Saturday, December 31, 2011

Shopping Is Not a Perfect Substitute for Politics

The New York Times has an interesting piece today on the shortcomings of organic agriculture in its current, commercialized form.  They describe vast monocultures, drawdowns of aquifers, wasteful attempts to prevent natural blemishes and deformation of vegetables, and long-distance shipping in the off-season.

A few of their criticisms are spurious; for instance, it is better ecologically to ship tomatoes and basil from Mexico to the US during the winter than to try grow them in greenhouses, and trying to persuade consumers to remove such things from their diet for half the year is not a reasonable strategy.  Nevertheless it is quite true that an organic label does not guarantee that the agriculture that brought the food to your table is sustainable, ecologically or socially.

The roots of the problem lie with the idea that agriculture can be fixed by establishing labels like organic or fair trade, so that shopping does the work of social change.  Of course, shopping can be better or worse.  You can have no labels at all and drift inexorably to the lowest common denominator in all aspects of food production outside the purview of the consumer.  Or you can have labels like the ones we have today and give shoppers a choice in how much social responsibility they want to trade off for price, product differentiation or other consumerly objectives.

Don’t expect these labels to do everything, however.  They have to be kept simple and standardized, so they can’t address all the practices that arise in different environmental conditions.  Also, they are assigned to production on a producer-by-producer basis, so they can’t take into account the interactions at a regional or sectoral level.  For instance, even if it were possible to insert language about sustainable water withdrawals into the organic standards, what constitutes sustainable depends on what other users sharing the same groundwater resources are doing.  An individual farm may simply be the wrong unit of observation.

Real solutions require regulation and coordination, stuff like water and soil conservation districts.  Reducing the burning of fossil fuels in food production and distribution requires a systematic control over carbon emissions, such as the permit system I’ve pushed in the past (such as here and here).  And better labor practices require better labor laws and healthy unions to enforce them.  You shouldn’t expect shopping to take care of all this.

So why is all the burden placed on labeling and consumerism?  Because we’ve given up on politics, at least for now.  If you don’t think the rules of the game can be changed through collective action, all you’ve got left is shopping.  But remind yourself from time to time that this is duct tape, not real repair.

Thursday, December 29, 2011

Partisan Misrepresentation of Ricardian Equivalence is Nothing New

Paul Krugman catches Robert Lucas (not to be confused with Robert Barro - thanks for the comment David) misrepresenting Barro’s claim to fame:

But, if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder — the guys who work on the bridge — then it’s just a wash. It has no first-starter effect. There’s no reason to expect any stimulation. And, in some sense, there’s nothing to apply a multiplier to. (Laughs.) You apply a multiplier to the bridge builders, then you’ve got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn’t going to help, we know that.

Let’s get back to this after this abbreviated explanation of Ricardian Equivalence from David Andofatto. OK David, we know that in a life cycle world where households understand the long-run government budget constraint that households view all tax cuts (even the 1981 and Bush43 tax cuts) as mere tax surcharges that have to be repaid. But this model goes well beyond this. If fiscal policy involved a permanent increase in government consumption, it also involves a permanent increase in taxes which would be a wash as Barro alleges. So if the Obama Administration passed a law where we built a bunch of bridges every summer only to tear them down every winter for the rest of time, then maybe Barro’s claim makes sense.

But this is not the correct policy experiment. The building of a bridge is a temporary blip in spending intending to invest in the public infrastructure where the benefits will be long-term. The financing requirements can be met either by a blip in taxes or very low taxes each year over the future. And in either case, the fall in private consumption in the first year will be small in proportion in the rise in government spending to build this bridge (which it does not intend to subsequently tear down).

One would think this logic was well known. The reason for this blog post, however, is to note that Republican hacks have grossly misrepresented Ricardian Equivalence before. Recall all the fuss over why the Bush43 tax cuts would be better aggregate demand stimulus if that were to be made permanent as opposed to temporary? While that might be good life cycle theory if we could ignore a lot of other economic propositions – such as the long-run government budget constraint (and of course Ricardian Equivalence). Yet some Republican hacks even went so far as to dismiss any concern about crowding-out (even as the FED was already raising interest rates) based on the proposition that tax cuts do not raise interest rates ala Ricardian Equivalence and that Paul Evans AER 1985 paper entitled “Do Large Deficits Produce High Interest Rates”. But wait a darn second – the Ricardian reason for all of this is the assertion that tax cuts don’t encourage more consumption. This incredible dishonest mishmash was most evident when Victor Canto claimed in what National Review November 2002 piece that the Bush tax cuts would be more powerful in encouraging consumption if made permanent, while in another National Review November 2002 piece he used Ricardian Equivalence to argue that the tax cuts would not raise interest rates. To be fair to Mr. Canto – the National Review expects such brazen dishonesty if it is in defense of its rightwing agenda.

I should say that the Evans AER 1985 paper always puzzled me because the Reagan tax cuts did raise aggregate demand by raising consumption during a period when government spending was not reduced. And while nominal interest rates may have declined, real interest rates rose. In other words, we got classical crowding-out from a mix of expansionary fiscal policy and the Volcker tight monetary policy. Now if you wanted to remain a true believer of Ricardian Equivalence, I guess you could have argued that households expected the Reagan revolution to eventually get around to reducing government spending. Domestic spending after all was trimmed a bit even as defense spending soared. But we did eventually get that good old Peace Dividend – in the 1990’s.

Wednesday, December 28, 2011

Does The Italian Bond Sale Mean The Eurocrisis Is Over?

Yesterday Italy sold bonds for a little over 3% compared to over 6% in late November. Does this mean the eurocrisis is over? Not necessarily, but it may well mean that the markets have finally figured out that Berlusconi really is gone, that Italy is one of four countries in the eurozone that is running a primary budget surplus (Germany, Belgium, and Luxembourg are the others), and a much higher proportion of its debt is held domestically by the high saving Italians.

The worst ongoing problem in the zone is Greece. It is caught in a downward spiral that is hard to see an end to other than an exit from the eurozone. While some worry what will happen "if Greece defaults," the hard fact is that it has already effectively done so. The wholse argument over the size of the "haircuts" on its sovereign debt is really just an argument over how bad the default will be and exactly who will end up having to bear the cost of their default. But for all the worry about linkage and contagion if Greece defaults, by now it looks like the ECB's plan to support European banks will probably work to keep the dominoes from falling down in a row as a result. Maybe Portugal might also have to depart, but both Spain and Italy have better budget fundamentals than either the UK or the US. Probably the eurocrisis will end with all that.

What we may be looking at is a better than expected scenario. I find it increasingly amusing to read and listen to commentators who note that Christmas sales did better than expected and that gasoline prices keep dropping, but who then warn that all this will probably turn around next year. Well, yes, maybe it all will. The eurozone has pretty much fallen into a recession that will probably continue into the next year, and more worryingly China is clearly slowing down with its property bubble seriously cratering. But it may be that the US will return to its old role as the engine of growth for the rest of the world, at least somewhat. Probably the biggest fly in the ointment may be the purely artificial crisis being ginned up over sanctions on Iranian oil to stop their nonexistent nuclear weapons program (despite all the hoopla, the IAEA report did NOT report an actual nuclear weapons program there, despite some new findings of some past research regarding a potential to have one).

Saturday, December 24, 2011

Daring To Disagree With Dean?

That would be Dean Baker, briefly a co-blogger on the old maxspeak, who warns that the recent upbeat reports on housing are not reliable, with them being too much based on highly volatile changes in multi-family housing. For details see as well as the closely related Dean must be taken seriously on these matters since his being the first to call the housing bubble all the way back in 2002.

I am not disagreeing with him very much. I agree that for much of the year the hype over a possible double dip in the US has been overdone, which partly explains the sudden surge of enthusiasm we are now seeing at recent high GDP growth rates, which are probably overdone due to being heavily driven by inventory adjustments that are likely to halt after the first of the year, not to mention the continuing likelihood of a European recession with a Chinese slowdown that will put a drag on externally, although those fears have been the main source for all the moaning and groaning in the markets for much of the past few months. And Dean is right on part of the details: single family home construction is barely above its pit in 2009 and not moving; nearly all of this recent increase in housing starts has been for multi-family dwellings, and that is a highly volatile monthly series.

Nevertheless, if one looks at the charts he provides and those he links to, there is a clear upward trend since spring, despite the month-to-month volatility, even if it is mostly in multiple family units. It is also true that it is regional, mostly in the Northeast and West, but any apparently sustained movement should be welcomed. In the chart he shows, with January 2002 as 100, there was a peak in mid-2006 at around 140. The pit in late 2009 was around 20, and it was below 40 this spring. But the November number is at 80. This will probably show declines in coming months, but if the general upward trend continues, this will mean that for the first time since 2006, housing will be a net positive contributor to the US economy, even if only somewhat weakly so.

The newspaper reports have it that rents have been rising in the regions where construction has been rising, reflecting an increase in household formation, with this rising demand finally crashing against the long-depressed supply. Overall housing starts remain far below where they once were, but the issue is direction, and that does appear to be upwards, if erratically and not throughout the US. Dean links to data on rents, but that does not show the most recent that has been reported in the papers.

So, this is at most a mild disagreement with Dean, but in fact I am willing to say that the news on the housing front is improving, at least in terms of a trend for multi-family construction, even if there is a continuing problem in foreclosures and in the single-family home portion of the market. So, while Dean threw in a mention of celebrating Hanukah, I'll throw in one for celebrating Christmas as well, :-).

Thursday, December 22, 2011

Lowering The Flag And Leaving Iraq

So, the US military has lowered the battle flag and the last official military have now left Iraq, although there will still be some engaged in advising and protecting the mammoth US embassy in Baghdad. Time for a reconsideration.

On the day that Saddam's last stronghold, his hometown of Tikrit, fell to US troops in April, 2003, I wrote a column published in my local paper, portions of which I posted on the old maxspeak. This was the moment of the highest US triumph, with the looting in Baghdad just starting and before the US stupidly disbanded the Iraqi army and fired all the Ba'athist civil servants, thus triggering the rebellion that eventually became the Sunni-Shi'i civil war, which seems to be picking up as the US leaves rather than tailing off. In that essay, I noted three positives and three negatives of the war, emphasizing that I thought the last of the negatives weighed more heavily than anything else. All six have come to pass.

The positives were that Saddam would no longer be violating human rights, that economic sanctions against Iraq would be ended, and that US troops would be reduced in Saudi Arabia, which had been a leading propaganda point of Osama bin Laden. Yes, despite the apparently tightening of authoritarianism of the Maliki regime and reports of ongoing torture, the human rights situation in Iraq is better today than under Saddam in general. Yes, economic sanctions were ended, but the benefits of that have been far overwhelmed by the subsequent economic collapse engendered by the ongoing war, with the effects of that still not ended. And the removal of US troops from Saudi was a strictly minor event, also overwhelmed by other events.

The negatives were that womens' rights would be worsened in the country as Shi'i fundamentalists would come to power, that the situation of Christians would also be worsened, and finally and most importantly, that this invasion would give al Qaeda a major propaganda gain. Womens' rights have not worsened as badly as I thought they might, but they have worsened. The situation of the Christians has been catastrophic, with more than half of their population having fled the country, not that this has registered one blip on the radar of the US fundamentalists backing the war. And, not only did al Qaeda get a propaganda boost, but as the civil war erupted al Qaeda gained a major foothold and became a major player in that war. More generally, the standing of the US in the Muslim world and more broadly was severey damaged by the entire episode and remains so.

Needless to say, I did not foresee the civil war or the scale of death and destructiont that followed. But then, just about nobody else did either, not at that point in time anyway.

One clear winner from the war has been the Kurdish population, who were under particular repression from the Saddam regime. They have won a virtual autonomy, now guaranteed as they remain power breakers in the federal government in Baghdad, and have been independently developing their oil industry with help of various minor oil companies from places like Norway and Canada. While not perfect, governance in autonomous Kurdistan seems to be reasonably competent, and the economic and social and political situation is almost certainly far improved over the previous period, something that cannot be said about the rest of Iraq.

Finally, I would like to comment on the whole issue of the role that oil played in the war, and here I shall largely be reiterating arguments I made long ago, although not in that original essay in April, 2003. While many thought and continue to think that the war was "mostly about oil," I have never accepted this. Yes, the first Gulf War was. Bush, Sr. clearly would not have bothered undoing Saddam's invasion of Kuwait if there were no oil there or if there was none in neighboring Saudi Arabia. As it was, it was the Saudis, satisfied that Saddam was contained, who held Bush Sr. back from rolling to Baghdad out of fear that this would lead to a pro-Iran, Shi'i-dominated government in Baghdad, which has indeed been an outcome of Bush Jr.'s invasion.

No, it was mostly about Bush Jr. trying to prove that he was a bigger man than his dad, a neo-Ronald Reagan, and many of the other backers of the war in the administration were neocons like Wolfowitz whose big concern was Israel and how Saddam's paying the families of Palestinian suicide bombers was an affront, not to mention the Israeli fear of the nonexistent weapons of mass destruction. As it is, the interests of Israel have basically never been in line with those of the US oil majors in the Middle East.

There was one player for whom oil was important: VP Dick Cheney, certainly a not inconsequential figure, and possibly the one who most effectively played on Bush Jr.'s inferiority complex vis a vis his dad to get him going on the whole thing. At a minimum, Cheney's own company, Halliburton, made money hand over fist, and there is a clear case of oil playing a role, if a minor one. It is also true that Cheney apparently semi-secretly plotted with various US majors about "getting back into Iraq" as a result of the war, although the CEOs of these companies were not enthusiastic about the idea of disruptions of oil production and transportation that might arise from the war and were not at all public supporters of it.

As it is, of course, the oil companies did make money as the price of oil rose with the disuptions that did occur, although these were not supposed to occur. Indeed, not only Cheney but Wolfie as well were fully under the delusion that we were going to be welcomed with flowers, and the drive to secure the Oil Ministry first in Baghdad was driven by the even more ridiculous delusion that as did Kuwait, Iraq would actually pay for the war itself out of their overwhelming gratitude. It is really astounding to think how such actually intelligent people (Paul Wolfowitz, whom I know personally, is in fact brilliant) could be so completely out of touch with reality.

In any case, the ultimate irony of this is that in the end, the US majors were probably right not to get too excited about all these prospects. They never came to pass. The Kurdish production is being handled by oddball small companies from around the world, although with a couple of minor US ones in there as well. And in the rest of Iraq, oil production has only barely gotten going again due to the ongoing problems of pipelines being blown up and so on, and the companies that have made contracts to do anything have been overwhelmingly non-US ones, with Chinese and Russian ones much more active than any US major. Cheney may have had getting the US majors into Iraq as a major goal of his own efforts, but this may have been the ultimate failure of the many that he was responsible for as VP of the US.

Wednesday, December 21, 2011

George W. Bush's Second Biggest Foreign Policy Mistake Revisited

Of course the first would be invading Iraq. But a close second not often remembered or even realized occurred two months into his term of office. It was the humiliation inflicted on then South Korean President Kim Dae-Jung, a Nobel Peace Prize winner and former torture victim of earlier military dictatorships in that country, when he arrived to visit the US. Secretary of State, Colin Powell, had planned on a continuation of the warming policies between the two Koreas and a friendly meeting with Bush and support for Kim. As it was, the "Vulcans" led by Cheney and Rumsfeld intervened to torpedo this and leave Kim not meeting in the cold and without his long-running policy. This also ended that round of negotiations with North Korea on nuclear weapons, with the Vulcans arguing that the US should pursue "regime change" in North Korea, which, hack cough, did not happen.

Instead what happened was that the nuclear negotiations came to and end and US-South Korean relations tanked until a more conservative government took over there. Not long after the end of the negotiations, the DPRK withdrew from the Nuclear Non-Proliferation Treaty and restarted its plutonium-based drive for nuclear weapons, which led to its successful acquisition of such not too long later. This is fish soup that cannot now be turned back into fish or spilled milk that cannot be returned to its container, a disastrous development that we might not now have to be dealing with at this time of leadership transition in North Korea, if Bush and his
Vulcans had not pulled this enormously stupid blunder.

Tuesday, December 20, 2011

KimJung Un should have such problems!

He doesn't have principles students telling him, on a final exam, that, for instance, the "shoe-leather costs" of inflation stem from "the rising price of leather" Or that hoary and hardy perennial, that the alternative to monetary policy is "physical policy" - carried out, no doubt, by the President's Council on Physical Fitness.

Why was I born?

Monday, December 19, 2011

How North Korea Became So Isolated

North Korea (DPRK) officially follows an ideology developed by its founder, Kim Il Sung, known as KimIlSungism (really), which his just deceased son continued to follow, and which it is likely will continue to be followed at least for awhile by his grandson, the Great Successor, Kim Jong Un. Besides generally following the Stalinist version of strict command planned socialism, somewhat loosened in recent years, the most famous aspect of KimIlSungism has been its doctrine of self-reliance, or juche (also transliterated as chuch'e). While some of the poverty of the DPRK is clearly due to its overemphasis on military production (fourth largest military in the world, and check out those nukes) and the typical stagnation of command planning, much is almost certainly due to the nearly autarkic approach due to KimIlSungism. Where did it come from? I see at least five sources.

The first is the Stalinist model itself. In the great struggle with Trotskyism, Stalin advocated "socialism in one country," although, of course, the Soviet Union was the largest nation in the world by far in land area. However, after WW II, this would be less emphasized as Eastern Europe went officially command socialist with the assistance of the Red Army in place. But in the DPRK, Kim Il Sung would cling to the older model.

Second is that after the death of Stalin, Kim would find fault even before Mao did to the moves towards thawing and loosening of the model that was going on in the Soviet Union. The first recorded speech of Kim supporting juche occurred in late 1955, prior to Khrushchev's 1956 deStalinization speech that reportedly upset Mao (according to official DPRK histories, Kim Il Sung gave his first pro-juche speech in 1930 at age 18, but no independent evidence supports this). With the failure of North Korea to conquer South Korea, and truce without official peace treaty after Stalin's death in 1953, the new leaders would go even softer with the Geneva summit in 1955, accepting the reunification of Austria, guaranteed to be neutral, a model possibly there for Korea that Kim rejected.

Third was the emergence of the Sino-Soviet conflict after 1956, although it would be a few years before this would become open and a problem for the DPRK, caught between the two. While Kim tended to side with Mao's critique of Khrushchev's ideological and policy deviations from Stalinism, he also disagreed with the more decentralized and agriculturally oriented version of socialism that Mao followed in China. As the conflict worsened, he wished to keep independent from both of them, which encouraged the idea of self-reliance. He also did not wish to go the capitalist road or fall into dependence on the capitalist West (or worse yet, Japan), so self-reliant juche became the way to go and was gradually developed over a long period.

Fourth was the emergence of his desire for a socialist monarchy, with his son to succeed him. Having a distinct ideology of self-reliant socialism fit in with this (and it is curious that some other dictatorships have followed the same path of de facto monarchy even if officially socialist republican, see Syria). Curiously, this is also consistent with traditional Confucian values of respect for family.

And the fifth involves the DPRK also falling back on traditional Korean attitudes and practices. Not only has Korea long been described as the most Confucianist nation, but prior to the Japanese conquest in 1910, it was also the most isolated, known as the Hermit Kingdom. In this it had long imitated Japan, but continued to resist being "opened up" even after Japan was by Commodore Perry's black ships in the 1850s, leaving it to the Japanese themselves to do the opening. Kim, of course, presented himself as the national hero of the anti-Japanese resistance, and this return to a traditional Korean practice burnished his credentials as the truly genuine national Korean leader who deserved to lead the unified nation.

Dear Leader Dead, Long Live Great Successor

While all had known that Kim Jong Il had long been seriously ill, his death on Saturday of a heart attack in a train has taken many by surprise, with citizens of the DPRK (North Korea) showing the same sort of hysterical grief they did when his father, Kim Il Sung (Dear Leader) died in 1994, which in turn repeated the sort of reaction seen in the Soviet Union on the death of Joseph Stalin.

In contrast with the long delay of reporting Kim Il Sung's death, it has taken only 48 hours for Kim Jong Il's death to be reported, with DPRK media reporting that his third son, Kim Jong Un, is to be called the Great Successor. Kim Jong Un had been reported to have been favored by his father and to have been groomed for acceptance by the family and military elites that rule the nation. Pretty clearly this ruling group has decided that he is to be the front man for continuing their dominance, although it is almost certain that it will be some time before he will be able to asert anything like the dominance his father and grandfather would come to have.

So, in the intermediate term the prospect is for stability, even as the South Korean stock market dropped 5% on the news before rebounding some, along with a drop in the ROK won as well, and various military maneuvers have been reported near the DMZ. Inter-Korean relations have been particularly bad during the past year, since military attacks by the North, thought by many to have been made to impress the DPRK military with Kim Jong Un on his appointment at a four star general.

Even as the near term seems to augur continuation of the system that has produced five straight years of GDP decline and ongoing malnourishment of large parts of the rural population, particularly in the nation's northeast. However, underneath this apparent stasis, many changes seem to be going on. Cell phones have spread widely, as have informal markets in various goods, towards which the government has oscillated in attitude. Chinese pressure to follow their model has steadily increased, and in recent months there have been reports of negotiations with the US. Kim Jong Un studied in Switzerland. So, there may be major changes down the road, if not immediately, particularly as the Great Successor may need to imitate in economic policy what was done in military policy this last year to assert his legitimacy to be officially on top of the nation's system. But this death and succession does mean the further future becomes much less clear.

Tuesday, December 13, 2011

President Gingrich Would Ignore The Humphrey-Hawkins Full Employment Act

I was scratching my head as to why any Presidential candidate would say Ben Bernanke should be fired until I read this:

"I would, first of all, demand a thorough audit [of the Fed]. Second, publish all the decision documents for 2008, 2009, 2010. Third, I would prepare legislation to eliminate the Humphrey-Hawkins Full Employment Act, which has totally confused the Fed," Gingrich said. The former House speaker went on to say that he would demand the Fed to hold "hard" money

There are lots of reasons why Newt should never be allowed near the White House again but this one has to go to the top of the list.

The Exegesis of Deceit

One of the steadiest hums of our time is liberal indignation at the dishonesty of the Right.  On any given day, you can hear the shock and disbelief: How can they say that?  Don’t they care about getting the facts right?  Don’t they realize they are being inconsistent?  Last week it was the Romney campaign ad that deliberately and even crudely misquoted Obama.  This morning I wake up to Krugman “truly amazed” at the way Paul Ryan would cite commodity prices on the way up and ignore them on the way down.  May I suggest that there is a method to this deceit and that being shocked is not an adequate response?

Sunday, December 11, 2011

Obama's Payroll Tax Cut

When the cut was first announced, I wrote that it seemed to pose a threat to Social Security. Now, a few of the Democrats, especially Bernie Sanders, seem to be picking up on the risk to Social Security. What would have stopped Obama from making it a tax rebate in which the treasury would not have to leave the fingerprint on the Social Security system. Besides, it could be targeted to people who made under x millions of dollars a year. Of course, really smart CEOs do not have to pay the tax. They can take a one dollar salary, then cash in stock options instead.

Saturday, December 10, 2011

The Brussels Agreement: Why it will Fail

One response would be to point out the irrationality of the agreement itself—the minimal role that fiscal profligacy played in bringing on the fiscal crisis, the lack of any mechanism for rebalancing between surplus and deficit countries, and the unchanged charter of the ECB, which prevents it from behaving like a normal central bank.  Those arguments have been made, are being made and will continue to be made, and will apparently have no effect on the course taken by European politics.

So let’s look at the realpolitik, past and future.

First of all, it is important to bear in mind that this is an agreement of the European right.  The economic collapse of 2008 resulted in an electoral rout of social democrats throughout the continent (and in the UK).  That’s a story that needs more explanation, but for now the point is simply that conservative parties have absolute control over Europe, and the agreement just reached represents their priorities.  It is for hard money, austerity in the face of recession, full guarantees for creditors, and implicitly for reining in the costs of the welfare state, which must happen if the deficit targets are to be met under foreseeable conditions.  This is why politics matters, after all.

Not liking a political program is not the same as predicting its failure, however.  It could happen that the conservatives get their way and a socially regressive stability takes hold.  Under this scenario, the fiscal crisis recedes and Europe enters a long period of slow growth which is favorable for those who acquired wealth during the go-go years: the value of their assets is protected, and labor is mortally weakened.  For those who designed the Brussels agreement, and for those who bankrolled them, this would look like victory.

A clear-eyed view of the situation suggests, for me at least, that this outcome is unlikely.  I believe that the fiscal pledge will buy time—at most a year—for German support for peripheral finances.  It is essentially a quid pro quo: the countries of Europe make a (foolish) promise to bind themselves to a 3% deficit rule, and in return the main creditor country, Germany, softens its stance toward transfers.  How much softer?  From first appearances, it looks like about €250B net, with some financing moved forward from 2013 to 2012.  (This assumes that the €200B directed to the IMF is returned to Europe without leveraging Chinese or other commitments.)  Is that enough?  It depends on whether the market response is favorable.  If interest rates come down in Italy, Spain and the rest, debt can be rolled over until the economy subsides.  This means something like a quarter or two.  If interest rates shoot back up, the money is not sufficient.  In that case, everything depends on the ECB and whether Draghi now has implicit German forbearance to monetize a portion of euro-denominated sovereign debt.

But this about whether the plan can make it through the next few months.  I believe it is simply impossible for it to survive much more than this.  Absent a miracle, Europe is sliding into a recession.  This will affect Germany as much as the weaker countries, even more considering its dependence on Eurozone exports.  (Germany suffered an exceptionally sharp contraction post-Lehman too.)  The result will be a risk of debt deflation in all markets.  The sovereign debtors will again face default as public revenue dries up.  Speculative assets like real estate will resume their decline.  Overleveraged financial institutions—and Europe is the world leader in overleveraged finance—will need to be bailed out.  Of course, a rise in unemployment will trigger automatic stabilizers and increase the pressures for discretionary fiscal deficits as well.  It is likely that there will be a wave of elections in which center-left parties take revenge for their defeats of the past few years—Germany could lead the way, in fact.

When it comes to whether European economies will simply collapse into a deflationary spiral, or whether the Brussels commitments will be abrogated, I’ll put my money on abrogation.  This agreement has a ticking clock, and when the time winds down, it will be history.

Friday, December 9, 2011

The Meme that Refuses to Die: Government Debt Must Be Paid Back

No it doesn’t.  It almost never is.  To pay back government debt, you have to run a budget surplus, and while there may be modest surpluses from time to time, they don’t add up to more than a minuscule fraction of all the accumulated debt.  But don’t take it from me, look at the record.

The story is unmistakable: the US jacked up its public debt to finance WWII and increased it further in almost every year since then.  We are not paying off the debt left by our parents and grandparents, and our children and grandchildren will not pay off ours.

The debt burden depends on the ratio of debt to GDP as well as the interest cost in servicing it.  The way to reduce this burden is to have a combination of real economic growth, inflation and modest interest rates.  If you want to show your solicitude for the well-being of future generations, demand macroeconomic policies that will boost demand and raise inflation a bit, consistent with continued low interest rates.

What to avoid: nonsense like this excerpt from today’s column by Catherine Rampell of the New York Times:
Total debt for the United States — that is, also including corporate and government debt — hit another all-time high because government borrowing is still outpacing the rate at which households shed debt.
 Guess who will ultimately pay back that government debt: American households.

A Theory About Polish Politics

This morning’s New York Times has a piece about Polish PM Tusk’s avid support for Germany’s stance in EU bargaining.  The article plays up Tusk’s pan-Europeanism and leaves out his equally passionate attachment to fiscal orthodoxy à la Merkel/Schäuble.  Putting both together, you have the classical liberal position, one that can still be found in every European country, although seldom with as much backing as in Poland.

I don’t have a detailed understanding of Polish politics, and I welcome comments from readers who can set me right, but here is my tentative explanation:

Thursday, December 8, 2011

More on Teaching Intro

Peter started a discussion here. And Nick Rowe at Worthwhile Canadian Initiative, under the title "God and Man at Yale" has another one, with hundreds of comments. I'll add my two cents. This is a comment I sent to WCI actually.

I want an Intro. Course to show students "how to think like an economist," but I also want some time devoted to the limitations of such thinking. I used to teach the course with David Friedman's *Hidden Order* and Robert Frank's *Choosing the Right Pond*, so they could see how the same methodology - rationality plus equilibrium - could give you very different political-economic visions. But the methodology itself -whether wielded in support of libertarian or left-liberal politics - ought not to be accepted uncritically. So I would assign Dickens' *Hard Times*. The students hated the Dickens, so I dropped it and substituted Amartya Sen's "Rational Fools." I wanted them to understand how the phenomenon of "commitment", as Sen uses it, by which he means "counter-preferential choice" is a deep critique of the conception of rationality that economists use. Unlike the behavioral critique, which simply documents all the ways people make mistakes in maximizing, a Senian critique says that human beings are more than utility maximizers. As the late lamented David Foster Wallace puts the point in a discussion of Dostoevsky, "[Dostoevsky’s] concern was always with what it is to be a human being—that is, how to be an actual person, someone whose life is informed by values and principles, instead of just an especially shrewd kind of self-preserving animal." I don't think this deep critique cuts either right or left, but I think we do a disservice to our students by not exposing them to it. The fact is that most of them when they come to us are already "thinking like economists" in important and pernicious respects: they are cynical about the possibility of principled behavior, they are sure that behind every alleged "value" lies a preference, they are nihilistic about normative authority. The have been brought up, after all, in the age of "sophisters, calculators and economists."

At an AEA meeting one year long ago, there was a session on "Teaching the Principles Course" I attended, which was really just advertising for two new texts by the presenters, one of whom was Robert Frank. (The text he was introducing is the one I have used in the Micro split ever since - it's a great book.) Frank talked about how the book encouraged the students to be economic naturalists, and to apply the economic way of thinking to everything they came across. I asked a question: suppose a student comes to your office hours and thanks you for teaching him the EWT. He was in a long-term relationship and felt that he owed his partner loyalty, but that after learning that sunk costs shouldn't play any part in guiding one's choices, he decided - given that the net benefit of the relationship going forward was negative- that he owed his partner nothing, and consequently was dis-loyal. Frank seemed genuinely at a loss for a response and after the session sought me out to talk more about it.

John Taylor Clarifies His Summary

John Taylor is not happy with a critic from Paul Krugman. His most recent summary states:

Krugman says my conference summary suggested that “Bloom, Baker and Davis had showed that fear of Obama was holding the economy down.” No, my summary said or implied no such thing; there is no mention of Obama, Bush, or any politician in my summary. It simply says that these authors “presented their empirical measures of policy uncertainty and showed that they were negatively correlated with economic growth.” … As part of his presentation Bob said that now and going forward we should assume “no chance of conventional fiscal expansion; rather, possible cutbacks motivated by excessive federal debt.”

Contrast this to what Taylor originally wrote:

In sum there was considerable agreement that (1) policy uncertainty was a major problem in the slow recovery, (2) short run stimulus packages were not the answer going forward

Wow – I read (1) as saying a lot more than simply negatively correlated. I also read (2) as asserting fiscal policy was ineffective but now we know that Dr. Taylor meant fiscal stimulus was never tried and will not be tried. I’m so glad he cleared this up!

Wednesday, December 7, 2011

Climate Change Proposal

If a large number of countries wish to band together to limit climate change, could they impose a tariff on imports from countries that do not limit CO2 production, accusing the non-compliant of taking advantage of an unfair trade practice?

John Taylor May Have One Thing Right

Paul Krugman provides us with the summary of a conference at the Hoover Institute provided by John Taylor. Paul notes that Taylor’s summary misrepresented what Bob Hall said:

Taylor makes it seem as if Bob Hall showed that fiscal expansion is ineffective. Yet if you have actually been following Hall — which I have, carefully — you’d know that he has been producing extensive evidence that fiscal expansion does, indeed, work; he argues that the Obama stimulus made the slump considerably less severe. His complaint is that the stimulus wasn’t big enough — which is the same argument I made from the beginning.

For a more fair and balanced summary – see Noahpinion. But let’s also note the following from Taylor’s summary:

I presented research with John Cogan on fiscal policy showing that it had not been successful in raising government purchases and was ineffective regardless of the size of the multiplier.

In other words – we really did not try fiscal stimulus after all. Isn’t that also been what Paul has been saying for quite a while!

Tuesday, December 6, 2011


The word has come down from on high in Europe.  Merkozy have decided:

1. Henceforth, after Greece, there will be no more haircuts administered to creditors of sovereign debt.  All obligations will be paid in full, no matter what interest rate has to be paid or how onerous the debt service program has become.

2. Every country will be subjected to hard limits on its budget deficit and must even show progress toward reducing debt-to-GDP to 60% if it is now above that target.

There are problems with each of these taken alone, but has anyone noticed that, under predictable circumstances, they contradict each other?  You can explain this as a quid pro quo for the two main players in the Eurozone, but sometimes political agreements also have to make sense.

A Modest Tactic for Improving Teaching

Yesterday’s lesson plan was fulmination; today’s is incremental improvement.

We—those of us who teach economics and other subjects—use exams and quizzes to evaluate students and assess our own effectiveness at reaching educational goals.  Some questions are narrow and technical, others broad and open-ended.  I want to talk about the narrow ones.

Narrow, close-ended questions are usually written to find out if the student can supply the correct answer.  The information we draw from them is whether the student “gets it” or not.  If not, and if there is enough time for it, we will go back and see if more explanation can facilitate the getting.

I propose the opposite approach: design these questions to see whether students have fallen into certain predictable errors.  If they have, unteach them.  The underlying conception behind this strategy is that the process of learning is not mainly, or at least only, that of gaining mastery over items of skill and knowledge, but also casting off false habits and beliefs.  The mind is not a tabula rasa but a messy blackboard, and if you simply try to overwrite it you will often get more mess at the end.  The critical tool is an eraser.

This is especially a problem in economics.  Students are exposed to a vast amount of information about economic topics outside the classroom, and a lot of it is wrong.  This exposure began long before they had the ability to question it, so false beliefs are often deeply embedded.  Worse, there are powerful interests operating through politics and popular media who benefit from particular misconceptions and feed them incessantly.  (Think, for instance, about why it is that most students entering their first macroeconomics class believe that inflation, by raising prices, reduces consumers’ real income—unaware that wages are also prices.)

If you want to organize assessment and teaching around error reduction, the key step is empirical.  You have to spend a lot of time listening to your students, not to find out whether they are saying what you want them to say, but simply listening to what they are saying.  What are their actual beliefs?  How do they define for themselves the technical terms you are using in the classroom?  How do they read equations, and how do they go about trying to manipulate them?  Look for errors in clusters, common pathways that lead them away from the goal you are trying to reach.  Then build the narrow questions in your exams and quizzes around what you have found, and use the results to guide your teaching in a more fruitful deconstructive direction.

Monday, December 5, 2011

A Republican Who Doubts the Laffer Curve?

Congressman David Schweikert of Arizona suggests that the payroll tax holiday will increase the deficit:

The simple fact is that this sort of temporary tax stimulus has repeatedly shown that without offsets, they only stimulate bigger federal deficits.

OK – but Republicans also want us to believe that tax cuts for well to Americans pay for themselves. The original Laffer curve was a proposition that even in a full employment economy, tax rate cuts so increase economic activity that tax revenues go up. Laffer described this in terms of reducing the wedge between the demand for labor and the supply of labor, which a reduction in the payroll tax would accomplish.

But to be fair to the Congressman – I should mention two points: (1) few labor economists ever bought the assumption that the labor curve was that elastic; and (2) we are not currently in a full employment economy. Point (2) would have us think in terms of the Keynesian marginal propensities to consume for households receiving the tax cut. If the household were very well to do, one would think the marginal propensity to consume would be low, which would lead to the conclusion that “tax stimulus” would “only stimulate bigger federal deficits”. But tax cuts for the working poor – which is what this payroll tax holiday is designed to accomplish – could lead to an increase in economic activity.

Conclusion – by any economic model, the Congressman has this exactly backwards. But what else is new?

Sunday, December 4, 2011

Mankiw’s Reply to the Walk-Out

Whatever my disagreements with Greg Mankiw’s op-ed self-defense today, I appreciate that he takes his dissident students seriously and refrains from slinging labels, pulling rank or other repressive tactics.  Protesters don’t always get this treatment.

That said, I think Mankiw fails to see two ways in which his introductory course, and other mainstream econ courses, impose a worldview that makes thinking constructively about economic problems less rather than more likely.

Occupy Chico State

On Thursday morning while riding to school, the main entrance was blocked with police tape. Supposedly someone had called in a bomb threat. Later during the day, my office building was evacuated because of some kind of mechanical malfunction. Finally, a fire drill set off alarms and forced us to leave the gym. All that seemed like a series of curious coincidences.

That night I was scheduled to give a talk at the Occupied Chico State teach-in, which was supposed to be followed by a take-over of the administration building. Because of the (phony?) bomb threat, the building was locked down early.

I had intended to discuss a sequence of the Bonus March, the GI Bill, which made higher education more accessible, then Reagan's 1966 institution of tuition for the previously tuition-free university system, culminating in the mess we have today. On Friday, I gave a brief overview of the talk on our local NPR station.

Here is our unedited conversation.

Saturday, December 3, 2011

Quote of the Day, December 3, 2011

“If you have the 1 percent saying, ‘Tax the 99 percent’ and the 99 percent saying, ‘Tax the 1 percent,’ you have a standstill.”

—Joseph Zarelli, lead Republican budget negotiator in the Washington State Senate, as quoted in the New York Times.

American politics made easy.

Friday, December 2, 2011

Not the Best News on the Employment Situation

Before we get too giddy over the news that the unemployment rate fell from 9.0% to 8.6%, we should note that the employment to population ratio barely increased from 58.4% to 58.5%. The big news really is that the labor force participation rate fell from 64.2% to 64.0%. Only hacks like Lawrence Kudlow get giddy when the unemployment rate falls because folks are no longer officially in the labor force. Most of us consider the discouraged worker effect bad news.

Also mind you that the rise in the employment to population ratio is due to the reported rise in employment per the household survey which claimed employment rose by 278,000. The payroll survey claimed an increase of only 120,000, which was really disappointing given that ADP said private employment rose by 206,000. Private employment per the payroll survey did rise by 140,000 by government employment fell by 20,000 (4000 drop in Federal employment, 5000 drop in state employment, and 11,000 drop in local government employment). As noted in my previous post the Senate Republicans wants even less government employment. Go figure.

The Balanced Budget Multiplier is Not Negative

Senate Republicans have a condition for supporting the continued payroll tax holiday:

Senate Republican leaders introduced a bill that would keep the payroll tax rate at its current level for another year. The cost is roughly $120 billion. Senate Republicans would offset most of the cost by freezing the pay of federal employees through 2015 and gradually reducing the federal work force by 10 percent.

The marginal propensity to consume for reductions in payroll taxes maybe be high but it is still less than unity. So if we reduce government purchases by the same amount as reduce payroll taxes – this proposal would be contractionary. I guess the good news here is that some of the reduction in government purchases would be deferred.

I guess in a world of PAYGO, however, we should ask how the Democrats propose to offset the loss in payroll taxes revenues:

Senate Democratic leaders want a deeper temporary reduction in Social Security payroll taxes. They would provide payroll tax relief to employers as well as employees. And they would offset the cost with a 3.25 percent surtax on modified adjusted gross income in excess of $1 million.

In other words, raise taxes on households who are not liquidity constrained which means if there is anything left to Barro-Ricardian equivalence, perhaps the marginal propensity to consume for changes in taxes on the very well to do is less than the marginal propensity to consume for reductions in payroll taxes. So if the goal is to increase aggregate demand – then the Senate Republican idea is awful whereas the Senate Democrat idea makes sense.

Morality: The Ecological Inference Problem

One further word on the hazards of assessing the moral position of a country:

The moral culpability of a population is not evenly distributed among its members. This is true in issues of war and peace as well as debt service. If one talks of “punishing” miscreants, as Merkel has done, some attention should be given to whether those being punished are the ones who misbehaved.

Unfortunately, the entire point of the bailout process is to cushion the losses of financial institutions, many of which (and many of whose high-level officers) profited by assuming excessive risk: they got the returns in the boom and now the taxpayers are stuck with the losses in the bust. Moreover, the taxpayers are disproportionately those who did not prosper in the bubble economy; ordinary working people have their taxes withheld from their paychecks and skimmed off through the VAT. The fast-and-loose crowd are shielded by unreported income, legal and illegal tax dodges and the like. True, the line can be fuzzy – low income people pay under the table too – but the balance of the burden does not correspond to the balance of the benefit.

This unfairness is a moral issue. To ignore it à la Merkel is a moral problem.

It reminds me of a saying: When the budget cuts come, we hear that it is the fat that will be cut, not the bone. Unfortunately, it’s the fat that makes the cuts.

Success and Morality in a Market Economy

There has been a lot of talk about economic success and moral virtue recently: the Tyler Cowen encomium to the morality of Teutonic creditors I jumped on yesterday, the Zingales conflation of meritocracy and justice that Andrew Gelman skewers today, and, on the other side, the complaint one sometimes hears from the 99-percenters that we are being dragged down by the greed of the other 1%.  My favorite observation on all this comes from one of the most eminent of Victorians, John Ruskin.  (Incidentally, I first came across this quotation in P. S. Atiyah's magnificent The Rise and Fall of Freedom of Contract.)

In a community regulated by laws of demand and supply, but protected from open violence, the persons who become rich are, generally speaking, industrious, resolute, proud, covetous, prompt, methodical, sensible, unimaginative, insensitive, and ignorant.  The persons who remain poor are the entirely foolish, the entirely wise, the idle, the reckless, the humble, the thoughtful, the dull, the imaginative, the sensitive, the well-informed, the improvident, the irregularly and impulsively wicked, the clumsy knave, the open thief, and the entirely merciful, just, and godly person.

Thursday, December 1, 2011

I Hope “The Moral Superiority of the Germans” Isn’t Translated Into German

Merkel et al. hardly need more encouragement. But if they must read this latest howler from Tyler Cowen, let them also bear in mind:

1. The entire premise of the argument is incoherent. On the one hand, TC says he is not comparing the morality of the German people to other Europeans—that would be “false and repugnant”—but rather the “system-wide” virtues of Germany versus those of the peripherals. On the other, he judges the peripherals to be morally inferior because they wish to default on their debt obligations. But the “they” who choose to default are not systems but individuals. So, yes, this is an argument about some people being more moral than others.

2. Saving and borrowing are partly matters of choice, but also matters of circumstance. Consider, for instance, the permanent income hypothesis, which tells us that when your income rises unexpectedly you save more, and when it falls you save less—even though your preferences for saving out of permanent income remain constant. This is where the trade surpluses and deficits come in. Without adhering to any particular model of savings behavior, it is clear that Germans have had more income because of their exports (half of German income is earned in the export sector), and countries with trade deficits have, for this reason, lower incomes. Of course, net savings and the current account are two measures of the same thing.

3. Even worse is the claim that default is simply a matter of choice—that those who propose defaulting on debts are less moral than their creditors. Except for Greece, loans taken out by public and private borrowers were generally in good faith. The economic catastrophe that decimated their finances was unanticipated. You could say they engaged in poor judgment by not taking the risk of such a catastrophe into account, and you would be right, but this verdict applies equally to the lenders. It is simply foolish, for instance, to say that, if interest rates remain at their current level, Italians are “choosing” to default. At 7% they have to pay 8.5% of GDP just to roll over, and the economic shrinkage this implies would raise that share year after year. Yes, Italians have assets, but if they sell them so that the state can tax the sales and redirect the revenues to debt service, then the returns on those assets will no longer accrue to Italians, and we are back, more or less, at the same point.

4. To sum up, the injunction to honor debts is like a lot of other obligations in this world. You should provide for the needs of your children. You should return your books to the library on time. If I lend you my car, you should avoid having it damaged in a collision. If you can do these things you should. If you can’t it depends on the reasons. Throwing poor parents into prison because they don’t give enough support to their children is neither good morality nor good economics. Same with people who get sick, can’t go out, and have overdue library books. Same with someone in a borrowed car who ends up in the middle of a giant crash. If the real estate market crashes in Spain, and the government is forced to step in to prevent a financial meltdown, what is the morality or economic sanity of demanding that the people of Spain be punished and forced to undergo a generation or more of austerity?

Tuesday, November 29, 2011

Quote of the Day

"....distributive justice without participative justice can only ever be coincidental."

W. Neil Adger, Jouni Paavola, Saleemul Huq and M. J. Mace, Fairness in Adaptation to Climate Change (MIT Press, 2006)

The Genealogy of Occupation

Much has been written recently on the question of where the Occupy Wall Street movement came from. The assumption seems to be that it represents a new manifestation of the counter-globalization ethos that first showed up in Seattle, 1999.

In some ways this is true, but the actual tactic, camping out, looks to me like an evolution from the tree-sitting strategy of radical environmentalists. Forget about Facebook and Twitter: this is the REI generation, and they want to climb and bivouac their way to liberation. It really makes sense when you think about it. To transgress the landscape of capitalist property rights, you need the proper gear. The only anomaly I can see is that pepper spray is being used against the campers, not by them.

Footnote: It might be argued that the starting point was really Greenpeace, which drew on small craft culture for its maritime adventures. Having noodled around in both outdoor and boat equipment shops, I think I can say that they represent two rather different slices of humanity, and the probability of crossover was slim. Of course, Greenpeace was also practicing urban mountaineering around the same time as Earth First was exploring the canopy zone.

The Problem with Pop Economics, Paul Seabright Edition

Maybe you’re in a hurry, so here is the problem in its general form: most of the reading public, even most of the fairly well-educated reading public, have little exposure to mainstream economic reasoning.  If they ever took an econ course, they did not come away with a durable understanding of opportunity costs, markets as cost-benefit algorithms and coordinating devices, market failure, etc.  This means there’s always an audience for a book that packages these rather standard ideas in a clever, unexpected or cool way.  Unfortunately, underneath the ribbons and shiny paper, it’s the same old same old.

Monday, November 28, 2011

Quote of The Day

I am currently making my way through Hume's History of England - a pure joy - and ran across a quote to share. In his discussion of the 1640 Long Parliament and the execution of Lord Strafford, he has this to say about the Puritan leaders Pym, Hambden and Vane:

Some persons, partial to the patriots of this age, have ventured to put them in a balance with the most illustrious characters of antiquity; and mentioned the names of Pym, Hambden, Vane, as a just parallel to those of Cato, Brutus, Cassius. Profound capacity, indeed, undaunted courage, extensive enterprize; in these particulars, perhaps the Roman do not much surpass the English worthies: But what a difference, when the discourse, conduct, conversation, and private as well as public behaviour, of both are inspected! Compare only one circumstance, and consider its consequences. The leisure of those noble ancients was totally employed in the study of Grecian eloquence and philosophy; in the cultivation of polite letters and civilized society: The whole discourse and language of the moderns were polluted with mysterious jargon, and full of the lowest and most vulgar hypocrisy.

Saturday, November 26, 2011

Some Like it Hot. So What?

In the world of climate economics, Richard Tol is a major name.  If his most recent post on the topic is any indication, he should pick another line of work.  Tol points to the desire of many people, including some of his economist colleagues, to move to warmer locations as “revealed preferences for climate”.  His final paragraph hedges a bit, but leaves the impression that the sunbirds are telling us something about policy:
Obviously, one cannot compare the individual impact of moving to a warmer climate with the impact of global warming, but at the same time it is clear that both Dublin economists specifically and intra-European migrants generally do not object to a warmer environment.
Yes, people move to warmer climates.  They lie under sun lamps and bake in saunas.  Thermo- and phototropism have nothing to do with the risks of climate change, of course.  The major risks are:

sea level rise that inundates, or ravages with storm surges, coastal areas that are home to much of the world’s population

the extinction of species that cannot adapt at the rate at which their environment is changing

an increase in the frequency and severity of severe weather events

the loss of water storage in glacial formations

shifts in rainfall patterns that could subject more regions to drought, fire and other hazards

loss of agricultural productivity in tropical and many temperate regions

and above all, the potential for positive feedback mechanisms (release of methane from peat bogs, permafrost and clathrates) that could trigger runaway, catastrophic increases in atmospheric carbon concentrations.

Personal preferences for a few degrees of temperature more or less have nothing to do with it.  Tol seems to be another poster child for the tendency of economic expertise to coexist with appalling ignorance about just about everything else.  Is economics worse this way than other fields, or am I just more sensitive to it because it rubs off on my reputation as well?

Friday, November 25, 2011

Montserrat Figueras

This extraordinary singer died a few days ago at the age of 69.  She had it all: purity of tone, deep personal expression, the ability sing in a vast array of styles, from Arabic and Sephardic to medieval to opera to folk song.  If you haven’t heard El Cant de la Sibilla, her recreation of a medieval religious incantation, or Ninna Nanna, her complication of lullabies from around the world and across the ages, you are missing something wonderful.

She was one of a kind.

Critique of the Political Scene Today?

As faction is the effect of that loose government which is unavoidable in a time of war and trouble; so, while faction is suffered to continue, it is a perpetual bar to better administration; for it emboldens the bad, and terrifies the good. Is a lunatic, whom the physician cannot approach without danger to himself. Some statesmen, therefore, when it rages high, withdraw from affairs, and will not administer the physic of their councils till the fit is over.
--Charles Davenant. 1698.

Wednesday, November 23, 2011

Is The Italian Crisis A Possible Self-Fulfilling Prophetic Negative Bubble?

Many observers are declaring Italy to be the key to whether the euro will collapse and along with it possibly most of the world economy. Having removed the near term problem from office, Silvio Berlusconi, the markets are not satisfied with the appointment of respected economist technocrat, Mario Monti, to replace him, with bond yields continuing to rise, thus threatening to bring about a crisis. What is it that Monti is or even can do to stop this?

Quite likely not a damned thing. Looking at supposed fundamentals, there should not be a problem with Italy. It is one of only four Eurozone nations that is currently running a primary budget surplus. The others are Luxembourg, Belgium, and Germany. Where is the problem?

Well, some say, aha!, look at the national debt to GDP ratio, a too high 120%. However, not only has Italy had a ratio such as this for a long time, and even been higher prevously, such as in the early 1990s, it has a much higher share of its debt domestically held, Italy has a much higher savings rate than most European nations (on the order of 17%). This would explain the NY Times story today that as long as Italians continue to hold their own debt, the euro will be saved.

What about proposals being made in Italy? One is that the retirement age be raised from 65 to 67. Maybe this should be done, but again, Italy has a primary budget surplus, and 65 is higher than quite a few other European nations have as a retirement age. And if such a "reform" is passed, it will have little near term impact on the budget balance, although maybe doing so will induce that magic effect of "raising confidence," thus bringing down the interest rates.

The other is labor market reforms, particularly to open up various professions to more entry and competition. This will be hard to pass, but I think there may be reasons for doing this, and this may well help increase the growth rate, which has been low for a solid decade, and needs some stimulus, however achieved. But, again, this is not likely to affect the budget balance at all. Why this would bring down overly high interest rates is also very unclear aside from hoping for the "confidence fairy" to suddenly appear.

That the confidence fairy has not appeared with the removal of Berlusconi is disturbing. It looks increasinigly to me that these high interest rates are simply a self-fulfilling negative bubble on Italian bonds unjustified by any actual fundamental phenomena. Even with the high interest rates, most reports suggest that Italy can manage to avoid any defaults for at least another year. It is not Greece, or even the less troubled Portugal, Ireland, or Spain. It is basically solvent. The only real threat is the high interest rates, apparently existing because of the fear of what high interest rates can do, a possible self-fulfilling prophecy, an empty, if still dangerous negative bubble.

Tuesday, November 22, 2011

In Politics, Let No Mean No

The recent elections in Spain point once again to a flaw in the voting procedures of all supposedly democratic countries: they prevent citizens from expressing what they actually think in the voting booth.

Do you suppose there was a sudden outpouring of love for the Spanish right?  More likely, there was an outpouring of disgust for the Socialists and the economy-without-a-future over which they preside.  The ballot, however, did not offer the opportunity to vote against the party in power, only for the opposition.  Thus the conservative Popular Party will enter government with what it claims is the support of the majority, when the reality is that is probably has less support than it had at the time of the previous election—which it lost.

There is a simple solution: provide voters with the option of either voting for a candidate or party, if they want to express support, or against a different one if they want to express rejection.  The final tally would be the number of votes for minus those against.  In a two party/candidate race the final result would be the same.  In a multi-party race, voters would have to think strategically about whether their feelings are more concentrated for or against any particular alternative.  In either case, you would see clearly the extent to which democracy was working, in the sense of producing a government that citizens actually support.

My guess is that, given a negative option, the people of Spain would have delivered two verdicts, one against their current rulers and the other, only somewhat less intense, against their future ones.  They should have had that chance.

Lessons for the Eurozone from US Fiscal Federalism

If the euro disintegrates because of a failure to take short-term measures needed to support it, we won’t have to worry about long run governance issues.  Just in case the e-zone gets through the immediate crisis, however, here are a few thoughts based on US experience.

Monday, November 21, 2011

A Business Cycle Theory Suitable for a Parallel Universe

I just glanced at Tyler Cowen’s model of a Eurozone downturn and noticed there are a couple of minor elements missing—the trade imbalances between the surplus and deficit countries in the period leading up to the financial crisis, and the financial crisis itself.

That’s right: Cowen explains the current Euromess without any reference to what transpired in 2008.  Imagine how much worse it would be if the crisis that actually happened actually happened.

Saturday, November 19, 2011

Education with a Twist—An Oliver Twist

Let’s let the newt speak for himself:
You say to somebody, you shouldn’t go to work before you’re what, 14, 16 years of age, fine. You’re totally poor. You’re in a school that is failing with a teacher that is failing. I’ve tried for years to have a very simple model. Most of these schools ought to get rid of the unionized janitors, have one master janitor and pay local students to take care of the school. The kids would actually do work, they would have cash, they would have pride in the schools, they’d begin the process of rising.
I don’t know what your reaction was, but the first thing that popped into my mind was, why take it out on the janitors?  If the school was failing it wasn’t their fault.  According to Gingrich, it’s the teachers who can’t make the grade.  So why not put the kids to work following lesson plans, going over last year’s standardized tests, etc.?  There would be as much pride in this as in cleaning toilets.

But let’s not get hung up on details.  Isn’t it nice having a historian running for president—someone who knows what was really good about the good old days?

Friday, November 18, 2011

Piggy No. 3: German?

Speaking of Germany and economic virtue, here is a question about the Walt Disney classic, Three Little Pigs. Take a look at the third little piggy, the one who builds his house of bricks.  He wears overalls.  In American pop culture circa 1933 (the date of the cartoon’s release), only farmers and Germans wore overalls, and I don’t see a farm.  Also, the first two piggies play the flute and fiddle, while No. 3 has a piano with sheet music.

Am I reading in too much?  (I do not see the framed portrait of dear old dad as a string of Würstchen as a corroborating clue, by the way.)

The German Obsession with Inflation

As a footnote to the previous post, here is an observation about the German obsession with inflation.  Media accounts always bring up the hyperinflation of the 1920s and its supposed role in ushering in the Third Reich.  This is bad history: a decade transpired between the inflationary madness of 1923 and the handing off of the chancellorship to Hitler.  That trope should be buried once and for all.

More generally, while the experience of the ‘20s is invoked by Germans themselves, I think it’s little more than a convenient rationalization.  Most Germans are generations removed from this era; it has as little relevance for them as, say, the great Mississippi flood of 1927 has for those living along its banks today.

The real reason is that Germany is a country of savers.  The savings rate is high, and savings are distributed broadly.  Saving is valorized by the culture; you could argue that it is seen as the greatest virtue of all, above courage, generosity and all the rest.  It is an act of self-denial that looks to the future—one’s own and that of the generations to come.  To have savings is to be free.  Germans see the capital stock of the country as the product of their own savings, and to a large extent they are right.  The mass savings institutions, the Sparkassen and the Postbank and savings banks, constitute the bulk of German finance.  Germany is a savocracy.

The great threat to savings is inflation.  Long before hyperinflation destroys savings altogether, modest inflation chips at their edges.  Policies that permit inflation to increase penalize savers, and this makes them immoral, since saving is the epitome of morality.  Better to allow your economy to go down in flames than to resort to the wickedness of the printing press; at least, in the rubble, you will have your savings to draw on.

Among other things, this perspective fails to take account of where savings come from.  Yes, they come from choices people make, but they also come from the income that make those choices possible.  Cut someone’s salary in half, and no matter how virtuous they are, their savings will take a hit.  And a significant part of German income derives, directly and indirectly, from its trade surplus with debtor countries like the Eurozone peripherals and the US.  In other words, the virtue of savings is inseparable from the vice of debt.  Simple accounting identities require this to be true, but it to point it out is to remove yourself from respectable public opinion in Germany.

Of course, it’s easy for me to see this as an American, the product of a massively indebted society buffered by the exorbitant privilege of minting the world’s currency....

The Power of One

European institutions, including the Eurozone, remain treaty organizations whose members are sovereign countries.  This is why important policy decisions have to be unanimous.  As a result, we have heard the lament that small, wayward countries have an unwarranted veto power and can hold everyone else hostage.  You know, the Finns, the Slovaks and their ilk.

In fact, the small and weak do not have this power.  If they try to throw sand in the gears, they will be put in their place one way or another.  A country like Finland, for instance, is simply too vulnerable to political and financial pressure to try to dictate Eurozone policy single-handedly.  Was anyone surprised when the True Finns, a party that campaigned on xenophobic nationalism, backed down and allowed the latest Greek financing package to go through?

The real threat to multilateral institutions has always been the veto power of the strong.  This is true of the US within the UN system, and it is increasingly clear that it is true of Germany in the current euro fiscal crisis.  As the moment of reckoning draws near, and as the need for a true lender of last resort to backstop euro-denominated credit becomes inescapable, one after another, the members of the zone are falling into line and demanding that the ECB mature into a real central bank.

Everyone except Germany.  Angela Merkel draws her line in the sand: “If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen.”  Hans-Werner Sinn, an economist whose every pronouncement is accorded scriptural authority, spits out the epithet “printing press” six times in a recent op-ed demanding that the ECB remain neutered.

In a nutshell, the German position is that any risk of inflation, no matter how small the inflation or the risk, outweighs the possibility of a financial meltdown resulting from a shortfall of euro liquidity.  If a country undergoes a run on its banking system or sovereign debt (typically connected), it is a sign of profligate living, and the specter of default is needed as an incentive for “reform”.  This attitude—and it is simply an attitude, not a rational economic argument—is the proximate reason why the global economy is on the brink.

So Germany, the biggest, strongest, richest country in the Eurozone is the rogue state, exercising its veto in increasing defiance of world opinion.  Forget the True Finns; the parties whose absurd demands are threatening to plunge Europe, and the rest of us, into crisis have names like the Christian Democrats, the Free Democrats, the Social Democrats and the Greens.  Will any of them start to crack before it's too late?

Thursday, November 17, 2011

Strike at California State University

Two of the campuses of California State University are striking today. The timing of the strike is unfortunate, coming at the same time as fees are raised once again almost 10%. The union realizes that pay raises are a small part of the overall abuse of higher education in California, but strikes are only permitted in opposition to the contract with University system. Chronic underfunding began during the first term of Jerry Brown, when the passage of proposition 13, frightened him. Not only is the administration grossly overpaid, its management style is arrogant and heavy-handed. Finally, the gutting of public education at all levels means that students come to the University underprepared and, more often than not, lacking the funds to pay for their education. Not only do they fall under a heavy debt burden, they work too many hours after school in order to focus on their education. To add insult to injury, all of us have to listen to public figures telling us how our economic future depends upon educating young people, presumably without any tax burden unless such funds are directed to hedge funds engaging in charter school scams.

Wednesday, November 16, 2011


I’m slow to get up this morning after a concert last night by this great Swedish folk group.  They played in an ancient church—great acoustics—in the tiny village of Freepsum in northwestern Germany.  Although they’ve been together for 22 years, this was the beginning of their first German tour.  (“We’ve had a lot of time to practice”, said Roger Tallroth, the guitarist.)

On stage, the core of Väsen is Olov Johansson, who plays the nyckelharpa–like its name says (in Swedish), a stringed instrument with keys.  He flies through complex runs in the dance tunes and produces a resonant tone for the slow airs.  While a few of the pieces they played were traditional, most were composed by one of them, especially the fiddle player, Mikael Marin.

Väsen’s virtuosity is exceptional.  Their sound is rich with harmony (think Ravel), even when they are blasting away at high-tempo polkas.  Toward the end of the night they started to fool around, and this was good too.  Lucy in the Sky with Diamonds mixed in with 18th century Swedish fiddle standards—why not?

They will be returning to the US in a few months, playing the Wintergrass festival in Bellevue in February and other events.  Not to miss.

Monday, November 14, 2011

Paperback version of The Confiscation of American Prosperity

I am writing a first draft of my introduction to the paperback edition of my book. Any feedback would be very much appreciated.

The Confiscation of American Prosperity: From Right-Wing Extremism and Economic Ideology to the Next Great Depression first appeared in October 2007, just as the stock market was peaking. Judging by the public pronouncements by economists and the business press, the economy appeared modestly healthy before the breakdown of the subprime mortgage market. In fact, the weakness of subprime mortgage market was a symptom of deeper problems that had been eating away at the economic core.

In addition to a diagnosis of these deeper problems, such as growing inequality and an emphasis on financial activities, rather than more productive economic endeavors, the book offered a historical analysis of the willful gutting of the economy that occurred over the last four decades. The Confiscation of American Prosperity presents this history in the form of a crime story, beginning with an accounting of the economic plunder engineered by a small part of society, with the complicity of both political actors and many, if not most, economists. The second part of the book describes the way that this group was able to carry out the theft of enormous wealth. In the tradition of crime stories, the third part of the book examines the expected retribution. The final section addresses the incompetence of the economists, who should have acted as policeman while the plot was unfolding.

The recent protests of the Occupy Movements indicate a deeper understanding of the crime than either the business press or the economic analysis following the meltdown of the financial system. The protesters correctly realize that many of the most serious perpetrators have escaped from the crisis without retribution. Their outrage might contribute to some modest retribution, but the expected retribution discussed in the book will come from more serious economic disruptions that are all but certain, without addressing some of the economic imbalances created by the crime. Of course, the economy can begin showing signs of health once again, but sooner or later the imbalances will take a serious toll on the economy.

Historically, economic crises do tend redress some imbalances, but political mobilization is also an important element in returning to a more healthy balance. One can only hope that such mobilization will be effective enough to prevent another Great Depression.

The Moral Philosophers' Stone: A Compleat History of 'A Certain Quantity of Labour to be Performed.'

In the past couple of weeks, the Sandwichman has uncovered not one but TWO previously unheralded milestones in the history of "best-known fallacy in economics". The first is a erudite defense by an accomplished first-generation political economist, Rev. Thomas Chalmers (1820), of the proposition that "there is a certain quantity of work to be done; and this quantity, generally speaking, does not admit of being much extended, merely on the temptation of labour being offered at a cheaper rate..." The second is a spirited plea by Dorning Rasbotham, Esq.(1780) for the use and encouragement of machines that attributes to "some persons staggered by this argument" the false view that there is only "a certain quantity of labour to be performed."

Ecological Headstand has commenced a series on "The Moral Philosophers' Stone: A Compleat History of 'A Certain Quantity of Labour to be Performed.'" The antiquity of Rasbotham's fallacy claim and the cogency of the Chalmers proposition suggest the persistence of the former as a pre-analytical, essentially pre-industrial fossil, petrified by ad hoc explanations.

Discipline, Hard Work and Obscene Wealth

It’s taken a day for this to settle in, but I find myself to be really embarrassed on Tyler Cowen’s behalf.  Yesterday he published a New York Times op-ed on the subject of why American’s don’t revere the rich, even though riches are usually the result of discipline and hard work.

Put aside his indirect reference to Steve Jobs (“earning money through production for consumers, as Apple has done”).  Rightly or wrongly, Jobs was admired because he brought industrial design values—beauty arising out of function—to high-tech products; he seemed to be as much an artist as an entrepreneur.  Over at Microsoft, Steve Ballmer has a work ethic second to none, and he will die a very rich man, but I doubt there will be much public outpouring of grief.

Let’s get to the core issue.  Assume there are four individuals, A, B, C, and D.  A and B are at the struggling end of the working class, C and D are rich.  A and C have only an average attachment to work and self-discipline; B and D drive themselves to the limit.  Suppose their annual incomes look like this:

A: $20,000
B: $30,000
C: $200,000
D: $2,000,000

If you had a lot of observations like this, and if you could somehow measure “work ethic”, you would find a healthy coefficient on it in an income regression.  But what would this have to do with the popular revulsion against an income distribution so skewed to the top?  The problem is not that there is a return to hard work, but that the return is so obscenely large at the high end and so small at the bottom.  Think of that old Jesse Jackson speech:
I know they work. I'm a witness. They catch the early bus. They work every day. They raise other people's children. They work every day. They clean streets. They work every day. They drive vans with cabs. They work every day. They change the beds you slept in these hotels last night and can't get a union contract. They work every day. No more. They're not lazy. Someone must defend them because it's right, and they cannot speak for themselves. They work in hospitals. I know they do. They wipe the bodies of those who are sick with fever and pain. They empty their bedpans. They clean out their commode. No job is beneath them, and yet when they get sick, they cannot lie in the bed they made up every day. America, that is not right. We are a better nation than that.
What does it mean when someone can see the self-discipline of the millionaire but not the double- and triple-shifts of the working poor?  Like I said, I’m embarrassed for Tyler Cowen.

Sunday, November 13, 2011

OWS and its “Leaders”: A Lesson from the 60s

To a large extent, the New York Times sets the news agenda for American journalism.  Today’s Times backgrounder becomes tomorrow’s conventional wisdom throughout the broadcast media and the regional press.  So we should take notice when Arthur Brisbane, the Times’ “public editor”, writes of Occupy Wall Street
An investigation into origins would lead to the identities of early leaders, at least, and the search for the broader leadership of the movement should continue from there. I polled a group of journalism educators on the question of how The Times should direct its coverage henceforth. Not all agreed on this, but most said it was important to understand who the leaders were and what demographics they represented.
This brings me back in time, to the late 60s and early 70s, when another largely formless movement was making itself felt in America.  On the ground, this radical upsurge was composed of affinity groups, underground newspapers, community storefront projects and streetcorner networks.  It had a visceral distrust of leaders and authority, of having others speak for you.

Nevertheless, a pathological symbiosis developed between the media and a relatively small number of movement self-aggrandizers.  The ambitious would-be leaders discovered that they would be anointed by the media as long as they adopted ever more outrageous postures and rhetoric, and the media found that by focusing on them they had a story they could cover in a convenient, template-satisfying way.  Unfortunately, that was not all.  Because the movements of the time had weak institutional structures, they ultimately depended on media coverage to attract new recruits and hang onto old ones.  Thus, when “leaders” like the Weathermen and the Black Panther Party flamed out, they sucked the rest of us down with them.

But here’s the thing: neither I nor anyone I knew in this movement chose these “leaders”, nor did we feel represented by them in the slightest.  Our story, whatever it was, had little to do with its representation in the media.  We were seeking something completely different, but this quest was cut off and even our memory of it was gradually erased by years of repetitive, fixated discussion of our Promethean but, alas, flawed “leadership”.

Lessons?  They are partly about the role of the media in refashioning social movements so they fit the standard journalistic model of who they are and how they should function.  Even more, they are a warning to the movements themselves, that they have to give thought to their own self-defined structures that convey who they are, what they believe, who is permitted to represent them, and how new recruits can join in.

Saturday, November 12, 2011

Naomi Klein on the Politics and Economics of Climate Change: Hit and Miss

Klein got her start, at least outside her native Canada, as a cultural critic in the wonderful book No Logo.  Since then, with each project she has dipped further into economics, with a weird bifurcation: her political and cultural analysis has become even more insightful, but her understanding of economics has not kept pace.  This was a problem in The Shock Doctrine, and it is a problem in her missive on climate change on view in the current Nation.

A first time investigation of the architecture of the international ownership network

It seems incredible that any economist, as late as this year, would claim that for the very first time in history there has been performed an investigation into the network of owners of global capital. But that is indeed what authors Vitali, Glattfelder and Battiston state in the opening paragraph of their abstract entitled 'The network of global corporate control'.

“The first investigation of the architecture of the international ownership network is presented, along with the computation of the control held by each global player. We find that transnational corporations form a giant bow-tie structure and that a large portion of control flows to a small tightly-knit core of financial institutions. This core can be seen as an economic “super-entity” that raises new important issues both for researchers and policy makers… network control is much more unequally distributed than wealth. In particular, the top ranked actors hold a control ten times bigger than what could be expected based on their wealth…”

"...nearly 4/10 of the control over the economic value of TNCs in the world is held, via a complicated web of ownership relations, by a group of 147 TNCs in the core, which has almost full control over itself. The top holders within the core can thus be thought of as an economic “super-entity” in the global network of corporations. A relevant additional fact at this point is that 3/4 of the core are financial intermediaries...."

The implications are mind boggling. How incredibly fragile must the global economy be when such an incredible lack of diversity of enterprise (and therefore also of intellect and strategic resilience) are present.

It is possible to see our world now facing very serious global trading and current account imbalances due to these enormous organisations having moved their gigantic 'enterprises' into pockets of cheap labour, land and currencies to gain an artificial economic advantage. As one big TNC after another diversifies into many enterprises there is a simultaneous loss of diversity for the economic system as a whole. This problem escalates when TNCs combine strategies through global networks. It's not surprising that vast portions of world trade have long metamorphosed into non-trade intracorporate transactions.

Friday, November 11, 2011

Major Economic Reporting Breakdown at the New York Times

I sometimes carp about minor missteps, but this is big.  In a front page “explanation” of how the eurozone got into a sovereign debt crisis, there is criticism of myopic banks, lax regulators and spendthrift peripheral governments, but no mention of the fundamental underlying cause, the swelling imbalances between surplus and deficit countries in the currency union.

The Times reporters and editors need a refresher in introductory economics.  The fundamental identity that connects financial balances to a country’s international position is

BP + BG ≡ CA

where BP is the net savings of the private sector (income minus spending for households and firms), BG is the government's fiscal surplus or deficit, and CA is the current account balance (mostly trade).

Over the decade of the 00's, the peripheral countries were running ever larger trade deficits with the core countries, especially Germany.  At first these deficits were financed by private sector borrowing, but after the financial crisis hit private sector leverage froze, economies contracted, and governments stepped in to do the borrowing themselves.  Before 2008 the problem was too much borrowing in real estate, banking and other sectors; after it was too much borrowing by the government.  Yet, as long as the trade imbalances grew, one or the other was unavoidable.

(From a macro identity point of view, if governments had not increased their deficits post-2008, incomes would have collapsed.  This would sustain the identity by curbing imports on the right hand side, but would have allowed an economic freefall.)

So the real story, the one that the Times should have told, is about how the imbalances grew, why few noticed, and how the eurozone framework, with its utterly irrelevant “Stability and Growth” criteria, was unable to cope.

Skip the Times and get your news and views from the econ blogosphere.

Footnote: Nothing Greece and Italy do by way of budget policies or “reforms” can solve their sovereign debt problems.  They might as well sacrifice goats to the gods.  The only practical significance of the current political drama is that it will or won’t persuade the core countries to open the liquidity spigots, write down debts and resolve the banks.