A few days ago Obama was quoted as saying that "getting entitlement spending under control" would be part of the effort to deal with budgetary problems. Most think he is focusing on getting rising medical care costs under control, which was part of his platform. But the question of maybe he might do something with or to social security has arisen, and with Larry Summers whispering in his ear, who wanted to go after the program under Bill Clinton, this may be worrisome. As it is during the campaign, Obama opposed any cuts in benefits or moves to privatization, with his only proposal being to possibly implement fica taxes on those making more than $250,000 per year starting in 2019, if the program needs financial shoring up at that time, with the widely publicized mid-range forecast of the system having that being a year or so after the program is scheduled to start running annual deficits rather than the (large) surpluses it has been running, and will continue to run forever if the very unpublicized low-cost scenario comes to pass.
This is where Bruce Webb and I came in last spring. While the system did not do so last year and certainly will not this year, in a majority of years over the past decade it has done better than that low cost scenario, raising the likelihood that the system may in fact never run a deficit. It may not need any fixing ever, and is just fine as it is. Ain't broke and don't need no fixin'. Initially Obama was proposing to implement his added fica tax immediately after taking office. At a certain point, Bruce and I composed a memo laying out the above facts and some others that was sent through channels I shall not discuss to the highest levels of the Obama campaign. Soon thereafter came the change in position to move this proposed change off to 2019, although this decision may have had little to nothing to do with our memo. But I still hold to the position of that memo and hope that Obama is not listening too closely to Summers now on this matter. The system is doing just fine and should be left alone as it is for the duration of his presidency, however long it proves to be.
Saturday, January 10, 2009
Obama’s Own Estimate of Employment Growth is Underwhelming
Reuters reports:
Employment as of December 2008 was about 3.3 million jobs less than it was as of November 1007 according to the household survey. The employment-population ratio has declined to 61.0%. Even if we had an additional 3.5 million jobs today, the employment-population ratio would be only 62.5%. Now when they start talking about an additional 7 million new jobs, I’ll be impressed as that might get us closer to the 64% employment-population ratio we enjoyed in the late 1990’s.
President-elect Obama said Saturday an analysis of his stimulus proposals shows that between 3 million and 4 million U.S. jobs could be saved or created by 2010, nearly 90% of them in the private sector.
Employment as of December 2008 was about 3.3 million jobs less than it was as of November 1007 according to the household survey. The employment-population ratio has declined to 61.0%. Even if we had an additional 3.5 million jobs today, the employment-population ratio would be only 62.5%. Now when they start talking about an additional 7 million new jobs, I’ll be impressed as that might get us closer to the 64% employment-population ratio we enjoyed in the late 1990’s.
David Brooks: Mendacity on Fiscal Policy
Brad DeLong is not happy with the latest from David Brooks. Brad writes:
I also found this comment weird:
But we did have tax cuts in 1964, 1975, 1981, and 2001. Those weren’t fiscal stimulus plans?
Update: The source for the “haste and panic” quote appears to be the 1963 Economic Report of the President on page XIII. And guess what? Brooks has misrepresented the context of this as well.
David Brooks quotes Christina Romer out of context--taking her 1994 argument that monetary policy is more flexible and effective at ending small recessions and misinterpreting it to apply to big recessions like today, which are too big to end via monetary policy alone.
I also found this comment weird:
All the administrations, Democratic and Republican, resisted large-scale fiscal stimulus plans. They didn’t believe they could time a stimulus correctly. They didn’t trust Congress to pass the bills quickly or cleanly. They decided they shouldn’t be making policy in what Kennedy administration economists called “an atmosphere of haste and panic brought on by recession.”
But we did have tax cuts in 1964, 1975, 1981, and 2001. Those weren’t fiscal stimulus plans?
Update: The source for the “haste and panic” quote appears to be the 1963 Economic Report of the President on page XIII. And guess what? Brooks has misrepresented the context of this as well.
Friday, January 9, 2009
Job Market Continues to Deteriorate
The BLS lead sounds bad enough:
Nonfarm payroll employment declined sharply in December, and the unemployment rate rose from 6.8 to 7.2 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Payroll employment fell by 524,000 over the month and by 1.9 million over the last 4 months of 2008. In December, job losses were large and widespread across most major industry sectors.
But notice that the household survey reported employment losses of 806,000 with this:
The employment-population ratio fell by 0.4 percentage point to 61.0 percent over the month and by 1.7 percentage points in 2008.
Our graph shows the employment-population ratio and labor force participation over the past 10 years. As the latter has declined, the rise in the unemployment rate understates to the true decline in the ratio of employment to population.
This news should tell Congress that we need a big stimulus package ASAP and one that has a lot of bang for the buck. On this score, I think the Senate Democrats have it right:
President-elect Barack Obama's proposed tax cuts ran into opposition Thursday from senators in his own party who said they wouldn't do much to stimulate the economy or create jobs … Sen John Kerry, D-Mass., said, "I'd rather spend the money on the infrastructure, on direct investment, on energy conversion, on other kinds of things that much more directly, much more rapidly and much more certainly create a real job."
Update: Bruce Bartlett provides a very interesting discussion on the effectiveness of various fiscal stimulus proposals.
Can the Fed Target Interest Rates Below the Zero?
Yes. I have posted here previously on how we have actually seen nominal interest rates below zero, including recently for both the actual federal funds rate and certain Treasury bill rates. During August to November of 2003, the repo market rates regularly went negative, this being the market the Fed normally uses for controlling the federal funds rate. And Japan had negative rates off and on in the late 1990s. Thus, if actual rates were to go negative and stay, the Fed could push the target rates below zero. This situation might well arise if the economic crisis worsens severely, and we fall into deflation. This would open up a new tool for the Fed, overcoming the limits of the liquidity trap.
The main theoretical argument for why interest rates cannot be negative, or not over a sustained period, as it is now clear that they can be so for at least short periods of time, has been the argument of cash as an alternative. That there was a lot of cash around in the 1930s may well have been why we never saw negative interest rates during that period of deflation and extreme economic decline. However, now cash is a tiny fraction of the money supply and of wealth more generally. It is not a meaningful alternative to government securities on a large scale for serious wealth holders, and such alternatives as checking accounts or CDs are all ultimately backed by government securities anyway, if the FDIC were to go under in a general further wave of bank collapses. Under such circumstances, the negative interest rate tool may be the only way out, especially if this follows a failed fiscal expansion.
The main theoretical argument for why interest rates cannot be negative, or not over a sustained period, as it is now clear that they can be so for at least short periods of time, has been the argument of cash as an alternative. That there was a lot of cash around in the 1930s may well have been why we never saw negative interest rates during that period of deflation and extreme economic decline. However, now cash is a tiny fraction of the money supply and of wealth more generally. It is not a meaningful alternative to government securities on a large scale for serious wealth holders, and such alternatives as checking accounts or CDs are all ultimately backed by government securities anyway, if the FDIC were to go under in a general further wave of bank collapses. Under such circumstances, the negative interest rate tool may be the only way out, especially if this follows a failed fiscal expansion.
Thursday, January 8, 2009
Does Andrew Sullivan Think State and Local Government Don’t Tax Us?
If Andrew Sullivan knows that that state and local governments do tax us – then why is he touting certain silliness from Greg Mankiw?:
Also excluded from these effective tax rate calculations are the deferred taxes being piled up by those Bush deficits that I’m sure Sulli knows about.
These figures include all federal taxes, not just income taxes.
Also excluded from these effective tax rate calculations are the deferred taxes being piled up by those Bush deficits that I’m sure Sulli knows about.
Good Jobs? Green Jobs? Shorter Hours!
by the Sandwichman
A contest announcement arrived in the Sandwichman's inbox yesterday. It was from Working America, the "community affiliate" of the AFL-CIO:
So the Sandwichman visited the conference website and perused the agenda. M.S., B.S., Phd. (more of the same BS piled higher and deeper). To remedy the apparent lack of analysis besetting the GJGJ conference, the Sandwichman is offering a prize of his own to contest entrants pointing out the contribution that the reduction of working time can make to a greener economy (see for example, the CEPR paper by David Rosnick and Mark Weisbrot and "Are Shorter Work Hours Good for the Environment? A Comparison of U.S. and European Energy Consumption").
The Sandwichman will award copies of Peter Victor's book, Managing Without Growth: Slower by design, not disaster to up to six contest entrants who make the environmental case for shorter hours. One of those prizes will go to the entry I like the best and up to five book prizes will go to any shorter hours entries that are selected as finalists by Working America. Just send a copy of your entry to the Sandwichman at "lumpoflabor(remove this)at(this too)telus(ditto)dot(ditto)net".
By the way, entries arguing against shorter working time will also be eligible for the prize, if anyone is so inclined! Here's the Sandwichman's own entry (not eligible for the prize):
The name "Good Jobs, Green Jobs" rings a bell. It recalls the theme of an issue of the Canadian environmental magazine, Alternatives, from 2001: "Green Jobs, Good Work." One of the articles, "Good Work, Less Toil" by Anders Hayden, explored the relationship between work, consumerism and the environment. As Hayden pointed out, "much of our work today feeds unsustainable forms of production that torment the planet." That article was concerned with more than just the tension between the slogan of "jobs, jobs, jobs" and the environment. It also addressed the time famine that many over-worked North Americans endure even while others remain underemployed or out of work. Sharing the work is thus an indispensable part of sparing the planet.
The dream of cleanly, efficiently and renewably retrofitting an economy addicted to unlimited growth is seductive but futile. As the 19th economist W. Stanley Jevons predicted -- and American experience in the wake of the energy crisis of the 1970s confirmed -- increasing energy efficiency alone leads to more, not less, total consumption. Similarly, green technologies can indeed lower emissions of greenhouse gases per dollar of output. But it is total emissions -- not just the intensity of emissions -- that need to be reduced. Urgent targets for reducing total emissions are only achievable by combining greener technology with slower or no economic growth.
In Managing Without Growth, Peter Victor, an ecological economist at York University in Canada modeled the effects on the environment, poverty and unemployment of various economic-growth scenarios. If we rely on economic growth averaging 2.5 percent annually to supply jobs, greenhouse gas emissions will increase by around 75 percent over the next 30 years even if the intensity of emissions continues to decline at a rate consistent with the historical trend. Even so, poverty and unemployment will creep upward. Simply ceasing economic growth, however, would result in catastrophic increases in poverty and unemployment. Only by slowing economic growth, reducing working time and targeting investment and regulatory policy on greenhouse gas reductions in combination can the goals of environmental protection and reduction of poverty and unemployment be approached simultaneously.
But how does the reduction of working time square with the goal of creating good jobs? Eighty years ago, economist Raymond Henry Mussey wrote that, "no student of American labor history can fail to be struck with the extraordinary importance of the eight-hour issue in union thinking during the formative years of the American Federation of Labor." Mussey affirmed that the shorter hours theory ideally fit the organizational needs of the labor movement. Indeed, in the face of the depression of the 1930s and concerns about job loss to automation in the 1950s and 1960s, the labor movement returned again and again to the issue of the shorter workweek. Today, what needs above all to be understood is that the reduction of working time creates opportunity for greater freedom and enjoyment through leisure and not a grim necessity to be borne with regret and resignation.
A contest announcement arrived in the Sandwichman's inbox yesterday. It was from Working America, the "community affiliate" of the AFL-CIO:
Working America is going to be sending two grand prize winners and up to three honorable mention winners to the Good Jobs, Green Jobs National Conference, to be held Feb. 4–6, 2009, in Washington, D.C. Winners won't just get a free trip (up to a value of $1,500), they'll get an opportunity to hear from activists and experts from around the country on how we can create jobs and help the environment at the same time.
To enter, go here and answer the question: "Why do you want to fight for a green jobs economy and why are you the right person to represent Working America's members at the Good Jobs, Green Jobs National Conference?"
So the Sandwichman visited the conference website and perused the agenda. M.S., B.S., Phd. (more of the same BS piled higher and deeper). To remedy the apparent lack of analysis besetting the GJGJ conference, the Sandwichman is offering a prize of his own to contest entrants pointing out the contribution that the reduction of working time can make to a greener economy (see for example, the CEPR paper by David Rosnick and Mark Weisbrot and "Are Shorter Work Hours Good for the Environment? A Comparison of U.S. and European Energy Consumption").
The Sandwichman will award copies of Peter Victor's book, Managing Without Growth: Slower by design, not disaster to up to six contest entrants who make the environmental case for shorter hours. One of those prizes will go to the entry I like the best and up to five book prizes will go to any shorter hours entries that are selected as finalists by Working America. Just send a copy of your entry to the Sandwichman at "lumpoflabor(remove this)at(this too)telus(ditto)dot(ditto)net".
By the way, entries arguing against shorter working time will also be eligible for the prize, if anyone is so inclined! Here's the Sandwichman's own entry (not eligible for the prize):
The name "Good Jobs, Green Jobs" rings a bell. It recalls the theme of an issue of the Canadian environmental magazine, Alternatives, from 2001: "Green Jobs, Good Work." One of the articles, "Good Work, Less Toil" by Anders Hayden, explored the relationship between work, consumerism and the environment. As Hayden pointed out, "much of our work today feeds unsustainable forms of production that torment the planet." That article was concerned with more than just the tension between the slogan of "jobs, jobs, jobs" and the environment. It also addressed the time famine that many over-worked North Americans endure even while others remain underemployed or out of work. Sharing the work is thus an indispensable part of sparing the planet.
The dream of cleanly, efficiently and renewably retrofitting an economy addicted to unlimited growth is seductive but futile. As the 19th economist W. Stanley Jevons predicted -- and American experience in the wake of the energy crisis of the 1970s confirmed -- increasing energy efficiency alone leads to more, not less, total consumption. Similarly, green technologies can indeed lower emissions of greenhouse gases per dollar of output. But it is total emissions -- not just the intensity of emissions -- that need to be reduced. Urgent targets for reducing total emissions are only achievable by combining greener technology with slower or no economic growth.
In Managing Without Growth, Peter Victor, an ecological economist at York University in Canada modeled the effects on the environment, poverty and unemployment of various economic-growth scenarios. If we rely on economic growth averaging 2.5 percent annually to supply jobs, greenhouse gas emissions will increase by around 75 percent over the next 30 years even if the intensity of emissions continues to decline at a rate consistent with the historical trend. Even so, poverty and unemployment will creep upward. Simply ceasing economic growth, however, would result in catastrophic increases in poverty and unemployment. Only by slowing economic growth, reducing working time and targeting investment and regulatory policy on greenhouse gas reductions in combination can the goals of environmental protection and reduction of poverty and unemployment be approached simultaneously.
But how does the reduction of working time square with the goal of creating good jobs? Eighty years ago, economist Raymond Henry Mussey wrote that, "no student of American labor history can fail to be struck with the extraordinary importance of the eight-hour issue in union thinking during the formative years of the American Federation of Labor." Mussey affirmed that the shorter hours theory ideally fit the organizational needs of the labor movement. Indeed, in the face of the depression of the 1930s and concerns about job loss to automation in the 1950s and 1960s, the labor movement returned again and again to the issue of the shorter workweek. Today, what needs above all to be understood is that the reduction of working time creates opportunity for greater freedom and enjoyment through leisure and not a grim necessity to be borne with regret and resignation.
Wednesday, January 7, 2009
Another day in the forests of Indonesia
“On Thursday, 18th December 2008, mobile police brigades in Riau, together with ordinary police officers and 500 paramilitaries stormed the settlement of Suluk Bongkal in order to evict the population. The background is the claim which the plantation company PT Arara Abadi is making on the land, and the company’s support by sectors of the government.” “The settlement of Suluk Bongkal, Beringin, in the district of Bengkali, Riau Province, Sumatra has been attacked by security forces. Two toddlers have been killed. 400 villagers have fled into the mountains and 58 people remain in the village. They are under extreme psychological pressure.” “State security forces, which are supposed to serve the population, have committed a crime against human rights with their attack on the population of Suluk Bongkal. There are strong indications that the violence was planned: Police and paramilitaries even used a special incendiary bomb in order to burn the village, they used fire arms and tear gas and a helicopter which appears to belong to PT Arara Abadi.” Since 1984 twenty six conflicts have been registered between local Indonesian populations and the ‘forestry’ corporation Arara Abadi. “The main cause is land rights conflicts. People are losing the right to their land, without receiving fair and timely compensation.” [1] Arara Abadi holds forestry and land concessions for around 3000 km2 in the Riau and Jambi provinces in Sumatra – an area covered by peatland forests that represent an enormous store of global carbon. This company feeds the paper mills of Asian Pulp and Paper (APP). Both companies are controlled by the Sinar Mas Group, one of Indonesia's largest conglomerates with a network of paper mills and land holdings that extends into China, India, Cambodia, Papua New Guinea. Sinar Mas Group is owned by Eka Tjipta Wijaya [2] the prominent Chinese entrepreneur. “according to data published in November 2007, its customers include Unilever, Proctor & Gamble, Henkel, Pizza Hut, McDonalds, Burger King, Danone, AAK and Cargill [3] . Other customers are the Swedish corporations of Cellmark, Ekman and Elof Hansson [4]. No doubt these companies are amongst many other corporations and their conglomerates around the world.
My bet is that, as long as we continue to consume the products of these corporations, the violence will continue.
[1]‘End the violence on pulp and paper plantations’ by Ade Fadli. 22nd December 2008.
http://www.eng.walhi.or.id/kampanye/hutan/konversi/pulp_arara/
[2] Forestry Giant Lobbying for Huge Plantation
By Luke Reynolds. The Cambodia Daily, Story of the Month, September 15 2004
http://www.camnet.com.kh/cambodia.daily/story_month/September-15-2004.htm
[3] Golden Agri-Resources, 2007. Company Presentation. November 2007 as quoted in Greenpeace Briefing ‘SINAR MAS: Indonesian Palm oil menace’. Published by Greenpeace Southeast Asia – Indonesia.
[4] www.swedwatch.org/swedwatch/content/download/277/1408/file/Summery.doc
My bet is that, as long as we continue to consume the products of these corporations, the violence will continue.
[1]‘End the violence on pulp and paper plantations’ by Ade Fadli. 22nd December 2008.
http://www.eng.walhi.or.id/kampanye/hutan/konversi/pulp_arara/
[2] Forestry Giant Lobbying for Huge Plantation
By Luke Reynolds. The Cambodia Daily, Story of the Month, September 15 2004
http://www.camnet.com.kh/cambodia.daily/story_month/September-15-2004.htm
[3] Golden Agri-Resources, 2007. Company Presentation. November 2007 as quoted in Greenpeace Briefing ‘SINAR MAS: Indonesian Palm oil menace’. Published by Greenpeace Southeast Asia – Indonesia.
[4] www.swedwatch.org/swedwatch/content/download/277/1408/file/Summery.doc
Raising Tax Rates on the Well to Do: Lane Kenworthy Gets It
I have been arguing that cutting taxes for households who are not borrowing constrained will NOT increase aggregate demand. Lane Kenworthy takes this argument one step further:
Well said!
It’s unlikely to delay economic recovery by reducing consumer spending, since most of those affected will still have sufficient income to be able to spend as much as they desire. The tax-rate increase is small enough that it should have little or no adverse impact on investment; when the rate was 39.6% in the late 1990s, investment didn’t suffer. And the added tax revenues could be used either to boost the size of the stimulus package or to reduce its impact on the federal deficit.
Well said!
Monday, January 5, 2009
Obama Goes For Tax Cuts
Jonathan Weisman and Naftali Bendavid report:
Will this appeal to a bipartisan approach going to reduce the effectiveness of the fiscal stimulus? I have made this argument:
But this is weird:
HUH? If “strapped consumers” means those facing borrowing constraints, it is precisely these households that are more likely to consume rather than save a tax cut.
Update: Mark Thoma weighs in on this issue and provides us another story by Peter Baker and Carl Hulse that notes:
So only half of the tax cut will go to borrowing constrained households with the rest being given to corporations who are not likely to invest anything extra during this period of weak aggregate demand. Ahem!
President-elect Barack Obama and congressional Democrats are crafting a plan to offer about $300 billion of tax cuts to individuals and businesses, a move aimed at attracting Republican support for an economic-stimulus package and prodding companies to create jobs. The size of the proposed tax cuts -- which would account for about 40% of a stimulus package that could reach $775 billion over two years -- is greater than many on both sides of the aisle in Congress had anticipated. It may make it easier to win over Republicans who have stressed that any initiative should rely more heavily on tax cuts rather than spending.
Will this appeal to a bipartisan approach going to reduce the effectiveness of the fiscal stimulus? I have made this argument:
If one is a believer of propositions such as the life cycle model of consumption or the Barro-Ricardo equivalence proposition, one would dismiss out of hand this notion that we can accelerate aggregate demand by passing a tax cut today that will one day have to be financed by a tax surcharge.
But this is weird:
Economists of all political stripes widely agree the checks sent out last spring were ineffective in stemming the economic slide, partly because many strapped consumers paid bills or saved the cash rather than spend it.
HUH? If “strapped consumers” means those facing borrowing constraints, it is precisely these households that are more likely to consume rather than save a tax cut.
Update: Mark Thoma weighs in on this issue and provides us another story by Peter Baker and Carl Hulse that notes:
The legislation Mr. Obama is developing with Congressional Democrats will devote about 40 percent of the cost to tax cuts, including his centerpiece campaign promise to provide credits up to $500 for most workers, costing roughly $150 billion. The package will also include more than $100 billion in tax incentives for businesses to create jobs and invest in equipment or factories.
So only half of the tax cut will go to borrowing constrained households with the rest being given to corporations who are not likely to invest anything extra during this period of weak aggregate demand. Ahem!
Wonk v. Wank II: The Big Picture
by the Sandwichman
Not all economic models lack "any connection with reality". In "Managing Without Growth: Slower by Design, not Disaster", Peter Victor used a model called LowGrow "to explore different assumptions, objectives and policy measures" regarding the Canadian economy. I suppose the biggest difference between LowGrow and Paul Krugman's Optimal Fiscal Policy in a Liquidity Trap model (I'll call it OptiTrap) is that LowGrow uses actual data to explore possibilities while OptiTrap assumes consumers who "maximize an intertemporal utility function".
In other words, OptiTrap leaves all the important qualitative decisions to a bunch of spectral rational agents tucked away in a black box. The obvious question would be: if those agents were so rational how did they get into such a liquidity trap mess in the first place?
The point of LowGrow is to make the nature of qualitative choices that must be made and the variety of outcomes based on different choices as transparent as possible. There is not a single, "optimal solution" in LowGrow. Nor is there a single, "big bang" policy prescription that issues from it -- like OptiTrap's "So let's get those [spending] projects going." Instead, multiple runs of tLowGrow using different assumptions are made to tease out an array of complementary policy recommendations.
At first glance it may seem that OptiTrap ignores such issues as climate change, peak oil, poverty, mass unemployment and happiness. Not so! It just assumes that its intertemporal utility-maximizing rational agents will deal with that shit.
All OptiTrap needs to worry about is how to get the damned economy moving again. Once it's back on the good old growth track those rational agents -- who, incidentally, bought all those overpriced houses with securitized sub-prime mortgages and voted for George W. Bush twice -- anyway, as I was saying those rational agents will take care of the ah... er... nevermind.
But if you'd like to view a cogent discussion of the disappointments of economic growth, the limitations of natural resources and how it may be possible to avoid both environmental and economic disaster and possibly even live richer fuller lives, please watch the video of Peter Victor's lecture at the Royal Canadian Institute for the Advancement of Science from November 23, 2008.
Not all economic models lack "any connection with reality". In "Managing Without Growth: Slower by Design, not Disaster", Peter Victor used a model called LowGrow "to explore different assumptions, objectives and policy measures" regarding the Canadian economy. I suppose the biggest difference between LowGrow and Paul Krugman's Optimal Fiscal Policy in a Liquidity Trap model (I'll call it OptiTrap) is that LowGrow uses actual data to explore possibilities while OptiTrap assumes consumers who "maximize an intertemporal utility function".
In other words, OptiTrap leaves all the important qualitative decisions to a bunch of spectral rational agents tucked away in a black box. The obvious question would be: if those agents were so rational how did they get into such a liquidity trap mess in the first place?
The point of LowGrow is to make the nature of qualitative choices that must be made and the variety of outcomes based on different choices as transparent as possible. There is not a single, "optimal solution" in LowGrow. Nor is there a single, "big bang" policy prescription that issues from it -- like OptiTrap's "So let's get those [spending] projects going." Instead, multiple runs of tLowGrow using different assumptions are made to tease out an array of complementary policy recommendations.
At first glance it may seem that OptiTrap ignores such issues as climate change, peak oil, poverty, mass unemployment and happiness. Not so! It just assumes that its intertemporal utility-maximizing rational agents will deal with that shit.
All OptiTrap needs to worry about is how to get the damned economy moving again. Once it's back on the good old growth track those rational agents -- who, incidentally, bought all those overpriced houses with securitized sub-prime mortgages and voted for George W. Bush twice -- anyway, as I was saying those rational agents will take care of the ah... er... nevermind.
But if you'd like to view a cogent discussion of the disappointments of economic growth, the limitations of natural resources and how it may be possible to avoid both environmental and economic disaster and possibly even live richer fuller lives, please watch the video of Peter Victor's lecture at the Royal Canadian Institute for the Advancement of Science from November 23, 2008.
Sunday, January 4, 2009
Wonk v. Wank I
by the Sandwichman
A few days ago on his blog, Paul Krugman offered up an "unreadable little paper" with a "fully-specified model" to examine the case for "big government spending in the face of a liquidity trap". The bottom line: "When the economy is depressed and monetary policy can’t set it right, the true opportunity cost of government spending is low. So let’s get those projects going."
Unreadable as Krugman's little paper may have been, seventy or so readers managed to comment on it insightfully. It's too bad Krugman doesn't reply to his commentators. I suppose it's the custom of simplistic economic model building to hide behind the abstract generality, simplicity and unreadability (to non-wonks) of the model. Nevertheless, several commentators had little difficulty identifying what was missing in Krugman's "fully-specified" model: The Big Picture.
Below are excerpts from several of the comments:
A few days ago on his blog, Paul Krugman offered up an "unreadable little paper" with a "fully-specified model" to examine the case for "big government spending in the face of a liquidity trap". The bottom line: "When the economy is depressed and monetary policy can’t set it right, the true opportunity cost of government spending is low. So let’s get those projects going."
Unreadable as Krugman's little paper may have been, seventy or so readers managed to comment on it insightfully. It's too bad Krugman doesn't reply to his commentators. I suppose it's the custom of simplistic economic model building to hide behind the abstract generality, simplicity and unreadability (to non-wonks) of the model. Nevertheless, several commentators had little difficulty identifying what was missing in Krugman's "fully-specified" model: The Big Picture.
Below are excerpts from several of the comments:
Umm… while we’re at it, Dr. Krugman, perhaps you could please explain just why consumption has to be so high to prevent economic meltdown.
... why does the economy require that people spend money they can’t afford on stuff they don’t need now, in order to keep the economy moving at all?
Better, surely, to have the government buy public goods that are at least needed–education, insulation, health care, efficient transportation.
But when, if ever, can we enter Keynes’ vision of a world at leisure, with plenty of time, jobs with family-compatible hours, and enough goods to keep us smiling? Will our economic system ever permit it? Can we use a crisis as a time to think about the possibility?
Can you please explain. Fiscal stimulus forever - or only until consumer spending resumes? Earlier this year you wrote in the NY Times that “weak spending is treatable and the economy could be saved”.
In the last 6 years everyone bought new cars, new computers, new mobile phones, new houses! These will last at least 10 years.
What now? Perpetuate the spending Greenspan ignited?
Consumer spending on “exotic” upgrades? - replacing a perfectly good car or computer with a more expensive model? $400 sun glasses, $300 joggers, the latest mobile phone? Is that the idea - spend like we use to? Maybe the government should stimulate advertising! Maybe brainwash the people - they really do need to buy these goods!
Or make it compulsory to have all cars, computers, TVs etc. destroyed if they are older than say 5 years. Then people will have to buy new ones! Creative destruction!
Spending restored and economy saved!
Keep people employed making and selling things we don’t really need = full employment in jobs nobody likes. Is that it?
The problem you face is convincing people that since excessive debt got us into this mess, even more debt (Federal this time) will get us out of the mess. And you have to do it without math.
Is there any chance that a liquidity trap is actually a manifestation of any or all of the following:
Too much debt; wealth/income inequality; and/or negative real earnings growth for most people
Why do almost all economists assume that preventing price deflation requires MORE DEBT??? I DO NOT believe that the solution to too much middle and lower class debt is MORE DEBT (whether gov’t debt or not)!!!
As was forwarned , the paper was too tough to follow. I have an equally difficult time understanding why complex wonkish academic theory and analyisis trumps and ignores common sense and the more obvious. What is right before our eyes is the fact that no matter what we do to stimulate the economy our major downfall is our lack of manufacturing ability which we gave away to China and the like. Sadly our national focus and young talent has migrated to financial ( funny money) engineering from engineering that creates new technology. And for too long the foundation of our new economy has been based on borrowed money and not on import income from making quality things. The more we borrow ( which we now have no choice but to do ) the more we dig our selves down into the black hole which may now be too deep to ever to get out of . The wonkish analysis seems to ignore what is obvious to the lesser intelligent people. Me and most of my friends who are about as equally unintelligent as me, were able to see the crazy mortgage/housing bubble and also the fact that our economy was a house of cards because it is based on borrowed and funy money. And this was obvioius to us several years ago while the wonkish lot ( ie economists such as Greenspan and company) were producing analytic outcomes that suited themselves so as to perpetuate the massive wealth accumulation for the very wealthy.
As I see it, full employment is not a binary predicate in any real economy.
You will always have sectors with over-full employment, sectors with full employment and sectors with less than full employment. The same is true for different geographic areas. There is plenty of skill and location stickiness that ensures that this is always true.
This means that there is no point in time in which you reach full employment in the whole economy, which also means that at no point in time does anything dramatic happen. The cost curve will never become a discontinuous function.
Rather, for every new job that is being added, there’s an increasing chance that the next job will appear in a tight part of the job market. As long as you have non-perfect distribution of new jobs only to the sectors and regions that have less than full employment, you will see the marginal cost increase for every created job, and from the start you’ll see faster than linear cost growth.
With government programs, it’s likely that certain sectors are stimulated more than others. Due to skill stickiness this will mean that the mismatch between available skills and requested skill grows. I believe this means that it’s highly likely that the cost curve crosses the benefit curve well before the mythical state of full employment.
Maximization of consumption is totally different from sustainable consumption. Your model is not comprehensive and tough only some parts of economy.
But the biggest point is we think only maximization but that is not sustainable. We have over consumption and over debts. The more government uses, the more the next generation will have to pay tax and the less the next generation will have to consume.
All optimization economic models we contribute cannot bring the sustainability of economy. We may look back to see Ramsey model to find why we have too much consumption, too much debts and low saving because we use optimization of consumption model that is all wrong in concepts.
Government can bring the full employment in short term to optimize consumption like we did for nearly 70 years on Keynesian tools but we cannot sustain full employment in the long run if the government and private debts stay at unsustainable high level.
Thursday, January 1, 2009
Does Amity Shlaes Even Know How to Be Honest?
It has been well established that Ms. Shlaes does not know any economics but her latest goes beyond the pale in dishonesty:
No – the logic behind the Troubled Assets Relief Program’s variation that the government make direct equity investment in troubled financial institutions by many economists including Paul Krugman:
Paul has been critical with certain aspects of TARP but he notes that not only has the basic idea of equity infusion is what financial economic theory suggests is a viable policy means for addressing the financial crisis but it has also been successfully tried.
The logic behind fiscal stimulus in general was explained in the 1936 General Theory authored by Lord Keynes. Lawrence Summers recently explained the specific logic behind Obama’s call for an acceleration of infrastructure investment. Summers appeals to conventional economic wisdom and not some longing for the New Deal.
While her alleged ties of the current policy proposals to the New Deal falls in its face, Shlaes repeats her debunked claim that the New Deal made the Great Depression worse:
What is this “significant evidence” you ask? Oh yea – the past writing of one Amity Shlaes! If the Washington Post really wants to make an argument against Obama’s fiscal policy proposals, might I suggest they find an economist rather than a discredited rightwing hack to make that case?
The United States has entered the era of the experiment. President-elect Barack Obama is putting forward an infrastructure program whose plans and price tag are unclear. Treasury Secretary Henry Paulson whipped up the Troubled Asset Relief Program to buy up bad mortgage instruments, and, expanding on that experiment, President Bush wants to try extending TARP to autoworkers. The idea that experiments are warranted in current circumstances comes from the New Deal.
No – the logic behind the Troubled Assets Relief Program’s variation that the government make direct equity investment in troubled financial institutions by many economists including Paul Krugman:
Before I explain the apparent logic here, let’s talk about how governments normally respond to financial crisis: namely, they rescue the failing financial institutions, taking temporary ownership while keeping them running. If they don’t want to keep the institutions public, they eventually dispose of bad assets and pay off enough debt to make the institutions viable again, then sell them back to the private sector. But the first step is rescue with ownership. That’s what we did in the S&L crisis; that’s what Sweden did in the early 90s; that’s what was just done with Fannie and Freddie; it’s even what was done just last week with AIG. It’s more or less what would happen with the Dodd plan, which would buy bad debt but get equity warrants that depend on the later losses on that debt.
Paul has been critical with certain aspects of TARP but he notes that not only has the basic idea of equity infusion is what financial economic theory suggests is a viable policy means for addressing the financial crisis but it has also been successfully tried.
The logic behind fiscal stimulus in general was explained in the 1936 General Theory authored by Lord Keynes. Lawrence Summers recently explained the specific logic behind Obama’s call for an acceleration of infrastructure investment. Summers appeals to conventional economic wisdom and not some longing for the New Deal.
While her alleged ties of the current policy proposals to the New Deal falls in its face, Shlaes repeats her debunked claim that the New Deal made the Great Depression worse:
Modern economists, monetarist or Keynesian, have not rejected this story line. The trouble with the 1930s, in their view, is that government did not fiddle enough. Had the Federal Reserve, the Treasury or the White House fiddled more, the Depression might have been shorter or less severe. The New Deal Fed, they say, never got the price level quite right. Or, the New Deal stimulus programs were too little. And so on. But there is significant evidence that the very arbitrariness of the New Deal made the Depression worse.
What is this “significant evidence” you ask? Oh yea – the past writing of one Amity Shlaes! If the Washington Post really wants to make an argument against Obama’s fiscal policy proposals, might I suggest they find an economist rather than a discredited rightwing hack to make that case?
Idiot Year
2008 is over. For many global citizens this year may one day be described as the year of revelation. A full century of environmental and economic abuse along with political intrigue and deceit may have finally come into full view. It seems unlikely that we will continue much longer to accept the counsel of those who tell us that we must fill our world with poisonous chemicals and overexploit our natural resources or take senseless and frightening risks with the employment of new technologies. In the world of politics another range of possibilities is apparent. False pretensions and embedded assumptions of national sovereignty and liberal democracy are unlikely to be accepted without serious questioning in western industrialized nations. With the obvious no longer hidden we may not be as easily fooled ever again. This breakdown of assumed ‘norms’ truly represents the end of an era and it’s happening just at the time a positive feedback loop of Arctic warming kicks in to alter the planetary air conditioner of the Northern Hemisphere [1]. Dramatic and unprecedented social and political change portends in the year that Prince Charles warned the world that we had 18 months to stop climate change. [2]
On 10th September last year the Maidstone Crown Court in the UK decided that “the threat of global warming is so great that [environmental] campaigners were justified in causing more than £35,000 worth of damage to a coal-fired power station.” Six Greenpeace activists were cleared of charges of criminal damage [3]. Just as three of these British protesters responded to systemic collapse in the ecosphere (by painting Gordon Brown's name on the British coal plant's chimney as a metaphor for political accountability) Ben Bernanke of the US Federal Reserve responded to another global crisis with a slightly more concrete metaphor of his own. Helicopter drops of money were used to bail the rich out with increasingly worthless fiat money and on an absolutely extraordinary scale. The surviving handful of Wall Street banks hoarded cash and refused to lend to each other as their four-decades-long global ponzi scheme of money and credit manipulation fell apart [4]. In turn this banking collapse was prompted by the oligopoly dynamics of concentrated economic power in a small number of corporate networks and conglomerates generally[5]. Fictitious capital [6] grew at an ever-increasing rate and fomented unbelievable distortions in what we are told is ‘economic development’ across the globe but is actually a well-managed path designed to generate dependency on the global corporations along with the stronger states that sponsor them.
In 2008 it became clear to many more people that ‘globalisation’ was not a spontaneous result of ‘free market’ dynamics as we had been repeatedly told. Rather it was revealed to be “the deeply political result of political choices made by successive governments of one state: The United States” [8]. Both Republican and Democratic administrations have used overt and covert means to topple democratically-elected governments around the world [7] and to tilt the balance of political and economic advantage unfairly towards North America in other ways [9].
2008 was the year when conventional wisdom became obsolete. It did not allow us to perceive the essential nature of things nor adequately anticipate the consequences of our actions. In 2008 everything became open to question. The ‘pluralism’ of the two-party system was found to be a delusion. There were no safeguards in place to protect against one group gaining too much power over the whole of society nor even the whole of the planet. How obvious it was that the private sector was not balanced by the public one as we saw ‘leaders’ in one national government after another working to a corporate narrow interest agenda. There are bad men on the Earth, after all.”...if nothing happens even though we're entering an ecological crisis of historic gravity, it's because those who have power in the world want it to be this way." [10]
The gift of 2008 is the revelation of important and critical truths. Its legacy is to come to terms with everything.
[1] Changes 'amplify Arctic warming'
By Jonathan Amos, Science reporter, BBC News. 16th December 2008
http://news.bbc.co.uk/2/hi/science/nature/7786910.stm
[2] Prince Charles: Eighteen months to stop climate change disaster. By Andrew Pierce
Last updated: 1:08 PM BST 18/05/2008
http://www.telegraph.co.uk/news/newstopics/theroyalfamily/1961719/Prince-Charles-Eighteen-months-to-
stop-climate-change-disaster.html?service=print
[3] Under the defence of "lawful excuse", a legal principle that “allows damage to be caused to property to prevent even greater damage” as quoted in the article:
Cleared: Jury decides that threat of global warming justifies breaking the law
By Michael McCarthy, Environment Editor. Thursday, 11 September 2008
http://www.independent.co.uk/environment/climate-change/cleared-jury-decides-that-threat-of-global-warming-justifies-breaking-the-law-925561.html
[4] A point had been reached where a huge volume of capital was held in such a small number of private hands that were largely outside any regulatory structure. This was accompanied by an even smaller number of trading and banking networks that resulted in a ‘common tilt’ in multinational corporations’ decisions and processes. See: ‘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.
[5] Instability in the global economy became inevitable, as global corporations played a zero sum game by combining high-productivity technologies with large, low-wage labour supplies in ‘under-developed’ nations. As economic power concentrated trade became dominated by non-market intra-corporate transactions where multinational corporations arbitrarily set unrealistic prices in exchanges between parent and affiliates in order to reduce taxes and tariffs, avoid currency exchange controls and optimize profits.
[6] paper claims on wealth (in the form of profit, interest and ground rent) in excess of the total available surplus value, plus available loot from primitive accumulation.
[7] The US was involved in coups in the Democratic Republic of the Congo, in Iran (Operation Ajax in 1953) , in Ecuador (Jaime Roldos), Brazil (1964) in Vietnam, in Indonesia (1967), Panama, Guatemala (Operation PBSUCCESS in 1954), Chile (1973) Australia (1975), Somalia. It attempted coups in Cuba in the early 1960s. there were covert CIA operations in Laos. The JFK assassination has all the qualities of a coup.
There's a longer (but incomplete) list at:
http://en.wikipedia.org/wiki/Covert_U.S._regime_change_actions
[8] The Global Gamble: Washington's Faustian Bid for World Dominance by Peter Gowan.
[9] American US dollar hegemony, for instance, that entails other nations having to earn US dollars first in order to purchase critical commodities such as oil or have syndicated loans lent to the third world denominated in US dollars and be subject to unilateral interest rate decisions by the US Federal Reserve. (In 1979 US Fed Chairman Volker’s decision to limit money supply led to catastrophic rises in global interests rates that resulted in third world debt becoming permanently unpayable.)
[10] From Hervé Kempf's "How the Rich Are Destroying the Planet."
END.
On 10th September last year the Maidstone Crown Court in the UK decided that “the threat of global warming is so great that [environmental] campaigners were justified in causing more than £35,000 worth of damage to a coal-fired power station.” Six Greenpeace activists were cleared of charges of criminal damage [3]. Just as three of these British protesters responded to systemic collapse in the ecosphere (by painting Gordon Brown's name on the British coal plant's chimney as a metaphor for political accountability) Ben Bernanke of the US Federal Reserve responded to another global crisis with a slightly more concrete metaphor of his own. Helicopter drops of money were used to bail the rich out with increasingly worthless fiat money and on an absolutely extraordinary scale. The surviving handful of Wall Street banks hoarded cash and refused to lend to each other as their four-decades-long global ponzi scheme of money and credit manipulation fell apart [4]. In turn this banking collapse was prompted by the oligopoly dynamics of concentrated economic power in a small number of corporate networks and conglomerates generally[5]. Fictitious capital [6] grew at an ever-increasing rate and fomented unbelievable distortions in what we are told is ‘economic development’ across the globe but is actually a well-managed path designed to generate dependency on the global corporations along with the stronger states that sponsor them.
In 2008 it became clear to many more people that ‘globalisation’ was not a spontaneous result of ‘free market’ dynamics as we had been repeatedly told. Rather it was revealed to be “the deeply political result of political choices made by successive governments of one state: The United States” [8]. Both Republican and Democratic administrations have used overt and covert means to topple democratically-elected governments around the world [7] and to tilt the balance of political and economic advantage unfairly towards North America in other ways [9].
2008 was the year when conventional wisdom became obsolete. It did not allow us to perceive the essential nature of things nor adequately anticipate the consequences of our actions. In 2008 everything became open to question. The ‘pluralism’ of the two-party system was found to be a delusion. There were no safeguards in place to protect against one group gaining too much power over the whole of society nor even the whole of the planet. How obvious it was that the private sector was not balanced by the public one as we saw ‘leaders’ in one national government after another working to a corporate narrow interest agenda. There are bad men on the Earth, after all.”...if nothing happens even though we're entering an ecological crisis of historic gravity, it's because those who have power in the world want it to be this way." [10]
The gift of 2008 is the revelation of important and critical truths. Its legacy is to come to terms with everything.
[1] Changes 'amplify Arctic warming'
By Jonathan Amos, Science reporter, BBC News. 16th December 2008
http://news.bbc.co.uk/2/hi/science/nature/7786910.stm
[2] Prince Charles: Eighteen months to stop climate change disaster. By Andrew Pierce
Last updated: 1:08 PM BST 18/05/2008
http://www.telegraph.co.uk/news/newstopics/theroyalfamily/1961719/Prince-Charles-Eighteen-months-to-
stop-climate-change-disaster.html?service=print
[3] Under the defence of "lawful excuse", a legal principle that “allows damage to be caused to property to prevent even greater damage” as quoted in the article:
Cleared: Jury decides that threat of global warming justifies breaking the law
By Michael McCarthy, Environment Editor. Thursday, 11 September 2008
http://www.independent.co.uk/environment/climate-change/cleared-jury-decides-that-threat-of-global-warming-justifies-breaking-the-law-925561.html
[4] A point had been reached where a huge volume of capital was held in such a small number of private hands that were largely outside any regulatory structure. This was accompanied by an even smaller number of trading and banking networks that resulted in a ‘common tilt’ in multinational corporations’ decisions and processes. See: ‘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.
[5] Instability in the global economy became inevitable, as global corporations played a zero sum game by combining high-productivity technologies with large, low-wage labour supplies in ‘under-developed’ nations. As economic power concentrated trade became dominated by non-market intra-corporate transactions where multinational corporations arbitrarily set unrealistic prices in exchanges between parent and affiliates in order to reduce taxes and tariffs, avoid currency exchange controls and optimize profits.
[6] paper claims on wealth (in the form of profit, interest and ground rent) in excess of the total available surplus value, plus available loot from primitive accumulation.
[7] The US was involved in coups in the Democratic Republic of the Congo, in Iran (Operation Ajax in 1953) , in Ecuador (Jaime Roldos), Brazil (1964) in Vietnam, in Indonesia (1967), Panama, Guatemala (Operation PBSUCCESS in 1954), Chile (1973) Australia (1975), Somalia. It attempted coups in Cuba in the early 1960s. there were covert CIA operations in Laos. The JFK assassination has all the qualities of a coup.
There's a longer (but incomplete) list at:
http://en.wikipedia.org/wiki/Covert_U.S._regime_change_actions
[8] The Global Gamble: Washington's Faustian Bid for World Dominance by Peter Gowan.
[9] American US dollar hegemony, for instance, that entails other nations having to earn US dollars first in order to purchase critical commodities such as oil or have syndicated loans lent to the third world denominated in US dollars and be subject to unilateral interest rate decisions by the US Federal Reserve. (In 1979 US Fed Chairman Volker’s decision to limit money supply led to catastrophic rises in global interests rates that resulted in third world debt becoming permanently unpayable.)
[10] From Hervé Kempf's "How the Rich Are Destroying the Planet."
END.
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