Retribution, Complex Financialization, and the Law

A wonderful Ohio judge seems to have stopped foreclosure in Ohio because the investors in mortgage securities pools lack legal standing to foreclose because they cannot show proof ownership. After all, nobody knows who owns what.



Morgenson, Gretchen. 2007. "Foreclosures Hit a Snag for Lenders." New York Times (15 November).

"A federal judge in Ohio has ruled against a longstanding foreclosure practice, potentially creating an obstacle for lenders trying to reclaim properties from troubled borrowers and raising questions about the legal standing of investors in mortgage securities pools. Judge Christopher A. Boyko of Federal District Court in Cleveland dismissed 14 foreclosure cases brought on behalf of mortgage investors, ruling that they had failed to prove that they owned the properties they were trying to seize."

"The pooling of home loans into securities has been practiced for decades and helped propel real estate prices in recent years as investors sought the higher yields that such mortgage trusts could provide. Some $6.5 trillion of securitized mortgage debt was outstanding at the end of 2006."

"But as foreclosures have surged, the complex structure and disparate ownership of mortgage securities have made it harder for borrowers to work out troubled loans, in part because they cannot identify who holds the mortgage notes, consumer advocates say. Now, the Ohio ruling indicates that the intricacies of the mortgage pools are starting to create problems for lenders as well. Lawyers for troubled homeowners are expected to seize upon the district judge’s opinion as a way to impede foreclosures across the country or force investors to settle with homeowners. And it may encourage judges in other courts to demand more documentation of ownership from lenders trying to foreclose."

Moral Hazard Fundamentalism Redux

I posted somewhat infelicitously (or even more infelicitously than usual!) a while back on this topic . I have a neat example to make my point, now.

Imagine a society where everyone has the same opportunities for producing income. Working with high effort, they make $144 with probability 2/3 and $0 with probability 1/3. Working with low effort - slacking- they have equal probability of making $144 or $0. Utility is the square root of income, minus 1/2 if they work hard, or minus 0 if they slack off. People maximize expected utility. In one society - let's call it the ownership society - the state is a night watchman state and does no redistribution. Everyone works hard in this society, since this gives utility of 2/3(12) -1/2 = 6.5, while slacking gives utility of 1/2(12) = 6. Another society - let's call it Slackerland - practices complete egalitarianism, redistributing all income. Of course, with incentives dulled, everyone slacks off in Slackerland - the bums! If they are large enough in number, each will enjoy a certain income of $72 (compared to an average income of $96 in THE OWNERSHIP SOCIETY, the wonder of the world, where incentives are as sharp as tacks and moral hazard dare not appear). But oh my, the Slackers enjoy utility of of 8.48, the square root of 72 - more than the 6.5 utils the citizens of the ownership society enjoy*!

Moral hazard fundamentalists ignore the fact that moral hazard is often an inescapable byproduct of doing something good, namely spreading risk. The welfare state dulls incentives: therefore it is bad. Bad welfare state! Get down!

*I am assuming that private income insurance is unavailable - due to adverse selection (I'd need, obviously, to heterogenize my people and their opportunities and the numbers in my example would be the averages.)

Rebecca Moves from Sunnybrook Farm to the New York Times!

Below, New York Times economics writer David Leonhart gives us the upside of down. My comments are in brackets.

The New York Times / November 14, 2007

Economic Scene Good News: Housing's Down, Market's Off, Oil's Up
By DAVID LEONHARDT

Until yesterday's rally on Wall Street, the news on the business pages has sounded pretty grim lately. Stocks are still down 6 percent from their peak this year, and oil is near a record high. The dollar, incredibly, is worth only 96 Canadian cents. And house prices will be falling for a long time to come.

So in an effort to cheer everyone up before Thanksgiving, this column is going to focus today on some good news. Here it is:

Stocks are still down 6 percent from their peak, and oil is near a record high. The dollar, incredibly, is worth only 96 Canadian cents. And house prices will be falling for a long time to come.

Seriously.

[I truly admire this willingness to be contrarian! There's no reason to accept any
version conventional wisdom at face value. -- JD]

As long as the financial system doesn't have a major meltdown, none of these developments will turn out to be as bad as you think. Some of them are downright welcome.

[This "as long as the financial system doesn't have a major meltdown..." is quite a clause! (a veritable Santa Clause!) Can we rely on the Fed to prevent such a meltdown? do they have the power to do or will they have to mobilize the big banks to save the day? (can the big banks afford to do so?) will the taxpayers foot the bill, as with the bail-out of the Savings & Loan industry? or is the financial mess smaller and milder than most think? there are no answers in this article.]

Too often, we think about the economy without nuance. We treat it as a local sports team that is either winning or losing, up or down. We're always supposed to be rooting for stocks and homes to become more valuable and for oil and overseas vacations to become more affordable.

But that's not quite right. There are real downsides to an economy full of expensive assets and inexpensive resources. There are also a lot of people who are better off because of the recent turmoil. You may well be one of them.

The best place to start is the stock market, because it's the most counterintuitive. The notion that anybody but a sophisticated Wall Street short-seller should be hoping that stocks fall sounds, frankly, bizarre. But it's true: a huge chunk of the population -- including most people under the age of 50 -- has benefited from this year's market drop.

My favorite explanation of this idea is still a column that Peter Coy of Business Week wrote in 1999, during the dot-com mania. He said he was thinking of forming a club called Stockholders Who Wish the Stock Market Would Stop Going Up So Fast. It would be meant for people who were at least two decades from retirement and who weren't active investors. They instead owned 401(k)'s and individual retirement accounts.

They were, in other words, typical. Only 21 percent of families owned stocks outright in 2004, the most recent year for which the Federal Reserve has released data. Almost 50 percent of families owned a retirement account, by contrast. The typical retirement account (median value of $35,200) was also a lot bigger than the typical stock holding ($15,000).

These long-term, buy-and-hold investors, as Mr. Coy pointed out, are actually hurt by a market that rises too quickly. When stocks get so expensive, returns over the next few decades are usually mediocre. And only a small chunk of a typical person's investments will have been made before the run-up.

It would be much better -- tens or even hundreds of thousands of dollars better -- if the market rose more steadily and the bulk of the 401(k) contributions could then rise along with it. Buy low and sell high, right?

[Alas, a lot of people don't get this. I still remember friends asking me for advice when they were leaping into the stock market in the late 1990s. My advice that they "stay out until prices fall" wasn't acceptable.]

A true crash would take care of this problem. But the market's big fall from 2000 through 2002 doesn't fit the definition, because it didn't come close to erasing the effects of the bubble. Stocks are still more expensive today, relative to corporate earnings over the previous decade, than at any time besides the late 1920s and the dot-com boom.

So unless you're about to retire or sell stock for some other reason, you shouldn't get too upset about the market's fall. As long as you are planning on more buying than selling over the next decade or two, a market correction is your friend.

[The problem with this is that a "true crash" creates other problems. Suddenly the ability to use stocks as collateral for loans is severely undermined. If you are already heavily indebted, perhaps if you borrowed to put money into stocks, falling asset values represent a serious problem. It can drive you into bankruptcy.

Further, the wealth effect of a true stock market crash depresses consumer spending, especially that of stock-owners (mostly, the rich). Corporations have a harder time raising funds to finance real (fixed) investment by selling new stock. Expectations of future profitability are hurt. All of these spell recession, all else constant. This usually hurts corporate dividends and returns, and the stock market.]

It's also likely to improve the nation's long-term economic prospects. The bull market of 1990s, combined with the housing boom, fooled many people into thinking they didn't need to save money. They evidently figured that their existing assets would continue to soar in value and could serve as their nest egg. Last year, Americans saved only 0.4 percent of their disposable income, down from 7 percent in 1990.

This decline in personal savings has set the stage for all kinds of problems. The biggest may be that less savings, by definition, equals a smaller pool of capital available for overall investment. Less investment -- be it in medical technology or software -- will mean slower economic growth and lower standards of living down the road.

[This is illusion. As Keynes pointed out, it's not saving that drives investment. Increased saving, all else equal, encourages a _fall_ in total spending on GDP, i.e., recession. A recession -- or even a slow-down in the economy -- can, via the famous accelerator effect, _stop_ private fixed investment (the real stuff, not the financial investment in the stock market).

In any event, domestic saving is not needed to finance real investment. Funds can -- and have been -- coming from outside the country. This is where many people get upset: an inflow of funds is the same thing as a trade deficit (or, more accurately, a current-account deficit), where the country is spending more on foreign goods and services than it sells exports.

But there is nothing wrong with that kind of deficit if the funds go to pay for productive investment. The US did very well during most of the 19th century
despite trade deficits, since it used the borrowed funds to build up industry
and rise toward the top of the pack.

The problem is that nowadays these imported funds (capital inflows) go to pay
for wasteful activities, such as tax cuts for the rich and the war in Iraq. They are mostly going to current consumption and unproductive purposes rather than to fixed investment (broadly defined, to included education and the like).

In sum, it's fixed investment that deserves our attention, not saving.]

Fortunately, the savings rate has begun to climb, especially since the housing market turned. So far this year, Americans have saved 0.8 percent of their income, and the number should continue to rise. As Joe Davis, an economist at the Vanguard Group, the investment company, said, "This will be a slow-moving and ongoing process, but I think a welcome one."

[Yes, if we want a recession. Now, it _is_ true that rising (net) exports due to the falling dollar can help avoid a recession. But that falling dollar imposes a loss of real living standards on all of us who import or rely on others to import -- i.e., all people in the US. It also encourages inflation, for example in oil prices (in US dollar terms).

It is also true that a rising government deficit can avoid recession. But, as
mentioned, currently that's going mostly as rewards to Bush's rich supporters
or down the sink holes of Iraq and Afghanistan. That hardly helps the economic
health of the Average American!]

The other ostensible pieces of bad news have their own silver linings. As the cost of gas has soared to $3 a gallon [and significantly higher in places like California, where I live -- JD], from an inflation-adjusted low of about $1.20 in 1999, Americans have finally started buying more efficient cars and trucks. For the first time since the mid-1980s, the fuel economy of new vehicles has increased for two straight years, the Environment Protection Agency recently reported. This will slow global warming and make life a little less comfortable for oil-rich autocrats (though not nearly as much as a carbon tax would).

[Yes, but the rising oil price also creates an inflationary impulse that prevents the Fed from using monetary policy to moderate recession and/or solve the big financial mess that Wall Street faces. Not that the Fed is normally all-powerful, able to "fine tune" the economy and avoid recessions, inflation, and the like. But the inflationary shock makes its tasks even harder.]

The fall of the dollar, meanwhile, may be precisely what the world economy needs right now, as James Paulsen of Wells Capital Management points out. It provides a lift to the sagging American economy, by allowing companies in the United States to export more, while encouraging consumers to spend less on imports and save more.

[See above.]

It's not even clear that falling house prices are such a bad thing. They don't really matter for families who aren't planning to move. They don't even matter much for families moving to a similar house in a similar market. The house they are buying will have gotten cheaper, too.

Families hoping to buy their first house, on the other hand, clearly benefit. (Easy for me to say, though. As my boss pointed out when he heard about this column, I'm a renter and still decades from retirement.)

There is no question that people have gotten hurt this year. Many families have struggled to pay their bills. Others have had to delay retirement, and thousands have lost their homes to foreclosure. In an ideal world, the imbalances in the economy would never have become so extreme.

[Note that the housing crunch, like a "true" stock market crash, encourages recession by dampening consumer spending -- and also by hurting fixed investment in the housing industry (and related, like Home Depot).]

But once they did, what, really, was the alternative to the recent turmoil? An ever-higher stock market, ever-cheaper oil or an ever more insane mortgage market wouldn't have solved the problems of the American economy. It would have made them worse.

Copyright 2007 The New York Times Company

[This shows a total lack of perspective. Since the end of the Keynesian age (in the 1970s) we've seen a return to the business cycle pattern that prevailed in the 1920s and before. There are speculative booms in GDP like that of the late 1990s, followed by speculative crashes as in 2001 (moderated by the Fed). The boom creates the conditions that create the crash, which then creates the next speculative boom. Just as then, the self-generating cycle is changed by the US involvement in wars (World War I back then, the Gulf War I and II now), which stimulate the economy.

The only complication is that nowadays (unlike under the gold standard) the Fed moderates (or tries to moderate) the fluctuations. Sometimes, it seems, it creates the basis for new speculative booms, as with the currently-ended housing bubble.

Using perfect 19th century logic, Leonhardt is arguing that because of the speculative boom, we need the speculative crash. But what about changing the policy regime? The government could increase the role of the automatic stabilizers as it did starting in the 1930s, while increasing the amount of investment in (needed!) infrastructure, basic research & development, education, and public health. It could actually make an effort to clean up the aftermath of Katrina. That would get us back to the 1950s & 1960s. Of course there would be problems, but that's another topic.

Another problem with the pre-1950s cycle -- and with Leonhardt's logic -- is that the economy can spin off its normal up-and-down path. This is what happened back in 1929-33. I don't think Leonhardt wants to contemplate this possibility.]

[by Jim Devine]

API Commissions CRA to Write Macroeconomic Nonsense

Karen Matusic and Robert Dodge of API, which is the national trade association that represents all aspects of America’s oil and natural gas industry, boosts:

Energy legislation pending in Congress likely would have significant adverse effects on the economy and consumers – including nearly 5 million lost jobs and $1 trillion in lost economic output, according to a report released today by API. The study, prepared by CRA International and commissioned by API, found that the combined effect of seven legislative proposals would restrict the supply of energy available to the U.S. economy and would likely increase the cost of energy supplies to consumers and businesses.

The CRA report goes well beyond this by claiming that by 2030, the effect of this bill would be to: (1) reduce aggregate employment by 4.9 million relative to baseline; (2) reduce GDP by 4 percent of $1 trillion relative to baseline; and (3) lead to reductions in both consumption and investment.



Who knew CRA was in the business of macroeconomic modeling? I did find this presentation. NEEM seems to rely on CRA’s expertise in the energy sector whereas MRN focuses on the macroeconomic impacts of some policy change. The MRN stands for Multi-Regional National Model. The designer of MNR appears to be Thomas F. Rutherford who appears to be a professor of “Environmental and Resource Economics” and not a macroeconomist. So maybe we can forgive him and CRA for not understanding that the aggregate demand effects of policy changes are not generally believed to last for a couple of decades even in the most Keynesian of models.

It would appear that the API and CRA have put forth a rather nonsensical analysis to trick us into believer that changes in energy policies will lead to a prolonged recession.

Social Security: Obama and Russert

Mark Weisbrot watches Meet the Press so we don’t have to:

Obama told Russert: "Now, we've got 78 million baby boomers that are going to be retiring, and every expert that looks at this problem says 'There's going to be a gap, and we're going to have more money going out than we have coming in unless we make some adjustments now.'"

Had Russert said this, I would have thought that this was his usual stupidity on this issue. But to hear Senator Obama says this was sad. Mark offers this explanation of why these GOP talking points miss the boat:

In fact, the first cohort of baby boomers (those born in 1946) will begin retiring in just a couple of months, since many people take their Social Security at age 62 (with a correspondingly reduced benefit). Our Y2K moment is upon us, and nothing will happen - because the baby boomers' retirement has already been financed. Back in 1983, when Social Security really was running out of money, with just a few months of payments on hand, Congress raised the payroll tax substantially. This was done deliberately in order to pile up a surplus to finance the baby boomers' retirement. And so it did: that accumulated surplus stands at more than two trillion dollars today, and is increasing at a rate of $190 billion annually. As a result of this surplus, all the baby boomers' will have retired before Social Security runs into a projected shortfall in 2041. That is according to the Social Security's (mostly Republican-appointed) Trustees. According to the non-partisan Congressional Budget Office, Social Security can pay all promised benefits even longer, until 2046. By either date, most baby boomers will be dead, and almost all of the rest retired, before there is a problem.

Senator Obama is beginning to sound like Fred Thompson, which has me wondering: is he running for the Democratic or the Republican nomination?

The Corporatization of the University

"Presidents at 12 private universities received more than $1 million in the 2005-6 school year, the most recent period for which data on private institutions is available, up from seven a year earlier, according to an annual survey of presidential pay to be released today by The Chronicle of Higher Education. The number of private college presidents earning more than $500,000 reached 81, up from 70 a year earlier and just three a decade ago. The survey also found that the number of public university presidents making $700,000 or more rose to eight in 2006-7, the reporting period for public institutions. Only two public university presidents made $700,000 in the previous period. The survey did not include E. Gordon Gee, who took over at Ohio State University earlier this year and whose $1 million pay package, before bonuses, is probably the highest of any public institution."
"John W. Curtis, director of research and public policy at the American Association of University Professors, said rising pay to presidents was consistent with a “corporate mindset” at colleges."



Glater, Jonathan D. 2007. "Increased Compensation Puts More College Presidents in the Million-Dollar Club." (New York Times (12 November).

In the Long Run We’re All Hung Over from the Short Run

One of fundamentals of contemporary economic wisdom is that short run fluctuations only affect short run output; in the long run it’s all about growth. Textbooks have dropped their chapters on business cycles and replaced them with fancy growth models. The short run is for speculators; the long run is for serious policy analysts. But what if it’s all wrong?



A recent paper by Cerra and Saxena, two economists at the Bank for International Settlements, argues that the economic costs of recessions and more serious crises tend to be permanent. According to their analysis, post-recession recovery does not generally return an economy to its pre-recession growth trend, but shifts the trend line down a notch. That is, periods of negative growth are not usually followed by periods of above-trend growth. Poor countries may be poor not because their growth rates during healthy periods are lower, but because they have more and deeper disruptions.

I am not in position to adjudicate, except to notice (1) most economists simply assume that recovery returns an economy to trend, (2) the issue is of enormous importance, and (3) if Cerra and Saxena are right, we need to rewrite the macro textbooks (again).

UPDATE: DeLong endorses the view that short run effects don't last:

Which side am I on? I tell my undergraduates:

At a time horizon of 0-3 years, be a Keynesian: the most important things are the fluctuations in unemployment, in real demand, and in capacity utilization.

At a time horizon of 3-8 years, be a demand-side monetarist: you can assume (provisionally) that fluctuations in employment, real demand, and capacity utilization die out; the most important things are the fluctuations in the composition of real demand (investment vs. consumption vs. government vs. net exports) and in inflation- and deflation-causing nominal demand assuming (provisionally) stable growth of the economy's productive capacity.

At a time horizon of 8 years or greater, be a sane supply-sider: the most important things are the processes of investment in physical, human, and organizational capital that raise the economy's productive capacity

Fictitious Capital and Financial Responsibility

Joel Kupferman, who has done great work on the World Trade cleanup scandal, just sent me this. The last line gives a deep insight into the mindset of people with authority in the U.S. today.

WTC insurance funds used for food, drinks

Published: Nov. 11, 2007

NEW YORK, Nov. 11 (UPI) -- Records show officials tied to the $1 billion World Trade Center insurance fund have been using that money for dinners and cocktails in New York.

Designated for Ground Zero cleanup and potential liability claims against the city, the insurance fund has been used by fund lawyers and executives to pay for a series of drinks and dinners in local establishments, the New York Post said Sunday.

Those expenditures have been criticized by U.S. Rep. Jerrold Nadler, D-N.Y., who said the money should be focused on aiding the victims of Sept. 11.

"The captive fund was never meant to serve as an open-ended expense account for well-paid lawyers," Nadler said. "Every dime wasted is money that could, and should, have gone to those who continue to suffer because of their exposure at Ground Zero."

The Post reported that Caroline Gentile, a spokeswoman for the fund, has defended the expenditures. She said the dinner and beverage costs were legitimate business expenses and added that the fund has grown by $15 million since its inception due to interest.

More Economic Imbalances

The tightly wound economy is such that when adjustments to contradictions take place in one spot they create new contradictions elsewhere, at least that is what an old German philosopher once said. Here is an example:

"Washington Mutual Inc. got what it wanted in 2005: A revised bankruptcy code that no longer lets people walk away from credit card bills. The largest U.S. savings and loan didn't count on a housing recession. The new bankruptcy laws are helping drive foreclosures to a record as homeowners default on mortgages and struggle to pay credit card debts that might have been wiped out under the old code, said Jay Westbrook, a professor of business law at the University of Texas Law School in Austin and a former adviser to the International Monetary Fund and the World Bank. "Be careful what you wish for,'' Westbrook said. "They wanted to make sure that people kept paying their credit cards, and what they're getting is more foreclosures"."






Also, I wonder how much the increasing Japanese yen will unwind the carry trade, which is been a major source of cheap finance for speculation.

economic imbalances

Look at the comparison between changes in household debt and the current account balance. I hope that Peter will throw some more light on this relationship. An eminent retired blogger whom may of you appreciate formatted this graph for me.

http://www.un.org/esa/policy/policybriefs/policybrief4.pdf

Rubin’s Fallacy and the Paradox of Thrift

When I choose my blog pseudo-name – PGL or ProGrowthLiberal – Angrybear suggested I was a Rubinesque Bear, that is, a believer that fiscal restraint could promote long-term growth through higher national savings. I hate to say this but Paul Krugman had to give a stern lecture to Robert Rubin over the simple issue of transmission mechanisms. Before we get to the details of international macroeconomics, let’s do an analogy drawn from the paradox of thrift.



Classical economists used to have faith that a rise in national savings would automatically lower real interest rates enough to increase investment demand such that the economy would stay at full employment. Keynes noted that sticky prices – or a decision by the Central Bank to peg interest rates – could frustrate this transmission mechanism, which would mean that the rise in the savings schedule could lead to a recession, which would result in less investment and savings. Without further ado, let’s turn the microphone over to Paul by first noting Rubin’s fallacy:

You could have had surpluses that affected the savings rate and would have helped the trade balance. I think you would have had more confidence in the policy framework and you would have had a better dollar,” he says regretfully. He pauses to reflect. “But we are where we are.”

Paul harkens to the doctrine of immaculate transfer noted by John Williamson as Paul notes that accounting identities do not induce expenditure-switching unless they are accompanied by changes in the real exchange rate. Paul also notes that a fall in national savings could lead to fewer imports if it means a recession. But aren’t we trying to avoid a recession as we find means of encouraging more investment and net exports? If so, we should be hoping for lower real interest rates and a real devaluation of the dollar.

Could Obesity Lead to a Longer Life Expectancy?

Greg Mankiw reproduces a table from the Carpe Diem blog that shows a series called “standardized life expectancy” noting that the U.S. leads in this constructed figure. Greg writes:

I have not studied the details behind the construction of these numbers, but they are asking a sensible question … Given how overweight we Americans are compared with citizens of other countries, it is amazing that we live as long as we do.

Why this might be misleading is explained after the jump.



OK, Greg is likely correct in his assertion that obesity – along with homicide and accidents – tend to lower life expectancy as traditionally measured but notice that his previous post asserted that higher spending should lead to better health outcomes. Let’s turn to Carpe Diem’s source, which was a PowerPoint presentation by Robert Ohsfeldt and John Schneider, which discusses health care reform by starting with a bullet point entitled “Dimensions of underperformance”. The sub-bullets are excessive spending, poor health outcomes, and inadequate access to care. Slide 6 notes that the US spends twice as much per capita as nations such as Canada, France, Germany, and the UK. The authors do, however, note that one would expect at least a little higher spending per capita given the fact that the U.S. has higher income per capita. The authors also provide a lot of evidence on the quality of health care debate as well as how many Americans go uninsured.

The contributions to this debate made by Ohsfeldt and Schneider appear to go well beyond the standardized life expectancy comparison that Mark Perry (Carpe Diem) and Greg have emphasized. I for one would love to study the details of their research more closely. But for now, let me rephrase Greg’s query as follows:

Given our much we Americans spend on health care compared with citizens of other countries, it is amazing that we don’t live longer.

Back to School on Exchange Rates

Menzie Chinn has done us all a service with his review of recent exchange rate theory, which I also skimmed in this. I was particularly intrigued by his reference to Frydman and Goldberg’s “Imperfect Knowledge Economics” approach. I read their article but not their book, and at the risk of thereby embarrassing myself offer these thoughts.



1. F&G are certainly right that a single model should not be expected to explain xrate movements over long periods of time because the market determinants are changing. This fits to a Kuhnian view: there are periods of “normal” trading, where movements respond predictably to economic news, and paradigm shifts—discontinuities in trading behavior.

2. PPP is a weak attractor at best. This is because the vast majority of transactions in international markets concern stocks, not flows. Forex markets are more like stamp or coin markets than markets in toothpaste, but PPP is based on the toothpaste template. Self-fulfilling prophecies can persist until the effects of currency misalignment are so disruptive that macro events force a correction; arbitrage doesn’t regulate. Any intermediate xrate would appear to be a statistical attractor due to mean reversion; is there any evidence that PPP outperforms other values in that respect?

3. F&G frame their argument in terms of forecasting, which on a practical level is certainly the test. The larger question, however, is whether their approach, or any of the alternatives, is consistent with the role assigned to xrates in micro models of international trade. This was the issue I raised in Challenge. The general answer, I still think, is that they don’t. F&G in particular present a view that, in theory, cannot be reconciled with strict comparative advantage. If a shifting bundle of macro fundamentals determine xrates, and if their weights change from one period to the next, how then can international prices be relied on to settle at levels that balance trade at the margin?

F&G end with the habitual sop toward trade orthodoxy, continuing the Hayekian tradition of deep insight into the process of markets combined with an inability or unwillingness to see that the normative view of markets has been eviscerated.

Oh...My....God: Business and the Bard

Today's Times Business section has an article called "Lessons in Shakespeare, From Stage to Boardroom" that I recommend heartily: one of the funniest things I've read in ages - albeit unintentionally so. A few gems follow under the fold:



Remember Ken Adelman ( one of founders, if I'm not mistaken, of that pack of jackals we've since come to know and love as the neo-CONS) : he and his wife, Carol, "have been dressing managers in Elizabethan costumes since the 1990's. Senior executives have been increasingly joining the classes and re-enacting the speech in which Henry V urges his 'band of brothers' to fight to the death."

Then we have Stephen Coleman, of Shakespeare & Company, "who said he noticed the chief executives in a recent audience grow pale as he played the role of Hamlet confronted by the ghost of his father. 'The ghost demands, if you love me, you will avenge my murder.' The CEO's told him, Mr Coleman said, 'This is the dilemma we face: what is our responsibility to shareholders, to employees, to clients.'" Say what? You can't make this stuff up. Finally we have one James Fugitte, CEO of Wind Energy Corporation, who finds inspiration in Falstaff: "It's a Falstaffian world. When I began my career, there was a scarcity of capital. Now there's an abundance of capital. Falstaff, he added, c'est moi." Oh. Fellas, make the friggin' widgets and leave Shakespeare out of it.

On second thought, this isn't funny: this is terrifying. Where is S. J. Perelman whne you need him?

Revised Introduction: The Invisible Handcuffs

I very much appreciated the comments from my first posting of the introduction. Please indulge me for posting another version. I have changed it radically, especially after the first paragaphs. Any more comments would be appreciated:

The Invisible Handcuffs of Capitalism:

How Market Control Undermines the Economy by Stunting Workers

Setting the Stage

The Invisible Handcuffs makes the case that the modern economy has matured to the point where markets do not and cannot harness anything near the full productive potential of society; and even more seriously, that markets significantly undermine economic performance. Even though purely monetary incentives may appear to work effectively when one takes a narrow view of their operation, from a larger perspective, the invisible hand turns out to be akin to invisible handcuffs for the economy, as well as for society as a whole.



Other books address the cultural, social, and ethical shortcomings of markets. But The Invisible Handcuffs is unique because it will emphasize the way that markets affect people in their lives as workers in contrast to the usual perspective that judges an economy by how well it serves people as consumers.

Certainly, the current U.S. economy falls short on a maddening array of counts. Here is the most powerful economy in the world, yet it seems powerless to meet the most pressing needs of society. The list of pervasive problems includes excessive poverty, inadequate health care, environmental damage, pervasive toxins, just to name a few. Although the United States policymakers pay insufficient attention to such problems in order to nurture the market, the relative economic strength of its economy still seems to be eroding.

The contradictory nature of the U.S. economy raises a host of relatively obvious consumer oriented questions: Surely, an economy with a communication system that would have been unimaginable only a few years earlier should be able to foster a sense of community or at least create a satisfying culture. Why has a widening circle of poverty begun to engulf more and more people, even after the pace of technological change began to accelerate in the late twentieth century?

Although the majority of the population may have access to considerable material goods, the current economic system fails miserably in creating a satisfying quality of life. For example, social scientists have found that happiness in the United States has not increased since the 1950s, despite enormous economic growth (Layard 2005, p. 29).

This book will argue that the producer oriented perspective suggests promising answers to such problems. For example, a major cause of the lack of satisfaction is an inattention to the quality of people's working lives. Most of all, The Invisible Handcuffs emphasizes that even though the rationale of the market system is to create an efficient economy, market control undermines the economy by stunting workers and ignoring their potential.

The stakes are far higher than just the ability to supply consumers with more commodities the purported purpose of the economy. At a time when the world faces difficult threats, such as global warming and scarcity of vital materials including water and petroleum society cannot afford to waste a resource as valuable as human potential. In this sense, the importance of looking at the economy from the perspective of workers becomes undeniable.

Overview

The first chapter begins with the theological defense of markets, by people as far apart in time and in stature as Edmund Burke and George W. Bush. According to such people market relations ensure not only efficiency, but higher qualities, such as freedom and justice. Questioning markets become akin to blasphemy. The Invisible Handcuffs suggests that a more appropriate theology of markets might come from Greek mythology in particular, the legend of the sadistic Procrustus, whose story is introduced in this chapter.

The second chapter introduces the subject of labor, both direct discipline in the workplace and macroeconomic discipline by creating unemployment, what Alan Greenspan referred to as the traumatization of labor. Ironically, policy makers pretend that all other objectives whether higher wages, better working conditions, environmental protections, or the quality of life must give way to the creation of jobs, at the same time as the maintenance of unemployment is necessary to sustain labor discipline. The two concluding sections of the chapter offer quantitative estimates of some of the human and economic costs of labor discipline and a brief discussion of the path that led economists to adopt the narrow perspective that makes them uncritical of the present form of labor discipline.

The third chapter turns to the motives for why economic theory pays no attention to working conditions. Instead, work becomes nothing more than the absence of leisure. In addition, relations between workers disappear from consideration in economic theory. Perhaps, the greatest defect of all is the reduction of workers into a factor of production, comparable to coal or steel.

Even when economists treat workers' skills, they do so by conceptualizing abilities as "human capital." This perspective is especially destructive because it blocks economists (and those whose vision is shaped by economists) from seeing people as anything more than a commodity.

The fourth chapter discusses what policy based on the narrow market perspective means for everyday life, including the amount of time that jobs consume as well as the extension of controls on people's behavior outside of the workplace. At the same time, these controls interfere with people's opportunity to improve their own capacities.

The fifth chapter briefly extends the subjects treated earlier to the international economy.

The sixth chapter puts the subject in historical perspective by looking back at the economic perspective bequeathed by Adam Smith. The chapter emphasizes Smith as a harsh disciplinarian. It shows how Smith eliminated any discussion of modern industry in order to allow him to offer a vision of freedom and liberty.

Smith realized that the harmonious society he advocated depended upon a prior coercion of labor to accept the discipline of the workplace. At that time, violent measures were often required to leave people with no option but to accept the new conditions of wage labor. Even after people became corralled into wage labor, Smith realized that controls had to go deeper into people's lives, including state regulation of religion. In short, for all his positive rhetoric about freedom, Smith's concern was to control people in order to make them obedient workers.

The seventh chapter analyzes the consequences of Smith's work. It describes how later economists simplified Smith's writings and removed its uncomfortable ideological implications. The result was an effective, but unrealistic, propagandistic shell.

The eighth chapter looks at the concept of the Gross Domestic Product, a seemingly straightforward measure of the success of an economy. The chapter reviews the evolution of this highly political concept, showing how, just like with Adam Smith's theory, the Gross Domestic Product focused on convenient matters that put the market in the best possible light.

The chapter ends by contrasting the Gross Domestic Product with the results of a recent field of "happiness studies," in which social scientists, including economists, recognize the disconnect between the Gross Domestic Product and a satisfying quality of life.

Chapter 9 surveys some of the innumerable ways in which capitalism even fails in its narrowly conceived objective of increasing the Gross Domestic Product. In keeping with the theme of this book, this chapter only looks at ways in which the control of labor is self defeating. For example, unwieldy bureaucracies driven by purely financial motives are incapable of efficiently organizing and inspiring people.

These shortcomings fall into two classes. In the first one, efforts to control labor are wasteful, even though they seem necessary given the present capitalist system. The more interesting second class emphasizes the way that the present this organization of production stunts workers potential.

The final chapter offers some hints about the future possibilities of people working together to create a better life.