Joe the Plumber’s $275,000 – Is This Gross or Net?

Josh Marshall suggests that Joe the Plumber (real name – Joe Wurzelbacher) may be a rightwing Republican and not the average Joe some want us to believe. When I saw his question directed at Barack Obama, I had the same feeling. Joe told Obama that he was about to purchase a business that brings in $275,000. John McCain must have thought this was Joe’s net as in profit but what if Joe was referring to his gross income or revenue? But let’s suppose Joe has to hire five plumber friends at $42,000 per year to run his business. His net would be only $65,000 per year. While a 50 percent improvement over what his friends would be making, Joe would get a tax cut not a tax increase under Obama’s proposal. Steve Benen makes this same point:

Based on the reports this morning, the profits of Wurzelbacher's small business are well under $250,000, so Obama's proposal wouldn't adversely affect him at all. He's apparently concerned that he may someday have those kinds of profits, though, which is obviously his prerogative. In the meantime, depending on some of the details, Wurzelbacher would probably get a tax break under Obama's plan, and if he's like most of the middle class, his break would be bigger under Obama than under McCain.

For McCain to suggest otherwise is either dishonesty or sheer confusion. Now I would hope our next President understands the difference between revenue and profit. You may have also heard McCain’s claim that Joe’s business would pay a fine under the Obama health care plan. Watch and enjoy both Obama’s rebuttal and McCain’s confused stare when McCain was caught on one of his many false claims.

Joe, your 15 minutes are up.

Joe the plumber hates social security.

The beginning of 'unmanageable liabilities'.

Coincidence? That when banks adopted 'managed liabilities', using the huge pool of Eurodollars and soon afterward the petrodollars, we experienced historically-unprecedented prolonged inflation. The pool of surplus 'savings' should surely have reduced interest rates but instead banks became a major customer for surplus funds. Their behaviour, as such, would have artificially pushed up the cost of capital (ie interest rates). In themselves the resulting higher charge on debt would have surely created a major source of inflation on its own. Then monetary policy would have created a vicious spiral in further raising inflation (that at least partially resulted from higher interest rates) by raising interest rates further?

"[In the 1960s] American banking had discovered a more aggressive approach to management that evaded the traditional inhibitions of deposit growth, a method for achieving faster growth that appealed especially to the largest and most ambitious banks. Instead of waiting for new deposits the banks would go ahead and make new loans, then turn around and borrow huge sums themselves, in effect “buying” their deposit base in the money market to finance the expansion of credit. The practice was known as “managed liabilities,” since both the regular deposits and the borrowing done by a bank constitute the liabilities on its balance sheet – money owed to someone else. Conversely, a bank’s outstanding loans were its assets – the money it will collect from someone else (exactly the reverse of how families or businesses would describe their balance sheets). Managed liabilities depended on banks issuing such large financial instruments as certificates of deposits and Eurodollar borrowings of $100,000 and in much greater sums. As long as the banks could count on borrowing new funds at a lower interest rate than they charged for lending them out, the interest rate spread assured their profits. [25]”


[25] (William Greider’s] "brief description of how the management strategies of commercial banks evolved into a more aggressive competition is a capsule summary of a rich and complex story. The development is traced in fascinating detail in two books by Martin Mayer, ‘The Bankers’, Random House, 1974, and ‘The Money Bazaars’, EP Dutton, 1984. The international implications are lucidly explained by Michael Moffit, ‘The World’s Money’, Simon and Schuster, 1983."

From: ‘Secrets of the Temple – How the Federal Reserve runs the country’ by William Greider. Pages 109 and 110.
Touchstone Simon & Schuster Building, Rockefeller Center New York. ISBN 0-671-67556-7 pbk. 1987.

McCain: "I am not President Bush"

Nixon: "I am not a crook."

Time to Reread Christina Stead

The roster of fiction dealing with the innards of the financial system during a time of crisis is slim, but it includes Stead’s House of All Nations. Consider this assessment of the state of paper wealth: “If all the rich people in the world divided up their money among themselves there wouldn't be enough to go around.”

Capital for the Subprime Banks

This from today’s New York Times:

The Treasury will receive preferred shares that pay a 5 percent dividend, rising to 9 percent after five years. It will get warrants to purchase common shares, equivalent to 15 percent of its initial investment. But the Treasury said it would not exercise its right to vote those common shares.

The terms, officials said, were devised so as not to be punitive. The rising dividend and the warrants are meant to give banks an incentive to raise private capital and buy out the government after a few years.

If you know how subprime mortgages worked, you’ve got to chuckle—except when you remember how they ended.

Economic and Social Importance of the Eight-Hour Movement

"Capital can yield in­creasing returns-i.e., become a cheaper productive force than labor-only when it can produce on an extensive scale. Since the laboring classes constitute seven or eight-tenths of the community, it is upon increasing their consumption-which means raising the so­cial life and wages of the laborer-that the market for capitalistic productions finally depends."

It is a universal fact in the history of society that capital can only become a cheaper productive force than labor as it can yield increasing returns - that is to say, as it can supply the same products at less cost to the consumer. It is also a funda­mental principle in economic production that the advantage resulting from the adop­tion of capitalistic methods does not arise so much from their producing the same quantity at a less cost, but in producing a much larger quantity at a less relative cost. For example, a market for a hundred pairs of shoes a month could be supplied cheaper by hand labor than by the most improved machinery of a modern shoe factory; but if a hundred thousand pairs of shoes a week can be sold, the factory can make them for less than one-half the cost of the hand laborer. Thus, capital can yield in­creasing returns - i.e., become a cheaper productive force than labor-only when it can produce on an extensive scale. And it is equally obvious that wealth can be profitably produced on a large scale only when the market for its consumption is commensurately increased. Even the large consumption of a small class cannot continuously furnish a market for the products of the large factory. Since the laboring classes constitute seven or eight-tenths of the community, it is upon increasing their consumption - which means raising the so­cial life and wages of the laborer - that the market for capitalistic productions finally depends.

It will thus be seen that the economic interests of the employing class are not op­posed to, but are bound up with and DE­PENDENT UPON the social well-being of the laborer; that the success of the modern factory depends upon the comfort of the average laborer's home, and that the profitable employment of capital can only be promoted as the general rate of wages is advanced.

David Brooks on Big Government – When Did He Wake Up?

Andrew Sullivan is right about the latest silliness from David Brooks:

I spent seven long years waiting for David Brooks to really concern himself with the massive spending, massive borrowing and huge expansion of government that typified the first decade of the 21st century. Well, now the Democrats are about to become dominant, he has woken up. When the Republicans are in power, he is a Big Government Conservative. When the Democrats look imminent, it all gets a little more complicated.

Brooks ended his oped with:

What we’re going to see, in short, is the Gingrich revolution in reverse and on steroids. There will be a big increase in spending and deficits.

What Gingrich revolution? It is true that the Federal deficit was reduced in the 1900’s (while we had a unified surplus – total Federal debt remained roughly constant even in real terms during Clinton’s second term) but that was NOT due to some Gingrich revolution. The two drivers towards fiscal sanity were the 1993 tax increased – opposed by every Republican in Congress – and the reduction in defense spending. I don’t see Gingrich’s disciplines calling for a smaller military. But let’s examine Brooks’ big fears:

First, there will be the bailouts ... Second, there will be more stimulus packages ... Third, we’re in for a Keynesian renaissance. The Fed has little room to stimulate the economy, so Democrats will use government outlays to boost consumption. Nouriel Roubini of New York University argues that the economy will need a $300 billion fiscal stimulus ... Fourth, there will be tax cuts.

Deferring taxation – the proper term for these tax cuts sine spending reductions – is a Republican idea and not evidence of a bigger government. The bailout as Brooks calls it represents a series of asset trades and not more government consumption. The new calls for stimulus represent mainly an acceleration of public investment. Most economists understand that aggregate demand management usually means re-timing spending decisions and not necessarily increasing the role of the government permanently.

Then again – David Brooks is not an economist. Why the New York Times waste its space on the silliness of David Brooks is beyond me.

Economic and Social Importance of the Eight-Hour Movement

"Capital is not an original but an auxiliary force in produc­tion. Capital being merely an implement in the hands of man he will only use it when he can obtain his end better with than without it."

There are two sets of forces which can be employed in production-human forces and natural forces. The former are supplied by the physical energies of the la­borer; the latter by the capital of the employer. These forces cannot be equally employed under all conditions. There are many circumstances under which human labor can be employed in producing wealth where capital cannot. Capital is not an original but an auxiliary force in produc­tion. Capital being merely an implement in the hands of man he will only use it when he can obtain his end better with than without it. Consequently, capital will only be continuously employed in produc­tion when it can produce wealth cheaper than it can be obtained by human labor. Whenever labor is cheaper as a productive force than capital it will be employed in preference to it, upon the same principle that man endeavors to obtain the maximum result for the minimum effort, and refuses to give something for nothing. Conse­quently, the employing class becomes an economic factor in the community only in proportion as capital becomes a cheaper productive force than labor.

Finance as the Economic Equivalent of HIV

Capitalism presents many problems. One of the thorniest is the ability of capital to invade the structure of any attempt to reform it, turning it to destructive purposes. Economists often draw the moral from such outcomes that efforts to reform the market are destructive -- evidence of what they call the law of unintended consequences.

The law of unintended consequences was one of the first discoveries of political economy. Usually, the purpose of invoking this principle was to demonstrate how the market worked to people's benefit. The most famous example, of course, was Adam Smith's invisible hand.

Smith, Wealth of Nations, I.ii.2, pp. 26-7: "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."

Smith's colleague, Adam Ferguson, suggested a more general application, writing:

122: "Every step and every movement of the multitude, even in what are termed enlightened ages, are made with equal blindness to the future; and nations stumble upon establishments which are indeed the result of human action but not the result of human design."

Ferguson, Adam. 1793. An Essay on the History of Civil Society, 6th ed., Duncan Forbes, ed. (Edinburgh: Edinburgh University Press, 1966).

Not surprisingly, the son of former prime minister Walpole coined the word, "serendipity" 1754.

At the same time, capital makes the control of destructive behavior necessary. Even in Smith's day, bakers with attempt to improve their profits by adulterating bread -- hardly an act of social beneficence and, perhaps, suggesting a different meaning for the invisible hand. Regulating bakers is not terribly difficult, so long as the public is able to commit a sufficient number of regulators to check on the bread.

Finance is something altogether different, deliberately creating unintended consequences. Like the AIDS virus, finance can quickly adjust to almost any regulation. In addition, even the most well-intentioned regulation will have to pass muster with an army of lawyers, lobbyists, and political contributors before it can pass into law. Last-minute adjustments make it possible to insert little additions that make laws and regulations more favorable to capital.



In addition, bankers, accountants, lawyers, and even mathematicians and physicists can devise methods to skirt the intentions of virtually any regulation. Besides, modern communications allows people in finance carry on their business in other locations. For example, the tiny Grand Cayman Islands, where corporations outnumber the population, is one of the largest banking powers in the world.

Finance, in effect, can invade the DNA of any possible regulation, transforming it into a profitable opportunity that may be socially destructive. Of course, finance is not the sole source of such perversions, only the most effective because it is less tied down with physical capital. For this reason, neoliberalism is not so perversion of capitalism, but a natural tendency. Reforms can potentially help to protect the public for a while, without constant vigilance they are certain to erode.

Likes AIDS, this economic retrovirus will compromise the health of the system, as the current crisis demonstrates, but the economic immune system is also very powerful. As shown by earlier crises, capitalism demonstrates an ability to regroup. What doesn't kill you can make you stronger.

The current crisis provides an opportunity for massive organization to try to take some control of the system away from being capital, without serious efforts, we're going to see more of the corporate consolidations will make future progress more difficult.

Some Rhetoric for Obama

Recently my Republican opponents have been trying to convince you that there is not one Barack Obama but two. There is the man standing in front of you, a candidate for president who has been speaking out on the major issues of this election, and then they say there is another Obama, mysterious, with a hidden past and secret motives. Their plan is to make you so worried about this mysterious Obama that you will not believe the one you see and hear.

My response is that there is in fact just one Barack Obama, and I’m him. Like most national political figures I have hardly any private life. You can go to my website and see who my advisors are on the economy and foreign policy. In fact, I would recommend this, since who a presidential candidate picks to advise him is a good indicator of what he’ll do in office. And my past is an open book. Actually, it’s a published book, one I wrote called Dreams from My Father. Read it, and find out how I got to where I am.

I will go further. Not only is there just one Barack Obama; there’s one Joe Biden, one John McCain and one Sarah Palin. Everything you need to know about all four of us is on the record. We have all taken our stands on the political issues you care about, and you can check out our performance in office to verify our deeds as well as our words. I encourage you to do this. This election gives us an opportunity to reverse the disastrous direction our country has taken in the last eight years, and it deserves all the careful consideration you can give it. But don’t expect any great mysteries to be revealed. We four candidates are exactly the people you see before you. What you see — and what you vote for — is what you will get.

A Deficit Hawk Provides Cover for Fiscal Stimulus

Reuters reports:

The United States needs a new economic stimulus plan that pumps billions of dollars into infrastructure projects and budget relief for cash-strapped state and local governments, Democratic lawmakers said on Sunday ... Rep. Roy Blunt, the Missouri Republican who serves as House minority leader, said he would support a stimulus plan if it did not include massive public works spending and budget bailouts for states that overspent on health care and other social programs.

Why Blunt is opposed to maximizing the bang for the buck from the new fiscal stimulus proposal is beyond me. Senator Schumer and Robert Rubin support more spending now on infrastructure. So do I. But wait you say – am I not one of those deficit hawks like Lawrence Summers?

The idea seems to have taken hold in recent days that because of the unfortunate need to bail out the financial sector, the nation will have to scale back its aspirations in other areas such as healthcare, energy, education and tax relief. This is more wrong than right. We have here the unusual case where economic analysis actually suggests that dismal conclusions are unwarranted and the events of the last weeks suggest that for the near term, government should do more, not less. First, note that there is a major difference between a $700bn (€479bn, £380bn) programme to support the financial sector and $700bn in new outlays. No one is contemplating that the $700bn will simply be given away. All of its proposed uses involve either purchasing assets, buying equity in financial institutions or making loans that earn interest … Second, the usual concern about government budget deficits is that the need for government bonds to be held by investors will crowd out other, more productive, investments or force greater dependence on foreign suppliers of capital. To the extent that the government purchases assets such as mortgage-backed securities with increased issuance of government debt, there is no such effect. Third, since Keynes we have recognised that it is appropriate to allow government deficits to rise as the economy turns down if there is also a commitment to reduce deficits in good times. After using the economic expansion of the 1990s to bring down government indebtedness, the US made a serious error in allowing deficits to rise over the last eight years. But it would be compounding this error to override what economists call “automatic stabilisers” by seeking to reduce deficits in the near term. Indeed, in the current circumstances the case for fiscal stimulus – policy actions that increase short-term deficits – is stronger than at any time in my professional lifetime.

Well said Larry. It’s a shame that we’ll likely have to wait until January 20, 2009 so that President Obama can urge the next Congress to do what we really need to implement ASAP.

Why I Forecast that Krugman Would Not Get the Economics Nobel Prize

So, I accurately put international trade first as a field to get the Nobel this year and also forecast accurately that the prediction markets would be wrong. However, I said the trade prize would be to Bhagwati and Dixit with a third, but not Krugman. I was clearly very wrong on that. Why was I wrong about Jim Devine's former roommate?

Well, they have said that they gave it to him for applying his ideas to both international trade and location theory, and I must give him credit on that. The last person to get one for international trade did so also, the Swede, Bertil Ohlin, whose most famous book was _International and Interregional Trade_. I should have seen that one coming. He applied the Dixit-Stiglitz model to both fields to develop the respective "new trade theory" and "new economic geography."

So, why did I forecast he would not get it? Because he was not the first to apply that theory to those areas. For that matter, he did not invent the idea. Stiglitz and Dixit did. Now Stiglitz got his prize for asymmetric information, but Dixit has not gotten one, and it was for this paper that I had him on my list for a trade prize. This reminds me of Robert Lucas getting the prize for applying rational expectations to macroeconomics, while the inventor of the idea, John Muth, has to this day not gotten one.

As for applying, there were others, such as Elhanann Helpmann, who applied the D-S model to trade (Krugman always cited his and others work on this, although he took it much further than they did). As for applying it to location theory, that was first done by Masahisa Fujita of Japan, whom Krugman also cited. But it was Krugman who did it in both places and pushed the application far. That is why he got it.

Now, I have been on record harshly criticizing him regarding some of this, in particular in my review of his book, _Development, Geography, and Economic Theory_, which appeared in JEBO in 1996. In particular I was annoyed that he put himself forward as the first (except for Fujita, with whom he would later coauthor) to provide a mathematically rigorous explanation of agglomeration economies. Now D-S does this but on the basis of consumers liking a variety of goods, not on production efficiencies, which is what most observers think is what is really going on. However, there had been a long literature during the 1980s by non-economists in non-economics journals in fact developing mathematical models of regional dynamics with agglomeration economies (examples, the physicist Peter Allen, a student of Ilya Prigogine at the Free University of Brussels, and Wolfgang Weidlich of the Stuttgarth Institute of Theoretical Physics). Krugman never cited any of this work, and, frankly, this pissed me off.

Now, I must admit something important: I do not know for sure that Paul Krugman ever read any of that literature. It is possible he did not. Even if he did, he could defend himself on the grounds that although these models are mathematical, they were not drawn on neoclassical economic theory in a standard way. Dixit-Stiglitz is.

Now, I know that most readers here are probably cheering the award because of Krugman's long opposition to Bush's policies from his perch at the NY Times. I must give him credit for pointing out problems in Bush's policies at times when he was popular and few others were in the media. I also think he is a very brilliant and innovative guy, and I have long said that he probably eventually deserved a Nobel for his work on foreign exchange rate models.

While I think his excellent current commentaries on the current financial crisis may have played a role in his getting the prize, I do not think his criticisms of Bush did much, although commentators over on Marginal Revolution are frothing at the mouth over the award, saying it is "political." I would note that one of last year's winners, Hurwicz, was a student of Hayek, and the previous year's winners, Kydland and Prescott, were open supporters of Bush and his policies, especially Prescott who followed his award by writing a very stupid column in the Wall Street Journal praising Bush's fiscal policies and calling for more supply side tax cuts.

So, anyway, I am not against Krugman getting the award. He is indeed brilliant, and his applying the D-S model to both trade and location theory was very innovative. Congratulations to him.

$3.3 Trillion in New Treasury Issues

If that doesn’t get your attention, what does it take? This is the forecast for the coming fiscal year by analysts for Deutsche Bank, cited by Menzie Chinn. OK, most of this will take the form of asset swaps, with the Fed/Treasuring absorbing gunky paper in return for its treasuries, but still. The analysts note that the bulk will be in short maturities, since this is what the market will swallow. Surely I must not be the only observer who thinks this means of financing the bailout and counteracting the incipient recession is extraordinarily fragile. It depends on a level of confidence that must remain high each hour, each day, each month. One reversal and we are all in big trouble.

I don’t think we should adopt policies that generate catastrophic risks when there are alternatives.

Fun with U

by the Sandwichman

Alan Clarke, economist from the bank BNP Paribas, said the number of those claiming unemployment benefit was due to break the one million mark by the end of next month at the latest, with up to two million looking for work by December: he is forecasting unemployment to hit 7 per cent by the middle of next year and carry on rising until 2010.

Reading the above paragraph, from the Guardian, leaves the false impression that unemployment in the UK will double between next month and Christmas. Hogwash. "Those claiming unemployment benefit" and those "looking for work" are two different categories. The August figure for benefit claimants in the UK is 904,000. For ILO-defined unemployment ("those looking for work"), the number was 1.72 million.