Interest Rates During the Clinton Years

In a couple of comments to this post, EconoSpeak reader wellbasicly at first questioned whether the 1993 return to fiscal sanity actually promoted long-term growth and then posed this question:

for instance it is incontrovertible that interest rates did not go down

Our graph shows that interest rates moved up and down during the 1992 to 2000 period but it also shows that the interest rate was 5.24% when Clinton was leaving office as compared to 6.77% when Bush41 was leaving. So to the simple question posed, the answer is yes. Now matters like cause and effect are a little more difficult.



Much of the ups and downs likely relate to Federal Reserve’s actions and their view of how the macroeconomy was stacking up with respect to full employment. For example, the FED was allowing interest rates to fall during 1992 as the economy was weak. Why the FED slammed on the monetary brakes in 1994 was beyond me because the recovery had yet to get us anywhere near full employment.

But mercifully, the FED did allow interest rates to basically fall during the next four years even as economic growth was quite strong. I suspect the return to fiscal sanity convinced the FED that we could encourage more investment demand as at least the government was trying to boost national savings for a change.

Alas, the experiment with fiscal sanity and more national savings departed the White House along with the Clinton economic team. Then again, this decade started off with an insufficiency of aggregate demand that was stubborn to reverse itself for several years.

Is the Obama Campaign saying the 1993 Tax Increase and Health Care Proposals Were Bad Politics?

Greg Sargent notes:

In what may be Obama's most direct and aggressive criticism of Bill Clinton's presidency yet, the Obama campaign dropped a new mailer just before Super Tuesday that blasts "the Clintons" for wreaking massive losses on the Democratic party throughout the 1990s.

The Republicans did win a majority in Congress during the 1994 elections. From a policy perspective, what to make of this mailer?



As I recall, the Clinton Administration was pushing a couple of policy in 1993. One was a tax increase to end the Reagan-Bush41 policy of Spend&Spend and Borrow&Borrow. The other was the ill fated health care reforms. If Senator Obama is now saying he does not have the courage to end Bush43’s fiscal irresponsibility, then why should we want him as President? And it strikes me that health care reform will be a high priority for our party during the 2008 election.

But maybe the Senator does have the courage to push for both fiscal responsibility and health care reform. If so, I would suggest that Senator Obama apologize for this mailer. Let me also echo a concern that Kevin Drum shared:

So what does this tell us? Nothing except that this was a really, really close race.

The good news: Exciting! The bad news: Contrary to the storyline the talking heads have been feeding us, this hasn't really been a very nasty race. But it might turn into one now. Fasten your seat belts.

My plea to both candidates is that they try really hard to avoid what Kevin fears here (and this plea extends to the spouses even the ones who used to President).

Some Economists for Edwards to Endorse Obama

I am jumping the gun as this has not yet been publicly announced, but on Sunday about half of the former group, "Economists for Edwards," agreed at the urging of James Galbraith and Clyde Prestowitz to endorse Barack Obama for president. A condition of this, which I insisted on as a condition for signing on, was that it be made clear in our statement that we would be working to change some of Obama's policy positions, particularly on health care and social security, to become more like those supported by Edwards. There was considerable debate in the group on all this, and about half are not signing on. However, none of those not signing on expressed that they favored Hillary instead, even though some favored some of her policy positions.

Regarding the social security issue, I would like to make public a table that I have cooked up with invaluable input from Bruce Webb. It makes clear the degree to which reality in the last decade has been much closer to the low cost (LC) projections by the Social Security Trustees, the projection under which the system never runs a deficit ever, in contrast with the widely publicized intermediate cost (IC) projections which give deficits starting in 2017 and "bankruptcy" in 2041 (after which recipients would only be getting about 120% of what ones are now in real terms), thus reinforcing the case for doing nothing. The numbers are annual percentage terms, and I think it is otherwise pretty self-explanatory. The only year that reality was below the IC projection was the recession year of 2001, and it exceeded the LC projection in six out of the ten years. I also note that final GDP numbers for 2007 are not in, but social security balances came in above the IC projection by $3 billion, but below the LC projection by $12 billion.

Year IC projection LC projection Actual real GDP change
1997 2.5% 3.2% 3.8%
1998 2.5% 3.1% 3.9%
1999 2.6% 3.4% 4.0%
2000 3.5% 3.9% 5.1%
2001 3.1% 3.5% 1.0%
2002 0.7% 1.6% 2.4%
2003 2.9% 3.8% 3.1%
2004 4.4% 4.9% 4.4%
2005 3.6% 3.9% 3.6%
2006 3.4% 3.8% 4.7%

1997-2006 average IC = 2.92% LC = 3.51% Actual = 3.60%
2001-2006 average IC = 3.02% LC = 3.58% Actual = 3.37%

Krugman on Obama

Is anyone else as fed up as I am at Krugman's continual sniping at Obama? Is he looking for a job with Hilary? As hard-hitting as he has been on the War, doesn't it count with him at all thatClinton voted for, while Obama voted against, the thinly-disguised authorization of the use of force against Iran last year?

A Profile for Killing

Today’s news brings up an important question: are American and other military forces using profiling techniques in selecting targets for assassination?



Let’s speculate for a moment. Suppose you are a tactical commander for an occupying military force in some such place as Iraq or Gaza. You are locked in a struggle with a partisan militia, and you don’t have enough intelligence data to know who its members are. Your main weapon is aerial bombing; your main information source is aerial observation.

Begin by assuming that there is a probability that any randomly selected male between the ages of 16 and 40 is a militia fighter, say 10%. (Women may be fighters too, but their likelihood is much lower.) It is not in your interested to try to kill everyone in that demographic; you would give young men no incentive to not join the militia.

But what about groups of young men? Suppose that the probability of being in a militia rises with the number of military-age men who are seen meeting together. It might be 25% for groups of four, 50% for groups of six, and so on. Once a gathering reaches a certain size you determine that the risk of bombing non-fighters (type I error) is small enough that you should attack.

This model is too simple, of course. An actual profiling system would presumably include other dimensions (ethnic, geographic, time of day), but the general idea remains the same: if a gathering of men is given a high enough score you kill them. The result is that you eliminate a large number of those fighting against you, and you also accept the occasional public relations setback of bombing a wedding, a work detail, a militia unit made up of local collaborators.

I would like to see two things: the actual profiling methods employed by American, Israeli and similar forces (not a chance), and a public defense of the procedure by those who carry out or support it. Right now there is only silence and invisibility, but does anyone doubt that assassination-by-profile is standard operating procedure in modern anti-insurgency warfare?

Microsoft v. Google in the Acquisition Game

We got the sense that Microsoft and Google did not like each other when Microsoft objected to Google’s acquisition of DoubleClick:

Microsoft, a veteran defendant of epic antitrust battles in the United States and Europe, is urging regulators to consider scuttling Google’s plan to buy DoubleClick, an online advertising company. Microsoft contends that the $3.1 billion deal, announced on Friday, would hurt competition in the fast-growing market for advertising on the Web and raises questions about how much personal information would be collected by Google, already a dominant player in online advertising. Bradford L. Smith, Microsoft’s general counsel, said in an interview yesterday that Google’s purchase of DoubleClick would combine the two largest online advertising distributors and thus “substantially reduce competition in the advertising market on the Web.” Google dismissed Microsoft’s assertions. “We’ve studied this closely, and their claims, as stated, are not true,” Eric E. Schmidt, the chief executive of Google, said in an interview last night.

Some of you might scoff at the notion that Microsoft wants competitive markets. So what’s up with the proposed Microsoft acquisition of Yahoo?

Microsoft Corp.’s proposed $42 billion purchase of Yahoo Inc. would establish the world’s largest software maker as a “strong No. 2 competitor” against online search leader Google Inc., Microsoft CEO Steve Ballmer said Monday. Speaking to a group of analysts in New York, Ballmer said the acquisition of Yahoo would raise competition, rather than eliminate it, in the Web search and advertising market. “Google’s clearly got a dominant position. They’ve got about 75 percent of paid search worldwide,” Ballmer said. “We think this enhances competition. Anything else would be less good from that perspective.” On Sunday, a Google executive said Microsoft could use the acquisition to gain too much control over the Internet, underscoring the online search leader’s queasiness about its two biggest rivals teaming up. Google’s opposition isn’t a surprise, given that Microsoft views Yahoo as a crucial weapon in its battle to gain ground on Google. “This is about more than simply a financial transaction, one company taking over another. It’s about preserving the underlying principles of the Internet: openness and innovation,” Google chief legal officer Michael Drummond wrote in the company’s blog ... Since announcing its unsolicited bid early Friday, Redmond, Wash.-based Microsoft has been trying to depict a Yahoo takeover as a boon for both advertisers and consumers because the two companies together would be able to compete against Google more effectively. But Google is painting a starkly different picture, asserting that Microsoft will be able to stifle innovation and leverage its dominating Windows operating system to set up personal computers so consumers are automatically steered to online services, such as e-mail and instant messaging, controlled by the world’s largest software maker. In a move that illustrates just how badly Google wants to torpedo the deal, Google Chief Executive Officer Eric Schmidt called Yahoo CEO Jerry Yang Friday to offer his help in repelling Microsoft, according to a report Sunday on The Wall Street Journal’s Web site, which cited anonymous people familiar with the matter.

This spat between Google and Microsoft over who is more concerned about preserving competition strikes me as a big disingenuous on both of their parts. As the Internet moves closer to a duopoly market, shouldn’t our government being taking a much closer look at the economics as to whether these acquisitions should be allowed or not?

Update: Alex Tabarrok argues that Google’s complaint is an example of antitrust protectionism.

A Sociological Analysis of the Rogue Trader

The Wall Street Journal has a very perceptive article about the class nature of Jerome Kerviel, a striving person from a modest background, who was trying to compete with and win approval from his more fortunate colleagues. Kerviel's story is obviously self-serving, but much of it rings true -- especially his ill-fated efforts to be accepted.

Gauthier-Villars, David and Stacy Meichtry. 2008. "Kerviel Felt Out of His League." Wall Street Journal (31 January): p. C 1.

"In 2005, Jérôme Kerviel got the biggest break of his career: a promotion out of Société Générale SA's lowly back office -- a place so uncool it was dubbed "the mine" -- and into a coveted job as a trader at the powerful bank. But if clawing your way up from the mailroom wins you a badge of honor in the U.S., not so within in the rigid class system that defines the upper ranks of French finance. Mr. Kerviel's effort to impress his colleagues now appears to be a motivating factor behind his disastrous trading spree, which burned a $7.3 billion hole in Société Générale's books."

""I was held in lower regard than the others because of my educational and professional background." Mr. Kerviel told prosecutors over the weekend. His comments were from a transcript and confirmed by prosecutors and his lawyer. Trading might not be rocket science, but Société Générale has a tradition of drawing its star traders from France's most elite schools. Many have doctorates in disciplines such as astrophysics or nuclear science .... The bank's top brass, including investment-banking head Jean-Pierre Mustier, is from the engineering school Polytechnique, the M.I.T. of France. Chief Executive Daniel Bouton graduated from the prestigious Ecole Nationale d'Administration, a school known for churning out high-level government functionaries that run the country. "If you graduated from ENA or Polytechnique, you have an absolute tenure; if not, you miss out on all the good job opportunities," according to a former Société Générale executive. "This rift exists all over the bank."

"The high-pressure atmosphere has taken its share of victims. In June, a trader in his 30s who worked on the same floor as Mr. Kerviel jumped to his death from a footbridge near Société Générale's towering headquarters in the La Défense suburb of Paris. Moments before his death, Mr. Marchet says, a supervisor had interrogated the trader for losing about €9 million in unauthorized trades. "He took his bag, left Société Générale and jumped off a bridge," Mr. Marchet says."
.... that death came in the wake of two other suicides in recent years. In 2005, a trader jumped to his death from a ninth-floor window at the bank's headquarters, Mr. Marchet said. A year later, a back-office employee jumped in front of a train commuting between La Défense and the center of Paris."

"The trading desk where Mr. Kerviel landed, the "Delta One" unit, deals with trades aimed at making small profits with stock-market fluctuations. Mr. Kerviel, who hails from a small town in Brittany and graduated from a little-known university, suggested in his statement to prosecutors that he hoped to curry favor with people who counted."

"At first, Mr. Kerviel's strategy paid off -- too well, in fact. His gains snowballed so quickly that, at some point, he had locked in a gain of €1.6 billion, about a third of the bank's overall net profit in 2006. At that moment, "I don't know what to do," Mr. Kerviel told investigators. "I am happy, proud, but I don't know how to justify my gains"."

"What seemed to disappoint Mr. Kerviel was that his trading prowess wasn't being acknowledged. He told prosecutors that he believes managers were aware of his methods but never spoke up as long as things were going well. "I cannot believe that my superiors did not realize the amount I was risking," he said in the interrogation. "It is impossible to generate such profit with small positions. That's what leads me to say that while I was [in the black], my supervisors closed their eyes on the methods I was using and the volumes I was trading."

The Super Bowl and Intellectual Property vs God

The NFL has a rule to limit TV screens to 55 inches at public viewings. The league makes an exception for venues like bars and restaurants that regularly broadcast sporting events. But churches that dare to let their parishioners watch the mayhem on the big screen are coming under fire. Presumably, the league is not protecting intellectual property, but want parishioners to go to bars instead of churches on Sunday.

Alter, Alexandra. 2008. "God vs. Gridiron: As Church Super Bowl Parties Are Busted by NFL." Wall Street Journal (2 February): p. W 1.

On Greg Mankiw’s Birthday – Does He Trust His Kids More than Himself?

Hat tip to Mark Thoma for bringing us the birthday wish of Greg Mankiw who writes:

What worry me are the problems that we will bequeath to our children. Long before I was born, Franklin D. Roosevelt established a compact among the generations. Families had long cared for their elderly members, but Roosevelt federalized that responsibility in the form of the Social Security system. Social Security is sometimes viewed as a pension plan, but it is mostly pay-as-you-go. The working-age population taxes itself to support its parents, in the hope and expectation that its children will do the same … unless we figure out a politically acceptable way to reduce the benefits now promised to future retirees, taxes are going up in the coming decades. The national debate will have to shift from which tax cuts do the most good to which tax increases do the least harm.

Where to begin with such a weak attack on the Social Security system?



I could go all Dean Baker on this criticizing Greg for mixing up three things: the projected increase in Federal health care spending, the massive general fund deficit (which Greg fails to even note), and the Social Security system which is not that far from being solvent over the long-run. Greg loves to note the rise in payroll taxes but he omits the reason for that 1983 increase, which he and I had to face just as we were getting out of graduate school. Greg claims Social Security is pay-as-you-go but we know better than this in the wake of the Reagan Social Security reform.

But what is most odd about this birthday wish is its claim about family relations. Maybe some kids are willing and able to take care of their parents, but during the 1930’s several of the elders were destitute. So this line about FDR Federalizing family responsibility sort of ignores the historical context behind the creation of the Social Security system.

But Greg’s main concern is one that I share – that we are leaving a huge Federal debt for our kids. Then again I am reminded of Robert Barro’s reconstruction of Ricardian Equivalence. Greg and I are both lucky enough to have both children and good jobs. With all those tax “cuts” (actually shifts) that we got from Greg’s former boss (President Bush) – shouldn’t he and I be saving to help our kids pay for those future taxes?

Happy 50th birthday Greg!

deLong on Marx's predictions

Some comments on deLong’s analysis of Marx’s prediction.

Shanghai Daily (2/1/08)

Would Marx say rising tide today lifts all boats?
By: J. Bradford DeLong

A century and a half ago, Karl Marx both gloomily and exuberantly predicted that the modern capitalism he saw evolving would prove incapable of producing an acceptable distribution of income.

"Acceptable"? Marx wasn't much concerned with such moral terms (especially since his predecessors had been overly fond of moralistic phrasings), nor did he care about the distribution of income as much as the distribution of power.

Wealth would grow, Marx argued, but would benefit the few, not the many: the forest of upraised arms looking for work would grow thicker and thicker, while the arms themselves would grow thinner and thinner.


Ever since, mainstream economists (in the West) have earned their bread and butter patiently explaining why Marx was wrong.

That's why they're paid? Hmm... somehow I thought so all along.

Yes, the initial disequilibrium shock [!!!] of the industrial revolution was and is associated with rapidly rising inequality as opportunities are opened to aggressiveness and enterprise, and as the market prices commanded by key scarce skills rise sky-high. But this was - or was supposed to be - transient.

The reason I inserted the exclamation points is because deLong seems to assume that “Western” economies were in equilibrium right before the industrial revolutions and that the equilibria were shocked by some sort of outside force. I would like to know the theory and, more importantly, the facts behind this view. Was it a theory developed by the late Walt Rostow in his "non-Communist Manifesto"?

The history of actual capitalist industrial revolutions suggests that "aggressiveness and enterprise" is a euphemism for theft. (The latter does not have to be a moralistic term: a lot of Marx's arguments are stated in terms of the bourgeoisie breaking their own laws, of their practice violating their own theory.)

The rest of deLong’s article isn’t about Marx as much as about his interpretation of Marx’s prediction of growing inequality (the absolute general law of capitalist accumulation).

A technologically stagnant agricultural society is bound to be an extremely unequal one: by force and fraud, the upper class pushes the peasants' standards of living down to subsistence and takes the surplus as the rent on the land they control.

It seems that deLong believes that the extraction of rent has stopped, since most of the people in the “West” no longer live in agricultural societies. But oil producers (and to a lesser extent, other mining interests) still make tremendous profits from the scarcity rents that are a big chunk of the exorbitant prices of their product. (“Scarcity rents” are revenues received simply because the product is scarce, not because anyone has to devote resources to producing it.)

By contrast, mainstream economists argued, a technologically advancing industrial society was bound to be different. First, the key resources that command high prices and thus produce wealth are not fixed, like land, but are variable: the skills of craft workers and engineers, the energy and experience of entrepreneurs, and machines and buildings are all things that can be multiplied.

It's true that skills of the craft workers who initially benefited from industrial revolution in England (and I presume the US) later found that their skills were rendered obsolete (as their bosses mechanized, de-skilled production, etc.) It's also true of engineers and other "knowledge workers," since they are in very much the same boat as the craft workers, i.e., dependent on the capitalist accumulation process and the capitalist effort to end dependence on any group of high-paid workers. (Computer programmers paid too much to allow you to receive abundant enough profits? I have a H1-B visa program for you...)

It's also true that the capitalist competitive effort to profit by any means necessary can cause over-accumulation: like fools, they rush in, over-investing in and over-producing machines and (especially) buildings. This eventually causes a crash, which obsoletes some capitalists. (Marx tells this story in volume I: it's called the "concentration and centralization of capital.")

The problem with deLong's story (or what he might call a "model") is that some of their crowd get out while the going is good. They convert their machines and buildings (or, more generally, corporate equity) into liquid cash before the markets crash. (Even if they aren't personally thieves themselves, they follow many a criminal's dream: steal a million and turn it into cash (without being caught) and then "go legit.") The ones that succeed can then hold a nice diversified portfolio of assets (hedged by holding lots of ultra-safe government bonds), which allows them to weather most storms.

On top of that, they can build on their initial advantages, taking their property income (a.k.a. surplus-value) and increasing the size of their nest-eggs, until they grow to the size of Roc eggs. They can regularly take some big risks with some of their portfolios (while sheltering the rest), get a high return, and accumulate even more of the safer assets.

Next, they can buy some politicians to help them grow their wealth and power and major-domos to help them spend their money.

This, of course, is why we see dynasties established and lasting for centuries. It's true that the scions get decadent and want to break the First Commandment ("thou shalt not dip into capital") or the Second ("thou shalt not put all thy eggs in one basket"). But that's why God invented trust funds with all sorts of rules.

As a result, high prices for scarce resources lead not to zero- or negative-sum political games of transfer but to positive-sum economic games of training more craft workers and engineers, mentoring more entrepreneurs and managers, and investing in more machines and buildings.

I truly wish economists and other social researchers would drop the lame "game theory" metaphors. In any case, it says nothing about the accumulation of money wealth and money power.

Second, democratic politics balances the market.

Where does this "democratic politics" come from? does it fall from the sky? is it innate in the mind? No. They come from social practice, and from it alone. (Gee, I wonder if people reading the "Shanghai Daily" know who I plagiarized that from.)

In 19th century England, as in most other capitalist countries, democratic politics came from below, from movements such as the Chartists. That is, working people fought back -- and the moneyed rulers weren't interested in democracy. (In the US, the story is different, as Mike Davis points out, because many democratic rights were won without working-class struggle because a big chunk of the male population owned land in the early stages. Nonetheless, US workers had to fight pretty damn hard.)

And of course, the growing money potentates used their friends in the government (or hired scabs) to fight the working-class upsurge. They also developed ways to control democracy so that it wouldn't get out of hand, while (1) keeping working people quiet because it was "their government" and (2) making them alienated from politics because "their government" was corrupt (owned by -- guess who?)

Of course, it's wrong to over-generalize from the corrupt system of managed democracy we see in the U.S. The workers don't always lose. But they don't win if they rely on the "condescending masters" in the government to solve the problems. They need to organize to pressure the government if they want to get anything decent.

Government educates and invests.

And who pays for that? and what good is a public information if the government destroys its scarcity value by educating lots of people, creating your competition? it's great to be literate, numerate, etc., but it doesn't give you a leg up to compete with the moneyed powers. I doubt that education ever made anyone rich, able to join the capitalist class, to become independently wealthy, etc.

It also provides social insurance by taxing the prosperous and redistributing benefits to the less fortunate.

As Otto von Bismarck (who invented it) knew, social insurance is almost completely a matter of redistribution within the working class, not a redistribution from the rich. Like most insurance, it's needed. But we, not the rich, pay for it.

(Your employer contributes to unemployment insurance, it's true, but all economists (though maybe not deLong) know that that tax is passed on and is really paid by the employees. The wages are lowered to allow the employers to afford to write the checks for the tax.)

Economist Simon Kuznets proposed the existence of a sharp rise in inequality upon industrialization, followed by a decline to social-democratic levels.

As Doug Henwood has said, we've gone beyond the Kuznets curve. The latter’s curve has inequality up followed by inequality down. Even it this happened, we in the US are now in a new "inequality up" phase, since 1980 or so. This, it seems, explains what deLong says next.

But, over the past generation, confidence in the "Kuznets curve" has faded. Social-democratic governments have been on the defensive against those who claim that redistributing wealth exacts too high a cost on economic growth.

The problem with this statement is that the Kuznets curve was supposed to be the end of inequality. Except for a small minority, it says, we’ve been through the pain, the economy spreads the gain to everyone. But that ended. In the spirit of retro, we went back to the bad phase of the Kuznets curve.

The bigger problem is that the Kuznets curve is just a curve. It doesn’t really explain anything. All it does is describe the change in inequality over time that actually happened up to the point when Kuznets summarized it.

Instead of saying there’s a Kuznets curve, we should look at the political economy, the history. The end of growing inequality after the industrial revolution in the U.S. -- and the so-called "Golden Age" of the 1950s and 1960s -- came from four main sources (listed below). These made workers' struggles relatively easy for a change, as long they kept generally within channels, allowing them to gain a share of some of the productivity gains. By the way, this does contradict Marx's "prediction" of growing inequality. Instead, it tells us something we should have known: like many or most "predictions" in economics, it worked "all else equal." And not all else stays equal.

(1) the crash of 1929, which hit the rich folks especially hard.

(2) the social movements of the 1930s, which pushed F.D.R. to reform capitalism a bit in a way that helped promote equality.

(3) World War II, which not only involved an abundant demand for labor-power and relatively high wages (for those outside the armed forces) but also had “forced saving”: at the end of the war, a big chunk of the U.S. working class actually had significant savings accounts and/or holdings of government bonds, because the government had pressed them to buy bonds during the war and because of the limited available of commodities to buy.

(4) the political economy of the immediate post-World War II period, in which the “GI Bill” helped returning veterans get education and home-ownership. (This was a belated response to the class struggles after World War I, as when veterans marched on Washington to insist on a bonus.) Also, the U.S. was on the top of the world pile (in the capitalist sphere), with little or no competition from other capitalist powers plus immobile capital (compared to later), This meant that it was a good time for raising wages in step with productivity. Many capitalists even saw high wages as a source of demand, downplaying their role as costs. The arms economy -- the dominant part of the warfare/welfare state -- kept the system stable and demand humming.

In addition, international political competition with the Soviet Union encouraged the capitalist powers to respond to mass social-democratic demands. Especially in Europe, a welfare state grew.

By the way, the people that deLong refers to who claim to be defending "economic growth" are the neoliberals. In recent decades, they have been successful at feathering their own nests and those of their employers, encouraging growing inequality. They have encouraged the undermining and end of the temporary "Golden Age."

Neoliberals also totally define "growth" in market-driven terms (GDP). If you do that, you've lost the game (as it were).

The consequence has been a loss of morale among those of us who trusted market forces and social-democratic governments to prove Marx wrong about income distribution in the long run - and a search for new and different tools of economic management.

Increasingly, pillars of the establishment are sounding like shrill critics. Consider Martin Wolf, a columnist at The Financial Times.

Wolf recently excoriated the world's big banks as an industry with an extraordinary "talent for privatizing gains and socializing losses ... (and) get(ting) ... self-righteously angry when public officials ... fail to come at once to their rescue when they get into (well-deserved) trouble ... (T)he conflicts of interest created by large financial institutions are far harder to manage than in any other industry."

What’s happening, it seems, is that even folks who write in the Financial Times are upset about the hammerlock that financial capitalists have on government policy!

For Wolf, the solution is to require that such bankers receive their pay in installments over the decade after which they have done their work. But Wolf's solution is not enough, for the problem is not confined to high finance.

The problem is a broader failure of market competition to give rise to alternative providers and underbid the fortunes demanded for their work by our current generation of mercantile princes.

What? now deLong recognizes the existence of "mercantile princes"? and now his only response is totally ambiguous? Is he hoping that "democratic politics" is going to fall from the sky again? is he going to convince those mercantile princes to be nice for a change? If so, he has to be much less ambiguous. If he thinks that Marx turned out to be right on the question of growing inequality, he should say so.

Jim Devine

More on time in a capitalist economy

Part of what interested me in the article was the time requirement to find the best price. Economists tell us that prices are supposed to be signals indicating how utility can be produced with the least opportunity costs. In this sense, exploring alternative prices can be seen as a productive activity. Here, the problem is that business is creating an artificial need to muck around to find the best price.

Parents take eggs out of the refrigerator to hide them on Easter, because children enjoy looking for them. This article suggests that the stores are wasting their own energies manipulating prices in order that they can make potential customers chase around for the best deal.

Time in a capitalist economy

The American Economic Review has a fascinating article that inadvertently points to a relatively insecure, but significant negative consequence of capitalism. The authors find: "Specifically, households in their late forties pay, on average, 4 percent more for identical goods than households in their late sixties. This is consistent with the fact that market labor hours, earnings, and time demands from children all decline after middle age. Additionally, we document that higher-income households pay higher prices than lower-income households, and dualworker couples pay higher prices than singleworker couples."

Aguiar, Mark and Erik Hurst. 2007. "Life-Cycle Prices and Production." American Economic Review, 97: 5 (December): pp. 1533-59.

Normally, we hear that higher prices are a form of rationing scarce goods, but the scarcity here is a scarcity of customers. Stores try to draw customers in with low prices in order to make more profits, often using loss leaders, so they can charge more for less inelastic goods. Even assuming that the average price is somehow "fair" or "efficient," this strategy costs people time, jumping back and forth to get the best deal.



This time cost falls outside of the typical economic measures, along with wait time on the telephone, standing around in a store until a clerk comes your way, long commutes, and interminable security checks before an uncomfortable and often late plane ride.

Does Steven Landsburg Believe in Ricardian Equivalence or Not?

The LA Times featured a debate between Jason Furman and Steven Landburg where Jason opened up with a nice discussion of how Lord Keynes might have viewed the current prospect of a US recession and the possible policy reactions. Steven began his reply with suggesting that most people don’t know who Lord Keynes was and then decided to dismiss much of what we economists teach in macroeconomics with what seemed to be a contradictory counterview. Steven starts with:

First, when the government mails you a check, it's essentially making you a loan. That's because they're sending you money that they'll have to recapture with higher taxes in the future.

Hmm – sounds like Robert Barro espousing his Ricardian Equivalence proposition that any change in taxes not accompanied by a permanent change in government spending will be seen as only transitional. As such, the tax cut will be 100% saved and not increase consumption at all. Of course, transitional increases in government consumption could raise aggregate demand even in a Ricardian Equivalence world. Ah, but then that’s what some Democrats have proposed to do.

But then Steven sums up with this:

In sum, you (along with the president and the majority of Congress) are asking us to:

shower people with loans to encourage reckless spending;

somehow expect that the loan recipients will feel both richer and not richer at the same time (so that they'll spend more without working less), and;

do all this in the name of delaying the sometimes painful adjustments that are going to have to get made a year down the line in any event.

I object.

What was his objection? That people don’t behave in the way the Barro-Ricardo model of consumption predicts? That somehow the idle production from the types of recessions that Keynes wrote about is a better use of resources than the consumption from induced by tax cuts? Or is Steven saying such recessions do not occur in the first place? After all, he sees the problem not as an insufficiency of aggregate demand but as the need to let “unhealthy industries” adjust.

Thoughts on Credit in the United States Economy

I'm far from an expert on credit, so I'm posting this, hoping that some of you may contribute to my education.

My understanding is that most families avoided borrowing for consumer goods, except for pianos and encyclopedias, which were considered moral consumption. Then in the 1920s, the automobile industry, facing a stagnating market, encouraged consumers to purchase automobiles on credit.

The Depression and the unavailability of consumer goods during the war left most families in the United States without much of a credit burden. Over time, an increasing share of consumption depended on credit, the absence of which would have limited economic growth.

After the early 1970s, when the great burst of inequality began, the dependence on credit as an engine of economic growth became more extreme.

Regulatory Neglect and the Subprime Mortgage Crisis

Until a recent Washington Post op-ed piece, I was unaware that the federal government, in particular the Treasury Department's Office of the Comptroller of the Currency, had put an end to state regulations that might have prevented many of the subprime mortgage abuses.

Bagley, Nicholas. 2008. "Crashing the Subprime Party: How the Feds Stopped the States From Averting the Lending Mess." Slate (24 January). [op ed from the Washington Post]

"To combat this surge in predatory lending, several state legislatures decided to stanch the flow of easy credit to subprime lenders. In 2002, Georgia became the first state to tell players in the secondary mortgage market that they might be on the hook if they purchased loans deemed "predatory" under state law. This worked a dramatic change. Before, downstream owners of mortgage-backed securities might see the value of their investments drop, but that was generally the worst that could happen. Under the Georgia Fair Lending Act, however, players in the secondary mortgage market could face serious liability if they so much as touched a predatory loan. The AARP, which drafted the model legislation that formed the basis for the Georgia law, explained that imposing liability on downstream owners would "reduce significantly the amount of credit that is available to lenders who are not willing to ensure that the loans they finance are made in accordance with the law"."

That's when the feds came in. Some of the biggest players in the secondary mortgage market are national banks, and the states' efforts to curb predatory lending clashed with the banks' fervent desire to keep the market in subprime loans rolling. And so the national banks turned to the Treasury Department's Office of the Comptroller of the Currency. The OCC is a somewhat conflicted agency: While its primary regulatory responsibility is ensuring the safety and soundness of the national bank system, almost its entire budget comes from fees it imposes on the banks—meaning that its funding depends on keeping them happy. It was unsurprising, then, that the OCC leapt to attention when the national banks asked it to pre-empt the Georgia-like subprime laws on the grounds that they conflicted with federal banking law.