url to watch my lecture on-line

http://www.ustream.tv/recorded/8702391

Dresden: The Simulacrum City

I’ve just returned from several very enjoyable days in Dresden: a lot of museums, some music, and plenty of superb Saxon wine, which you can hardly find anywhere else. Nevertheless, I am obsessed with what this city has to say about the nature of reality.

Dresden was one of the great baroque capitals of Europe. It was made wealthy by mining, and its rulers were adept at avoiding war, so the wealth accumulated. Over several generations a series of spectacular buildings was erected along the banks of the Elbe, culminating in the construction frenzy of August der Starke – August the Strong, although the sculptures and portraits suggest that his muscle tone left something to be desired. A particular marvel is the Zwinger complex, a large open courtyard surrounded by arcades, parapets, towers and domes.

As you probably know, all of this, down to a few blasted wall segments, was destroyed during the bombing raids of February, 1945. Where there had been baroque splendor, now there was only rubble.

After the war, Dresden found itself in the German Democratic Republic, the “People’s State” that emerged from the Soviet zone. Slowly and not very efficiently, the authorities began to rebuild the ancient palaces and churches according to the original plans. After 1989 the process was accelerated, culminating in the completion of the Frauenkirche in 2005.

So now it’s all back, every vaulted arch and sculptured ornamentation. The effect is enormous. Dresden is once again a tourist mecca: I heard every European language family along with several Asian ones as I walked the streets of the Altstadt – and, of course, Dresden attracted me.

But what is this? The guidebooks talk about the buildings as though they are the same as those built centuries ago, but each one is a reconstruction. Dresden looks old, but it is newer than Las Vegas. It is an elegant, extremely sophisticated Euro Disneyland. The palaces were not built by kings to proclaim their wealth and power; they were built by modern construction firms to give tourists, and even the local population, the illusion of continuity, that the great erasure of 1945 could be undone.

Ah, but the artwork is original, you say. Those spectacular paintings, the Raphael Madonna with the bored cherubs at the bottom, the dynamic images of Rubens, the landscapes by Caspar David Friedrich that are almost archetypal for German romanticism – there is no make-believe here. These are the real items, the actual canvases that felt the brush of these artists.

Probably, but let’s do a thought experiment. These paintings survived because they were transported out of the city during the war. Some were returned immediately. Others, such as those seized by the invading armies (especially the Red Army), were returned later. Some were never returned and may never be seen again. But what if the canvas that hangs in the gallery today is not the original, but an excellent copy executed during the years when the work was passed from hand to hand? Maybe someone thought, I’d like to keep the original work and pass off a copy. If I can’t tell the difference, if I enjoy the copy while imagining that I am viewing the actual brush strokes of Raphael or Friedrich, how is this different from the pleasure I get from the ersatz palace the painting is housed in?

Is all of this an argument against the rebuilding of Dresden? No. I’m glad it was done. Like I said, I had a great time. Nevertheless, it does raise difficult questions concerning the meaning of authenticity in a world that expects to see the past within the present. I wonder what Walter Benjamin would have thought of this.

UPDATE: Before anyone posts a comment about this, I should mention that there is a fascinating coda to the Dresden story. The rebuilt city was declared a "World Heritage Site" by UNESCO, but this honor was revoked when the decision was made to build a new bridge across the Elbe that would alter the historic view. Except, of course, that the "old" bridges were also new, postwar reconstructions. It's all a hopeless tangle.

UPDATE No. 2: I've corrected a couple of spelling errors.

Bernanke Says Rising Wages Will Lift Spending

The New York Times Headline Says It all. This beats Greenspan some of Greenspan's worst predictions.

LINK

If anyone watched my video tonight, I would appreciate your comments

http://www.ustream.tv/channel/unsettling-economics

Reminder of My Streaming Experiment, 6:00 PM tonight

I am trying to see if I can figure out how you can send me text messages during the talk

http://www.ustream.tv/channel/unsettling-economics

To The Barricades!

I saw an open letter from economists advocating more fiscal stimulus. Obviously the Republicans and their Blue-Dog Demo allies make this a lost cause. What about an open letter to Bernanke asking the Fed to take its collective Head out of Its A**? A March on the Fed?

As Krugman notes in his column today, people who don't give damn about the unemployed are making noise about an increase in the natural rate as an excuse for inaction.

RAISE THE TARGET INFLATION RATE
MORE -OR AT LEAST NO LESS - QUANTITATIVE EASING
OBEY THE HUMPHREY-HAWKINS LAW: PUT PEOPLE BACK TO WORK

Streaming My First Economics Lecture Tuesday 6:00 PM PST

You can watch it streaming or, I hope, afterwards it should be available at

http://www.ustream.tv/channel/unsettling-economics

I hope you might find this a useful approach to economics, first using capital investment, and then production in general, as the focal point.

I have never tried anything like this before. No guarantees.

Cobol Is My Hero -- A Reverse Luddism

The Sacramento Bee reported that some people in California are wearing T-shirts bearing the cryptic words, "Cobol Is My Hero."

People outside of California might not be aware that our governor, Arnold Schwarzenegger, attempted to have state workers paid the minimum wage until the Legislature presents him with acceptable budget. Since the budget cannot be passed without a two thirds majority and the Republicans, who are unanimously committed to holding firm on their pledge to not raise taxes, have enough votes to veto any budget that does not suit them.

Already, in previous years, the Democrats have capitulated and agreed to horrendous cuts to education and, even worse, any program that threatened to give any help whatsoever to the poor. The Democrats went one step further, agreeing to additional tax cuts, which can only make the budget worse.

The state comptroller, John Chiang, refused to comply with the governor's demands, explaining that revamping the state computer system to change the wage structure in a short period of time would be impossible. To do so would be especially difficult because the system is programmed in an obsolete language, Cobol.

Cobol was last in the news in the run-up to the Y2K panic. Companies need to upgrade their computer systems, but lacked people trained in obsolete computer languages. In desperation, they turned to Indian companies, which was instrumental in accelerating the growth of outsourcing computer work to India.

Shortly before this rush to reprogram computers in anticipation of the Y2K disaster, Paul Strassmann, former CIO at General Foods and Kraft, wrote a book, which took the position that the churning of computer systems by means of excessively frequent upgrades cost a great deal more than any potential savings. The manpower required to reprogram everything, along with the inevitable glitches were not worth as much as the cost of upgrades.

Strassmann, Paul A. 1997. The Squandered Computer: Evaluating the Business Alignment of Information Technologies (Information Economics Press).

Strassmann's position was not particularly popular for obvious reasons. I have not followed the literature enough to know if he was proven correct or not, but workers in California have reason to applaud the obsolescence of Cobol -- a kind of reverse Luddism.

Economics without Equilibrium

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

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

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

For more detail on my take, look here.

The Ultimate Death Blow for Notre Dame Heterodoxy

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

http://chronicle.com/article/Notre-Dame-to-Dissolve/48460/

Back to Square One on Climate Change

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

What can we learn from this?

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

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

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

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

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

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

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

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

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

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

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

Selection Bias 101

What’s wrong with this picture?

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

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

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

Sovereign Default Risk

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

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

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

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

Phil Mirowski Mortifies Nearly All Economists

That iconoclast Phil Mirowski has published a paper in The Hedgehog Review, "The Great Mortification: Economists' Responses to the Crisis of 2007 - (and counting),"
http://www.iasc-culture.org/publications_article_2010_Summer_mirowski.php, in which he pretty much lambastes almost the entire economics profession, including most heterodox schools of economics as well, for their miserable failures in dealing with or explaining what has been going on in the world economy in the last few years. Few are spared, including even some who have been viewed as having "called it," such as "Black Swan" Nassim Taleb and "Dr. Doom" Nouriel Roubini. About the only economist quoted favorably without a cutting caveat is James K. Galbraith. Otherwise, he sneers at all the running back to Keynes, even if in his final line he wonders "where is our Keynes?" although he is thinking in terms of Keynes as a philosopher of economics rather than as a policy maker or suggester.

Very Simple Debt Dynamics

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

Private budgets + Public budgets ≡ Current account

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

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

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

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

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

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

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

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

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

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

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