Saturday, February 28, 2009

Furloughing in the Wind

by the Sandwichman

Sandwichpal, John de Graaf is quoted in this New York Times feature about "A Slowdown That May Slow Us Down." "It ['furloughs'] may not ultimately be a sacrifice," John told the Times. "It may be exactly what they need to do to be happier and healthier."

The article also cites shorter work time mavens, Juliet Schor and Ben Hunnicutt and cite Dean Baker's tax credit for time off proposal.

Christina Romer: Following in the Tobin Tradition

Like the late James Tobin, Christina Romer argues for the efficacy of fiscal policy to pull us out of a recession. But that is not the motivation for my title – rather it is something Paul Krugman noted about Dr. Tobin:

He was a great economist and a remarkably good man; his passing seems to me to symbolize the passing of an era, one in which economic debate was both nicer and a lot more honest than it is today.

Let’s focus on the following from Dr. Romer’s paper:

The first issue is what it would mean for the policy to work. The President gave a very concrete metric: he wanted a program that would raise employment relative to what it would be in the absence of stimulus by 3 to 4 million by the end of 2010. Some on the blogosphere (such as the best man at my wedding, Greg Mankiw) call this metric meaningless: they complain that because we never observe the outcome under the no stimulus baseline, it isn’t verifiable. But it is, in fact, the intellectually sound and appropriate metric to use. Exactly what any macroeconomist would ask of a policy is what are its effects, holding constant all the other forces affecting the economy. I feel the strongest evidence that the President’s metric is a good one is that it has focused the debate on the right issue. Numerous forecasters, from Mark Zandi to Macroeconomic Advisers to CBO to the Federal Reserve, have looked at what they expect the Act to do. Rather than fighting over the differences in the no-stimulus baselines, which are substantial and largely outside the control of policymakers, the debate has centered on what the policy would accomplish. Of course, one can also debate the baseline and the question of whether creating or saving 3 to 4 million jobs will be enough to fully heal the economy. But, it is important to acknowledge that creating or saving that many jobs would be a tremendous accomplishment.

She was referring to this:

The expression "create or save," which has been used regularly by the President and his economic team, is an act of political genius. You can measure how many jobs are created between two points in time. But there is no way to measure how many jobs are saved. Even if things get much, much worse, the President can say that there would have been 4 million fewer jobs without the stimulus.

Romer could taken the approach that Brad DeLong took to this line:

Greg, Greg, Greg, Greg, Greg, Greg. Setting fire to your own credibility to please your political masters is a very myopic intellectual strategy. It is doubleplusungood to say: "It's bad when a Democratic president and his economic advisors do it, but it was just wonderful peachy when a Republican president and I did it."

To be fair, Greg Mankiw did update his post with the following:

A regular reader of this blog (who deserves anonymity) misinterpreted my meaning, so let me clarify: The 4 million job number is a counterfactual policy simulation of what the stimulus will do based on a particular model of the economy. As such, I have no objection to someone citing it in a policy discussion. In fact, macroeconomists use models to generate figures like this all the time. I have even done it myself.

And most economists draw up counterfactual policy simulation as Dr. Romer so politely points out. As Brad earlier noted, Greg Mankiw has unfairly gone after Christina Romer before:

Is there any way to interpret Greg Mankiw's Sunday New Yotk Times other than as an elbow to Chtistie's ribs while he thinks the ref's eye is elsewhere? Christie certainly does not believe that tax multipliers are twice the size of spending multipliers.

Had she gave an elbow to Mankiw’s rib in reply, she would have been well justified. But hers was a very polite and professional reply. Let’s return to what Paul Krugman said back in 2002:

Why do I feel that Mr. Tobin's passing marks the end of an era? Consider that Kennedy Council of Economic Advisers, the most remarkable collection of economic talent to serve the U.S. government since Alexander Hamilton pondered alone. Mr. Tobin, incredibly, was only one of three future Nobelists then working at the council. Would such a group be possible today? I doubt it. When Mr. Tobin went to Washington, top economists weren't subject to strict political litmus tests -- and it would never have occurred to them that the job description included saying things that were manifestly untrue. Need I say more? Yesterday I spoke with William Brainard, another Yale professor who worked with Mr. Tobin, who remarked on his colleague's ''faith in the power of ideas.'' That's a faith that grows ever harder to maintain, as bad ideas with powerful political backing dominate our discourse. So I miss James Tobin, and I mourn not just his passing, but the passing of an era when economists of such fundamental decency could flourish, and even influence policy.

Bad ideas with powerful political backing may still be leading to some rather sharp elbows being thrown – but it would seem Christina Romer represents a return to fundamental decency.

Crowding-out for Spending Increases but Not Tax Cuts?

Lori Montgomery plays Steno Sue for the GOP:

Republicans quickly attacked the document as a recipe for economic disaster, saying it would raise taxes on businesses and consumers in the middle of a recession in order to bankroll a massive government expansion. "The era of big government is back, and Democrats are asking you to pay for it," said House Minority Leader John A. Boehner (R-Ohio). "The administration's plan, I think, is a job killer, plain and simple." White House budget director Peter Orszag rejected that analysis, saying none of the tax increases would take effect until 2011. But some economists worry that even in 2011 the economy may be too fragile to absorb a tax increase. Meanwhile, some Democrats joined Republicans in complaining that the budget plan does not go far enough to narrow the yawning budget gap.

Dean Baker objects to this nonsense:

While no economists are identified with the view that President Obama's tax increases on the wealthy in 2011 will harm a fragile economy, the article does not discuss at all the economic impact of the cuts in spending that "some Democrats" and Republicans apparently favor. The multiplier for almost possible spending cuts would be considerably larger than the multiplier for the tax increases on the wealthy. Any economists who were concerned that tax increases in 2011 could harm a still weak economy would almost certainly be much more concerned about the prospect of spending cuts in that year.

OK – this is the standard Keynesian view but we are seeing a parade of folks on display at this blog who would tell you: (1) the multiplier for tax cuts is indeed high; and (2) increases in government spending completely crowd-out investment even during periods of unemployment. After all, the Treasury View is what must be taught to their graduate students. Of course, all real economists know the Treasury View does not hold when fiscal stimulus comes in the form of tax cuts for the rich – right?

Friday, February 27, 2009

Not Part of the Remit? Part II

by the Sandwichman

The Sandwichman submitted the following comments to the "Middle Class Task Force" (formerly the White House Task Force on Working Families):

The Middle Class Task Force staff report on Green Jobs, issued today, cites the UN Environmental Programme's report, "Green Jobs: Towards Decent Work in a Sustainable, Low-Carbon World." I would like to call your attention to two brief but absolutely crucial sections in the UNEP report: "Rethinking Consumption" and "A New Approach to Work Hours".

In the section on rethinking consumption, the authors state, "Sooner rather than later… we need to confront the specter of insatiable consumerism itself. There is a danger that the consumer juggernaut will overwhelm even the most sophisticated methods and technologies that can be devised to make consumption lean and super-efficient. Consuming better does not obviate the need to consider moderation in overall consumption levels."

What this means, to be perfectly clear, is that if we DON'T confront the economic growth imperative all the rest of the good work we do to create green jobs will be moot.

That's a rather strong statement, tucked in inconspicuously in a one-page section of a 376-page document and, significantly, excluded from the summary report "for decision makers."

We know why this matter wasn't discussed more fully because the report tells us. The question about what to do about excessive consumption was "not part of the remit of this report." Let me repeat, it was "not part of the remit of this report" to look into a matter that could overwhelm (that is to say: bury, crush, submerge completely) all of the sophisticated methodological and technological innovations discussed in the other 375 pages of the report.

May I point out that is like getting ready to do a twelve-hour brain surgery without making sure there are double and triple back-ups in case of a power outage? As John Kenneth Galbraith remarked fifty years ago, it is like having a discussion about how to prevent traffic accidents while agreeing not to talk about speed.

There's a name for this bizarre phenomenon of skirting around the forbidden question. It's called "the elephant in the room." The White House blog mentioned the good-natured jockeying among cities and states for who was "greenest." By coincidence, earlier this week the City of Vancouver launched a program with the goal of making Vancouver "the greenest city in the world." In response to that, I started a facebook group called "The Greenest Elephant in the Room" because so much of the talk about green jobs sidesteps the single most direct and immediate way to cut greenhouse gas emissions (among other things) – reduce consumption, reduce the hours of work, share the work and spare the planet!

That brings me to the other brief section in the UNEP report, "A New Approach to Work Hours":

Industrial economies are extraordinarily productive-meaning that the same quantity of output can be produced with less and less human work. In principle, this can translate into either of two objectives: raising wages (in line with productivity) while holding working hours constant, or providing greater leisure time while holding income from wages constant. In practice, it has mostly been the former. Most people have been locked into a "work-and-spend" pattern.
Since the rise of mass industrialization in the late 19th century, there has been an ongoing tug-of-war between employers and unions over working hours… Employees have struggled for less work time – in the form of shortened workdays or weeks, extended vacation time, earlier retirement, or paid leave. These efforts were primarily motivated by a desire to improve the quality of life and to create more jobs. While environmental issues have not played a central role, channelling productivity gains toward more leisure time instead of higher wages that can translate into ever rising consumption also increasingly makes sense from an ecological perspective.

It is crucial to retool not only the economy, but also economic thought. Right now, economic actors are primed to respond to quantitative growth signals… A sustainable economy needs a different way of measuring human activity and of providing signals to investors, producers, and consumers. It needs a different theory, abandoning the outdated assumption that quantitative growth is unconditionally desirable and embracing instead the notion of qualitative growth.
The UNEP report "is correct when it states that it is crucial to retool not only the economy, but also economic thought." But then, amazingly, the report doesn't follow through on what could be done to retool economic thought! It focuses exclusively on the technological fix.

It takes courage to talk about what has become taboo to mention – to name the elephant in the room. The brief sections in the UNEP report that discuss "rethinking consumption" and "a new approach to work hours" are pithy. Their brevity, though, and lack of follow-through speaks volumes.

Not Part of the Remit? Part I

by the Sandwichman

Sooner rather than later, however, we need to confront the specter of insatiable consumerism itself. There is a danger that the consumer juggernaut will overwhelm even the most sophisticated methods and technologies that can be devised to make consumption lean and super-efficient. Consuming better does not obviate the need to consider moderation in overall consumption levels.

Notwithstanding the "danger that the consumer juggernaut will overwhelm even the most sophisticated methods and technologies that can be devised to make consumption lean and super-efficient," how to tame that consumer juggernaut was "not part of the remit of this report", this report being the United Nations Environment Programme's "Green Jobs: Towards Decent Work in a Sustainable, Low-Carbon World."

Is there an elephant in the room? I see one. Do you? But it is not part of the remit of this report to talk about the Greenest Elephant in the Room!.

When dealing with the juggernaut that could overwhelm even the most sophisticated methods and technologies is not in the remit, there is something fundamentally, radically, pathologically wrong with the remit.

Do Keynesian Economists Believe in Fairy Tales?

Oliver Staley and Michael McKee have a nice article entitled Yale’s Tobin Guides Obama From Grave as Friedman Is Eclipsed. John Cochrane is quoted as claiming the following:

while Tobin made contributions to investing theory, the idea that spending can spur the economy was discredited decades ago. “It’s not part of what anybody has taught graduate students since the 1960s,” Cochrane said. “They are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children but it doesn’t make them less false.” To borrow money to pay for the spending, the government will issue bonds, which means investors will be buying U.S. Treasuries instead of investing in equities or products, negating the simulative effect, Cochrane said.

Maybe Professor Cochrane is not aware that Dr. Tobin was including Keynesian economics in his graduate classes at Yale University. I’m sure other the macroeconomic classes in other graduate programs also spend considerable time explaining the contributions of Keynes, Tobin, et al. And we see that Professor Cochrane is still stuck on this discredited Treasury view. To claim that Keynesian economic represents a fairy tale that has been proven false shows how out of the loop Professor Cochrane happens to be.

Update: Brad DeLong wonders if Cochrane has an economic model to back up his argument for complete crowding-out. As Brad tries to fill in the blanks left by Cochrane, he realizes the following:

If Cochrane were to present his model and argument for crowding out, it would sound--to me at least--pretty silly. It would carry the implication not just that government spending can't spur the economy, but that private spending by high-tech startups in the 1990s or by homebuilding compaanies in the 2000s did not spur the economy either--that it was simply chance that high-tech investment spending boomed in the late 1990s and the unemployment rate fell at the same time and that it was simply chance that home construction spending boomed in the mid 2000s and the unemployment rate fell at the same time. And Cochrane's position had not to my knowledge been seriously advanced--certainly Milton Friedman did not advance the view that there was always 100% crowding-out of fiscal policy--since R.G. Hawtrey and the "Treasury View" of the 1920s.

Pieces of Mind - Kyoto Protocol

Piece One:
Global models that include the feedbacks between climatic change and the carbon cycle have all shown decreased carbon sinks over the next century. [1]

Piece Two:
Growing trees absorb net quantities of CO2, and the higher levels of CO2 and nitrogen in the atmosphere are themselves stimulating tree and plant growth…. But the researchers expect these effects to reach saturation point and cease to have an effect. [2]

Piece Three:
What the researchers found limited the trees' capacity to respond to carbon fertilisation was a shortage of other nutrients, especially nitrogen. The availability of water was also important. ….The US and the other members of the so-called Umbrella Group (Japan, Switzerland, Canada, Australia, Norway, New Zealand and Russia) wanted to rely considerably on sinks in meeting their Kyoto targets for reducing emissions of greenhouse gases that may be warming the global climate. The European Union and others opposed this, arguing that open-ended use of sinks to absorb CO2 could allow countries to avoid making any actual emission cuts at all. [3]

Piece 4:
[Tree] respiration increases in response to temperature rises, which are triggered by the rising levels of CO2. Many scientists believe that respiration may be about to accelerate, turning the forests from sinks to sources of carbon…. They failed to recognise that this could happen because, although CO2 take-up is instantaneous, the warming that triggers respiration has a built-in delay of about 50 years, mainly because of the oceans' thermal inertia. So planting more trees could soon prove a quick way of speeding up climate change, not of moderating it. Bob Scholes, of the South African Government's research agency, CSIR, says it could be a costly mistake. "The carbon cycle has a very long equilibrium time. The consequences of actions taken now will persist for many centuries." [4]

[1] The First State of the Carbon Cycle Report (SOCCR)
The North American Carbon Budget and Implications for the Global Carbon Cycle
The Carbon Cycle in Land and Water Systems, Part III Overview.
Lead Author: R.A. Houghton, Woods Hole Research Center

[2] Forests 'only temporary carbon absorbers'.
Wednesday, 7 November, 2001, 19:13 GMT
By Alex Kirby. BBC News Online environment correspondent

[3] Tree planting warning over global warming
Tree at sunset BBC
Trees may not live up to expectations for storing carbon dioxide
By BBC News Online's environment correspondent Alex Kirby

[4] Trees 'will not avert climate change'
Wednesday, October 20, 1999 Published at 22:49 GMT 23:49 UK
The world's forests can buy a little time, before they start adding to the warming
By Environment Correspondent Alex Kirby

Wednesday, February 25, 2009

The Greenest Elephant in the Room

by the Sandwichman

The Sandwichman has started a facebook group called Greenest Elephant in the Room and fondly invites all EconoSpeak readers to join. There will be a Greenest Elephant in the Room contest, too!

No one can avoid noticing an elephant in the room. But respectable folks somehow know it's not polite to mention that it's there.

In response to the City of Vancouver's upcoming "Greenest City in the World" initiative (it will be announced sometime this week), the Greenest Elephant in the Room is dedicated to raising the "forbidden question" of reducing the workweek.

It's the most immediate and direct way to reduce material throughput while preserving and even creating jobs. Yet even as the current economic and environmental crises make the reduction of working time more urgent, serious proposals to do so are treated as curiosities from the fringe. Why is this so?

The Greenest Elephant in the Room suspects that there are a lot of economists, politicians and other respectable folks who would rather be silly than look silly by marching out of step with their silly peers. As John Maynard Keynes remarked of bankers, "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."

Tuesday, February 24, 2009

Jindal’s Reply to Obama’s Speech: I Have No Clue What You Intend To Do

As I post this, the President is speaking to the Congress on the economy. The Republican response will be delivered by a clueless person:

To solve our current problems, Washington must lead. But the way to lead is not to raise taxes and put more money and power in hands of Washington politicians ... Democratic leaders say their legislation will grow the economy. What it will do is grow the government, increase our taxes down the line, and saddle future generations with debt. Who among us would ask our children for a loan, so we could spend money we do not have, on things we do not need?

Jindal cannot argue that the stimulus bill raises taxes today as it cuts taxes at least in the short-run. Yes – the present value of future government spending plus any current debt must be financed by the present value of future taxes. So if the President was proposing a permanent increase in government spending, then Jindal might have a point. But had Jindal bothered to actually listen to what the President has been saying – the long-run plan is for fiscal restraint following the current temporary fiscal stimulus.

Jindal is seen by many in Republican circles as their next leader. Yes – Republicans does have a habit of letting economic know-nothings rise to the top of their party.

Update: I did not stay up to actually watch Jindal but some folks at Faux News did and they were not impressed. As David Weigel notes:

Brutal. No one seems to think Jindal performed well.

Monday, February 23, 2009

Is There a Speculative Bubble in Gold?

The price of gold topped $1,000 per ounce this past Friday, only the second time it has done that, the last being last March for a few days. Yes, I think there is a bubble, but some other observers disagree (Patrick Heller: "Gold Reaches $1,000 Again: This Time It's Different"). Heller claims that "this is different" (from last March), with "prudent buyers" still buying, and various "mainstream pension funds" getting into the act, with him forecasting a major "shortage" of gold coins and loose jewelry later this spring. He suggests we will not see a price below $1,000 again any time soon.

Quite aside from my vague sense from people coming up to me randomly with this sort of frenzied tone when asking me about gold (always a bad sign), there are some aspects of this that do not smell right. Sure, I would not be surprised if the price rises some more. This bubble could bubble away for some time more, even some months. But usually the drive to gold is a flight from currency based on fears of inflation. Now, maybe there are people fearing hyperinflation from the fiscal stimulus, but a lot of forward swap markets still show expectations of deflation. Jim Hamilton at econbrowser is all pleased that there was a slightly positive increase in the US CPI in January, but is still hoping for much more inflation (his favored target is a 3% rate), and the price of oil has only gone down since then.

Of course, a deeper possibility here is probably a fear of just total collapse of everything, call it fleeing from nameless black swans that may be flying towards us. The same sort of thing probably explains the newly recent highs we are seeing on the US dollar, this absurd "flight to quality" to the dollar, when it is facing massive foreign imbalances and indebtedness, rather like what happened in mid-September when we briefly saw negative nominal interest rates. However, the most likely Awful Event still does not look like the sort of hyperinflation that feeds the gold bugs's mania, but a deep decline into deep depression, which would mean deflation. This would mean a collapse of the price of gold. Sure looks like a speculative bubble to me.

Update on "Gradual Decline Before the Crash"

Last July 12 I posted here on both old and recent work of mine on modeling how most bubbles experience "period of financial distress" after a peak during which they gradually decline for awhile before crashing. I noted the declines in deriviatives markets, identifying August 2007 as the peak. I warned of the danger of a crash, while holding back from outright forecasting one or when it might occur. Well, it occurred in mid-September with the general global meltdown after the failure of Lehmann Brothers, and was followed by a pretty steep crash of stock markets around the world.

I also note that housing continues to follow my forecast, that it is in a gradual decline since its peak in mid-2006, with no sign of a full-scale crash, although we are pretty clearly still well above a bottom. The other pattern for bubbles, of a crash immediately following a peak still looks like what happened to oil this past summer. Again, for the record, in the fourth edition of his Manias, Panics, and Crashes, of the 47 historical bubbles identified by Charles Kindleberger in his Appendix B, 37 of them followed the "period of financial distress" pattern, including all the really big ones, with the remainder about evenly split between the other two patterns.

Does Rick Newman Understand Either Moral Hazard or Option Valuation?

Rick Newman calls the possibility of temporarily nationalizing troubled banks “scary” for reasons that are being properly ridiculed – a topic we’ll come to in a moment. But let’s start with this claim:

It wouldn’t solve the underlying problem. The main problem at struggling banks like Citigroup is a mountain of losses – which the banks may not have enough cash to cover … The government can pump taxpayer dollars into banks to help cover losses, which it’s already doing. But even if it owns the banks, “the government can’t make embedded losses go away,” says economist James Barth of the nonprofit Milken Institute. “The question is how to prevent additional losses.” If troubled banks were making wild decisions that were exacerbating their problems, then a government takeover might be one way to install more prudent management. But by most accounts, government regulators are now watching troubled banks so carefully that they’re effectively clamping down on any risky moves anyway.

The problem is not past decisions but the possible future decisions of zombie banks, that is, banks with liabilities exceeding the value of their assets. The fact that the government can observe a troubled bank does not erase the moral hazard dilemma inherent in letting the owners of these zombies continue to make management decisions. But the claim that is getting the most ridicule is as follows:

A government takeover would vaporize a lot of wealth. This is why the markets freak out every time there’s a rumor, or a rumor of a rumor, about nationalization. If the government took over a bank, public shares would suddenly be worthless and shareholders would lose everything. With Citi and Bank of America shares down more than 90 percent over the last 12 months, many shareholders have already lost a fortune. But there’s still a chance they’ll get some of it back if the bank recovers. That potential upside would disappear if the feds stepped in.

TPM reader AC nails this:

the only reason that the 90% to 95% losses that many have taken is not 100% is because of the chance that the feds bail out the banks but leave some equity outstanding (e.g., the 40% Citi solution). This, of course, is just a transfer of wealth from taxpayers to bank shareholders--like Paulson's funding of Citi greater than their market cap, to take meaningfully less than a 100% stake.

Paul Krugman recently made the same point:

And the market caps of these banks did not reflect investors’ assessment of the difference in value between their assets and their liabilities. Instead, it largely — and probably totally — reflected the “Geithner put”, the hope that the feds would bail them out in a way that handed a significant windfall gain to stockholders. What’s happening now is a growing sense that the federal government, in return for rescuing these institutions, will demand the same thing a private-sector white knight would have demanded — namely, ownership.

While Newman is correct in the claim that there is some remote possibility that the future cash flows of these banks will turn positive, there is also the strong possibility that the future cash flows will turn even more negative. The difference between the current market price of these bank shares and this Geithner put option is the current expected present value of cash flows – with each element of the probability matrix accounted for. Dr. Krugman et al. argues that the present value is negative. What I guess scares Mr. Newman is that the bank shareholders might lose the value of this Geithner put option, which of course is what we taxpayers would be giving away for free if we do not nationalize these troubled banks.

Sunday, February 22, 2009

The Kyoto Protocol. Oh No!

"Under Kyoto, emissions are allocated to the country where they are produced. By these rules, the UK can claim to have reduced emissions by about 18% since 1990 - more than sufficient to meet its Kyoto target. But research published last year by the Stockholm Environment Institute (SEI) suggests that, once imports, exports and international transport are accounted for, the real change for the UK has been a rise in emissions of more than 20%...." [1]

"VICTORIA'S bushfires have released a massive amount of carbon dioxide into the atmosphere - almost equal to Australia's industrial emission for an entire year. Mark Adams, from the University of Sydney, said the emissions from bushfires were far beyond what could be contained through carbon capture and needed to be addressed in the next international agreement. "Once you are starting to burn millions of hectares of eucalypt forest, then you are putting into the atmosphere very large amounts of carbon," Professor Adams said. In work for the Bushfire Co-operative Research Centre, he estimated the 2003 and 2006-07 bushfires could have put 20-30million tonnes of carbon (70-105 million tonnes of carbon dioxide) into the atmosphere. "That is far, far more than we're ever going to be able to sequester from planting trees or promoting carbon capture," he said..... [2]

Whatever were the chances of success of the Kyoto forum? The Australian (Labor) Government appointed the heads of the Australian National Association of Forest Industries (NAFI) as members of the official Australian delegation to the United Nations Framework Convention on Climate Change (UNFCCC) meeting in Bali in December 2007. [3] Prime Minister, Rudd, placed little value on selecting delegates with an appropriate background of study on climate change dynamics. NAFI CEO, Catherine Murphy was then free to spout her usual ill-informed logic at this critical international forum "Forestry is the only carbon positive industry and plays a significant role in reducing greenhouse gases in the Earth’s atmosphere....” [4]

James Lovelock would have been a much better forestry delegate: ". "Carbon offsetting? I wouldn't dream of it. It's just a joke. To pay money to plant trees, to think you're offsetting the carbon? You're probably making matters worse. You're far better off giving to the charity Cool Earth, which gives the money to the native peoples to not take down their forests." [5]

In these times of rapid and threatening climate change we can still enjoy life...for now...with the lights off.

[1] West blamed for rapid increase in China's CO2
[Consumer exports behind 15% of emissions - study]
Duncan Clark. The Guardian, Monday 23 February 2009

[2] Bushfires release huge carbon load
Asa Wahlquist, Rural writer | February 13, 2009
Article from: The Australian,25197,25047322-11949,00.html

[3] NAFI represents Australian forest industry at Bali climate change meetings

[4] NAFI welcomes ratification of Kyoto Protocol by the Australian Government. December 2007.

[5] 'Enjoy life while you can'
* Decca Aitkenhead * The Guardian, * Saturday March 1 2008

Senator McConnell: For Short-term Fiscal Restraint But Against Long-Term Fiscal Restraint

Advocates of long-term fiscal restraint often argue ala the Solow growth model that increases in national savings lead to more investment as long as we can assume full employment is maintained. During periods of weak aggregate demand (such as the current one), a strong case for short-term fiscal expansion can be made. The Obama stimulus bill was designed to reverse the slide in aggregate demand. However, Senator McConnell and other Washingtonian Republicans – aka the neo-Hooverites - opposed this fiscal stimulus on the grounds that it sacrificed fiscal responsibility.

President Obama has trumped these fools by arguing for long-term fiscal responsibility. John King asked Senator McConnell about the President’s proposal to reduce the government deficit over the long-run in part by letting the Bush tax cuts for the very rich sunset:

So we have got to ask ourselves whether increasing capital gains taxes, dividend taxes and taxes on small businesses is a great thing to do in the middle of a deep recession.

Excuse me but recessions do not last forever and the President was clear that he has been talking about a mix of short-term fiscal stimulus and long-term restraint. Is McConnell really this stupid? I doubt it as his hypocrisy has been standard Republican practice for over a generation. They justified the 1981 tax cut on the grounds that we had a recession to deal with – never mind the fact that fiscal policy was operating at cross purposes with Volcker’s monetary policy. We would have had more national savings had we had less fiscal stimulus and a quicker path to lower interest rates. Bush43’s tax cuts may have been sold as dealing with the 2001 recession but the truth was they were not as much about immediate fiscal stimulus and more backloaded in their impact on aggregate demand. We continued to hear GOP calls for making the tax cuts permanent even as the economy rebounded and the Federal Reserve chose to raise interest rates.

For McConnell to use the recession as an excuse not to eventually raise taxes is pure hypocrisy. But it is also standard Republican rhetoric – as stupid as this rhetoric may be.

Unemployment Rates in the States Where the Governors Reject Federal Unemployment Assistance

We noted the silly argument made by Louisiana’s governor as to why he wants to turn down the $98 million in federal unemployment assistance – which amounts to less than 2% of the total stimulus going to his states. CNN reports that Jindal has company:

Though they support some federal action to help their states recover from the recession, several Republican governors said Sunday they plan to turn down a portion of what's offered in the stimulus bill that President Obama signed last week. "If we were to take the unemployment reform package that they have, it would cause us to raise taxes on employment when the money runs out -- and the money will run out in a couple of years," Mississippi Gov. Haley Barbour told CNN's "State of the Union" on Sunday. The Republican governors of Idaho, Alaska, Texas, South Carolina and Louisiana have expressed similar concerns.

I guess Barbour got the same talking points that were given to Jindal. Steve Benen reports on the nonsense coming from the governor of South Carolina:

As for Sanford's notion of a "fundamental misdiagnosis," what does the South Carolinian believe is the wisest course of action? "When times go south you cut spending," Sanford recently explained. "That's what families do, that's what businesses do, and I don't think the government should be exempt from that process." It is Neo-Hooverism in its most obvious form.

As these governors decide that the unemployed of their states are less important than a little political pandering to the rightwing, maybe we should check with this source as to how much the unemployment rate has increased from December 2007 to December 2008:

Alaska: 6.5% to 7.5%

Idaho: 2.7% to 6.4%

Louisiana: 4.0% to 5.3%

Mississippi: 6.3% to 8.0%

South Carolina: 6.2% to 9.5%

Texas: 4.2% to 6.0%

Saturday, February 21, 2009

Crop Scientists Say Biotechnology Seed Companies Are Thwarting Research.

Pollack, Andrew. 2009. "Crop Scientists Say Biotechnology Seed Companies Are Thwarting Research." New York Times (19 February).

"Biotechnology companies are keeping university scientists from fully researching the effectiveness and environmental impact of the industry’s genetically modified crops, according to an unusual complaint issued by a group of those scientists. “No truly independent research can be legally conducted on many critical questions,” the scientists wrote in a statement submitted to the Environmental Protection Agency. The E.P.A. is seeking public comments for scientific meetings it will hold next week on biotech crops."

"The researchers, 26 corn-insect specialists, withheld their names because they feared being cut off from research by the companies. But several of them agreed in interviews to have their names used. The problem, the scientists say, is that farmers and other buyers of genetically engineered seeds have to sign an agreement meant to ensure that growers honor company patent rights and environmental regulations. But the agreements also prohibit growing the crops for research purposes. So while university scientists can freely buy pesticides or conventional seeds for their research, they cannot do that with genetically engineered seeds. Instead, they must seek permission from the seed companies. And sometimes that permission is denied or the company insists on reviewing any findings before they can be published, they say. Such agreements have long been a problem, the scientists said, but they are going public now because frustration has been building. “If a company can control the research that appears in the public domain, they can reduce the potential negatives that can come out of any research,” said Ken Ostlie, an entomologist at the University of Minnesota, who was one of the scientists who had signed the statement."

"The companies “have the potential to launder the data, the information that is submitted to E.P.A.,” said Elson J. Shields, a professor of entomology at Cornell."

"The growers’ agreement from Syngenta not only prohibits research in general but specifically says a seed buyer cannot compare Syngenta’s product with any rival crop. Dr. Ostlie, at the University of Minnesota, said he had permission from three companies in 2007 to compare how well their insect-resistant corn varieties fared against the rootworms found in his state. But in 2008, Syngenta, one of the three companies, withdrew its permission and the study had to stop. “The company just decided it was not in its best interest to let it continue,” Dr. Ostlie said."

"Mark A. Boetel, associate professor of entomology at North Dakota State University, said that before genetically engineered sugar beet seeds were sold to farmers for the first time last year, he wanted to test how the crop would react to an insecticide treatment. But the university could not come to an agreement with the companies responsible, Monsanto and Syngenta, over publishing and intellectual property rights. Chris DiFonzo, an entomologist at Michigan State University, said that when she conducted surveys of insects, she avoided fields with transgenic crops because her presence would put the farmer in violation of the grower’s agreement."

"Dr. Shields of Cornell said financing for agricultural research had gradually shifted from the public sector to the private sector. That makes many scientists at universities dependent on financing or technical cooperation from the big seed companies. “People are afraid of being blacklisted,” he said. “If your sole job is to work on corn insects and you need the latest corn varieties and the companies decide not to give it to you, you can’t do your job".”

Gov. Jindal Rejects $98 Million in Unemployment Assistance – Senator Landrieu Must Just Be Smarter than the Governor

Jan Moller has a very insightful story with respect to what the headline notes as Jindal rejects $98 million in stimulus spending:

Saying that it could lead to a tax increase on state businesses, Gov. Bobby Jindal announced Friday that the state plans to reject as much as $98 million in federal unemployment assistance in the economic stimulus package.

Rather that go off on what at first glance appears to be a knne-jerk GOP preference for business owners over the average working class family down on their luck, let’s pull what might appear to be Jindal’s reasons for this stance:

Jindal, who has emerged as a leading Republican critic of the $787 billion spending and tax-cut bill signed into law this week by President Barack Obama, said the state would accept federal dollars for transportation projects and would not quarrel with a $25-per-week increase in unemployment benefits. Both of those items are financed entirely with federal dollars and require the state only to accept the money. The part that Jindal rejected would require permanent changes in state law that the governor said makes it unacceptable. "You're talking about temporary federal spending triggering a permanent change in state law," Jindal said ... At issue are two pots of federal money that states can access only if they agree to change their laws to make it easier for unemployed workers to qualify for benefits. To access the first pot of money, worth $32.8 million over 27 months, Louisiana would have to offer benefits to workers who have held jobs for as little as three months before becoming unemployed. Workers now have to hold a job for at least a year before they are eligible to collect unemployment. The Louisiana Workforce Commission, which administers the state's unemployment insurance system, estimates that an additional 4,000 former workers would become eligible for benefits under that change. A second pot of money, valued at $65.6 million, would be available to Louisiana only if it agreed to other, larger expansions of benefits. For example, the state could extend benefits to part-time workers or change the law so that people could collect unemployment if they voluntarily left their job for "compelling" family reasons. As the Jindal administration interprets the law, Louisiana would be required to keep providing the expanded benefits even after the federal stimulus dollars run out at the end of 2010. That, in turn, would lead to higher costs on businesses, whose taxes finance the state's unemployment compensation fund. According to the Workforce Commission, the expanded benefits would cost Louisiana companies $12 million a year after the federal money ends. The businesses, in turn, would pass those costs on to their workers. “I don't think it's good policy to take temporary federal dollars to create a permanent state spending obligation,” Jindal said.

Senator Landrieu has another view:

But U.S. Sen. Mary Landrieu, D-La., disputed the governor's interpretation and said the new unemployment benefits are designed to be temporary. "This bill is an emergency measure designed to provide extra help during these extraordinarily tough times, " Landrieu said. "To characterize this provision as a 'tax increase on Louisiana businesses' is inaccurate." … A senior aide to Landrieu agreed that the state would have to change the law to take advantage of the windfall but said the change would not have to be permanent. Instead, the Legislature could write the new law with a "sunset provision" so it expires when the federal stimulus dollars run out.

Republicans should understand sunset provisions – it’s how they claimed that the 2001 tax cuts would not permanently drive up the deficit. The governor of Louisiana is turning down almost $100 million in federal unemployment assistance becomes he cannot think out of the box? Isn’t this complete incompetence grounds for his removal from public office?

The perversion of humanitarian activities

The United States has a long history of using humanitarian ventures as a cover for promoting its own self-interest. Here is an example I found from the early 20th century regarding Herbert Hoover's relief work following World War I.

Andelman, David A. 2008. A Shattered Peace: Versailles 1919 and the Price We Pay Today (New York: J. Wiley).

31: "Colonel Edward House recognized that the peace was likely to be won by the power that had the best understanding of the situation on the ground of each of the territories that the delegates were about to carve up and remodel. So in mid-November House and Van Deman hit on an original approach to the rapid establishment of an effective spy network throughout Europe. Van Deman described it in his own words: "It will be remembered at the time Herbert Hoover had been given charge of providing food and relief for certain devastated sections of Europe. We desired to send with Mr. Hoover's workers going into those areas certain intelligence agents who were familiar with the country, but to this Mr. Hoover violently objected."

31: "It was a brilliant system of the utmost simplicity. Herbert Hoover, who would become the 31st president of the United States, then headed network of private relief workers in the defeated nations. They could move with total freedom and without a scintilla of suspicion among all the subject people of Europe. Indeed, as the dispensers of life-giving food and water they would be welcomed as saviors. The only remaining problem was to persuade Hoover himself. House insisted as his allies you Gibson, a gifted young American diplomat. While serving as principal aide to Hoover and his relief efforts in Belgium during the war, and Gibson also managed to distinguish himself in gathering battlefield intelligence by wriggling through German lines. House now promised Gibson a cushy post as coordinator of the intelligence effort at the U. S. Legation in Vienna if he would persuade Hoover to go along with the plan."

32: "Gibson was surpassingly discreet, but he and House prevailed. In a face-to-face showdown in Paris was Col. House, Hoover, who never really managed to overcome his roots as a simple mining engineer from Iowa was forced to give in. The coordinator of the largest international relief effort ever mounted was persuaded to the use of his pan-European organization as a cover for the first network of spies the United States ever fielded in a coordinated fashion across the continent."

California Budget Follies

California is doing whatever it can to mismanage its way to disaster. Here is a graphic showing how the California State University system keeps piling on administrators, while expecting the staff and faculty to take on more responsibilities. In so far as teaching is concerned, the model is becoming more like No Child Left Behind -- more and more silly ways to generate numbers that have nothing to do with education.

With all the superficial complaints about education, virtually nobody in authority takes issue with the managerial bloat. Anyway, enjoy the graphic.

Friday, February 20, 2009

Geographers Goof Up on Bin Laden Whereabouts

Juan Cole today ( reports on the controversy over a recent paper by Gillespie et al, some geographers, in the MIT International Review, which has also gotten a lot of media attention. By doing analysis from space they claim that Osama bin Laden is probably hiding in the largest city in frontier zone of Pakistan near the Afghan border, Parachinar, and even identify three building complexes in it as likely locations for him to be. The obvious implication is for the US military to bomb the heck out of those buildings, or maybe at least to drop some Special Forces or whomever into there to try and capture him.

Cole reprints a letter from a former resident of the area to the MIT International Review, Murtaza Haidar, a professor at Ryerson University. Haidar points out a reason why Gillespie and crew are almost certainly wrong, and why it would be a major mistake for anybody to attack the place. While this zone is overwhelmingly Sunni Muslim, as is bin Laden and his closest followers, the city of Parachinar is inhabited overwhelmingly by Shi'i Muslims, with the city under siege and attack by their neighbors. Al Qaeda and the Taliban in the area have been responsible for the deaths of many Shi'a, so that there is simply no way that anyone from either group would be remotely welcome in Parachinar, most especially bin Laden himself. But , this is not the first time we have seen American "experts" calling for military action on the basis of ideas from outer space that are not at all in touch with the facts on the ground.

Raymond J. Keating is Silly

by the Sandwichman

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. Karen Kerrigan is President and C.E.O. of the Council and is chairperson of the Coalition to End Union Violence, a project of the Small Business Survival Committee (of which she is chairman and founder). These folks and organizations share an office suite on L Steet in D.C. with Grover Norquist and his American's for Tax Reform. Get the picture? Cogs in the vast right-wing Wurlitzer.

Keating also happens to have the distinction of being the only economist the Sandwichman knows of who has published a commentary on Dean Baker's shorter work-time proposal.
These are serious and rather grim economic times.

After all, the current recession is over a year old, and real GDP growth in the fourth quarter of last year registered a dire -3.8 percent. And nobody sounds cheery about 2009.

Belying such seriousness, however, there are a lot of silly ideas being kicked around when it comes to economic policy.

Consider the suggestion made by Dean Baker, co-director of the Center for Economic and Policy Research, in a commentary piece in the Jan. 28 New York Daily News.

Baker argued that President Barack Obama and Congress should be "creating incentives for companies to reduce the workweek and work year for many Americans." He claims that this would "provide a quick boost to the economy and jobs - and lasting gains in reduced unemployment."

Hmmm, working and producing less somehow translates into higher economic growth. Lower productivity then must be a plus for the economy. Baker claims that with certain tax incentives, workers could get paid the same for less work, more workers would have to be hired, and apparently all this would be just ducky for business.

Does any of this make sense? Of course not. Lost productivity, higher business costs and reduced economic growth would result if this were implemented.
It may be germane to point out that Keating is one of those climate change denial guys and that Kerrigan's outfits are funded by the likes of Exxon and R.J. Reynolds Tobacco. According to her bio on Inc., "A seasoned player in the conservative movement, Kerrigan made a name for herself by playing a key role in derailing the Clintons' health care plan." Smoking good. Health care bad. Tax cuts good. Unions bad.

But the Sandwichman only brings up the matter of Raymond J. Keating's silliness to underscore the fecklessness of prominent liberal economists whose silence on Baker's proposal for shorter working time amounts to a tacit endorsement of the Keating/Kerrigan/Norquist growth-at-any-cost paradigm.

Raymond J. Keating is silly. The silent liberals are feckless.

The Lucas Critique

I see the eminent Nobelist has explained to all of us why the Stimulus hasn't a chance in Hell. This is a man who told Arjo Klamer (in Conversations With Macroeconomists) that macroeconomics, before he bestrid (?) it, Colossus-like, was a complete waste of time, since it was devoted to explaining a fiction invented by Keynes. The "fiction?" Why, Involuntary Unemployment, of course! So let's pay careful attention to what he has to say about fixing things. What is there to fix, after all. Ain't broke!

Thursday, February 19, 2009

Bard College has fired Joel Kovel

I am biased since I admire Joel. Lou Proyect has done an excellent job in putting the case into context.

Great Moments in Labor Relations

In a Letter from the Gatling Gun Company to B&O Railroad in 1877:

"... we have the honor to suggest that you strengthen yourselves now against such emergencies in the future, by providing yourselves with Gatling guns."

Full letter here:

5,000 Characters

by the Sandwichman

The White House Task Force on Middle Class Working Families has increased their comment submission length from 500 to 5000 characters. The Sandwichman submitted the following 4,994 character summary, along with a link to a longer version:

The key to addressing the issues of work and family balance, labor standards, equitable distribution of the fruits of economic progress and protection of the environment lies in regulating and limiting the hours of work. In the absence of countervailing union pressure or government policy, there is a structural bias that leads to the prevalence of socially and environmentally harmful long hours of work. This summary outlines the case for work time reduction and draws attention to a promising policy innovation to redress the current imbalance. A full, hyperlinked version of this submission is available [at the end of this post].

American families have changed substantially since the 1960s but many policies aimed at assuring income security have remained unchanged since the New Deal of the 1930s. Today, two-thirds of all families with children are either single-parent or dual-earner families. Between 1979 and 2000, the hours worked per year by married couples with children increased by 16 percent, or nearly 500 hours. Bernstein and Kornbluh noted that without that increase in hours worked, the incomes of middle- and lower-income families would have stagnated or declined. That conclusion, however, overlooks the possibility that the increased supply of hours may itself have contributed, through a feedback effect, to wage stagnation.

Most work-family advocates in the U.S. focus on the need for family-friendly policies such as child-care, paid family leave and flexible scheduling that mitigate the effects of a seemingly immutable working time regime. "The challenge," though, Kornbluh has noted, "is to frame work-life balance as a broader political economy issue."

Historically, work-life balance was framed as a broader political economy issue in labor agitation for shorter working time. For nearly a century, from the 1860s to the 1950s, American labor unions also put forward the reduction of working time as their focal strategy for combating unemployment. After the Second World War, though, the unions' enthusiasm for shorter hours waned. Instead, the AFL-CIO primarily focused its efforts on urging government spending to foster economic growth and only sought shorter hours as a "last resort."

What changed between the 1930s and the 1960s was the acceptance of the idea that government spending could stimulate economic growth. Although popularly referred to as "Keynesianism," Keynes himself did not accept the idea that boundless expansion of production and consumption was worthwhile for its own sake. Instead, he specified working less as the "ultimate cure" for unemployment. The imperative for growth was a notion added by later economists.

Continued economic growth, fostered by government fiscal and monetary strategies, has led to an increase in effective demand for what Hirsch called positional goods. Competition for these socially or physically scarce or congested goods draws resources away from the output of final consumption goods and also exacts a personal cost in terms of time pressure. Individuals are compelled to spend more time in market activities and thus have less time to spend in non-commercial pursuits such as production for home consumption, leisure and sociability. "This has helped to upset a long-held expectation about the potential fruits of economic growth – namely, that they will be taken increasingly in the form of relief from material pursuits."

Rosnick and Weisbrot
estimated that if European countries adopted the long working hours prevailing in the U.S., they would consume 25 percent more energy. Conversely, if the U.S. adopted working times closer to the European average, it would consume 20 percent less energy. Assuming that the intensity of greenhouse gas emissions per unit of GDP continues to decline at a rate consistent with the historical trend, economic growth averaging 2.5 percent annually would increase emissions by around 75 percent over the next 30 years. Meanwhile, poverty and unemployment will creep steadily upward. The alternative to continual economic growth and a resulting environmental and/or social catastrophe is to reduce the average hours of work for the bulk of the working population and increase employment opportunities for the unemployed and the underemployed.

Dean Baker has proposed government subsidies for shorter hours and vacation pay as part of the economic stimulus plan.
The government could give employers an incentive to provide paid time off now by giving tax breaks to cover all or most of the paid time off…

This is a neat form of stimulus because it directly gives employers an incentive to hire more workers, as can be easily shown…

If employers of 50 million workers took up the deal, then this 6 percent would translate into 3 million jobs…

There would undoubtedly be technical challenges to implementing a scheme such as that outlined by Baker. But there are challenges to implementing any stimulus package or policy reform.

Wednesday, February 18, 2009

Does Eric Cantor Heart the Economic Consequences of Mr. Churchill?

Josh Marshall says he is a big Winston Churchill fan but doubts that Republican House Whip Eric Cantor knows much about Mr. Churchill’s political career. Josh makes this claim after reading this:

But Rep. Eric Cantor (Va.), the House minority whip who led the fight to deny Obama every GOP vote for the plan, is studying Winston Churchill's role leading the Tories in the late 1930s, a principled minority that was eventually catapulted into power over the Labor Party. He calls the stimulus bill "a stinker."

Should we remind both of them about a piece Lord Keynes wrote in 1925 entitled The Economic Consequences of Mr. Churchill? Churchill as Chancellor of the Exchequer had the British pound return to the gold standard after the First World War at too what turned out to be too high of a value. Keynes correctly predicted adverse economic consequences. British macroeconomic policy during this period also was the kind of macroeconomic mix the U.S. saw in the early Reagan years – tight money combined with tax cuts. The prices of British exports such as coal and textiles became uncompetitive on world markets leading to deflation and unemployment. As Keynes predicted, this strong pound policy also caused a trade deficit. The Reagan macroeconomic mix also created a fall in net exports, which contributed to the 1982 recession.

Churchill later recognized that the 1925 return to the gold standard was a mistake. One would think that U.S. Republicans would recognize that had we chose to repeat Herbert Hoover’s policies, we would be making an even greater economic mistake. But then Eric Cantor hearts Churchill’s leadership during this period. Go figure.

Tuesday, February 17, 2009

Happy Birthday, Dear Leader!

Yesterday was the 67th birthday of Kim Il Jong, the "Dear Leader" of the Democratic Peoples' Republic of (North) Korea.

In a column in today's Washington Post, the knowledgeable Selig Harrison reports on a trip he took about a month ago to Pyongyang, where met with top leaders and discussed possible options for deals on nuclear weapons. Apparently Kim did have a stroke last August, and while still participating a bit in decisions, is no longer running the government in any detail. The person on top effectivel now is his brother-in-law, Chang Soon Teak. Furthermore, the hardline National Defense Commission is on top, and Harrison was not allowed to meet with any of the "pragmatists" he has met in the past who favor a friendlier deal with the US and the rest of the world. Upshot is that they will not negotiate regarding the plutonium produced during the Bush years that is now "weaponized." They might negotiate on not producing any more, but there is a much harder line now in place there, unfortunately.

China on the Buy American Provisions

AP reports on an editorial from the Xinhua News Agency:

Measures in a $789 billion U.S. stimulus package that favor American goods are a "poison" that will hurt efforts solve the financial crisis, an editorial by China's official news agency said. Provisions in the U.S. stimulus bill approved Friday favoring American steel, iron and manufactured goods for government projects are protectionist measures that could trigger trade disputes, said the editorial issued late Saturday by the Xinhua News Agency. "History and economics have told us, facing a global financial crisis, trade protectionism is not a solution, but a poison to the solution," the editorial said. U.S. labor groups that pushed hard for inclusion of the measures have argued that their main purpose is to ensure that U.S. Treasury dollars are used to the fullest extent to support domestic job creation. China has promised to avoid "Buy China" protectionist measures in its own multibillion-dollar stimulus effort, and appealed to other governments to support free trade.

I suspect that Robert Scott will find this claim that China is an advocate of free trade hard to shallow:

The growth of U.S. trade with China since China entered the World Trade Organization in 2001 has had a devastating effect on U.S. workers and the domestic economy ... A major cause of the rapidly growing U.S. trade deficit with China is currency manipulation. China has tightly pegged its currency to the dollar at a rate that encourages a large bilateral surplus with the United States. Maintaining this peg required the purchase of about $460 billion in U.S. treasury bills and other securities in 2007 alone. This intervention makes the yuan artificially cheap and provides an effective subsidy on Chinese exports. The best estimates place this effective subsidy at roughly 30%, even after recent appreciation in the yuan (Cline and Williamson 2008).

While Greg Mankiw wants to pretend that “China favors free trade, even if U.S. doesn’t”, one has to wonder if he also endorses the Chinese government’s policy of maintaining an undervalued yuan.

Update: Just in case someone reminds us that the exchange rate used to be 8.28 yuan per dollar and is now only 6.83 yuan per dollar, our graph shows this but it also shows that after this 17.5 percent exchange rate change, the exchange rate has not appreciably changed since July 2008. Just after the Presidential election, Bloomberg reported:

Barack Obama's calls for changes in China's yuan policy may put the president-elect on a collision course with the U.S.'s second-largest trade partner, which is holding the currency stable to support its export-led economy. Obama said China must stop manipulating the currency in a letter to the National Council of Textile Organizations released on Oct. 24. The People's Bank of China has kept the yuan almost unchanged against the dollar since mid-July as it shifts focus from countering inflation to sustaining growth amid a global credit crisis. The Foreign Ministry said last week the U.S. shouldn't blame its trade deficit on exchange rates.

It would seem that government officials in both nations view the exchange rate as part of the overall trade policy stance.

Reading Hicks (so Brad DeLong won't have to)

by the Sandwichman

In his diatribe against David Harvey, Brad DeLong invoked the authority of John R. Hicks more than once. "He (Harvey) doesn't understand Keynes, probably never read Hicks..."

And most tellingly,
And it is at this point that we draw on neoclassical economics to save us--specifically, John Hicks (1937), "Mr. Keynes and the Classics," the fons et origo of the neoclassical synthesis. Hicks's IS curve gives us a menu of combinations of levels of production and interest rates at which private investment spending and public deficit spending are financed out of the flow of savings.
Presenting the J.R. Hicks of "Mr. Keynes and the Classics" and his IS curve as the ultimate authority on Keynes is disingenuous. In the 1970s, Hicks himself repudiated his earlier formulation. But meanwhile its adoption by the US proponents of the "Keynesian neo-classical synthesis" could best be understood as an effort to inoculate economics against the more radical implications of Keynes's theory. A footnote from an essay by Luigi Pasinetti elaborates:
A simplified didactical tool, a mere device of exposition, had become so widespread as to become misleading -- too restrictive a tool for the purpose of accurately conveying Keynes's complex original message. Hicks kept on re-thinking his theory and slowly moving away from his original IS/LM formulation. In the late 1960s, early 1970s, he courageously took a break-away step. He strongly criticised, and actually, explicitly repudiated his successful little analytical toy. To stress his break-away, he went as far as declaring openly that he had ceased to be a neoclassical economist (in his words: "J.R. Hicks, [is] a 'neoclassical' economist now deceased..."). And in order to underline his change of mind, he even ceased to sign his articles by the name of J.R. Hicks and began to sign them by the name of John Hicks (in his words: "Clearly I need to change my name... John Hicks [is] a non-neoclassic who is quite disrespectful towards his 'uncle' [J.R.].

Of course, the story is more complex than that, even, and for Pasinetti's full take on Hick's Conversion there is no substitute for reading the article, even if for no other reason than to relish Joan Robinson's acerbic remark that:
John Hicks noticed the difference between the future and the past and became dissatisfied with the IS/LM but (presumably to save face for his predecessor, J.R.) he argued that Keynes's analysis was only half in time and half in equilibrium.

So much for "knowing more about Keynesian economics than Joan Robinson". DeLong thus cited as definitive a "little analytical toy" that the toy-maker himself repudiated and cherry picked quotes from a Joan Robinson who elsewhere disparaged the very toy that DeLong upheld as definitive. Sheesh.

I don't want to belabor 'uncle' J.R.'s culpability for "little analytical toys" and "simplifying assumptions" that made the neo-classical economist's work more excitingly elegant, remunerative and less relevant to the real world. But I do want to mention Hicks's assumption about the hours of work that has displaced an important argument from neo-classical economics that, if widely known, would decisively demonstrate the futility of the tautologies contemporary neo-classicals amuse themselves with -- Sydney Chapman's theory of the hours of labor. Think of it as the labor version of the Cambridge Capital Controversy.

As Chris Nyland wrote some twenty years ago, Chapman's theory essentially confirmed Marx's regarding the extensive and intensive dimensions of the hours of work. Sadly, with few exceptions, Marxists appear no more eager than neo-classicals to examine this theoretical convergence.

Monday, February 16, 2009

Capturing the Success of Non-traditional Monetary Policy: Are BAA Interest Rates a Good Metric?

While President Obama is about to sign a bill that provides significant fiscal stimulus for the ailing U.S. economy, most economists would likely argue that this is a necessary but not sufficient condition for restoring full employment. Ben Bernanke made the following observations on January 13, 2009:

The abrupt end of the credit boom has had widespread financial and economic ramifications. Financial institutions have seen their capital depleted by losses and writedowns and their balance sheets clogged by complex credit products and other illiquid assets of uncertain value. Rising credit risks and intense risk aversion have pushed credit spreads to unprecedented levels, and markets for securitized assets, except for mortgage securities with government guarantees, have shut down. Heightened systemic risks, falling asset values, and tightening credit have in turn taken a heavy toll on business and consumer confidence and precipitated a sharp slowing in global economic activity. The damage, in terms of lost output, lost jobs, and lost wealth, is already substantial.

We noted that the credit crunch is consistent with being in a liquidity trap as Paul Krugman also noted:

conventional monetary policy has lost effectiveness. Yes, there are other things the Fed could do — and it’s doing them, on an awesome scale. But they’re controversial, precisely because, unlike conventional monetary policy, they involve picking and choosing among potentially risky investments.

Bernanke also noted:

The Federal Reserve has responded aggressively to the crisis since its emergence in the summer of 2007 ... As indications of economic weakness proliferated, the Committee continued to respond, bringing down its target for the federal funds rate by a cumulative 325 basis points by the spring of 2008. In historical comparison, this policy response stands out as exceptionally rapid and proactive … Although the federal funds rate is now close to zero, the Federal Reserve retains a number of policy tools that can be deployed against the crisis ... Other than policies tied to current and expected future values of the overnight interest rate, the Federal Reserve has--and indeed, has been actively using--a range of policy tools to provide direct support to credit markets and thus to the broader economy. As I will elaborate, I find it useful to divide these tools into three groups. Although these sets of tools differ in important respects, they have one aspect in common: They all make use of the asset side of the Federal Reserve's balance sheet. That is, each involves the Fed's authorities to extend credit or purchase securities.

The chairman of the Federal Reserve went on to describing in some detail these non-traditional monetary policy tools. The fact that interest rates on short-term government debt fell from around 5 percent in early 2007 to near zero now – with longer-term rates falling from around 5 percent to around 3 percent at the end of 2008 is testimony that the Federal Reserve did all it could do using conventional monetary policy and yet interest rates on BAA rated corporate debt rose from just over 6 percent as of late 2006 to around 9.5 percent towards the end of October 2008. While the beginning of the recession preceded the enormous spike in interest rates on BAA rated corporate debt, the panic signals over the credit crunch were the result of the unprecedented surge in credit spreads towards the end of 2008.

The title of this post suggests that watching the BAA interest rate may be a decent proxy for the success of non-traditional monetary policy. It is a metric that can be followed on a daily basis and is readily understood. If the proximate problem is high credit spreads and if investment demand is sensitive to the BAA interest rate, then this metric should be closely related to the policy problem and how it gets transmitted to the real economy.

So if one accepts my premises that the BAA interest rate is a good metric for the success of non-traditional monetary policy – how are we doing? I would submit that we have seen some – but not nearly enough – success. After all, an interest rate of 7.9 percent is not as burdensome as an interest rate of 9.5 percent. However, these interest rates are still quite high.

An Important Question (that is never asked)

by the Sandwichman

Brad DeLong wrote: "The question of should Americans be working less, and why aren't we working less already, is an important one. It has nothing to do with whether the Obama stimulus is doomed to fail:"

I disagree. Harvey's argument is not that there is a technical imposibility to a stimulus that worked (the Treasury view) but that there are political obstacles to implementing a stimulus that is large enough and appropriately targeted. My claim is that one of the political obstacles to the appropriate targeting of a stimulus is the systematic exclusion of one of the three "ingredients of a cure" prescribed by Keynes.

Keynes was very explicit. He viewed investment as first aid. He viewed work time reduction as the ultimate solution. But political Keynesianism over the past 60 years has applied first aid over and over again and has systematically excluded Keynes's ultimate solution. Now if Brad thinks Keynes was wrong, that's another matter. Show why. But you can't just assert that it has "nothing to do with whether the Obama stimulus is doomed to fail". In medicine, you don't keep applying first aid over and over and never address the fundamental problem. Is it not the same in economics?

David Harvey vs. Brad DeLong Dustup!

In a post that Andrew Jackson, social and economic policy director of the Canadian Labour Congress, calls "absolutely brilliant and compelling," David Harvey argues that the stimulus package is bound to fail. On the one hand, the current package is not big enough and on the other hand, the US can't finance a big enough stimulus package because of its recent debt history. Brad DeLong calls Harvey's argument "intellectual masturbation." To which Harvey responds, lamenting the arrogance of neoclassical economists.

And now, the Sandwichman jumps into the fray with his two cents worth...

A distinction needs to be made between “Keynesianism” (even Harvey’s “strong”, “true” or “full-fledged” Keynesianism) and what Keynes actually thought about economic stimulus and full employment.

Keynes viewed government investment in infrastructure as “only one particular application of an intellectual theorem”. The other two were consumption and reduction of the hours of work. We hear about the first two applications, consumption and investment, incessantly but it was the third strategy, working less, that Keynes pronounced the “ultimate solution” to full employment. See his 1943 Treasury Department memorandum on “The Long Term Problem of Full Employment” and his 1945 letter to the poet, T.S. Eliot.

Keynes was concerned with full employment, not with economic growth. It was his successors who shifted the emphasis from the one to the other. They did so, I would argue, to suit their mathematical models more than anything. Be that as it may, in the 1970s Fred Hirsch showed how economic growth drained resources from both non-market activities and even from final consumption goods. Increased competition for scarce positional goods diverted resources into intermediate goods.

There remains a taboo against talking about work-time reduction as a possible response to the crisis. Dean Baker (he who ‘called’ the housing bubble in 2002) wrote a pair of op-ed pieces a few weeks ago in the Guardian and the New York Daily News calling for tax breaks for work time reduction. I have seen no uptake of Dean’s suggestion from the stable of liberal Keynesian economists — Krugman, et. al.

Sunday, February 15, 2009

The Proposition That the GOP Cares About the Burden of the Debt is Bogus

Mark Thoma listened to John McCain so we did not have to:

I saw Senator McCain on CNN talking about how the stimulus package is, essentially, reaching into the pockets of future generations and transferring their wealth to the present generation.

Mark does a nice job of noting why this rhetoric is misplaced. Jeff Frankel has a related and interesting post noting that while the fiscal stimulus may not be enough to get us back to full employment, it may raise danger signals in international financial markets:

The 2009 fiscal-year deficit is already expected to exceed $1.2 trillion, so we are talking about deficits thereafter that could surpass 10 per cent of GDP. This is far above the levels that are considered danger signals when they come from any other country. Until now, the US has not been “any other country;” The rest of the world has been willing to finance American profligacy cheerfully. But there have already been signs in the last few weeks that the prospect of this much Treasury debt coming onto the markets is already beginning to push bond prices down and long-term interest rates up. My feeling is that if the current stimulus package were to break the $1 trillion mark, it might truly alarm international financial investors, who would in that case stop acquiring dollar assets, thus precipitating the hard landing of the dollar that so many of us have feared for so long. In those circumstances, the Fed would lose the ability to keep interest rates low, and we could be in even worse trouble than today. Everything would be different if we had spent the last 8 years preserving the budget surpluses that Bill Clinton bequeathed to George Bush. Then we would have paid down a big share of the national debt by now, instead of doubling it. We would be in a strong enough fiscal position to undertake the expansion today that we really need. In that light it is ironic, to say the least, that the politicians who are warning against the size of the stimulus bill (”generational theft”), particularly the Congressmen who are voting against it, are mostly the same Republicans who supported the original fiscal policies that gave us the doubling of the national debt: the huge long-term tax cuts of 2001 and 2003 and the greatly accelerated rate of government spending. What we need now is a fiscal policy that maximizes short-run demand stimulus relative to long-run damage to the national debt. Lots of bang for the buck. The Republicans supported fiscal policies that did the opposite. Lots of buck for the bang.

While Jeff is correct about the hypocrisy of the modern Republican Party, I think he could have gone further. Not only did these Republicans support the Bush43 increase in the debt to GDP ratio, they still praise the fiscal policies of the Reagan-Bush41 era, a period when the debt to GDP ratio doubled.

I would also beg to differ that a transitional period where the debt to GDP ratio rose as a result of a short-term fiscal stimulus that was necessary to avoid a major recession will lead to fiscal ruin. We have seen much larger increases in the debt to GDP ratio before without fiscal ruin but as Robert Barro noted in his On the Determination of the Public Debt (Journal of Political Economy, 1979), U.S. policymakers before the advent of the modern Republican Party was committed to retiring public debt over time.

In 1993, the Clinton Administration passed a deficit reduction package that included tax increases. Unfortunately – he got even less support from Senate and Congressional Republicans than President Obama received for the legislation he is about to sign. David Waldman reminds of the incredibly petty and stupid things said by Republican Congressional leaders in 1993. These leaders did not care about fiscal responsibility back then and their newly found devotion to fiscal austerity today sounds insincere. But as Barro’s 1979 paper suggests – we eventually need to get back to the pre-Reagan fiscal stance of using fiscal stimulus only during times of recessions or other national emergencies. We will not get there unless the Republican Party changes its ways or disappears as a force in American politics.

Nassim Nicholas Taleb and I Make Peace

I finally received an email reply from Nassim Nicholas Taleb. He wrote, "you are off the hook" I checked, and the innaccurate (and insulting) material that he had on his website about me has been removed. I thank him for reconsidering the matter and correcting the situation. While I have been critical of him on several counts, I am largely in agreement with his analysis of the current situation and the broader problem of "black swans," or to use the more conventional terminology of Keynes and Knight, fundamental uncertainty. I also repeat that his books contain much interesting information and are fun to read.

Regarding barbell investment strategies, there is no single one that necessarily will do well all the time, and Taleb has stated that. He has indeed more fundamentally made the point that we all must keep this profound degree of uncertainty in mind. I also remind that there are many different forms that barbell strategies can take, and that one might be doing well even as others might not be doing well. In any case, I welcome an end to this feud that probably should never have occurred in the first place.


by the Sandwichman

S'man's cookie fortune from Friday night: "The world will soon be ready to receive your talents."

Minute Dream

By the Sandwichman

I woke up this morning and glanced over at the clock. It was 7:08. Then I dozed off again and started to dream. I dreamed I turned on a light and the light bulb burned out. I woke up and looked at the clock. It was 7:09.

Saturday, February 14, 2009

Claiming the Fiscal Stimulus Bill Failed

Let’s start with a sensible account from David Espo:

In a major victory for President Barack Obama, Democrats muscled a huge, $787 billion stimulus bill through Congress late Friday night in hopes of combating the worst economic crisis since the Great Depression. Republican opposition was nearly unanimous. The Senate approved the measure 60-38 with three GOP moderates providing crucial support. Hours earlier, the House vote was 246-183, with all Republicans opposed to the package of tax cuts and federal spending that Obama has made the centerpiece of his plan for economic recovery. The president could sign the bill as early as next week, less than a month after taking office. Supporters said the legislation would save or create 3.5 million jobs ... Vigorously disagreeing, House Republican leader John Boehner of Ohio dumped a copy of the 1,071-page bill to the floor in a gesture of contempt. "The bill that was about jobs, jobs, jobs has turned into a bill that's about spending, spending, spending," he said ... Republicans complained they had been locked out of the early decisions, and Democrats countered that Boehner had tried to rally opposition even before the president met privately with the GOP rank and file.

Didn’t Rush Limbaugh say early on in the next Administration that he wanted our new President to fail? Boehner marshaled the House Republicans to follow Limbaugh’s lead even if it meant endorsing Herbert Hoover economics. And of course Jonah Goldberg had to follow suit:

The stimulus bill has failed. Barack Obama has failed. The Trojan Horse of Hope and Change crashed into the guardrail of reality, revealing an army of ideologues and activists inside. Now, before I continue, let me say that Barack Obama will still be popular, he will still get things done, and he will declare victory after signing a stimulus bill. But Obama’s moment is gone, and politics is about nothing if not moments. The stimulus bill was a bridge too far, an overplayed hand, ten pounds of manure in a five-pound bag. The legislation’s primary duty was never to stimulate the economy, but to stimulate the growth of government, the scope of the state. By spending hundreds of billions on things that have absolutely nothing to do with providing an immediate stimulus for the economy, Democrats hoped to make a down payment on their dream government.

The only manure I smell is the nonsense emanating from rightwing hacks such as Boehner and Goldberg. The main problem with the U.S. economy is a lack of aggregate demand - but these economic know nothings cannot understand that increasing aggregate demand via more government spending is indeed stimulus that will create more jobs. Brad DeLong makes this point:

Had John McCain won the presidential election last November, a similarly-sized fiscal boost bill--more tax cuts, fewer spending increases, tilted toward the rich rather than toward the poor and middle class--would now be moving through the congress with genuine bipartisan support. But Barack Obama won the presidency. And so the Republicans decide to try to make America a poorer nation with higher unemployment: 246-183-1 in the House, with not a single Republican representative voting yes

When Bill Clinton first became President, certain Republicans such as Bob Barr were hoping to impeach him on just about anything, which eventually became known as the Monica Lewinsky scandal – all gift wrapped by Jonah Goldberg’s mother. It seems that these hacks are still putting partisan politics ahead of the nation’s interest even as we desperately something to reverse this recession.

Update: Rush Limbaugh wants the stimulus bill to fail – so do certain GP Congressman. It follows that these rightwing hacks actually want this recession to continue. Those of you who are suffering from being unemployed – guess this in mind.