The Masters Always Deal Themselves the Trumps

More Feargus O'Connor (1844) on labour's objections to machinery (see my earlier post on Crowding Out and the Social Overhead Costs of Labor for more context and analysis):

And now, sir, let me state my principal objections to the unrestricted use of machinery. First, it places man in an artificial state, over which the best workman, the wisest man and most moral person, has no control. Secondly, while it leads to the almost certain fortune of those who have capital in sufficient amount to command those profits, made up, as you admit, by the reduction of wages; upon the other hand, it leads to uncertainty in the condition of the employed, against which he is incapable of contending. Thirdly, it disarranges all the social machinery of which formerly individuals were necessary items, families formed branches, and small rural districts important sections of the one great whole. Fourthly, the present fluctuations give rise, in good trade, to an augmentation of artificial classes, if I may so call them, who have no natural position in society, but are merely called into existence by present appearances, trade upon nothings, traffic in fiction, and, like your order, speculate upon what they may retire upon when trade begins to flag. Hence we find each fluctuation in trade followed by a new race of shopkeepers, who are grasping in prosperity, compound when appearances change, and retire when adversity comes, leaving a vacuum to be filled up by the next alternation from panic to speculation. 

...

And now, as the thread of our dialogue has been somewhat broken, I beg to submit a summary of my objections to machinery. Firstly, the application of inanimate power to the production of the staple commodities of a country must inevitably depreciate the value of manual labour; and every depreciation of the value of man’s labour in an equal degree lowers the working-man in the scale of society, as well as in his own esteem: thus making him a mere passive instrument, subservient to any laws that the money classes may choose to inflict, to any rules the owners may impose, and satisfied with a comparative state of existence. I object to machinery, because, without reference to the great questions of demand and supply, the masters can play with unconscious labour as they please, and always deal themselves the trumps. I object to machinery, because it may be multiplied to an extent whereby manual labour may be rendered altogether valueless: I object to machinery, because under its existing operation you admit the necessity of emigration, better ventilation, education, improved morality, manners, habits, and customs of the working classes, thereby showing that a slate of recklessness, ignorance, want, and depravity exists; which, as I before said, you admit to be consequences of the present system.

While the inevitability of each of O'Connor's objections is subject to debate, the crucial issues at stake for him are the sociological and psychological effects of the unrestricted use of machinery on communities and individuals, under its existing operation. The specter of the "job-killing robot" plays a minor and only contingent role: "it may be multiplied to an extent whereby manual labour may be rendered valueless." Even that objection can readily be interpreted as more significantly about a loss of social status and psychological esteem rather than a wholesale elimination of jobs.

Extreme Contempt

Donald Trump has engaged in so many outrageous statements and conduct that it has become very difficult to remember which of  those were really the most outrageous, the most morally contemptible, the ones that should have led his supporters to have abandoned but they did not, the ones that merited above all others the most Extreme Contempt.

The events of the last 24 hours have clarified for me what was the moment in 2016 when Trump crossed the line, when he committed an act of Extreme Contempt that should have lad to every Republican worth anything above a sewer of morally contemptible and disgusting garbage to have rejected this worst of all people to have occupied the White House.  That moment was when he dissed John McCain as a loser for having been captured by the North Vietnamese during the Vietnam
War.  I think the only way fervent Trump supporters can justify their existence on this planet after that particular outburst is to simply ignore it and forget about it, which is what I am sure the vast majority of them have done,  But the events of the last 24 hours have brought this matter back into focus, and while I really do not know, I think that it is quite likely that when we get to the bottom line, and we are indeed now at a very serious bottom line, Donald Trump's ultimate desecration of any moral  consciousness when he dissed McCain for becoming a deeply tortured POW has come back to haunt him and defeat his pathetic and incoherent effort to overturn the Obama health care legacy.

Let me be clear that I have many disagreements with McCain, and many things he has done personally.  But the man's days are now shorter than most of ours.  Yeah, maybe it will all go away and he will still be a Senator a decade from now.  But more likely he will follow the late Ted Kennedy, who apparently had the same sort of "aggressive" brain cancer he has, and, well...

So, let me confess that I know John McCain.  About a decade ago I sat next to him on a long airplane flight and we discussed climate change.  He had a reasonable view in my mind, and indeed when he ran against Obama, his position was only marginally less progressive/reasonable than Obama's.  I actually gave him my card offering to give advice, although I never heard from him later.  Of course he has gone silent on this issue more recently as his party has gone off the deep end on denying the very existence of global warming, on the  list of many others where, well, tsk tsk.

So, let us get to the really serious. McCain has been going back and forth on the heath care issue, a man about to die and having surgery on taxpayers money, a man who is by far the most serious Republican senator there is currently by several orders of magnitude, and not just because he is a former presidential candidate of the Republican Party in 2008.  No, he is serious beyond all of them for  his experience, much bragged about by his party in 2008, as a POW in Vietnam, where he experienced Extreme Torture, leading him to stand unequivocally and without a shred of doubt that torture is completely unacceptable, morally and practically.  I applaud his declaring and maintaining this position throughout the Bush admin when torture got approved during the Iraq War.  On this matter he has absolute and unassailable credibility beyond all critics, and I applaud him for this.  I shall add that this is a matter that is personal. My wife was tortured by the former Soviet government, and I have also been tortured in a distant land I shall not name and of which I shall not speak. Unsurprisingly, my wife and I have deep personal support for McCain's unequivocal position on this matter to totally oppose torture in all circumstances everywhere period.

As regards the Extreme(ly) Beneath Contempt Trump, he got out of going to Vietnam by claiming a phony ailment, something he had on his foot, or was it on his knee? Some sort of obtrusion or extrusion, that nobody in the known universe ever heard a word of ever after (or before).  So, when Donald Trump had  the unmitigated and astounding and immoral nerve and gall  to critricize McCain for being shot down out of the air over Vietnam to  be profoundly tortured far beyond anything either my wife or me remotely experienced, well, this was so far beyond the pale that when Trump's remarks were first reported, I thought "this it is."  But it was not.  His supporters just kept on supporting  Soh we live with the consequences of this profound moral degradation of America.

And to conclude this post, I think that for all his wobbling and vacillations, when it got down to  it, and John McCain looked at the bottom line of the "skinny repeal" proposal, well, he may have been looking at the facts on the ground, but, personally, I think it got down to Trump finally getting his punishment for his utterly morally unacceptable Extreme Contempt when he fundamentally and hypocritically mocked John McCain for being shot out of the sky and profoundly tortured.

Barkley Rosser

Crowding Out and the Social Overhead Costs of Labor

Another strange twist in the convoluted lump-of-labor saga. Chartist leader Feargus O'Connor refuted the "Treasury View" -- aka "crowding out" -- in 1844. O'Connor's tract is long-winded and sentimentalized an idyllic past but it also contains some cogent analysis of why workers were (and should still be) wary of the exploitative use of technology by capitalist firms.

O'Connor's critique took the form of a dialogue, which parodied and refuted an earlier dialogue, "The Employer and Employed," that had been published in Chambers's Miscellany of Useful and Entertaining Tracts. In the Chambers dialogue, the mill owner, Mr. Smith explains to a worker, Mr. Jackson, how the immutable laws of economics harmonize their interests. Smith's elaboration of the doctrine of wages was described elsewhere as "right orthodox, and admirably clear too." I will return to O'Connor's rebuttal in more detail later, but first I would like to set the stage by briefly reviewing the contemporary relevance and the historical background of the central argument in the two dialogues.

Self-Muzzling

I teach at Evergreen State College.  Early this spring I became alarmed at the rapid deterioration of collegiality and respect for dissent on campus, and I drafted a letter which I hoped to circulate for signatures—but I sat on it.  I thought: not enough faculty would be willing to sign and this would just expose how isolated I was in my concern.  Or: the letter would only add to the momentum for polarization, since, despite its protestations, it wouldn’t be seen as simply a statement about democratic norms.  Or: the timing wasn’t right, and I should hold onto it for a more propitious moment.  Or: maybe I was just looking for excuses.

So for what it’s worth, which isn’t very much at this point, I’m posting it here.  This draft was dated April 3, 2017, a bit shy of two months before the outbreak of student protests.

* * * * * *

This letter is prompted by the perception that the atmosphere at Evergreen is being poisoned by political and communication processes that are antithetical to the principles this institution was created to uphold.  In particular:

1. A number of recent email exchanges have been highly inappropriate.  A public distribution list should not be used for lengthy threads intended to “resolve” a contentious issue.  It should not be used to impugn the character of any member of our community, nor should it use praise for community members as a signal that dissenting views are to be viewed as personal attacks.  We should all bear in mind that ignoring a post you regard as misguided is always an option and usually the best one.

2. One of Evergreen’s five foci is “learning across significant differences”.  It is normal that there should be significant differences among us on nearly every issue we face, and it is normal that they should be expressed in a variety of venues.  By all means, we should make reasoned arguments for positions we support, but closing off or even discouraging the expression of dissent should play no role.  This principle holds not only before decisions are taken, but also after: that’s democracy.

3. Even though we often disagree deeply, we owe each other the presumption of good faith.  This institution cannot prosper on any other basis.  We are all vulnerable to misperceptions due to unacknowledged biases, but this is not a reason for not listening to one another or failing to treat each other as colleagues.

4. In seminar students often have to cope with heated differences of opinion, and sometimes their comments are out of line.  We try to respond constructively, without suggesting that anyone be ostracized or points of view withheld.  We owe the same consideration to our colleagues that we expect students to extend to their peers.

The Hassett-Laffer Curve and that Norwegian Outlier

My earlier post needs a better title and a clear reason why Norway’s corporate profits were near 10% of its GDP even as it had a lower statutory corporate profits tax rate than nations like Australia or the U.S. Mark Thoma calls Norway an outlier:

Since it looks like all that's been done here is to draw a line through an outlier, Norway … I haven't actually run the regression, but it looks clear to me that revenues rise with tax rates, and the fit also looks better than in the first graph. Toss out Norway, and the fit looks even better

But we can do better when we realize that the statutory tax rate often fails to capture the totality of how profits are taxed in any particular nation. KPMG provides corporate profits tax rates by nation over the 2003 to 2017 period by nation with footnotes such as this one for Norway:

Special rules may apply petroleum companies and in the power sector

Let’s compare two nations: A and N. A has a statutory rate = 30% but allows half of its profits be sourced in tax havens. N has a statutory rate = 28% but has no tax haven profits. Instead it applies a 78% tax rate on petroleum and power sector companies. Oliver Milman notes:

Norway’s oil piggy bank is worth more than the GDP of Switzerland. More even than the US’ gargantuan annual military budget .... In Norway, companies drilling for North Sea oil pay a 78% tax rate on income, compared with a corporate tax rate of 28%... By contrast, the much-derided Minerals Resource Rent Tax placed a 22.5% “super profits” tax on coal and iron ore producers. But the nature of the system meant that it raised very little money. But the nature of the system meant that it raised very little money. Indeed, last financial year it raised nothing at all and was projected to bring in just $450m this year. This kind of flaw isn’t that surprising when, uniquely among businesses, the mining companies were allowed to write their own tax code by a callow Labor government terrified of marauding mining magnates on the back of Utes.

Let’s assume both nations have profit to GDP ratios equal to 30% but different tax rules. A would be expected to collect taxes equal to only 4.5% of GDP but N would likely collect taxes equal to 9.9% if 3% of its GDP faces this 78% tax. As our simple model explains the Norwegian outlier – you might protest I’m being unfair to Australia as their profit tax/GDP ratio was 6% not 4.5%. You see the Australians have been more aggressive at closing loopholes and enforcing transfer pricing. A is actually America as the U.S. allows for things like REITs and S corporations and has a weaker record of enforcing transfer pricing. Wasn’t this what this Angrybear post?:

First – if you are wondering why the US rate is 39.3% rather than 35% – think state income taxes. Of course, US corporations often don’t pay a 4.3% effective state tax rate as tax planning plays such as Delaware Intangible Holding Companies (can your say transfer pricing) allow opportunities to lower this effective tax rate. At the Federal level, US corporations used to have that FISC/EIE game and now have a Section 199 game. So if you tax director has you stuck with a 39.3% effective tax rate – fire him now. That Swiss rate of 21.3% might look low but it is not as low as the 12.5% Irish rate. So why are so many US based companies shifting intangible profits to Switzerland rather than Ireland? Could it be that the Swiss Federal rate is only 8.5%? The alleged 21.3% rate contains a high local government rate. Only thing is that a lot of companies are located in the Swiss equivalent of Delaware. Also note that the Mexican corporate profits tax is lower than the US rate. So why do many companies try to source more income in the US and less in Mexico (can you say transfer pricing again). It seems that the Mexican government imposes a tax on profits to pay for their version of Social Security. The WSJ’s amateurish graphs and all the regressions in the world are not that impressive unless one addresses two matters. The first matter is the above concern regarding measuring effective tax rates.

Bottom line –these regressions (or phony curves) across nations with different tax systems can be misleading. But note Norway lowered its tax rates to 24% overall and 74% on oil profits so if our model is right, their tax/GDP ratio should drop to 8.7%. Time will tell!

Kevin Hassett and Donald Luskin Do Not Understand Norwegian Tax Law

Brad DeLong reminds us of Kevin DOW 36000 Hassett second dumbest moment giving credit to Mark Thoma for the original take down of Hassett’s Laffer trick:

The Wall Street Journal says Kevin Hassett has discovered the Laffer curve, but I think these data might say something else ... The blue line is supposed to be the Laffer curve, but this is far from compelling. Since it looks like all that's been done here is to draw a line through an outlier, Norway (an outlier that in other contexts we are told to ignore because it is an outlier, e.g. see below), and since this is clearly not the best fitting line to these data, here's another possibility ... I haven't actually run the regression, but it looks clear to me that revenues rise with tax rates, and the fit also looks better than in the first graph. Toss out Norway, and the fit looks even better

A lot of people had a lot of fun pointing out how dumb this graph was including Kevin Drum:

And one more thing. Just for laughs, take a look at what the Journal’s barmy graph drawing implies: Norway, with a corporate tax rate of about 29%, generates enormous amounts of corporate tax revenue. But then, since it’s the only way to get an upside-down U out of the data, the graph goes nearly vertical. Even the Journal’s editorial writers, normally a pretty barefaced bunch, were apparently too embarrassed about this economic singularity to follow the right side of their graph to its logical conclusion, but we can: at a rate of about 33% corporate taxes produce no revenue at all. An increase of a mere four percentage points destroys tax revenue entirely! Mirabile dictu! A junior high school geometry student would be embarrassed to produce work like this. But not the Wall Street Journal editorial page. Or the American Enterprise Institute, which created it in the first place. They apparently think their readers are too dumb to see what they’re doing.

Of course Donald Luskin tried to defend Hassett’s nonsense. As Kevin Drum does remind us, however, that Norway “generates enormous amounts of corporate tax revenue” even though its corporate tax rate is less than 30%. But this is incomplete as Oliver Milman reminds us:

In Norway, companies drilling for North Sea oil pay a 78% tax rate on income, compared with a corporate tax rate of 28%.

Norway produces and exports a lot oil. President Trump is also hoping we can export a lot of natural gas, coal, and oil. Maybe the right thing to do is to follow Norway’s lead and raise the tax rate on these profits.

Another Personal Observation On Privatized Highways

Last month I posted a personal observation on Trump's plan to privatize infrastructure, noting especially how in the long run privately owned turnpikes in Virginia ended up in government ownership.  In the comments on that post there was discussion of the Indiana Toll Road, privatized a few years ago.  I have just ridden on it (yesterday), and I shall recount as an anecdote datum my less than pleasant experience, bad enough to make me want to avoid it entirely in the future.

I was driving west on it from Ohio.  I stopped in one of the new service areas to get some pizza.  Fancy roof, but only two eating places, Lagrange in the east.  OK, but nothing great.  I would say road condition about same as Ohio's, but tolls higher, although not as high as in Illinois or Pennsylvania.  Anyway, I saw that I had enough gas to make it to the LaPorte service area in the western part of the state, so did not refill there or at the Elkhart one.  Nowhere did I see any signs or information about any problems with any of the upcoming service areas.

So, two miles before the LaPorte service area on the sign for it was draped a cloth saying the area was closed.  Indeed, when got there, it was torn up, presumably to build a new one like what I saw before, not that big of an improvement.  It was OK for trucks to park there, but no gas.I had 10 miles of gas left in my car. Got off at the next exit to go into  LaPorte to get gas.  There was a machine to take the payment, no attendants,, two machines actually.  One would not take my card. Managed to back out and go into the other one, which took my card, but would not take my credit card.  I did have  cash which it took, but there I am fiddling around while my gas is running low.  Had to go around a closed road to get to LaPorte.  Fortunately I got to a gas station with one mile of gas left in my tank.

On returning following the detours, could not reenter the Indiana Toll Road and had to go further to get onto I 94, but given my experience with it, I was not all that unhappy not to be on it.  Maybe this is just an odd case, but I have to say I was not impressed with how these private owners of the toll road are managing it, not at all an obvious improvement.

Of course, Trump has completely stalled out on doing anything about his infrastructure plan, with even his air traffic controller privatization plan sitting there doing nothing, although, of course, his proposed budget does cut actual ongoing infrastructure projects that will shut some of them down, mostly for non-auto transportation systems in urban areas like Pittsburgh.  When I continue to see commenators talking about how his infrastructure plan might stimulate the economy, I am not sure whether I should laugh or cry.

Barkley Rosser

Could The US Default Due To A Complexity Catastrophe?

Definitely.

Front  page story in today's Washington Post by Damien Paletta reports that "Treasury chief hurtles toward fiasco," the fiasco being a failure to raise the US debt ceiling in time to avoid a default.  Trump has declared that Sec Mnuchin is responsible for this matter, which he should be, but somehow has not made a sufficiently definitive statement to keep his former Freedom Caucus big cheese OMB director, Mulvaney, from opining that Mnuchin is an out of it New York finance guy (Goldman Sachs even) who is not well connected in Washington, and he, Mulvaney, thinks that the dumb games he played as a Congressman threatening to default are appropriate for  somebody in charge of all this.  The deadline is approaching, although it might be somewhere between early September and mid-October, but at some point if the debt ceiling is not raised, the US will seriously default, something we have not seen, and I doubt that any deal Mulvaney might propose would get through this dysfunctional Congress.  And the article reports that while Mnuchin wants a "clean raise" before  the Congress really shuts down in August, well, according to WaPo, he does not have the "stature in Washington to press through a vote on a measure" supported by all previous Treasury Secretaries.  Indeed, the article is right that he may not be able to do so, and the US may well seriously default on its debt for the first time, something the gang that Mulvaney has belonged to has declared is no big deal. We may be about to find out if that is correct or not.

In thinking about this I have come to realize that part of the problem is that this is a very complicated issue, one that few people understand, and that this lack of understanding is self-propagating: that few understand it means that there are few who can teach those who do not understand it what it is about. The upshot is that an incredibly miniscule proportion of the US population has any remote idea what all this  is about, so are not  putting any pressure on these loud mouthed Congresspeople to behave resonably. If in fact there is a default and it leads to a global financial crisis that puts the world economy back into a serious recession, well, who could have known that, and who will be to blame?

So let me get personal on how severe the lack of knowledge about this is, which is exacerbated by the fact that few media talk about it at all, or if they do so, it is with massive  ignorance.  So, over the Fourth of July weekend I was with extended family. A niece is a prominent journalist in Washington. Her brother, a nephew, was the top performer in high school on a statewide math test in California.  He is  now a wealthy high level computer game programmer in Silicon Valley.  They asked me if there was a threat of recession, as some other family members were claiming, and I said the most serious near term threat for  such would be a default by the US  failing to raise its debt ceiling, leading to a global financial  crisis.  It became clear that both of these very smart and well-informed people knew nearly nothing about this  issue. If they do not, well, probably less than 1% of the US population does, which makes it all the more likely that full-of-themselves ignorami in the House  Freedom Caucus will be all too happy to put Secy Mnuchin in his place when he comes calling for a "clean debt ceiling increase."

Why is this so hard?  Well, one thing is that few  Americans know, and neither my very well-informed and super smart relatives did, that the US is the only nation in the world to have such a stupid thing as a debt ceiling.  The vast majority of professional economists think it should be eliminated.  Congress effectively decides on this when it passes a budget, and this is just an extra nonsensical conundrum.  It is  a historical arttfact from a century ago, when right after  the 1913 passage of the amendment allowing the personal income tax, the US went into WW I, which was not supported by many in the Congress, the Congress imposed this idiotic debt ceiling to retain control over the budget  during wartime. When the war ended, it was not repealed, and we have been stuck with it since, with the vast majority of  both the Congress and the public thinking it is something sacred and important and stuck in marble, when in fact it was an unfortunate mistake that should have been repealed a century ago.

Regarding what will happen if we default, I  do not know, as that could follow many paths. But a serious catastrophe cannot be ruled out, and if  it  comes to pass it may be at least partly due to how complicated this whole thing has become, with neither the public nor most of  the Congress at all aware of what is involved here.  So, we could indeed end up with a complexity catastrophe, and if we do, let us hope that it is not too severe.

Barkley Rosser

"Those Of You Who Are Old Enough Will Really Get This"

I am adding yet more  to my most recent two posts where I am complaining about this essentially side remark that Larry Summers made in his commemoration of his late uncle, Kenneth Arrow, in which he reports that at the party celebrating Arrow's Nobel Prize in 1972, Summers's other uncle, the late Paul Samuelson was supposedly "discussing how stupid  Joan Robinson was."  As it is,  I should have added to my quote from his talk in the last post what immediately followed that snide and inappropriate remark.  It is the title of this post: "Those of you who are old enough will really get this."  This was then followed by "And they were discussing the turnpike theorem and the maximum principle and the Hamiltonian and whatever."  After that, Summers then moved on to how they continued to  discuss these matters until all the guests were gone and their wives were waiting there impatiently for them to wrap it up, with Larry himself, then a sophomore at MIT, also waiting so somebody could take him back to his dorm.

I think this additional remark  is also worthy of note for  being inappropriate.  It essentially reinforces the idea that it was perfectly reasonable  for Samuelson to have discussed "how stupid  Joan Robinson was." After all, sufficiently senior insiders would "really get this," the strong implication being that of course Samuelson was right about Robinson, and these wise insiders would agree.

Except, of  course, any truly knowledgeable insiders there, and there may well have been some as some of those involved in the Cambridge capital controversy, particular Eytan Sheshinski, who was specifically mentioned in another part of Summers's talk  and who has long been based in Israel, would know  that Summers was being very misleading, that whatever Robinson's level of intelligence,she and her allies in Cambridge, UK had won the debate, the controversy, with Samuelson having admitted that they had and subsequently changing his line about the appropriateness of using the concept of aggregate capital, even if  the rest of those at MIT, especially Robert Solow,  simply ignored this and continued on their merry way using the concept, even though Solow himself showed it be very weak in explaining anything about economic growth.  In any case, few grad schools even teach about this controversy anymore  while continuing to  shove aggregate neoclassical production functions down the throats of unwitting grad students, hence Summers himself recognizing that one needs to be "old enough" to know to what he was referring to when he in effect inaccurately made it look like Samuelson had legitimate grounds for his snarky remark.

In discussing these two earlier posts in comments over on Economists View, RGC linked to the Wikipedia entry on all this. A curious tidbit near the end of that Wikipedia entry on the Cambridege capital controversy is that it quotes one of  the participants, Edwin Burmeister, in 2000 stating that he and Leland Yeager in a 1978 Reply had admitted that assuming smooth substitutability of factors did not  eliminate the possibility of capital-reversing. However, the 1978 cite does not appear in the References.  As it was, it was in Econoimic Inquiry and was a reply to my "Continuity and Capital Reversal: Comment," which had appeared in the Jan.1978 issue of Econoimic Inquiry, which was on a 1976 paper by Yeager (which had won a prize) in Economic Inquiry on capital theory.  Yeager had made the false claim that such smooth substitutability would eliminate those annoying capital theoretic paradoxes in a properly formulated Austrian model.  I showed that he was wrong, and he and Burmesiter admitted it in their Reply to me (they were both at UVa at the time while that was my first year at JMU).

Yeager's 1976 paper in Economic Inquiry was "Toward Understanding some Paradoxes in Capital Theory."

J. Barkley Rosser, Jr., "Continuity and capital-reversal: comment," Economic Inquiry, 1978, 16(1), 143-146.

He and Burmeister's Reply (Yeager first coauthor) was "Continuity and Capital  Reversal: Reply," Economic Inquiry, 16, 147-149.

Barkley Rosser

More On Larry Summers Distorting Intellectual History

I would have included what follows in the previous post, but was afraid of putting too much into one post.  So, a bit more.

Here is the precise quote from Summers's talk about the conversation between Ken Arrow and Paul Samuelson on the evening of the celebration in 1972 in Cambridge, MA.

"Almost everybody left and Paul and Kenneth were discussing turnpike theorems.  Kenneth was discussing aspects of Pontryagin's maximum principle.  Paul was discussing how stupid  Joan Robinson was."

So somehow Larry Summers thought that it was appropriate at this ultimate commemoration of Ken Arrow at the Tel Aviv Institute for Advanced Studies to pull out of what was reported to be a very long discussion that had their wives getting quite impatient, and which Larry himself noted was, well, the two Nobel prize winners in the room going on and on as I am sure they did about all sorts of matters, many of them highly mathematical, that Larry decided to quote as the one contribution by his other uncle, Paul Samuelson, this snide remark about Joan Robinson, which looks pretty ridiculous and hypocritical in light of his humiliating admission only six years earlier that this "stupid" Joan Robinson had been right and he had been wrong.

Let me add some not so well known further weird details about all this.  The first is that after Paul Samuelson walked down Mass Ave from Harvard to MIT after the anti-Semites at Harvard refused to hire him there, in the first year that he was in charge of admitting potential grad students at MIT he rejected his future quasi-brother-in-law* for admission to the grad program, yes, rejecting Kenneth J. Arrow, right up there in stupid decisions along with approving of that incorrect paper on the surrogate production function by various of his grad students in the QJE that led him to  confess about the "foundations of sand" upon which economics is supposedly based.  (Among those accepted in that class instead of Arrow was Lawrence Klein, a future Nobel Prize winner and Samuelson's first PhD student.)

Yeah, pretty embarrassing. As it was in the end, Samuelson was more worried about Arrow-Debreu(-McKenzie) general equilibrium theory, which he did not do, than he was about Robinson and the Cambridge capital theory controversies, and so he hired Duncan Foley, who got his PhD from Herbert Scarf at Yale, to come to MIT and help him teach grad micro  theory there. Duncan did  that, later going to Stanford and falling into heterodox Marxist sin and not getting tenure there. But Samuelson got his  new orthodoxy, which was taught to  people like Krugman and Akerlof and Varian, and  others, establishing neoclassical orthodoxy, although it still lacked game theory.

Regarding Arrow and the Cambridge capital theory debates, to the best of my knowledge, he never said a word about them.  He coauthored a famous book on general equilibrium with Frank Hahn in 1971, with Hahn playing a defender of neoclassical theory, although granting much to the Robinson crowd.  That Samuelson's defense was to retreat to heterogeneous capital being the true way to go is ultimately profoundly ironic, given that he rejected his future quasi-brother-in-law for entrance to MIT's grad program, the general equilibrium guy whose model was ultimately totally decentralized..

In any case, Summer's tossed-off quote from Samuelson looks really shameless, aside from being historically seriously intellectually misleading. Why did he do  this?  I do not know, but it is shameful.

*The parents of Lawrence H. Summers both worked at the Philadelphia Fed, with his father also at U. Penn, and the inventor of the concept of PPP international measurements. His mother,Anita, was the sister of Kenneth J. Arrow, and his father the brother of Paul A. Samuelson.  His father, Robert changed the name from Sanuelson to Summers in an effort to avoid anti-Semitism when he arrived in the US .  Robert kept it, but Paul decided to retrieve the original name, which is why Larry is Summers rather than Samuelson.

Barkley Rosser

Larry Summers Reports That In 1972 Paul Samuelson Complained About "How Stupid Joan Robinson Was."

Ohmigod, he really did this. At the Institute for Advanced Study in Tel Aviv, during a major conference honoring his profoundly wise and honorable uncle, the late Kenneth Arrow, Larry did this. The vast majority of his talk is an outstanding discussion of Ken Arrow as an economist and a person, full of interesting details, all leading to the conclusion that his uncle was both one of the most brilliant economists who ever lived as well as a deeply wise,  personable, morally incorruptible, and all but impeccable as well as just a plain nice guy.

I did not know Ken nearly as well as him, of course, but  all that I ever saw of him, as well as everything I have heard of him personally through my sources, completely supports this.  To the extent he had noticeable faults they were those of an absent-minded professor who is also  a genius.  He paid no attention to obvious simple things.  He was out of touch with various mundane realities, sometimes embarrassingly so.  I shall add a detail not  in Larry's account that I have from a primary source.  In his old age he would sometimes wander the halls of the Stanford econ dept with his fly unzipped. Nobody ever suggested or remotely thought that there was any ill intent in that.  It was like Joe Stiglitz before he became a big star, tying his shoelaces together, something a distracted and brilliant person far beyond anybody around him would do out of absent-mindedness, although Arrow was far beyond Stigitz intellectually and historically, not even close.

So let me deal with the odd matters where on such an august occasion Larry made such an ass of himself.  One is a matter of debate, and he put it out there: he and Arrow disagreed with how the post-Soviet transition should be handled.  He recognizes that Ken disagreed with his policy as Treasury Secretary under Bill Clinton in the mid-to-late 90s about how to deal with the former USSR.  He approved AID funds for Andrei Shleifer and a few others to "assist" in the transition process there, which ended up with Harvard University paying out over $22 million to end a suit by the US Treasury Dept against Shleifer for his conduct there. Summers's attempt to cover for Shleifer, involving him lying in an open meeting to the senior members of the Harvard faculty was the bottom line on why Larry was fired from being Harvard's president.  Unsurprisingly, his wise uncle Arrow knew better, but, of course, Larry did not remotely tell the story of what went down there, implying that Ken was somehow unwisely out of touch with US policy as determined by him.  (Dave Warsh has written decisively on this matter.) Ooooooooooooooog.

Which brings us to this astounding and utterly despicable bit about Joan Robinson and his other uncle, the late Paul A. Samuelson.  So the bottom line outcome of the Cambridge capital theory debates as they came to a head in 1966 in the QJE was that Samuelson's effort to  paper over the critique about aggregate neoclassical production functions coming from Joan Robinson and Piero Sraffa was wrong.  He admitted it in his "Summing Up"paper in the fall 1966 issue of the QJE when such figures as Garegnani and Pasinetti showed that the attempt to dismiss the general presence of capital theoretic anomalies, more precisely, the general presence of non-monotonicity  in the steady-state relations between the rate of profit and level of long term per capita consumption implied that "the foundations of economic theory are based on quicksand."

The bottom line is that he admitted he was wrong in his claims about the "surrogate production function," and that Joan Robinson and Piero Sraffa were right.  In many later publications he maintained this position.  Indeed, when I first met him personally in the early 70s and confronted him with all the details of the Cambridge Controversies in the Theory of Capital, he admitted that Cambridge, UK was right.  He completely disarmed me at that point, of course.  Yes, Joan Robinson and Piero Sraffa were right.  Capital is only meaningfully discussed as being heterogeneous, ironically a position that Hayek came to before he abandoned the topic.  What could I say?

Oh, but now we have his nephew in the venue of honoring his other uncle, the deeply impeccable Kenneth Arrow, reporting this snide wisecrack from Paul Samuelson.  I have no doubt that Paul Samuelson made the remark, frustrated undoubtedly as he was with this most serious intellectual defeat of his entire (and very long) career.  The occasion was a party celebrating Arrow's receipt of the Nobel Prize in 1972 at a point in time that the only other US  Nobel recipient was Paul Samuelson. They were discussing all kinds of mathematical issues long after all the guests were gone and their  wives were bored, and here we have Samuelson making inappropriate and nasty remarks about the woman who intellectually humiliated him. But somehow Larry Summers decided in his remarks on Ken Arrow at this very serious and offical commemoration to ever so quietly slip this utterly unjustified jibe at Joan Robinson in.  Really, this is shameful.

Barkley Rosser

Comparing Companies to Nations

Asher Schechter raises a good point in How Market Power Leads to Corporate Political Influence but this comparison is troublesome:

In 2016, the advocacy group Global Justice Now published a report showing that 69 of the world’s largest 100 economic entities are now corporations, not governments. With annual revenues of $485.9 billion, Walmart topped all but nine countries.

GDP is a value-added concept – revenue is not. So what is the right metric? Walmart may have had this much revenue but its pretax income was only $20.5 billion and its operating income was $22.8 billion. Profits understate value-added and since Walmart has over $100 billion in operating expenses (think all those workers surviving on $9 an hour), Walmart’s gross profit is likely the right metric to compare to the GDP of nations and this figure in 2016 was $124.6 billion. So yea – it is a mega corporation but its value-added does not put it in the top 10 of governments.

Was Thomas Jefferson A Monstrous Rapist?

It is quite likely that I shall be on the receiving end of some strong opprobrium for this post, but, well, here it goes anyway.

So, Shaun King in the New York Daily News in an article being spread around the internet has accused Thomas Jefferson of being a "rapist" (in the article headline) and "monstrous" in the body of the article for his relationship with his slave, Sally Hemings, who bore him six children, with her and them not ever being freed by the in-debt Jefferson.  Much of the article is accurate, including that last point, as well as that he owned more than 600 slaves (sorry, having trouble linking to article itself).  The main point is that because he legally owned her she had no ability to consent or not consent, so therefore any sex between them was rape, indeed, monstrous rape, with in fact it appearing that this all started when she was about 14, so adding in by current standards statutory rape, although that point was not made in the article. 

I would contend that the correct point in the article is that slavery was itself a monstrous system, and that anybody trying to defend it because some slavemasters were not as cruel as some others is unjustified.  It cannot be justified.  It was monstrous.  And, indeed, the nature of it profoundly morally polluted all interpersonal relations that occurred within it, including sexual ones.

Well, I would say that we do not know whether or not she consented or not. Those pointing out that she could not refuse are, of course, correct.  But that does not mean that she did not consent.  There is a parallel, although less so, with ongoing situations where male bosses impose themselves on female subordinates, where the surbordinate may really not be able to give up the job because of economic reasons, needing to support a family, no alternative jobs available. OK, this is not as bad as slavery, but it is also very similar.  Yes, that is now illegal, but we call in sexual harassment, not monstrous rape, with rape still involving a clear unwillingness of the person supposedly being raped.  In the case of Sally Hemings, we simply do not know,

Let me note a possible alternative view on what happened between them, although this may not be true, and Jefferson's failure to free her does not speak at all well of him.  None of this is mentioned in Shaun King's article.  So, when Jefferson (TJ) took Sally Hemings (SH) with him to Paris when she was 14 and he became ambassador, he was 44.  This is noted in the article, hence, of course the further statutory rape aspect.  But what King left out is that at the time TJ was a widower and alone.  Furthermore, the really important detail, SH was the half sister of his dead wife, with both of them sharing the same father.  Now today we consider all of this not only to be monstrous, but an abomination, really horrendous.  But at the time, it was not at all uncommon, quite widespread in fact.

So it is not at all impossible that TJ himself fell in love with this slave who so reminded him of his dead wife, and she may well have been sympathetic and understanding and not at all in a mood to resist or reject him, in fact, the feeling may have been mutual, although we shall probably never know.  Now at this point somebody might say, "well, why did he not do the right thing and free her and marry her?!"  There is a very simple and obvious reason.  It would have been against the law.  Miscegnation was outlawed in Virginia in the 1690s and that law would remain on the books until a half century ago when the SCOTUS famously overturned it in Loving versus Virginia, the ruling that basically ended all anti-miscegenation laws throughout the US.  Maybe he was just a monstrous rapist, but it is also quite possible that they were both oppressed by this law and system where they could not do what they really wanted. 

So, he had to cover it up, although one can certainly ding him on his hypocrisy in certain writings that are not favorable to African-Americans.  But then we know that for him, he was deeply hypocritical, the slaveowner who wrote all those stirring words in the Declaration of Independence that would later by used by civil rights leaders like Martin Luther King, Jr. to advance their cause.

Barkley Rosser

Here is a Little Economics Lesson

Here’s a little economics lesson: supply and demand. You put the supply out there, and demand will follow. -- Rick Perry, U.S. Secretary of Energy

While the media is having fun at the expense of Secretary Perry's asinine "economics lesson" it is worth pointing out that the very same publications that ridicule Perry perpetually peddle the exact same theory under the guise of "debunking" the imaginary lump-of-labor fallacy. Here is The Economist from yesterday telling its readers that the demand for goods and services is infinite:

By the 1990s governments and employers realised they were making pension promises they would not be able to keep. The idea that there is only a finite number of jobs to go round—the "lump of labour"—was more widely exposed as a fallacy. It became fashionable to argue that "we must work till we drop."

Just for the record, the number of jobs to go round is indeed finite. The demand for goods and services is limited by the funds and credit available to consumers to purchase them and the time available to consume them. Those funds and credit are, in principle, limited even though those limits are, in practice, quite malleable and difficult to pinpoint. Expansion of credit beyond those limits invariably leads to collapse when debt loses its "credibility" -- which is to say the reasonable expectation that the debtor can continue to service the debt.

Perry may be a total fool but he is only parroting what he has been taught by... "economists."

Did Kevin Hassett Ever Hear About the Solow Growth Model?

Why did Brad DeLong dig up some 2007 nonsense by Kevin DOW 36000 Hassett?

When Kenneth Arrow was awarded the Nobel Prize in Economics in 1972, one of the contributions the awards committee cited was his miraculous “impossibility” theorem. Decades from now, Arrow’s theorem, originally drawn in his doctoral dissertation, will be viewed as the 20th-century idea that best anticipated the 21st century. While mathematical in origin, the impossibil¬ity theorem is simple to describe in words: A government is really just a mechanism that makes collective decisions for a large number of cit¬izens who have different preferences. I might want to spend our tax dollars on dog parks; you might prefer more police. The government’s job is to work it out.

I guess by now you may be wondering where this is going. It seems Hassett is making a case for dictatorship based on stimulating economic growth:

An organization called Freedom House rates the level of political freedom of the world’s nations on a scale of 1 to 7, with 1 the most free. For example, according to the 2006 sur¬vey, countries like the United States and Italy are rated 1, while Singapore is rated 4.5, China and Saudi Arabia 6.5, and North Korea 7 ... nfree China had a growth rate of 9.5 percent from 2001 to 2005.

By contrast, the U.S. growth rate averaged only 2.5%. So much for the Bush boom! Then again – U.S. per capita income was considerably higher than that of Chinese per capita income so would not one expect higher Chinese growth – assuming one bothered to have learned the Solow growth model?

Dean Baker v. Paul Krugman on Trump’s Tariffs

Paul Krugman goes after Trump on his trade war agenda, which alas prompts Dean Baker to go holier (more progressive) than thou on Krugman. While there are passages where Dean is making sense, some of this is bait and switch in my view.

This prospect has many folks, including Paul Krugman, terrified. I don’t share his fear.

Not only is Paul not terrified, Dean later notes that high tariffs on Chinese goods such bad policy that he might be terrified. Can we stop we these cheap shots? Here is the basic underlying premise of Dean’s substantive comments:

I should also say that tariffs are not my preferred way of dealing with the country’s trade deficit, which I do consider a problem. Anyone who thinks secular stagnation (i.e. not enough demand in the economy) is a problem should believe the trade deficit is a problem. If the trade deficit were 1.0 percent of GDP rather than 3.0 percent of GDP we would have been approaching full employment many years ago.

In other words, Dean is assuming we are not close to full employment so we can go all Keynesian here. Look, I agree we are not at full employment so I will go all Keynesian too. If Dean is suggesting Paul does not share this view when we are below full employment, he is not being honest with his audience. And yes I know some think we are at full employment right now. Can we simply say these folks are wrong? Dean continues:

But the normal mechanism for reducing a trade deficit is an adjustment in currency values. This means that the currency of the country (the United States) with the deficit falls and the country with surplus (much of the rest of the world) rises. When the dollar falls in value relative to other currencies, U.S. made goods and services become more competitive internationally. That will lead to more U.S. exports, and fewer imports, bringing trade closer to balance.

Not disagreement here or from Paul I would presume. But now Dean goes a bit off the rails:

This adjustment in currency values has not taken place primarily because foreign governments have bought up massive amounts of dollars. This is partly as a reserve currency to protect themselves against financial crises.

Does Dean really think we are in a world of pegged exchange rates? Maybe China was doing currency manipulation a decade ago but they are not now. The main reason that the dollar is too strong is that the ECB is adopting easier monetary policies than we are. Dean notes that Trump has finally abandoned this currency manipulation nonsense and is going for trade wars. Of course the folly of both trade wars or currency manipulation was exposed by Joan Robinson in 1937 when at least some countries were under a pegged exchange rate regime. But I challenge Dean to think about tariffs under floating exchange rates. If we adopt Trumps tariffs, the dollar would further appreciate hurting export sectors even if it helps the favored import sectors. Dean to his credit wants to talk about the distributional aspects of all of this but he needs to address what Paul wrote:

the tariffs now being proposed would boost capital-intensive industries that employ relatively few workers per dollar of sales; these tariffs would, if anything, further tilt the distribution of income against labor.

I’m sure Dean has heard of the Stopler-Samuelson theorem which in this application would imply higher profits and lower wages. So explain to me – how is Dean being more progressive than Paul on this issue?

It Is Monday, And Robert Samuelson At The Washington Post Is Bashing Social Security Yet Again

Yet again.

I grant that he did not do  it at length or present a lot of clearly incorrect nonsense.  But bash Social Security he did, using an old ruse to do so, combining it with Medicare to invoke a long term deficit danger due to the two of them together, when in fact it is well known that it is the Medicare part of that projection of future spending that leads to all the scary looking deficit numbers, not the Social Security part.

Most of the column by Robert J. Samuelson today,"Everybody's mad at somebody," is a lament about political polarization in the US today, and the obnoxious effect this has policy making.  Fred Hiatt has a similar column, "Trump's wasted opportunity," although I would say that for once Hiatt avoided saying anything too silly, noting possible political compromises on a carbon tax, immigration policy, and tax reform, that might have been possible if Trump had been willing to be a nonpartisan leader, but that look unlikely to happen given his descent into cheap partisanship, as well as his general ignorance and incompetence.  Most of Samualson's column deals with past history of compromises made and how we got to not doing that anymore. However, his misguided statement on Social Security appears in a single paragraph, which I shall quote in its entirety now, regarding supposed compromises or issues that need compromising that are not likely to be.

"To take two familiar examples: The Republican promise to repeal and replace Obamacare while also  reducing premiums and expanding coverage was never possible.  It was make-believe. Similarly, the Democratic refusal to deal with the escalating costs of Medicare and Social Security is crushing other worthy government programs - a strange position for a pro-government party."


So here is RJS back to  playing the role of WaPo Very Serious Person, or whatever, calling for  a compromise between the supposedly equally unwise positions of  the two parties.  But, the hard fact is that his analysis of the impossibility of the GOP position is completely accurate.  He falls down when he gets to the Dem side.  Again, there is a rising trend of medical care costs, which affects Medicaid as well as Medicare. If he had replaced Social Security with Medicaid, he would have been much more accurate, and clearly we need some sort of program to get rising medical care costs under control

But throwing in Social Security there instead of Medicaid (which the GOP is trying to cut without cost controls, just throw people off) as part of their Obamacare repeal and replace, muddies the waters, although it fits in with the longstanding campaign by the WaPo ed board to slash Social Security. And it does have RJS back on his regular Monday spot playing that old game, even if  he did not make too much of a silly fuss about it this time.  But some of us have our eyes on him, and will call him out when he pulls this nonsense, when we catch him. And he was at it again here.

BTW, Happy Fourth of July, you all.

Barkley Rosser