Walking Backward into the Future...

by the Sandwichman

For a while in the 1990s I used a quote from a book review by Canada's new Liberal leader, Michael Ignatieff, in my signature file: "Only in mediocre art does life unfold as fate." As fate would have it, 12 years later I can now Google search the phrase and come up with 70 or so of my own musings from a decade ago. I was only able to find the originl source of the quote, "The Illusion of Fate" in the February 13, 1995 New Republic, by truncating the phrase.

Side-shadowing speaks to the contingent and haphazard way our lives unfold. This contingency leaves us with a haunted sense of lives that we might have lived, choices that we might have had good reason to make. Only in mediocre art does life unfold as fate. Yet all of us yearn, in Bernstein's words, for the possibility that our biography "will be revealed as destiny," and that "the life we ended up having was, from the outset, actually the only possible one." This is what makes us suckers for bad books.

Earlier in his review -- commenting on the demise of the "grand narratives" of Marx, Freud, Weber, Durkheim, etc. -- Ignatieff observed that the passing of those commanding theories "leaves us in a curious state of intellectual denudation. For theories of the past are always maps of a possible future. Now we are walking backward into the future, and without maps."

I wonder if Ignatieff will now, as Liberal leader, advocate a "contingent and haphazard" party program.

On Krugman's Nobel Prize Speech

One can access Paul Krugman's Nobel Prize speech at http://nobelprize.org/mediaplayer/index.php?=1072. In it he gives a pretty clear description of the new trade and new economic geography approaches, with some interesting discussion of how this fits with the broad history of urbanization in the US. Unsurprisingly he once again fails to cite important predecessors of these ideas, with him basically deserving credit for linking them and doing a good job of publicizing them with his clear models. The two names not mentioned that most deserved to be were Avinash Dixit, co-developer of the Dixit-Stiglitz model that is the key to "Krugman's" theories, with Krugman briefly noting that the theory ultimately came from industrial organization. The other was the first person to apply the Dixit-Stiglitz model to economic geography, who would be Masahisa Fujita, 1988, "A monopolistic competition model of spatial agglomeration: a differentiated product approach," Regional Science and Urban Economics, vol. 18, pp. 87-13124. Krugman is a better writer than the Japanese Fujita, but Fujita has done far more innovative work in this area than Krugman ever did, which I think Krugman knows as he later coauthored with Fujita, even as he did not cite him in his much cited 1991 paper in the JPE that used the same approach as Fujita. Having Dixit and Fujita share the prize with Krugman would have been appropriate and also given the prize to someone from East Asia for the first time. I hope that Krugman finally gets it right for the written version of his speecch and cites the even longer list than this of people who preceded him and deserve recognition for it by him. The model here is Stiglitz, whose reference list for his Nobel Prize speech paper goes on for 13 pages in the AER.

As for his remarks on the auto industry in Detroit, in the end his only explanation is that wages and medical care costs are too high in Detroit compared to the Deep South (no mention of legacy pension costs). Supposedly he was going to explain the problems of the auto industry in Detroit by his theory, which supposedly explains "agglomeration," but he made no reference to his theory other than a vague statement that economies of scale are declining, which supposedly has been going on since about 1965, according to him. However, how or why they have been declining was not explained by him. This rather puts to shame his bragging that he has explained "agglomeration," in contrast to all those pathetic people prior to him, whom he assiduously avoids citing, except for a couple of ancient scribes who used no math, so he can present himself as the great savior who uses math to lead us all to enlightenment regarding these important matters. If Detroit arose because of the factors laid out in his model, he does not say how this happened nor how they stopped holding so that Detroit is now doomed. Blaming high wage and medical care costs amounts to nothing more than de facto union bashing with no link to any version of his model discernible at all. A pretty pathetic performance all in all, especially after he went after Brian Arthur some years ago in Slate for supposedly overselling his role in describing increasing returns, which took Kenneth Arrow to come in and defend Arthur, noting that he, unlike Krugman, actually cited his appropriate predecessors.

Ignore the Guantánamo Confessions

So five accused planners of Sept. 11 want to confess, avoid a trial, and enter paradise via lethal injection. Their wishes should have no bearing on their cases. First, there is an alarming incidence of false confession, to the extent that, if guilt cannot be established by evidence, confession alone should not be decisive. One of the causes of false confession according to the Innocence Project, by the way, is torture and the threat of torture—not that this would have any relevance to Guantánamo inmates, of course. The second thing to consider is the larger significance of the legal case against these men. The damage done to America’s global reputation and to popular views about justice at home cannot be erased, but the first step toward recovery is a public embrace of the rule of law. If the evidence against them is sufficient, put them on trial. Demonstrate a commitment to truth and fairness of judgment. If they did in fact plot murder against innocent thousands, show the cruel calculation of their planning. And if the evidence isn’t there, the confessions don’t take its place.

Investing in Our Cities

Keynesian macroeconomics suggests that we need some sort of quick but temporary spike in government purchases to get us back to full employment. We would also want to spend these funds on high value projects. I used to drive on Los Angeles roads, which I know need a lot of work. It seems my former mayor is onto something:

Mayors across the country are calling on President-elect Barack Obama to invest in their cities when he takes office in order to get the economy back on track. A group of mayors met in Washington on Monday to lobby for federal funding for what they say are "ready-to-go" infrastructure projects. They want funding to go directly to their cities instead of being distributed on a state level. "Over the last eight years, there's been ... an absence of investment in cities, whether it's the infrastructure, public transportation, bridges, highways, schools, hospitals," Los Angeles, California, Mayor Antonio Villaraigosa said at a news conference on Capitol Hill. "We are here not for a bailout, but to present a recovery plan."

Now that I live in New York, I don’t drive as I ride our subways and my current mayor has chimed in:

The news conference coincided with the Conference of Mayors' release of a list of 11,391 "ready-to-go" infrastructure projects that would cost $73.1 billion. The report surveyed 427 cities across the country and includes roads, bridges, schools, city halls and other public works projects. The report says that those projects would create 847,641 jobs. "All of these projects and more involving our bridges and schools are ready to go. They've gone through the design and approval process. They've gone through all of the political requirements. They just need money," said Michael Bloomberg, mayor of New York City. The president-elect said over the weekend that he supports an economic stimulus plan that includes an overhaul of the nation's roads and bridges. According to a report by the American Association of State Highway and Transportation officials, roads and bridges in the United States need critical repairs that would total $64 billion, and construction could begin within six months if the federal government makes the funds available. That report found 5,148 road and bridge projects that are considered "ready to go." The mayors say that investing in their metropolitan economies is the most direct path to create jobs and jump-start the economy.

One of my big concerns is the proposed cutbacks in subway service and the proposed downsizing of the MTA workforce. It’s not that there is too little demand for subway services but rather a projected MTA deficit that has generated these fiscal contraction proposals. Maybe Mayor Bloomberg can ask the Federal government for some direct revenue sharing so the MTA does not have to initiate these cutbacks. With a little imagination, there are plenty of areas where high value investments in our cities can be found, which would also have beneficial Keynesian effects. The story continues with a debate as to whether having the governors oversea this would lead to a better allocation of resources versus just the slowing the process down.

Of course, I’d rather spend our Federal funds on local infrastructure than more war machines.

Update: I have included a graph showing government spending (Federal, state, and local) on transportation (TRAN) and education (EDUC) as shares of GDP from 1959 to 2007. The 1.8% share for transportation is certainly less than what between 1959 and 1976 with this share declining over time. The education share peaked in 1975 at 5.66% and was 5.4% last year. Whether or not we spend too much or too little on schools, however, cannot be ascertained by anecdotal evidence on how recently a school has been refurbished as one follows Bill Kristol around.

Kristol’s Fiscal Stimulus Proposal – Make War Not Schools

Bill Kristol finally admits it – modern day Republican leaders have not been championing smaller government:

Five Republicans have won the presidency since 1932: Dwight Eisenhower, Richard Nixon, Ronald Reagan and the two George Bushes. Only Reagan was even close to being a small-government conservative. And he campaigned in 1980 more as a tax-cutter and national-defense-builder-upper, and less as a small-government enthusiast in the mold of the man he had supported — and who had lost — in 1964, Barry Goldwater. And Reagan’s record as governor and president wasn’t a particularly government-slashing one. Even the G.O.P.’s 1994 Contract With America made only vague promises to eliminate the budget deficit, and proposed no specific cuts in government programs.

Tiny correction – any fall in nondefense Federal spending under Reagan was offset by the increase in defense spending with the ratio of Federal spending to GDP being unchanged during the Reagan years as President. So Reagan did not cut taxes – he deferred taxes. But let’s fast forward to what Kristol would do with Federal spending today:

Similarly, if you’re against big government, you’ll oppose a huge public works stimulus package. If you think some government action is inevitable, you might instead point out that the most unambiguous public good is national defense ... Obama wants to spend much of the stimulus on transportation infrastructure and schools. Fine, but lots of schools and airports seem to me to have been refurbished more recently and more generously than military bases I’ve visited.

Kristol in other words opposes government investment in schools and roads but supports spending on items that would at best not be used and at worst kill people and destroy infrastructure – obviously inconsistent with long-term growth or credible supply-side economics!

Thoughts from the Great Depression

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

(Eccles, Marriner S. 1951. Beckoning Frontiers: Public and Personal Recollections (New York: Alfred A. Knopf): p. 76



Eccles ran the Fed under Roosevelt

Some people who contributed to creating the preconditions for the Depression developed understood that their greatest contribution would be to get out of the way.

In December 1932, Calvin Coolidge spent an afternoon in idle talk with an old friend. "We are in a new era to which I do not belong," he finally said, "and it would not be possible for me to adjust myself to it. These new ideas call from new men to develop them. That task is not for me who believe in the only kind of government that I know anything about". In another three weeks, Coolidge was dead.

Schlesinger, Arthur. 1957. The Crisis of the Old Order, 1919-33 (Boston: Houghton, Mifflin): p. 457, internally citing Stoddard, Henry Luther. 1938. It Costs to be President (New York: Harper & Brothers): p. 146.

"Lunatic Scheme" a Qualified Success

by the Sandwichman

In the wake of Friday's dismal employment report, New York Times editor Adam Cohen is channeling the Sandwichman:

One way to reduce the need for layoffs would be to cut back on hours, spreading the available work among more employees. This was an idea that had considerable currency in the Great Depression. In 1933, the Senate passed a “30 Hour Bill” that would have barred from interstate commerce goods made by workers employed more than 30 hours a week. Its sponsor, Senator Hugo Black of Alabama, said the bill would create six million new jobs. It made no sense, he insisted, for some employees to work 70 hours a week "while others are driven into poverty and misery from unemployment."

But didn't they try this in France and wasn't it a fiasco -- a "lunatic scheme" that brought "seven years of rising unemployment, economic stagnation, and general malaise"?



Well, no. The 35-hour policy was a "qualified success." But you wouldn't have known that from reading the English speaking press. Sandwichpal Anders Hayden tells the story:

France’s 35-hour workweek is one of the boldest progressive reforms in recent years. Drawing on existing survey and economic data, supplemented by interviews with French informants, this article examines the 35-hour week’s evolution and impacts. Although commonly dismissed as economically uncompetitive, the policy package succeeded in avoiding significant labor-cost increases for business. Most 35-hour employees cite quality-of-life improvements despite the fact that wage moderation, greater variability in schedules, and intensification of work negatively impacted some—mostly lower-paid and less-skilled—workers. Taking into account employment gains, the initiative can be considered a qualified success in meeting its main aims.

Sandwich man!

The New York Times
November 21, 2008

Bebeto Matthews/Associated Press
Caption: "Paul Nawrocki of Beacon, N.Y., wore a signboard this week in Midtown Manhattan advertising his need for a full-time job with benefits. He said he has been looking for work for nine months."

See also: Business Week.

New Radio Interview

I just had a wonderful time talking with Kris Welch about the economic crisis for the second half of her hour long show on KPFA. She is such an enthusiastic host that she brings out the best in her guests.

http://aud1.kpfa.org/data/20081205-Fri1200.mp3

Sandwichman's KEYNESIAN Stimulus Plan

by the Sandwichman

The concept of the Sandwichman's stimulus plan is extremely simple: a basic income guarantee of $145.68 a week combined with a voluntary annual cap on hours of work at 1,600 hours. The rationale for this approach is that this is not your grandfather's depression. The nature of work has changed. It is not feasible to continue treating the environment as if it was an economic "externality". Historical evidence and real economic theory (as opposed to textbook lore) support the strategy outlined in the Sandwichman plan.

The Sandwichman plan would create an estimated 12.5 million jobs! Yes, but is is Keynesian?

Although the total cost of the stimulus plan is indeterminate, a maximum is easily calculated at $1 trillion for an annual payments of $5,827.20 to 200 million non-retirement age adults. As the payments themselves will be taxable income, the actual outlays are reduced by, say 15 percent. But even that amount would be reduced again by the fact that some of the payments will act as replacement for current income support payments such as welfare, unemployment insurance, disability pensions and so on. The $5,827.20 amount comes from basing the figure on the median wage ($18.21) times eight hours for 40 weeks (assuming 10 current statutory holidays and two week vacation).

Part-time workers and low-wage earners would get an income boost from the median wage supplement. Similarly, it is proposed that other income support payments should not be reduced by the full amount of the basic income guarantee.

Furthermore, because the hours cap will be voluntary, a portion of the total will be clawed back as the result of higher-income earners choosing to work longer hours. The cap on annual hours of work will provide for a deduction of $18.21 for each hour worked beyond 1,600 a year. Some flexibility could be added by a provision enabling banking of, say, a maximum of 200 hours a year for up to seven years. In such cases the clawed-back amount could be reserved in a registered sabbatical saving account.

The 1,600 hour cap is based on an assumed four-day, 32-hour work week, with two weeks annual vacation. But those 40 freed days could be taken in a block as extra vacation time.

Job creation in the Sandwichman plan results from the massive volume of hours of work "released" back into the labor market through the reduction of the annual hours of work. The raw numbers (from the 2007 American Community Survey) are mind-boggling. There are somewhere around 240 billion hours worked a year in the U.S. Obviously, not all of those hours can be spread around. But according to Bosch (2000) "most studies" find an employment result in the range of 25 to 70 percent of the "arithmetically possible effect."

The Sandwichman, however, is skeptical about the job creating potential of overly long work weeks. In the ACS survey, some people reported working 99 hours a week or more. I don't consider such statistical noise as productive work that can be parceled up into three pieces. To get around that problem, I've marked down to 2400 hours all current annual hours in excess of that amount. That reduces the "arithmetically possible effect" of the stimulus plan to a mere 31,000,000 jobs!

Assuming Bosch's estimate of 25 to 70 percent of that effect, that suggests somewhere between 6.5 million and 18 million jobs, with 12.5 the happy medium between those two figures.

How Large of a Keynesian Multiplier Do You Want?

David Tufte is not happy with some claim that the multiplier can be as high as 5:

UB suggests that it has a multiplier of 5. If they did, this would be like the goose that laid the golden egg. My gosh, all they'd have to do is appropriate $140B to UB, and they could pay for the whole $700 Federal bailout ... A more telling multiplier is the economic impact divided by the whole UB budget of $832M, to get a multiplier of 1.8. I think that seems a lot more reasonable than 5 to 1.

A multiplier of 1.8? That is what Dani Rodrik comes up with if we keep our international markets open but:

The size of this multiplier depends in turn on three things in particular, the marginal propensity to consume (c), the marginal tax rate (t), and the marginal propensity to import (m). If c=0.8, t=0.2, and m=0.2, the Keynesian multiplier is 1.8 (=1/(1-c(1-t)+m)). A $1 trillion fiscal stimulus would increase GDP by $1.8 trillion. Now suppose that we had a way to raise the multiplier by more than half, from 1.8 to 2.8. The same fiscal stimulus would now produce an increase in GDP of $2.8 trillion--quite a difference. Nice deal if you can get it. In fact you can. It is pretty easy to increase the multiplier; just raise import tariffs by enough so that the marginal propensity to import out of income is reduced substantially (to zero if you want the multiplier to go all the way to 2.8). Yes, yes, import protection is inefficient and not a very neighborly thing to do--but should we really care if the alternative is significantly lower growth and higher unemployment? More to the point, will Obama and his advisers care?

Maybe SUNY-Buffalo has figured out a way to make sure that its extra spending does not leak out into the surrounding communities – which would mean a multiplier larger than what David Tufte considers reasonable!

The world-wide web of misinformation

So I give a test that asks students something about Ricardian equivalence, which we had studied using two-period framework a la Fisher. We had looked in particular at the difference between the effects on the interest rate of changes in deficit-financed tax cuts (zero) and deficit-financed government spending increases (positive). Well a certain false sentence kept popping up in several exams - say 10%. I immediately suspected the web, and sure enough, in the Wikipedia article on Ricardian equivalence, I read:

Ricardian equivalence states that a deficit-financed increase in government spending will not lead to an increase in aggregate demand. If consumers are 'Ricardian' they will save more now to compensate for the higher taxes they expect to face in the future, as the government has to pay back its debts. The increased government spending is exactly offset by decreased consumption on the part of the public, so aggregate demand does not change.

This is not just wrong, it is flagrantly wrong. I'm sure everyone has their favorite examples of Wikipedia falsehoods, so I'm not saying anything new here. File under: The Wisdom of Crowds: NOT!

A Bleak Employment Situation

BLS reports the bad news:

Nonfarm payroll employment fell sharply (-533,000) in November, and the unemployment rate rose from 6.5 to 6.7 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. November's drop in payroll employment followed declines of 403,000 in September and 320,000 in October, as revised. Job losses were large and widespread across the major industry sectors in November ... In November, the labor force participation rate declined by 0.3 percentage point to 65.8 percent. Total employment continued to decline, and the employment-population ratio fell to 61.4 percent.

The household survey showed an employment decline of 673,000. BLS also notes:

Over the month, the number of persons who worked part time for economic reasons (sometimes referred to as involuntary part-time workers) continued to increase, reaching 7.3 million. The number of such workers rose by 2.8 million over the past 12 months. This category includes persons who would like to work full time but were working part time because their hours had been cut back or because they were unable to find full-time jobs.

The rise in the unemployment rate sounds bad but the situation is actually worse as the fall in the labor force participation (LFP) rate masked the effect on employment relative to the population (EP). Our graph shows the two series ever since January 1999 to give some context as to how the labor market is faring today as opposed to almost 10 years ago. The need for some sort of aggregate demand stimulus could not be more clear.

Big 3 Automobile Woes and Union Wages

Kendra Marr and Steven Mufson blame the UAW:

Over the past three decades, they have lost ground to more agile foreign rivals that favored smaller cars built by non-unionized labor at lower wages.

Really? So what are the wages for the foreign rivals? They don’t tell us. Last night – Rachel Maddow did - $25 an hour. Oh, but UAW wages are $70 – right? No, try $28 an hour. Hat tip Dean Baker who adds:

Actually, many of these cars were built in unionized factories in Japan, South Korea, and Germany. Unions didn't keep foreign manufacturers from producing high-quality popular cars in these countries. Even when these companies set up shop in the U.S. they have been able to work well with unions. Toyota operated a plant in California where the workers were represented by the UAW for decades (it may still be open). There may have been problems with the way the Big Three management dealt with unions, but other car companies have been able to operate very effectively with a unionized workforce.

We will likely learn in a few hours that more workers have lost their jobs. And yet incompetent writers for the Washington Post still have theirs?

Dead Keynes Blogging

by the Sandwichman

The Sandwichman is still wondering how economists make up their guesses about how $x billion dollars of fiscal stimulus (AKA "deficit spending") will create y million jobs.

Yves Smith says they find them on the back of an envelope. Greg Mankiw says econometrics doesn't always confirm the predictions of textbook Keynesian models. Martin Wolf mentions something about how "deficits aimed at sustaining demand will be piled on top of the fiscal costs of rescuing banking systems bankrupted in the rush to finance excess spending by uncreditworthy households via securitised lending against overpriced houses." Don't you love that house-that-Jack-built volute?

Whew! It can be easy to forget that the issue here is unemployment. As Paul Krugman notes, the US employment report comes out tomorrow, Friday. "The economy is falling fast. We’ll see what tomorrow’s employment report says, but we could well be losing jobs at a rate of 450,000 or 500,000 a month."

Coming Soon: The Sandwichman Stimulus Plan. I'll show you my back of the envelope calculations.