Sunday, June 30, 2013

Glenn Greenwald Shout Out to Dean Baker

"So the last point I want to make is that one of the things I set out to do and I think that Mr. Snowden set out to do and that I know the people at The Guardian set out to do was not simply to publish some stories about the NSA. It was to really shake up the foundations of the corrupted and rotted roots of America’s political and media culture. And the reason I say that is that there is an economist Dean Baker, who yesterday on Twitter wrote that he thinks the stories that we’re doing are shining as much light on the corruption of American journalism as they are on the corruption of the National Security Agency. 
"I think that is true for several different reasons. Number one is if you look at the 'debate' over—the charming, very endearing debate over whether or not I should be arrested, prosecuted and then imprisoned under Espionage Act statutes for doing journalism—What you find is that debate is being led by other people who are TV actors who play the role of journalists on TV. They’re ones who are actually leading the debate and the reason they are doing that is they purport to be adversaries of political power or watchdogs of political power but what they really are servants to political power. They’re appendages to political power."

Saturday, June 29, 2013

Increases in Certain Price Over the Past Ten Years

Paul Krugman provided us certain information on the price of bread and milk as a reaction to a rant from Erick Erickson:
The rest of America is nervous about where their next meal and paycheck are coming from, how they are going to afford to bail their kids out of crumbling schools, and the price of a gallon of milk and loaf of bread that keep going up though Ben Bernanke tells them there is no inflation.
I’m a little surprised that this rant failed to mention the price of gasoline so permit me to provide a similar chart for that. Paul’s graphs (plus ours) show that these prices are volatile but haven’t had much of an upward trend over the past 5 years. But I guess one could say they have risen a bit over the past 10 years. Mik prices as of May 2013 were 28% higher than they were as of May 2003, while bread prices rose by 40% over the same period. And gasoline prices have risen by 135% over this 10-year period. But let’s break this into the period from May 2003 to May 2008 (a period where Federal Reserve policy wasn’t that expansionary) versus the period from May 2008 to May 2013 (where the Federal Reserve has increased the monetary base substantially). Milk prices rose by 40% over the earlier period and have moderated since. Bread prices rose by 37% over the earlier period with the increase over the past 5 years being just over 2%. Gasoline prices are even more fun given how Republicans tried to argue that Obama has doubled gasoline prices as they focus on the change since December 2008 ignoring the fact that this followed a major dip from its height in May 2008. If we use our 5-year period (May to May), gasoline prices soared by 144% during the earlier period and have basically moderated since. Correct me if I’m wrong but I don’t recall Mr. Erickson complaining about hyperinflation when George W. Bush was President.

Friday, June 28, 2013

The Minions of Marginal Revolution

Pour yourself a cup of coffee (or tea if you're like me), pull up a chair and have a look at the comments to a question posed by Tyler Cowen, "Who is the most influential public intellectual of the last twenty-five years?"  Hint: "intellectual" is interpreted rather broadly.

Tuesday, June 25, 2013

"Ned" Snowden: Hedge-Levellers, Frame-Breakers and Whistleblowers

In a comment a couple of weeks ago at Juan Cole's Informed Comment blog, Warren Lunsford called Edward Snowden a "Luddite":
In this Snowden disclosures it appears we are finding standard Marketing Science applied to National Security and Federal Criminal Investigations of Enemies of our County. I would think Snowden is a Luddite. Just as a group of early 19th century English workmen destroyed laborsaving machinery as a protest, we find Snowden attempting the same activity against the application of Modern Technology for National Security.
Lunsford was right but for the wrong reasons. There is indeed an important parallel between Snowden's actions and the frame-breaking of the Luddites (as well as the hedge-levelling of the commoners resisting enclosure). But Lunsford got his chronology backward.

The enclosures of the commons and the mechanization of industry were usurpations that disrupted long-established regimes of property and legality. The real innovation here was the criminalization of protest against actions that previously would themselves have been regarded as violations of acknowledged rights.
The law doth punish man or woman
That steals the goose from off the common,
But lets the greater felon loose
That steals the common from the goose.
Nicholas Blomley (2007) wrote about "the consequential and often contradictory role of material objects in producing enclosure" emphasizing "the important work that hedges did, physically, symbolically and legally, in the dispossession of the commoner." I would argue, as did Marx, of course, that machinery performs a similar function of physical, symbolic and legal dispossession of labor power from the worker as does information technology dispossess citizens of their privacy.

This is not to say that machines or IT, any more than hedges, are culpable for the dispossession. That would be to reduce them to their physical aspect alone. Rather it is the interaction of this physical aspect with its symbolic and legal interpretations that resulted and results in dispossession.

The Infernal Errors of Dan Brown

Just finished reading Dan Brown's Inferno while in Italy.  I know I should not bother correcting stuff, but for this book he declares at the beginning, "All artwork, literature, science, and historical references in this novel are real."  So, he is inviting closer scrutiny than in earlier books, where he definitely stretched and invented and distorted lots of books, but avoided such claims.  Here are some errors of fact in this book (which is a fun read anyway, although formulaic).

p. 95: "To this day, modern banks use the accounting method invented by the Medici - the dual-entry system of credits and debits."  Wrong.  It was first used in Pisa where I sit at this moment a good two centuries prior to the Medicis getting into banking. BTW, the oldest continuously existing bank in the world is also here in Tuscany, the now-troubled Monte dei Peschi di Siena, where its HQ still is since it was founded in 1472, which is the period of the Medicis.  [Correction:  Double entry accounting was not invented in Pisa, but in Florence.  However, it was initially done by merchants in the late 1200s prior to the Medici, although they may have been the first to use it in banking.  Brown is not as far off on this matter as I initially suggested.]

p. 96:  "You can't get into the [Boboli] gardens from here.  The entrance is way over by the Pitti Palace.  You'd have to drive through Porta Romana and go around."  False.  From where they were standing just outside of the Porta Romana, southern entrance to Old Florence, there is an entry to the gardens just to their right, a few meters away, not requiring going through the Porta Romana.

p. 103 (and related pages):  A graph of world population is shown starting 2 million years ago, which, with this scale highly magnifies recent growth while not really showing that the growth rate of world population has been decelerating since the mid-1970s.  It is repeatedly declared, including by a character with an IQ of 208, and never questioned, that it is a "mathematical certainty" that exponential population growth is simply continuing at a constant rate with no mention of the slowdown.  It is mentioned that world population might reach 9 billion by 2050.  The latest estimates are that this level might be reached later and might be the maximum world population will ever reach.  Population growth is almost certainly going to go negative before the century is over due to the spread of falling birth rates across more and more countries, which is happening.

p. 106: "If we head northeast, we'll reach the palace."  From where the characters were at that point (having entered Boboli Gardens by jumping over a wall near the southern entrance), the palace is northwest, not northeast.  The error of the location of the palace is repeated throughout the coming pages.  It is on the northwest end of the gardens, not the northeast.

p. 136: an even more ridiculous figure with rates of growth of various variables stuck on top of each other so that they all appear to converge at a point at the right end of the figure.  Some of these are extremely misleading.   Thus, one is the rate of growth of the demand for fresh water.  Yes, that is growing, but the rate of growth of the supply of clean fresh water has been growing more rapidly as a rising percentage world population  obtains clean water.  I will note that some of the variables do reflect real problems, such as species extinction and overexploited fisheries.

pp. 141-142:  He has the Vasari corridor starting at the northeast end of the Boboli Gardens and going east across the Arno River.  It is at the northwest corner (near the palace) and goes basically north and a bit west across the Arno.

pp. 144-145: "A quick Internet search led him to  information about a prominent nineteenth-century mathematician and demographer named Thomas Robert Malthus, who predicted a global collapse dut to overpopulation."  I do not think anybody has ever described Malthus as a mathematician, although arguably he was a demographer.  In any case, besides being a minister, he was the first Professor of Political Economy in Britain, and he did not predict "global collapse."  He did predict ongoing poverty and stagnation due to overpopulation, but not this more dramatic outcome.  That would come with some of his followers, particularly in the 1970s, when this book would have been more timely.

There are numerous repetitions later of the inevitably of  global collapse due to overpopulation, accompanied by such statements as "The mathematics is indisuputable" (p. 214).  Nowhere does Brown ever let any character remotely bring up the numerous well known issues questioning this that are mentioned above.

p. 294: "In the 1940s, Nazi scientists had dabbled in a technology they'd dubbed eugenics..."  The term was invented decades before the Nazis and was highly respected and supported by many progressives in the US and elsewhere.  It was the Nazi embrace of this already dubbed and established eugenics that made it become a disrespected movement.

p. 324: "Architectrually speaking, the word basilica defined any eastern, Byzantine-style church erected in Europe or the West."  The first buildings to which the term was applied were built in Rome during the Roman Empire period, prior to the Byzantine period.  The term moved east initially, and more generally is a church term tied to having a saint buried or strongly associated with the building
[Addition: The first basilica was built in 184 BCE in Rome by Cato the Elder.  They were originally public building located in the forum of a major  Roman city.  Their crucial architectural  detail was the presence of colonnades in the interior to create separate spaces, not a dome, although some do have domes.]

Sunday, June 23, 2013

Border Security as Militarized Keynesianism – Outsourced

I think we have found a proposal to increase government purchases that Republicans like:
Leahy said a proposal drafted by Sens. Bob Corker (R-Tenn.) and John Hoeven (R-N.D.) “reads like a Christmas wish list for Halliburton.” The amendment requires implementation and activation of $4.5 billion in technology and equipment to achieve full surveillance of the U.S.-Mexico border. “I am sure there are federal contracting firms high-fiving at the prospect of all of the spending demanded by some of our friends on the other side in this amendment,” Leahy said on the Senate floor. Leahy criticized the GOP-sponsored language for waiving standard federal contracting rules. “That is a potential we must watch out for — for waste and fraud,” he said.
Normally – this kind of largesse for military contractors should be roundly condemned by those who care about fiscal responsibility and/or efficient allocation of resources. But we are far below full employment and this seems to be the only form of stimulus we can expect from the modern Republican Party.

Thursday, June 20, 2013

Robert Reich and Life of "Pie"

AFL-CIO: "The rich keep getting a bigger share of the economic pie while everyone else’s share keeps shrinking. What should be done to reverse this trend?"

Sandwichman: "Stop growing "the pie." Restore the commons instead."

Bob Reich: "They go together. Economic growth doesn't have to result in more consumption of material goods. It can also result in a better environment, better public health, better education. All growth does is create the economic capacity to do these things. How we use growth -- either for more consumer goods of for more public goods (the commons) is a political choice."

Sandwichman: "There is a very large literature that disagrees with that assumption, Bob. A good place to start would be with Jonathan Rowe's "Our Common Wealth" or the 1995 Atlantic Magazine article on the GDP Jonathan co-authored. Also the commons is not just another term for public goods. See Elinor Ostrom's Nobel Prize winning work on the commons."

Tuesday, June 18, 2013

Megan McArdle: As the Lump Crumbles...

At the Daily Beast, Megan McArdle tries to defend herself from charges that she has committed the dread Lump of Labor Fallacy (Why Aren't We Creating Enough New Jobs?) -- but wants to have it both ways.
Last Friday, I wrote a piece about When Work Disappears. On twitter, by email, and in the comments, I got pushback. Wasn't I committing the Lump of Labor Fallacy, assuming that the jobs that were disappearing meant permanent unemployment? 
No, but I can see why people were worried. Let me explain.  
For starters, let me define the Lump of Labor Fallacy for those who don't fill their spare hours by reading classical economics texts. Or rather, let me let The Economist define it for you.
After citing the "one of the best known fallacies" BS from The Economist's Economics A to Z, Ms. McArdle asks: "Is that what I am worrying about? Am I under the delusion that when we lose 10,000 steelworker jobs, that necessarily means 10,000 fewer people working?"

McArdle then answers her own question: "No, not at all. Nonetheless, I am worried about unemployment at the bottom of the economy..."

It doesn't dawn on McArdle that she is no exception. If she is not guilty of the alleged Lump of Labor Fallacy (and I agree with her that she isn't), then on what basis does she assume that the fallacy claim is valid for other people? Maybe if instead of relying on The Economist's Lump of Labour hackery, Ms. McArdle would consult a peer-reviewed economic journal article...

"Why Economists Dislike a Lump of Labor"
"The lump-of-labor fallacy has been called one of the “best known fallacies in economics.” It is widely cited in disparagement of policies for reducing the standard hours of work, yet the authenticity of the fallacy claim is questionable, and explanations of it are inconsistent and contradictory. This article discusses recent occurrences of the fallacy claim and investigates anomalies in the claim and its history. S.J. Chapman's coherent and formerly highly regarded theory of the hours of labor is reviewed, and it is shown how that theory could lend credence to the job-creating potentiality of shorter working time policies. It concludes that substituting a dubious fallacy claim for an authentic economic theory may have obstructed fruitful dialogue about working time and the appropriate policies for regulating it."

Theodore Kaczynski's TED Talk

There is, of course, no such thing.

Fred Hiatt Outs Self As Total Social Safety Net Hysterian

In (now yesterday's) Washington Post, editorial page editor Fred Hiatt makes it clear that he is one of the most out there of Washington "liberal" social safety net hysterians, totally obsessed with cutting benefits for Social Security and Medicare, no matter what.   Dean Baker duly takes him to task on various fronts, including that taxes could be raised (and even Republicans are willing to do so to avoid cuts in those programs), defense could be cut more, and there is no guarantee that if liberals go along with cutting those benefits, the money will go to discretionary non-defense spending as Hiatt wants rather than yet another round of tax cuts for the rich See .  I have a few additions to Dean's worthy screed on this.

One is the matter that Hiatt seems particularly incensed that Congressional liberals have not jumped on Obama's proposal for a chained CPI for COLA adjustments to Social Security.  Hiatt completely ignores that there is an alternative CPI for the elderly that shows substantially higher rates of price increases for goods purchased by the elderly than the non-elderly, with the still rapidly rising medical care costs a main reason for this, even if that rate of increase is decelerating.  A chained version of that is probably conceptually the best one to use.  As it is, Hiatt simply does not care what is fair or reasonable.  He just wants to have those future benefits cut now, blankety blank, no matter what the rationale.  After all, if we do not cut the future benefits now, we might have to cut them in the future!!!

Like many other VSPs who regularly pat each other on the back, such as Bowles and Simpson, he is clearly upset that the recent declines in the budget deficit have taken the pressure off for a grand bargain of tax increases and spending cuts, with social safety net cuts the centerpiece of this.  What is funny is that he fails to notice that this recent decline in the deficit is in fact partly the result of what is effectively a grand bargain that has now been struck, although admittedly a pathetic and stupid one and not done so in any coordinated way: the ending of the Bush tax cut for the rich and the ending of the Obama fica tax cut for the middle class and poor along with the spending cuts mandated by the inane sequestration.  Sure, this is not what these good government goo goo VSPs think should be done, but they are living in la la land if they think this totally dysfunctional Congress is at all remotely able to have any sort of sensible negotiation on this matter, if indeed such were really needed, which is highly questionable in the current situation.  They would rather blame Obama anyway, even though he caved to the VSPs and offered the chained CPI for SS, only to have everybody in both parties in Congress shoot it down, well aware that the public does not like it at all.

Something that is important is that Fred Hiatt is an especially influential VSP, much more so than most, who only rarely surfaces in such a public way as he does here and whose role is probably not that well known by the broader public.  His influence on the editorial WaPo page is certainly why few columnists there go against his arguments, with Harold Meyerson being about the only one I can think of who does so on any regular basis.  While some simply ignore the topic, several other supposedly nominally liberal columnists there parrot the line of Hiatt, including Robert J. Samuelson and Ruth Marcus.  And, of course, all their conservative columnists also agree that Social Security and Medicare should be cut, period, the sooner and greater, the better.

What remains to me a bit mystifying is how he and some of these others managed to get themselves so obsessed and in such conniption fits over this.  I suspect that it dates back to the 90s when Clinton was pushing the issue, with much talk of setting up private accounts then and of course under Bush as well.  I attribute much of the original push to pressure coming from Wall Streeters like Robert Rubin who saw lots of money for their companies if such accounts were set up.  That has largely fallen out of the discussion, but this consensus among Washington insiders that formed then, has simply remained ("Everybody knows Social Security is in crisis," said Robert Schieffer to John Kerry and George W. Bush during their third presidential debate back in 2004), even though it is clear that this view is highly unpopular with the public, and many of the arguments that these people make have been repeatedly discredited over a long period of time.  This is clearly the general phenomenon, but why somebody like Hiatt is so particularly obsessed himself to the point of writing such a silly column as this one, which is simply crawling with false or distorted "facts," more documented by Dean Baker and his commenters, is something of a mystery to me in the end.

Sunday, June 16, 2013

John Taylor’s Flip-Flop on Federal Revenue Sharing

Paul Krugman compared John Taylor’s testimony in 2009 that Federal revenue sharing was only committed to reducing state government debt versus Taylor’s latest:
Janet Yellen blamed the slow recovery in part on the fact that “State and local governments were cutting spending…” As a matter of national income and product accounting, it is true that cuts in state and local government purchases subtract from GDP, but these cuts are mainly an endogenous consequence not an exogenous cause of the weak recovery.
His latest is the claim that state governments with balanced budget constraints are forced to adopt austerity during recessions. But isn’t this the reason we adopted Federal revenue sharing in the first place. OK, Taylor has resigned from the community of honest economists to join Team Republican but can we point out one consistency in his 2009 testimony and his latest:
Consider the following two charts. The first shows how state and local government purchases have been essentially flat in nominal terms in the past few years.
He also graph nominal purchases back in his 2009 testimony. Odd – don’t macroeconomists normally talk about real purchases, which is how our graph is drawn? In real terms, state and local government purchases have fallen after 2009. They were also showing stagnation in 2008 as the recession got started but they showed a bump in 2009 when ARRA implemented its temporary Federal revenue sharing. Oops – doing this in real terms sort of undermines what Taylor was trying to claim.

Friday, June 14, 2013

Thomas Schelling Gives The Bottom Line On Why We Did Not Blow Ourselves Up So Far In A Nuclear War

For as good account as will probably ever be given on how we are still alive and not having had a nuclear war since 1945, from the man as responsible for this good outcome as any on the planet, see .

I have no further comment on this, which speaks for itself totally.

Paul Krugman's Sympathy for the Luddites

Paul Krugman finally catches up with the Sandwichman:
Mechanization eventually — that is, after a couple of generations — led to a broad rise in British living standards.

But it’s far from clear whether typical workers reaped any benefits during the early stages of the Industrial Revolution; many workers were clearly hurt. And often the workers hurt most were those who had, with effort, acquired valuable skills — only to find those skills suddenly devalued.
As the Sandwichman wrote a little over two years ago (May 7, 2011) in an Open Letter to Paul Krugman:
One of the favorite unintended-consequences stories in economics is the idea that 'technology creates more jobs than it destroys.' This was a standard rebuke to Luddites in the early 19th century, who were portrayed as fearing that machines would create chronic unemployment. It closely resembles the case argued against the mercantilism of the early 18th century by Henri Martyn in Considerations on the East India Trade. The lump-of-labor fallacy appears as the negative version of this story. In fact, the fallacy is sometimes called the Mercantalist or Luddite fallacy.

There is a crucial difference between the two sides of the story, though. The technology creates jobs story is openly embraced by economists and triumphantly played as the trump card in debates over employment policy. The fixed-amount-of-work story, though, is only attributed by economists to Luddites, shorter work time advocates and other 'naive populists' they wish to discredit. In both cases it is the economist (not infrequently, The Economist) speaking, telling the uninitiated to sit down and shut up.

Tuesday, June 11, 2013

From The Big Ear To The Universal Ear

In 1958 a radio silence zone was created in eastern West Virginia around the Green Bank radio telescope.  During the next few years it was thought there might be a way of monitoring of Soviet military/intel communications by catching them bouncing off the moon.  A project was initiated to do just that, the "Big  Ear," with a site selected at Sugar Grove, West VA, about 30 miles from Green Bank and within its radio silence zone, which would make it easier to pick up the signals.  For a variety of reasons this project was discontinued in 1962, but the materials and equipment were in place at Sugar Grove, just over the Shenandoah Mountain range from the central Shenandoah Valley, and became attractive to other customers for other communications purposes.

So it was that the Sugar Grove Naval Station opened in 1969, although with minimal publicity, under the oversight of the Naval Informations Operations Command (NAVIOCOM).  To the few who became aware of this station in the area it was let out that it was involved in long wave communications with submarines, which apparently was a function that it did.  Over time, a variety of obvious pieces of equipment appeared there that could carry out such activities, eventually three large dishes (each much smaller than the originally planned Big Ear), as well as some large circular arrays, all of this readily visible from nearby mountaintops, particularly Reddish Knob on the Shenandoah range, a high point where a James Madison University, Norlyn Bodkin, would find a previously unknown species of plant left over from the ice age, along with a parking lot, where students and many locals would regularly repair for picnics and wild parties, with all those very visible communications devices down below providing fodder for all kinds of amusing speculations.

And then in 1982 James Bamford published a book about an agency whose existence had previously been officially classified, although its existence had surfaced briefly during the 1975 Church committee on abuses by US intelligence agencies.  One upshot of those hearings related to this agency whose existence was still classified was a 1978 act establishing a secret court to determine when this agency (and any others) could listen to telephone calls by US citizens.  The agency was the National Security Agency (NSA), whose initials had long been claimed jokingly to stand for "Never Say Anything," 

Among the more important secrets revealed about the NSA in Bamford's book was about the Sugar Grove Naval Station.  Not only did it communicate with submarines, it also was the top listening post for the NSA on the US East Coast, able to listen to all long distance telephone calls, the technology of that time being that such calls were transmitted by shortwaves, with local calls sticking to cables.  While all such calls could be listened to, at that time only ones using key words and with foreigners were supposedly listened to, but the potential was clear for what could be done, particularly in connection with the NSA being the regular first customer for whatever was the latest Cray supercomputer to roll out of the barns in Chippewa Falls, Wisconsin, which could be programmed to direct such mass targeting of long distance telephone calls.

Well, time and technology have moved on.  The importance of Sugar Grove began to decline in the 1990s as long distance calls increasingly were transmitted via fiber optic cables rather than shortwave transmissions, hence not readily picked up by the ears at Sugar Grove (not to mention that some attention got focused on the even more secret spy satellite operater NRO, whose existence had continued to be classified until then: how widely are they watching people?), although reportedly there was quite a bit of construction there during 2000-04.  I do not know how NSA sweeps up those calls now, but obviously they have the tech, and the computer tech has only massively increased. 

Last year in Wired magazine, Bamford reported that NSA was building a massive new data center in Utah, able to "intercept, decipher, analyze, and store vast swaths of the world's communications as they zap down from satellites and zip through the underground and undersea cables of international, foreign, and domestic networks," as quoted in an article by the superknowledgeable Walter Pincus in today's Washington Post.  Not many paid much attention, any more than many had paid attention in 2006 when USA Today, of all sources, according to Pincus, had reported that NSA "has been secretly collecting the phone records of tens of millions of Americans, using data provided by AT&T, Verizon, and BellSouth."  However, this did trigger some reaction with President Bush defending the program in terms reminiscent of those now defending PRISM, with NSA's ability to do this expanded with the 2008 FISA.

As for Sugar Grove, ironically the announcement of the end came just before Edward Snowden publicly revealed PRISM and related activities by the NSA, amounting to a Universal Ear picking up all telephone calls, not to mention a whole lot emails and other communications.  On April 23 of this year, NAVIOCOM sent an order moving the naval command at Sugar Grove to NSA headquarters at Fort Meade, Maryland.  I have no idea what, if anything, will still happen at Sugar Grove, but I suspect that those dishes and circular arrays will still be around for some time for the picnickers and partiers from around where I live in the central Shenandoah Valley to look at and speculate about while they do their things on top of Reddish Knob.

Barkley Rosser

NSA Leak – Privatization Run Amok

Is Edward Snowden a hero for protecting our liberties or a traitor for undermining our national security? This is indeed a difficult issue for most Americans but as I watched Snowden describe his actions, it struck me that the privatization of our national security may have undermined both noble goals. Some excellent reporting from the Washington Post shocked me as to how far this privatization has gone:
Never before have so many U.S. intelligence workers been hired so quickly, or been given access to secret government information through networked computers. In recent years, about one in four intelligence workers has been a contractor, and 70 percent or more of the intelligence community’s secret budget has gone to private firms ... But in the rush to fill jobs, the government has relied on faulty procedures to vet intelligence workers, documents and interviews show. At the same time, intelligence agencies have not hired enough in-house government workers to manage and oversee the contractors, contracting specialists said.
If the national security buffs in our Federal government were serious about keeping such programs classified, why allow private contractors to be so heavily involved? And when private companies have such access to our private information, where are the protections to our liberties? And with the secrecy involved with these programs, private fraud is made that much easier. The situation created by this privatization run amok is something only Dick Cheney could love.

Monday, June 10, 2013

Debt Alarmism in California

Not all the paranoia about fiscal deficits has been exorcized.  Jim Hamilton tells us that, if interest rates rise, the interest burden on the federal debt will swallow us whole, or nearly.  Where will we get the cash to service this monster?

The short answer is: from the same folks who are collecting all this interest.  Lord knows, there’s plenty of room for tax increases on the wealth-holding class, and there’s no reason why we can’t have a private-to-public flow of tax transfers to offset any increase in public-to-private interest transfers.  More even.  If our economy ever gets back on its feet and away from the ZLB, fiscal multipliers will be small again, and smaller still at the highest income brackets.

The key is to remember that, if the increased government debt is held domestically, we are simply seeing a shifting of net credit positions between the private and public sectors.  If the balance shifts too much toward private net wealth and public net obligation, we have ways to rebalance again.  If interest rates rise, lean on the tax lever; if not, go a little easier.

I hear you ask, what if a significant portion of new public debt ends up in the hands of foreigners?  If they are simply substituting public credit assets for private, our domestic wealth-holders have increased their portfolios of something else, and we can tax them just the same.  If there is a sizeable net increase in foreign holdings of US assets, public and private, then we have a widening payments imbalance to deal with—and that’s the problem, not the fiscal deficits.  (Yes, I hear some say, and fiscal deficits cause current account deficits, which sounds fine as long as you don’t look at the evidence.)

However, we are saddling future generations with difficult problems because of our political shortsightedness today.  They will have more poverty and broken lives to repair because of this endless slump, a less educated society and an infrastructure shortfall because of funding cuts, and above all a climate change problem that may well be intractable.  If we care about future generations, this is what we will deal with today.  Deficit paranoia is not a harmless quirk if it prevents us from spending the money to do what needs to be done.

Sunday, June 9, 2013

From Big Brother to Big Data

Today’s events can spread ripples that influence the far future, but the future can also cast a shadow on the present.  The full meaning of today’s news may be revealed only in retrospect, as foreshadowings of a future we can barely imagine in advance.

I’m thinking of the revelations of the past week concerning the collection and analysis of massive amounts of digital data, the records of our communications, transactions and travels, by the National Security Administration.  They have been parsing all our phone calls (although not the content), as well as every available database maintained by social media, financial institutions and other businesses with electronic data storage.  They were attempting to gain access to Dropbox and may well have accessed other cloud backup services.

There are two interesting questions that, as far as I know, haven’t been asked yet.  The first is obvious: what are they looking for, exactly?  We see vague references to “terrorists”, but that is a slippery term.  First, there are many potentially violent people out there.  Some have connections to radical Islamist groups.  Some adhere to other apocalyptic religions or ideologies.  Some are just crazy.  Are all such threats targeted in this dragnet or only some?  Which?  And what constitutes a threat?  What about radical environmentalists who want to physically obstruct a project they oppose?  Organizers of some future Occupy-type movement? Hackers who try to breach security walls?  Whistleblowers like the ones the Obama administration is so determined to identify and punish?  Who are they trying to find?

The second is deeper and, well, more paranoid.  Some time ago I mentioned in this blog that, by all appearance, killing by profile was becoming an established military tactic.  Targets for bomb attacks, including but not limited to armed drones, were being selected on the basis of statistical profiles.  Given the number of individuals at a particular location, their age and gender, the time of day, whether there was a pattern to their meeting and so on, a decision would be made to blow them up.  It was not necessary to have information on their precise identities or human confirmation of their military activities.  A simple statistical likelihood was sufficient cause.  In the years that have passed the suspicion that profiling was being employed for target selection has become a near certainty.

Indeed, profiling is apparently being used by the security apparatus in other contexts.  It is likely that individuals are being placed on lists that trigger heightened scrutiny at airports or prevent them from flying altogether on the basis of profiling.  Visa applications may receive differential treatment on the basis of statistical models.  For a long time it has been known that the IRS uses profiling to identify which tax returns it wants to audit, although there is supposed to be a wall between their data resources and those of other government agencies.  (How much do you want to bet that there aren’t big holes in this wall?)

So the second question is, to what extent do the profiling activities of NSA and other agencies interface with the profiling models employed to take action against individuals—to restrict, punish or kill them?  The current discussion seems to be based on the assumption that the profiles constructed by intelligence agencies will be used only as an aid to traditional surveillance and investigation.  NSA tells the FBI, watch these guys: they may be dangerous.  Or they tell them, here are several suspects for this crime you should follow up on.  That sounds only a tiny bit Orwellian, nothing to be too concerned about.  But what if that traditional human layer is bypassed, and the profiled data go directly into a profiled action?  Someone is detained at an airport for 18 hours or is subjected to a cyberattack or is assassinated in a country accused of harboring potential terrorists because their factors loaded too strongly?

And this is the shadow of the future falling on us today.  The technology for taking action against individuals automatically via statistical modeling will only become less expensive and more effective over time.  The case for implementing these technologies will be overwhelming, since they will work.  The rest of us will adapt: we will be careful who we communicate with, where and when we travel, what we buy.  We will make sure our factor score remains well below the critical threshold.  Indeed, most people in Europe and North America will not have to worry; their risk of being positively identified will be negligible.  The result will be a modern, clean totalitarianism, with no visible enforcers and lots of space for daily life to go on as usual.

Friday, June 7, 2013

ObamaCare in California – Reuters Rehashes Avik Roy’s Lie

It saddens me that Reuters wrote this:
Healthcare policy expert and Forbes commentator Avik Roy said that prices were in fact going up as much as 146 percent for some people compared with those for individual plans for sale now in California.
There was absolutely no qualification to this claim given and one can see lots of comments to this online post where the readers accepted what Roy claimed as if it were gospel. Yet, days earlier this claim was exposed to be a fraud by several writers including Rick Ungar who also write for Forbes as well as Ezra Klein and Jonathan Cohn. The coverage of how Roy misrepresented this issue was so thorough, it is hard to imagine how these two Reuters reporters missed it. And yet they repeat the claim as if it were the truth. And we wonder why the rightwing spin machine continues to succeed.

Thursday, June 6, 2013

Who Predicted The Crisis-Redux

I probably should not dredge around in this further, but there has been in the last week or so a major outpouring of dicussion about "who predicted the crisis," with a lot of wrangling and some less than pleasant comments being strewn about.  I got dragged into it and should probably leave it alone, but more keeps coming, and I also think there might be a link to developments here at this blog.

Anyway, the main volley and still the main center of this discussion was set off  by Noah Smith, .  (I have just tried this link, which is accurate, but it failed.  He laid out three conditions for having really predicted it fully, actually four.  The main three were to have called the housing bubble, then called the broader financial market collapse deriving from the collapse of the housing bubble, and then to have called that there would be deep recession with a long stagnation afterwards.  Oh, and to really qualify for him, one needed to do this with a fully specified model based on data.  He basically argued that nobody fully satisfied all these criteria, although he makes lots of favorable remarks about Dean Baker, accurately crediting him, I think, with having first called the housing bubble back in 2002, and also arguing that its collapse would lead to a recession, although not necessarily a broader financial collapse nor how deep the recession would be, and also he did not have a fully specified data-based model for his forecasts, although he did use data.  I basically agree with this.

Now most of the rest of the post, after throwing out a few other names (not including me), focused on Steve Keen, who has quite prominently claimed to have called the crisis.  Noah basically jumped all over Steve, even confessing to not liking him personally based on his tweets.  He admits that Steve had an interesting Minsky- based model in 1995, which I happen to be a fan of, but argued that it was not based on data and had various characteristics (such as lots of cyclicity) that made it not all that good for actually forecasting the crisis in the way he prescribed.  At least some of this is true, although I commented on the thread that I thought he was overdoing the harshness of his criticisms of Steve, particularly the personal ones.  I have always found Steve to be personable and lots of fun in person, even though he definitely argues hard, thereby annoying many.  I also noted that Steve has been the victim of a purge at the University of Western Sydney, although I did not fully spell it out there.  But he has.  His department was eliminated as of the end of March.  One can dump on Steve Keen all one wants, but he is currently unemployed as a result of a vendetta by orthodox types in the Australian establishment that has taken down his department, although this is part of a broader bad policy in the educational establishment of Australia.. Anyway, this is a scandal as far as I am concerned.

Anyway, this post set off a massive debate in 179 comments so far that has ranged all over the place, with many vigorously defending Steve, and others attacking him, in some cases more aggressively than did Noah.  As this wore on various other links were made and other people were brought in as suspects or possible predictors. 

One link that did this was in the original post by Noah, to a paper from June 16, 2009, by Dirk Bezemer, who himself claimed to have "called it."  He listed 12 others with how and what they said.  Some of them I know nothing about, although none of them clearly fulfilled all the criteria of Noah.  Those I know of included Dean Baker (first on the list), the late Wynne Godley, Steve Keen, Nouriel Roubini (Baker, Roubini, and Keen received an award at some point for their efforts), Peter Schiff (who also predicted massive hyperinflation and is still doing so), and Robert Shiller.  Roubini stands out from this group in like Dean Baker also calling ahead of time for the housing crash to trigger a recession, although both of them had some details of timing and how it would play out a bit off.  The Bezemer link is .  (Hope these links work.)

Then deep in the debate, Robert Viennau linked to a paper from a couple of years ago by Jamie Galbraith entitled, "Who Are These Economists Anyway?'  I do  not have a solid link to it, but it is linked to in another blogpost out yesterday by Lars Syll, .  Jamie's piece mentions another set of candidates for "who predicted it," including Marxists Patrick Bond and Robert Brennan, Keynesians such as Wynne Godly and people at the Levy Institute, Minsky non-linearians, including the late Peter Albin, me, and Ping Chen, and then "the new criminologists" who focus on insitutions and fraud, Gary Dymski and Bill Black, whom he saw as following his late father's ideas.  (I don't think he mentioned Steve, but maybe I just did not read closely enough.)

This led me to enter the fray, talking about how I had made predictions on the old Maxspeak about the housing bubble, but that these were not available due to the archives being sealed. Although these were initially inspired by Dean Baker and later supported by data from Shiller in his Irrational Exuberance, 2nd edition, Chap. 2 (did not mention that, but is true).  I also noted that though I did not blog on it early, I gave talks about the link between the housing bubble and global financial markets, forecasting a major crash in March and December, 2007 (dates of speeches, I did not pick a time for the crash), with this  insight coming from a Sept. 2006 speech by Timothy Geithner in Hong Kong, of all  people.  I then called that the crash was coming soon in a post here that was picked up by Mark Thoma at Economistsview, http://economistsview.typepad,com/economistsview/2008/07/gradual-decline.html , which led Mark to express a hope that the crash would not happen.  (Although also accurate, this one did not work for me, so here is the original post from here, .) That was based on a model of mine with Antonio Palestrini and Mauro Gallegati, published in Macroeconomic Dynamics in 2011, although the first draft was out in 2005.  Nobody was interested in publishing an ABM of Minsky dynamics somehow prior to the crash.  It was this model that Jamie cited when he mentioned me.

That model was more specifically of the three different kinds of crashes that can come out of a bubble according to Minsky initially and picked up by Charles Kindleberger, in his classic _Manias, Panics, and Crashes_: a sudden fall from the peak, a gradual decline from the peak with no hard crash, and then one with a "period of financial distress" wherein there is a gradual decline for awhile after the peak, followed by a hard crash, which is by far the most common historical pattern according to Kindleberger.  I said in July, 2008 that the global financial markets were in such a period of distress, which had started in Summer 2007, varying slightly depending on the market, and that it looked like a hard crash was coming probably pretty soon, the Minsky Moment, which indeed happend in mid-September after the failure of Lehman Brothers.

I have since with Gallegati and Marina Rosser published a paper in 2012 in the Journal of Economic Issues noting how other bubbles of the period fit into this.  Housing looked like the gradual decline, roughly paralleling its rise, something one would expect more from real estate, particularly residential real estate, where people resist selling their homes when the price is falling, and oil, which in 2008 followed the sudden crash scenario from $147 per barrel in July to around $30 in November, with commodities often more likely to follow this scenario than the other two.  I admitted in my comment at Noah's that I did not anywhere forecast the depth of the recession or the length of the recovery.

An odd spinoff of this is that it is not out of the question that this triggered Max Sawicky to announce that he will open the old Maxspeak archives.  I suspect that he has been planning to start Maxspeak again for some time, but I have also noticed that a "Max" has commented on Noah's blog.  Maybe Max saw my whine about the archives and decided to open them up.  I confess that I was never happy about his sealing them off, but never until that comment on Noah's blog did I ever complain about it as I knew that when he stopped Maxspeak, Max was dealing with a tragic family health problem, and there was no way I was going to give him a hard time about anything then.

 This has become ridiculously long and looks like what Noah disapproves of, people "thumping their chests about having predicted it," although he says that Dean Baker should be praised for not having done so, and clearly one of the things he is annoyed with Steve Keen about is that he does it a lot, with Noah not thinking he deserves to get that much credit for it.  But I need to comment on one more item.

This would be the most recent post by Lars Syll, which on the one hand I appreciate, but on the other I think he does not quite have things right.  He bashes Noah for "bashing the predictors," and then names five people: Dean Baker, Dirk Bezemer, Nouriel Roubini, me, and Steve Keen.  Now, he certainly did bash Steve, but I do not think this characterizes what he said about the rest of us.  He simply linked to Bezemer's paper, but really did not comment on it at length other than to argue that none of those listed by Bezemer fulfilled his own criteria, even if all of them got at least parts of it right.  He is not all that unfavorable to Roubini, although thinking that his mechanism for the recession was off, involving a crash of the dollar, when just the opposite happened at the Minsky Moment, with Bernanke doing a Fed save by buying up $600 billion of eurotrash to prop up the collapsing euro, which was quietly rolled over during the next six months into MBSs (Noah did not spell out all those last details; I did).  Dean Baker he actually said good things about, mostly, even if Dean did not have a full model.  And he really did not comment on my post other than to say that Dean was one of those who did not constantly beat his own drum.  I am doing so here, although I have not done so super-duper often in the past.  As it is, I have to say that Lars overdid how hard Noah came down on all of us, although he definitely came down hard on Steve Keen big time, and promised in some comments to come down hard on Peter Schiff some other time.

I shall close this by noting some quotes that Lars pulled from the end of Jamie's paper, that he had written in 2000, doing his own "claiming," I suppose, :-).  Just a few, and I think he is right on this.  He speaks of "a kind of Politburo of correct economic thinking" that rules the profession.  "They predict disaster where none occurs.  They deny the possibility of events that then happen."  But, "No one of  them loses face, in the club, for having been wrong.  No one is disinvited from presenting papers at later annual meetings.  And still less is anyone from the outside invited in."  And this remains pretty much true to this day.

Barkley Rosser

Wednesday, June 5, 2013

Guest Post: The Logical Inconsistencies of AS-AD

Although I stirred up the dust a bit with my previous posts on AS-AD, I tried to avoid debating the overall merits of the model(s).  I was interested in why AS-AD is more prominent in the textbooks than in other venues, like the blogosphere and policy analysis.  But the desire for a red-blooded debate is out there!  Here is a guest post from Fred Moseley of Mt. Holyoke College that lays out his view that AS-AD should be chucked altogether.

Get Rid of AS-AD, by Fred Moseley

I think that AS-AD is a very bad model, that we should not be teaching to our students, for the following reasons:

1. It is logically inconsistent outside of equilibrium. The AS and AD curves do not refer to separate economic agents making separate decisions about S and D (as consumers and firms in microeconomics), but instead refers to different theories of the relation between output and the price level in the same economy. Outside of equilibrium, these two different theories predict two different levels of output for the same price level; but the same economy cannot produce two different levels of output at the same time.

There are different theories of AS, but all of them are logically inconsistent with the AD curve outside of equilibrium. The original AS curve in the 1970s was derived from the classical labor market. The AD curve, on the other hand, was (and is) derived from the Keynesian IS-LM theory. Thus, the AS-AD model attempts to reconcile Keynes’ theory (in which employment is determined in the output market) and the classical theory (in which employment is determined in the labor market). Keynes must be shouting out from his grave: “No, don’t do it! This is absurd!”

More recent AS curves (e.g. Mankiw’s “sticky price” model) turn AS into a price, which is a function of output, and which thus contradicts AD which is a quantity of output as a function of P.

2. Because of the logical inconsistency between AS and AD, the model cannot explain the adjustment process to equilibrium. For example, in the case of excess supply, the AD curves implies that output should increase in order to restore equilibrium and the neo-classical AS curve implies that output should decrease in order to restore equilibrium. But the output of the same economy cannot both increase and decrease at the same time.  In the “sticky price” model, AS > AD has no meaning, because AD is a quantity and AS is a price.

3. The AS-AD model is empirically unrealistic. The model predicts that AS > AD causes prices to fall, but prices have not fallen since the 1930s (more than a percent or two once or twice). And it is a very good thing that prices no longer fall! Because significant deflation would be a disaster for such a heavily indebted economy as the US. And yet the AS-AD models in the textbooks still present deflation as an unproblematic solution to excess supply. Ben Bernanke, in his real-world job as Chairman of the Fed, is doing everything he can possibly think of in order to avoid deflation. And yet his intermediate macro textbook (co-authored) still presents the AS-AD model and deflation as a solution to excess supply.

David Colander was one of the first to call attention to these deficiencies of the AS-AD model in a very interesting and important 1995 JEP article entitled “The Stories We Tell: A Reconsideration of ASAD Analysis” (9, 3: 169–188.)

We should not be teaching such a logically contradictory and empirically unrealistic to our students. It encourages sloppy thinking and memorization, rather than rigorous and critical and creative thinking.

Mankiw concludes Part 4 of his textbook (on short run fluctuations) as follows:
If you find it difficult to fit all the pieces together, you are not alone. The study of aggregate supply remains one of the most unsettled – and therefore the most exciting – research areas in macroeconomics. (emphasis added)
I argue that the reason why so many students (and professors as well) “find it difficult to fit all the pieces together” is that the pieces do not fit together logically! The pieces – the AD and AS curves – are mutually contradictory. It is not only that the theory of AS is unsettled, but more fundamentally that all the theories of AS are logically inconsistent with the Keynesian ISLM theory of AD with which it is combined.

The fact that students “find it difficult” is a good sign, not a bad sign. It is not a sign that students are not smart enough for the theory, but rather that the theory has serious logical problems, and that students are smart enough to have an intuition about these problems, even though they usually cannot fully identify and articulate them.

One is reminded of Colander’s “precocious student”, who asks probing questions about the inconsistencies between the ISLM model and the ADAS model, and does not receive satisfactory answers from a back-peddling professor, and she decides to switch to another major.

For further discussion of these issues, see my critique of Mankiw’s presentation of the AS-AD model in “Critique of Aggregate Demand – Aggregate Supply: Mankiw’s Presentation”, Review of Radical Political Economics, 2010; vol. 42, 3, pp. 308-314.

Cheap Hustle #2: How to Lie with Statistics

Look at how closely real wages track productivity growth in the U.S. (according to Stephen Gordon):

Maybe you expected a growing gap -- something more like this?:
The difference between the two graphs is largely a reflection of greater wage inequality ("the share of all wages accounted for by the top 1 per cent of wage earners has nearly doubled, from 6.8 per cent in 1973 to 12.9 per cent in 2010" - Mishel), the rapidly growing cost of health insurance and differences between the CPI and the GDP deflator.

When Stephen Gordon talks about productivity being "the only way for people to become better off" the naive assumption would be that he is referring to "most people" or the "average person" but the figures he uses to show that "market forces" ensure that "wages respond to labour productivity" have nothing to do with the average person (median) becoming better off -- they have to do with the wealthiest becoming better off and thereby raising the average (mean). Bill Gates walks into a room and the "average wealth" of the people in the room soars. He leaves and the average plunges.

Darrell Huff (1954) discussed this particular "average income" swindle in a whole chapter, "The Well Chosen Average" of his classic, How to Lie with Statistics. Compensation is not normally distributed therefore the means and medians are far apart. No doubt Professor Gordon will claim a plausible technical rationale for his use of  "nominal compensation divided by GDP deflator." But such a rationale doesn't address the "why you should care" part.

Why should you care that the rich get even richer while the middle class stagnates? Well you should care but not for the reason Gordon implies -- that productivity increases will make you better off. You should care because the productivity gains of the last 40 years or so have done diddly-squat for the average sot. The rising tide has lifted the yachts. Period. Or, to express it in a chart:

Tuesday, June 4, 2013

Crime: Should New York Bring Back Rudy or COPS?

There was a silver lining from the latest garbage from Byron York as it motivated me to check out the BEA data on real government spending on public order and safety (police and fireman ala NIPA table 3.15.6). This spending peaked in 2009 at $297.3 billion (2005$). But forgive me for citing York’s interview with mayor “a noun, a verb, and 9/11”:
But even after his performance guiding New York through the days after Sept. 11, 2001, Giuliani's greatest accomplishment will always be saving the city from a long-term disaster of crime, insolvency and dysfunction. Especially crime. The New York homicide rate peaked under Giuliani's predecessor, David Dinkins. In 1993, Dinkins' last year as mayor, 1,927 people were murdered in the city. In 1998, Giuliani's fifth year as mayor, the homicide rate fell to 629 — less than a third the number he inherited. In Dinkins' last year, there were 85,892 robberies; in 1998, there were 39,003. In 1993, there were 100,936 burglaries; in 1998 there were 47,181.
York’s message is that the last time New York City has a black mayor as its mayor, crime soared but Rudy solved all of that all by himself. Or to put it another way – elect another Republican mayor or DIE! York leaves out at least a couple of details, however. The decline in New York’s violent crimes actually started during the tenure of David Dinkins. Secondly, which is why I checked BEA data, let’s check this discussion of President Clinton’s Community Oriented Policing Services (COPS) program:
The original Clinton plan, enacted as part of a crime bill in 1994, envisioned hiring 100,000 police officers who would walk the streets, visit the schools and get to know the communities they were policing. The federal government paid 75 percent of the cost for three years, with a salary and benefit cap of $75,000 per officer ... Of course, Republicans were against Clinton’s COPS program back then. Sigh. Republicans preferred to focus on punishing crimes and claimed to have issue with the federal government having any say over local government. It was a waste of money, they cried! ... Obama started funding the COPS program again via the stimulus, at a time when police departments couldn’t afford to keep fully staffed.
Reinstating COPS in 2009 was a smart version of Federal revenue sharing. While former mayor Giuliani should be condemned for this only Republicans can handle crime, we should be glad that he at least did not turn down the funding from the Clinton Administration for additional spending on police. Alas, the austerity minded Republicans today abhor such ideas.

Sorry, RJSamuelson, Carter Appointed Volcker, Not Reagan

In today's Washington Post, Robert J. Samuelson wants to praise Paul Volcker and his new effort to get people to trust government.  Fair enough and OK so far, but he proceeds to descend into a massive string of nonsense.  Dean Baker has already dumped on this column, , wherein he notes that RJS thinks the US government has taken on too  many responsibilities, and also fails to note that other nations had falling inflation rates when Volcker was doing his Fed Chair thing, not to mention that real growth after he did so was not nearly as impressive as many have been led to believe. 

However, I think there is more to pound him on in this column, particularly an over-the-top hero worship of Reagan, who is identified as being the man solely responsible for the virtuous things Volcker did, particularly battling inflation. RJS's killer line is, "Volcker was supported by Ronald Reagan; no other plausibe president, Republican or Democrat, would have permitted Volcker to continue austerity until it achieved its goal."  He later bloviates about "the Volcker/Reagan victory over  inflation" and "the triumph of Volcker and Reagan in the 1980s."

Well, allow me to beg to differ.  There certainly was another plausible such president, the man who appointed Volcker in the first place in 1979 and who stood by as Volcker initiated his tight money policies, which played a major role in Carter's inability to get reelected.  There is no reason whatsoever to believe that Carter would not have continued this support, but RJS does not mention the wimp afraid of rabbits in boats once, so busy is he with this orgy of praise of Reagan.

Some might say that the counterfactual of Carter winning in 1980 was nonsense.  But up until the first debate when despite winning on the points, Reagan won the debate with that delightful little phrase, "there you go again," it was very close. Indeed, if the Iran-hostage rescue mission had succeeded, and Reagan had not said his little phrase, Carter might have won.  In April, 2008, he was far ahead of Reagan in the polls just after RR declared that "trees cause pollution."

Even for what RJS thinks Reagan was so great for, Carter did more than Reagan.  The only government agency RR eliminated was the 10-person Council on Wage and Price Stability (CWPS), which was just an advisory board anyway.  Carter eliminated the Civil Aeronautics Board, deregulating the airline industry.  And it was tough guy Carter who boycotted the Moscow Olympics after the Soviets invaded Afghanistan and started supplying jihadist rebels with arms against them.

Curiously, the one extra thing Reagan did was to bust the unions, particularly the PATCO strike.  Ironically, if Carter had been elected, they might not have struck.  They had supported Reagan in the election and apparently thought he would be nice to them. Wrong.

For a long list of not so admirable things Reagan did as president that his fan club conveniently ignores, see .

Monday, June 3, 2013

A Cheap Market Will Always Be Full of Cheap Hustlers

Case in point: Stephen Gordon writes today, at Maclean's Econowatch:
Another popular misconception is that increased productivity means higher unemployment. If the same amount of output can be produced by fewer people, then what happens to those excess workers? This is the “lump of labour” argument, the notion that the quantity of work to be done is a fixed constant. It is also a well-known fallacy: higher productivity increases the demand for labour, because more productive workers are more valuable to employers. Although higher productivity in a given industry may reduce employment in that sector, the increase in total output and income across the economy will create new, better-paying, employment opportunities elsewhere.
Thus Professor Gordon performs the academically-sanctioned equivalent of the thimblerig or the pigeon drop. He will no doubt pull off his swindle with impunity, as have hundreds of economists and economists-manque before him, however much Jonathan Chait may inveigh in vain against debating straw men: "If you’re arguing against an idea, you need to accurately describe the people who hold them [sic]. If at all possible, link to them and quote their argument. This is a discipline that forces opinion writers to prove that they’re debating an idea somebody actually holds."

In his 1891 article, "Why Working Men Dislike Piece Work," David F. Schloss, reported a conversation with a laborer making washers on piece work. "I know I am doing wrong," Schloss quotes him. "I am taking away the work of another man. But I have permission from the Society." It was to those italicized passages that Schloss assigned the name, "the Theory of the Lump of Labour."

The remarkable thing about the laborer referred to by Schloss is that he was working in violation of, not in conformity to, the dictates of his supposed theory. Furthermore, he had permission from his union to do so.

This unnamed washer-boring workman has the distinction of being one of the very few individuals whose spoken words (whether authentic or apocryphal) have ever been cited in evidence of a belief in the alleged lump-of-labour theory. By contrast, for example, the prominent agitator for the eight-hour day, Tom Mann, "looked for the absorption of the unemployed by the distribution of work; while disclaiming the fallacy that there is only a fixed amount of work to be done."

In fact, disclaiming the alleged fallacy had been honed to a fine edge decades before Schloss coined the quaint 'lump-of-labour' sobriquet. The transactions of a miners' conference held at Leeds in 1863 contained an introductory report that astutely mocked the hypocrisy of political economists and employers who, on the one hand, decried the "ignorance and folly" of those who would attempt to regulate grievously long hours, which were supposedly the "infallible and inevitable result of demand and supply" while "constantly telling the men that wages must be reduced in consequence of over-supply [of labor]." Meanwhile, the coal-owners themselves maintained restrictions on the production of coal -- known as "the limitation of the vend" -- from 1771 to 1845.

"Unvarying" is the supposed quantity of labor to be performed, allegedly assumed by the typically anonymous offender against the fallacy taboo.
At the bottom of these contrivances for artificially increasing the amount of employment, there seems to lurk the fallacy of supposing that the labour required to be done in any department of trade, or in the country generally, is a fixed quantity; therefore, in order to secure an aliquot portion of it to the greatest number, the labour must be spread out thin. The teaching of sound Political Economy is directly the reverse of this.
wrote the author of an article on Trades Unions in the Edinburgh Review of 1867.
The League is only an offshoot of the Unions... Their theory is that the amount of work to be done is a fixed quantity, and that in the interest of the operatives, it is necessary to spread it thin in order to make it go far.
wrote the London correspondent to the New York Times in 1871.
The root of the mania which has had such a disastrous effect on the material prosperity of the country, and, above all, of the working classes, is the idea that the amount of work to be done is a fixed quantity, quite independent of any efforts which may be made to encourage and stimulate demand, and that, therefore, the best course is to spread it thin in order to make it go as far as possible.
is how the author of an article in The Saturday Review of Politics, Literature, Science and Art put it in 1876.

I have a database of over 540 entries, from 1871 to 2011, most of which invoke some variation on the lump-of-labour fallacy claim. A precious few refute the fallacy claim and there are perhaps a dozen or so duplications. With very few exceptions, these parroters of the claim do not cite any actual person who holds the fallacious idea.

"These people think that the amount of work to be done is a fixed quantity."

"If we are to proceed on the assumption that the amount of work to be done is a fixed quantity..."

"The theory of the Lump of Labour will be seen to rest upon the utterly untenable supposition that a fixed amount of work exists."

"But there is not, as this argument assumes, a fixed Work-Fund, a certain amount of work which has to be done, whatever the price of labour."

"The Leaders of the Federation said that there was a certain amount of work to be done in Atlantis..."

"The notion is that there is exactly so much labor predetermined to be done; therefore, if machines are introduced, there is that much less for men to do..."

"This means, roughly speaking, that there is a certain total number of hours of work to be done each week."

"This view -- that the amount of work to be done is fixed -- is called the lump-of-labor fallacy."

"Very similar to the general overproduction fallacy is the erroneous belief that there is only a certain amount of work in the community to be done..."

"At the bottom of these contrivances..."

"We have touched the fallacy which lies at the bottom of this whole system..."

"The real question which lies at the bottom of the dispute..."

"The root of the mania..."

And on... and on... and on... and on...

Getting to the bottom of the fallacy claim took 15 years of patient, persistent inquiry. The economists who pedantically recite the fallacy claim and insist upon its authority know nothing of its origins (or, for that matter, its subsequent career)! The lump-of-labour label was a late Victorian addendum that alluded impishly to the colloquial term for a kind of labor sub-contracting, "lump work," which explicitly specified the amount of work to be done as a fixed quantity. Henry Mayhew chronicled the practice in his mid-century reportage on "London Labour and the London Poor":
It is this contract or lump work which constitutes the great evil of the carpenter's, as well as of many other trades; and as in those crafts, so in this, we find that the lower the wages are reduced the greater becomes the number of trading operatives or middlemen...

"Lump" work, "piece" work, work by "the job," are all portions of the contract system. The principle is the same. "Here is this work to be done, what will you undertake to do it for?"
So, if lump work was by definition "a fixed amount of work to be done" from whence does the "fallacy" arise? The lump-of-labour and its antecedent, lump work, turn out to be blind alleys. The origin of the fallacy claim had to do with the introduction of machinery rather than with piece-work or working time (not to mention immigration or early retirement). Dorning Rasbotham, a magistrate in the county of Lancashire, England, published a pamphlet, "Thoughts on the Use of Machines in the Cotton Manufacture," in 1780 in response to rioting that had occurred the previous year near Blackburn. In it, on page 18, occurs what appears to be the seminal instance of the fallacy claim, expressed in words unmistakably paraphrased by the now standard "fixed amount of work to be done":
Dorning Rasbotham, Esq.
"There is, say they, a certain quantity of labour to be performed. This used to be performed by hands, without machines, or with very little help from them. But if now machines perform a larger share than before, suppose one fourth part, so many hands as are necessary to work that fourth part, will be thrown out of work, or suffer in their wages. The principle itself is false. There is not a precise limited quantity of labour, beyond which there is no demand. Trade is not hemmed in by great walls, beyond which it cannot go. By bringing our goods cheaper and better to market, we open new markets, we get new customers, we encrease the quantity of labour necessary to supply these, and thus we are encouraged to push on, in hope of still new advantages. A cheap market will always be full of customers. Men will cross land and sea to go thither."
Although virtually forgotten today, Rasbotham's pamphlet was well-enough known in the early 19th century for his views to have been cited with admiration by John R. M'Culloch in an 1827 Edinburgh Review article on the cotton industry:
Dorning Rasbotham, Esq., a magistrate near Bolton, printed some time about the period referred to, a sensible address to the weavers and spinners, in which he endeavoured to convince them that it was for their interest to encourage inventions for abridging labour. The result has shown the soundness of Mr Rasbotham's opinion.... There is, in fact, no idea so groundless and absurd, as that which supposes that an increased facility of production can under any circumstances be injurious to the labourers.
Unlike David Schloss's account, more than a century later, of a conversation with a workman who subscribed to the Theory of the Lump of Labour, Rasbotham's pamphlet presented no indication of who "they" were who allegedly said there was "a certain quantity of labour to be performed." But it would be rash to judge his argument solely on this singular lack of evidence. Indeed, a careful reading of the pamphlet reveals this supposedly "sensible address to the weavers and spinners" to be a smug, patronizing exercise in diminishing the actual grievances of the working population while extolling the abstract virtues of trade and technology detached from the circumstances of their employment by the rich. The author who on the first page styles himself "from the bottom of my heart, a Friend to the Poor," concludes his peroration berating his erstwhile "friends" for their improvidence and their propensity to "carry their money to the Alehouse" rather than seize the burgeoning opportunities for self improvement. The real core of Squire Rasbotham's argument, though, occurs in the fourth of seven enumerated principles:
It is the use of Machines, which chiefly distinguishes men in society from men in a savage state. Some have thought it no bad description of a human being, that he is a tool-making, or a machine-making animal. What are the most common instruments or furniture of our houses, but machines to shorten labour? What is an ax, a hammer, a saw, a pair of bellows, but machines for this end? [...] If we must go upon the principle of having no machines, we must pull them all down, and bruise our corn in Mortars. -- What do I say? The Mortar and Pestle are machines for shortening labour. We mull crush our corn between two stones, or beat out the flour with sticks.
It is just such a disquisition as this Marx had in mind in the section in volume one of Capital titled, "The Theory of Compensation as Regards the Workpeople Displaced by Machinery," where he presented his parody of Bill Sikes, the villain from Oliver Twist, addressing the jury:
Gentlemen of the jury, no doubt the throat of this commercial traveler has been cut. But that is not my fault; it is the fault of the knife! Must we, for such a temporary inconvenience, abolish the use of the knife? Only consider! Where would agriculture and trade be without the knife? Is it not as beneficial in surgery as it is in anatomy? And in addition a willing help at the festive table? If you abolish the knife — you hurl us back into the depths of barbarism.
Marx's point, of course, was that it was not the machines that threw people out of work, any more than it was the knife that cut the throat of the traveling salesman. It was how the machines were used by those who owned them that threw people out of work. Similarly, the argument advanced by M'Culloch, James Mill, Robert Torrens, Nassau Senior and John Stuart Mill -- that "all machinery that displaces workmen, simultaneously and necessarily sets free an amount of capital adequate to employ the same identical workmen" -- was groundless. Instead,
The labourers that are thrown out of work in any branch of industry, can no doubt seek for employment in some other branch. If they find it, and thus renew the bond between them and the means of subsistence, this takes place only by the intermediary of a new and additional capital that is seeking investment; not at all by the intermediary of the capital that formerly employed them and was afterwards converted into machinery.
Note that Marx's specification of the necessity of "new and additional capital" is not at all the same thing as assuming that there is a fixed amount of work to be done. There is more work to be done; but whether or not it is done depends on additional investment. As Keynes phrased it some 60 years later, the economic system is not "self-adjusting" as assumed by "almost the whole body of organized economic thinking and doctrine of the last hundred years."

This self-adjusting, automatically-compensating for displacement doctrine made a notable appearance in William Stanley Jevons's speculations regarding The Coal Question and thus has implications for contemporary debates about energy consumption, conservation and climate change. Jevons maintained that, "It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth [emphasis in original]." He went on to explain:
William Stanley Jevons
As a rule, new modes of economy will lead to an increase of consumption according to a principle recognised in many parallel instances. The economy of labour effected by the introduction of new machinery throws labourers out of employment for the moment. But such is the increased demand for the cheapened products, that eventually the sphere of employment is greatly widened. Often the very labourers whose labour is saved find their more efficient labour more demanded than before.
If we subscribe to Marx's and Keynes's refutation of the self-adjusting, compensation principle, the 'good news' is that increasing energy efficiency doesn't necessarily lead to increased consumption, as the Jevons Paradox or 'rebound effect' implies.

The bad news, though, is that to whatever extent the self-adjusting principle doesn't apply to fuel, it also doesn't apply to employment. Meanwhile employment, as conventionally defined, is deeply entangled with energy consumption. Whatever we might do to expand aggregate employment will likely increase the consumption of energy if past performance is any indicator.

But of one thing we can be certain: a cheap market will always be full of cheap hustlers.

IRS To No Longer “Waste” Money on Training

There is an aspect of the latest IRS scandal that I find absurd:
IRS spokeswoman Michelle Eldridge said Sunday that spending on large agency conferences with 50 or more participants fell from $37.6 million in the 2010 budget year to $4.9 million in 2012.
I have no idea whether 220 conferences costing $50 million over 3 years is too much or too little as far as a budget to reasonably train the IRS staff to enforce a very complicated tax code. OK, there may have been a few excesses here and there but most tax directors will tell you that the IRS desperately needs to increase the abilities of their staff. And yet the politicians and even Ms. Eldridge are arguing that slashing the training budget is a sign of good management. Penny wise – pound foolish.

Sunday, June 2, 2013

A Berlin Chronicle

Under the S-Bahn arch on Knesebeckstraße, across the street from the Joan-Miró-Grundschule, which a century ago had been the Kaiser-Friedrich-Gymnasium that Walter Benjamin attended as a child, the Sandwichman was accosted by a Franz Biberkopf look-alike who pretended to have just found a gold ring on the sidewalk. Complete with illegible hallmark inside! Had I dropped it?

The gold ring drop -- akin to the pigeon drop and the Guinea drop -- is a venerable scam, the latter version of which was mentioned by John Gay in his 1716 poem, "Trivia -- Or, the Art of Walking the Streets of London,":
Who can the various city frauds recite,
With all the petty rapines of the night?
Who now the guinea-dropper's bait regards,
Trick'd by the sharper's dice, or juggler's cards?
Why should I warn thee ne'er to join the fray,
Where the sham quarrel interrupts the way?
Lives there in these our days so soft a clown,
Brav'd by the bully's oaths, or threatening frown?
I need not strict enjoin the pocket's care,
When from the crowded play thou lead'st the fair;
Who has not here or watch or snuff-box lost,
Or handkerchiefs that India's shuttle boast?
Charmed by my ersatz Biberkopf's supplications for "ein Bier!" I offered him two Euro for his performance but balked at his demand for "funf!" Having puzzled now for a week about the persistence of this archaic hustle, I am beginning to wonder if perhaps it doesn't embody the transition from gift to market exchange. The operator doesn't attempt to sell the counterfeit item to the mark but presents it as a gift -- or under the pretence of a gift. If it was the item it purports to be, such a valuable gift would impose an obligation on the receiver to reciprocate.

Utilitarian analysis operates on the unspoken assumption that fraud, misrepresentation and adulteration are the anomalies and that the normal course of business entails the exchange of items that are what their purveyors claim them to be. This is not the case with advertising, which incessantly alludes to social joys the products themselves are incapable of delivering. So although the value of a utility may be subjective, any correspondence between expected utility and objective fulfilment is strictly coincidental. "Value" is the hallmark of the discrepancy. Perhaps the bourgeois lifestyle, broadly speaking -- career, private life, mortgaged abode, social relationships mediated by possessions -- can be better appreciated as a macrocosm of the counterfeit gold ring drop scam. And then there are the various Ponzi schemes of the macroeconomy. "Lives there in these our days so soft a clown..."

AS-AD: Counting the Ballots

Ah, the blogosphere is a wonderful thing.  I asked for thoughts about the status of AS-AD in the intro macro textbook, and I got a whole bunch.  I really appreciate the response!  Here is my takeaway:

1. There is a lot of love out there for AS-AD.  I didn’t want to get into a debate over its merits (and yes I know Romer’s version, the claim that AS is a kind of Phillips Curve, and so on), but I was curious about whether economists feel positively enough about the model to actually use it in real life (as opposed to the classroom).  The answer is that some do.  That said, I think one could follow policy debates in economics without any exposure to AS-AD: all the main arguments on every side—Keynesian, classical, Post Keynesian, Austrian—can be presented and normally are presented without recourse to the AS-AD format.  There is a bit of AS-ADing on the web; there is little to none, as far as I know, in the corridors of policy.

2. AS-AD’s greatest claim to relevance may be its role in allowing the 1970s experience in the US to be placed in a different box than previous and subsequent episodes of macro distress.  (This is Paul Krugman’s core point.)  I can see the logic of this.  The 1970s was a crucial decade for macrotheory, and if all recessions were like the OPEC-induced variety the real business cycle model would be the only way to go.  By differentiating between “demand-side” and “supply-side” crunches, we can ringfence the 70s.  AS-AD is the easiest way to do this.

3. And what is the alternative?  Surely we don’t want to suggest that a model without prices (like the venerable Keynesian Cross) can fill the bill?  Whatever the detailed merits of AS-AD, at least it allows you to talk about output and prices at the same time.

So have I budged?  Maybe, somewhat.

1. I still think AS-AD is logically flawed.  That’s a different debate, but I think the flaws show up in a widespread perception that the framework isn’t very useful for policy purposes.  Here are two examples: (a) A recurring question is “what should the central bank do?”  Assuming that the CB engages robotically in inflation targeting (the Romer version of the model) isn’t exactly the best starting point for trying to answer it.  (b) The standard model of a shifting short run Phillips Curve (when unemployment is above or below NAIRU) provides a more empirically relevant basis for understanding the relationship between output and inflation than an AS curve.  You can actually measure NAIRU, debate its stability, etc.  That will give you an AS curve too.  But what is the empirical basis for a shift in the AS curve?  That’s about a shift in NAIRU, right?  Am I the only one who notices that the literature that would justify and calibrate such shifts is thin and inconclusive?  (I say this even though I think I have a rough understanding of the factors that might push NAIRU one way or the other.)  A lot has been written on the impact of Obama’s initial stimulus on output and employment, for instance; how much has been written on its impact on NAIRU?

2. It’s true that without AS-AD it’s hard to put the 1970s in a separate box.  How much that matters depends on how you want to respond to the new classical critique that emerged at the same time.  One response is, OK you guys were right, but mostly about this one period, which really was a real business cycle.  That’s not the only option.

3. What the alternative is depends on whether you think you always need a single model to tie everything together.  That function is served by DSGE at the upper reaches of macrotheory.  (Again, the merits of DSGE are not at issue at the moment.)  But DSGE can’t do this job at the intro level.  So do you tell a number of stories that bear on DSGE-ish issues, or do you opt for a simple model whose value is mainly to provide a thread that runs through the intro textbook?  The mantra for textbooks today is simple stories with lots of repetition.  Whether you can get introductory students to wrap their minds around multiple stories that stand in some tension with one another is a practical question.  We’ll see.