Thursday, July 29, 2010

Economics without Equilibrium

There’s a nice post today (or yesterday, depending on what time zone your brain is in) by Rajiv Sethi on the effort to bring back non-equilibrium approaches to macroeconomics. It looks at the argument made by Tobin in the 1970s, Minsky’s oscillating financial instability model, as well as his own work.

I think the simplest way to put the question is to ask, what sciences should economics, given its subject matter, most resemble? Physics, with its immutable laws and extraordinarily precise measurement apparatuses? Not likely. How about biology, ecology and geology, with their messy, variegated objects of study, one-off cases, and path-dependence? This is where I would turn.

So how much equilibrium analysis do we find in these fields? The answer is, a little, but not much. Mostly there is a painstaking identification of discrete causal processes, each a challenge that can occupy a whole career, with little expectation that all of them will ever be fitted neatly into a single, all-explaining model. Economics would do well to follow this path.

For more detail on my take, look here.

Wednesday, July 28, 2010

The Ultimate Death Blow for Notre Dame Heterodoxy

Notre Dame exiled its heterodox economists to a separate department. Now it is about to execute a death sentence for the department. Apparently, mainstream economists have offered such excellent guidance that questions about their dogma no longer serve any purpose.

Friday, July 23, 2010

Back to Square One on Climate Change

There is no way to paint a pretty color on the bad news: the Democrats have abandoned any hope of passing a climate bill this year. If the Republicans pick up seats in November, as everyone expects them to do, this effectively postpones any serious action until 2013 at the earliest. Carbon targets will have to be pushed back, and the cost of meeting them will rise.

What can we learn from this?

Above all, that the strategy of the national green groups—the National Resources Defense Council, the Environmental Defense Fund, the Sierra Club, etc.—simply failed. They wanted to bring business, and especially the energy sector, along as partners by cutting backroom deals. Let’s put forward a united front, they said, and we will cut you some free carbon permits, ease up on some regulations, shovel you some pork. You’ll make your money and we’ll save the planet.

The deal-making happened; just scan the Kerry-Lieberman text if you have a spare day or two. What didn’t happen was the partnership. The climate “allies” courted so assiduously by the green groups funneled money to deniers and obstructionists. They took giveaways and demanded more. They never really shouldered any of the burden of pushing this bill through. And with each retreat to a fallback position the effort had less to offer and less traction.

In my dreams, the leaders of the green groups stand before the microphones and say, Enough! No more beltway BS! We are going to draft a bill that meets the criteria of science and ask the public to force the politicians to pass it.

In real life, I know that these groups have their eyes on their side of the deals: the funding for mass transit, energy research, renewables, efficiency retrofits. They don’t want to give this up, so they will be the last to recognize that the deal is really, truly dead.

Whatever the composition of congress, the need for legislation remains urgent, and it is still possible for the public, if organized and focused, to push the politicians into it. What’s needed is a strategy that’s exactly the opposite of what we’ve seen for the past two years:

1. No deal-making to win over business “allies”.

2. No disappearance into the minutiae of complex energy bills.

3. A single environmental demand: to put an economy-wide price on carbon.

4. A single economic demand: to collect the full price and rebate it back to the public.

Yes, there are details that can make a big difference, but if you want a popular movement the emphasis has to be on the core ideas. If you say that the stringency of the targets is essential, I won’t argue. If you say we need gobs of investment in research and infrastructure and retrofitting to get us to a decarbonized economy, I will agree completely. But job one is getting an architecture in place as soon as possible. Once there’s a price on carbon, and once the public starts getting money from it, the political environment for everything else we have to do will become more favorable.

At this point, what’s needed more than anything else is leadership to galvanize this movement.

Selection Bias 101

What’s wrong with this picture?

Historically, self-financed candidates have tended to lose. The National Institute on Money in State Politics recently found that of those candidates who received more than half of all campaign contributions from themselves or an immediate family member, only 11 percent won from 2000 to 2009.

It’s not much of a puzzle, since I gave away the answer in the header. Just to spell it out, if we assume that candidates with a higher likelihood of winning will attract more funding, the “more than half self-funded” criterion selects against popularity. There is reverse causation, from weak political prospects to poor fund-raising to greater self-finance.

This is a nice example if you teach stats. Just don’t label it the way I did.

Sovereign Default Risk

Please take a look at this fine analysis by Michael Pettis. It cuts through the nonsense about the almighty debt-to-GDP ratio that dominates current discussion. This ratio has no predictive power over sovereign default risk; much more depends on the composition of the debt, the volatility of the public revenue stream, and the forces acting upon creditors. Above all, there are moderately procyclical debt burdens (weak economy, weak burden) and monstrously countercyclical debt burdens. You want to assume the first and flee in terror from the second.

Pettis also points toward an interesting political economic aspect of the fundamental asymmetry between surplus and deficit countries. He writes:

A sovereign default is always a political decision, and it is easier to default if the creditors have little domestic political power or influence. Unless foreign investors have old-fashioned gunboats, or a monopoly of new financing, for example, it is generally safer to default on foreigners than on locals.

While credit markets may be segmented, being a deficit country increases the likelihood that sovereign debt will be held by foreigners. We often think of deficit countries as being weaker or more vulnerable, and they are, but governments often fear their domestic elites more than the global lords of finance.

Thursday, July 22, 2010

Phil Mirowski Mortifies Nearly All Economists

That iconoclast Phil Mirowski has published a paper in The Hedgehog Review, "The Great Mortification: Economists' Responses to the Crisis of 2007 - (and counting),", in which he pretty much lambastes almost the entire economics profession, including most heterodox schools of economics as well, for their miserable failures in dealing with or explaining what has been going on in the world economy in the last few years. Few are spared, including even some who have been viewed as having "called it," such as "Black Swan" Nassim Taleb and "Dr. Doom" Nouriel Roubini. About the only economist quoted favorably without a cutting caveat is James K. Galbraith. Otherwise, he sneers at all the running back to Keynes, even if in his final line he wonders "where is our Keynes?" although he is thinking in terms of Keynes as a philosopher of economics rather than as a policy maker or suggester.

Wednesday, July 21, 2010

Very Simple Debt Dynamics

The starting point is the budget identity: the sum of all budget positions in a country, public and private combined, is equal to the current account surplus or deficit. Separate out public and private and you get

Private budgets + Public budgets ≡ Current account

As a mental exercise, suppose the CA is fixed. In that case, if the public budget position increases by $1B (either a smaller deficit or larger surplus), the private budget position must fall by the same amount. Of course, no single component is fixed; they all change simultaneously in order to maintain the identity.

“Identity” is an important word here. What you see above is not an equation (with an equal sign), but an identity with an extra little bar. This means it is not a behavioral relationship, one which may or may not be true depending on how agents behave. It is an identity: it’s always true at every moment of every day, brought to you by the gods of accounting.

Since it has no behavioral content, it tells you nothing about what adjusts to what, or how. Nevertheless, it is a useful starting point—the most useful starting point.

Consider a first problem, adjustment. This arises when a deficit country (this refers to a CA deficit) is no longer sustainable. A crisis could take the form of a run on foreign exchange, or a sudden stop in external lending. A deficit country, by virtue of the budget identity, is a net borrower: its households, firms and government borrow more than domestic savers can finance. This exposes the country to the risk that external capital markets will shut down or become too expensive to access. Adjustment means that a country must do two things, which according to the identity are actually one thing: rapidly reduce the sum of public and private borrowing and reduce the current account deficit. Surplus countries don’t have to adjust; they are net lenders. They face default risk, but that can’t be remedied by changes in their own policies, at least not to a first approximation. (At a detailed level it depends on how large and connected they are.)

Keynes didn’t like this asymmetry of adjustment; he thought it lent a deflationary bias to the global economy. He was right, but there wasn’t anything he could do about it. This asymmetry is the dominant fact about the international financial system today as it was in his time.

Adjustment is what Greece and Hungary are going through right now, and what the other peripheral European countries are staring at.

Additional governments who are not threatened by adjustment are nevertheless planning to cut public (fiscal) deficits in the near term. Some of these are deficit countries like Britain, which is not completely crazy to worry about abandonment by international markets. Some are surplus countries like Germany, which is completely crazy (in this respect).

That brings us to the second problem. Recall that, if the CA is unchanged, any reduction in fiscal deficits must be offset by an increase in private deficits. There is no plausible mechanism for this, however. In fact, the most probable adjustment to preserve the identity will be the CA itself. If private borrowers do not change their behavior, or if they actually continue to deleverage, the logical sequence is that fiscal tightening will lead to a decline in national income and therefore a surplus or reduced deficit on the CA. In other words, the more elastic component of this identity is the external position, due to contractionary fiscal policy. But reductions in national income will also reduce public revenue, which means that the achieved reduction in the fiscal deficit will turn out to be less than the intended. To summarize, unless you can tell me why fiscal tightening (government spending cuts and tax increases) will cause households and businesses to become greater net borrowers, the tightening is offset instantaneously and unavoidably (this is an accounting identity after all) by some combination of automatic stabilizers and reduced imports, both due to a shrinking economy.

What does this mean for intelligent policy? First, Keynes was right: if the private sector has stopped borrowing, the public sector must leap in and take its place, and this must continue as long as the private sector remains skittish. If that imperative leads countries into the maw of adjustment—well, we need international institutions that spread adjustment across surplus and deficit countries alike, so that the contractionary impact on the latter is offset by the stimulative impact of the former.

Second, if lots of bad debts have been incurred, and if the amount of time it will take to wind them down and return to healthier levels of consumption and investment is too long, it is better that there be an orderly writeoff of a large chunk of the debt overhang. Alas, this was not central to the bailouts of the last two years as it should have been, even though the financial system had accumulated trillions of dollars in bad debt. Either we do this in a rational, civilized way, or the economy will sputter until default breaks out chaotically.

Unfortunately, the creditors are in command across the world economy and can think only of squeezing out every last cent of their assets.

Monday, July 19, 2010

Comments on Charles Davenant

I am posing a quick first draft of the introduction to a short chapter on Charles Davenant, hoping that some of you might know more than me about the subject or at least show me how to make it sharper.

Shifting from great economists, such as Petty, Law, and Cantillon to Charles Davenant, the same person who worked with Cantillon is a war profiteer, might seem a bit jarring. Although some of Davenant's insights anticipated later economic thinking, few economists gave much thought to Davenant. Cantillon did lump Davenant put together with Petty, but he did so to diminish Petty rather than to praise Davenant.

Davenant was a good writer, so much so that the Dutch ambassador refused to have lunch with Jonathan Swift, suspecting that Swift had been the author of one of Davenant's pamphlet. The art of writing may have been embedded in Davenant's genes. His father William D'Avenant was a popular playwright and poet laureate of England.

His father was also the godson of William Shakespeare and widely accepted at the time as the illegitimate son of the Bard. D'Avenant's mother was married to a wine merchant and innkeeper with whom she had no children for many years. Shakespeare often stayed the inn when traveling between London and Stratford. She was rumored to have been Shakespeare's mistress. Davenant's uncle, a clergyman, used to tell how Shakespeare would shower him with kisses. The main source for Shakespeare's paternity was Davenant's father. One Shakespeare biographer finds numerous hints of the relationship between D'Avenant and Shakespeare in his plot lines (Weis 2007).

Although Davenant seemed to have avoided the legal problems that hounded the other three economists, he seemed to have the same ruthless drive to improve his position in life. As a young man working for Brydges, the war profiteer:

## 309-10: "Davenant urged a correspondent at Lisbon to undertake the delicate mission of informing the Paymaster of the English Force in Portugal (Morrice) that the Paymaster General of the Forces Abroad (Brydges) was accustomed to receive presents from all foreign princes subsidized by England; that the Portuguese court had been negligent therein; that Morrice should with all prudence and secrecy try to induce the Portuguese ministers to atone for their previous neglect and make their gifts retrospective; and that Morrice's success would result in greater activity, on Brydges' part, in soliciting for Morrice's own "incidents." [Davies and Schofield 1941, pp. 309-10]

John Macky offers another glimpse at Davenant. Macky was a famous Scottish spy, whose network famously informed William III of the planned invasion by the deposed king, James II. Macky's son later published his father's short sketches of acquaintances, which pictured Davenant as "a very cloudy-looked Man, fat, of middle Stature, about fifty Years old" (Macky 1733, p. 133). Macky accused Davenant of conspiring with Lord Peterborough to take advantage of the Fenwick Affair.

John Fenwick was arrested for plotting an uprising against the King. According to Macky, Peterborough promised to prevent Fenwick's execution if he would implicate Peterborough's rivals, the Duke of Shrewsberry, and the Lord Oxford. Davenant assisted Peterborough publishing a book, Memoir of Secret Service (1699), under the name of Matthew Smith (Macky 1733, p. 65). Jonathan Swift annotated his copy of Macky's book with a note on Davenant: "He ruined his estate, which put him under a necessity to comply with the times."

A short biographical sketch describes Davenant as being involved in highly suspicious dealings with French agents (Waddell 1958, pp. 281-82). The author, who wrote his doctoral dissertation on Davenant, probably studied him more than anybody in history. Davenant also frequently changed positions in order to ingratiate himself with the government's positions at the time. Regardless of Davenant's questionable character or even the absence of any major contribution to economic theory, Davenant still merits our attention. To begin with, in his capacity as a government official Davenant was an important figure in modernizing the system of tax collection. In this role, Davenant was not merely concerned about raising money for the state; he was also attempting to create a database.

Saturday, July 17, 2010

Seven Questions for the SEC regarding Goldman

Today the Wall Street Journal has a very good article analyzing the Goldman victory over the SEC. The article is not yet gated, so I put the reference first.

Scannell, Kara and Susanne Craig. 2010. "SEC Split Over Goldman Deal." Wall Street Journal (17 July): p. A 1.

Question 1: Is Ms. Casey really asking if the agency caved? Probably not, but if so, that is interesting.
Republican Commissioner Kathleen Casey questioned the SEC staff Thursday on their decision to abandon the strongest fraud charge and strike a settlement involving a lesser allegation, and given that, how the SEC could justify such a large penalty on a lesser charge.

Question 2: Is Russell Ryan saying that the SEC did not have enough proof to charge Goldman with intentional fraud rather than giving incomplete information? After all, the fraud has been public knowledge for some time. Why did the SEC cave?

Russell Ryan, a former SEC enforcement lawyer, said the negotiation to drop the strongest fraud charge is "usually a strong indication the SEC had some doubt whether it could prove intentional fraud. Mr. Ryan, now a defense lawyer at King & Spalding, said the SEC typically insists a defendant settle on the strongest allegation made in its complaints. Watering down the toughest charge, as in this case, is unusual.

Question 3: Why would the fraud charges be dropped in the course of negotiations with Goldman?
The SEC initially alleged that Goldman violated a rule -- known as Rule 10b of securities laws -- which contains a sweeping antifraud provision covering trading in securities. The charge is one of the most serious the SEC can make, and carries greater stigma for a financial firm than the lesser charge included in the settlement. The lesser charge Goldman settled on comes under a rule known as 17a. These charges can involve intentional and unintentional fraud, as well as negligence. The SEC staff, led by Kenneth Lench, head of the agency's structured-products unit, told the commission the shift stemmed from the settlement negotiations, a person familiar with the matter said.

Question 4: The SEC suggests that lessening the charge did not make the offenses less serious. Then why lessen the charges?
Lorin Reisner, deputy director of the SEC's enforcement division, said "Section 10b and Section 17a1 are functional equivalents. Section 17a1 is a more appropriate claim in the context of a fraud in connection with the offering of securities." He declined to comment on why the agency dropped the 10b charge.

Question 5: How can anybody believe that the SEC did not cave?
The division in the settlement vote casts a cloud over what the SEC had claimed on Thursday was a major victory. Investors had expected any SEC fine in the case to be $1 billion or more. Goldman's shares have jumped since Thursday.

Question 6: Did Goldman hit a home run?
Combining a settlement of the SEC suit with a resolution of related SEC probes could calm Goldman's restive clients and investors, while shielding the firm from information that could be used against Goldman in private litigation. Goldman's paramount concern was removing the more serious fraud charge rather than knocking down the size of the fine, say people familiar with the matter.

Question 7: Why would the SEC be upset about Goldman leaving the cat out of the bag?
On Wednesday, upon learning The Wall Street Journal was preparing an article on catch-all settlement talks, SEC enforcement chief Robert Khuzami grew furious and blasted Goldman. He accused the firm of leaking a story that suggested Goldman had bested the SEC, a person familiar with the matter says.

Last question: How many staffers is Goldman going to hire and how many Goldmanites will join the SEC?

Friday, July 16, 2010

RIP, Tuli Kupferberg: Beatnik Peacenik Poet And Fugs Co-Founder

Just saw obit in WaPo for Tuli Kupferberg who died at 84. An old beat poet, he co-founded the Fugs with Ed Sanders, who was more the musician, while, big surprise, Tuli was the lyricist, poet he. Most famous song of the group and by him? "Kill for Peace," still unmatched for its message.

Tuli was the link between the Fugs and Allen Ginsberg, who toured with them in 1967. I saw both of them performing (well, Ginsberg reading) in May, 1967 in the Stock Pavilion at the University of Wisconsin-Madison, a peculiar venue where I would also see Martin Luther King, Jr. speak once. There was a hippie Be-In the next day on Picnic Point, a wooded area sticking out into Lake Mendota, which was probably the purest epiphany of hippiedom in the history of Madison, with Ginsberg chanting. I briefly met him there, through a friend who now edits a leading literary magazine.

Regarding that moment of purist hippiedom in May, 1967, when Love would conquer all, it did not last. By October there was the anti-war demonstration against Dow Chemical recruiting on campus, which turned violent, chronicled by David Maraniss in his "They Marched into Sunlight." This would lead to more violence and yet more.

As for Tuli Kupferberg, I met him once many years later, but it was in New York. He was a gentle soul, capable of quietly wry remarks, for all the shouting and carrying on the Fugs did in their performances and recordings. Ultimately still an old beat poet, he had become a sort of grand old man of the East Village, which I guess he continued to be until his recent death. We did not hear much of him in these recent years, and now...

Thursday, July 15, 2010

Econospeak Up Sharply In Average Page Views

I do not usually report such things, but this monthly change is probably the largest I have seen since this blog has started and has it up about as high as I have seen it. I am talking about the monthly rankings based on average daily page views that *Brian Gongol provides on EconDirectory of econoblogs. For quite a long time we have been sort of in the 50s and 60s (out of nearly 190 listed). Suddenly this month we have jumped up to 36th. Whereas we were running in the 400-500 adpv, we are now over 1100. I do not know why this is, but I am letting folks know. For whatever reason, we seem to have been getting a lot more attention recently.


Wednesday, July 14, 2010


I just read a wonderful book: The Ornament of the World: How Muslims, Jews and Christians created a Culture of Tolerance in Medieval Spain, by Maria Rosa Menocal. Abd Al-Rahman I's Cordoba was described as 'the ornament of the world' by a certain nun whose name escapes me. Menocal means it to apply more generally to Islamic Spain under the Ummayads and in the post-Ummayad but pre- Almodovar period of the "taifas," where various city-states competed for power. She calls Islamic Spain in this period a "first-rate" place, citing F. Scott Fitzgerald (in The Crack-Up): " the mark of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time."

Speaking of which, Brad Delong, one of my favorite bloggers, recently did another of many periodic posts featuring Edmund Burke. I have always wondered how he squares his evident admiration for Burke's thought (which I share) with his otherwise by-the book utilitarianism (which I don't share!) I suspect Brad is a first-rate intelligence! Me, not so much.

Tuesday, July 13, 2010

Gandhi, Buber and the Politics of Palestine

The New York Times has an interesting but minimally informed piece this morning on Gandhi’s advice concerning the Jewish settlement, and ultimate seizure, of Palestine. It brings up the Indian sage’s exchange of views with Martin Buber, the great Jewish philosopher and educator who fled Germany in the 30s and became an advocate for the kibbutz as a model of social and spiritual development. Buber was undoubtedly right that nonviolent resistance was an absurd strategy against the Third Reich. This was an enemy that openly embraced force and terror; there was no “soul” to appeal to.

I will leave it to others to complain about the way the article passes over the long history of nonviolent resistance in the occupied territories. What I missed was the great flash of insight that, if my memory is correct, jumps off the page toward the end of Buber’s Paths in Utopia. (I don’t have my copy with me.) After extolling the kibbutz as a model of egalitarian economic and community life fit for human regeneration in a dark time, Buber emphasizes that “inside” and “outside” social relations are inextricably linked. It will be impossible, he says, for Jews to retain the liberatory aspects of their social order if their relationship with Arabs is one of domination and exclusion. You can’t practice mutuality in one direction and exploitation in another: the psychological wall crumbles. This follows immediately, of course, from the point of view he expressed in I and Thou (Ich und Du), which insists on the universality of all truly engaged human interactions.

Buber endorsed a binational state because, for him, not only social justice, but also a community in full consciousness, was indivisible.

Monday, July 12, 2010

Michael Perelman, International Economist Manqué

I see that PBS is going to broadcast a review of the world of George Shultz. I fear that they will leave out the time that Schulz was interested in promoting my career. While Secretary of State under Ronald Reagan, Schultz's son, Alex, took a class from me. At first I knew him only as a very good and personable student. Later, I discovered his family ties.

Knowing that the sins of the father should not fall on the son, I always had fun feelings for Alex. One day after returning from vacation, Alex told me that he had a number of arguments with his father based on ideas he picked up in my class. He told me that at one point his father responded, "that man should not be teaching in this country." Knowing Shultz's position as Secretary of State, I awaited a call. Was I going to be made ambassador to France? Or perhaps advising the world a rational method of organizing society.

After a few seconds, I began to realize that no such offer was on the horizon. I would more good remaining in Chico with the opportunity to other enlighten children of the power elite.

I never heard from Alex after he left Chico. I wish them the best and hope that did not get entangled in the dark networks of Hoover, Bechtel, or the other nefarious organizations with which his father associated.

Saturday, July 10, 2010

How Slippery Is Hayek's Slope In Road To Serfdom?

Puffed by Rush Limbaugh and Glenn Beck, Hayek's Road to Serfdom has been surfing the best seller lists recently, the new edition with the long scholarly introduction by Bruce Caldwell, which I doubt many buyers will read. They are using it to bash Obama and charge him with being a socialist-fascist-nazi-communist, etc., starting with his health care proposal, all of course failing to notice that Hayek in RTS came out for national health insurance and some degree of more general social insurance. But, hey, we want to wave the book like Red Guards waving Chairman Mao's Thoughts, not read the thing. Please.

As it is, there is a new entry in a long running debate. Many observers, perhaps most prominently Paul Samuelson in a bunch of his Principles texts, saw Hayek as promoting a "slippery slope" argument, that any move towards a welfare state by the US or UK or other western democracies, would put them onto "the road to serfdom," which, of course, history has shown to be a bunk argument, even if the tea partiers are now invoking Hayek to repeat it along with Limbaugh and Beck. Hayek himself, with Caldwell agreeing, have argued that this is a misreading of RTS, and that Hayek was really focusing on the dangers of Soviet-style command central planning, with Hayek writing angry letters to Samuelson about this matter.

Now we have a new entry into this with an article by Andrew Farrant and Edward McPhail, "Does F.A. Hayek's Road to Serfdom Deserve to Make a Comeback?" in the July/August issue of Challenge, 53(4), 96-120, (requires subscription or payment to read, unfortunately). Anyway, they say that Samuelson was right all along, and that one can find passages in RTS where Hayek certainly looks like he is making the strong version of the slippery slope argument that he later realized was an embarrassment, even if it is probably the source of the renewed sales. Thus, Farrant and McPhail would say that Limbaugh and Beck are more on the money here than Caldwell, even if they are ignoring Hayek's call for social insurance (a clear sign that he did not view any and all such moves as going onto the slippery slope).

Young Ben Bernanke, Economist

In 1983, Ben Bernanke published an interesting article in which he proposed that the real service that banks perform is the development of long-term working relationships, which give them the informational wherewithal to allocate capital efficiently.

Bernanke, Ben S. 1983. "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression" American Economic Review, 73: 3 (June): pp. 257-76.

He elaborated on this idea in:

Bernanke, Ben. 1993. "Credit in the Macroeconomy." Federal Reserve Bank of New York Quarterly Review, 18: 1 (Spring): pp. 50-70.

Surprising, then that today Bernanke is so protective of a banking system dominated by firms that rely on fees and trading profits rather than the traditional function of banks, which was to take in deposits, which they supposedly doled out to the businesses that were potentially the most efficient users of that money based on their accumulated information.

Since then, banks have changed and so has Bernanke. This new generation of banks perform no such service. Instead, they mostly dominate a zero-sum game in which come at the expense of others, who lack the same access to information and economies of scale.

Obviously, these large banks perform some services, which are of use. I have two questions. Is it possible that another kind of financial provider could offer the same services with less risk? Even more broadly, is it possible that these large banks in fact the economy was so much risk, that whatever services they may provide does not offset the damage is that they create?

Noh Explanation

OK, this is an exaggeration. Eric Alterman’s valiant attempt to identify the systemic roots of America’s political insanity does identify a number of prime suspects: the anti-democratic rules of the political game, the role of money, right wing media, background framing and ideology. It would be nice to be able to do something about them.

But coming up with a purely American explanation for what is clearly an international phenomenon violates the first principles of clear thinking. Progressive politics has hit a cul-de-sac in every advanced industrial economy. Not even the Great Recession/Reset/Whatever has lifted the constraints. Conservatives rule everywhere, and populism is in the hands of the loony right. One way or another, the scale of the explanation has to match the scale of the explanandum.

Friday, July 9, 2010

Inducing the Madness of Crowds

After losing a fortune speculating in the South Sea Bubble, Isaac Newton reportedly said that he could calculate the motions of heavenly bodies, but not those of the madness of crowds.

Today, millionaires and billionaires are pretty much united in the proposition that even kind of social provision must wither in order that the state can afford to clean up the mess that the wealthy have created. In addition, raising their taxes is not only unfair, but destructive of health of the economy. Yves Smith's opinion piece in the Times, largely lifted from her wonderful book, ECONned, reports how corporations are hoarding their cash. They have also been investing in their own stock, which raises executive bonuses, which helps to amplify the obscene redistribution of income.

Of course, common sense shows that austerity is the worst policy in the face of an economic decline. In a market economy, without consumer demand, business activity dries up.

I can understand why the millionaires and billionaires promote their self-interested ideology. I can also understand why the democrats have joined in the millionaire and billionaire ideology rather than upset their base -- the millionaires and billionaires.
What I cannot understand is why more people have not caught on to this game. Yes, a small number of sensible economists have spoken up, but without any real effect. Instead, supposedly progressive people go along with the Democrats on the ground that the Republicans would be worse. But again, why have so few people seen behind this good cop/bad cop game?
The New York Times can publish an article describing how destructive austerity has been in Ireland

Alderman, Liz. 2010. "In Ireland, a Picture of the High Cost of Austerity." New York Times (29 June): p. A 1.

However, buried within a mass of millionaire and billionaire ideology, such information has no effect.

Of course, people are angry, but the millionaires and billionaires have been able to divert this anger for their own purposes. Of the 538 members of Congress, none of them gives any indication that they have a clue. Of course, some of them know very well what is happening, but fear speaking out, lest the millionaires and billionaires come after them.

Given this mess, we live in an era of induced madness. Virtually nobody gives any indication that s/he has the sense of Isaac Newton to recognize this as madness, which now appears as common sense. Congratulations to Pete Peterson and his ilk -- at least until this mess you are creating falls apart.

Thursday, July 8, 2010

From the Rubble

This morning’s report on the failure clear earthquake rubble from the streets of Haiti connects with something I’ve often thought about. Anyone who spends time in the urban agglomerations of the developing world is familiar with the rubble problem; it is just more extreme in Haiti. How big a deal is it? Not massive, but traffic moves much more slowly on torn-up streets, and in day to day life the stuff is ugly and just gets in the way.

Now flash back to 1945 and the end of the wars in Europe and the Pacific. In the great bombed-out cities like Berlin and Tokyo, ordinary citizens, mostly women, cleared the rubble with whatever tools they could find. No one paid them, but they worked with grim determination until the job was done. For a visual impression, see the opening scenes of Fassbinder’s classic “Marriage of Maria Braun”.

Why then and not now? It isn’t because Europeans and Japanese are intrinsically “harder-working”; you can see tremendous amounts of hard work taking place around piles of rubble in impoverished cities today. I suspect a correct answer to this question would take us a long way toward understanding how and why development takes place.

One element is that the “rubble women” knew what their cities had looked like before the war, and this gave them a vision of and confidence in the post-rubble city of the future. The task was brutal but it had a clear end-point.

Whatever its role in a more complete explanation, this observation is useless for development policy. It is like Robert Putnam’s implicit advice for the Mezzogiorno in Making Democracy Work: have the right twelfth century. Port-au-Prince does not have a rubble-free past its residents can draw on to guide their path to a rubble-free future. All the same, the resources needed to solve this problem are right there in full view. How can they be mobilized?

Not Bai-ing It

When Matt Bai first appeared on the scene, I thought, This looks like something interesting: a journalist who specializes in the center-left, doesn’t particularly identify with it, and can write about it with objectivity. It sounds like a nice idea—too bad the actual work is so shoddy.

I should have learned by now, but each new Bai essay sets out an appealing framework, an approach that promises some sort of new insight. Then comes the letdown.

This is how it went with his piece in this morning’s New York Times on how “the argument over fiscal policy represents the churning of a cultural fault line that has defined and destabilized Democratic politics pretty much since the onset of the Great Society”. Ah, I thought, now we are going to get to the political substructure behind Obamanomics, the deeper reason why this administration is kowtowing to fiscal conservatives and Wall Street barons.

No such luck. First off, the guy just doesn’t get the facts right.

1. A deficit projection for 2020 is not a meaningful guide to policy today (there will be a lot big surprises during the next ten years), and a public debt of 90% of GDP, while not desirable, is far from “staggering”. Matt should take a look around the OECD, or back into our own history for that matter.

2. If you wanted to reduce fiscal deficits, the least meaningful step would be to call for “scaling back entitlements”. Social Security runs a surplus, which it will live off of for another three decades or so. Medicare is a big worry, but mostly because health care costs have metastasized. The government currently pays over half of all health expenses in the US, but if we can’t control these costs we’ll be broke no matter who pays for them. Meanwhile, the big drivers of fiscal deficits since the Clinton-era surpluses have been tax cuts and wars. You want to stem the red ink? Start there.

3. “Fiscal responsibility” has nothing to do with modern political conservatism, at least not since Reagan. Republicans have pumped up deficits with their anti-tax, pro-war fixations, to an extent that surpasses the ambitions of even the most wild-eyed liberals. Take a look at those unreconstructed 60s Democrats: they want to undo the Bush tax cuts and even increase taxes on upper incomes and capital gains. They want to tax financial transactions. They want to tax carbon. In short, they want to stuff the “beast”, not starve it.

And the basic premise behind this article is just a cop out. The capture of the Democratic party by its pro-finance wing is not a “cultural” event. It has nothing to do with the songs on Obama’s iPod or whether Bill Clinton did or did not inhale. It has everything to do with the rise of the finance sector, the emergence of a new view of corporations as portfolios (and therefore congruent with finance), and the dominance of the wealth-holding constituency, the top tenth or so of households, in an era of ever-increasing inequality. Exactly how the tectonic forces within the national and global economy have their expression in politics is murky and complex. Journalists could do a world of good by illuminating it. In my imaginary parallel universe there is someone like Bai, but much more informed and aware, covering this beat.

Tuesday, July 6, 2010

Who Should Own The Tea Parties?

According to WaPo today, the TV ad shows red coats with guns about to shoot down colonial revolutionaries, when, a Dodge Challenger roars out of the woods with an American flag on it, driven by George Washington, who vanquishes the red coats and then steps out to declare "Here's a couple of things America got right: cars -- and freedom." When I watched the July 4th parade in Harrisonburg, by far the largest contingent were members of the Shenandoah Valley Tea Party handing out pamphlets supporting tax cuts and smaller government, the pamphlets very slick and showing funding support from the Heritage Foundation and various other conservative entities. A friend who was in the parade supporting a local Democratic candidate emailed friends about feeling threatened by gun-toting people in the parade, particular the Tea Partiers.

So, it has been taken for granted that the political Right owns the Tea Parties. After all, the original tea party was to protest a tax on tea, right? Not so simple, actually. The original slogan was "No taxation without representation," not "no taxation." It was pro-democracy, not anti-tax or anti-government. And all the taxes we have have been instituted by democratically elected Congresses and legislatures and city or county councils or boards of supervisors. There are many progressive aspects of the American Revolution, not just arguments for going back to the late nineteenth century. Tea partiers cite the 10th amendment to argue that the federal government should not be regulating the environment or providing social security or health insurance, ignoring that the Constitution calls for support of the general welfare.

Another aspect often ignored by the Tea Partiers is the relative social liberalism of many of the Founding Fathers on many issues (although not on slavery or attitudes towards the Indians or women). These men were deists who believed in the separation of church and state. The claims that the US is a "Christian nation" were refuted by even the most religious of them, John Adams, as president in our treaty with the Barbary States in 1798. Franklin and Washington were Masons before their official religions (and Franklin did not have one at all). When they attended the Episcopal churches to which they belonged, neither Washington nor Jefferson took communion, and Jefferson declared a favoritism for Unitarianism, which John Adams was a card carrying member of at his death, while Washington had a Masonic funeral. It is perhaps ironic that some of these folks are aware of these attitudes, as the recent effort by the Texas School Board to remove the teaching of Jefferson as an important political figure for his support of separation of church and state shows.

In any case, I think that progressives need to claim, or perhaps re-claim, their heritage in the American Revolution and not let it be taken over by this collection of hypocrites and lunatics.

Monday, July 5, 2010

Insight on Iran

Mohammad Maljoo, an impressive young economist whom I met a few years ago, published an important article on the relationship between Green Movement and labour movement in Iran.

At a time when we know so little about the reality of Iran, Mohammad's insights are important.

Thursday, July 1, 2010

Dwight Armstrong Of the Gang That Could Not Bomb Straight Dies

As reported in the NY Times a few days ago, Dwight Armstrong died of lung cancer at age 58 in Madison, Wisconsin. At 3:40 AM on Aug. 24, 1970, almost 40 years ago, he and the other three members of the New Year's Gang, parked a Ford Econoline full of gasoline-soaked ammonium nitrate next to Sterling Hall (once the home of the econ dept.) on the University of Wisconsin campus, and set it off, making the largest terrorist explosion in the US up to that time. They were targeting the Army Mathematics Research Center (officially the "Army" had been dropped from the name by then, although it continued to be funded by the US Army). However, they were The Gang That Could Not Bomb Straight, having earlier in the year set off a bomb in the Primate Center, thinking it was the Selective Service office, which was across the street. So, instead of the (A)MRC, they blew up a bunch of physics labs, injuring four, and killing post-doc, Robert Fassnacht, who was reported to be anti-Vietman War in his views, and was the father of three children. In many ways, this was the highwater mark in terms of intensity of the anti-Vietnam War movement in the US, although badly bungled as the participants later admitted.

Dwight was a kid from the east side of Madison whose dad worked at the Oscar Mayer plant. Dwight had been a high school dropout and was a personally troubled individual who was arrested in Indiana in 1987 for running a meth lab. He was apprehended in 1977 and served two years in jail. The main leader of the New Year's Gang was his older brother, Karl Armstrong, who was the first apprehended in 1972, and served seven years in jail. Karl runs a fruit juice stand on the Library mall these days in Madison. David Fine was the youngest and from Maryland. He was apprehended in 1975 and served four years, later becoming a paralegal in Oregon. The fourth, Leo Burt from Pennsylvania, has not been apprehended to this day.

I must note my own connection to all this. I was in grad school in econ at UW at the time, in between my first and second years. My father, the late J. Barkley Rosser, Sr., was the Director of the Center at the time. We disagreed about politics (and the war in particular), but I always personally respected him, and I always opposed the use of any sort of violence in protesting the War in Vietnam.