Thursday, February 28, 2008

"Fisking" Modern Monetarism

OPINION / That '70s Show
February 28, 2008; Wall Street Journal / Page A16

The title of this message is slightly off. Alan Meltzer (AM) is not really an old-time Monetarist, because that view (as defined by Milton Friedman) is basically dead. (It morphed into something called "new Keynesianism.") However, even though AM does not believe in the idea that the money supply should be kept growing at a slow and constant rate (the key tenet of high Monetarism), he is of that tradition: to him, the Fed must fight inflation, forgetting all other goals.

My comments are in dark type, his in light type. If you want his full article unscathed, see the link above.

Is the Federal Reserve an independent monetary authority or a handmaiden beholden to political and market players? Has it reverted to its mistaken behavior in the 1970s? Recent actions and public commitments, including Fed Chairman Ben Bernanke's testimony to Congress yesterday -- where he warned of a steeper decline and suggested that more rate cuts lie ahead -- leave little doubt on both counts.

An independent central bank is supposed to maintain the value of the currency and prevent inflation. In the 1970s and again now, Federal Reserve officials repeatedly promised themselves and each other that they would lower inflation. But as soon as the unemployment rate ticked up a bit, the promises were forgotten.

Contrary to AM, a true "independent monetary authority" does not have to "maintain the value of the currency and prevent inflation." (These really are one goal, by the way.) A truly independent central bank (CB) can do anything it damn well pleases. No one could complain or do anything about it. But AM isn't really calling for an truly independent CB.

AM is advocating a political position by making an assertion of fact: he's calling for one that's independent of any democratic control -- so that the citizens cannot hold the CB accountable in any way. This kind of institution would instead be responding only to political pressure from Wall Street and the banks. He then hopes that its priorities would be totally dedicated to fighting inflation. His hopes are likely to be dashed, since the Fed is partly a creature of Wall Street, which is not just concerned with inflation.

By the way, the view that unemployment “ticked up a bit” during the 1970s is totally wrong. The overall rate jumped from 4.9% to 5.9% in 1972, while it had already been pretty high by 1960s standards before that. It soared from 4.9% in 1973 to 8.5% in 1975 and then stayed high (above 7%) for two years. AM has likely never experience unemployment and thus does not know what “ticking up” means.

People soon recognized that avoiding possible recession overwhelmed any concern about inflation. Many concluded that inflation would increase over time and that the Fed would do little more than talk. Prices and wages fell very little in recessions. The result was inflation and stagnant growth: stagflation.

AM is presenting the theory of the “credibility” of the Fed. If the CB isn't a strict task-master, the story goes, workers won't cut their money wages much in recessions (relative to productivity, but for simplicity let's ignore that). Similarly, businesses do not cut prices. There's some truth to that idea, but it's radically incomplete and therefore wrong. Back in the 1970s, the persistence of inflation and the rise of stagflation was much more than just a matter of "inflationary expectations."

First, there was the wage/price spiral. This is something that existed mostly autonomously from expectations and the credibility of the Fed. Workers find that their money wages are falling behind inflation and thus strive to raise them -- or to get a cost-of-living escalator built into their contracts. They were able to do this because their were stronger labor unions in the private sector than nowadays. Then, the employers push the costs of the higher wages onto consumers by raising prices. Back during the 1970s, they had the pricing power needed to pull this off.

Price hikes encourage further wage inflation. Despite the recession of the early Nixon years, which AM likely applauded, the price/wage spiral continued. This inflationary hangover meant that we saw the first "stagflation."

By the way, the Fed really wasn't in charge of the economy back then the way it was now, so its credibility was irrelevant to this discussion. It only gained its current status with the complete transition to a floating exchange rate system. Back in the 1960s and very early 1970s, the dollar was fixed to gold and other currencies, so the Fed was forced to focus its efforts on keeping it fixed. It was unleashed starting in August 1971, when Nixon started the process of letting the dollar go. The Fed soon replaced the federal government as the macroeconomic maestro.

Second, and more importantly, there were two major oil shocks during the 1970s (1973-4 and 1979-80). These occurred due to political events (the 1973 Arab-Israeli war and the Iranian revolution) and had nothing to do with the Fed's credibility or lack thereof. The oil-price hikes, rather than the price/wage spiral or inflationary expectations had much more to do with causing the rise of inflation. Part of this impact was due to the newly-floating dollar: oil prices would be hiked in dollar terms, but then a depreciating dollar would undermine the oil revenues’ purchasing power, so that prices had to be hiked again (to protect the petro-princes).

Third, the rate of profit had fallen since the 1960s. As I've argued elsewhere, this encouraged business to raise prices more than usual. (Falling profit rates, all else equal, cause rising stagflation.) It wasn't a matter of passively responding to wage increases. It was the start of what the late labor leader Doug Fraser called a "one-sided class war" aimed at restoring profitability.

It's beginning to happen again. Unlike the response of wages and prices in the low inflation 1990s, expectations of rising inflation now delay or stop price and wage adjustment, inhibiting growth.

When AM says "inhibiting growth," I presume that he's following the convention among economists and referring to growth in the ability of the US to produce (potential output, the "supply side"). He's not referring to growth of demand, which is what most journalists mean. Because it’s clear that the kind of tight monetary policy he’s advocating causes slower growth of demand.

He's assuming that any kind of inflation hurts the supply side. That doesn't make sense. In standard orthodox theory, long-term supply-side growth is unaffected by inflation (unless it gets to Zimbabwean levels). Getting beyond the orthodoxy, inflation can actually make the economy more flexible, serving the employers' needs. You've got an employee (or a bunch of them) who you can't get rid of and whose wages are "too high"? Well, let inflation reduce the impact of the cost.

As noted, he's also assuming that anti-inflation recessions help supply-side growth. That does not follow either. Recessions stomp on private investment, weakening a key source of normal capitalist growth. There seems to be a correlation -- called Verdoorn’s Law -- between the growth of demand and the growth of supply, with demand leading the process. So sustained and deep recessions of the sort that AM is advocating actually can hurt supply-side growth.

One lesson of the inflationary 1970s: A country that will not accept the possibility of a small recession will end up having a big one when the politicians at last respond to the public's complaints about inflation. Instead of paying the relatively small cost of a possible recession, the public pays the much larger cost of sustained inflation and a deeper recession. And enduring the deeper recession is the only way to convince the public that the Fed has at last decided to slow inflation.

Here, AM is referring to the fact that the US went through a severe recession, with unemployment rates near 10% in 1982 and 1983 -- under the guidance of the Fed's Paul Volcker. Making things worse, it was a "double dip" recession, hitting in 1980 and then in 1981-82.

This "Great Recession" occurred for several reasons. First, people were sick of inflation at the time. But more importantly, it was an expression of the revenge of finance capital: creditors and owners of paper assets (bonds, stocks) had found their paper losing value due to inflation, so they helped the resistable rise of Volcker to the pinnacle of power, shoving aside the "weak" William Miller. It was a part of the one-sided class war mentioned above, involving not just a simple recession but the breaking of unions (think PATCO) and the smashing the old industrial heartland (Michigan, Indiana, Pennsylvania, etc.) The strict task-master had arrived.

Free market orthodoxy ruled. It was better to simply throw large numbers of workers out of work rather than increasing the inflation-fighting efficiency of the recession using wage and price controls. (Contrary to the standard story, wage/price controls complement recessions in fighting inflation rather than being a substitute.)

It worked! Inflation decreased, while labor unions in the private sector went on a seemingly final death march. Of course, Volcker does not deserve all of the credit. The drastic fall of oil prices in 1986 and after (due to the collapse of OPEC, having nothing to do with the Fed’s “credibility”) put a big nail in the coffin of stagflation.

Economic forecasts are not very accurate; still, the International Monetary Fund, the Congressional Budget Office and even the Federal Reserve do not forecast recession in 2008. The Fed thinks that the unemployment rate may rise to 5.3%, below the postwar average. In any event, it cannot do much to change economic activity or unemployment experienced in the next few months, and the Fed anticipates stronger growth in the second half of the year. Why the haste to cut interest rates drastically?

The experience of everyday people “in the trenches” of the economy suggests that something very much like a recession is happening right now, whether or not the economy falls in the exact way that technically defines a “recession.” And if forecasts aren’t accurate, why does AM use them?

The freezing up of short-term financial markets called for more borrowing. The Fed's response was creative and correct. It recognized that its responsibility as lender of last resort required bold action to maintain the payments system; and it delivered.

It seems that AM ignores the repeated nature of the credit freeze. It’s more of a structural problem right now, rather than being something that can easily be solved using lender-of-last-resort lending.

But the rush to bring real short-term interest rates to negative values is an unseemly [!!] and dangerous response to pressures from Wall Street, Congress and the administration. The Federal Reserve became "independent" in 1913 so that it could resist pressures of that kind. And in the postwar years, although it often failed to do so, it was expected to safeguard the purchasing power of our money and maintain economic growth.

The Fed was supposed to resist pressures from Wall Street?? The main impetus for its creation occurred because the ultimate Wall Street insider -- J.P. Morgan -- was no longer up to the task of handling financial panics. The private sector had failed, so the public sector took over. The whole idea is not only protect the value of the currency (prevent inflation) but to protect Wall Street’s goodies.

For Wall Street, the pressure for lower interest rates is based on a hope that bond and mortgage yields will decline and their losses will be limited. Often long-term rates fall when the Fed lowers short-term rates -- and since bond and mortgage prices rise when their rates fall, the losses of investors in these instruments will be reduced. For Congress and the administration, there is a need to show "concern" by doing something in an election year. These are not the concerns that should influence an independent central bank.

It is truly bizarre that AM does not acknowledge the housing mess, in which falling house prices are causing increasing numbers of homeowners to have “negative equity” and increasing numbers of financial institutions to find that their assets are worthless -- or at least worth much less than they counted on. The latter, of course, is what spurred the aforementioned credit freezes.

Surely Mr. Bernanke and his colleagues remember what happened in the 1970s. They console themselves with the belief that they will respond to any inflation that occurs by promptly raising interest rates. That repeats the commitments made repeatedly in the 1970s, which the Fed was unwilling to keep. The blunt fact is that there is rarely a popular time to raise interest rates. [even when inflation is high?] And with the growing streak of populism in the country, it will become more difficult.

Oh my god! People are beginning to be populist! What next, democracy?

The Fed's recent behavior is in sharp contrast to the European Central Bank. The ECB keeps its eye on both objectives, growth and low inflation. It doesn't shift back and forth from one to the other. The Fed should do the same. In the 1970s, because the Fed shifted from one goal to the other and back again, it achieved neither. Both inflation and unemployment rose on average, then fell together in the 1980s -- after the Fed controlled inflation.

One problem with this assertion is that even though unemployment generally fell in the 1980s is that unemployment started taking on greater meaning. The intensifying neoliberal policy revolution (initiated by Volcker and Reagan) raised the cost of losing one’s job, so that any given unemployment rate had more impact in restricting wage demands. And the fall in inflation rates was not just due to breaking the back of the price/wage spiral but also the drastic fall in oil prices.

After 1985, Fed policy kept inflation and unemployment low. The result was 20 years of growth, and three of the longest peacetime expansions punctuated by short recessions.

Not mentioned are the institutional changes that weakened the wage half of the price/wage spiral and the increasing amount of international competition in product markets, which sapped the price half. To the very model of a modern monetarist, it’s all the Fed’s doing. And, following the tradition of Milton Friedman, if things go wrong, it’s all the Fed’s fault. It's never because the Fed faces irreconcilable goals, such as saving Wall Street while avoiding inflation.

We should not throw this policy away. Federal Reserve independence is a valuable right which should not be discarded. The Fed should insist on its obligation to prevent inflation and sustain growth, not sacrificing inflation to lower unemployment before the election.

What obligation? The Fed’s obligation is much more complicated than that, if you actually read the laws.

But let’s drop that issue and conclude by tying up two loose ends. First, I referred above to “sustained and deep recessions of the sort that AM is advocating.” He does not explicitly advocate a sustained and deep recession as much as assert that the current recession (if it occurs) will be mild, with perhaps a minor up-tick in unemployment. (People need a vacation, anyway, right?)

The other loose end is that the economy currently seems to fit AM’s story. In the private sector and most of the public sector, workers lack the bargaining power to raise wage. Most businesses don’t have much power to raise prices any more and are more like victims of supply and demand. So if inflation persists, it seems like it would be due to inflationary expectations and (dare we say it) the lack of credibility of the Fed.

The problem is that even if the economy is imitating the economists’ model of the perfect market, that can be a disaster. With consumers in debt up to their necks and home equity collapsing, it looks like we’re going to have a massive collapse of consumer demand. No longer will middle-to-upper-class consumers live it up on credit. No longer will working-class and poor consumers meet their obligations in the face of stagnant wages using credit. It’s crunch time. Private investment will likely be blocked by fears of disaster and increasingly important corporate debt and unused capacity (as the demand for their product falls). It’s possible that the government’s military campaigns and the revival of exports will pump up the economy, but nothing is guaranteed. Both of those encourage inflation, which simply makes the Fed’s job harder and encourages moderation in recession-fighting.

As Bernanke knew in the early 2000s, deflation (a general fall in prices) is possible. It was made possible by the undermining of worker bargaining power and employer pricing power. With consumers in deep debt, falling prices are a total disaster. (A consummate orthodox economist, Irving Fisher, pointed this out in 1933, having just seen it happen.) Suddenly debts and interest payments become more important, encouraging waves of bankruptcy and further cuts in consumption. People begin to expect deflation and delay spending (if they can) to take advantages of future “deals.” The fall in prices becomes credible, so people believe in it.

Okay, we cannot predict that such a debt deflation will occur. But the point is that AM’s hoped-for mild recession might easily cause it. It's quite possible that Monetarist policies combined with the neoliberal changes in the economic structure could reap a whirlwind.

Wednesday, February 27, 2008

Perfervid Flapdoodle on the Post-Fidel Cuban Economy

Since the announcement of the retirement of Fidel Castro as Cuban president, there have been a series of postings and perfervid threads on both Brad Delong and Marginal Revolution, going on about what terrible shape the Cuban economy supposedly is in, along with denunciations of the political repression carried out by Fidel (I am in agreement with most of those latter denunciations). I have not visited Cuba myself, but there has been much debate, both over the varying published figures, and also among people who claim to have visited Cuba (which includes MR's Tyler Cowen, but does not appear to include Brad DeLong, whose arguments have seemed especially off the wall and out of line with most reports). Even the critics grant at least some quality of education and health care, although they often claim the official stats are inaccruately positive and that the health care system is deteriorating.

Among the matters of debate has been the effect of the US economic embargo on Cuba. Many state it is huge; others say it is not and bring up the past subsidies from the USSR and current ones from Venezuela. I do not intend to adjudicate that or any of the other issues here. Rather I wish to comment on a particularly hypocritical collection of views that some of the more inflamed commentators have put forward. So, we see people who a) strongly support free trade, b) strongly support keeping the embargo in place, c) strongly argue that the embargo has no (or few) negative effects on the Cuban economy, and d) never notice that the political repression that they (and I) are unhappy about has for nearly a half a century received its strongest propagandistic justification from the fact that this embargo has been in place for all this time, even as the US trades with the likes of China and Vietnam.

Parallax Accounting Standards

Maybe this is important, maybe not. But what do I know? I’m holed up here in my rainforest hovel, where the Long Damp has finally returned. I am ignorant of most accounting matters, but I suspect that the current credit crunch is, to misquote John Sayles via Burt Reynolds in “Breaking In”, “a big event in the world of asset pricing.”

Whenever there are opportunities to falsely upgrade values during a boom or falsely prevent them from dropping during a bust, I say keep an eye on the accountants.

Sunday, February 24, 2008

Bed Sores and Outsourcing

Here is a brief extract from a valuable book that described how outsourcing was losing the sort of crucial healthcare information that can come from the supposedly "unskilled workers."

Appelbaum, Eileen, Peter Berg, Ann Frost, and Gil Preuss. 2003. "The Effects of Work Restructuring on Low- Wage, Low-Skilled Workers in U.S. Hospitals." In Eileen Appelbaum, Annette Bernhardt, Richard J. Murnane, eds. Low-Wage America: How Employers Are Reshaping Opportunity in the Workplace (Russell Sage Foundation): pp. 77-117.

85: "because food service and housekeeping are not typically seen as distinct sources of hospital success or expertise, some hospital administrators have outsourced these functions or their management to external firms that specialize in these areas. On the other hand, food service workers, housekeepers, and nursing assistants all have direct contact with patients, and contacts can affect patients' experiences in the hospital and satisfaction with care. In response, other hospital administrators have sought to improve employee skills within these jobs and ensure a more stable workforce through more careful selection, cross-training, and work reorganization."

Bed Sores and the Cultural Revolution

More than three decades ago, I read a book by an English doctor, who described his positive experiences during the cultural Revolution. Just today, I got around to the New York Times science section from last week in which nursing homes are starting to adopt slightly similar practices in which they distribute responsibility to all levels of caregivers. The basic difference, of course, is that in the Chinese case all the caregivers were given authority as well as responsibility, while something much different occurs in nursing homes.

What follows is my brief notation from the British doctor's book and some extracts from the article.

Horn, Joshua S. 1971. Away with All Pests: An English Surgeon in People's China, 1954-1969 (New York: Monthly Review Press).

Joshua Horn, a British doctor, depicted the changes that occurred in his hospital at the time. He described how nurses, orderlies, patients, and even patients' friends became active in the decision-making process. Although the typical orderly had no formal medical training, she or he would spend far more time with the patient than the doctor, who might have only a few minutes to spend with the patient. As a result, the orderly might have a great deal to offer in deciding what course of treatment to follow.

Schaffer, Amanda. 2008. "Fighting Bedsores With a Team Approach." New York Times (19 February).

"Experts estimate that two million Americans suffer from pressure ulcers each year, usually through some combination of immobility, poor nutrition, dehydration and incontinence. The Centers for Disease Control and Prevention does not keep statistics on fatalities, but one prominent victim was the actor Christopher Reeve, who died of a bedsore infection in 2004 in the middle of a heroic battle against paralysis. New research is suggesting that the battle against bedsores requires a team approach, enlisting everyone from nurses and nursing assistants to laundry workers, nutritionists, maintenance workers and even in-house beauticians."

"At the Lutheran Home in Fort Wayne, Ind., for instance, “the laundry workers helped us see that some clothes weren’t fitting the residents properly and were restricting their skin,” said Jeanie Langschied, a registered nurse there. The kitchen staff began putting protein powders in cookies to boost nutrition. They added buffet dining, so residents would not remain in one position for so long, compressing fragile skin. Even the beauty shop “realized that wait times needed to decrease,” Ms. Langschied said, and residents should be repositioned while getting their hair done. “It was all departments looking at everything, and it was just amazing the information that flowed through."

Friday, February 22, 2008

Really Bad Economics in Defense of Savings

The zombie that Keynes couldn’t kill still stalks the landscape. In a New York Times op-ed today, Conley tells us that the reason we are sliding into a recession is that we save too little, and that only more savings can pull us out.

A few remarks, with Conley in italics:

The recent slowdown in gross domestic product growth is only a symptom of recession, not the cause. While there are many things to blame for the current crisis — most notably the subprime mortgage mess — one factor that has received little attention is America’s low savings rate.

Um, what is the transmission mechanism here? Weren’t people buying subprimes saving too much or in the wrong way relative to their income? This seems to be an argument based on moralism, not economics: we have been bad these past years, spending beyond our means, and now the recession will be our punishment. In the middle ages our sins were punished by earthquakes and plagues, now it’s recessions. At least it’s an ordered universe.

The simplest approach would be to seed universal mutual fund accounts for low-income Americans. The best way to do this would be through a so-called refundable tax credit deposited directly into a special investment account for each taxpayer. In future years, the government could contribute an additional 50 cents for every dollar the taxpayer deposited into this account. Think of it as a universal 401(k), but one that could be used not only for retirement but also for things like a down payment on a house, college expenses or unexpected health costs.

Well this is dandy: in a time of recession we should create new incentives for individuals to salt away more money. Less consumer demand, that’s the ticket. And behind this proposal is the error of thinking that savings creates investment. If the economy is in a nosedive, and businesses are going bust everywhere, who will want to invest?

As I’ve written in this august blog before, our savings shortfall is the consequence of the massive and ongoing trade deficit: we have to borrow to make up the difference between what we earn and what we spend. The problem with the stimulus package, at least one of them, is that it does nothing for expenditure switching.

Thursday, February 21, 2008


by the Sandwichman

In the comments on Peak Food, Juan shared his observations of activity in the grain markets.

"Led by trade on the Minnesota Grain Exchange (MGEX), there were sequential limit up days that effectively froze the market, part of a short squeeze, unmet margin calls, rumours that the Canadian Wheat Board was stressed, elevator and/or bank failures."

The chart below shows MGEX front month wheat contracts (click on the chart to enlarge):

"From 8 Feb, the big three grain exchanges, with CFTC approval, all raising margin requirements while loosening trading limits, which at least in theory should attenuate or stop the rise.

"There is some real fundamental basis for the price rise but what began a few weeks ago went beyond this and has begun to really hit smaller bakeries as well."

The following commentary is from Karen Ballhagen & Scott Davis's 'Sorting It Out' column at AgWeb from February 8:

"An enormous amount of money continues to change hands in the multiple wheat pits -- primarily linked to the Minneapolis exchange. The focus of supply and demand may have run its course, leaving money as the major player. I say this in part due to the companies which are being squeezed now on the other side of this run-away market. Grain elevators and large grain companies across the U.S. and Canada are facing critical junctures in managing uncomfortable lending situations due to margin calls. Banks have become more prudent with lending in recent months due to the U.S. real estate debacle. If you look closer at the Minneapolis market, you will not only see prices have spiked to above $15/bushel on the futures, but even more serious is the potential for that to go higher yet. The daily price limit on wheat is about to jump another ten cents to 40 cents per day. At this price tag, where does that leave the end users to financially defend hedge positions? It would speak volumes to agriculture if solid grain companies start to fold under pressure due to this money squeeze.

"I can hear it now: the old timer 30 years from now in 2038 will be telling his grandson about the wild and wooly wheat market of '08 when prices defied gravity. But the second half of this tale has yet to be written. Margin calls and forced liquidation are now the primary driver of wheat price action as the "squeeze" in Minneapolis wheat has moved past the point where true fundamentals have much meaning."

Wednesday, February 20, 2008

Robert J. Samuelson Goes Imbecilic Over Obama

In today's WaPo, Robert J. Samuelson attacks "the Obama delusion," complaining that he is a new kid on the block whom RJS is uncomfortable with in contrast with Hillary and McCain. He starts with the usual whine about Obama's speeches being too good but lacking substance. Then he admits that Obama presented a 12-point economic plan at the Janesville, WI GM plant, only now the problem is that it is just "the usual political goodies," and looks too much like Hillary's plan. Oh. But I thought Hillary's plan was OK. I think RJS is steamed that he has not been schmoozed enough by Obama and his circle.

Of course RJS makes a serious fool of himself by ranting about entitlements, he being one of these people who thinks social security and medicare are one and the same. So, Obama is castigated for not resolving entitlement spending. His call to lift the income cap on FICA taxes is simply dismissed, although it is something specific. That Hillary is calling for a vague commission with no specifics, and McCain has said nothing at all that I know of about any of this, and has confessed that he does not know much about economics, does not seem to bother RJS in his lather at all.

Sunstein and Obama

Peter noted the connection between Obama and Sunstein's minimalism already. It occurs to me that some of his earlier work is germane as well. He was a leading light of the revival of "Civic Republicanism" in legal theory. A key idea is that politics can be more than bargaining on the basis of given preferences, that democratic deliberation can sometimes, at its best, be a locus for the transformation of preferences.

Some of our greatest political leaders, or so it seems to me, have been people who challenged us to transform ourselves. Think Lincoln, King, FDR. Some of us who are impressed by Obama see him as potentially cut from the same cloth. We'll see.

Are Child Laborers Exploited?

Don’t jump to conclusions. Children who work for pay usually make less than adults, but they are usually less productive too. It is far from obvious whether their employers take in more profits, or whether child labor undercuts jobs and wages for adults. You can speculate on this all you want, but now, for the first time, there is empirical evidence.

My study, “Child Labor Wages and Productivity” has just been published by the International Labor Organization (ILO). Working with teams in four countries, we surveyed children and their employers in two sectors per country, gathering data on the division of labor between adults and children, relative wages and productivity, firm-level factors, employer motivation, and the social context. You can read about children who fish off the coast of Ghana, repair cars and motor scooters in India and fold fireworks in the Philippines. The analysis is not particularly high-tech, but you can find basic wage regressions and estimates of production functions with child and adult labor inputs. There is also a ton of descriptive material.

The bottom line is, sometimes, under some conditions. When normal people talk about child labor they often assume that children are a gold mine for unscrupulous employers. This can be true, but it’s not the whole story. Meanwhile, when economists study child labor they usually assume the opposite, that the law of one price equalizes unit labor costs across all age levels. This is even less likely to be the case. If you care about child labor and want evidence instead of arbitrary assumptions, I think you’ll find the study up your alley.

It’s a free download at

Tuesday, February 19, 2008

Showdown in Wisconsin Too Close to Call

Hillary's last chance in Wisconsin has her slightly ahead in last poll last night. Too close to call. Here is my take. Northwestern part goes to Obama, old Progressive territory like Minnesota. Northeast, including Green Bay (she was in its suburb, De Pere last night) goes to Hillary, old Joe McCarthy stomping ground. Rural parts of the southern part of the state tossup. Madison and Dane County (around Mad City) for Obama. Racine slightly to Obama because of Af-Am pop, Kenosha slightly to Hillary. Milwaukee split, northside to Obama, southside to Hillary. Which leaves what I have said all along is the key: Waukesha County, third largest in the state, suburbs to the west of Milwaukee, inner part more working class with income rising as one goes west and getting more suburban. Tossup, but as it goes, so will the state and Hillary's chances.

Monday, February 18, 2008

Repression at University of Missouri, Kansas City

A very troubling report:

Why the McCain Line on Iraq is Wrong

John McCain will be pushing the line that the "surge has worked," based on declines in attacks on US troops and declines in violence in Baghdad and al-Anbar Province, even as violence is again on the increase in some other parts of Iraq, and basic political and economic settlements remain unachieved. The problem is that neither of these declines in violence has had very much to do with an increase in the presence of US troops, although the case is stronger for Baghdad than for al-Anbar. In Baghdad the decline in violence would ultimately have happened because the main source of it was ethnic cleansing and the rise of sectarian segregation. This is now basically complete, with few integrated neighborhoods left and with many Sunnis fleeing both Baghdad and Iraq. A city that was 2/3 Shi'i, is now about 3/4 Shi'i, with the US effectively aiding this outcome.

The turning of tribal sheikhs against al-Qaeda in Iraq in al-Anbar Province has had nothing to do with increased US troops (although providing arms probably helped) and everything to do with al-Qaeda in Iraq stupidly killing sons of some of those sheikhs. Ironically, one of the biggest neocon hawks, Charles Krauthammer, has effectively admitted this. He criticized Dems in Congress for saying the 2006 election changed things by pointing out that this change of attitude had happened prior to the election, even as McCain and crew are claiming it came later in 2007 with the US troop surge. Not so. Bottom line is that the violence situation has been naturally self-stabilizing, making it much easier to engage in large-scale withdrawals of US troops without destabilizing Iraq beyond what it is anyway.

More on Labor Markets vs. Family Values

Following up my last post that suggested family stability inhibits labor flexibility, I might mention that in our own recent hiring experience at Chico State, an inordinate number of good candidates proved unemployable because of the need to accommodate a spouse.

In a similar vein, Andrew Oswald showed that home ownership is the most reasonable explanation for differences in unemployment rates between countries. His scatter graph has a very impressive fit, presumably because people with homes are less likely to pick up and leave for a new job.

Oswald, Andrew J. 1999. "The Housing Market and Europe's Unemployment: A Non-Technical Paper."


by the Sandwichman

A guy came into the food co-op today to pick up the four 25-pound sacks of wheat he special ordered. He told me to "pick up a couple of sacks of wheat for yourself and store them in your basement." So I took a look at recent news stories on agricultural commodity prices. Prices are soaring. Every kind of planted crop has increased in price by 30% to 50% over the past few months. This will have a huge impact on food prices.

Things are going to get very interesting.

Sunday, February 17, 2008

Economists vs Family (Human) Values?

Betsey Stevenson and Justin Wolfers proposed an analogy between the supposed rigidity of European labor markets and the stability of European families:

"The U.S. labor market, like its marriage markets, differs from Europe in having substantially greater "churn"; in any given month in the United States, workers are more likely to be fired than are their European counterparts and those without a match are more likely to be hired. There is an emerging consensus that restrictions on churning in European labor markets yield inefficient labor markets with "too few" job separations. We do not mean to suggest by analogy that Europe is afflicted with too few divorces."

Stevenson, Betsey and Justin Wolfers. 2007. "Marriage and Divorce: Changes and their Driving Forces." Journal of Economic Perspectives, 21: 2 (Spring): pp. 27-52, p. 50.

Although they downplay the seriousness of their analogy, they may actually be on to something. Economists also know that home ownership, which might also contribute to family stability, represents a barrier to labor mobility. In effect, the ideal members labor force would be people without any attachments. Even better, these workers sprout like mushrooms already formed, like an 18-years old, age and expire on the day of retirement.

Saturday, February 16, 2008

Departures from Conservatism and Republican Presidents

Jeff Frankel has made his only third blog post and it’s a gem. Let’s start with his criteria for departures from conservatism:
(1) Growth in the size of the government, as measured by employment and spending.
(2) Lack of fiscal discipline, as measured by budget deficits.
(3) Lack of commitment to price stability, as measured by pressure on the Fed for easier monetary policy when politically advantageous.
(4) Departures from free trade.
(5) Use of government powers to protect and subsidize favored special interests (such as the oil and gas sector, among many others).

Hard to argue with this list of economics departures from conservative principles and hard to argue that George W. Bush has not violated the first two and the last two. Ronald Reagan does not fare well based on these criteria either and #3 seems to be directed towards Nixon. As Jeff notes:
I would contend that, not just George W. Bush, but also Richard Nixon, Ronald Reagan and (to a lesser extent) George H.W. Bush, all - in sharp distinction from their conservative rhetoric - in practice have been interventionist. They have all wandered, far from the principles of good neoclassical economics, and far from from the principles of small government and laissez faire. How far? Farther than did, for example, Jimmy Carter and Bill Clinton … Documentation that Republican presidents have since 1971 indulged in these five departures from “conservatism” to a greater extent than Democratic presidents can be found in some writings of mine, listed below. The name I would give to this set of economic policies, as well as to the parallel abuses of executive power in the areas of foreign policy and domestic policy, is neither “liberal” nor “conservative” but, rather, “illiberal.”

Jeff also offers a link to a 2003 paper that he wrote on this topic.

Friday, February 15, 2008

subprime primer

David Shemano sent me this nice power point primer on the subprime crisis. I don't know how to upload it to this blog, but here is a URL.

NYC Mayor Joins the Coalition Against the Fiscal Stimulus

OK, the bill has been signed into law and the checks are in the mail, but this did not keep Michael Bloomberg from having his say:

Mayor Michael Bloomberg has unleashed another flurry of jabs on Washington, ridiculing the federal government's rebate checks as being "like giving a drink to an alcoholic" on Thursday, and said the presidential candidates are looking for easy solutions to complex economic problems. The billionaire and potential independent presidential candidate also said the nation "has a balance sheet that's starting to look more and more like a third-world country."

Ouch! But the mayor did have praise for another idea:

His tirade against the candidates and the economic stimulus package on Thursday began when he was asked how that experiment is going. In his answer, he praised Democrat Barack Obama for the plan the Illinois senator outlined on Wednesday that would create a National Infrastructure Reinvestment Bank to rebuild highways, bridges, airports and other public projects. Obama projects it could generate nearly 2 million jobs. Last month, Bloomberg and Govs. Arnold Schwarzenegger of California and Ed Rendell of Pennsylvania announced a coalition that would urge more investment in infrastructure. "I don't know whether Senator Obama looked to see what I've been advocating, or not - you'll have to ask him - but he's doing the right thing," Bloomberg said.

Thursday, February 14, 2008

White House/Wodehouse

I draw your attention to the letters page of the Times today, where William Julius Wilson smacks down Krugman for last weeks' "Nixonland" column. It really was a nasty column. The reader is clearly given the impression that the MSNBC guy who made the inexcusable comment about Chelsea was acting at the behest of Obama's campaign. The column is a prime example of the sneaking insinuation it purports to decry.

But enough of the road to the White House. I took an escapist break this past weekend and re-read Pigs Have Wings, by P.G. Wodehouse. I have read just about all of Wodehouse's stuff and he is just phenomenal. Wodehouse has been admired by people as different as Evelyn Waugh and Alexander Cockburn. He is the best writer of comedy ever to have lifted a pen, I think. While the novels involving Bertie Wooster and his butler Jeeves are more widely known, I strongly recommend the Blandings Castle series, of which Pigs is one. Much of the plotting revolves around the corpulent Empress of Blandings, Lord Emsworth's prize pig, who has won the prize for corpulence at the local Agricultural Show on multiple occasions, despite the nefarious attempts on the part of owners of rival pigs to hobble him. I guess you had to be there - as it were- but if you've never read him before, drop everything until you have. You will thank me. How can you not like a man who pens throwaway lines such as:

"If not positively disgruntled, he was certainly far from gruntled,"

The Next Steroids.

I'm not much of a sports fan, but the story below suggests once again that it's time to take the money totally out of sports (beyond salaries for jobs done). The "winner take all" nature of the game creates a gigantic incentive to use performance-enhancing drugs to get into the high-paid majors (which pay much (much) more than the minors and amateur sports) or to stay there (cf. Barry Bonds).

If things continue to go the way they are going, big-league professional sports will either involve cyborgs, druggies, and/or transplantees -- or it will involve a draconian and intrusive system to prevent any kind of significant enhancement (making an extremely arbitrary decision about what's "significant").

So, even though (as an inveterate couch potato) I can't be the pied piper in this movement, I think sports fans should shun major-league sports and flock to (truly) amateur sports, or as a compromise, minor-league sports. The Olympics would be a good place to start: fans should insist that it go back to amateur athletics, perhaps with some allowance for athletes receiving a standardized salary.

My friend Ian responded that "Athletes have been cyborgs since shoes and helmets were invented and the pharmacology of performance enhancement is thousands of years old."

True, but that doesn't change the point: we have to end the winner-take-all nature of sports. (Look what winner-take-all competition does to politics! but that's another question.)

The New York Times / February 12, 2008
Finding May Solve Riddle of Fatigue in Muscles

One of the great unanswered questions in physiology is why muscles get tired. The experience is universal, common to creatures that have muscles, but the answer has been elusive until now.

Scientists at Columbia say they have not only come up with an answer, but have also devised, for mice, an experimental drug that can revive the animals and let them keep running long after they would normally flop down in exhaustion.

For decades, muscle fatigue had been largely ignored or misunderstood. Leading physiology textbooks did not even try to offer a mechanism, said Dr. Andrew Marks, principal investigator of the new study. A popular theory, that muscles become tired because they release lactic acid, was discredited not long ago.

In a report published Monday in an early online edition of Proceedings of the National Academy of Sciences, Dr. Marks says the problem is calcium flow inside muscle cells. Ordinarily, ebbs and flows of calcium in cells control muscle contractions. But when muscles grow tired, the investigators report, tiny channels in them start leaking calcium, and that weakens contractions. At the same time, the leaked calcium stimulates an enzyme that eats into muscle fibers, contributing to the muscle exhaustion.


Then, collaborating with David Nieman, an exercise scientist at Appalachian State University in Boone, N.C., the investigators asked whether the human skeletal muscles grew tired for the same reason, calcium leaks.

Highly trained bicyclists rode stationary bikes at intense levels of exertion for three hours a day three days in a row. For comparison, other cyclists sat in the room but did not exercise.

Dr. Nieman removed snips of thigh muscle from all the athletes after the third day and sent them to Columbia, where Dr. Marks's group analyzed them without knowing which samples were from the exercisers and which were not.The results, Dr. Marks said, were clear. The calcium channels in the exercisers leaked. A few days later, the channels had repaired themselves. The athletes were back to normal.

Of course, even though Dr. Marks wants to develop the drug to help people with congestive heart failure, hoping to alleviate their fatigue and improve their heart functions, athletes might also be tempted to use it if it eventually goes to the market.


So the day may come when there is an antifatigue drug.

That idea, "is sort of amazing," said Dr. Steven Liggett, a heart-failure researcher at the University of Maryland. Yet, Dr. Liggett said, for athletes "we have to ask whether it would be prudent to be circumventing this mechanism."

"Maybe this is a protective mechanism," he said. "Maybe fatigue is saying that you are getting ready to go into a danger zone. So it is cutting you off. If you could will yourself to run as fast and as long as you could, some people would run until they keeled over and died."

Copyright 2008 The New York Times Company

Wednesday, February 13, 2008

A View of Obama's Win from Virginia

So, this is the first time ever that I am aware of that a primary in Virginia has been important in tilting a presidential nominating race, now all the more significant since VA appears to be competitive in the national election, despite an edge John McCain may have with all the military personnel and veterans in the state (and, yes, most of those protesting Evangelical pro-Huckabee supporters will probably "go home" to him against that obvious "Muslim," Barack Hussein Obama). I had made forecasts in a local blog about the outcome, but way underpredicted the scale of Obama's win (as did everybody else).

I note that some of the media has been misreporting things. I heard somebody this morning on ABC claim that Obama won "all regions" of VA. Not so. Except for saying Northern VA would be close (it was a blowout for Obama) I came near to perfectly forecasting the regional outcomes in the state. I said the Blue Ridge Mountains would be the line, with Hillary winning most locales west of them, with the city of Harrisonburg (where I live) a possible exception (it went for Obama with 69%), and east of the mountains going for Obama, with the exception maybe of a few counties just east of the mountains in the Southwest. This is how it played out. Among the counties east of the Blue Ridge in the Southwest going for Hillary was Franklin County, long famous as the Moonshine Capital of America (yes, she got the Dukes of Hazzard vote, especially Daisy's mom and aunt). One of the few mistakes I made was that the county containing Harrisonburg (here in VA, alone among states, counties do not embed cities), Rockingham, also went for Obama, although only by 57%. I blame this on the influence of Harrisonburg on the county. The only identifiable demographic group going for Hillary statewide were white women, by 55% (which group included my wife, who says "we need a woman as president to keep those macho bastards in line"). I close by noting that both Rockingham and Harrisonburg and the areas that went for Hillary, mostly also went for Huckabee on the Republican side.

Tuesday, February 12, 2008

Support the Troops, Not!

The mantra about supporting the troops is like the conservatives concerned about the sanctity of life until after the baby is born. The military opposes improving the GI Bill because it gives soldiers and incentive not to reenlist. Even after a soldier leaves, navigating the system is complicated and the ultimate funding is inadequate for a college education, except, perhaps from a mail-order diploma mill. Here is the story from the Boston Globe.

Sennott, Charles M. 2008. "GI Bill Falling Short of College Tuition Costs: Pentagon Resists Boost In Benefits." Boston Globe (10 February).

"The original GI Bill provided full tuition, housing, and living costs for some 8 million veterans; for many, it was the engine of opportunity in the postwar years. But, in the mid 1980s, the program was scaled back to a peacetime program that pays a flat sum. Today the most a veteran can receive is approximately $9,600 a year for four years -- no matter what college costs."

"The Pentagon and White House have so far resisted a new GI Bill out of fear that too many will use it -- choosing to shed the uniform in favor of school and civilian life. "The incentive to serve and leave," said Robert Clarke, assistant director of accessions policy at the Department of Defense, may "outweigh the incentive to have them stay"."

"Paul Rieckhoff, an Iraq war veteran and director of the Iraq and Afghanistan Veterans of America, an organization based in New York, said that enhancing the GI Bill is a solid investment in the country's future. One study he cites suggests that every dollar spent on the original GI Bill created a seven-fold return for the economy. "Funding the GI Bill as Senator Webb proposes it for one year would cost this country what it spends in Iraq in 36 hours," he said."

"Beyond the financial struggle is a daunting bureaucratic obstacle course that can confound veterans and sometimes steer them away from the benefit altogether. That struggle starts with the requirement that all participants buy into the program with a $1,200 upfront payment. William Bardenwerper, an Army veteran of Iraq with an undergraduate degree from Princeton University, described a six-month odyssey of paperwork in trying to navigate the current GI Bill. He kept a detailed log of his frustrating, and to-date fruitless, effort to access his benefits for graduate school. "Not to sound elitist," said Bardenwerper, "but if a 31-year-old Princeton grad has a hard time deciphering what he is entitled to, then I have no idea how a 21-year-old armed only with a GED could navigate this system."

"Clarke, of the Department of Defense, said it is simply off-base to compare what was offered to World War II veterans to the situation today. There was no concern about retention rates back then, he said; rapid demobilization was the order of the day."

Taxes, Mandates and Rebates

I have to disagree with Mark Thoma regarding the equity advantage of mandates (like CAFE standards) over taxes on carbons and other bads. I think he misses two points: equity can be credibly built into the tax, and mandates and taxes (or permits) are not mutually exclusive.

For simplicity, let’s assume that the policy on the table is a carbon tax, overlooking the advantages (in this case) of a tradeable permit system. Requiring 100% auction of permits would be equivalent to a tax under full certainty, but in an uncertain world—the one I woke up in this morning—a permit system would nail down the atmospheric impacts at the expense of price volatility, while taxes would do the opposite. But we will ignore this for now and talk only of taxes.

My first point is that a tax system could be introduced with the stipulation that all (or a very, very high percentage of) proceeds be rebated to citizens on a per capita basis. As Boyce and Riddle show, this would be highly progressive, benefitting a solid majority of us on a net basis (even after subtracting higher prices from rebate income). Yes, the rich could still whiz by on the freeway in their supersized guzzlers, but ordinary folks could take comfort in their ability to buy more of the non-carbon-emitting stuff. They might even think, as the behemoth roars by, “That’s another dollar in my pocket.”

Thoma worries that low income people might worry that a future administration and congress might tinker with the rebate formula. Maybe, but it’s our job to nudge perceptions as close as possible to reality. Consider Social Security: we have seen multiple attempts in recent years to eviscerate the program, but they have been turned back every time, for a simple reason: most of us benefit from SS and would lose out if it were privatized. The same goes for a rebate plan. If it is written in as a basic entitlement, once the rebates start rolling the program will be virtually impregnable.

Second, I am sensing an emerging competition between tax (or permit) advocates and those pushing higher standards. There is no reason for this to happen, and each should stand or fall on its own merits. For instance, students of energy efficiency, like Gar Lipow, tell us that there is lots of low-hanging fruit—big improvements in efficiency at no net cost or even producing a net benefit. The purpose of a standard would be to circumvent information gaps, coordination failures and the like. A tax doesn’t change any of this; on the contrary, by enlarging the pool of innovations that can ultimately pay for themselves, a tax can justify an even more stringent efficiency standard. On the reverse side, a well-designed efficiency standard can help the public better cope with the demands of a tax. True, a bad standard can be an efficiency-loser, but we don’t want this beast with or without a tax.

Keeping an eye on the bottom line, once we get a new congress and a new president in 2009, a national climate change program will be on the table. We are likely to get a carbon cap: a permit system that limits carbon emissions, with the cap going down on a yearly basis. We have to stay very focused to avoid fine print that will weaken the effect of the program or steer the huge amount of money involved into the pockets of the upper class. But we should also use the opportunity to look for regulations that target bottlenecks and irrationalities in the market: better energy efficiency in transportation, land use, the built environment.

Why either/or?

Will the GOP Ever Join the Pigou Club?

Mark Thoma wonders why there is more support for mandates such as CAFE standards over Pigouvian taxes as a means of addressing the problem of global warming and comes up with this:

In thinking about efficiency as the primary reason for promoting one policy over the other, I think we might be missing something important: equity. More choice is best most of the time, but when it's a matter of being constrained, of not being able to do something you want or need to do, people want that constraint on behavior to be shared equally - especially when it involves something as essential to daily life as energy.

Kevin Drum challenges the premise that mandates are politically preferred to taxes, but then adds this bit of realism:

Republican politicians, of course, are a whole different story. Greg Mankiw can yell "Pigou Club" until he's blue in the face, but as a Republican himself he knows perfectly well that it won't do any good because Grover Norquist and the Wall Street Journal editorial page will cheerfully eviscerate any Republican who dares to raise any tax of any kind, regardless of how efficient it is, what it's funding, or whether it's revenue neutral.

Greg does seem to be trying to alter this Norquist dominance over GOP politics. Good luck Greg!

Monday, February 11, 2008

Good for the Geese, Bad for the Geezer

Out running today, I had occasion to think about the difficulties involved in sharing the planet with geese. These hefty birds would be a plus in every respect were it not for their shortcomings in the domain of personal hygiene. While picking my way gingerly along the route, I focused on possible solutions.

First, we need to direct environmental budgets to serious problems, like goose poop. If people were pooping in public to anywhere near the same extent, stopping it would be viewed as a top priority.

Now on to specifics. As we know, geese are subject to imprinting. We should pay people to become surrogate goose-parents and to lead them (as pictured in the linked photo) to an appropriate bathroom or outhouse so that they can see what proper pooping looks like. But this will create a further complication: geese, alighting from their migrations, will be knocking on doors everywhere, asking to use the facilities. To forestall this, I recommend building banks of public toilets along known flyways. This might seem extravagant, but the size of these goose-a-potties can be small, holding down costs.

And then we humans can run along rivers and bays without staring at our feet all the time.

The Intellectual Roots of Obamian Post-Partisanship

Barack Obama has been driving Paul Krugman and others crazy with his call for a warm, fuzzy hands-across-America style of politics. Where does this come from? Here’s one answer....

Cass Sunstein. Sunstein has been cited as an advisor to Obama, and he has written extensively on the dangers of a world in which people only communicate with those they already agree with. If the right listens only to Limbaugh and Hannity, and the left logs on only to Huffington and Kos, each side will shift further away from the other, until there is no middle ground left. All will be blinkered extremism. For details, consult his book or his continuing stream of papers like this one. (Question: how does he write this stuff faster than I can read it?)

I have mixed feelings about this view of our political condition. On the one hand, as a partial follower of John Dewey, and as someone who teaches at an institution that embraces “learning across significant differences”, I know how important it is to listen with an open mind to those whose point of view challenges your own. You do yourself and the quality of your thinking no favor when you live and converse in an echo chamber.

But there are two problems with the let’s-all-get-along school. First, there is the issue of power. There are wealthy, well-entrenched interests that don’t want an open-minded, cooperative approach to political questions. They are in charge and want to keep it that way. Opposing views will be censored, defunded, misrepresented and, if they arise in distant oil-bearing regions, incarcerated and waterboarded. It is necessary to struggle against these interests if we want to create a world in which thoughtfulness and generosity rule.

Second, what counts as moderation in America is often hopelessly skewed to the right, even by the standards of other capitalist countries. I generally distrust corner solutions—all this or all that—and look for blending and balancing, but if John Edwards is too far to the left to be taken seriously, I’m a speck on the thin edge of the political distribution, several sigmas out. In this respect, the Sunstein/Obama analysis is correct, but radically incomplete. We need to really extend the conversation to the vast regions beyond the pale of approved discourse. The resulting zone of consensus will be moderate by the standards of intelligent human thought but extreme with respect the political constraints we live under today.

Economy is sound

Bush: "our economy is structurally sound in the long term and that we're dealing with uncertainties in the short term."

Need I say more?

A Con Job Versus Wishful Thinking

The absences serious policy discussion in the vacuous election campaign made me think about the CON Job, were con indicates coal, oil, and nuclear. Other than a brief mention of the ridiculous tax subsidies that the cons get, nobody has said anything serious about global warming, which brings me to wishful thinking, where the wish is Wind, Solar, and Hydrogen -- assuming that the hydrogen comes from reasonable sources, such as a recent story about using bacteria, instead of nukes, to produce hydrogen.

Saturday, February 9, 2008

Economists As Bullying Witch Doctors

Esther-Mirjam Sent has a work in progress regarding how Herbert Simon made an ass of himself in debating with progressive mathematicians, who did not approve of Samuel Huntington joining the National Academy of Sciences. She included two wonderful quotes from one of the mathematicians, Neal Koblitz regarding economist misuse of mathematics.

Sent, Esther-Mirjam. 2008. "Mathematical Verbiage as a Witch Doctor's Incantation? Herbert Simon vs. The Mathematics Community." unpub.

Koblitz, Neal. 1988. "A Tale of Three Equations: Or the Emperors Have No Clothes." The Mathematical Intelligencer, 10: 1, pp. 4-10.

10: "Mathematical verbiage is being used like a witch doctor's incantation, to install a sense of awe and reverence in the gullible and poorly educated."

Koblitz, Neal (1981) "Mathematics as Propaganda." in Lynn Arthur Steen, ed. Mathematics Tomorrow (New York: Springer-Verlag): pp. 111-120.

Koblitz (1981) had noted: "Mathematics can be used to mystify and intimidate rather than to enlighten the public."

Carbon Offsets as Personal Absolution and Environmental Policy

I am at the Bainbridge Graduate Institute, where last night I heard a presentation on the carbon offset market. Someone from the audience asked if this is really just a modern version of purchasing indulgences, salving the conscience of the sinner so he can go on sinning. This is a fair question, but it doesn’t dispel the confusion that now surrounds offsetting.

First point: it is an obvious fact that many if not most of the offsetting crowd in the US, the ones who seek to neutralize their carbon footprint, take a moralistic approach. In the end, purchasing offsets is about them and how they feel about themselves. I wouldn’t condemn this, since good intentions are, well, good (most of the time). But from time to time we should ask ourselves, what is the net effect of this business on actual carbon in the atmosphere?

This leads to the second point: carbon offsets mean entirely different things now and under a future regime of carbon permits. Today, if you buy a carbon offset, there is no particular social cost and probably some potential social gain. The offset doesn’t make you drive or burn fuel oil; you buy the offset because you do these things in the first place. Meanwhile, if the offset causes any improvement in the carbon situation somewhere else, even just a little, it is a plus. True, some offsets also make things worse because they take a tunnel vision to the problem and ignore other environmental and social effects, but these can be avoided with a little research.

Now think about the future. Suppose we institute a system of carbon permits, ratcheting them down each year to meet our long term carbon goals. In this hopefully not too hypothetical world carbon offsets become a threat. An offset represents the cancellation of some part of the permit framework: you get to emit more carbon because you bought an offset. In this case there is a clear and substantial social cost, measured against the same iffy social gain. The net effect is that carbon emissions are likely to go up.

Moral of the story: transcend moralism. Put some of your spare cash into carbon offsets, but do some digging into the practices of the offset providers. Support a national system of carbon emission controls that makes no room for offsets.

Friday, February 8, 2008

Interest Rates During the Clinton Years

In a couple of comments to this post, EconoSpeak reader wellbasicly at first questioned whether the 1993 return to fiscal sanity actually promoted long-term growth and then posed this question:

for instance it is incontrovertible that interest rates did not go down

Our graph shows that interest rates moved up and down during the 1992 to 2000 period but it also shows that the interest rate was 5.24% when Clinton was leaving office as compared to 6.77% when Bush41 was leaving. So to the simple question posed, the answer is yes. Now matters like cause and effect are a little more difficult.

Much of the ups and downs likely relate to Federal Reserve’s actions and their view of how the macroeconomy was stacking up with respect to full employment. For example, the FED was allowing interest rates to fall during 1992 as the economy was weak. Why the FED slammed on the monetary brakes in 1994 was beyond me because the recovery had yet to get us anywhere near full employment.

But mercifully, the FED did allow interest rates to basically fall during the next four years even as economic growth was quite strong. I suspect the return to fiscal sanity convinced the FED that we could encourage more investment demand as at least the government was trying to boost national savings for a change.

Alas, the experiment with fiscal sanity and more national savings departed the White House along with the Clinton economic team. Then again, this decade started off with an insufficiency of aggregate demand that was stubborn to reverse itself for several years.

Wednesday, February 6, 2008

Is the Obama Campaign saying the 1993 Tax Increase and Health Care Proposals Were Bad Politics?

Greg Sargent notes:

In what may be Obama's most direct and aggressive criticism of Bill Clinton's presidency yet, the Obama campaign dropped a new mailer just before Super Tuesday that blasts "the Clintons" for wreaking massive losses on the Democratic party throughout the 1990s.

The Republicans did win a majority in Congress during the 1994 elections. From a policy perspective, what to make of this mailer?

As I recall, the Clinton Administration was pushing a couple of policy in 1993. One was a tax increase to end the Reagan-Bush41 policy of Spend&Spend and Borrow&Borrow. The other was the ill fated health care reforms. If Senator Obama is now saying he does not have the courage to end Bush43’s fiscal irresponsibility, then why should we want him as President? And it strikes me that health care reform will be a high priority for our party during the 2008 election.

But maybe the Senator does have the courage to push for both fiscal responsibility and health care reform. If so, I would suggest that Senator Obama apologize for this mailer. Let me also echo a concern that Kevin Drum shared:

So what does this tell us? Nothing except that this was a really, really close race.
The good news: Exciting! The bad news: Contrary to the storyline the talking heads have been feeding us, this hasn't really been a very nasty race. But it might turn into one now. Fasten your seat belts.

My plea to both candidates is that they try really hard to avoid what Kevin fears here (and this plea extends to the spouses even the ones who used to President).

Tuesday, February 5, 2008

Some Economists for Edwards to Endorse Obama

I am jumping the gun as this has not yet been publicly announced, but on Sunday about half of the former group, "Economists for Edwards," agreed at the urging of James Galbraith and Clyde Prestowitz to endorse Barack Obama for president. A condition of this, which I insisted on as a condition for signing on, was that it be made clear in our statement that we would be working to change some of Obama's policy positions, particularly on health care and social security, to become more like those supported by Edwards. There was considerable debate in the group on all this, and about half are not signing on. However, none of those not signing on expressed that they favored Hillary instead, even though some favored some of her policy positions.

Regarding the social security issue, I would like to make public a table that I have cooked up with invaluable input from Bruce Webb. It makes clear the degree to which reality in the last decade has been much closer to the low cost (LC) projections by the Social Security Trustees, the projection under which the system never runs a deficit ever, in contrast with the widely publicized intermediate cost (IC) projections which give deficits starting in 2017 and "bankruptcy" in 2041 (after which recipients would only be getting about 120% of what ones are now in real terms), thus reinforcing the case for doing nothing. The numbers are annual percentage terms, and I think it is otherwise pretty self-explanatory. The only year that reality was below the IC projection was the recession year of 2001, and it exceeded the LC projection in six out of the ten years. I also note that final GDP numbers for 2007 are not in, but social security balances came in above the IC projection by $3 billion, but below the LC projection by $12 billion.

Year IC projection LC projection Actual real GDP change
1997 2.5% 3.2% 3.8%
1998 2.5% 3.1% 3.9%
1999 2.6% 3.4% 4.0%
2000 3.5% 3.9% 5.1%
2001 3.1% 3.5% 1.0%
2002 0.7% 1.6% 2.4%
2003 2.9% 3.8% 3.1%
2004 4.4% 4.9% 4.4%
2005 3.6% 3.9% 3.6%
2006 3.4% 3.8% 4.7%

1997-2006 average IC = 2.92% LC = 3.51% Actual = 3.60%
2001-2006 average IC = 3.02% LC = 3.58% Actual = 3.37%

Krugman on Obama

Is anyone else as fed up as I am at Krugman's continual sniping at Obama? Is he looking for a job with Hilary? As hard-hitting as he has been on the War, doesn't it count with him at all thatClinton voted for, while Obama voted against, the thinly-disguised authorization of the use of force against Iran last year?

Monday, February 4, 2008

A Profile for Killing

Today’s news brings up an important question: are American and other military forces using profiling techniques in selecting targets for assassination?

Let’s speculate for a moment. Suppose you are a tactical commander for an occupying military force in some such place as Iraq or Gaza. You are locked in a struggle with a partisan militia, and you don’t have enough intelligence data to know who its members are. Your main weapon is aerial bombing; your main information source is aerial observation.

Begin by assuming that there is a probability that any randomly selected male between the ages of 16 and 40 is a militia fighter, say 10%. (Women may be fighters too, but their likelihood is much lower.) It is not in your interested to try to kill everyone in that demographic; you would give young men no incentive to not join the militia.

But what about groups of young men? Suppose that the probability of being in a militia rises with the number of military-age men who are seen meeting together. It might be 25% for groups of four, 50% for groups of six, and so on. Once a gathering reaches a certain size you determine that the risk of bombing non-fighters (type I error) is small enough that you should attack.

This model is too simple, of course. An actual profiling system would presumably include other dimensions (ethnic, geographic, time of day), but the general idea remains the same: if a gathering of men is given a high enough score you kill them. The result is that you eliminate a large number of those fighting against you, and you also accept the occasional public relations setback of bombing a wedding, a work detail, a militia unit made up of local collaborators.

I would like to see two things: the actual profiling methods employed by American, Israeli and similar forces (not a chance), and a public defense of the procedure by those who carry out or support it. Right now there is only silence and invisibility, but does anyone doubt that assassination-by-profile is standard operating procedure in modern anti-insurgency warfare?

Microsoft v. Google in the Acquisition Game

We got the sense that Microsoft and Google did not like each other when Microsoft objected to Google’s acquisition of DoubleClick:

Microsoft, a veteran defendant of epic antitrust battles in the United States and Europe, is urging regulators to consider scuttling Google’s plan to buy DoubleClick, an online advertising company. Microsoft contends that the $3.1 billion deal, announced on Friday, would hurt competition in the fast-growing market for advertising on the Web and raises questions about how much personal information would be collected by Google, already a dominant player in online advertising. Bradford L. Smith, Microsoft’s general counsel, said in an interview yesterday that Google’s purchase of DoubleClick would combine the two largest online advertising distributors and thus “substantially reduce competition in the advertising market on the Web.” Google dismissed Microsoft’s assertions. “We’ve studied this closely, and their claims, as stated, are not true,” Eric E. Schmidt, the chief executive of Google, said in an interview last night.

Some of you might scoff at the notion that Microsoft wants competitive markets. So what’s up with the proposed Microsoft acquisition of Yahoo?

Microsoft Corp.’s proposed $42 billion purchase of Yahoo Inc. would establish the world’s largest software maker as a “strong No. 2 competitor” against online search leader Google Inc., Microsoft CEO Steve Ballmer said Monday. Speaking to a group of analysts in New York, Ballmer said the acquisition of Yahoo would raise competition, rather than eliminate it, in the Web search and advertising market. “Google’s clearly got a dominant position. They’ve got about 75 percent of paid search worldwide,” Ballmer said. “We think this enhances competition. Anything else would be less good from that perspective.” On Sunday, a Google executive said Microsoft could use the acquisition to gain too much control over the Internet, underscoring the online search leader’s queasiness about its two biggest rivals teaming up. Google’s opposition isn’t a surprise, given that Microsoft views Yahoo as a crucial weapon in its battle to gain ground on Google. “This is about more than simply a financial transaction, one company taking over another. It’s about preserving the underlying principles of the Internet: openness and innovation,” Google chief legal officer Michael Drummond wrote in the company’s blog ... Since announcing its unsolicited bid early Friday, Redmond, Wash.-based Microsoft has been trying to depict a Yahoo takeover as a boon for both advertisers and consumers because the two companies together would be able to compete against Google more effectively. But Google is painting a starkly different picture, asserting that Microsoft will be able to stifle innovation and leverage its dominating Windows operating system to set up personal computers so consumers are automatically steered to online services, such as e-mail and instant messaging, controlled by the world’s largest software maker. In a move that illustrates just how badly Google wants to torpedo the deal, Google Chief Executive Officer Eric Schmidt called Yahoo CEO Jerry Yang Friday to offer his help in repelling Microsoft, according to a report Sunday on The Wall Street Journal’s Web site, which cited anonymous people familiar with the matter.

This spat between Google and Microsoft over who is more concerned about preserving competition strikes me as a big disingenuous on both of their parts. As the Internet moves closer to a duopoly market, shouldn’t our government being taking a much closer look at the economics as to whether these acquisitions should be allowed or not?

Update: Alex Tabarrok argues that Google’s complaint is an example of antitrust protectionism.

Saturday, February 2, 2008

A Sociological Analysis of the Rogue Trader

The Wall Street Journal has a very perceptive article about the class nature of Jerome Kerviel, a striving person from a modest background, who was trying to compete with and win approval from his more fortunate colleagues. Kerviel's story is obviously self-serving, but much of it rings true -- especially his ill-fated efforts to be accepted.

Gauthier-Villars, David and Stacy Meichtry. 2008. "Kerviel Felt Out of His League." Wall Street Journal (31 January): p. C 1.

"In 2005, Jérôme Kerviel got the biggest break of his career: a promotion out of Société Générale SA's lowly back office -- a place so uncool it was dubbed "the mine" -- and into a coveted job as a trader at the powerful bank. But if clawing your way up from the mailroom wins you a badge of honor in the U.S., not so within in the rigid class system that defines the upper ranks of French finance. Mr. Kerviel's effort to impress his colleagues now appears to be a motivating factor behind his disastrous trading spree, which burned a $7.3 billion hole in Société Générale's books."

""I was held in lower regard than the others because of my educational and professional background." Mr. Kerviel told prosecutors over the weekend. His comments were from a transcript and confirmed by prosecutors and his lawyer. Trading might not be rocket science, but Société Générale has a tradition of drawing its star traders from France's most elite schools. Many have doctorates in disciplines such as astrophysics or nuclear science .... The bank's top brass, including investment-banking head Jean-Pierre Mustier, is from the engineering school Polytechnique, the M.I.T. of France. Chief Executive Daniel Bouton graduated from the prestigious Ecole Nationale d'Administration, a school known for churning out high-level government functionaries that run the country. "If you graduated from ENA or Polytechnique, you have an absolute tenure; if not, you miss out on all the good job opportunities," according to a former Société Générale executive. "This rift exists all over the bank."

"The high-pressure atmosphere has taken its share of victims. In June, a trader in his 30s who worked on the same floor as Mr. Kerviel jumped to his death from a footbridge near Société Générale's towering headquarters in the La Défense suburb of Paris. Moments before his death, Mr. Marchet says, a supervisor had interrogated the trader for losing about €9 million in unauthorized trades. "He took his bag, left Société Générale and jumped off a bridge," Mr. Marchet says."
.... that death came in the wake of two other suicides in recent years. In 2005, a trader jumped to his death from a ninth-floor window at the bank's headquarters, Mr. Marchet said. A year later, a back-office employee jumped in front of a train commuting between La Défense and the center of Paris."

"The trading desk where Mr. Kerviel landed, the "Delta One" unit, deals with trades aimed at making small profits with stock-market fluctuations. Mr. Kerviel, who hails from a small town in Brittany and graduated from a little-known university, suggested in his statement to prosecutors that he hoped to curry favor with people who counted."

"At first, Mr. Kerviel's strategy paid off -- too well, in fact. His gains snowballed so quickly that, at some point, he had locked in a gain of €1.6 billion, about a third of the bank's overall net profit in 2006. At that moment, "I don't know what to do," Mr. Kerviel told investigators. "I am happy, proud, but I don't know how to justify my gains"."

"What seemed to disappoint Mr. Kerviel was that his trading prowess wasn't being acknowledged. He told prosecutors that he believes managers were aware of his methods but never spoke up as long as things were going well. "I cannot believe that my superiors did not realize the amount I was risking," he said in the interrogation. "It is impossible to generate such profit with small positions. That's what leads me to say that while I was [in the black], my supervisors closed their eyes on the methods I was using and the volumes I was trading."

The Super Bowl and Intellectual Property vs God

The NFL has a rule to limit TV screens to 55 inches at public viewings. The league makes an exception for venues like bars and restaurants that regularly broadcast sporting events. But churches that dare to let their parishioners watch the mayhem on the big screen are coming under fire. Presumably, the league is not protecting intellectual property, but want parishioners to go to bars instead of churches on Sunday.

Alter, Alexandra. 2008. "God vs. Gridiron: As Church Super Bowl Parties Are Busted by NFL." Wall Street Journal (2 February): p. W 1.

On Greg Mankiw’s Birthday – Does He Trust His Kids More than Himself?

Hat tip to Mark Thoma for bringing us the birthday wish of Greg Mankiw who writes:

What worry me are the problems that we will bequeath to our children. Long before I was born, Franklin D. Roosevelt established a compact among the generations. Families had long cared for their elderly members, but Roosevelt federalized that responsibility in the form of the Social Security system. Social Security is sometimes viewed as a pension plan, but it is mostly pay-as-you-go. The working-age population taxes itself to support its parents, in the hope and expectation that its children will do the same … unless we figure out a politically acceptable way to reduce the benefits now promised to future retirees, taxes are going up in the coming decades. The national debate will have to shift from which tax cuts do the most good to which tax increases do the least harm.

Where to begin with such a weak attack on the Social Security system?

I could go all Dean Baker on this criticizing Greg for mixing up three things: the projected increase in Federal health care spending, the massive general fund deficit (which Greg fails to even note), and the Social Security system which is not that far from being solvent over the long-run. Greg loves to note the rise in payroll taxes but he omits the reason for that 1983 increase, which he and I had to face just as we were getting out of graduate school. Greg claims Social Security is pay-as-you-go but we know better than this in the wake of the Reagan Social Security reform.

But what is most odd about this birthday wish is its claim about family relations. Maybe some kids are willing and able to take care of their parents, but during the 1930’s several of the elders were destitute. So this line about FDR Federalizing family responsibility sort of ignores the historical context behind the creation of the Social Security system.

But Greg’s main concern is one that I share – that we are leaving a huge Federal debt for our kids. Then again I am reminded of Robert Barro’s reconstruction of Ricardian Equivalence. Greg and I are both lucky enough to have both children and good jobs. With all those tax “cuts” (actually shifts) that we got from Greg’s former boss (President Bush) – shouldn’t he and I be saving to help our kids pay for those future taxes?

Happy 50th birthday Greg!

Friday, February 1, 2008

deLong on Marx's predictions

Some comments on deLong’s analysis of Marx’s prediction.

Shanghai Daily (2/1/08)

Would Marx say rising tide today lifts all boats?
By: J. Bradford DeLong

A century and a half ago, Karl Marx both gloomily and exuberantly predicted that the modern capitalism he saw evolving would prove incapable of producing an acceptable distribution of income.

"Acceptable"? Marx wasn't much concerned with such moral terms (especially since his predecessors had been overly fond of moralistic phrasings), nor did he care about the distribution of income as much as the distribution of power.

Wealth would grow, Marx argued, but would benefit the few, not the many: the forest of upraised arms looking for work would grow thicker and thicker, while the arms themselves would grow thinner and thinner.

Ever since, mainstream economists (in the West) have earned their bread and butter patiently explaining why Marx was wrong.

That's why they're paid? Hmm... somehow I thought so all along.

Yes, the initial disequilibrium shock [!!!] of the industrial revolution was and is associated with rapidly rising inequality as opportunities are opened to aggressiveness and enterprise, and as the market prices commanded by key scarce skills rise sky-high. But this was - or was supposed to be - transient.

The reason I inserted the exclamation points is because deLong seems to assume that “Western” economies were in equilibrium right before the industrial revolutions and that the equilibria were shocked by some sort of outside force. I would like to know the theory and, more importantly, the facts behind this view. Was it a theory developed by the late Walt Rostow in his "non-Communist Manifesto"?

The history of actual capitalist industrial revolutions suggests that "aggressiveness and enterprise" is a euphemism for theft. (The latter does not have to be a moralistic term: a lot of Marx's arguments are stated in terms of the bourgeoisie breaking their own laws, of their practice violating their own theory.)

The rest of deLong’s article isn’t about Marx as much as about his interpretation of Marx’s prediction of growing inequality (the absolute general law of capitalist accumulation).

A technologically stagnant agricultural society is bound to be an extremely unequal one: by force and fraud, the upper class pushes the peasants' standards of living down to subsistence and takes the surplus as the rent on the land they control.

It seems that deLong believes that the extraction of rent has stopped, since most of the people in the “West” no longer live in agricultural societies. But oil producers (and to a lesser extent, other mining interests) still make tremendous profits from the scarcity rents that are a big chunk of the exorbitant prices of their product. (“Scarcity rents” are revenues received simply because the product is scarce, not because anyone has to devote resources to producing it.)

By contrast, mainstream economists argued, a technologically advancing industrial society was bound to be different. First, the key resources that command high prices and thus produce wealth are not fixed, like land, but are variable: the skills of craft workers and engineers, the energy and experience of entrepreneurs, and machines and buildings are all things that can be multiplied.

It's true that skills of the craft workers who initially benefited from industrial revolution in England (and I presume the US) later found that their skills were rendered obsolete (as their bosses mechanized, de-skilled production, etc.) It's also true of engineers and other "knowledge workers," since they are in very much the same boat as the craft workers, i.e., dependent on the capitalist accumulation process and the capitalist effort to end dependence on any group of high-paid workers. (Computer programmers paid too much to allow you to receive abundant enough profits? I have a H1-B visa program for you...)

It's also true that the capitalist competitive effort to profit by any means necessary can cause over-accumulation: like fools, they rush in, over-investing in and over-producing machines and (especially) buildings. This eventually causes a crash, which obsoletes some capitalists. (Marx tells this story in volume I: it's called the "concentration and centralization of capital.")

The problem with deLong's story (or what he might call a "model") is that some of their crowd get out while the going is good. They convert their machines and buildings (or, more generally, corporate equity) into liquid cash before the markets crash. (Even if they aren't personally thieves themselves, they follow many a criminal's dream: steal a million and turn it into cash (without being caught) and then "go legit.") The ones that succeed can then hold a nice diversified portfolio of assets (hedged by holding lots of ultra-safe government bonds), which allows them to weather most storms.

On top of that, they can build on their initial advantages, taking their property income (a.k.a. surplus-value) and increasing the size of their nest-eggs, until they grow to the size of Roc eggs. They can regularly take some big risks with some of their portfolios (while sheltering the rest), get a high return, and accumulate even more of the safer assets.

Next, they can buy some politicians to help them grow their wealth and power and major-domos to help them spend their money.

This, of course, is why we see dynasties established and lasting for centuries. It's true that the scions get decadent and want to break the First Commandment ("thou shalt not dip into capital") or the Second ("thou shalt not put all thy eggs in one basket"). But that's why God invented trust funds with all sorts of rules.

As a result, high prices for scarce resources lead not to zero- or negative-sum political games of transfer but to positive-sum economic games of training more craft workers and engineers, mentoring more entrepreneurs and managers, and investing in more machines and buildings.

I truly wish economists and other social researchers would drop the lame "game theory" metaphors. In any case, it says nothing about the accumulation of money wealth and money power.

Second, democratic politics balances the market.

Where does this "democratic politics" come from? does it fall from the sky? is it innate in the mind? No. They come from social practice, and from it alone. (Gee, I wonder if people reading the "Shanghai Daily" know who I plagiarized that from.)

In 19th century England, as in most other capitalist countries, democratic politics came from below, from movements such as the Chartists. That is, working people fought back -- and the moneyed rulers weren't interested in democracy. (In the US, the story is different, as Mike Davis points out, because many democratic rights were won without working-class struggle because a big chunk of the male population owned land in the early stages. Nonetheless, US workers had to fight pretty damn hard.)

And of course, the growing money potentates used their friends in the government (or hired scabs) to fight the working-class upsurge. They also developed ways to control democracy so that it wouldn't get out of hand, while (1) keeping working people quiet because it was "their government" and (2) making them alienated from politics because "their government" was corrupt (owned by -- guess who?)

Of course, it's wrong to over-generalize from the corrupt system of managed democracy we see in the U.S. The workers don't always lose. But they don't win if they rely on the "condescending masters" in the government to solve the problems. They need to organize to pressure the government if they want to get anything decent.

Government educates and invests.

And who pays for that? and what good is a public information if the government destroys its scarcity value by educating lots of people, creating your competition? it's great to be literate, numerate, etc., but it doesn't give you a leg up to compete with the moneyed powers. I doubt that education ever made anyone rich, able to join the capitalist class, to become independently wealthy, etc.

It also provides social insurance by taxing the prosperous and redistributing benefits to the less fortunate.

As Otto von Bismarck (who invented it) knew, social insurance is almost completely a matter of redistribution within the working class, not a redistribution from the rich. Like most insurance, it's needed. But we, not the rich, pay for it.

(Your employer contributes to unemployment insurance, it's true, but all economists (though maybe not deLong) know that that tax is passed on and is really paid by the employees. The wages are lowered to allow the employers to afford to write the checks for the tax.)

Economist Simon Kuznets proposed the existence of a sharp rise in inequality upon industrialization, followed by a decline to social-democratic levels.

As Doug Henwood has said, we've gone beyond the Kuznets curve. The latter’s curve has inequality up followed by inequality down. Even it this happened, we in the US are now in a new "inequality up" phase, since 1980 or so. This, it seems, explains what deLong says next.

But, over the past generation, confidence in the "Kuznets curve" has faded. Social-democratic governments have been on the defensive against those who claim that redistributing wealth exacts too high a cost on economic growth.

The problem with this statement is that the Kuznets curve was supposed to be the end of inequality. Except for a small minority, it says, we’ve been through the pain, the economy spreads the gain to everyone. But that ended. In the spirit of retro, we went back to the bad phase of the Kuznets curve.

The bigger problem is that the Kuznets curve is just a curve. It doesn’t really explain anything. All it does is describe the change in inequality over time that actually happened up to the point when Kuznets summarized it.

Instead of saying there’s a Kuznets curve, we should look at the political economy, the history. The end of growing inequality after the industrial revolution in the U.S. -- and the so-called "Golden Age" of the 1950s and 1960s -- came from four main sources (listed below). These made workers' struggles relatively easy for a change, as long they kept generally within channels, allowing them to gain a share of some of the productivity gains. By the way, this does contradict Marx's "prediction" of growing inequality. Instead, it tells us something we should have known: like many or most "predictions" in economics, it worked "all else equal." And not all else stays equal.

(1) the crash of 1929, which hit the rich folks especially hard.

(2) the social movements of the 1930s, which pushed F.D.R. to reform capitalism a bit in a way that helped promote equality.

(3) World War II, which not only involved an abundant demand for labor-power and relatively high wages (for those outside the armed forces) but also had “forced saving”: at the end of the war, a big chunk of the U.S. working class actually had significant savings accounts and/or holdings of government bonds, because the government had pressed them to buy bonds during the war and because of the limited available of commodities to buy.

(4) the political economy of the immediate post-World War II period, in which the “GI Bill” helped returning veterans get education and home-ownership. (This was a belated response to the class struggles after World War I, as when veterans marched on Washington to insist on a bonus.) Also, the U.S. was on the top of the world pile (in the capitalist sphere), with little or no competition from other capitalist powers plus immobile capital (compared to later), This meant that it was a good time for raising wages in step with productivity. Many capitalists even saw high wages as a source of demand, downplaying their role as costs. The arms economy -- the dominant part of the warfare/welfare state -- kept the system stable and demand humming.

In addition, international political competition with the Soviet Union encouraged the capitalist powers to respond to mass social-democratic demands. Especially in Europe, a welfare state grew.

By the way, the people that deLong refers to who claim to be defending "economic growth" are the neoliberals. In recent decades, they have been successful at feathering their own nests and those of their employers, encouraging growing inequality. They have encouraged the undermining and end of the temporary "Golden Age."

Neoliberals also totally define "growth" in market-driven terms (GDP). If you do that, you've lost the game (as it were).

The consequence has been a loss of morale among those of us who trusted market forces and social-democratic governments to prove Marx wrong about income distribution in the long run - and a search for new and different tools of economic management.

Increasingly, pillars of the establishment are sounding like shrill critics. Consider Martin Wolf, a columnist at The Financial Times.

Wolf recently excoriated the world's big banks as an industry with an extraordinary "talent for privatizing gains and socializing losses ... (and) get(ting) ... self-righteously angry when public officials ... fail to come at once to their rescue when they get into (well-deserved) trouble ... (T)he conflicts of interest created by large financial institutions are far harder to manage than in any other industry."

What’s happening, it seems, is that even folks who write in the Financial Times are upset about the hammerlock that financial capitalists have on government policy!

For Wolf, the solution is to require that such bankers receive their pay in installments over the decade after which they have done their work. But Wolf's solution is not enough, for the problem is not confined to high finance.

The problem is a broader failure of market competition to give rise to alternative providers and underbid the fortunes demanded for their work by our current generation of mercantile princes.

What? now deLong recognizes the existence of "mercantile princes"? and now his only response is totally ambiguous? Is he hoping that "democratic politics" is going to fall from the sky again? is he going to convince those mercantile princes to be nice for a change? If so, he has to be much less ambiguous. If he thinks that Marx turned out to be right on the question of growing inequality, he should say so.

Jim Devine