Friday, July 31, 2009

Aggregate Demand and Government Purchases

In certain GOP circles, the conclusion had already been drawn that the recent fiscal stimulus had failed to cure the patient even before the patient really swallowed the medicine. A few interesting tidbits from the BEA’s latest include the somewhat good news that real GDP fell by only 1 percent (all figures on an annualized basis) during the second quarter of 2009 as opposed to about 6 percent over the previous 6 months. Also notice that government purchased fell by 2.6 percent during the first quarter of 2009 with declines not only in state and local purchases but also Federal purchases. But during the most recent quarter, government purchases rose by 5.6 percent mainly because of a pop from Federal purchases. Simply put – the patient is still sick but the fiscal medicine has started to kick in.

Update: When Josh Bivens speaks, you listen:

The marked improvement in this quarter relative to last is largely due to the American Recovery and Reinvestment Act (ARRA). Despite the needed boost from the ARRA (up to 3 full percentage points of annualized growth in the quarter), the U.S. economy has still contracted over the past year by 3.9%, the largest annual contraction since 1947 ... Despite the overall contraction, the fingerprints of the American Recovery and Reinvestment Act could be seen in some aspect of today’s report. Federal government spending grew at an 11% rate in the quarter, adding roughly 0.8% to overall GDP. State and local government spending grew at a 2.4% annual rate, the fastest growth since the middle of 2007. It is clear that the large amount of state aid contained in the ARRA made this growth possible. Furthermore, real (inflation-adjusted) disposable personal income rose by 3.2% in the quarter, after rising by only 1% in the previous quarter. A large contribution to this increase was made by the Making Work Pay tax credit passed in conjunction with the ARRA, as this was the first full quarter that the credit was in effect. Inflation-adjusted transfer payments (including a one-time payment to Social Security recipients) rose at an annual rate of over 6% in the quarter as well. This increase in disposable personal incomes did not translate into a sharp boost in consumption spending because the personal savings rate jumped again — rising to 5.2% in the second quarter, up from 4% in the previous quarter. This slippage between personal incomes and consumption spending caused by a rising savings rate makes plain that, instead of focusing on even more tax cuts, it was wise to make sure that much of the ARRA was devoted to direct public investment spending. The public investment spending in the ARRA, while not having a significant impact in the second quarter, will provide an even stronger boost to the economy in quarters to come. The consensus of macroeconomic forecasters is that ARRA contributed roughly 3% to annualized growth rates in the second quarter. This means that absent its effects, economic performance would have resembled that of the previous three quarters, when the economy contracted at an average annual rate of 4.9%. In short, the recovery act turned this quarter’s economic performance from disastrous to merely bad. This is no small achievement, but with even more public relief and investments, the U.S. economy could do much better.

Thursday, July 30, 2009

Thirty Hour Work Week Bill, 1934

A BILL To prevent the shipment in interstate commerce of certain articles and commodities, in connection with which persons are employed more than five days per week or six hours per day, and prescribing certain conditions with respect to purchases and loans by the United States, and codes, agreements, and licenses under the National Industrial Recovery Act.

Whereas interstate commerce among the people of the various States has been and is now burdened, hampered, and clogged by a patent and continued idleness of workers as well as the mechanical appliances and implements of production; and

Whereas this continued idleness of men and machines has necessarily resulted in imposing the burden of feeding and supporting more than eighteen million people upon that part of our people who do work and produce, which condition is unjust to those who work and those who cannot obtain work; and

Whereas interstate commerce and trade can best be revived, and the comfort and happiness of the people can best be produced by an economic readjustment that supplies people jobs with wages, rather than charity without jobs; and

Whereas under our economic system production is stifled when purchasers with ability to buy are lacking, and is stimulated to action by purchasers with money; and

Whereas our private productive system is dependent for its own customers chiefly upon its own employees, who cannot buy the output of the system unless producers give them jobs at wages adequate to exchange for the products; and Whereas private business has not been able, and is not now able, to give jobs to those who need them, on past or existing hours of labor; and

Whereas business chaos, bankruptcies, insolvencies, misery, destitution, and want have resulted, and the American people have been deprived of the incalculable advantages and benefits of the abundance of goods, commodities, and services idle machines and idle people could have produced if put to work: Now, therefore, in order to provide a fairer and more nearly balanced income; to put idle machines and people to work; to increase the purchasing power of the people and thereby stimulate production to capacity; to revive languishing commerce and trade; and to promote the happiness and comfort of the people.

Be it enacted by the Senate and House of Representatives of the United States of
America in Congress assembled,
That no article or commodity shall be shipped, transported, or delivered in interstate or foreign commerce, which was produced or manufactured in any mine, quarry, mill, cannery, workshop, factory, or manufacturing establishment situated in the United States, in which any person, except officers, executives, and superintendents, and their personal and immediate clerical assistants, was employed more than five days in any week or more than six hours in any day: Provided, That upon the submission of satisfactory proof of the existence of special conditions in any industry included herein, making it necessary for certain persons to be employed more than five days in any week or more than six hours in any day, the Secretary of Labor, or his duly selected representatives, may issue exemption permits with respect to such persons, relieving the employer from the provisions of this Act with reference to such persons.

SEC. 2. (a) No article or commodity shall be purchased by the United States, or any department or organization thereof, from any business enterprise operating contrary to any provision of this Act, or if such article or commodity was produced or manufactured in any mine, quarry, mill, cannery, workshop, factory, or manufacturing establishment situated in the United States, in which any person, except officers, executives, and superintendents, and their personal and immediate clerical assistants, was employed, after the date this Act takes effect, more than five days in any week or more than six hours in any day.
(b) Each contract made with a contractor for any public work shall contain a provision that the contractor will buy no article or commodity to use on or in any public work from any business enterprise violating any of the terms or provisions of this Act, and will buy no article or commodity which was produced in any mine, quarry, mill, cannery, workshop, factory, or manufacturing establishment situated in the United States, in which any person, except officers, executives, and superintendents, and their personal and immediate clerical assistants, was employed more than five days in any week or more than six hours in any day.

SEC. 3. (a) No governmental agency shall make or renew any loan to any employer of labor in any mine, quarry, mill, cannery, workshop, factory, or manufacturing establishment situated in the United States, in which any person, except officers, executives, and superintendents and their personal and immediate clerical assistants, was employed more than five days in any week or more than six hours in any day.
(b) On and after the effective date of this Act, any such employer of labor who applies for a loan from any such governmental agency shall agree at the time of making application for such loan that so long as he is indebted to the United States he will not permit any person, except officers, executives, and superintendents and their personal and immediate clerical assistants, to work more than five days in any week or more than six hours in any day. In the event that there is a violation by any such employer of his agreement, the full amount of the unpaid principal of the loan made to such employer shall be immediately payable.

SEC. 4. (a) On and after the date this Act takes effect, every code of fair competition, agreement, and license approved, prescribed, or issued under title I of the National Industrial Recovery Act shall contain a condition that the employers covered by such code, agreement, or license shall not employ any person, except officers, executives, and superintendents and their personal and immediate clerical assistants, more than five days in any week or more than six hours in any day.
(b) Every such code, agreement, and license heretofore approved, prescribed, or issued under title I of such Act shall be deemed to be amended so as to include a provision corresponding to that prescribed in subsection (a) of this section.

SEC. 5. On and after the date this Act takes effect, it shall be unlawful for any employer subject to any of the provisions of this Act to reduce, directly or indirectly, the daily, weekly, or monthly wage rate in effect on such date (or, in the case of an applicant for a loan from a governmental agency, on the date his application is submitted) with respect to any of his employees until a reasonable opportunity has been afforded to his employees, through representatives of their own choosing by a majority vote, to meet with the employer or his representatives and to discuss and consider fully all questions which may arise in connection with the reduction of such wage rate.

SEC. 6. Any person who violates any of the provisions of this Act, or who fails [to] comply with any of its requirements, shall upon conviction thereof, be fined not
[more] than $200, or be imprisoned for not more than three months, or both.

SEC. 7. (a) This Act shall become effective thirty days after the date of its enactment, and it shall not apply to commodities or articles produced or manufactured prior to its effective date.
(b) Nothing in this Act shall be construed to apply to agricultural or farm products processed for first sale by the original producer.
(c) This Act shall remain in force for two years after the date it becomes effective.

SEC. 8. If any provision, clause, or paragraph of this Act, or the application thereof to any person or circumstances, is held invalid, the remainder of the Act, and the application of such provision, clause, or paragraph to other persons or circumstances, shall not be affected thereby.

Introduction to Three Notes on Budgetary Priorities

At the time that my university system faces almost half a billion dollars (yes, with a B) in budget cuts, I have felt the need to rant about budget priorities. As Joseph Schumpeter wrote: "the budget is the skeleton of the state stripped of all misleading ideologies."

People outside of California could not possibly comprehend the perverted logic of our prison system, which consumes more of the budget than state support of higher education. The number of public needs that deserve serious funding is enormous. The most ridiculous waste of money is the military.

I intended to write today about the military budget, going beyond Joseph Stiglitz and Linda Bilmes's estimate of the $3 trillion dollar war, looking at the harm done to and by veterans, over and above the medical costs that Stiglitz and Bilmes count.

I had planned to begin with Dave Philipps' articles on the how the war experience has screwed up soldiers' minds. He documents a rash of murders occurred near Fort Carson, Colorado. The murderers are from a small unit that experienced exceptionally heavy fighting and casualties. This morning I was pleasantly surprised to hear Philipps interviewed on Democracy Now, going into more detail.
The next note will point to the problem of homelessness among veterans.

The final note will note the recent discovery that Agent Orange did more harm to veterans health than previously recognized. I suspect that more information about Gulf War Syndrome will trickle in.

The point is not that veterans should be the highest budgetary priority. Social spending needs of all kinds go unmet.

Besides, the easiest policy to reduce the kind of costs noted here is to avoid fighting wars. (Has any empire ever been involved in so many foreign conflicts?)

Even so, the hypocrisy of supposed reverence for veterans in the face of the neglect of their needs is worthy of note. Just as much policy is designed to protect the fetus and then shortchange the kids, the country pours money into high tech military hardware, applauds the soldiers, then ignores the damage done to the veterans.

First Note:
Philipps, Dave. 2009. "Casualties of War, Part I: The Hell of War Comes Home." Colorado Springs Gazette (26 July).

The series discusses: Army unit whose members have been accused of at least 10 murders in the past several years highlights the risks of prolonged warfare.

"In August 2007, Louis Bressler, 24, robbed and shot a soldier he picked up on a street in Colorado Springs. In December 2007, Bressler and fellow soldiers Bruce Bastien Jr., 21, and Kenneth Eastridge, 24, left the bullet-riddled body of a soldier from their unit on a west-side street. In May and June 2008, police say Rudolfo Torres-Gandarilla, 20, and Jomar Falu-Vives, 23, drove around with an assault rifle, randomly shooting people. In September 2008, police say John Needham, 25, beat a former girlfriend to death. Most of the killers were from a single 500-soldier unit within the brigade called the 2nd Battalion, 12th Infantry Regiment, which nicknamed itself the "Lethal Warriors.

Second Note:
Eckholm, Erik. 2009. "For Veterans, a Weekend Pass From Homelessness." New York Times (26 July): p. A 13.

"The future mix of homeless veterans was signaled here last weekend at Stand Down, an annual three-day tent city that provides respite and aid to former members of the armed forces whose lives have collapsed. The number of homeless veterans who made their way to a high school's athletic fields for the gathering reached a record high, some 950 compared with last year's record of 830. The job-devouring recession is pushing up the numbers, but organizers said they were also starting to see younger veterans of the Iraq and Afghanistan wars, some with traumatic brain injuries or psychological stresses, who had fallen through the safety nets with unusual speed."

"According to V.A. estimates, the overall number of homeless veterans declined in recent years, from about 250,000 who lacked shelter at some point in 2006 to perhaps 200,000 last year. The share of women is climbing, and while they account for 4 percent of all homeless veterans, they make up 9 percent of those under 45, said Pete Dougherty, director of homeless programs at the department. The agency has so far detected about 3,700 homeless veterans who served in Iraq and Afghanistan, but with one million troops now home from these regions and more returning every week, Mr. Dougherty said, that figure is sure to climb. In an ominous harbinger, a recent study found that more than one-third of Iraq and Afghanistan war veterans who enrolled in the veterans' health system since 2001 had already displayed post-traumatic stress disorder, depression or other mental health problems."

Third Note:
Lorber, Janie. 2009. "Report Sees Agent Orange Link to More Illnesses." New York Times (25 July): p. A 12.

"An expert panel reported on Friday that two more diseases may be linked to exposure to Agent Orange, a defoliant used by the American military during the Vietnam War. People exposed to the chemical appear, at least tentatively, to be more likely to develop Parkinson's disease and ischemic heart disease, according to the report. The report was written by a 14-member committee charged by the Institute of Medicine with determining whether certain medical conditions were caused by exposure to herbicides used to clear stretches of jungle."

Tom Palley Writes to the Queen of England

Letter to the Queen: Why No One Predicted the Crisis

Her Majesty The Queen
Buckingham Palace
29 July 2009

In response to your question why no one predicted the crisis you have recently received a letter from Professors Tim Besley and Peter Hennessy, sent on behalf of the British Academy. They claim economists’ failure to foresee the crisis was the result of a “failure of the collective imagination.” That claim is tendentious and will mislead you.
The failure was due to the sociology of the economics profession. This failure was a long time in the making and was the product of the profession becoming increasingly arrogant, narrow, and closed minded. One was compelled to adhere to the dominant ideological construction of economics or face exclusion. That was the mindset of the IMF and the World Bank with their “Washington Consensus”, and it was the mindset of central bankers (including your own Bank of England) with their thinking about the sufficiency of inflation targeting and hostility to regulation.

The crisis was predictable and was predicted. See, for example:

(1) "The Weak Recovery and the Coming Deep Recession," Mother Jones, March 2006.

(2) "Debt and Lending: A Cri de Coeur," Levy Institute, April 2006.

(3) "The Fallacy of the Revised Bretton Woods Hypothesis: Why Today’s Financial System is Unsustainable," Levy Institute, June 2006.

Professors Besley and Hennessy’s letter is another example of the economics profession’s complete inability to come to grips with its sociological failure which produced massive intellectual failure with huge costs for society. This is a very serious social problem and we will all continue to pay the costs as long as it is unaddressed.

Respectfully yours,

Tom Palley

Hours of Labour 3

by Sydney J. Chapman (translated and condensed by the Sandwichman)

So far I have dwelt on two aspects bearing upon the hours of labor: first, the effect of industrial development in intensifying the work performed during the working day and thereby increasing the output; second, the subjective effect of the increasing strain associated with such advance. I have now to add another influence: the enhancement of the value of leisure that must accompany a rise in wages, improved education, and social progress generally. The amount of the real wage yielded by a given money wage necessarily varies with the time left to spend it; and, further, the value of leisure is a function of the goods that can be enjoyed in the period of leisure. The acute worker would aim at so distributing his time between work and recreation that the gain resulting from a little more leisure would equal the loss consequent upon the implied diminution of wages. Hence, when the volume of goods per capita annually supplied to labor increase, an attempt would almost certainly be made by the workers to buy more leisure, even if the satisfaction derived from leisure were unaffected, which it would not be, because the satisfaction derived from leisure must rise when each hour of leisure is enriched by greater possessions. As regards the effect of education, it is sufficient to point out that the value of leisure is a function of appreciative power and that this is developed by education. On the other hand, the higher appreciative power might also enhance the satisfaction got out of the work itself, and this effect could offset the effect on the value of leisure, or even more than counteract it. Ambitions would be further awakened, but the ambitious worker would probably demand, as a rule, more time for study. I think it unquestionable that, on the whole, educational advance causes a curtailment of hours.
But unfortunately human nature improves slowly, and in nothing more slowly than in the hard task of learning to use leisure well. In every age, in every nation, and in every rank of society, those who have known how to work well have been far more numerous than those who have known how to use leisure well. But on the other hand it is only through freedom to use leisure as they will that people can learn to use leisure well; and no class of manual workers who are devoid of leisure can have much self-respect and become full citizens. Some time free from the fatigue of work that tires without educating is a necessary condition of a high standard of life. – Marshall, Principles of Economics, 5th ed., pp. 719-20.
Social progress creates new claims on leisure by complicating life and rendering formerly vague feelings of social obligation more definite and insistent.
Generally it can be said that the more complex the social organism becomes, the more its constituent individuals must devote time, apart from work and business, to the family and recreation, to education and general affairs, the more necessary is a general social arrangement concerning the distribution of time between the several purposes which it has to serve. – Schmoller, Grundrisse der allgemeinen Volkswirthschaftslehre, p. 741.


Wednesday, July 29, 2009

The Bill O’Reilly Life Expectancy Theorem Applied to California

Paul Krugman said he needed a drink after seeing this:

Bill O’Reilly explaining that of course America has lower life expectancy than Canada - we have 10 times as many people, so we have 10 times as many deaths.

OK, I had a few drinks last night too but am all sober now and thinking how this pearl of wisdom applies to estimating life expectancy for the state of California. First, some background – the CIA World Factbook tells us that life expectancy in the U.S. is 78.1 years and our population is 307.2 million, while in Canada – life expectancy is 81.2 years and its population is 33.5 million. The Census Bureau tells us that California has a population less than 37 million so doesn’t the O’Reilly theorem suggest that life expectancy should be in excess of 80 years since California’s population is roughly the same as that of Canada?

Then again – California has the highest population of any state in the Union so one might also infer from the O’Reilly theorem that is life expectancy is among the lower of any of the 50 states in the Union, which would put it below 78 years. OK – I need another drink!

Fordy Hours

by the Sandwichman

There seems to be a bit of a buzz around Utah's 4-day, forty-hour workweek. Last Friday, Scientific American posted an article, "Should Thursday Be the New Friday? The Environmental and Economic Pluses of the 4-Day Workweek,". Then on Monday, the New Republic's environment and energy blog, The Vine picked up on "The Case For A Four-Day Workweek," channeling the Scientific American piece. Tuesday it was Derek Thompson's Atlantic magazine business blog echoing TNR echoing SA in "In Praise of the Four-Day Workweek." Today the "A Four Day Work Week" meme surfaced at Andrew Sullivan's Daily Dish.

What's wrong with this picture? For starters, the four-day, 32-hour week was the big story back in 1957. That's more than a half century ago. Chevrolets had big tail fins, then. Remember? There's nothing sacred about 40 hours. But there appears to be an apprehension that there is something sacred about that number. Hey, that's the length of the workweek that Henry Ford introduced in 1926, one year before he introduced the Model "A" Ford. "The five day week is not the ultimate, and neither is the eight hour day," wrote Samuel Crowther in 1926. The forty hour workweek is, at best, a "Model 'A'" workweek.

Will you ever work a four-day week?
Do you really want a four-day week
By Sid Ross and Ed Kiester
Parade Magazine, September 1957

Will you ever work a four-day week?

Vice President Nixon thinks you will. During last fall's Presidential campaign, he predicted an industry-wide four-day schedule “In the not too distant future.”

Walter Reuther, president of the United Auto Workers, thinks you should. Next year, he has announced, he will ask auto manufacturers to place workers on a shorter workweek without reducing their pay. Battle lines already are being drawn.

But do you really want a four-day week? Is it really “inevitable,” as the UAW likes to suggest, in view of automation and increased production? Or is it more likely to disrupt all of America — its jobs, its homes, its schools, its likes and dislikes?

One of the “hottest” controversies in the U.S. today is wrapped up in the answers to these questions. To find them, PARADE talked to industrialists, labor leaders, Government spokesmen, economists, sociologists, psychologists, educators, clergymen— all of whom have a stake in a four-day week. Briefly, here are highlights from what they had to say:

Some Differences of Opinion

• Most Americans don’t want a four-day week, even at the same pay, according to the Trendex News Poll and the American Institute of Public Opinion.
• Increased productivity will make the four-day week a strong possibility by 1970, a Department of Labor expert says, if workers prefer it to extra income.
• A four-day week might be short-sighted. We Americans, some economists and industry groups claim, could double our standard of living in 25 years by staying on a five-day week.
• If a change comes, it will be gradual, beginning in assembly-line industries and working down to service jobs like police, hospitals, stores.
• Many workers probably would take a second job in preference to a third day off.
• Some businesses probably would have to adjust, but others would boom: sports equipment, vacation resorts, garden supplies, gasoline, autos.
• Prices probably would increase further; crime rates might rise. Family breakups might be more widespread. But, conversely, some families probably would be drawn wore tightly together.
• The whole question may be decided not by workers but by their wives. Do you think,’ one psychiatrist asked PARADE, “that American women can stand to have their husbands underfoot three days in a row?”

And women, according to the American Institute of Public Opinion (the Gallup Poll), are more opposed to the shortened workweek than men. Gallup’s figures show that 67 per cent oppose the idea (after all, their workweek wouldn’t be reduced) while only 54 per cent of men do.

Trendex, surveying union members, learned that 47 per cent favored a five-day week. Nearly 30 per cent wanted a four-day week now, and 14 per cent suggested keeping the five-day schedule a little longer, but voted for a four-day week eventually.

Most workers told Trendex they need more income, not more free time. When the poll suggested a choice between a four-day week at present pay levels or a five-day week with increased pay, most workers voted for the pay raise. Businessmen point also to Akron’s rubber workers, who work a six-hour-day, six-day week.

They are openly opposed to returning to a five-day schedule. Reason: More than a third of them use their free time to hold down a second job.

Some industrialists— and some labor leaders —think the Reuther campaign is aimed not at more time but at more money. (Ford’s top negotiator, John Bugas, has called the plan “a smokescreen,”) The UAW, these sources say, wants to work the same number of hours but wants overtime pay to start earlier. In any case, they contend, the auto industry is unlikely to grant a four-day week next year.

“We could work a one-day week right now,” says a spokesman for the National Association of Manufacturers, if we wanted to give up a lot of things. But of course no one does. Adds Dr. Solomon Fabricant, a New York University economist: “I doubt that a four-day week is likely in the near future without a reduction in pay — and people won’t pay the price.”

But by 1970 things may be different. Increasing productivity will make four days at slightly higher pay a strong possibility, according to Charles D. Stewart. deputy assistant secretary for standards and statistics of the U.S. Department of Labor. Even then, would you want to work four days—or shoot for more money by working five?

Three Months Off at a Time?

The answer: No one is certain. Some union officials think you might prefer to stay on a five-day week and take the extra time off in long week ends or three months off every five years. When Trendex asked one machinist how be felt about a four-day week, he replied, “With a four-day week, I’d have another day at home with nothing to do.”

What would you do with an extra day off? Many businessmen predict a further boom in leisure-time industries. More families would tackle the mushrooming outdoor sports, like boating, skiing, skin-diving.

Husbands would attempt new and more involved do-it-yourself projects. Movies would draw more customers, more television sets would be sold, sports events would play to bigger houses.

The nation would need more highways because more people would use their spare time to travel. More cars and more gasoline would be sold; vacation resorts would be overrun. (But one businessman points out, logically, that more leisure requires more spending money. Could you afford a four-day week?)

A switch to four days’ work would give you more time with your family, but this is a two-edged sword, PARADE was told repeatedly. One psychiatrist predicted a four-day week would mean more broken homes. “There are a lot of marginal families based on keeping out of each other’s way,” he told PARADE. “Husband and wife are thrown together just two days a week; they can stand that. But the extra day might be enough to push them over the brink.”

For other families, another psychiatrist says, three days together could be a great boon “It could be the answer to the problem of father-son relationship we see so much of now,” he says. The Rev. Dr. Ralph W. Stockman, of National Radio Pulpit, adds: “The American family could well be drawn more closely together, and stronger moral fiber might be the result. But with three days of leisure, Americans might face many, many more temptations.”

Dr. Stockman does not subscribe to the idea that work is virtuous and play sinful. It’s simply that, mathematically, there’s more time to be tempted. Unfortunately, psychiatrists told PARADE, many people do regard work as “good,” and play as “bad.”

These are victims of what psychiatry calls ‘the Sunday neurosis.” At work, they feel satisfied, convinced they really are worth something; at rest, they are gnawed by feelings of guilt.

One psychiatrist who has specialized in the psychological overtones of leisure believes Americans can’t cope with three days off unless they have definite interests and hobbies with specific goals. For them to get the most from it, their spare hours will have to be planned — by themselves or others.

Dr. Eli Ginsberg, a Columbia University economist, once studied a group of movie projectionists who worked a four-day schedule. He found the same leisure-time pattern as for a two-day week end— only more of it.

“Time definitely did not hang heavy on their hands,” Dr. Ginsberg says.

“These men occupied themselves helping their wives, or with do-it-yourself projects, or watching ball games.”

But one psychiatrist predicts further scrambling of the jobs of husband and wife: “If the husband is home three days a week and spends his time washing dishes or cleaning the living room, how can a child tell who’s mother and who’s father?”

One of the biggest dislocations might be in the schools. Recently Dr. William E. Stirton, vice president of the University of Michigan, urged educators to plan now for an avalanche of students as workweeks shorten, Other educators also anticipate a boom in adult education — either by workers looking for “something to do” or by those trying to reach executive ranks (where, one hard-pressed executive told PARADE acidly, “they can then work 60 or 70 hours a week”).

Will the schools follow the pattern and cut back to four days? Many educators don’t see how the number of school days could be reduced without children being short changed. Dr. Earl J. McGrath, former U.S. commissioner of education, points out that many elementary schools already are experimenting with even longer school terms.

From parents, however, Dr. McGrath anticipates pressure to bring schools into line with the workweek. Absenteeism may increase as parents utilize three-day week ends for family trips.

“At the moment,” Dr. McGrath says, “most educators would oppose shortening the school week. It’s not the same as speeding up an assembly line.”

To many experts, this is the big stumbling block to a four-day week. As Reuther begins dickering with the Big Three of the auto industry, you’ll hear more and more of the UAW arguments: that a four-day week would spread jobs, that automation is displacing workers, that continually increasing productivity means workers are making more goods in less time, and this savings in time should go to the workers.

Today, however, nearly 50 per cent of Americans are providing services, not manufacturing products. Automatic assembly lines don’t include them. Yet if factories should cutback to a four-day week, inevitably a cry would go up for a four-day week in these fields, too.

One economist told PARADE a cut in hours would mean another rise in prices — and again the service workers would be the victims. Dr. William Haber, a University of Michigan economist, suggests that the most practical course would be to continue a five-day week. American living standards would increase and the nation could mop up some of its shortages — in highways and schools, for instance.

The Labor Department’s Stewart thinks industry might drop back to a four-and-a-half-day week, then to four days, just as the six-day week went to five and a half, then five. Other experts agree that the progress of the shorter workweek — if and when it comes —will be uneven, touching an industry here and there and leaving others on five days and some even on six.

Reuther’s demands have dramatized the issue. But no expert interviewed by PARADE believed a switch to four days of eight hours each is practical now, or even five years from now.

Both the National Association of Manufacturers and the U.S. Chamber of Commerce have assigned study committees to the subject, knowing that it will crop up frequently in the future. (Other unions already have taken their cue from the UAW and made similar demands.) They want to know, among other things, whether Americans really want to work only four days.

“Maybe what we’ll see is people trying to hold down two jobs,” says one industry spokesman. “Instead of a five-day week, they’ll choose a seven-day week.” Like many business figures, he feels that the abbreviated week will be theoretically possible someday — maybe in 20 years, maybe in 30 years, maybe more. Whether it will ever come true in fact is another question.

Will you ever work a four-day week? You can tomorrow, if you want to. But do you really want to? These, as the experts see them, are the terms.

Keynes' Friends

In his book, English Pasts, reviewing a volume of Bertrand Russell's correspondence, Stefan Collini quotes from one of the letters:

'"I saw Moore in the evening, and discussed whether there was any difference between knowing Arithmetic and knowing one's grandmother; he thinks not."'

Words fail me. At one point I wanted to go to grad school in philosophy. Professors who thought Russell was the epitome of a philosopher put me off the idea. How to answer the question of whether or not the present King of France was bald - this was a burning philosophical problem chez Russell!

(Answer: both the statement that he is and that he isn't are false, in case you're wondering.)

Tuesday, July 28, 2009

How Norton Antivirus Sucks

I just got back from a trip, where I got hit with the Virtuemonde virus. Norton never even picked it up. When I contacted Norton, they told me that they would escalate the problem, which I learnt meant paying Norton $99 to fix it.

Fortunately, Malwarebytes, along with Spybot, fixed it. I wonder what Norton actually does except slow down my computer.

Hours of Labour 2

by Sydney J. Chapman (translated and condensed by the Sandwichman)

The road of economic advance proceeds by specialization. Just as there has been specialization in tools and in division of labor, so has there been a specialization of labor during working hours and of leisure and social intercourse in non-working hours. Specialization on the one side implies the elimination of waste, whether of means or of time and it has therefore meant to the laborer the partial or occasionally complete elimination of the leisure that used to be interspersed within working hours. In a modern workshop, noise, the necessity of discipline, or of a continuously absorbed state of the attention, frequently reduce the possibilities of conversation to the barest limits. Humanity has no doubt been relieved of the heaviest burden of toil by inventions relating to the mechanism of production, but their application has been accompanied on the whole by the closer concentration of some kind of effort in time. The intensification of labor in a more confined sphere of activity may, as Professor Münsterberg argues, exercise more fully the higher human faculties and thereby bring with it a deeper interest, but it will almost certainly prove more exhausting, even apart from the elimination of change, leisure, and social intercourse. Decade-by-decade, with the speeding up of machinery, we can expect to find more nervous strain accompanying the process of production. That industrial functioning has become a severer tax on the energy of the workman is fully borne out by the evidence of numerous reports on industrial conditions.

Although it is not the only possible explanation, the increasing nervous strain of industrial work would account sufficiently for the curious circumstance that there is apparently no finality about any solution of the ever-recurring problem of the normal working day. The workman whose day has been reduced soon demands even shorter hours. Pessimists infer from this that the establishment of shorter hours leads the community down a slippery slope descending from competition, striving, achievement and progress toward economic stagnation. They deplore the indolence and apathy of the present generation. But an examination of the effects that work-time reduction has on output suggests the pessimists are wrong.

A mass of material for a study of this question exists in official and other reports in more than one advanced industrial country. Beginning with the writings of Robert Owen and Daniel le Grand, both of whom stressed moral and social elements, an investigator would find an almost unbroken sequence of evidence. Mr. John Rae collected a volume of facts in 1894, and these may now be supplemented by the experiences of yet another half generation. Limitations of space forbid that I should quote examples, but I may at least roughly generalize from the recorded facts. I have found no instance in which an abbreviation of hours has resulted in a proportionate curtailment of output. There is every reason to suppose that the production in the shorter hours has seldom fallen short by any very appreciable amount of the production in the longer hours. In some cases, the product, or the value of the product, has actually been augmented after a short interval. In a few cases, the reaction of the shorter hours on the output per week has been instantaneously noticeable and the new level of production has surpassed the old before mechanical methods could be improved. Further, for some industries – for instance, for the Lancashire cotton industry – we have preserved for us the results of a string of observations reaching back about three-quarters of a century. It would appear from them that the beneficial effects wrought upon output by the shortening of hours were substantially repeated, though of course in different degrees, at each successive reduction of the working day.


Monday, July 27, 2009

Arm the Hypocrites in the US Senate?

Oh, I should not post here on gun issues, but... So in today's Washington Post, E.J. Dionne has a column, "Arm the Senate." He points out the hypocrisy of senators constantly wanting to make it easy for people to walk into churches and bars with concealed weapons, reduce gun control in Washington, D.C, make it possible for people to take guns to states and cities that would otherwise restrict them, and so on. At the same time, nobody is allowed to take a gun into the US Congress, which has metal detectors at the entrances to forbid it.

So, Dionne reasonably asks if it is so wonderful and crime-reducing for the rest of society to have people walking in and out with concealed weapons, why does this not apply to the US Senate? I must agree that this is an excellent sign of their hypocrisy and their kowtowing to the worst of the gun nuts at the National Rifle Association.

Janet Yellen for Fed Chair?

I am one of those who think that Ben Bernanke literally saved the world in mid-September from a 1931-style global economic collapse. He is not getting much credit for that from Congress or many other people, and is increasingly becoming a generalized scapegoat for the continuing recession, even if it probably would be a whole lot worse now if not for his actions then. However, I grant that he can be criticized for many things, including being probably too slow ahead of time to admit things were dangerous (although actions after August 2007 suggest the Fedsters knew bad stuff was up, despite their public rhetoric), along with things like how the Merrill Lynch purchase by Bank of American was handled and the details of the banks bailouts, and other stuff. So, maybe he is damaged goods, kind of like Frodo after Gollum bit his finger off when getting the Ring of Power into Mount Doom, and he should retire into the West.

If so, the two candidates people are mostly talking about to replace him are Larry Summers and Janet Yellen. I will not say anything about Summers other than to say I would far prefer Bernanke to him. But Janet Yellen is quite another matter, a worthy rival to Bernanke for the position. She is certainly more progressive, and also has lots of personal cool and common sense, as well as being exceptionally intelligent and knowledgeable. She currently serves as president of the San Francisco Fed, second most important after the New York one, and is a voting member of the FOMC. She was on the Board of Governors under Greenspan in the early-mid 90s but left to serve as CEA Chair from 97-99. Long at Berkeley, and married to Nobelist George Akerlof, with whom she has coauthored some innovative and influential papers on macroeconomics, she also was on the Board of Governors staff in the late 70s in the international finance division. In short, she knows her way around the place, including the basements where all the wonks and geeks hang out, and I have heard personally from people at the SF Fed that she is a great boss whom they all can say nothing but the most admiring things about.

Sunday, July 26, 2009

Hours of Labour I

by Sydney J. Chapman, (translated and condensed by the Sandwichman)

Among the most insistent problems to be found in industrial societies are those concerning wages, conditions of work and living, and the hours of labor. The problem of the hours of labor has, perhaps, not received as much practical consideration as the others. Expressed in another way, our topic is the value of leisure, the bearing of industrial development upon it, and its effectiveness in shaping economic arrangements. The demands continually made for shorter hours and a normal day; the widely supported claim that the State should intervene; and the fact that some Governments have intervened, even to the length of regulating the hours of adult male labor, are additional grounds for trusting that this topic will be of more than academic interest.

Why doesn't the question of leisure assume prominence until modern industrialism has supplanted a simpler economy? Why is much less heard of it among agricultural than among industrial communities? In the hand industries of the past, the hours of labor were excessively long in comparison with modern industrial standards. Among the peasantry and pioneering farmers, work never wholly ceases in waking hours, except for short breaks for meals, throughout much of the year. Yet little complaint would seem to have reached us from either source. The explanation may lie partially in the fact that new grievances emerged with the spread of the wages system – the problem of the working day does not present itself in quite the same light to wage earners and to the self-employed. Furthermore, these grievances are rendered more articulate by group production and the concentration of people from one economic class lends cohesion and volume to the demand for reform. The hardships suffered by a scattered population, occasioning discontents, which, however, stop short of provoking outbreak, seldom succeed in attracting public notice. People acting in isolation are naturally timid. But this is not the sole explanation. The character of much of the world's work has changed and so have the demands made upon leisure.

Industrial work on the whole has certainly become more regular and continuous throughout the year. Analysis would seem to show that work per unit of time gets more severe, in a sense, as communities advance, though a strong case could be made for the view that economic progress fosters work that is generally more satisfying and conducive to human development. Mechanical improvements frequently bring with them a new monotony of work. However, higher wages may offset that new monotony of work by offering broader opportunities for living. Mechanical improvement proceeds by "specializing out" mechanical tasks, the performance of which by hand must be a dreary occupation. But each step in the march of invention seems to create, by its incompleteness, tasks involving a new and more intensified monotony despite the fact that it may result in less tedium per unit of output. Any work whose pace is set by a machine and kept absolutely steady must be wearisome. We may usefully compare mechanical improvements with discoveries relating to the re-use of by-products. The latter always recover from waste something of value to the community, but they generally leave a residue more concentrated than that with which they began.


Saturday, July 25, 2009

Organized Labor's Exhausted Paradigm

by the Sandwichman

On the Relentlessly Progressive Economics blog, Andrew Jackson, Chief Economist and National Director of Social and Economic Policy for the Canadian Labour Congress, approvingly cited a policy paper, "America's Exhausted Paradigm: Macroeconomic Causes of the Financial Crisis and Great Recession," written for the New America Foundation by Thomas Palley, former Assistant Director of Public Policy at the AFL-CIO.

At page 11, the Sandwichman threw up his hands in despair:
"The implementation of neo-liberal economic policies destroyed the stable virtuous circle growth model based on full employment and wages tied to productivity growth, replacing it with the current growth model based on rising indebtedness and asset price inflation."
Just what "stable virtuous circle" did Brother Dr. Palley have in mind?
Why the 1945-1980 Golden Age, of course. And just how does Dr. Palley envisage restoring that lost paradise?
"...restoration of worker bargaining power in labor markets through strengthened unions, a higher minimum wage, and stronger employee protections; restoration of full employment as a macroeconomic policy objective; restoration of the legitimacy of regulation and increased government provision of public goods; a new international economic accord that addresses the triple hemorrhage problem created by the flawed model of global economic engagement; and reform of financial markets and corporate governance that ensures markets and corporations work to promote national economic well-being."
There's just one catch: "While the economics are clear, the politics are difficult..."

Politics are always difficult. The Sandwichman doesn't think that's the problem with Palley's "clear economic" prescription, though. The problem with Palley's paradigm is that its politics are absent. I want to draw attention to the first two planks in the platform to illustrate what I mean: strengthened unions and a higher minimum wage. Both sound appealing to a left perspective. But do they go together?

Samuel Gompers didn't think so. Here's what he had to say about minimum wage legislation in 1914: "I am very suspicious of the activities of governmental agencies. I apprehend that once the state is allowed to fix a minimum rate, the state would also take the right to compel men or women to work at that rate." The rationale for Gompers's opposition to minimum wage legislation -- although not to minimum wages won by collective struggle -- was a philosophy based on collective self-determination and action.

Now I don't want to give the impression I think old Sam Gompers was a saint or always knew what was best for workers. He wasn't and he didn't. But there was a principle and logic larger than Gompers that played itself out in the first four decades of the 20th century that Sandwichman thinks has crucial bearing on the exhausted paradigms of macroeconomics and organized labor.

The Sandwichman drones on endlessly about the eclipse of the shorter working time ethic in the unions and the slander and taboo on the topic in economics. But let's forget about that for a moment and consider Supreme Court decisions and constitutional law. Allison Martens wrote a fascinating paper a few years ago titled, "Parrying with the Courts: Analyzing the Lochner Era through the Eyes of Organized Labor." I don't pretend to know much about US constitutional law myself, nor will I attempt to summarize Martens's argument here. I just want to call attention to a key switch in American Federation of Labor legal strategy that Martens highlighted in the paper and that was discussed earlier in a paper by James Gray Pope, "The Thirteenth Amendment Versus the Commerce Clause: Labor and the Shaping of the Post-New Deal Constitutional Order, 1921-1957."

Forgive me for quoting four paragraphs from the conclusion to Pope's article. The drama and the importance of what Pope is chronicling inhibits me from summarizing or paraphrasing:
"On the eve of the New Deal constitutional revolution, proponents of national labor legislation faced the momentous choice whether to ground their legislation on the Commerce Clause or on the Thirteenth Amendment. Since the early 1900s, the labor movement had claimed the rights to organize and strike under the Thirteenth Amendment. Labor constitutionalists argued that these rights were essential for workers to exercise actual liberty of contract in an industrial economy dominated by large corporations. By the early 1930s, this core theory had won wide acceptance, and legislators routinely echoed labor's claim that restrictions on worker self-organization and protest amounted to slavery and involuntary servitude.

"But labor's constitutionalists encountered stubborn opposition from the movement's own friends within the legal profession. During the campaign for anti-injunction legislation that culminated in the passage of the Norris-LaGuardia Act of 1932, a group of elite, progressive lawyers led by Professor Felix Frankfurter undercut labor's constitutional claims by refusing to acknowledge their existence in public while maneuvering behind the scenes to exclude them from legislative consideration. Their determined opposition to labor's freedom claims reflected not a tactical disagreement among allies, but a fundamental conflict over long-term, constitutional goals. While labor constitutionalists sought power for unions and workers, progressive lawyers sought power for social scientists and other professionals, including themselves. Over a period of six years, this cagey and well-connected opposition wore down labor's constitutional leaders. In the winter of 1931–1932, when presented with what appeared to be a choice between insisting on their constitutional theory of freedom and achieving anti-injunction legislation in the here and now, labor leaders chose the latter. Two years later, when Senator Robert Wagner proposed his labor disputes bill, unionists sought a constitutional foundation sounding in democracy and human rights, but again failed to force the issue.

"The result was to sever the popular demands for industrial freedom from the legal-professional campaign to validate the Wagner Act. Unionists embraced the Wagner Act as labor's latest 'Magna Charta' and declared that if the courts would not enforce it, the workers would. In his 1936 reelection drive, President Roosevelt campaigned against economic royalism and for industrial freedom, apparently endorsing the core of labor's theory. Roosevelt's landslide victory emboldened workers to stage full-blown factory occupations to enforce what they saw as their constitutional rights to organize and strike. The factory occupations, in turn, forced the Supreme Court to uphold the Wagner Act—a victory that workers across the country promptly celebrated as a 'new era' of industrial freedom.

"Meanwhile, however, government lawyers had been urging the courts to uphold the Wagner Act not as a human rights statute, but as an exercise of Congress's power to 'control' and 'punish' strikes under the Commerce Clause. And it was this view, not the popular vision of the statute as a human rights measure, that the Supreme Court embraced in the Wagner Act decisions. The Court did leave open the possibility that collective labor rights might be constitutionally protected, and—for a time during the 1940s—workers and unions won a number of decisions protecting the rights to organize, strike, boycott, and picket. But by the mid 1950s, labor's constitutional victories had been appropriated by others. Under the leadership of Justice Felix Frankfurter, the Supreme Court upheld a battery of restrictive labor laws. By the time the Court was finished, the new civil liberties won by unions and workers had been reshaped into a doctrine that, as Robert McCloskey famously put it, had the 'smell of the lamp about it.' The Constitution, it seemed, protected reasoned discussion about ideas, not appeals to labor solidarity. In class terms, then, the constitutional revolution of the 1930s represented the triumph within constitutional jurisprudence of what might be called the 'knowledge class' over the previously dominant business class. The role of the working class was to provide the foot soldiers for change."
I guess one could say that Palley's economic prescription, too, has something of "the smell of the lamp about it." Or, to quote Sam Gompers one last time:
"Be not deceived by any specious sympathy and guileful interest in your welfare, but like men and women work out your own problems and determine your own lives. Benefits, improvements gained by the power of collective action may be slower, but they do not menace future welfare they do not transfer to others control over future activity, policies, or methods. Self-help leads to independence, reliance, and true welfare."

Economic Illiterate: Fred Barnes v. Barack Obama

Fred Barnes tries to attack the intelligence of the President in his Know-Nothing-in-Chief. This single line should tell the reader that the rest of this Weekly Standard op-ed was a waste of time:

Demonstrating a passing acquaintance with free market ideas and how they might be used to fight the recession--that's not too much to ask.

Recessions are often seen as a gigantic market failure – letting the market decide is not a recipe for restoring full employment anytime soon. Barnes next goes onto confuse long-term issues with Keynesian remedies for the current shortfall of aggregate demand:

Obama endorsed a surtax on families earning more than $1 million a year to pay for his health care initiative. This is no way to get the country out of a recession. Like them or not, millionaires are the folks whose investments create growth and jobs--which are, after all, exactly what the president is hoping for. Another tax hike--especially on top of the increased taxes on individual income, capital gains, dividends, and inheritances that Obama intends to go into effect in 2011--is sure to impede investment.

Yes – another one of these pseudo-supply-side rants that we cannot tax high income folks lest investment will just dry up. I guess Mr. Barnes is not aware of the role of real interest rates on investment in those full employment models that free market types think rule the world. And maybe he is not aware that the current Federal Reserve is currently keeping interest rates low in the hope that investment demand will eventually regain its footing.

Steve Benen has more criticism.

Thursday, July 23, 2009

Rewriting Hours of Labour +100

by the Sandwichman

Coming up is the 100th anniversary of Sydney J. Chapman's theory of the hours of labour, delivered in Winnipeg Manitoba on August 26, 1909 as Chapman's presidential address to the Economics and Statistics section of the British Association for the Advancement of Science and subsequently published in the September 1909 Economic Journal.Chapman was not a great writer. Case in point (pay particular attention to the italicized passage at the end):
The workman whose day has been reduced is soon repeating again his demand for shorter hours, and there are pessimists who infer from this that the shorter hours attained hitherto have shifted the community on to a slippery inclined plane which leads from the economic “struggle for existence” by which is meant the competitive striving for place, reputation, and achievement, whereby progress is naturally stimulated – to economic stagnation. They think they discern in the present generation a growing disinclination to make an effort and a growing disposition to take the easy path; but that the truth cannot be mainly with the pessimists an examination of the effects of curtailments of the daily hours of labour upon output would at least suggest.
Compare my translation:
The worker whose day has been reduced soon demands even shorter hours. Pessimists infer from this that the establishment of shorter hours leads the community down a slippery slope descending from competition, striving, achievement and progress toward economic stagnation. They deplore the indolence and apathy of the present generation. But an examination of the effects that work-time reduction has on output suggests the pessimists are wrong.
To celebrate the theory's centennial, Sandwichman serialize a translation of the whole article in, if not Plain English, plainer English at least. I will retain original as much as serviceable and only intervene when Chapman's convoluted phrasing and compound sentences seriously obstructs comprehension.

Kevin Drum on the Compensation of Those Not Highly Compensated

Ellen Schultz (Wall Street Journal) writes something that catches the interest of Kevin Drum:

Executives and other highly compensated employees now receive more than one-third of all pay in the U.S., according to a Wall Street Journal analysis of Social Security Administration data -- without counting billions of dollars more in pay that remains off federal radar screens that measure wages and salaries … In the five years ending in 2007, earnings for American workers rose 24%, half the 48% gain for the top-paid. The result: The top-paid represent 33% of the total, up from 28% in 2002.

Kevin follows up with:

You probably thought that the big problem with skyrocketing executive pay was the fact that it left nothing for the rest of us. And you're right: that 24% increase for "American workers" includes the 48% increase for the top earners. In other words, the executives got a 48% increase, the rest of us got approximately nothing, and it all averaged out to 24%.

There may be two problems here. Kevin is taking a simple average of 48% for the wealthy one-third and zero for the rest of us to get this 24% overall average but that’s not quite right. A weighted average where one-third received a 48% increase and two-thirds received a 12% increase is more in line with the overall increase being 24%. But if the rest of us received a 12% increase in how nominal wages over this five-year period, how does that compare to the increase in the consumer price index? If one compares the CPI as of December 2007 to the CPI as of December 2002, the increase in CPI was over 16%. In other words, those who were not highly compensated may have seen their nominal wages rise slightly but in real terms, wages declined.

Wednesday, July 22, 2009

Habit and Myth

by the Sandwichman

Why do you think what you think and do what you do? Habit. How do you explain why you think what you think and do what you do? Myth.

What do you want?

The Economist On Modern Economic Theory Melting Down

The most recent issue of The Economist has three articles about The Crisis of Modern Economics, with a book on the cover whose title is "Modern Economic Theory" appearing to melt down, with the most interesting one being the one on macroeconomics. All three articles are linked to in a post by Menzie Chinn on Econbrowser, where he also links to Austrian, Mario Rizzo, criticizing mathematical modeling. While recognizing some of the arguments in The Economist to be valid, Chinn definitely defends mathematical modeling, and seems to be not too critical of the dominant DSGE models. Mark Thoma at Economist's View also linked to all three articles, along with a link to Mark Gertler's mini-course that attempts to try to show how the DSGE models might be fixed to do better (an effort that I think fails).

The main arguments in the article on macroeconomics (the main other one is on financial economics) involve failures to include behavioral economics, failures to do heterogeneous agent modeling, and a general failure to model bubbles well, with Minsky being mentioned, although also dismissed as not mathematical (despite work by Steve Keen and me and others). While these arguments are correct, there is all too much defense of the DSGE models for "benchmark" purposes, although my observation is that the people working on these models, which totally dominate central bank modeling, take them all too seriously and think that models assuming rational expectations by homogeneous agents in general equilibrium can be solved with minor tweaking (and think their inclusion of sticky prices and wages is some great breakthrough to ingenuity, a point Thoma pokes at, and that many Post Keynesians have argued is neither Keynesian nor even useful, with flexprice models often less stable than fixprice ones). There is also the general ignoring of deeper problems in microeconomics in these articles, such as those pointed out in Steve Keen's _Debunking Economics_, even if I disagree with some of what he has to say in that book.

Tuesday, July 21, 2009

Forestry 'ethics' in Australia

Earlier this year the huge ethical problem inherent in the long-term practice of converting Australia's native forests to monoculture tree plantations was solved in one fell swoop by a director of a plantation company:
“…..Effectively most of the Central Victorian forests, it's basically a plantation. It's called 'native', but it regenerated from a 1939 fire. It all got burnt on the same day, it all regenerated on the same day - apart from having human hands touch it, that's a plantation, but unfortunately it's seen psychologically as native. But that material now is high quality. And you could plant that stuff, but you won't get quality in 10 or 15 years, or 20 or 25. …So, it's really not a native versus plantation: it's a 30 to 50 year, versus a 10 to 15 year issue.” [1]

Setting aside the fact that the 1939 fires occurred 70 years ago, rather than a mere 50, plantation management entails considerably more than a passive wait for native species to regenerate after an inferno.

In Tasmania and large areas of mainland Australia the process goes something like this: First the native forests, including ancient stands of World Heritage value, are bulldozed to the ground. A tiny minority of the logs are used for furniture making, boat building and suchlike. Ninety percent of the logs that are harvested, however, are used for the conversion to woochip to make paper pulp for the commercial benefit of large transnational corporations [2]. The rest of the considerable biomass, as can be seen in the above image [3], is piled up and burnt using napalm dropped from helicopters. In this process hundreds of years of forest mulch is also incinerated and the top soil turns into baked brick. Local residents often choke on the thick plumes of smoke that emit from these gigantic industrial fires.

Monoculture bluegum trees are planted to replace the biodiverse forest. The industrial fire prevents the regeneration of unwanted (non-commercial) rainforest species. In turn, repeated industrial applications of 1080 poison kill off wildlife that may pose a threat to these small newly-planted monoculture saplings used to replace native flora.

Over the following 20 year life span of the industrial plantation there may be repeated aerial sprayings of cypermethrin and/or other toxic insecticides; and this occurs despite the placement of these industrial plantations in major water catchments and within and around rural communities across the state. Cursory and unreliable testing is done in major arterial streams where chemicals will be the most diluted. It is no coincidence then, that that the Australian state with by far the most intensive 'forestry' regime has the highest human cancer rate in the nation. Toxicological studies in Tasmanian devils, the platypus and other native mammals, unsurprisingly, reveals the presence of POPs including organo-chlorines, PCBs, furans and dioxins. [4]

The words of Ula Majewski can only hint at the tragedy of what is happening in (what now are only the small remnants left of) Australia's native forests :

"There is nothing quite like the silence of a freshly cut clearfell or a freshly cut aggregated retention coupe, just as there is nothing quite like the terrible roar of a chainsaw or an excavator splitting open the dawn air. In these blasted landscapes, the voice falls silent; narrative is systematically rendered nonexistent. To stand within this silence, in the choked up confusion of mud and splintered stumps, to come across the jagged remains of a tree under which you sat a few weeks before, is to truly understand the terrible parameters of ignorance and disrespect that are compelled by something as fundamental and as simple as human greed. "[5]

[1] Australia's recession-proof woodchips
Peter Mares interviewing Dennis Neilson (Director of the New Zealand based forest industry consultancy, DANA Limited. A company that owns eucalyptus plantations).
ABC National Interest program. 24th July 2009

[2] Corporations such as Norske Skog whose major customers are the Rupert Murdoch media empire and Fairfax Media. These two companies virtually monopolise the Australian newspaper market. Also woodchipper companies such as Gunns Ltd and Forest Enterprises and the companies that invest in them (Elders, AMP, ANZ, Macquarie Group, Perpetual Investments and others).

[3] Biomass piles from a typical native forest coupe clearfell in North West Tasmania. This image was taken by the author, Brenda Rosser, in February 1996. The 100 year old regenerating forest was 'harvested' by the Tasmanian state government enterprise 'Forestry Tasmania'. Despite written assurances that the area would be regenerated back to native forest the trees were replaced by a monoculture of Eucalypt Nitens. Rainforest species in the creeks were chopped down and other breaches of the Forest Practices Code occurred with no penalties imposed by the State Forest Practices Authority.

[4] See Dr David Obendorf's comments at:

[5] The Cracking of Our Hearts. Speech by Ula Majewski., left in the Florentine. Speech: Parliament Lawns, Hobart. 13th January 2009.

Monday, July 20, 2009

Fiscal Hypocrisy Goes Way Back

Steve Benen is right:

Yesterday, Senate Minority Leader Mitch McConnell addressed the costs of health care reform. "If you're going to do something as comprehensive as the president wants to do," the Kentucky Republican said, "you ought to pay for it." ... When Bush/Cheney slashed taxes by well over $1 trillion, Republicans said there was no reason to worry about paying for it. When Bush/Cheney started the war in Afghanistan, Republicans said there was no reason to worry about paying for it. When Bush/Cheney started the war in Iraq, Republicans said there was no reason to worry about paying for it. When Bush/Cheney added Medicare Part D, Republicans said there was no reason to worry about paying for it. It's not that their efforts at paying for it came up short, it's that they didn't even try. The notion of fiscal responsibility was simply deemed irrelevant -- an inconvenient detail for unnamed people in the future to worry about. And now, these exact same policymakers are, with a straight face, complaining bitterly about the fiscal habits of Democrats who are -- in case anyone's forgotten -- actually trying to pay for much-needed health care reform.

Steve adds that there are some centrist Democrats guilty of the same hypocrisy. Let me just add that Republican fiscal hypocrisy dates back to the 1981 tax cut paid for of course by increases in defense spending under President Reagan.

Sunday, July 19, 2009

An Idiosyncratic Road to Crisis Theory

An Idiosyncratic Road to Crisis Theory

As an undergraduate, introductory microeconomics didn't make any sense. After a few weeks, I realized that it was easy to get a good grade until by working backwards. Since the goal was to show that everything worked out perfectly, all you have to do on an exam is to start with the answer that the market creates the best outcome, then work backward to figure out what would make it occur. Economics soon became my easiest class. Although I do not follow that procedure anymore, I am convinced that much of the economics profession still does.

Eventually, some seemingly obvious questions began to trouble me. Economics, which purports to explain the nature of a capitalist system motivated by profit maximization, lacks a theory of capital as well as any coherent explanation of the determination profits. One of reasons is simple: economics generally deals with a static conception of the world, yet fixed capital, which becomes increasingly important with the maturation of capitalism, calls out for a dynamic analysis, even with a static conception of the world.

Read the rest here

Down Under's Dr. Doom Dukes It Out With Dr. Bounceback Down Under

Well, that is an exaggeration, but they were both in the same room at points and are friendly. I have just returned from Computing in Economics and Finance, 15th conference of the Society for Computational Economics, held at the University of Technology in Sydney, Australia this past week. While dominated by wonkish quants who worship DSGE models in central bank basements ("putting some learning in them will make everything all right"), there were also some heterodox types, most prominently Australia's Dr. Doom, aka, Steve Keen, a Post Keynesian who has been math modeling Minsky since before it was fashionable and is now all over Aussie media having loudly called the crash early. He also runs a lively blog, Debtwatch. Brenda Rosser and I saw him perform, which he does well, with his array of slides of misery and mounting debt, and so on.

Dr. Bounceback is Jim Morley of Washington University in St. Louis, whose talk was not as well attended as Keen's, but interesting nevertheless. He has recently been touted on some blogs (econbrowser at least) for being out on a limb as the most optimistic forecaster around, arguing that the depth of the fall will in the pattern of inventory adjustment models give us a strong bounceback, and while he was a bit more cautious in his talk, bringing in model averaging and recognizing that the current situation has other factors messing things up, he is still probably the strongest voice for a "V" pattern, as opposed to a "W" or a "U" or an "L," as these things get labeled in the world of alphabet business cycles. One can access a description of the bounceback model in a paper by Morley and Jeremy Piger, "Practical Computation of the 'Model-Free' Business Cycle"(pdf). I note that while some may think he is very conventional, he is not that big a fan of the DSGE models, and is friendly with his Post Keynesian colleague at Washington University, Steven Fazzari.

A facade to hide Australia's foreign-owned resources

Today, in a newspaper distributed in Australia and known as the 'Daily Telegraph' Mr Greg Sheridan has an article entitled 'Stern response vital to future' [1]. In it Sheridan refers to an interesting saga now playing out between an angry Chinese Government and Rio Tinto, which is a giant, mainly British-owned multinational natural-resource company that operates on 6 continents. It is the 4th largest publicly-listed mining company in the world.

Two weeks ago Mr Stern Hu, an executive of Rio Tinto who is also an Australian citizen, was detained by the Chinese Government and accused of "bribing officials from companies he was doing business with and engaging in illegal espionage."

The context for Mr Hu's detainment was that Rio Tinto had recently rejected a $25 billion bid for a 20% stake in Rio by the Chinese Government-owned Chinalco. The Chinese Government made it clear that it was "furious" about this rejection. China also missed out on its bid for a 40% cut in iron ore prices when customers from Japan and South Korea undermined China's position by accepting prices would fall by a lesser 33%.

What concerns me about the nature of the reporting on this issue in Australia's mainstream media is that the Australian reader is being misled about the true nature of these, and related, disputes. The conflict, it is pretended, is between China and Australia. But it's not. Australlian ownership levels in Rio Tinto are minimal at around 16%. By contrast 42% of Rio Tinto shareholders are in the UK and 18% of its equity is owned by Americans.

Although it's true that Mr Stern is an Australian citizen, his detainment alone does not justify the enormous amount of media coverage that his arrest is getting. Nor does it seem appropriate that our Prime Minister over-emphasise the economic stake that China has with its relationship with the Australian government; as he appears to do.

Alarmingly, Australia's mining resources (in general) are likely to be predominantly foreign-owned. [2], [3] If this nation now fits the contemporary description for Canada: a "twenty-first century version of a tenant farmer", it's about time Australian citizens were told the truth by the major GLOBAL media companies.

[1] 'Stern response vital to future by Greg Sheridan. The Sunday Telegraph. Page 100. 19th July 2009

[2] Foreign-owned major resource projects By Stephen Mayne. May 19, 2009

[3] Foreign government investments in Australia By Stephen Mayne. May 18, 2009

Thursday, July 16, 2009

Only So Much Boilerplate to Go Round

by the Sandwichman

The Economist again pimps its lump:
A commonly held view is that British youngsters have been displaced by the influx of youthful migrants from eastern Europe since 2004. But this is the "lump-of-labour" fallacy—that a job for a Polish cleaner means one fewer for a native worker...

A more likely explanation, though still disputed, is that the minimum wage was pushed up too much a few years ago.
No. This is the lump of labour fallacy. And this is how The Economist has reused and reused and reused the same propaganda boilerplate nineteen (19) times since 1993!

More than a year ago, I offered $10,000 to anyone who could refute my debunking of this perennial "lump-of-labour fallacy" canard and get their refutation published in a leading economics journal. And I repeated my offer and repeated it.

No takers. No nibbles, even. Why? Because if you actually look into The Economist boilerplate about "this is the lump of labour fallacy, yada, yada..." you'll quickly learn it is bogus. It is baseless name-calling and not a bona fide "economic fallacy".

Wednesday, July 15, 2009

Krugman Notes the Role of Automatic Stabilizers – in Part

Paul Krugman makes an interesting argument in Deficits Saved the World:

What we’ve had is a sharp increase in the desired private surplus at any given level of GDP, due to a combination of higher personal saving and reduced investment demand. This is shown as an upward shift in the private-surplus curve. In the 1930s the public sector was very small. As a result, GDP basically had to shrink enough to keep the private-sector surplus equal to zero; hence the fall in GDP labeled “Great Depression”. This time around, the fall in GDP didn’t have to be as large, because falling GDP led to rising deficits, which absorbed some of the rise in the private surplus. Hence the smaller fall in GDP labeled “Great Recession.” What Hatzius is saying is that the initial shock — the surge in desired private surplus — was if anything larger this time than it was in the 1930s. This says that absent the absorbing role of budget deficits, we would have had a full Great Depression experience. What we’re actually having is awful, but not that awful — and it’s all because of the rise in deficits. Deficits, in other words, saved the world.

If we consult table 1.1.6 of BEA’s NIPA tables (real gross domestic product and its components in 2000$), we see very little change in either real GDP or consumption but an almost $450 billion decline in investment from 2007QI to 2009QI. Government purchases rose by approximately $90 billion with the rest of the offset coming from an improvement in net exports. However, real exports fell by over $35 billion so one of the saving graces was the fall in imports. A positive marginal propensity to import tends to reduce the Keynesian multiplier and hence works as another form of automatic stabilizer.

Tuesday, July 14, 2009

Sarah Palin’s Supply-side Silliness on Cap & Trade

Whenever a supply-sider lectures us on economics, it is always fun to see if said supply-sider even knows the basics of economics. Case in point in an op-ed opposing cap & trade from Sarah Palin:

There is no shortage of threats to our economy. America's unemployment rate recently hit its highest mark in more than 25 years and is expected to continue climbing. Worries are widespread that even when the economy finally rebounds, the recovery won't bring jobs. Our nation's debt is unsustainable, and the federal government's reach into the private sector is unprecedented ... There is no denying that as the world becomes more industrialized, we need to reform our energy policy and become less dependent on foreign energy sources. But the answer doesn't lie in making energy scarcer and more expensive! ... Job losses are so certain under this new cap-and-tax plan that it includes a provision accommodating newly unemployed workers from the resulting dried-up energy sector, to the tune of $4.2 billion over eight years. So much for creating jobs … The ironic beauty in this plan? Soon, even the most ardent liberal will understand supply-side economics. The Americans hit hardest will be those already struggling to make ends meet. As the president eloquently puts it, their electricity bills will "necessarily skyrocket." So much for not raising taxes on anyone making less than $250,000 a year.

I guess we should give her credit for actually knowing we are in a recession. But cap & trade is more about our long-term future and surely new jobs can be created in other sectors – assuming the current Republican love of Herbert Hoover economics does not get in the way of rational macroeconomic policy. And I would hope the former governor of Alaska might recognize that a well designed cap & trade policy could actually reduce the deficit she worries about. Conservative economist Greg Mankiw even thinks the extra tax revenues might allow us to lower other forms of taxation – perhaps on those “Americans hit hardest”.

But my main problem with this op-ed is that it contends that cap & trade represents a restriction on the supply of energy, which confuses an alleged shift of the supply curve with what is really going on – a tax wedge between the demand curve (private marginal benefit of using energy) and the supply curve (private marginal cost). Credit goes to Brad DeLong for clarifying how Palin may have missed the main reason why economists including Greg Mankiw endorse policies akin to cap & trade:

So I called Jennifer Lee:

ME: Good morning. My name is Brad DeLong. I got your email about the cap-and-trade op-ed this morning and I was wondering if I could ask you a few question. An op-ed about cap-and-trade energy policy that doesn't even whisper about global warming? Why is publishing this something to be proud of rather than embarrassed about?

Others have noticed the same problem as documented by Steve Benen.

Update: Palin was for cap & trade before she was against it.

Monday, July 13, 2009

Is California Printing Money?

Via Mark Thoma and Marshall Auerback comes a news story that has been read by Mark and Marshall as the state deciding to print its own money. But is an IOU really money when:

Banks like Bank of America and Wells Fargo stopped accepting IOUs yesterday.

If the two major banks in the state are not accepting these IOUs, they aren't exactly liquid which is a key element in the usual definition of "money".

Friday, July 10, 2009

Jobless Recovery v. Working Less

by the Sandwichman

Brad DeLong worries and worries about the "jobless recovery"

The "jobless recovery" is an oxymoron. It also stands the lump-of-labor fallacy on its head. Instead of a "fixed amount of work to be done" there is a growing amount of work to be done by a fixed number of workers. Well, the remedy is obvious -- or would be obvious but for the precision-engineered blinkers worn by almost all economists these days: "So long as there is one man who seeks employment and cannot find it, the hours of work are too long." Who said that? Why the great Keynesian himself, John Maynard!

Wait! No! That was Samuel Gompers. What Keynes said was:

"The full employment policy by means of investment is only one particular application of an intellectual theorem. You can produce the result as well by consuming more or working less. Personally I regard the investment policy as first aid... Less work is the ultimate solution."

So, the first Obama stimulus was first aid. Let's assume the patient is stabilized. The economy is no longer "falling off a cliff". WHAT WOULD KEYNES DO?

Jobless or work less?

Thursday, July 9, 2009

No Evidence that Business Week Economics Editor Knows What He is Talking About

by the Sandwichman

Peter Coy fantasizes that he is imparting eternal wisdom when he boilerplates:
"The idea that older workers displace younger ones assumes that there’s a fixed amount of work to be done. That’s known as the lump-of-labor fallacy—and it’s at play in the anti-immigration camp as well. By and large, economies don’t work that way. Workers earn incomes and spend the money and the recipients of the money hire more people and off we go. Growth."
Indeed there is not a fixed amount of work to be done! In fact, between December 2007 and June 2009 six and a half MILLION jobs disappeared. Thus, there is not a fixed amount of work but a diminishing amount. By and large, economies don't work... the way economists pretend they do. Workers' incomes stagnate and debt soars and the recipients of the money repackage subprime mortgages as collateralized debt obligations and off we go. Collapse. ("But who could have known???")

As for that alleged lump-of-labor fallacy...

Wednesday, July 8, 2009

Contracting Out, Or Boeing Bites Itself on the Butt

Boeing is having a great deal of difficulty in constructing its new airplane. These problems remind me of the work of Ronald Coase.

In 1991, Coase won the misnamed Nobel Prize for economics, largely on the basis of two articles. In one of these, Coase explored the nature of the firm, "distinguishing mark" of which is the "the suppression of the price mechanism."

Coase, Ronald. 1937. "The Nature of the Firm." Economica, 4: 386-405, p. 389.

To some, at first glance, such words might suggest a radical Marxist ideology -- "suppressing the price system". In fact, Coase saw something that earlier economists had overlooked. Business transactions between firms are based on prices, but, within a business orders and procedures generally determine how things are done, not prices.

At the same time, a business can theoretically contract out virtually everything it does. A major corporation could consist of a telephone, an Internet connection, and a bank account. It could rent its office and make contracts with employees on a daily basis. It could pay other companies to produce and market its goods.

No major company has ever gone that far because of the difficulty of specifying everything it needed in contracts. Yet, in the new age of neoliberal worship of markets some corporations have actually made great strides toward creating a totally market-driven business. A few corporations have even taken to using prices within the firm in an effort to make each division accountable.

Subcontracting can have different kinds of motives. Some firms may subcontract because another firm is more efficient in performing a task. Of course, subcontracting with sweatshops in low-wage countries has become all too common. Others may do so in order to avoid responsibility, such as an otherwise "reputable" corporation that subcontracts out janitorial work to a company that pays minimum (or even subminimum) wages. In this way, the company can still present itself as an upstanding "citizen" -- never having a clue about the fate of its janitors. Other unionized firms may openly subcontract just to avoid paying union wages.

Now back to Boeing. For years, Boeing has increasingly subcontracted out work. In part, the objective was to provide jobs in countries that purchased its planes, but avoiding unionized labor was a major motive for much of the subcontracting.

Now, the subcontracting is coming back to bite Boeing. The specifications for airplane parts leave little tolerance for error, yet the quality of some of the work was substandard or late. So now Boeing is forced to purchase some of the subcontractors instead of their products.

Sanders, Peter. 2009. "Boeing Sets Deal to Buy a Dreamliner Plant: Company to Pay Vought Aircraft $580 Million, Forgive Cash Advances for Work on 787." Wall Street Journal (8 July).
Boeing Co. agreed to acquire manufacturing operations from one of its key suppliers [Controlled by the Carlyle Group] on the delayed 787 Dreamliner aircraft at a cost of $1 billion. The purchase of a plant in North Charleston, S.C., from Vought Aircraft Industries would mark the second time Boeing has taken over a key part of the Dreamliner's supply chain.

Now back to Coase. His idea was that firms chose to avoid the price system, at least in part, because of the difficulty of framing requirements in terms of a formal contract. Perhaps, the management of Boeing might consider reading Coase.

One other part of Coase' analysis was the idea transactions costs -- the time and expense of working out deals or specifying the requirements of purchased products or services. Contracts are terribly difficult to write in a way that they spell out all contingencies in advance. Economists refer to this as the principal-agent problem.

One other problem with contracting out: sometimes such arrangements require more than a contract. Parties may shut down or build new factories depending upon which side of the contract they sign. Should economic conditions change, readjustment can be costly. Workers must relocate or remain unemployed [which explains why there is an association between home ownership and unemployment]. Companies may be left with the challenge of restarting production or with finding alternative uses for empty factories.

For example, when oil prices spiked, some companies found that increasing transportation costs wiped out the expected savings from contracting out production in far-off lands. For this reason, some the business press is suggesting that Mexican maquiladoras are now becoming more attractive than Chinese sweatshops.