myself studying child labor.  I recognize that it raises many difficult questions, and reasonable people can disagree.  I believe, however, that most of the arguments of the protagonistas are straw men (straw kids?), although the HRW statement is rather weak as well—legally defensive rather than substantively engaged.

To really dig into the issues would take more time and space than my life or EconoSpeak permits.  Here are a few bald statements, however:

Whether children want to work or not is not a decisive issue for policy on child labor.  Sorry.  Minimum wage laws prevent people from accepting jobs that pay less than the minimum, and occupational safety laws often interfere with the freedom of workers to take jobs that regulators have decided are dangerous.  Food safety laws tell you what substances you're not allowed to eat in your food, even if you want to.  Regulations interfere with free individual choice, for adults as well as children.  That doesn’t mean that all regulations are good or that we should ignore what people whose freedom will be impinged have to say about them, but the “statism” of regulation is not a general argument for deregulation either.

Yes, child labor has played a central role in every traditional culture.  Of course.  Until very recently average lifespans were short.  If the average lifespan of those who make it out of infancy is, say, 40, it makes no sense to delay work until the age of 15.  And with much lower productivity, every pair of hands was needed.  But the new reality is that people can expect to live a lot longer, even in the poorest parts of the world, and childhood as a time of investment and development is inescapable.  I’m not for cultural imperialism, but I’m not for consigning whole generations of kids growing up in traditional cultures to lifelong poverty.

Which leads to the main point.  Of course, no general rule regarding child labor fits the situation of every child.  No matter what limits you impose—whether you make 14 or 12 or 3 the age of consent for employment—some children will be harmed.  Every regulation does this.  But not regulating can also cause harm, and the sensible thing to do is strike a balance, to minimize the sum of harms.  Take the case of domestic child labor, a flashpoint of the current debate.  An International Labor Organization Convention categorizes this as a “worst form of child labor”, and indeed there are horror stories galore of young children, especially girls, exploited economically, socially and sexually as underage servants.  But many children work at domestic service without any serious harm, some of them even bonding with the families they live with.  So what’s the call?  The ideal would be to have an army of investigators checking into each domestic situation, separating the noble from the evil, but that’s not going to happen.  (First reports out of Bolivia say that the government there doesn’t have the resources to monitor newly legalized child labor for the treatment of children.  Surprise.)  So in the end some sort of regulation is necessary, with the expectation that those enforcing it will act flexibly in situations where the regulation is clearly inappropriate.

Finally, I think the eminent researchers are wrong about two important points.  First, quite generally, substantial time devoted to child labor tends to have harmful effects on education, especially as measured by cognitive test scores and grade advancement; you can read about it here.  Second, as the only researcher who has studied the question in a disciplined way, I can say that greater exploitation of children compared to adults, while by no means universal, is characteristic of many work situations.  These potential negative spillovers to adult labor markets were the reason why labor movements were in the forefront of opposition to child labor.  We now have at least some evidence that their fears were not imaginary.

I should stop: this has already gone on too long.  But I don’t want to check out before saying that I agree with one of the main arguments of the Grupo 59: simple prohibition is generally not a good way to combat child labor.  Much better is the strategy of providing income support for poor families, and, although the evidence is less clear, I suspect that substantially improving schools in the poorest regions will increase the time and commitment that children devote to them.  The way forward is through support and opportunity, not prohibition and punishment.  But the child labor crusaders at the UN say this too.

UPDATE: Hoisted from my own comment: "After sleeping on this, I now think I should have emphasized the fundamental point, that massive poverty and underinvestment in children is the core problem, which shows up in a variety of symptoms. You can certainly debate how much emphasis should be given to regulations versus transfer programs versus school enhancement. The problem I have with protagonistas like Liebel is that they seem to deny there is a problem in the first place, or they define it down to just specific instances of exploitive work."

Sykes-Picot Centennial

This past Monday, May 16, was the centennial of the signing of the then secret Sykes-Picot Agreement that divided up former Ottoman territories between UK and France, with substantial remnants of the division still abiding, even as I write this it is still for a few more minutes the 81st anniversary of the death of T.E. Lawrence, aka, "Lawrence of Arabia," whose role in connection with the Sykes-Picot Agreement was ambiguous and now a matter of debate.

His public image and his conduct at Versailles put him as apparently an enemy of Sykes-Picot and a supporter of  Arab nationalism, supposedly suppressed by Sykes-Picot, but more recent scholarship has Lawrence's position as more complicated.  He and Sykes were both on the UK delegation at Versailles, even as he was also representing the interests of Prince Faisal ibn Hussein al Hashim, direct descendants of the Prophet Muhammed and the traditional local rulers of Mecca. His father, Hussein, held the old position of Sharif of Mecca, but would also as a result he would become the King of Hejaz, the long strip of land along western Saudi Arabia containing both Mecca and Medina.  So while Lawrence did  not get his unified Arab nation, but his friend Faisal and his brother and father would all become kings with British support.

The other view is that while Lawrence put on this grand show of  opposing the Sykes-Picot division of the Arab Middle East between France and Britain, he was not as opposed as it  appeared he was. More  precisely his accounts of being shocked when he learned  of  it after the Bolsheviks released the word, with the Russians also supposed to be getting serious chunks of  Turkey that Ataturk militarily kept them from getting.successfully.  But France and UK got most of what they wanted.

I saw the film Lawrence of Arabia with Peter O'Toole as  Lawrence when it first came out over a half century ago, when I was at an impressionable age and it impressed me greatly.  I still consider the early desert cinematography and the great score by Jarre as some of the finest in all film.  At that age I found some of the later scenes annoying and upleasant, but educational as I saw  the film more times as I got older.

A particular scene involved Lawrence's supposed learning of Sykes-Picot.  He was in Cairo in the office of the very real General Allenby (played by Jack Hawkins), who would take Jerusalem from the Ottomans with the assistance of troops of Prince Faisal (played by Alec Guinness), who was also in attendance, as Lawrence spoke passionately with them about the need for an Arab nation, only to break out into bleeding on his back,  Faisal informs him of his naivete advocating the Arab nation given that the Sykes-Picot agreement already divided its territories between them, with Lebanon and Syria coming out of the French  side of it and Jordan, Iraq, and Israel came out of the British side, although France was supposed to get northern Iraq where now Daesh-ISIS-ruled Mosul is, and also a lot of oil, which British troops from Basra came to hold and did. And while they were promised a nation at Versailles, the Kurds did not get one when the final agreements were drawn at San Remo in 1920, which ratified that the British would get Mosul, which would end up in Iraq rather than Syria.

After Faisal informs him of the supposed perfidy in fact Faisal demands that the fourth person in the room explain what was up, so the mysterious Dryden, not a real person and played by Claude Rains, explains the Sykes-Picot agreement there to Lawrence, who is suitably upset.  However, this is one place where the film is historically inaccurate more seriously.  Most of  the major characters shown in the movie were real historical people even if occasionally there was a misrepresentation of what they did.  But this Dryden never existed.  However, near the beginning of the movie he is shown asking Lawrence to "assess the situation" just before Lawrence goes off to run around in the Arabian desert with Faisal blowing up Turkish rail lines among other things. It is now known that Lawrence was advised by a senior Whitehall official before he left to be with Faisal.  But that figure was none other than Mark Sykes of the Sykes-Picot agreement.  So this "Dryden" figure who is given the job of explaining the Sykes-Picot agreement was none other than Sykes himself in reality, although probably forewarning  Lawrence of the basics of the agreement before Lawrence ever left to see Faisal.

In the early 1920s Lawrence would work for Winston Churchill and with Gertrude Bell would draw the boundaries of Iraq, with a line from the Sykes-Picot agreeement dividing Iraq, Syria, and Jordan (the latter nation a pure creation of the Sykes-Picot agreement), although their moving the southernmost boundary a bit north from that of the old Ottoman province of Basra became Saddam Hussein's excuse for invading Kuwait, to gain the northern part of it to overcome this great wrong committed by Gertrude Bell and Lawrence, with Gertrude Bell rumored to be a mistress of Faisal's, whom they all installed as King Faisal I of Iraq.  He also  played bridge a lot with Bell and was just fine interacting in European society while appearing fully western in suits and all that, unlike he did  at Versailles with Lawrence, all in his proper Arab robes. Faisal I was succeeded by his son, Faisal II, who would be assassinated in 1958 when his monarchy was overthrown by a military could that would lead to the leadership of the Baath Party and Saddam Hussein some years later, with this bringing to an end the Hashemite monarcy in Iraq.

In contrast to Iraq, the new nation of Jordan has done quite well, not falling apart like either Iraq or Syria.   Its current king is Abdullah II ibn Hussein al Hashim.  His great grandfather, Abdullah I, was the more obscure brother of Faisal I and never made appearance in any of the movies.  He was made king of Jordan even as his brother was made king of Iraq.  Abdullah I would be assassinated outside the al-Aqsa mosque, third holiest site in Islam in the Haram al Sharif or for the Jews, the Temple Mount, in Jerusalem.  The man who shot him was a Palestinian nationalist under the impression that Abdullah was on the verge of recognizing the state of Israel, which ha may have been.  But his son Talal did not, although Talal's long-ruling son, Hussein, would eventually make a peace deal and recognize Israel.  His son, Abdullah II  rules a still mostly peaceful Jordan.

The other Hashemite monarchy was Hejaz, where Sharif Hussein, father of Faisal I of Iraq and Abdullah I of Jordean, was made king.  However he would fall from power when Abdulaziz ibn Abdul Rahman al Sa'ud came storming out of the desert from Riyadh to conquer Hejas and then take the title of  King of Saudi Arabia and Protector of the Holy Cities (Mecca and Medina).  This whole business would manifest itself  at Whitehall in a debate between Lawrence who sided with the Hashemites and Hussein against Harry St John Philby, who advised Abdulaziz and converted to Islam, marrying extra wives, while also being the first European to cross the Empty Quarter and fathered Kim Philby, the famous Soviet spy.

Today Daesh-ISIS emphasizes Sykes-Picot as the ultimate western imperialist design that they are undoing, wiping out the boundary of Iraq and Syria.  They imitate the Ottomans by claiming to be caliphs (or at least this al-Baghdadi) whose sultans were caliphs until Ataturk decided to end  the remnant of the empire in the early 1920s, controlling the core Turkish remnant of the  Ottoman Empire, so he abolished it and declared the Republic of Turkey, which still exists.

I do not have a bottom line on this.  Sykes-Picot certainly was a bunch of European colonial powers dividing up territories of the Ottomans successfully, with some of the borders and governments it established still in place, with some other parts not resembling its design well at all (no Israel in the agreement, Mosul and its oil were  supposed to be French not British).  Much did not follow it and much has changed from even what followed it initially. Nevertheless, its shadow continues.

Barkley Rosser

Eduardo Porter on the Need For Fiscal Stimulus

I agree with this call:

At the very least, the dismal forecast calls for the government to prepare for another bout of fiscal stimulus. The recovery by now is already seven years old. With interest rates near rock bottom, the Fed would have little room to prevent another spike in unemployment if the economy were to falter.

I agree with this because I believe we are still far from full employment. But alas, I’m not sure what Porter is really trying to say here? A lot of what he writes suggests we are near full employment with potential output growth being rather limited:

But that cyclical tailwind — bolstered by putting idle resources back to work, which brought the unemployment rate down to 5 percent from 10 percent — is spent. The jobless rate will not fall from 5 percent — close to what economists consider full employment without excessive inflation — to zero. What remains is an economy at the mercy of two powerful dynamics. The first is a gradual shrinking of the work force as a share of the population, as it is squeezed by successive waves of retiring baby boomers and no longer gaining from the one-time surge of women into the paid work force in the 20th century. The second is a persistent decline in productivity growth over the last dozen years. Lakshman Achuthan of the Economic Cycle Research Institute adds it up this way: Over the next five years, labor force growth of half a percentage point plus productivity growth of half a percentage point will push the economy ahead at the anemic pace of just 1 percent a year. even the Congressional Budget Office’s modest projection that the economy will grow by 2 percent a year over the next 10 years is excessively optimistic, he argues, relying on a tripling of the rate of productivity growth from its average of the last five years.

OK – if he is this pessimistic, then why open with this?

Back when “Gunsmoke” was on TV and Lyndon Johnson was president, the United States economy managed to storm ahead by nearly 5 percent a year for nearly a decade. What we would give to recover some of that power!During Ronald Reagan’s presidency two decades later, the rise in the economic cycle, coming out of what was then the worst downturn in the post-World War II era, averaged a bit over 4 percent a year.

A little fact checking please. From 1964 to 1966, real GDP growth did average 6.3% per year as we lowered the unemployment rate from around 5.7% to 3.6%. This, however, is not 5% growth for a decade. And even the most Keynesian economists back in 1966 were saying the fiscal stimulus from the triple whammy of the 1964 tax cut, the Vietnam War build-up, and the Great Society programs may have gone too far. From 1983 to 1985, real GDP growth did average 5.3% per year but that was our economy coming out of a massive recession engineered by a vicious use of monetary contraction to kill inflation. Hey as we are bringing up unusual periods, let’s go back to the Korean War which created 8.4% per year growth for two years. Of course, the unemployment rate started at 6.6% and fell to 2.5%. After this military Keynesianism, we saw a decade with three recessions. I know that I may be beating a very tired horse here but one cannot talk about growth rates over a decade without specifying what the current output gap is and detailing a model of our potential output will grow over time. Porter’s pessimism on this score seems to be out of line with his hope for the benefits from his proposed fiscal stimulus.

Neo-Bonapartism In The Nuclear Age

I have gotten bored with all the "Benito Trump" talk.  Yeah, sure, he actually looks like Il Duce at the right angle, and he certainly has the bombast and ego and nationalism, as well as the curious mixture of right and left economic appeals all muddled up so that who like the bombast and the nationalism can find something they like (he is a socialist like me!  he loves big business like me!), with ultimately the message to be on economics that both business and labor should subordinate themselves to the great leader for purposes of moving The Nation forward.  Yes, that is fascism, but the term has been overused to the point of meaninglessness, and indeed because it is tied to full out genocide in Hitler, it has become a general swear word, with leftists declaring it right wing and rightists declaring it left wing, and so on.

So I want to point out what it replaced, what is its origin, what the same basic political impulse was called before Benito came along with his party in the 1920s and dredged up this old Roman term for a bunch of sticks tied together to name his party.  That older term is Bonapartism, after, yes, Napoleon Bonaparte.  So we have most of the elements there.  He came out of the French revolutionary left just as Mussolini came out of the Italian Socialist Party (and the Nazis were the National Socialists) and Donald Trump used to support Dems like Hillary.  But then he went right in asserting a strong nationalism, maintaining certain nods to the left but also strongly supporting the bourgeois and big business right in asserting the superiority of France and its power.  This peculiar combination was Bonapartism, and whenever a "Man on the Horse" would appear, especially in France, but also elsewhere in Europe, making these kinds of mixed appeals that the class conflict would be subsumed into nationalism under the leadership of the Man on the Horse, this was Bonapartism, with Napoleon's nephew, Napoleon III, a perfect practitioner.  Some would say that this continued in France on down through Charles de Gaulle even.

Now I will accept that Bonaparte may not have been bad as the fascists or even as modern day Donald Trump.  He did support liberation of some minorities, especially the Jews from old feudal restrictions. But he also clearly believed in the superiority of the French over all other people and their right to rule them. 

Now one area where Trump might look better than old Bonaparte or the later fascists is in the parts of  his foreign policy where he seems to want to avoid too many entanglements abroad.  Of course he has been lying that he opposed the Iraq War when it started; he supported it.  But on some foreign policy subjects, he almost looks reasonable, but there are two important caveats.  One is simply his label for  this, "America First," which for any student of US history was the label of the pro-Nazi and fascist sympathizers who did not want the US to  get into WW II.  Oooops!

Bit the more serious is when we get to the most important policy issue of them all, even more important than global warming, and far more important than any domestic economic issue: nuclear weapons and nuclear war.  Part of his staying out of the rest of the world has been his call for letting Japan and South Korea get  nuclear  weapons.  I shall simply note that trying to halt nuclear proliferation has been one of the highest goals of nearly every US president since WW II and for good reason.  But here is the Donald just fine with it.  Let them have nukes!

Then, even more seriously we have him talking loosely about using tactical nuclear weapons against ISIS.  No presidents or presidential candidates have talked about using nuclear  weapons.  It is not done. Even Barry Goldwater did not do so, and since the retirement of the late Curtis E. LeMay, no significant figure in the US government has done so.  This silence was matched globally after awhile, and I would give Thomas Schelling back door credit on this for helping to establish as a global focal point norm that nobody would be the first to use nuclear  weapons, and nobody would even talk about doing so.'

But now this norm has broken down, and neo-Bonapartist Trump is part of it.  I shall note that he did not start it, however. The credit for that goes to people around Trump's pal, fellow neo-Bonapartist Vladimir Putin, who at the time the Russians grabbed Crimea and sanctions were put on Russia for doing so, started yapping about how they could destroy New York City with their nuclear weapons.  The cat was let out of the bag at that point,and Putin indeed fits the neo-Bonapartist scenario, appealing to resentments about national failure and leaning both left and right on economic policy while assuming more and more dictatorial power.  So, yes, here in the nuclear age, we have neo-Bonapartists recklessly bringing us closer to nuclear war with their irresponsible and loose talk.

Barkley Rosser

You Grow the Pie?

The New York Times recycles boilerplate nonsense:

YOUR MONEY: Disproving Beliefs About the Economy and Aging 

The notion that the job market is a zero sum game — more jobs for one group translates into fewer jobs for another group — is deeply ingrained. Economists call the belief that there are only so many jobs in an economy the "lump of labor fallacy." 

But the truth is that growth in the number of jobs for older people tends to run in parallel with gains for younger workers. "There isn’t a fixed number of jobs," Ms. Carstensen said. "You grow the pie."

When I see a pie growing, I toss it in the compost.

Where to begin? "The notion... is deeply ingrained." Deeply ingrained in WHAT? WHO thinks this notion, aside from Ms. Carstensen, Christopher Farrell and other disciples of unidentified "economists" who call this believerless belief the "lump of labor fallacy"?

The old zero sum game gambit AGAIN? Oh come on. Haven't the boilerplate recyclers heard of prisoner's dilemma yet?

Issues with Econ 101 at Three Levels

The debate about what’s right/wrong with introductory economics, which has raged intermittently since the financial crisis, is back again (here, here and here).  I’m preparing a paper on this topic for a conference this summer, so it’s been on my mind.  Here is a structuring proposal:

There are three aspects to what people like or don’t like (often the latter) with Econ 101.  The first is pedagogy—the way introductory econ is presented in the classroom.  This includes issues like the role of lectures vs workshops and projects, the balance between marching through models and exploring applications and empirical debates, and behind it all, whether the main purpose is to induce students to accept particular economic doctrines or to cultivate critical thinking on open-ended (but not anything-goes) economic questions.

The second is the intellectual content of the principles course, particularly as it is encoded in the leading textbooks.  There is a lot of drag on the textbook front, and the gap between standard 101 content and the current trajectory of the discipline is arguably wider than it has been in generations.

The third is the state of economics itself.  Some of what critics object to in intro econ is an accurate representation of how most economists think and the assumptions on which their research is based.  For instance, for every behavioral economist who tweaks U-max, there are fifty whose work is based on toy models firmly situated in Umaxia.  That includes not only most New Keynesian macro, but the micro models that apply welfare criteria to policy choice.  All of the literature on “optimal” carbon prices, for instance, is based on the assumptions that (a) there is this universal substance called utility and (b) everyone acts at all times to maximize it, so that, in the absence of market failure, prices convey utility information.  If Econ 101 takes a narrow, unrealistic line on utility and human decision-making, it could just mean that the limitations of that view are more obvious at that level than they are higher up.

Of course, these three dimensions overlap and influence one another; it’s somewhat artificial to put them in separate boxes.  But I think debates over 101 can be benefit from being clearer about just what it is that irks us.

Make America Fake Again!

Immaterial labor, unconventional oil, multi-level marketing, fictitious capital, negative interest rates, counterfeit politics...

You've really got to read the Italian Autonomist Marxists -- people like Paolo Virno and Maurizio Lazzarato -- if you want to get a handle on what's up with the Donald Trump shtick. More precisely, cultural theorists have used the Automists' concept of immaterial labor to analyze the appeal of Trump's reality game show, The Apprentice. The show is a metaphor for the man, the campaign and the distinctive "virtuoso" labor of neoliberal capitalism.

What it all boils down to is the blurring of the boundaries between work and entertainment; employment, unemployment and precarious under-employment; advertising, entertainment, news and education (of a sort). In this twilight "workplayce," it is the image of competitive personality -- rather than any substantive competence -- that succeeds. Doing the job -- or any job at all -- is secondary to projecting that image. The pinnacle of success is celebrity.

I have to confess that I have never watched a single episode of The Apprentice. For that matter, I have never watched a single episode of any TV "reality" show. I don't feel like I have missed much. However, there are people who build their dreams and aspirations around "brandom" -- brand fandom. This is nothing new, just more pervasive.

What I'm getting at here is that Trump's nomination is no anomaly. It's the new normal personified.

Did I mention the blurred boundaries between work and entertainment? Writing blog posts is my entertainment. I am writing this "at work" (although not on work time). In isolation, the critique of immaterial labor is unsatisfying because it seems to lead into a hall of mirrors made of signifiers and subjectivities. Where is the substantive anchor? Isn't there some universal unit in which value can be evaluated?

It helps to recall the sense in which the seemingly new has been there all along. In his notes on James Mill, Marx observed the way that debt transforms the human personality into a commodity:

Credit is the economic judgment on the morality of a man. In credit, the man himself, instead of metal or paper, has become the mediator of exchange, not however as a man, but as the mode of existence of capital and interest. The medium of exchange, therefore, has certainly returned out of its material form and been put back in man, but only because the man himself has been put outside himself and has himself assumed a material form. Within the credit relationship, it is not the case that money is transcended in man, but that man himself is turned into money, or money is incorporated in him. Human individuality, human morality itself, has become both an object of commerce and the material in which money exists.

It is difficult to avoid a moral judgment of the morality implied in the human personality becoming an object of commerce. However, that is just the kind of restraint needed to arrive at an objective evaluation of what is happening. Regardless of whether it is a good thing or a bad thing, it is an historical process and any transcendence of it will also entail an historical process, not a moral judgment.

Criticisms of Donald Trump's policy positions or of his supporters' alleged racism or xenophobia are incidental, if not irrelevant. In crucial respects, Trump is indistinguishable from Hillary Clinton or even Bernie Sanders. He is a celebrity projecting "larger than life" personality traits that have become an object of commerce. Clinton's or Sanders's personalities and what they stand for may be more appealing to particular market segments, but... it all comes down to what was once provocatively referred to as "The Selling of the President."

But it is not just a matter of sovereign citizens acting in their capacity as sovereign consumers expressing their presidential brand preferences. Those brands are counterfeit, as are the debtor/citizen/consumers electing them!

Since, owing to this completely nominal existence of money, counterfeiting cannot be undertaken by man in any other material than his own person, he has to make himself into counterfeit coin, obtain credit by stealth, by lying, etc., and this credit relationship – both on the part of the man who trusts and of the man who needs trust – becomes an object of commerce, an object of mutual deception and misuse. Here it is also glaringly evident that distrust is the basis of economic trust; distrustful calculation whether credit ought to be given or not; spying into the secrets of the private life, etc., of the one seeking credit; the disclosure of temporary straits in order to overthrow a rival by a sudden shattering of his credit, etc. The whole system of bankruptcy, spurious enterprises, etc.... As regards government loans, the state occupies exactly the same place as the man does in the earlier example.... In the game with government securities it is seen how the state has become the plaything of businessmen, etc.

In other words, phoniness is a large part of Trump's appeal to his supporters -- as it is to the supporters of Hillary Clinton and Bernie Sanders. None of it will restore "the American Dream" or "the middle class." Presidential politics is part of the problem, not the solution.

Will Trump Do the Kudlow Deficit Dance?

Noah Smith notes:

Donald Trump is difficult to take seriously on policy matters, because he’s kind of a random idea generator -- he just throws out a lot of different policy plans, many of them contradictory. This is a great defense against criticism from policy wonks -- as soon as we criticize one of his proposals, he just offers up the exact opposite. For example, he’s advocated reducing the federal debt, spending more and cutting taxes (or possibly not).

OK – Trump 2016 flip flops a lot like Romney 2012 flip flopped. And President Reagan told us he would balance the budget with massive tax cuts and increases in defense spending. Art Laffer explained how this all worked on a cocktail napkin. But Paul Krugman informs us that Trump has sought the assistance of two economic experts:

Still boggled by reports that Trump, having realized that the numbers on his tax plan aren’t remotely credible, has decided to fix things by bringing in as experts … Larry Kudlow and Stephen Moore.

Of course the title of Pauls’s blog post was “Send in the Clowns” as he documented some of the real whoppers these two right wing know nothings have written over time. But my favorite goes back to November 2002 when Kudlow wrote:

The federal budget deficit was $158 billion for fiscal year 2002…As a result, actual economic performance has fallen below the long-term 3.5% historical trend line, which reflects the economy’s indisputable potential to grow. If that trend line were extended through 2002, as though no slowdown had occurred, then the potential third-quarter gross domestic product would have been $9.829 trillion. Instead, actual GDP fell $364 billion short of the mark. Cumulatively, over the past two years, the loss of potential GDP comes to $1.95 trillion — a considerable amount. All this would be academic were it not for the fact that total output in the GDP account (as compiled by the Commerce Department) equates with the taxable income base of the nation’s economy. So a smaller output pie means a shrinking tax base. If you apply the 18% economy-wide tax rate of recent years to the nearly $2 trillion loss of potential output, you get a $351 billion shortfall in tax revenues — which we’d be counting now if the economy had been running at full steam.

A $2 trillion output gap sounds yuuuge! Given that GDP in 2002 was $10.877 trillion, Kudlow was implying an output gap over 18%. Gerald Friedman take note! The CBO, however, suggests that the output gap at the end of 2002 was less 3%. So where did Kudlow get his insane calculation? First of all the 3.5% historical trend assumption was a bit silly since most estimates of potential output growth were lower. But that is not the big mistake here. After Kudlow took his trend line estimate of potential output, he found 8 quarters worth of estimated output gaps – all expressed in annualized terms. While anyone with a brain would have averaged the series but Kudlow summed the numbers thereby overstating the annual output gap by a factor of 8. With Kudlow – it is hard to tell. Is he really this incredibly stupid? Or does he just assume his audience is so stupid that he can blatantly lie to them?

The North Korean Workers' Party Congress

The seventh Workers' Party of North Korea congress has just ended, the first since 1980 when the nations' first leader, Kim Il Sung, announced that his son, Kim Jong Il, would succeed him, which he did  in 1994.  This congress was convened by his son, the 33-year old Kim Jong Un, who has used it to consolidate his power.  Among the more noticeable  of  things that happened is that he was named to be Chairman of  the party.  It has been widely noted that the congress fits in with a policy of elevating the party in comparison with the military, which was apparently favored by his late party.  So the congress elevates both the party and Kim Jong Un.

What is of perhaps more interest for  readers of this blog is what economic policies came out of the congress.  It is interesting to me at least that prior to the congress outside observers were very much up in the air about what it would do regarding economic policy, aside from reconfirming the "byungjin" policy of simultaneous pursuit of nuclear weapons and economic growth, or as some wags have put, both guns and butter. 

A particular issue of controversy involves agricultural policy, which has involved an unofficial spread of more  or less free markets.  This came about after the famines and extreme food shortages of the 1990s and early 2000s, with the situation much improved, if not  great. Many thought that perhaps the congress would make this policy official, although it was always understood that they might not.  In the end, they did not.  Official ideology of socialism remains in place, even as the reality in agriculture at least is one of more or less free markets now.

Probably the only other notable decision was to resume five year plans.  Many outsiders probably think that they never went away.  We (and I am guilty of this) have long described its economic system as this holdover of Stalinist command socialist central planning, and indeed it is a socialist command economy, with the notable exception of the agricultural sector as noted above.  However, fiver year plans were abandoned in the late 1980s while Kim Il Sung was still in power and prior to the end of Communist Party rule in the Soviet Union and Eastern Europe.  So this is also a return to a more officially formal socialist position.

BTW, it should be noted that the North Korean economy is probably doing better than many think.  We are back to a situation where there are widely competing estimates of how  its economy is doing.  The Bank of (South) Korea estimates that North Korean GDP has been growing at about 1-2% per year, but numerous other observers, such as Andrei Lankov, who is based in Seoul, think it is  growing at more like 7% per year.  There certainly has been a lot of construction going on in Pyongyang recently, although this at least partly reflects a growing inequality between the capital city and the rest of the country in economic conditions, with the northeastern part especially poor.  Much of these disagreements indeed involve trying to figure out some of  these sectors such as agriculture, where it is clear that official data probably do not reflect reality.

Barkley Rosser

How Easy is Income Shifting?

Oxfam got the signatures of 300 economists on a letter than noted in part:

To counter this, the economists are calling for governments to agree new global rules requiring companies to publicly report taxable activities in every country they operate, and to ensure all territories publicly disclose information about the real owners of companies and trusts. Jeff Sachs said: “Tax havens do not just happen. The British Virgin Islands did not become a tax and secrecy haven through its own efforts. These havens are the deliberate choice of major governments, especially the United Kingdom and the United States, in partnership with major financial, accounting, and legal institutions that move the money. The abuses are not only shocking, but staring us directly in the face. We didn’t need the Panama Papers to know that global tax corruption through the havens is rampant, but we can say that this abusive global system needs to be brought to a rapid end. That is what is meant by good governance under the global commitment to sustainable development.”

Even if we know how multinationals are shifting income to tax havens, can national governments do much about it under current law? President Obama is trying to end earnings stripping by using section 385 to recharacterize intercompany debt as equity. As this law firm explains what this is about, the discussion noted how weak this provision has turned out to be:

Two recent cases highlight the IRS’s approach (although, so far not so successfully) to attack these foreign intercompany lending transactions. In NA General Partnership & Subsidiaries v. Commissioner, T.C. Memo 2012-172, the Service attacked loans made to a U.S. entity from a foreign related entity (Scottish Power, via NA General Partnership & Subsidiaries). The IRS solely relied upon a debt versus equity attack to seek to have the U.S. interest expense deductions recharacterized as dividends and non-deductible in the U.S. The court applied traditional tests to determine if a given security is debt or equity and found for the taxpayer. The material terms of the security were more debt-like and the conduct of the parties (accounting entries, public and securities filings, etc., all treated the security as debt) was consistent with the intention to create debt between the parties. In PepsiCo Puerto Rico, Inc. v. Commissioner T.C. Memo. 2012-269, the IRS was again arguing in court whether a given financial transaction created debt or equity in the U.S. The taxpayer intended to create a security that would be treated as equity in the U.S. and debt by the related holder in the Netherlands. The IRS sought to treat the U.S. equity side of the transaction as a loan. The court, recognizing the intent of the parties and the economic realities of the transaction as the primary factors in deciding whether a given transaction should be characterized as debt or equity, reviewed the traditional debt versus equity factors (those mentioned above). Again, the IRS lost the case, as the intent of the parties and economic realities suggested the U.S. side of the transaction was equity and not debt.

The first case involved the acquisition of PacifiCorp by a UK entity, which was a version of hybrid financing. While the interest expense was deductible in the US, the UK chose not to tax the interest income. Tax free income! Now if you never heard of this entity, it is now owned by Berkshire Hathaway Energy (BHE):

A leading western U.S. energy services provider and the largest grid owner/operator in the West, PacifiCorp serves 1.8 million customers in six western states. The company is comprised on three business units: Pacific Power (serving Oregon, Washington, California), Rocky Mountain Power (serving Utah, Idaho, Wyoming) and PacifiCorp Transmission.

BHE owns several other US energy providers and has approximately $80 billion in tangible assets generating about $6 billion in profits. Let’s imagine for a moment that Warren Buffett gets into one of his corporate inversion moods and decides to relocate corporate headquarters to Edinburgh, Scotland. Let’s also imagine that the Scottish parent had extended a $60 billion 20-year loan on October 1, 2015 with an interest rate equal to 5%. What authority would the IRS have to challenge this aggressive planning? I’m sure Warren’s lawyers could successfully structure its agreements so that section 385 is no problem. I guess some hot shot IRS lawyer might pull out section 163(j):

the term “excess interest expense” means the excess (if any) of the corporation’s net interest expense, over the sum of 50 percent of the adjusted taxable income of the corporation plus any excess limitation carryforward under clause (ii).

Don’t you love the horrific writing of lawyers? What does this mean in our case? Since interest expense is less than 50% of operating profits before depreciation, section 163(j) does nothing for the IRS. So what’s left is to question whether the 5% interest rate is above the arm’s length standard. Alas, on October 1, 2015, the yield on 20-year corporate bonds with credit rating = BBB was over 5.3%. Unless the IRS can argue that the credit rating was something akin to AA, it will get nowhere under current law. I’m not saying Warren Buffett even considered this move but if he had – how would the IRS stop it?

Trump Back Peddles on His Debt Default Proposal

Apparently Donald Trump was on CNN trying to clarify his insane suggestion that the Federal government should be run like his Atlantic City disasters:

I said if we can buy back government debt at a discount, in other words, if interest rates go up, and we can buy bonds back at a discount, if we are liquid enough as a country, we should do that. In other words, we can buy back debt at a discount. People said I want to go and buy debt and default on debt, these people are crazy. This is the United States government. First of all, you never have to default because you print the money, I hate to tell you, OK? So there is never a default. But the point is, it was reported in the New York Times incorrectly.

The interview babbled on but let’s take him at his word here. Suppose you had purchased $100 million of 30-year government bonds at the beginning of the year. The Federal government has promised to pay the holder $3 million per year until 2045 and at the end of the year, the holder gets $100 million in principal. For the Federal government, their loan is not callable but you could sell this if suddenly interest rates went up from 3% to 4%. The only problem is that the present value of your future payments is now only $82.7 million. Trump’s brilliant idea would be to have the Federal government immediately retire this loan for the $82.7 million and then refinance it in the current market. But let’s see, the interest rate is now 4% not 3%. For the next 30 years, the Federal government will pay over $3.3 million in interest expenses as opposed to the original $3 million. Trump says he learned finance at Wharton. Something tells me that the finance department is denying he ever took classes from them.

The Capital Noncontroversy, or How the World Actually Works

EconoSpeak has been revisiting the capital controversy of the 1960s, fueled by Barkley Rosser’s posts (here and here) and stimulating comment threads.  The discussion has been thoughtful and well-informed.  Meanwhile over at Marginal Revolution you can find this pop introduction to aggregate production functions.

According EconDirectory.com, during the month of April MR averaged 43,285 page views per day, EconoSpeak 396.

Does the U.S. Have the Highest Corporate Tax Rate in the World?

Paul Krugman reports on his Twitter war with Donald Trump:

Yesterday I tweeted a response to Donald Trump’s claim that America is the highest-taxed nation in the world. Actually, he’s been busted on that claim repeatedly, which makes it even more shameful that TV interviewers just let it slide. But I’m also interested in the responses I’ve been getting, which I think tell you something about the broader situation – maybe call it the politics of epistemology. As you might guess, I’m getting a lot of denial, with quite a few people “explaining” that the international comparisons don’t include state and local government. Um, guys, maybe you shouldn’t make confident pronouncements about stuff you’ve never looked at.

Paul is noting that total taxes as a share of GDP is not really that high by international standards. I’m sure some conservative might scream “that’s average” and then go on some rant about marginal rates. My focus will be on corporate tax rates. KPMG has a handy comparison even if it is very incomplete. It claims that the corporate tax rate in the U.S. is the sum of a 35% Federal rate and an average state tax rate equal to 5%. Of course even domestic firms can get all sorts of tax breaks and likely pay less in state taxes. Multinationals are particularly adept at reducing their effective tax rates. Oil multinationals realize that several foreign tax authorities impose high surcharges on oil profits. I want to focus, however, on the battle between Wal-Mart and Puerto Rico. Puerto Rico imposes a 20% corporate tax but also includes a surcharge that can be up to 19% of profits if the firm’s revenues are high enough. The effective tax rate for the Puerto Rican affiliate of Wal-Mart is 39%. The 10-K filing for Wal-Mart notes that its U.S. tax rate is 37% even when one includes state taxes. And yet we see this claim:

The Secretary has not even proven that the use of transfer pricing to shift profits to other parts of the United States is a problem. As witnesses for both parties testified, the continental United States is not a tax haven like the Cayman Islands are... If Wal-Mart PR has managed to shift $79 million to, say, the State of Arkansas, those are profits on which Wal-Mart Stores will have to pay income tax at a rate of 38% or 39% – namely, a 35% federal corporate income tax, plus a 3% to 4% state corporate income tax.

Why does this matter? Consider this claim by one of Wal-Mart's expert witnesses - Professor Richard Pomp:

You’re not going to transfer profits from Puerto Rico to the United States, where it’s going to be taxed at a higher rate.

While I may have some sympathy with Wal-Mart’s claim that this particular alternative minimum tax discriminates against Wal-Mart, since when is 39% less than 37%?

Ben Rhodes Has Been Stupid And Irresponsible Regarding Iran

So today's New York Times has the story by David Samuels on Ben Rhodes, where they play bros loving Don DeLillo and Rhodes bragged about his mind melding with Obama over the last 7 years and how he set up echo chambers to fool ignorant and stupid reporters, not to mention out of it foreign policy establishment types.  Whoopee!  Of course, all kinds of people are all ticked off at him, calling him many names, although not the one I have called him, with others picking up some of what he has dropped and running with it to discredit the Iran nuclear deal.

This is the matter that I am concerned with, and the matter where Rhodes has seriously messed up.  Rhodes notoriously brags about putting forth a misleading story regarding the Iran nuclear deal in order to sell it to the US public.  The lie was that the negotiations started in 2013 rather than in 2011 as they did.  This was after "moderate" Rouhani became president, and this was what was sold to the ignorant media fools through the elaborate echo chamber Rhodes and his pals set up, of which he is clearly very proud. 

But for anybody who actually knows anything about Iran,  Rouhani was never ultimately in charge of the deal or foreign policy.  That person is the Vilayat-el-faqih, the Supreme Jurisprudent, the unelected (well, elected by a small group of senior clerics) Ali Khameini, the leader of the "hardliners.".  While Rhodes disses Hillary Clinton for  having voted for the war in Iraq in 2003, she was the one who sent someone to meet with a rep from Khameini in Oman that initiated   But she remains an annoying foreign policy establishment figure in Rhodes's view, while Kerry is barely mentioned, dismissed as someone who negotiated "details" while Rhodes and others had already negotiated the "framework.  But to get to get a deal, the US had to have the hardlining Khameini on board as he was and is in charge, the Supreme Jurisprudent.

The problem is that this revelation of this unnecessary and stupid echo chamber is that the enemies of the Iran nuclear deal are already using this to argue that the whole deal is no good because it was sold on this lie, that the negotiations were only initiated with the moderate Rouhani rather than the necessary negotiations with Khameini.  They should have sold it upfront with the reality of whom they were negotiating with, and frankly, people who play attention like me knew what was going on when it was going on. so it is true that most of the reporters are horrendously ignorant.  But that does not excuse that the revelation of this stupid lying will be used by the enemies of this very important and wise agreement to undercut it.

Ben Rhodes should be ashamed of himself.  I think he did this to sell himself for the post-Obama era, but I hope he has to go sit in a cottage somewhere and write his short stories, all by himself and reviled by the world.

Barkley Rosser

The Revenge Of Joan Robinson: Capital Theory Controversies Revive

It is easy to argue about what is the most important or influential thing that the late Joan Robinson did in economics.  More conventional types would probably point to her widely accepted and even textbookified Economics of Imperfect Competition.  Some would point to her later more philosophical and methodological writings about historical time versus analytical time.  Many Post (or post-) Keynesians revere her closenss to Keynes and Kalecki and see her as the godmother-founder of their movement  who could see the unity among their various bickering factions.  But others would look to her work on capital theory in the 1950s, her 1954 paper in the RES, "The production function and the theory of capital," along with the appendices to her 1956 The Accumulation of Capital, as well as her influence on Piero Sraffa to publish his famous book in 1960.  This was the trigger for the famous Cambridge controversies in the theory of capital that reached a culmination a half century ago when Paul Samuelson agreed that the "parable" he and some of his students had set forth was not true in general, given such paradoxes as reswitching (called the "Ruth Cohen curiosum" by Joan Robinson), with him declaring in 1966 in the QJE that, "the foundations of economic theory are built on sand."

As discussed elsewhere, we know that although the Cambridge, England side won an intellectual victory at that point, it turned out to be pyrhhic as those following the Cambridge, MA side simply ignored these results and proceeded to act as if nothing had happened, merrily estimating aggregate neoclassical production functions with well-behaved capital in them, with never a note or caveat about any potential problems, as well as building growth theory models, as well as general equilibrium macro models on such assumptions.  Joan Robinson may have drawn figures showing non-monotonic relations between "real capital" and "output," in the appendices of her 1956 book, as well as non-monotonic relations between interest rates and employment rates elsewhere.  But none of that mattered.  It was all to be ignored as oddities or whatever, things not to tell the children lest they become upset and lose sleep and cry when fed their porridge.

So it is a curious matter that the question of  capital theory has re-arisen recently.  It was just two years ago that Thomas Piketty's book, Capital, made the best seller lists.  Right now considerable attention is being paid to  Anwar Shaikh's voluminous magnum opus, Capitalism.  Both of these books take as their central issue that of the underlying forces driving secular trends in income distribution, particularly the division between wage incomes and profit or interest-based incomes.

Curiously, Piketty's theory remains firmly in the neoclassical camp regarding the questions raised by the old Cambridge, England school.  He briefly notes those controversies, but more  or less dismisses them, perhaps reflecting the influence of being at MIT for a long period of  time, even as he mocks excessive mathematical abstraction of much of modern growth theory.  Jamie Galbraith and others, including Shaikh, have taken Piketty to task for his dismissal of the issues raised by those old controversies, and many have criticized him for his super-aggregated view of capital that includes not  only land but also such things as collectibles, while others have taken him to task for  his arguments regarding r >g.  Where he has been most praised has been in his presentation of data supporting his broader arguments, as well as his ability to bring in broader historical and cultural support.  In any case, he is bringing the issue of capital and the foundations of income distribution front and center, even if he is not  doing so along British Cantabridgian lines.

Shaikh is an old fan of Sraffa's and a participant in the original  debates.  While he also does not present most of his theory as drawing on these old arguments, his approach is much closer to that approach in flavor and discusses it at some length sympathetically, even if he eventually draws more heavily on modern econophysics methods.  These fit nicely into his more Marxist approach,  even as he downplays Marx. But, of course, it was Marx who more sharply posed these questions regarding the nature of capital and how it affects income distribution, as well as power distribution, within societies.

I  note, of course, that the ever increasing emphasis  on financial theory in economics is itself an offshoot ultimately of capital theory, even if  it has gone off into its own niche with more emphasis on problems related to risk and uncertainty, while ignoring the broader issues of growth and income distribution.

I do  not know what Joan Robinson would think about this recent revival, but given what has been going on with income distribution trends in the higher income nations, I suspect she would not  be surprised.  And unlike many others, she always thought deeply about the problems of capital theory, taking account of historical and philosophical issues well beyond her peculiar graphs showing supposedly paradoxical relationships.

I close this by quoting myself from my 1991 book (p. 125):

"What really is capital and what does it mean for value, growth, and distribution?  Is it a pile of produced means of production?  Is it dated labor?  Is it waiting?  Is it roundaboutness?  Is it an accumulated pile of finance?  Is it a social relation?  Is it an independent source of value? The answers to these questions are probably matters of belief."

Barkley Rosser.