Amity Schlaes Criticizes Lord Keynes Only to Display Her Own Ignorance

Why did Bloomberg print this nonsense?

The Great Society of that period was the ultimate Keynesian experiment, and it didn't work very well ... The jobs that Keynes emphasized were AWOL: America became accustomed to high levels of unemployment.

Paul Krugman objects:

The Great Society wasn’t deficit spending, it wasn’t intended to create jobs, and the economy of the 1960s wasn’t depressed. It was social engineering; we can talk about how well or badly it worked, but it had nothing whatsoever to do with Keynesian economics. Now, LBJ did engage in some Keynesian economics: namely, he imposed a contractionary fiscal policy in the form of a tax surcharge in an effort to cool an overheating economy.

Paul is basically correct but let’s go further. The big Keynesian fiscal experiment was that 1964 tax cut, which did seem to work fairly well as the economy returned to full employment by late 1965. While Paul and I were both too young in 1965 to have been included in the discussions between the Council of Economic Advisors and President Johnson, I have had the pleasure of hearing from those who were what kind of macroeconomic advice the CEA gave the President during December 1965. Realizing that the economy was at full employment and seeing the triple whammy of tax cuts, proposed Great Society domestic spending, and the run-up in Defense Department spending from the Vietnam War, the CEA strongly urged the President to push for fiscal restraint lest the Federal Reserve would have to raise interest rates to choke off excessive demand. The President fired back that the Great Society was important to him and that he was not ready to pull out of Vietnam. The President also noted that getting a reversal of the 1964 tax cuts would be politically difficult. The Federal Reserve did raise interest rates in 1966 leading to the 1966 Credit Crunch, which held inflation at bay. However, the Federal Reserve later reversed course unfortunately. So we eventually got a delayed and lukewarm version of the fiscal restraint that the CEA recommended way back in late 1965 – as Paul noted. Too little and too late.

For Schlaes to blame the run-up in inflation on the Keynesian economists that advised President Johnson only shows she has absolutely no clue. But then we knew that already.

Force Them to Lend?

My restful sleep continues to be disturbed by Willem Buiter, who writes

I am in Slovenia today, talking to bankers, entrepreneurs, managers, politicians, government officials and academics. The story is the same here as in every country I have visited since mid-September 2008: the banks aren’t lending. They don’t lend to each other. They don’t lend to non-financial businesses and they don’t lend to households....The macroeconomic consequences of this lending paralysis are potentially disastrous. It could turn a global recession into a global depression, with many years of stagnation and cumulative declines of GDP of 10 percent or more.

His solution?

I propose the following form of forced lending by banks to non-financial businesses. Every loan that matures during the coming year gets extended/renewed for another year on the same terms as the maturing loan. This applies to both secured and unsecured loans. Likewise every credit line or overdraft facility that expires during the coming year gets extended/renewed for another year. Expiring loans, credit lines or overdraft facilities that had an original maturity of less than a year or more than a year will have the same interest rate for the one-year extension/renewal as the original arrangement.

Yes, force them to lend. This is a rather blunt instrument, I would say. It would roll over some loans that should absolutely not be renewed, and it would not direct financing to new, previously unfinanced projects. I think bankers won’t like it. They wouldn’t like my “Plan B”, creating a public competitive financial entity, either. So which one should it be?

Buiter’s approach has the advantage of using the existing institutions: the same personnel, the same chains of command, the same office layouts—nothing new that could create friction or delay at a time when we particularly don’t need it. My approach would be vastly less expensive for the public (and therefore more feasible in direct financial terms) and would be capable of making more rational distinctions at the micro level. But one way or the other, we have to shift the narrative quickly. What needs to be rescued are not the financial markets but the real economies, the incomes and employment, that are the substance of our standard of living.

Report from the Galbraith Conference in New York, 11/14

I previously posted what I was planning to say, which I did, at the Conference on "The Financial Crisis, the US Economy, and International Security in the New Administration," organized by James Galbraith at New School University on Nov. 14, and sponsored by Economists for Peace and Security. They will have a full video up at some point on their website at http://www.epsusa.org, and currently have the full program. I shall focus on main points presented by others, with an emphasis especially on new policy proposals, and will not cover the remarks by quite a few who spoke. I may add more later.

Galbraith indicated he would be presenting many of the ideas to the Obama economic transition team this week, as well as in a keynote address he gave yesterday to Congressional Democrats at EPI.

Galbraith was the first speaker and recounted points that have appeared in an article by him in this month's Challenge magazine. His main proposals were to revive the New Deal Housing Ownership and Loan Corporation (HOLC), strongly supported by others as well, to reinstitute general revenue sharing to support state and local governments, to institute an infrastructure investment fund, with emphasis on green technologies, and to increase social security benefits.

Joseph Stiglitz called for converting the housing tax deduction to a tax credit for poorer homeowners, for the government to make mortgage payments for those who become unemployed, and to institute a law forbidding US banks from dealing with foreign ones that do not conform to global banking standards.

Pierre Calame supported establishing global commodity buffer stocks to moderate price fluctuations of basic commodities.


Allen Sinai forecast a 24 month recession, which he considers to have begun in January 2008, and called for a $350 fiscal stimulus package. Others called for larger such packages.

Teresa Ghilarducci supported Galbraith's proposal on converting tax deductions to credits, and also supported having the government pay employers' contributions to fica for the duration of the recession, and finally a much-discussed proposal to lower the medicare eligibility age to 55.

Perry Mehrling provided an insightful account of how the Fed has become effectively the world's central banker, taking much of the world's dodgy paper onto its books. He proposed establishing an insurance scheme for credit-default swaps that would involve them providing appropriate collateral, and would also requiring turning them into operating with transparency through an exchange rather than over the counter.

Gary Dymski supported my proposal for using shared appreciation mortgages and called for more direct efforts to prevent "exploitative" housing lending, as well as directing some of the infrastructure spending towards housing, high speed rail networks, and such social support services as child care.

John Eatwell called for increasing the regulatory authority of the IMF, noting that the Forum for Stability has many ideas that it could use. This did not come out of the G-20 summit, but another idea he supported did, that of establishing "colleges of supervisors" (Eatwell said "regulators") in which the regulators meet and coordinate their activities from the main nations that a particular multinational financial entity operates.

Paul Davidson supported establishing the 1944 "Keynes Plan" that would have a strong central bank, with international clearing units, and a responsibility placed on surplus nations for making adjustments. With the large stimulus plan in China happening, this may be occurring to some degree at this time, especially as the Chinese seem to be allowing some RMB appreciation.

Missing: the strange disappearance of S. J. Chapman’s theory of the hours of labour (13)

Conclusion
In his article on the canonical labour-supply model Derobert (2001) mentioned Chapman's theory in connection with Hicks's description of it as "the classical statement of the theory of 'hours' in a free market." Derobert dismissed Chapman's theory as "excessively complicated" and as "more of an amalgam than a synthesis" (p. 204). He also described it as lying "somewhere between Jevons's analysis and the canonical model" (p. 204). Chapman's theory lies between Jevons and the current canonical model only in a narrow chronological sense. Although Chapman's analysis did indeed develop Jevons's earlier discussion of the hours of labour, it bears little resemblance to the income-leisure choice model. Instead, it incorporates the opportunity-cost concept without at the same time abandoning the idea that work provides intrinsic satisfactions and dissatisfactions.

Perhaps Chapman's theory could indeed be considered "excessively complicated" in the non-pejorative sense that life itself is too complicated to describe in a mathematical model. The income-leisure choice model simply ignores Chapman's theory, it doesn't refute, refine, simplify, adapt or transcend it. In its ignorance of Chapman's theory, it tacitly assumes proportionality between hours worked and output produced. In the bargain, mainstream analysis implies an identity between market goods purchased and economic welfare. Leisure time disappears – even as a commodity. The hypothetical purchase of leisure time leaves behind no receipts to be reckoned in the calculation of national income. Thus Barone's book-keeping artifice involves writing entries in disappearing ink – a practice that might elsewhere be reckoned as fraudulent.

Sydney Chapman's theory of the hours of labour was both insightful and authoritative. It was widely accepted by eminent English economists of its day. It buttressed the novel conclusions that the ideal hours of work for maximizing social welfare would be shorter than those for maximizing profits and that the hours of work set in a competitive market may be too long even from the standpoint of maximizing output. Yet that acknowledged authoritative theory was displaced by what? A simplifying assumption? A semantic device? A book-keeping artifice? An absent-minded lapse of theory? In place of an established theory has sprung up a mathematical model of income-leisure choice in which the face of actual work is unrecognizable. With the centennial of its original presentation fast approaching, it is fitting that economists should re-examine what opportunities have been sacrificed and what – if anything – has been gained by this remarkable instance of theoretical substitution.

Bibliography

Abstract: Sidney Chapman's theory of the hours of labour, published in 1909 in The Economic Journal, was acknowledged as authoritative by the leading economists of the day. It provided important insights into the prospects for market rationality with respect to work time arrangements and hinted at a profound immanent critique of economists' excessive concern with external wealth. Chapman's theory was consigned to obscurity by mathematical analyses that reverted heedlessly to outdated and naïve assumptions about the connection between hours and output. The Sandwichman is serializing "Missing: the strange disappearance of S. J. Chapman's theory of the hours of labour" on EconoSpeak in celebration of the centenary of publication of Chapman's theory. (To download the entire article in a pdf file, click on the article title.)

Missing: the strange disappearance of S. J. Chapman’s theory of the hours of labour (bibliography)

References

Altman, M. (2001) 'A behavioral model of labor supply: casting some light into the black box of income-leisure choice', Journal of Socio-Economics, vol. 33, pp. 199-219.

Barone, E. (1908/1935) 'The ministry of production in the collectivist state', in (F.A. Hayek, ed.), Collectivist Economic Planning, pp. 245-290.

Bergson, A. 'A reformulation of certain aspects of welfare economics', Quarterly Journal of Economics, vol. 52, pp. 310-334.

Bohm-Bawerk, E. von. 1894 'One word more on the ultimate standard of value', Economic Journal, vol. 4, pp. 719-724.

Chapman, S. J. (1909) 'Hours of labour', Economic Journal, vol. 19, pp. 353-373.

Derobert, L. (2001) 'On the genesis of canonical labor supply model', Journal of the History of Economic Thought, vol. 23, pp. 197-215.

Edgeworth, F.Y. (1894) 'One word more on the ultimate standard of value', Economic Journal, vol. 4, pp. 724-725.

Farzin, Y. H. and Akao, K.-I. (2006) 'Non-pecuniary work incentive and labor supply', Note di Lavoro 21, Milan: The Fondazione Eni Enrico Mattei

Green, D. I. (1894) 'Opportunity cost and pain cost', Quarterly Journal of Economics, vol. (8?), pp. 218–229

Hicks, J.R. (1932/1963) The Theory of Wages, London: Macmillan.

Hicks, J.R. (1939/1946) Value and Capital, London: Oxford University Press.

Hicks, J.R. and Allen, R.G.D. (1934) 'A reconsideration of the theory of value (part 1)', Economica, vol. 1, pp. 52–76.

Jennings, A. (2004) 'Dead metaphors and living wages: on the role of measurement and logic in economic debates', In (D.P. Champlin and J.T. Knoedle, eds.), The Institutionalist Tradition in Labor Economics, Armonk, N.Y.: M.E. Sharpe, pp. 131-145.

Lewis, H. G. (1957) 'Hours of work and hours of leisure', in Proceedings of the Ninth Annual Meeting, Madison: Industrial Relations Research Association, pp. 195-206.

Marshall, A. (1961) Principles of Economics, 9th edition, London: Macmillan for the Royal Economic Society.

Nyland, C. (1989) Reduced Worktime and the Management of Production, Cambridge: Cambridge University Press.

Pagano, U. (1985) Work and Welfare in Economic Theory, New York and Oxford: Basil Blackwell.

Pencavel, J. (1986)'Labor Supply of Men: A Survey', in (O. Ashenfelter and R. Layard, eds.), Handbook of Labor Economics, Amsterdam: North Holland. pp. 3-102

Philp, B., Slater, G. and Harvie, D. (2005) 'Preferences, Power, and the Determination of Working Hours', Journal of Economic Issues, vol. 39, pp. 75-90.

Pigou, A.C., (1920) The Economics of Welfare, London: Macmillan.
Robbins, L. (1929) 'The economic effects of variations of hours of labour', Economic Journal, vol. 39, pp 25-40.

Robbins, L. (1930) 'On the elasticity of demand for income in terms of effort', Economica, No. 29 (Jun., 1930), pp. 123-129

Robbins, L. (1930) 'The conception of stationary equilibrium', Economic Journal, vol. 40, pp. 194-214.

Scitovsky, T. (1992) The Joyless Economy: The Psychology of Human Satisfaction, New York and Oxford: Oxford University Press.

Scitovsky, T.(1951) Welfare and Competition, Chicago: R.D. Irwin.

Spencer, D. A. (2003) 'The labor-less labour supply model in the era before Philip

Wicksteed', Journal of the History of Economic Thought, vol. 25, pp. 505-513.

Spencer, D. A. (2004) 'From pain cost to opportunity cost: the eclipse of the quality of work as a factor in economic theory', History of Political Economy, vol. 36, pp. 387-400.

Tribe, K. (2004) 'Sydney Chapman', Oxford Dictionary of National Biography, Oxford University Press.

Walras, L. (1954) Elements of Pure Economics: or, the Theory of Social Wealth, translated by William Jaffe, Homewood, Illinois: Richard D. Irwin.

Abstract: Sidney Chapman's theory of the hours of labour, published in 1909 in The Economic Journal, was acknowledged as authoritative by the leading economists of the day. It provided important insights into the prospects for market rationality with respect to work time arrangements and hinted at a profound immanent critique of economists' excessive concern with external wealth. Chapman's theory was consigned to obscurity by mathematical analyses that reverted heedlessly to outdated and naïve assumptions about the connection between hours and output. The Sandwichman is serializing "Missing: the strange disappearance of S. J. Chapman's theory of the hours of labour" on EconoSpeak in celebration of the centenary of publication of Chapman's theory. (To download the entire article in a pdf file, click on the article title.)

Clown on Wall Street

Maybe a picture is worth a thousand words. Here are clowns -- not the ones in the executive suites, but real clowns -- ringing the opening bell on the New York Stock Exchange.

From Financial Crisis to Currency Crisis: Is Britain Next?

The suggestion by Willem Buiter that Britain may already be on its way to a collapse of its currency and possible sovereign default has been making waves in the UK, but deserves attention here as well. First of all, the mechanism he describes is exactly the one I have been harping on for the US:

If there is doubt in the markets about whether the solvency gap of the banking system is smaller than the fiscal spare capacity of the government, we could have a UK public debt crisis. Fear of default would cause an across-the-board rush of out sterling assets. Fear that the authorities would choose to monetise the UK public debt and deficits rather than defaulting, would also cause a sharp decline in the value of sterling.

There are fiscal limits to what governments can do, and pledging to bail out all investors who have claims on the financial system is not the same as being able to actually carry out this pledge. Moreover, a run on sterling would not only signal the failure of the British bailout plan; it would set in motion currency shockwaves that would ricochet through the global economy. Money fleeing the pound would have to go somewhere else, but this somewhere would then find itself on a hair trigger, as fears of currency and default risk escalate. My reference period for the earlier Depression is not 1929, for which there were domestic solutions, but 1931-32, when a cascade of currency runs rendered national monetary policymakers helpless.



Having signed on to Buiter’s main point, I want to emphasize some divergences:

1. Britain’s risk is, like Iceland’s, a function of the size of its banking sector liabilities relative to the economic size of its currency area. It can crank up the denominator by joining the eurozone—if it can. The political impediments in this environment are simply too great, however. If Britain starts to melt, would the euro powers risk their own solvency to save it?

2. The US has a far larger GDP, but its numerator is also much larger, since the epicenter of the crisis was in US-generated assets, all of which matter because the Fed has committed itself to making good on all claims on US financial institutions, whatever their country of origin.

3. The dollar is a reserve currency as the pound is not. This gives the US much more breathing space, and the amount of claims needing to be satisfied would not be altered by a potential devaluation, since it’s all in dollars. What this means, though, is simply that the dollar can hold on longer than the pound; it doesn’t mean the dollar is invincible. It is ultimately subject to the same constraints laid out in Buiter’s analysis (and mine).

4. The British exposure is somewhat less than meets the eye. The City is the repository for an undisclosed but certainly very substantial pool of mideast petro-profits. Their placement is essentially a political, not a market-based choice. No doubt the failed occupation of Iraq has reduced the geopolitical subservience of the Gulf potentates, but it is hard to believe that they would simply withdraw their funds in a crisis. They remain vulnerable domestically—even more so as oil prices fall—and still depend on Anglo-Saxon guarantees of their continued rule.

5. Buiter’s solution, to move first on trimming the claims (haircuts) before assuming public liability for them, is entirely sensible, and roughly equivalent to the asset window I briefly described in my own proposal two months ago. The problem is that he gives no attention to the collapse of the real economy. In fact, he would exacerbate it by cutting back fiscal stimulus, which he sees as unaffordable. Here I think he misses perhaps the most important point: that a principle reason for reversing the bailout strategy is to have the resources to sustain employment and income. Moreover, the finance for renewed growth is essential, and if the strict austerity Buiter (rightly) seeks to impose on financial markets only dulls the private appetite for assuming new risk, a public financial entity must pick up the slack.

Federal Revenue Sharing & NYC’s Mass Transit System

I woke up this morning to hear that New York’s Metropolitan Transit Authority (MTA) may lay off 1500 workers in order to address a projected $1.2 billion deficit. Maybe it is because I live on the Upper East side of Manhattan but every morning’s subway ride (the Lexington line) involves pushing and shoving just to get into the subway car. The thought of service cutbacks strikes me as just absurd. MTA says it was hoping for funds from the state of New York but I know Governor Patterson is also trying to address a revenue shortfall.

Of course, we could avoid the layoffs and the service cutbacks if Congress decides to expand Federal revenue sharing. It would be one way to counter the usual pro-cyclical nature of state & local fiscal policy that we noted here. I just hope this is on the agenda of President-elect Obama.

Missing: the strange disappearance of S. J. Chapman’s theory of the hours of labour (12)

The days are gone…, Part III

The canonical labour-supply model, based on the analysis of income-leisure choice, differs from both Walras and Hicks in establishing the constraint of 24 hours as the sum of the hours of leisure and of labour. In very general terms, the formula for such a calculation was stated by David I. Green (1893). Green argued that "the laborer stops work at a certain hour, not simply because he is tired, but because he wants some opportunity for pleasure and recreation" (p. 222) and further, that "the economic opportunities which a man sacrifices by pursuing a certain course of action are more capable of objective measurement. These sacrifices of opportunity are what constitutes the principal part of the costs of production which determine normal exchange values" (p. 223).

Although Green made explicit a trade-off of limited hours between labour and leisure, he didn't take the obvious next step of dividing the day into 24 hours to be apportioned between the two activities, nor did he specify an hourly wage. Enrico Barone (1908/1935) did, however:

It is convenient to suppose – it is a simple book-keeping artifice, so to speak – that each individual sells the services of all his capital and re-purchases afterwards the part he consumes directly. For example, A, for eight hours of work of a particular kind which he supplies, receives a certain remuneration at an hourly rate. It is a matter of indifference whether we enter A's receipts as the proceeds of eight hours' labour, or as the proceeds of twenty-four hours' labour less expenditure of sixteen hours consumed by leisure. (pp. 248-249).

Barone's "simple book-keeping artifice" constituted a second, not entirely congruent, version of opportunity-cost doctrine. The first version, as articulated by Green, was vague enough about time to defeat the pain-cost argument as an explanation of prices. Barone's version was precise enough about the division of the 24 hours in a day to be incorporated into mathematical formulae. Such precision came only at the (unexamined) cost of resurrecting what Robbins called the 'naïve' assumption that "the connection between hours and output is one of direct variation."

Abram Bergson (1939) adopted Barone's framework as a basis for his "Reformulation of certain aspects of welfare economics." Although it may have seemed a matter of indifference to Barone whether to count the receipts of labour as eight hours or as twenty-four hours minus sixteen hours of leisure, the book-keeping artifice was essential to the flourishing of the indifference-curve analysis, unhampered by the essentially unquantifiable spectres of worker fatigue, unrest or even intrinsic enjoyment of work. The founding myth of the new orthodox approach thus passed unannounced into the canon. Chapman's theory was rendered expendable not by an explicit simplification but by the quiet revival of a naïve and anachronistic assumption about the connection between hours and output.

Chapman theory appears to have covered both the opportunity-cost and pain-cost bases. In a technical footnote, he drew two dotted-line curves to describe the effects of the length of the working day on the worker (see appendix). The first curve, labelled I, clearly indicates an opportunity-cost analysis of the value "of the leisure destroyed by the addition of [an] increment of time" (p. 364). The second curve, labelled L, retains the notion of absolute satisfaction or dissatisfaction involved in working. There doesn't seem to be a suggestion that this curve L directly determines the cost or value of labour, only that it affects the welfare of the worker. To paraphrase Chapman, what curve L addressed was not "the quantity of external wealth produced" but rather the "balance between internal and external wealth" (p. 373).

Next

Abstract: Sidney Chapman's theory of the hours of labour, published in 1909 in The Economic Journal, was acknowledged as authoritative by the leading economists of the day. It provided important insights into the prospects for market rationality with respect to work time arrangements and hinted at a profound immanent critique of economists' excessive concern with external wealth. Chapman's theory was consigned to obscurity by mathematical analyses that reverted heedlessly to outdated and naïve assumptions about the connection between hours and output. The Sandwichman is serializing "Missing: the strange disappearance of S. J. Chapman's theory of the hours of labour" on EconoSpeak in celebration of the centenary of publication of Chapman's theory. (To download the entire article in a pdf file, click on the article title.)

Bretton Woods, a failure timeline.

Michael Moffit, in his 1983 book 'The World's Money - International Banking from Bretton Woods to the Brink of Insolvency'[1] has been very helpful this week. He presents an economic history that makes it clear as to why national economies started to come under pressure. This happened virtually as soon as their currencies were made fully convertible with each other under the obligations of the IMF's Article VIII. The Post-World-War-Two boom appeared to have much more to do with the stimulative boost of the Marshall Plan afterall.

1944 - Bretton Woods conference

1949 – Birth of Eurodollars

1945 – 1955. Europe’s capital markets remained largely closed to international capital flows. The US dollar was stable and other currencies were weak. Exchange controls in Europe were heavy. This combination discouraged speculation.

1950s – Growing concentration in international trade and investments leads to a small number of networks from which impressions and advice is received. This leads to a ‘common tilt’ in multinational corporations decisions and processes that courts instability in the global economy.

“Multinational enterprises in the ordinary course of operations dispose of vast quantities of money across international exchanges….Most of that flow is concentrated in forty or fifty multinational networks that draw their impressions and their advice regarding the relative stability of different currencies from common sources – half a dozen banks, and even smaller number of financial journals, and an incestuous round of lunches and conferences. Viewed in the abstract, the situation is set up for disaster; a common tilt in the group becomes a source of irresistible pressure on any currency.”[2]

1955 – European nations make their currencies convertible to the US dollar (defacto) in response to pressure from the US.


1958 – Currency convertibility of European currencies announced. “The [global economic] system begins to sputter after 1958….”

Late 1950s – The Euromarket emerged. This new capital market entailed the free flow of U.S. dollar- denominated assets without supervision or control by any national government. It expanded substantially over the following three decades. The US and the UK rescinded capital controls on short-term capital flows. Other countries were compelled to rescind their own capital controls because they became too costly to sustain; especially in the light of the rapid growth of multinational corporations (MNCs). MNCs could simply avoid controls by borrowing and lending through foreign affiliates in the Euromarket. MNCs could also shift operations to other countries with looser restrictions so as to preserve their competitiveness. Countries that tried to retain tight controls faced capital outflows and a consequent loss of investment, employment and income.[3]

1960 – The US gold pledge weakened under pressure of the dollar overhang, leading promptly to speculation in the London gold market during the 1960 US presidential election. The volume of hot money circulating in the world’s money markets was increasing.

1960 – March. ‘Operation 40’ created by Allen Dulles (Director of the CIA under President Eisenhower) from the ‘group of 40’ of the US National Security Council. It was presided by vice-president Richard Nixon. The Cuban revolution had occurred the year before. This group was designed to respond to the threat of left wing governments in Latin America (in general) affecting US corporate holdings. Operation 40 not only was involved in sabotage operations but also, in fact, evolved into a team of assassins. Frank Sturgis, claimed: "this assassination group (Operation 40) would upon orders, naturally, assassinate either members of the military or the political parties of the foreign country that you were going to infiltrate, and if necessary some of your own members who were suspected of being foreign agents... We were concentrating strictly in Cuba at that particular time." [4]

1961 – On January 17th. Outgoing US President Eisenhower warned against the “acquisition of unwarranted influence by the military industrial complex.” Australia becomes viewed as a geopolitical asset by the US.

1964 – The exchange rate for sterling (one pound = $US2.80) became obsolete.

1967 – The British Pound was the first currency to succumb to international speculation.

1971 - Bretton Woods dismantled after the US dollar comes under heavy speculative attack.
-------oOo--------

[1] ‘The World’s Money – International banking from Bretton Woods to the brink of insolvency’ by Michael Moffitt. Touchstone Book, Simon and Schuster New York. 1983. ISBN: 0-671-50596-3 Pbk.

[2] Harvard economist Raymond Vernon in his book ‘Storm Over the Multinationals’ (Cambridge, Mass: Harvard University Press, 1977), p.121. As quoted on page 76 of ‘The World’s Money – International banking from Bretton Woods to the brink of insolvency’ by Michael Moffitt. Touchstone Book, Simon and Schuster New York. 1983. ISBN: 0-671-50596-3 Pbk.

[3] Global Neoliberalism and the “Fate of the State”
George DeMartino, Assistant Professor of International Economics
Graduate School of International Studies.University of Denver
Denver, CO 80207 USA. 23rd May 2002. [1(1)DeMartino.pdf]
project.iss.u-tokyo.ac.jp/nakagawa/members/papers/1(1)DeMartino.pdf

[4] Allen Dulles' Operation 40 Brainchild
http://theselloutofamerica.blogspot.com/2007/08/allen-dulles-operation-40-brainchild.html

Net Investment Under FDR: Krugman v. Will and a Chart

Brad DeLong, Ian Welsh, and Steve Benen treat us to an exchange between George Will and Paul Krugman that Steve captures this way:

On ABC's "This Week" earlier, George Will explained his belief that FDR financial/regulatory policies discouraged investment and created an environment in which the "depression became the Great Depression." Fortunately, Will was sitting next to Paul Krugman. To hear Will tell it, the Roosevelt administration stood in the way of investors. In a fairly devastating 45 seconds, Krugman not only set the record straight, but explained that it was FDR's desire to balance the budget and cut federal spending that contributed to a decline in 1937.

Will not only tried to claim that FDR somehow spooked investment demand but he also suggested that net investment was negative during the 1930’s. Krugman’s counter was that investment demand tends to be pro-cyclical so it fell during the 1929 to 1932 period but rose from 1932 to 1937 as real GDP rose. Fortunately we can turn to this source for the NIPA tables. Table 1.1.6, line 6 provides us with gross investment, while table 1.7.6, line 5 provides us with private depreciation. The difference is net investment, which we have graphed from 1929 to 1941. The pro-cyclical nature of net investment that Krugman noted is rather clearly shown. We also see that net investment was positive in 1936, 1937, and 1939.

If some pundit like Will is going to mention an economic time series such as net investment, shouldn’t he be required to get the facts straight? Maybe such pundits should also be required to bring along correctly drawn charts of the series that they mention.

[Footnote: all series in real terms ala 2000$ (billions), INV-g = gross investment, INV-n = net investment, Depr. = private depreciation]

Missing: the strange disappearance of S. J. Chapman’s theory of the hours of labour (11)

The days are gone…, Part II

In Value and Capital, Hicks's treatment of work and leisure is laconic. It appears virtually as an aside in his discussion of the difference between the consumer's demand, if it is assumed to be fixed in terms of money, and what happens if the consumer is also a seller with a fixed stock of some commodity, who might hold back some of that commodity for his own consumption depending on the market price. "Thus a fall in wages," Hicks wrote,

may sometimes make the wage-earner work less hard, sometimes harder; for on the one hand, reduced piece-rates make the effort needed for a marginal unit of output seem less worth while, or would so, if income were unchanged; but on the other, his income is reduced, and the urge to work harder in order to make up for the loss in income may counterbalance the first tendency (p. 36).

The salient detail to note about Hicks's 'wage-earner' is that he is being paid by piece-rates, not on an hourly wage. That is to say, his income presumably varies in proportion to his output, not as a function of the number of hours he spends on the job or the number of hours of leisure he sacrifices to do so. The possibility that he may "work less hard" could thus mean either that he would exert less effort or that he would reduce the amount of time he worked. Or it could mean some combination of the two.

The dichotomy of working harder or less hard also introduces a certain ambiguity into exactly what is being traded-off, particularly if the wage-earner's hours at work remained unchanged. In the latter case, working less hard could be interpreted as a way of making work time more enjoyable (or less painful) and thus would be a backdoor re-introduction of the rejected pain-cost theory of value.

Next

Abstract: Sidney Chapman's theory of the hours of labour, published in 1909 in The Economic Journal, was acknowledged as authoritative by the leading economists of the day. It provided important insights into the prospects for market rationality with respect to work time arrangements and hinted at a profound immanent critique of economists' excessive concern with external wealth. Chapman's theory was consigned to obscurity by mathematical analyses that reverted heedlessly to outdated and naïve assumptions about the connection between hours and output. The Sandwichman is serializing "Missing: the strange disappearance of S. J. Chapman's theory of the hours of labour" on EconoSpeak in celebration of the centenary of publication of Chapman's theory. (To download the entire article in a pdf file, click on the article title.)

Who Will Speak Out to Stop the Bailouts?

Here is the problem in a nutshell: our economic well-being depends crucially on the provision of finance for all sorts of useful purposes—to move goods, launch new enterprises, retool old ones, pay college tuition, buy things like houses and cars that would otherwise take decades of savings. Most of the financial system is privately owned and operated for profit. The profit paradigm of the past generation was based on a systematic bias toward risk, a bias built into all limited liability institutions but compounded by deregulation and hubris. Now the system is reeling under the weight of trillions of dollars in losses. This has led to a seizing up of credit supply and has turned a typical recession into a potential economic abyss.

In the spirit of London Banker, let’s keep our eye on the ball. The financial losses incurred by banks, hedge funds, insurance companies and those who invested in them are their problem. The breakdown of the financial system is our problem. The bailout solutions being pushed in the US and elsewhere are based on the premise that we have to solve their problem first in order to deal with our own. Throw enough money at the financial sector, turn their red ink to black, and some day they will be willing to lend to the rest of us.

How to begin with what’s wrong with this?




1. This is a program for a systematic looting of the public. The 90+% of us who never enjoyed the profit bonanza of the last 20 years are going to pay through the teeth so that the rich get to stay rich. This is perfectly clear in the case of AIG, for instance. We hear about a $150B “investment” of public funds into this company, as if the money were going to, oh, upgrade their computer networks. The word is dishonest: this very large sum, which could do a lot of good things if spent intelligently, is going right through AIG to those it sold credit default insurance (asset swaps) to. Institutions leveraged themselves to the max in order to rake in profits by investing in high-risk, high-return mortgage-backed securities, insuring themselves against default risk by buying CDO’s from a company (AIG) that never had the capacity or intent to actually follow through if defaults became widespread. Seen in its entirety, the process was a scam. Now extraordinary amounts of public money are being transferred to the jilted investors who bought this insurance. We will never see this money again. The value of our public “investment”—80% of AIG’s ultimate capitalization—will be a few percent of what we have paid in, if the firm even survives.

2. By solving the problem of the financial institutions first, the bailout is making our problem worse. It isn’t just a question of banks who get public cash infusions not lending enough, although this is important. Finance that ought to be supporting the real economy is being diverted to the bailout. This sentence is in italics so you will read it two or three times. It is very, very, very important. You can see this in the Fed’s decision to pay competitive interest rates to attract excess bank reserves, which now amount to more than $400B. This is money that, in normal times, would amplify itself through the money multiplier and find its way to borrowers in the real economy. Now it finances the Fed’s acquisition of troubled assets at far above their market value—in other words, bailouts of private investors. Similarly, the Treasury has been selling hundreds of billions of dollars in new issues to finance the bailout, and much of the money it is sopping up would otherwise be available for normal lending.

2a. The corollary is that the world economy is sinking fast and deep. This will mean great hardship, especially in less developed countries were the margin between prosperity and penury is all too thin. It also means that the epicenter of financial crisis will shift toward sectors now being decimated by the downturn, particularly consumer credit and corporate debt. (A side note: this is the real fear about GM. Honda and Toyota can make our cars as energy-efficient as technology allows, and they can do this in their US plants. If GM is allowed to go belly up, however, it could trigger a run on a wide range of corporate debt.) Hence the bailouts, by soaking up credit and bleeding the economy, are adding to the losses that they seek to defray.

3. The resources available for these bailouts are not endless. You wouldn’t know this by following the discussion in the media. Commentators do complain about how expensive it all is, but there is no sense that a limit exists, and that we are at risk of reaching it before the financial system is repaired. But this is exactly what makes people close to the situation very nervous. The rest of the world is buying vast amounts of treasuries. The Fed takes this money and hands it to investors facing losses, receiving in return paper assets that might have value, maybe, sometime well into the future. If those holding treasuries should change their mind, this process cannot be run in reverse. The Fed is in no position to sell its damaged portfolio in order to buy back even a fraction of the huge overhang in public debt. Monetization—settling claims by simply creating new bank reserves—is not an option, because it would almost certainly trigger a run on the dollar, a threat for which no institutional antidote currently exists. What this all means is that the bailout strategy puts us in a race: will we reach our financial limit before the losses that paralyze the system are erased? It is extraordinary to me that this question is not being asked in public.

If these arguments are correct, the bailout agenda needs to be challenged. We are following a course of action that is indefensible from a social justice perspective and at best extremely risky on its own terms. An alternative exists: rapidly putting into place a public system that can make available the finance needed by the real economy. This would mean allowing a large swath of existing wealth-holders to be ruined. Such an option would be unthinkable to those who inhabit the existing world of finance: for them, repairing the system means first of all restoring the profits of investors. There is also a bit of class interest at stake, I would guess. For these reasons, it would take a mighty movement to change the way governments are responding to the financial crisis. I don't know where this will come from, but for starters it would be nice to see some real live public debate.

Work Less Insurgency

by the Sandwichman

Campaigning on a shoestring and with minimal coverage in the mainstream media, Work Less Party candidates for Vancouver City Council received 10% of the votes in the civic election Saturday.

SHAW, Chris.............Work Less Party......11237...10.8%
GREGSON, Ian.........Work Less Party......10493...10.1%
TRAMUTOLA, Geri...Work Less Party.......8619....8.3%
WISDOM, Timothy...Work Less Party.......7435....7.2%

In the election, there were ten council seats to be filled. The tenth-place seat was won with 44.2% of the votes. The lowest vote total for a major party candidate was 27.8%.

The centre-left coalition of Vision Vancouver and COPE swept 9 of the 10 seats on council. Three of the Work Less Party candidates garnered vote totals higher than the margin of victory between the sole NPA victor, Susan Anton, and Vision Vancouver's highest polling losing candidate, Kashmir Dhaliwal.

(Vote percentages were calculated based on total votes cast for all council candidates divided by ten, the number of council seats to be filled)

Chinese Fiscal Stimulus and the US Economy

It was almost two years ago when several of us were hoping for more Chinese domestic demand stimulus and less Chinese mercantilism. OK, we were also advocating US fiscal restraint on the hope that more US exports would make up for the reduced US domestic demand. In today’s environment, the smart call seems to be for a large US fiscal stimulus.

Ariana Eunjung Cha reports that the Chinese may be about to be consuming a lot more:

Long known for high saving rates, China’s middle-class consumers are starting to spend like their American counterparts ... Increasing consumer spending is a key goal of the $586 billion economic stimulus package unveiled Sunday by China’s leaders ... James E. Quinn, global president for New York-based Tiffany, said in an interview that Chinese customers are the “fastest-growing segment” of its business. “A lot of American customers have a complete wardrobe of jewelry, passed down from previous generations. That’s not the case in China. Chinese consumers are at the early stage of acquiring a sense of style and appreciation for design in jewelry.” U.S. companies have been so successful in China because “Chinese consumers have a ‘look up to the rich’ attitude and the United States is the world’s top developed country in their eyes,” said Gao Tao, a consultant for the International Brand Association in Beijing

But before we anticipate an export led boom, check out what Brad Setser has to say:

the non-petrol goods deficit is now moving in the wrong direction. It increased from $29.3b in June to $35.6b in August. Non-petrol exports fell by $9.9b over the last two months, while non-petrol imports fell by “only” $3.7 billion. The sharp fall in exports shows up clearly in a chart showing “real” non-petrol goods exports and imports.

The Chinese fiscal stimulus is certainly good news as it may soften the bleak news on US export demand, but we will still need to increase US domestic demand even if that means living with a large current account deficit for several more years.