Monday, February 28, 2011

David Brooks - Misinformed Cheerleading for Mitch Daniels

David Brooks hearts the governor of Indiana:

Since 2004, the 49 other states in the nation increased their debt levels by an average of 40 percent. Indiana has paid down its debt by 40 percent. Indiana received its first Triple-A bond rating in 2008, and now it is one of only nine states to have the highest rating from all three rating agencies. At the same time, the business climate has improved significantly. Infrastructure spending is at record levels. The state has added jobs at twice the national average.

I was alerted to this fluff piece by Dean Baker who had a neat chart on how this last sentence is just factually incorrect. BLS provides its own neat charts on how employment has fallen and the path of the unemployment rate in Indiana. Where David Brooks got the idea that employment in Indiana has boomed under the tenure of Mitch Daniels is not clear.

Dean also reminded us of the tenure of Mitch Daniels as OMB director. But hey – George Bush was his boss back then. As far as paying down the Indiana debt – I wonder how much of this was from the front loading of receipts from the sale of toll roads:

Leasing or selling a public asset is a classic one-shot—a short-term measure that bolsters the balance sheet today but that can't be repeated … As a result, our tax revenues wind up in Beijing—as interest payments. At the state level, Indiana is relying on foreign companies to lease public infrastructure like toll roads. And under these arrangements, tolls—taxes people pay for driving—are being paid to foreign shareholders of foreign companies.

This is not long-term deficit reduction if the sale price is less than the present value of the lost future tax revenues. But I guess teaching finance to David Brooks will have to wait until he learns to read simple graphs from the Bureau of Labor Statistics.

What Krugman Did Not Say At The Easterns

The Eastern Economic Association held its annual meeting in New York this past weekend, and on Friday Paul Krugman delivered the presidential address to an overflow crowd on "The Profession and the Crisis." Although most of it he has written or said before, it was well put and generally well received. Among his points were that economists failed to forecast the crisis and were particularly remiss in failing to note the housing bubble, that poor policy analyses were given with much bad advice as the crisis unfolded, and that that the profession exhibited massive ignorance of both economic history (particularly regarding the Great Depression) as well as of the history of economic thought (particularly that of Keynes) before and even during the crisis.

There were two main items he left out, one brought up by a questioner, one not brought up at all. The first involved the role of income distribution. Krugman sort of fumbled this, going on at some length about how Princeton will have a conference on this very soon without saying who would participate or what they might say. He went on also about how this was not like in the GD, with underconsumption not playing a role, although he did think it interesting that peaks of inequality immediately preceded this crisis and the GD. He finally admitted that inequality might have had something to do with the financial part of the housing mortgage problems.

The unmentioned issue was corruption. Now, with Elizabeth Warren being appointed over strong opposition within the administration, something on this matter might be done. However, that little has been done may reflect how many people from Goldman Sachs have been (and still are) involved in both the last and current administrations at top economic policy making levels. I note that people who have emphasized this issue have included former regulator, Bill Black (the initial whisteblower on the Keating Five S&L scandal), and Jamie Galbraith. Of course, Minsky and Kindleberger both emphasized that corruption and scams are a common side accompaniment of most speculative bubbles.

merit pay

One of the knocks on collective bargaining is that employers should be able to pay people what they are worth. An interesting example of this phenomenon came in the realm of professional football. In January 2011, Pro Bowl cornerback Nnamdi Asomugha's contract was voided because his contract included a little-known clause allowed the team to void his contract if he didn't achieve his not-likely-to-be-earned incentives in 2010 -- and he didn't. One reason for his failure to earn his incentives was that he was so effective that quarterbacks would not to pass to someone near him. Consequently, he did not have any interceptions.

Sunday, February 27, 2011

Along the Libyan Coast, the World is Anything but Flat

In case you were wondering whether globalization had erased the division between the colonizer and the colonized, you can relax: the old order is still in place. Especially in moments of crisis, the platitudes about a borderless world fall away, and we can see clearly who counts and who doesn’t.

Benghazi, Libya — American and British citizens have been evacuating for days. The Chinese workers were on their way, and the Bosnians stood ready with their bags on the shore. But from the milky windows of stifling rooms in a makeshift camp, the migrant workers from other, poorer countries, stranded by war and, in some cases, forsaken by their employers, watched cruise ships — and salvation — depart.

Read on.

Are Bosses Always Right?

Disagreements over the role of unions usually come down to this: do you believe that managers normally make the right decisions over how to run organizations? If you do, then “union rules” just get in the way, and unions need to be weakened or eliminated in order to increase efficiency, as supporters of Scott Walker (and his predecessor in Indiana) argue. If you think bosses can be wrong, or capricious or self-serving, you support unions as a way to reduce power differences and compel more dialog. The debate over the Wisconsin drive to eviscerate public sector unions is really about whether you think a world in which some give orders and others simply obey is the ideal.

Where does economics come down on this? There are nice models of information flows within organizations that support dispersion of power, but they are somewhat exotic and not what gets pulled off the shelf when economists reach for a simple representation of organizational dynamics. Instead, we have crude principle-agent models of the employment relationship in which bosses always seek greater efficiency and have to fine tune the carrots and sticks of employment contracts so that workers will go along. Williamsonesque transaction cost theory is built on the same assumptions: managers must defeat workers’ opportunism, just as shareholders must subdue the opportunism of managers. Does this bias follow from the deeper assumption of individual self-interest? I think not: manager opportunism could just as readily be directed down the ladder as up. Rather, what we see is an unspoken class bias, an expression of the same instincts that lead to identifying with order-givers rather than order-takers—the belief that hierarchy is a reflection of differences in competence and social commitment and not just an organizational form.

Thursday, February 24, 2011

The Two Worlds of Trade

There are two longstanding narratives in economics about trade.

1. Trade is about comparative advantage. Two people or communities that specialize in what they can do best (relative to what they would be doing otherwise) and trade with each other are better off (enjoy higher levels of consumption) than they would be without trade. The story becomes more dramatic when you bring in specializations within communities: those who specialize in goods that have a comparative disadvantage (e.g. electronics assembly in the US) lose out when trade is opened up, although their losses are not as great as the gains experienced by the rest of the community. The lesson is clear: there are special interests who will try to impede trade liberalization, but they should be resisted (or bought off) by the rest of us. Economists, who know the score, have a particular obligation to expose and combat protectionism.

2. Trade, while essential for growth and development, is a potentially destabilizing aspect of national and global macroeconomics. The gold standard was doomed to fail, for instance, because the specie flow mechanism (outflows of gold resulting in reduced money supply and lower prices) did not, in practice, cause trade deficits to diminish over time. In the absence of other adjustment mechanisms, countries with persistent deficits were forced to adopt punishing austerity measures, and this imparted a contractionary bias to the global macroeconomy. In the current period of flexible exchange rates, it is still the case that unbalanced trade is not only the norm, but has even increased in scale and destabilizing potential. Deficit countries are particularly subject to financial crises, due to the accumulation of private and public debt. (This is the message of the fundamental macroeconomic identity.) On the national level, persistent trade deficits result either in chronic employment problems or addiction to Keynesian demand stimulus that should, in principle, be only temporary medicine. In a world of sovereign states, we are still far from establishing a financial architecture that can contain the destabilizing effects of capital mobility and unbalanced trade.

What is interesting is that there is almost no communication at all between these two narratives. In particular, the second invalidates the first: if trade does not balance at the margin (changes in imports exactly offset changes in exports), the microeconomic case for trade liberalization collapses.

Winners & Losers from Free Trade: the Boxer, the Economist & the Hot Girlfriend

Kash Mansori has resumed his economist blogging – something that makes all economist bloggers better off. Welcome back and thanks for making me laugh at the Uwe Reinhardt story about the boxer and the economist , which reminds us that not everyone necessarily gains from a movement towards free trade. But let me humbly suggests that this story needs something – a third player.

The usual economist parable as to why there are both winners and losers from free trade might go something like this. As we removed the trade restrictions from importing apparel from China, American households were able to buy quality clothing at lower prices. Chinese apparel workers also benefited from higher wages. But American apparel workers suffered reductions in their real income from the increase in competition from Chinese workers. While aggregate American income rises, some Americans suffer losses. The compensation principle suggests that it ispossible for the winners from free trade to compensate the losers in such a way that everyone is left better off. Of course in the real world this compensation is rarely executed.

Let me recast Kash’s and Uwe’s story by noting that one of my friends is indeed a former professional boxer and not is a personal trainer who I sometimes work out with (we’ll call him Jay). Jay is still in incredible shape and if he were to punch someone in the nose, it will really hurt. Let me be the economist and let’s pretend that I just start dating a very sexy lass (we’ll call this hypothetical hottie Kay). Kay decided to come watch one of my training sessions with Jay and afterwards Jay had an intense desire to punch me in the nose. So he asked Kay how much he would have to pay her to get permission to punch her new boyfriend out. Kay pulls me aside and say “honey, I really need $3000”. When I told her that Jay’s punches are devastating, she promised that she would more than make up for the pain later that evening. So I told her to go negotiate with Jay. She was elated that he actually offered her $5000 to let him punch me in the nose. The deal was consummated when he hit me so hard in the nose that it broke and I bled a lot. But he did give her the $5000. The only problem is that when she saw how awful my face looked, she said: “oh dear, you are now so ugly that I can’t go home with you. And we certainly are not having sex”.

So let’s recap on this notion that free trade supposedly makes everyone better off. Jay got want he wanted and Kay is now $5000 richer. But all I got was a broken nose. Compensation principle – FEH!

Wednesday, February 23, 2011

The Most Dangerous Union in the World

Several commentators have remarked about the sudden outbreak of class struggle in the United States. I see the brutal behavior of the state and federal governments as an indication of the failure of class struggle.

Let me explain. Back in the 1960s, when United States was enjoying the so-called Golden of economic prosperity, profits were weakening. By the late 1960s, the organized right wing began to harness the energy of the tea party of the day, which took hold with the defeat of Barry Goldwater. Using its almost unlimited source of funding, wealthy businesspeople and corporations began to create a solid network of organizations to remake the country by undoing the gains made during the and New Deal, and even emulating the political landscape of the late 19th century. The Cato Foundation, the Heritage Foundation, right wing legal offices, and a host of other activist operations led a systematic assault on anything and anybody who seem to know represent a barrier to profit maximization.

This movement was extraordinarily successful, so much so that they even co-opted the Democratic Party, which had previously offered a meek resistance to business demands. By the 1990s, the results were clear to anybody who bothered to take notice of the economy. On the eve of the Great Recession, the results were so obvious that only the most stubborn ideologues could fail to see that virtually all of the economic growth since 1970 had been captured by a very small elite. I told this story in a book entitled The Confiscation of American Prosperity: From Right-Wing Extremism and Academic Economics to the Next Great Depression, published in 2007, just as the stock market peaked.

The ideological justification of this confiscation was that business prosperity would create a tsunami of productivity by following the right-wing regimen. The entire population would benefit.

Productivity did increase — not spectacularly — but which is still stagnated. Job security eroded. Protections previously guaranteed by regulatory agencies or the law quickly disappeared.

Despite the idea that the economy somehow suffered from an over burden of taxes and regulations, the more these hindrances to prosperity fell by the wayside, the worse the economy performed. Profits became concentrated in the financial sector, but much of the rest of the economy faltered.

Scapegoats had to be found. Already, during the Nixon administration, the right wing became adept at recruiting working-class support, using racism and cultural discomfort as fuel. Ironically, one of the first groups successfully recruited were craft unions, a minority of whose members attacked antiwar demonstrators. A parade of scapegoats march across the political landscape. Braless hippies, Blacks, unwed teenage mothers, welfare recipients, immigrants, and now public workers, especially teachers.

The results were always the same. The right would win more victories. The overall economy would still perform sluggishly. And the next scapegoat would step forward. Even when the culprit is obvious, scapegoats still must be found. For example, with the collapse of the financial scams in 2007, blame was shifted to Fannie Mae and Freddie Mac, and even more ridiculously to an obscure rule that had been passed two decades earlier.

For example, private-sector unions became virtually powerless on the national scene. In this environment, jobs disappeared. Disappointed union members would be vulnerable to the relative prosperity of public sector workers, who had pensions and medical coverage. Similarly, people who had lost their pensions to fraudulent banking schemes often became more upset with the relatively comfortable conditions of public sector workers.

One union stood out by its successes. It is not generally called a union, but so long as we can abuse reality by calling corporations people, we can call the Chamber of Commerce a union. This union is so powerful that the present United States must come before as a humble supplicant. This union was at the forefront of the deconstruction of the New Deal.

The time has come to stop blaming the victim. Somehow, we have to learn to fight back in this one-sided class warfare. We have to learn to explain that more of the same medicine that made us sick is not going to cure us. We have to learn to identify the architects of this disaster — the political manipulators, the right wing foundations and their benefactors, and if we want to begin a legitimate fight against unions, let’s start with the Chamber of Commerce.

A Business in Decline?

With the end of unions, what can we do to help those good people who provide strike breakers?

Tuesday, February 22, 2011

Are Teachers Overpaid In The US?

An ongoing meme of those supporting Governor Walker's efforts to crush public unions in Wisconsin is the repeated claims that public workers are overpaid. There is plenty of evidence that this is not so, even with their greater benefits, but I think another piece of evidence may be useful, a cross-country comparison of teacher salaries. This is important given that at the state and local levels, teachers are the most numerous of public workers, and it is hard to compare them with private sector equivalents, who are not that numerous at the K-12 level.

So, according to OECD data reported by the New York Times for 2007, out of 33 OECD countries, the US is #26 in pay per GDP for primary school teachers with 15 years of experience. No, we are not overpaying our teachers, not at all.

OTOH, out of 18 countries listed for 2007, US general practitioners are #1 in pay per GDP. Big surprise.

While teachers are more likely to be publicly paid in all of these countries, doctors get a higher proportion of their pay privately in the US than in these other countries, although a substantial proportion is public. Yet, as has been widely reported, life expectancy and infant mortality rates in the US are way below those of other high income countries. We overpay our doctors while underpaying our teachers, and more generally there is no reason to believe that publicly paid teachers are somehow ripping off their fellow citizens.

Sunday, February 20, 2011

Value of a Statistical Life

Peter mentioned that he wrote a book on the value of a statistical life. I wrote about the subject in two books, neither of which were exclusively devoted to the subject. In The Confiscation Economic Prosperity I showed how the right wing used the concept to lowball the value of regulation.

In The Invisible Handcuffs, I looked at the subject from a different perspective, showing how economists get blackballed for trespassing away transactions into the labor process. Richard Thaler, who did the original research on the subject had the good sense to reject the idea. His adviser would not talk with him after that.

I think both approaches are interesting. Maybe you will take a peak.

Thursday, February 17, 2011

Ground Zero For American Labor: Madison, Wisconsin

I am watching the Ed Show, which is coming out of my hold hometown of Madison, Wisconsin. Big crowds are at the Capitol Square. Not sure how many were out today, but there were 30,000 yesterday. They are out to protest a completely unreasonable move by the new Republican Governor, Scott Walker, to eliminate collective bargaining for state workers. He claims that there is a budget crisis, which is wildly exaggerated, and has made no effort to negotiate with the workers. Both houses of the legislature went Republican in November, and he is trying to ram this change through, threatening to bring out the National Guard. But there has been a rising and peaceful demonstration against this. In response, 14 Dem state senators have left the state, causing a failure of quorum and blocking the move (they were led by Fred Risser, in the state senate since 1956, now the longest serving legislator in the US, who is completely articulate and on top of things).

Make no mistake, Ed Schultz is right. This is of significance across the country. The move in Wisconsin is the front edge of a major battle to crush the US labor movement. This is ground zero for American labor. There are apparently a few moderate Republicans in the senate holding back from backing Walker's plan, but so far Walker has not negotiated. We shall see what happens, and it is very important, whatever the outcome.

Back in the News: The Embarrassment Known as the Value of a Statistical Life

Some economic ideas thrive only in the darkness: they are simply too weird and half-baked to withstand public scrutiny. Perhaps no concept better exemplifies this than the value of a statistical life, the sum of money that supposedly measures the value of a life saved or sacrificed by a government program. Few nonspecialists pay attention to the slow trickle of research articles on the topic, although the spotlight descends every few years, usually because of a scandal involving government proclamations that some people are worth more than others. (The prime case was the dispute that broke out over the economic analysis in the third IPCC report, which pegged the monetary value of an American life at ten times that of a Chinese or Nigerian life. The numbers were subsequently crossed out.)

Today’s New York Times draws our attention to the topic in a less charged context, the discrepancy between VSL’s posted by different federal regulatory agencies. It is a small issue in the larger scheme of things but still illuminating in what it reveals about the economic profession. (I should also admit that my interest is probably larger than yours, since I wrote a book on the subject 15 years ago.)

It is quite true, as the article reports, that agencies assign monetary values to human life in benefit-cost analyses. It is true that their numbers are based, more or less, on the work of Kip Viscusi and a few of his colleagues. It is also true that the numbers are drawn from regressions on wages, with the intention of identifying a wage premium for physical risk after controlling for other factors that affect labor market outcomes. Those parts of the story are correct.

What’s more important is what is missing:

1. The theoretical model underpinning all work in the field is vintage 1960s supply-and-demand analysis. There is no search and matching, no transaction costs, no bilateral bargaining, no repeated interaction between employer and employee, no unemployment. None of the VSL honchos, from Viscusi on down, have bothered to try to construct a model of wage compensation for risk using the methods all serious labor economists have now adopted. In fact, they would have a hard time doing this: equimarginal outcomes (of which wage compensation for risk is one) are few and far between in modern labor analysis.

2. The regression methods employed in the VSL studies are primitive and sloppy. They rarely account for obvious endogeneities in observed labor market phenomena. They are notoriously sensitive to omitted variables (as I showed in a paper I coauthored back when.) They don’t even take care of the basics, like accounting for the effects of grouped data (such as average injury rates assigned to individuals according to their industry or occupation) on significance estimates. It’s a real methodological backwater.

3. Practitioners seldom discuss the embarrassing fact that their wage regressions produce different values of life for different subsamples, without any obvious justification. Men’s lives are worth more or less than women. Whites are worth more than blacks. The lives of unionized workers are worth more than those not in unions, except when it’s the other way around. In fact, subsample results jump all of the map, a sure sign that the econometrics are not leading us to a stable underlying relationship.

4. The whole enterprise is conceptually vacuous. Are we identifying the willingness to pay for safety or the willingness to accept risk? (What difference do occupational safety regulations, which ostensibly set the default, play?) Why should wage rate differentials be entrusted with assigning the value of life and health? On what theoretical ground are these choices privileged over all other means of assigning values? How do we reconcile the view that workers are fully compensated for the risks they face at work with the all-too-evident politics of health and safety regulation? Why would workers forego this compensation by demanding tougher regulation? Why don’t employers factor in the ability to pay lower wages when they assess new regulatory demands? Why aren’t they funneling gobs of money to their safety consultants in order to cut wage costs without government prodding in the first place? Why is there such a complete disconnect between the world of the VSL “experts” and the one seen all over the world in the politics and law of workplace safety?

In the wake of the financial crisis, macroeconomists have been on the defensive. How could they have missed the buildup of asset bubbles and financial vulnerabilities, cheering on the very policies that brought us to the brink? But it isn’t only this particular tribe: as the VSL morass demonstrates, there are other clumps of cultishness in the profession—fields and subfields whose reputations are built on mutual citation and a willingness to set aside serious intellectual standards. In the end, the problem is that economics is too often able to insulate itself from hard criticism: there is seldom a career cost to being shown to be in error. The questions on the table are why and what to do about it.

Wednesday, February 16, 2011

What Social Security Deficit?

A lot of folks are giving our President credit for this:

Now, you talked about Social Security, Medicare and Medicaid. The truth is Social Security is not the huge contributor to the deficit that the other two entitlements are.

I would say too much credit – although in fairness the President was responding to this question:

You’ve been talking a lot about the need for tough choices in your budget, but your plan does not address the long-term crushing costs of Social Security, Medicare, Medicaid -- the real drivers of long-term debt. Can you explain that?

Kevin Drum does deserve a lot of credit:

But unless you believe that the United States is literally going to collapse in the near future, Social Security isn't. Period. The weird thing about this is that Social Security isn't even hard to understand. Taxes go in, benefits go out. Unlike healthcare, which involves extremely difficult questions of technological advancement and the specter of rationing, Social Security is just arithmetic. The chart on the right tells you everything you need to know: Right now, Social Security costs about 4.5% of GDP. That's going to increase as the baby boomer generation retires, and then in 2030 it steadies out forever at around 6% of GDP.

A lot of the current Tea Party hysteria has to do with the current Federal deficit and as Kevin’s chart shows, we are currently running Social Security surpluses. In fact, we have been running surpluses for quite some time adding to the Trust Fund’s assets. Some projections have currently promised benefits outstripping tax revenues such that the Trust Fund’s assets may be depleted in just over 30 years. Fine – then we may have to do some minor changes in either the pay-ins or pay-outs in the future but Social Security is not part of the alleged Federal deficit crisis. But that’s never stopped the modern leaders of the Republican Party from raiding the Trust Fund to bankroll the General Fund irresponsibility that they have created over the past 30 years.

Tuesday, February 15, 2011

Why Does Boehner Not Care About Unemployment: We’re Broke or Just Stupid?

Ed O’Keefe gets the facts right. Federal employment in 2010 was 2.65 million as compared to 2.63 million in 2002. As he notes, Federal employment per 1000 in US population actually fell from 9.1 to 8.4. It was 13.3 in 1962:

Still others noted that the size of the federal workforce compared to the overall U.S. population has dropped steadily since the 1960s, thanks to a booming population and cutbacks made during the Reagan and Clinton years.

Brian Beutler reports the latest from the Speaker of the House:

If House Republicans succeed in cutting tens of billions of dollars in discretionary spending over the next six months, some of the most immediate victims will be federal employees, many of whose jobs will be slashed as their agencies pare back. At a press conference in the lobby of RNC headquarters Tuesday morning, House Speaker John Boehner (R-OH) shrugged this off as collateral damage. "In the last two years, under President Obama, the federal government has added 200,000 new federal jobs," Boehner said. "If some of those jobs are lost so be it. We're broke." ... Boehner didn't cite a source for the claim that Obama had added 200,000 employees to the federal payroll.

We truly are ruled by idiots!

Monday, February 14, 2011

Demonstrations Spreading To Sunni Arab Oil Exporters?

In an earlier post I noted that most of the predominantly Arab Sunni nations with anti-government demonstraters were not substantial oil exporters (and also were generally net food importers). I noted the exceptions on not having demonstrations of Morocco and Syria, which continue to be exceptions, despite a few rumbles in each, and various commentators in the US predicting that Syria will get it. We shall see, quite possibly a matter of wishful thinking.

On the oil exporter side Algeria was already noted as a partial exception, and indeed demonstrations appear to have returned there. Also, the first Gulf oil exporter to have demonstrations has joined the headlines, Bahrain. Regarding Algeria, I have already noted that it has an unpleasant past of a reasonably democratic election having its results overturned by a military coup, with that regime still in power, with their clearly being ongoing resentment. I also note that while Algeria does export oil, it is 23rd in the list of nations for oil exports per capita, so it is not a major oil exporter.

Bahrain is somewhat higher on that list, but it has the unique problem for a Gulf state of having a Shi'i majority (about 65% of the population) while being ruled by a Sunni monarchy. There have been some efforts to loosen rule a bit there (local elections allowed), but there have been long ongoing charges of anti-Shi'i discrimination by the regime, so this is not your ordinary Arab Sunni state. Also, Bahrain has long been the Gulf HQ of the US Navy's 5th fleet, which has also long been a source of substantial resentment by much of the population.

There are reports that there may be a re-eruption of demonstrations in Iran. Of course, it is neither Arab nor predominantly Sunni, and has its own history of political problems, including quite recently, despite its oil exporting status. On that one, we shall see.

Along with forecasts of trouble in Syria, I keep reading forecasts by various commentators that there will be demonstrations in Saudi Arabia. My take on that is that this is wishful thinking. Do not count on it, in fact, I forecast that there will not be.

OTOH, there are rumblings in Libya, where Gaddafi has been the longest in place dictator in the Arab Sunni world. May not come to anything as he has long been spreading the wealth, but he has been in so long and been so repressive, that his time may well be up, or at least there might be a challenge to his rule.

Sunday, February 13, 2011

Austerity -- Force Molting the American Working Class

Michael Pollan described how laying hens are force molted -- deprived of food and light and water in order to squeeze out some extra eggs before they die. This practice reminds me of the mantra that politicians spout: Everybody has to make sacrifices (except for the rich and powerful who need more tax cuts and deregulation). Anyway, capital can always find cheaper hens in the impoverished corners of the world.

"… the American laying hen, who passes her brief span piled together with a half-dozen other hens in a wire cage whose floor a single page of this magazine could carpet. Every natural instinct of this animal is thwarted, leading to a range of behavioral “vices” that can include cannibalizing her cagemates and rubbing her body against the wire mesh until it is featherless and bleeding. Pain? Suffering? Madness? The operative suspension of disbelief depends on more neutral descriptors, like “vices” and “stress.” Whatever you want to call what’s going on in those cages, the 10 percent or so of hens that can’t bear it and simply die is built into the cost of production. And when the output of the others begins to ebb, the hens will be “force-molted” -- starved of food and water and light for several days in order to stimulate a final bout of egg laying before their life’s work is done."

Pollan, Michael. 2002. "An Animal’s Place." The New York Times Magazine (10 November).

Thursday, February 10, 2011

Why the Efficient Market Hypothesis (Weak Version) Says Nothing about the Ability to Identify Bubbles

One answer we keep hearing to that entirely reasonable question, “Why didn’t economists predict the crash?”, is that economic theory, in the form of the Efficient Markets Hypothesis, proves that reliable prediction is impossible. Sure, it is argued, some people like Brad Schiller and Dean Baker were jumping up and down and pointing to a housing bubble, but there are always Cassandras, and it is purely coincidental that these particular Cassandras turned out to be right. No doubt there are a range of other economists saying all sorts of things today, and in retrospect a few of them will be right too. But no one outpredicts the market on a regular basis, so there is no reliable way to know whose predictions today will prove correct in the future. This, we are told, is the lesson we need to learn from the EMH.

The logical fallacy here is so obvious that I would not bother with this post if it were not for the persistence of the EMH defense. So here goes.

First, for those not already versed, there are two levels of the EMH. The strong level says that market prices reflect the fundamental forces acting on an economy: there is no better measure of the true opportunity cost of something than its market price, or prediction of the future supply and demand conditions than its appropriate future, etc. This is known to be false, due to systematic biases and anomalies like overshooting, calendar effects, etc. That is not at issue.

The discussion largely centers around the weak version which says that, while market prices may not always be a great guide to real economic forces, their movements are not systematically predictable. At every moment, prices reflect all the forecasts of all the market participants who, between them, have access to all potential information and ways of utilizing it. A price moves only when new information arises. But to be truly new, this information has to be unpredictable—otherwise it is simply an inference from information that already exists. Because the information is unpredictable, so is its effect on prices. The randomness of price movements in turn implies that no one can outperform the market in betting on where they will go.

I have no problem with this. The fallacy arises when this argument is invoked to deny the possibility that economists can identify bubbles in real time. If you’re so smart you can spot a bubble, why aren’t you rich? If people could spot bubbles with any predictability, then the EMH would be wrong—but we know it’s right.

Let’s put aside the possibility that even the weak EMH can be wrong from time to time. We don’t need to go there; the error is more basic than this.

Let’s put ourselves back in 2005. It is two years before the unraveling of the financial markets, but I don’t know this; all I know is what I can see in front of me, publicly available 2005 data. I can look at this and see that there is a housing bubble, that prices are rising far beyond historical experience or relative to rents. The “soft” warning signs are all around me, like the explosion of cheap credit, the popularity of credit terms predicated on ever-rising prices, and the talk of a new era in real estate. Based on my perceptions, I anticipate a collapse in this market. What can I do?

If I am an investor, I can short housing in some fashion. My problem is that I have no idea how long the bubble will go on, and if I take this position too soon I could lose a bundle. In fact, anyone who went short in 2005 and passed on the following two years are price frothery grossly underperformed relative to the market as a whole. Indeed, you might not have the liquidity to hold your position for two long years and could end up losing everything. Of course, it is also possible that the bubble could have burst a year or two early and your bets could have paid off. What the EMH tells us is that, as an investor, not even your prescient analysis of the fundamentals of the housing market would enable you to outperform more myopic investors or even a trading algorithm based on a random number generator.

The logical error lies in confusing the purposes of an investor with those of a policy analyst. Suppose I work for the Fed, and my goal is not to amass a personal stash but to formulate economic policies that will promote prosperity for the country as a whole. In that case, it doesn’t much matter whether the bubble bursts in 2006, 2007 or 2010. In fact, the longer the bubble goes on, the more damage will result from its deflation. At the policy level, the relevant question is whether trained analysts, assembling data and drawing on centuries of experience in financial manias, can outperform, say, tarot cards in identifying bubbles. The EMH does not defend tarot.

To profit from one’s knowledge of a market condition one needs to be able to outperform the mass of investors in predicting market turns, which the EMH says you can’t do. Good policy may have almost nothing to do with the timing of market turns, however.

Omar Suleiman and the Job Title that Dare Not Speak its Name

So what is it with these American press reports from Egypt? Why are print journalists unable to write and broadcast journalists unable to say the words “Omar Suleiman, Head of the Secret Police” or even “Omar Suleiman, director of intelligence services under Mubarak”? Has anyone else noticed this? What could possibly explain this across-the-board withholding of core information?

Job Killing Spending Cuts

The Republicans have come up with a list of spending cuts that appear to sum to a mere $35 billion a year – sort of pennies on the dollar as far as balancing the budget without tax increases. In that list is a reduction in the IRS budget of $593 million, which will make tax evasion even easier. Kent Hoover, however, is more concerned with what is being cut – as we all should be:

Many of the budget cuts would come in programs that are dear to Obama’s heart, including spending on scientific research, loan programs to support alternative energy, and infrastructure investments. Let’s start with research. Republicans propose cutting $1.1 billion from the Department of Energy’s Office of Science, which is the nation’s largest supporter of basic research in the physical sciences. The plan calls for a $1 billion budget cut at the National Institutes of Health, the federal government’s medical research agency. The Centers for Disease Control would see its funding drop by $755 million. Agricultural research would be cut by $246 million.

Not exactly a recipe to promote future economic growth – is it? Public investment not only promotes long-term growth but is also an effective means for reducing the current aggregate demand gap. Of course, some might argue (incorrectly in my view) that a sizeable portion of the 9 percent unemployment problem comes from a mismatch of job opportunities and the current skills of those looking for work. But if this is the new conservative excuse for massive unemployment – then please explain why the Republicans want to reduce spending on jobs training by $2 billion?

Why Is Obama Channeling Beck And Palin On Egypt?

It looked for awhile as if the Obama administration was going to side with the demonstraters in demanding that Hosni Mubarak resign, and there was even a unanimous resolution out of the US Senate to this effect. But the administration has been backtracking since, appearing to support maintaining Mubarak in power for some unspecified transition period, even as the street demonstrations increase in size. Are they channeling the Glenn Beck-Sarah Palin line that if Mubarak goes, Egypt will go radically Islamist and we will end up with a radical Caliphate from Mauretania to the Philippines?

This is more mysterious given that a bipartisan Working Group on Egypt was formed last spring, with members ranging from Human Rights Watch member, Tom Malinowski, to former Bush official and neocon, Elliott Abrams, which has been warning that there would be a popular uprising in Egypt against the regime and that the US needed to support this movement. Instead, the administration cut funding for the Endowment for Democracy, which had been developing links with the secular, democratic opposition, and essentially looked the other way at the time of the seriously rigged Egyptian election in November.

Now we know that Israeli leaders very much want Mubarak to stay, as well as the Saudis and Jordanians and some other neighbors, but it is seriously unclear who in the administration it is who is getting to Obama to push a line that seems both morally wrong and politically/diplomatically stupid. Is it the State Department, the CIA, the US military, some or all of the above? Whoever it is, this seems to be a serious mistake on Obama's part, the sooner undone, the better.

Tuesday, February 8, 2011

50 Little Herbert Hoovers and Federal Revenue Sharing

Mark Thoma brings up a couple of related themes. The first being:

Recessions lower revenues and increase the demand for state and local services, and this pushes state and local governments into the red. Since state and local government are required to balance their budgets, this forces forcing them to either cut spending or raise taxes (most are choosing to cut spending).However, since both tax increases and cuts in spending are harmful to employment and growth, as state and local governments bring their budgets into balance it makes it more difficult for the economy to recover.

Those balanced budget requirements force state and local governments to adopt pro-cyclical fiscal policies, which has been recently dubbed the 50 Little Herbert Hoovers problem (I believe Paul Krugman coined this term). This problem is generally well known by at least the school of economists who appreciate what Lord Keynes was saying in his General Theory and one remedy for this problem is countercyclical movements in Federal revenue sharing. But let’s have Mark continue:

If the federal government steps in and helps to close the state and local budget gaps, the negative consequences can be reduced, but budget pressures at the federal level make federal help unlikely. In the worst case, states could face large federal-to-state cost shifts or cutbacks in federal payments as a result of attempts to balance the federal budget, something that cannot be ruled out. That would lower growth even more. Thus, the extent to which Congress chooses to shift costs or reduce payments to the states as a remedy to federal budget problems could be an important factor in the recovery.

My limited contribution is simply the above graph showing the ratio of Federal revenue sharing to GDP over the past half century. Note in particular that this ratio climbed during the last recession and that it reached 3.5 percent during the current one. Given the severity of the recession, some of us would have hoped for even more Federal revenue sharing. But alas – there does seem to be a tendency for some D.C. politicians to adopt Herbert Hoover economics at the Federal level.

Monday, February 7, 2011

The Western Response to the Revolt in Egypt: A Counterfactual

The reactions of US and European political leaders to the democratic uprising in Egypt is dismaying but not surprising. Democracy and human rights are fine words, but other imperatives, like western economic interests in the middle east and the alliance with Israel, carry more weight. The people of Egypt are not ready to determine their own future, our leaders say; first we need many months of oversight by a government led by the man who headed the secret police for 20 years, and then, after the protests are a dim memory, we can have a properly managed “transition”.

To evaluate a course of action, however, we need an alternative—a counterfactual policy that offers a benchmark against which actual policies can be compared. What would a positive response to the situation in Egypt look like? Here is my suggestion for an ideal western statement:

1. The recent outpouring of political protest in Egypt demonstrates that the prior policies of our countries did not actually uphold the values we claim to believe in. We supported dictators and torturers and largely ignored the democratic rights of the Egyptian people, as well as the economic suffering that was endemic in a country ruled by corrupt, unaccountable elites. It would have been better if we could have reversed course on our own, but we intend to use the current upheaval as an opportunity to reexamine our motives and actions, in order to chart a course which is both ethical and practical.

2. We call for the immediate establishment of a provisional coalition government representing all sectors of Egyptian society. We will support the process for reform they agree upon, providing only that it conforms to the fundamental elements of the Universal Declaration of Human Rights—that it respect the physical security of each individual, freedoms of speech, assembly and association, and the personal rights to conscience and faith. We share the outrage felt by most Egyptians at the denial of the most minimal degree of economic opportunity to those trapped in extreme poverty and expect to work in the years to come as colleagues in the urgent business of finding solutions. We take heart at the courage and seriousness shown by the people of Egypt, and we see rebellion for democracy as an inspiring opportunity, not a threat.

3. We know from history that there is a high likelihood that nations that undergo internal revolutions will be subjected to external attack. In that light, we offer to the people of Egypt our guarantee of the integrity of its borders, a commitment we are prepared to back with military force if necessary. Furthermore, we pledge to maintain the current level of military assistance until new arrangements can be negotiated with a future democratic government. In return, we ask for two commitments on the Egyptian side: (1) The Egyptian military should remain neutral in domestic political contests, not aligning itself for or against any particular faction. It should also refrain, during the transitional process, from any actions outside Egyptian borders. Its primary mission should be to protect the rights of all Egyptians, including peaceful demonstrators and members of minority communities. (2) The Egyptian democratic process should remain demilitarized. No political faction should be permitted to maintain a paramilitary force, explicitly or otherwise. If these commitments can be upheld, the democratic moment can be transformed into a democratic era.

4. While Egypt is not a heavily indebted country, in most years it has been paying 2-3% of its GDP in debt service to foreigners. For a poor country this is a significant burden. For instance, it is more than half of Egypt’s total public spending on education. Essentially all of this debt was acquired during the period of dictatorship. While some of the credit may have been used to benefit the population, a substantial part of it found its way into the private accounts of well-connected individuals. Given this, we are prepared to begin a process of identifying odious debt—debt resulting from loans that lack legitimacy in their origination or which creditors had reason to know was intended for corrupt purposes. We will convene a body of Western and Egyptian specialists to sift through these debts and compile a list of those that should be written off. At this point, based on what we currently know, we expect that odious debt will constitute the majority of the total. While we recognize that, after years of selling and reselling these loans in international markets, it will not be easy to devise a fair basis for assigning the costs of the writedown, nonetheless we will not use this as an excuse to limit or delay it. We hope that a systematic process for writing off Egypt’s odious debt can serve as a model that can be applied to other democracies.

5. We know all too well that our past promises in the realm of foreign aid have fallen far short. We have given less than we said we would, and much of our aid was tied to purchases of our products or policies we were essentially bribing countries to support. We could announce today that all this has changed, but we would not be believed, and rightfully so. With this in mind, we pledge to work with a democratic Egypt in the international effort to construct a new, fairer and more reliable system of economic cooperation based on the principle of global public finance, the use of taxes on international transactions to finance the Millennium Development Goals and similar objectives. We see the revolution in Egypt as a call not only for the end of political repression, but also for the end of extreme poverty. These should be goals for all people everywhere.

Sunday, February 6, 2011

Does Economics Explain The Current Arab Uprising?

Some days ago I posted on the political economic roots of the Egyptian uprising, and I think that michael perelman is correct in putting all that in a broader framework of international political economic domination by the US. However, the degree of importance of economic factors in the broader uprising in many Arab countries now seems to me to be not as strong as one might think.

I do see two clear areas where one can see economic factors. The first has to do with oil. No Arab country that is a major oil exporter (or earns the vast majority of its export earnings from oil) is seeing an uprising, or even any noticeable hints of one, unless one counts the continuing rumblings and instability in Iraq, and Algeria is a borderline case as a somewhat significant oil exporter that has had riots. Oil prices have risen, and it would appear that most of the leaders of the countries exporting lots of oil have been clever enough to sufficiently distribute the rising earnings from this so as to tamp down any incipient unhappiness about dictatorship or monarchy or excessive friendliness with the US.

The other obvious shock has been the spike in food prices, with the massive drought due to an unprecedented heat wave in Russia, Ukraine, and Kazakhstan last summer playing the leading role in this, with something on the order of a 10% decline in world wheat production resulting. Egypt is the world's largest importer of wheat, and pretty much all the other Arab countries with demonstrations or riots are also importers of food to some extent, and almost all of wheat in particular. So, there we have a neat story. Those with rising foreign earnings from oil exports have not had political upheavals (except maybe Algeria), while those more strongly dependent on food imports and thus suffering shocks that especially impact the poorer parts of their populations have almost all had uprisings.

Beyond those two fairly clear cut matters, all else is very murky. This can be seen by considering the two reasonably large, non-oil exporting and mostly Sunni Arab, states that have not had actual demonstrations or riots, although both have had rumors and threats of same: Morocco and Syria.

It is hard to find much in common between them. Both have lower per capita GDPs than either Tunisia or Egypt, the countries with the most serious riots and demonstrations. Both have greater inequality as measured by official Gini coefficients than Egypt (who has the lowest Gini of any Arab nation), although Morocco has slightly greater inequality than Tunisia (Gini of 40.9 with Tunisia at 40.0, while Syria is at 37.0 and Egypt at 34.0). However, Morocco has had a higher growth rate than either Tunisia or Egypt, while Syria has had a lower one than either of those countries.

Furthermore, Morocco and Syria are probably at opposite ends in terms of foreign policy and internal politics. Like Jordan, Morocco is a near-absolute monarchy, whose king is a descendant of the Prophet Muhammed and which has very friendly relations with the US, and less hostile relations with Israel than many Arab states, although has not had a peace treaty like Egypt or Jordan. Ba'athist Syria is Arab nationalist socialist (indeed was unified officially with Egypt a half centry ago in the failed United Arab Republic), and very anti-US and anti-Israel, while being friendly with Iran.

Some attribute the lack of uprisings in Syria, although there have been rumblings put down by security forces, to the population favoring the foreign policy of the regime. Could be. In the case of Morocco, the current king is relatively young and still relatively new in office, and viewed as a reformer compared to his autocratic and long-serving father. Again, there have been rumblings, but nothing too noticeable. It may be that the Moroccan population is cutting a relatively popular new and young king some slack.

Other Arab states that have had demonstrations or riots have had more dramatic political problems or issues, although there is no pattern, beyond the intense cases of Tunisia and Egypt. So, Yemen is the poorest by far, with serious demonstrations; Jordan has a 70% Palestinian population possibly unhappy over policy with Israel and a weak economy; Algeria has had long conflicts with Islamists and a past of a military resisting the results of an election; Lebanon it is a matter of Sunnis rising up to protest the coming to power of Shi'i Hezbollah, and Iraq is just an ongoing mess from the overthrow of Sunni rule by the US invasion (and it is an oil exporter anyway, so not properly in these groups). However, aside from the much greater poverty of Yemen, most of these countries are not all that different in the major economic variables than the two without demonstrations: Morocco and Syria. So it is probably these other political factors that are the source of the greater calm in those two compared to the others.

Reagan and Carter

Today is the centennial of Ronald Reagan, being wildly praised by Republicans, conservatives, and others, even as some point out that many things being said about him now are myths in one form or another. I shall add to this with a few points regarding things that he has been credited with, which were actually due to his much-maligned predecessor, Jimmy Carter, although it is debatable whether or not all of these were ultimately good things.

Before piling on the debunking, let me note that not all that Reagan did was bad. I applaud his willingness to negotiate with Gorbachev when he came to power. I also applaud his willingness to back off the next round of his tax cuts in August, 1982, thus allowing for an easier monetary policy, when the incoming Mexican finance minister arrived threatening a default, which allowed for a recovery from that very deep recession (and thus for his "morning in America" 1984 campaign after 8% GDP growth in 1983). He also discretely held off many more conservative initiatives that he supposedly supported and were pushed for by some of his backers.

Anyway, two things that Reagan receives praise for are the decline in inflation during his presidency and his support of the Mujaheddin rebellion against Soviet rule in Afghanistan, usually placed into the list of things that more generally led to the fall of the Soviet Union, which he widely gets credit for, even though it happened during the presidency of his successor.

Anyway, I am not a monetarist, but maybe I am enough of one to believe that if the Fed really cracks down hard with a super tight monetarist policy, it will eventually reduce inflation while also bringing about at least a nasty recession. That was indeed what Paul Volcker did after being appointed Fed Chairman by Jimmy Carter, with the Fed-induced recession having a lot to do with Carter's failure to be re-elected. Indeed, it was the 1982 deal that brought an end to this super monetarist policy that certainly played a major role in the reduction of inflation, although it was Carter, not Reagan, who initiated it by appointing Volcker.

Also, it was Carter in 1979, who made the crucial decision to aid the Mujaheddin against the Soviets after they conquered Afghanistan. That also is arguably a mixed bag in that of course this would eventually lead to the Taliban controlling Afghanistan and al Qaeda using it for a base to attack the US, etc. Indeed, it was during Carter's presidency that the crucial decision to send Osama bin Laden to Pakistan to assist the Mujaheddin was made by Saudi intel with the concurrence of the CIA, although I doubt Carter was involved with that specific decision, despite his rep for micro-managing, although that reportedly had more to do with who got access to the WH tennis court.

An Excellent Analysis of Empire: Reflecting on Cairo

The United States, like Germany, came late to the empire business. It did not aspire to informal Empire, but rather went to great lengths to undermine the existing empires to open them up for US business. Eric Louw tells the story very well:

Louw, P. Eric. 2010. Roots of the Pax Americana: Decolonization, Development, Democratization and Trade (Manchester: Manchester University Press).

In his account, the US was going to great lengths to undermine Britain's Empire, especially India, even when those powers were allies during the Second World War. He attributes Chamberlain's behavior in Munich to a justifiable fear that dependence on US support in fighting the Nazis posed a greater threat to the empire than the Nazis themselves. He shows that the US made good use of Gandhi in discrediting the British Empire.

Rather than going to the expense and trouble of maintaining a formal Empire, the US preferred finding compliant regimes in important venues. For example, the US could have kept Cuba as a colony, but it got what it needed much more cheaply by keeping friendly governments in place. In contrast, Puerto Rico, which was much smaller, would not pose much trouble as a territory controlled by the US.

The book does not seem to be intended as a radical critique. It does not discuss how this Pax (Pox) Americana proved to be a disaster, leaving people under the rule of Marcos, Mubarak, the Shah, and other such klepocrats and thugs I am anxiously waiting new chapter being written today in the streets of the Middle East.

Saturday, February 5, 2011

Grover Cleveland, Obama's Percursor?

I have been thinking about presidential comparisons with Obama. The closest I could imagine was Grover Cleveland's second administration.

Cleveland was the leader of the pro-business Bourbon Democrats who opposed high tariffs, free silver, inflation, imperialism and subsidies to business, farmers or veterans. His battles for political reform and fiscal conservatism made him an icon for American conservatives. Cleveland was tight with the bankers and the railroad. Maybe he was not so much in love with them as Obama, but it is still pretty disgusting.

Here are my notes from Matthew Josephson's The Politicos:

Josephson, Matthew. 1969. The Politicos, 1865-1896 (New York: Harcourt, Brace and company).

518-9: The second Cleveland administration was intent on restoring business confidence, in part, by reestablishing the gold standard by repealing the sermon Silver Purchase Back of 1890, and the elimination of silver as a metallic basis of money.

519: Tariffs were to be reduced in order to encourage imports to raise customs revenue.

519: Gold reserves were depleted under Harrison. The government would issue bonds to purchase more gold. Bankers, such as August Belmont, J.P. Morgan, and James Stillman, together with a group of German bankers represented by Henry Villard, had the president's ear.

527: In early 1893, Austria was accumulating gold for resumption and Russia for suspected war purposes. In Interest rates were rising and bankers were withdrawing gold from the treasury at an alarming rate.

530: A financial panic morphed into a depression.

530-1: Congress did not like Cleveland, who withheld patronage from Congress, in order to wield this scarce resource. Later to get unpopular measures passed.

531: In June of 1893, Cleveland called a special session of Congress to repeal "unwise laws" relative to the currency.

540: By January 1894, and the treasury, moving on its own, announced the issue of $50 million of 5% 10-year bonds to be sold that not less than 117.223 two-year-old 3%.

540-1: The banks did little to increase the treasury's holdings of gold. They presented their legal tender for redemption, using the gold they received, we loaned the gold back to the treasury.

543: The tariff reduction bill was structured so that it presented little threat to the great trusts.

545: The final tariff bill actually produced significant tariff increases in the most significant industries.

559: By the spring of 1894, people were becoming rebellious. They were even said to have commandeered trains from the southern Pacific and the Union Pacific. The credibility of these claims was an indication of how fearful the ruling class had become.

561: Coxey's "army" was forming. Coxey was a successful businessman, whose program was to have the federal government use its credit to give jobs to the unemployed, especially for public works.

563: Attorney general Olney enrolled approximately 1000 deputy marshals to track down disturbers.
566: The police violently dispersed Coxey's demonstration to the great relief of the establishment.

566: Labor injunctions had rarely been used. Olney perfected the legal weapons by which the military and the police would protect capitalist enterprises.

567: In 1894, following the panic of 1893, employers engaged in intensive wage cutting. This time, workers' resistance became stronger, unlike earlier periods. Almost 750,000 workers engaged in strikes -- the great railroad strike being the most dramatic.

588: While Cleveland and Olney were battling the workers to protect the capitalists, the capitalists were withdrawing their gold from the treasury.

589: By the fall of 1894, the depression became more acute.

590: By August of 1894, the government had exhausted the proceeds of his recent loan and the gold reserves sank the $52 million. Secretary of the treasury, Carlyle, begged the bankers, the deposit gold in the subtreasuries in return for legal tender. The bankers grudgingly relented a bit.

592: In November, Carlisle invited public bids for a second loan, but the bankers were dissatisfied with the terms.

593: The bankers relented, but the proceeds of the loan disappeared within 10 weeks, whereas the earlier loan took 10 months. In other words, massive withdrawals of gold occurred.

595: By January 1895, Cleveland agreed to virtually all of the banker's demands. He asked congress to agree that all new bonds would be gold bonds and that greenbacks and treasury silver notes would be converted into a national bank notes secured by government gold bonds.

596: The bankers, led by Morgan, demanded that the government make sure that the 3.75% bonds be issued abroad and that the gold be purchased with these bonds come from abroad.

599: The administration's financial bill was overwhelmingly defeated in the house in February 1895.

600: "At one psychological moment of the contest, by telephone, a call came from a treasury official who reported that there was less than $9 million in gold coin at the New York Sub-Treasury. Whereupon Morgan is said to have remarked: "Mr. President, the Secretary of the Treasury knows of one cheque outstanding for twelve million dollars. If that is presented today; it is all over." The implied threat in Morgan's words was unmistakable." [In other words, Morgan could bankrupt the government if it refused to accept his conditions.]

601: "Morgan also supervised and controlled for several months the gold reserve of the Treasury. Every banking house and exchange dealer in New York having important European connections was bound to the undertaking by being given an allotment of the syndicate's bonds at profitable rates."