I was happy to see Pete Seeger at he Inaugural Concert (with the Boss in tow), singing all of the verses of This Land is Your Land, including the rarely sung:
As I was walkin'
Right there in front of me
Was a great big sign,
Said "Private Property"
But on the other side
It didn't say nothin'
'Cause this land was made for you and me.
Oh and speaking of Paul Samuelson, as Barkley has been, he has to be one of the funniest of all economists - a low bar I know. For example, his "algorithm" for solving the Transformation Problem: "Write down Values. Erase. Write down Prices." I think this was the same article where he called Marx "a minor Post-Ricardian." I have to admit, though, when I first read the article, I wasn't laughing. Spitting, more like. Ah, youth!
Tuesday, January 20, 2009
Monday, January 19, 2009
Britain needs a shorter-hours culture
by the Sandwichman
David Spencer in the Guardian this morning echoes two of the Sandwichman's favorite talking points:
David Spencer in the Guardian this morning echoes two of the Sandwichman's favorite talking points:
In a letter to the poet TS Eliot in 1945, he [Keynes] suggested that unemployment could be lowered by the reduction in working time. Indeed for Keynes this was the "ultimate solution" to the unemployment problem. Reducing work time not only extended the time during which workers could spend income and hence generate employment, but it also allowed jobs to be spread out more evenly across the available workforce, thereby reducing unemployment.and...
Orthodox economic theory teaches that those who argue for shorter working time succumb to the "lump of labour fallacy". This is the idea that there is a fixed amount of work to be done in society, so any reduction in work hours must increase the number of available jobs. It is argued by orthodox economists that the amount of work is not fixed and that reductions in work time will simply add to firms' costs. But the above fallacy is not wholly persuasive. If reduced hours encourage people to work more efficiently, then the effect may be to lower prices and to increase the demand for goods and services and in turn the demand for labour.
UK Government Adopts Nationalization of Troubled Banks
Bloomberg reports that Gordon Brown has been listening to economists:
Felix Salmon looks at the troubles at Bank of America and Citigroup and recommends we adopt nationalization:
But it seems that we Americans are heading down a different route, which Paul Krugman doesn’t like:
Paul notes the American fear of the word nationalization and our willingness to give the troubled banks a gift by buying toxic assets at a “fair” price that exceeds the market value. In my view, this American way is just sheer insanity. We should watch and learn from the actions of the UK government.
Prime Minister Gordon Brown’s government tightened its grip on Britain’s financial system, guaranteeing toxic assets and giving the Bank of England unprecedented power to buy securities. The plan will increase the cost of bailing out the nation’s banks by at least 100 billion pounds ($147 billion), the Treasury said in a statement today. The government raised its stake in Royal Bank of Scotland Group Plc to 70 percent and said it would use Northern Rock Plc to spur mortgage lending. “This is aiming to once and for all underpin faith in the banking system,” said Alan Clarke, an economist at BNP Paribas SA in London. “We’re breaking all conventions. The availability of credit is going down and the economic outlook is getting worse, so the government is having to throw more and more at it.” The new measures are the biggest steps by Brown to get banks lending again as Britain slides deeper into a recession that may be the worst since the aftermath of World War II. The government will require aid recipients to sign “specific and quantified” agreements to lend, reflecting Brown’s frustration at the failure of an October rescue to unlock credit markets.
Felix Salmon looks at the troubles at Bank of America and Citigroup and recommends we adopt nationalization:
Citi and BofA aren't suffering from liquidity problems. They have all the liquidity they need, thanks to the Fed. The problem is one of solvency: the equity markets simply don't believe that the banks' assets are worth more than their liabilities. I can't see a solution to this problem short of nationalizing both Citi and BofA, and summarily firing the hapless Vikram Pandit along with the overambitious Ken Lewis.
But it seems that we Americans are heading down a different route, which Paul Krugman doesn’t like:
On paper, Gotham has $2 trillion in assets and $1.9 trillion in liabilities, so that it has a net worth of $100 billion. But a substantial fraction of its assets — say, $400 billion worth — are mortgage-backed securities and other toxic waste. If the bank tried to sell these assets, it would get no more than $200 billion. So Gotham is a zombie bank: it’s still operating, but the reality is that it has already gone bust. Its stock isn’t totally worthless — it still has a market capitalization of $20 billion — but that value is entirely based on the hope that shareholders will be rescued by a government bailout ... Well, the government could simply give Gotham a couple of hundred billion dollars, enough to make it solvent again. But this would, of course, be a huge gift to Gotham’s current shareholders — and it would also encourage excessive risk-taking in the future. Still, the possibility of such a gift is what’s now supporting Gotham’s stock price. A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: it seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to a special institution, the Resolution Trust Corporation; paid off enough of the banks’ debts to make them solvent; and sold the fixed-up banks to new owners. The current buzz suggests, however, that policy makers aren’t willing to take either of these approaches. Instead, they’re reportedly gravitating toward a compromise approach: moving toxic waste from private banks’ balance sheets to a publicly owned “bad bank” or “aggregator bank” that would resemble the Resolution Trust Corporation, but without seizing the banks first.
Paul notes the American fear of the word nationalization and our willingness to give the troubled banks a gift by buying toxic assets at a “fair” price that exceeds the market value. In my view, this American way is just sheer insanity. We should watch and learn from the actions of the UK government.
Samuelson on Hayek, A Comment on Comments
Paul A. Samuelson has published "A few personal reminiscences of Friedrich von Hayek" in Journal of Economic Behavior and Organization, January 2009, vol. 69, issue 1, pp. 1-4, which I happen to edit, with an accompanying paper pp. 5-16 by Andrew Farrant and Edward MacPhail, entitled "Hayek, Samuelson, and the logic of the mixed economy?" One can link to Samuelson's paper at http://economistsview.typepad.com where Mark Thoma has it as one of his links for 2009-01-18 (easier than listing the whole url). In the last two days there have also been full blown postings on The Austrian Economists, Marginal Revolution, and Brad DeLong, with lots of furious commentary on the first two about it. While Samuelson praises Hayek's economics of information, saying he was the real winner of the socialist calculation debate and deserved his Nobel, PAS also criticizes his macroeconomic theory in comparison with Keynes's, argues his Road to Serfdom was wrong in forecasting that allowing for various forms of state intervention would lead to the road to serfdom, and dismisses Hayek's own criticisms of him on this matter, with Farrant and MacPhail examining the letter exchanges between them on this issue, and largely agreeing with PAS. The paper also has a long footnote highlighted by both Tyler Cowen at MR and Brad DeLong in which he reprises Melvin Reder's discussion of anti-Semitism by Keynes, Schumpeter, and Hayek, concluding that Keynes was the worst on this and Hayek the best of these three.
The comments on AE and MR have been mostly perfervidly livid at PAS over this article, going on about many points. However, I wish to address one in particular that has been brought up a bunch, one that was already mashed over in a posting and comments on Marginal Revolution by Tyler Cowen on 11/20/08. Responding to a nasty quote by PAS in Spiegel that "libertarians are emotional cripples," he linked to p. 416 of Mark Skousen's The Making of Modern Economics, who quoted the 13th edition of Samuelson and Nordhaus Economics from 1989, p. 387: "The Soviet economy is proof that, contrary to what many skeptics had earlier believed [a reference to Mises and Hayek](bracketed remark by Skousen) a socialist command economy can function and even thrive." Cowen and others have jumped on this as proof that Samuelson is "incompetent" and a lot worse, even though he cited CIA data for his claims, and also of course these commentators claiming the superiority of Hayek and how dare Samuelson say all those bad things about him.
Well, some of the language in Samuelson's paper (which I edited), is a bit strong, but I agree with the substance of most of it. Furthermore, while Hayek argued that centrally planned socialism would be inefficient, an argument PAS agrees with, Hayek no more forecast the moment of the Soviet collapse than did PAS or the CIA or pretty much anybody other than a French sociologist named Revel in 1976. Also, the severe economic decline in the Soviet bloc largely came after the political collapse of the bloc. It is not at all clear such a collapse would have happened without the political collapse, if the Soviet leaders in 1989 had cracked down on the independence demonstraters in Lithuania, the people fleeing across the Hungarian border into Austria, and of course supported the Honecker regime in East Germany in preventing the Berlin Wall from falling. After all, the upshot of the Chinese crushing the demonstrations in Tienanman Square was continued economic growth with a gradual transition to its current peculiar mixed economy that has grown very rapidly. And for all the carrying on many make about the Soviet economy, while it may have been inaccurate to describe it in 1989 as "thriving," and it was falling behind the US in growth, technical innovation, and quality of goods, it was functioning, and the population was not starving or homeless or without clothing or education or medical care, although it was politically repressed. But it had provided the industrial expansion that allowed it to build a military capacity that defeated Hitler's military at Stalingrad and Kursk. In short, this dumping all over PAS for these statements is fairly ridiculous, whatever one thinks of Samuelson's ultimate or broader influence on economics as the godfather of its mainstream neoclassical form in the last half of the 20th century.
The comments at The Austrian Economists can be found at http://austrianeconomists.typepad.com/weblog/2009/01/samuelson-reminiscences-hayek-in-jebo.htm and the ones at Marginal Revolution are at http://www.marginalrevolution.com/marginalrevolution/2009/01/samuelson-on-hayek.html.
The comments on AE and MR have been mostly perfervidly livid at PAS over this article, going on about many points. However, I wish to address one in particular that has been brought up a bunch, one that was already mashed over in a posting and comments on Marginal Revolution by Tyler Cowen on 11/20/08. Responding to a nasty quote by PAS in Spiegel that "libertarians are emotional cripples," he linked to p. 416 of Mark Skousen's The Making of Modern Economics, who quoted the 13th edition of Samuelson and Nordhaus Economics from 1989, p. 387: "The Soviet economy is proof that, contrary to what many skeptics had earlier believed [a reference to Mises and Hayek](bracketed remark by Skousen) a socialist command economy can function and even thrive." Cowen and others have jumped on this as proof that Samuelson is "incompetent" and a lot worse, even though he cited CIA data for his claims, and also of course these commentators claiming the superiority of Hayek and how dare Samuelson say all those bad things about him.
Well, some of the language in Samuelson's paper (which I edited), is a bit strong, but I agree with the substance of most of it. Furthermore, while Hayek argued that centrally planned socialism would be inefficient, an argument PAS agrees with, Hayek no more forecast the moment of the Soviet collapse than did PAS or the CIA or pretty much anybody other than a French sociologist named Revel in 1976. Also, the severe economic decline in the Soviet bloc largely came after the political collapse of the bloc. It is not at all clear such a collapse would have happened without the political collapse, if the Soviet leaders in 1989 had cracked down on the independence demonstraters in Lithuania, the people fleeing across the Hungarian border into Austria, and of course supported the Honecker regime in East Germany in preventing the Berlin Wall from falling. After all, the upshot of the Chinese crushing the demonstrations in Tienanman Square was continued economic growth with a gradual transition to its current peculiar mixed economy that has grown very rapidly. And for all the carrying on many make about the Soviet economy, while it may have been inaccurate to describe it in 1989 as "thriving," and it was falling behind the US in growth, technical innovation, and quality of goods, it was functioning, and the population was not starving or homeless or without clothing or education or medical care, although it was politically repressed. But it had provided the industrial expansion that allowed it to build a military capacity that defeated Hitler's military at Stalingrad and Kursk. In short, this dumping all over PAS for these statements is fairly ridiculous, whatever one thinks of Samuelson's ultimate or broader influence on economics as the godfather of its mainstream neoclassical form in the last half of the 20th century.
The comments at The Austrian Economists can be found at http://austrianeconomists.typepad.com/weblog/2009/01/samuelson-reminiscences-hayek-in-jebo.htm and the ones at Marginal Revolution are at http://www.marginalrevolution.com/marginalrevolution/2009/01/samuelson-on-hayek.html.
Sunday, January 18, 2009
Sandwichman Reads the Footnotes (so you don't have to)
by the Sandwichman
The title of my last post was a composite allusion to The Rise and Fall of Economic Growth by H.W. Arndt (1978)and to chapter nine of Fred Hirsch's Social Limits to Growth (1976): "Political Keynesianism and the Managed Market." In his Managing Without Growth, Peter Victor cited Arndt's book extensively in his retelling of the short history of economic growth as prime policy objective.
Arndt concluded his book with a somewhat optimistic, albeit qualified, assessment of growth -- "the realistic question to ask is not whether further economic growth is possible or desirable, or even how rapid it should be, but what kind of growth we should aim at." In discussion "the right kind of economic growth," he footnoted Hirsch's book, "While this present book was in press, the implications for economic growth as a policy objective of 'positional competition' have been spelled out much more fully in an important and exciting book..." (which would have been clearer if he had stated it as "...the implications of 'positional competition' for economic growth as a policy objective have been spelled out...").
Admittedly, there is some discussion going on of what kind of spending is desirable in a stimulus package. But this is neither a secondary question nor a transitory one. It is, as Arndt termed it, the realistic question. When the question becomes "what kind of growth" instead of "how much growth," then some things that have in the past been growing may come to be excluded from the calculus as kinds of growth we don't actually want because they don't benefit society and they impose unacceptable costs on the environment, sociability, etc. It could even be that the sum total of those expendable kinds of growth results in a decline in Gross Domestic Product, which at any rate is not a good measure of social welfare.
Hitherto the "weapon of mass destruction" in defense of economic growth has always been the assumption that only through continued and fairly brisk growth could full employment be attained. That assumption is not tenable for two reasons. One, the political linkage between growth and full employment has been broken... and it has been broken by proponents of growth. Two, the claim to exclusivity relies on the reactionary political assertion that work-time reduction cannot play a positive role in maintaining full employment. That assertion is groundless.
The title of my last post was a composite allusion to The Rise and Fall of Economic Growth by H.W. Arndt (1978)and to chapter nine of Fred Hirsch's Social Limits to Growth (1976): "Political Keynesianism and the Managed Market." In his Managing Without Growth, Peter Victor cited Arndt's book extensively in his retelling of the short history of economic growth as prime policy objective.
Arndt concluded his book with a somewhat optimistic, albeit qualified, assessment of growth -- "the realistic question to ask is not whether further economic growth is possible or desirable, or even how rapid it should be, but what kind of growth we should aim at." In discussion "the right kind of economic growth," he footnoted Hirsch's book, "While this present book was in press, the implications for economic growth as a policy objective of 'positional competition' have been spelled out much more fully in an important and exciting book..." (which would have been clearer if he had stated it as "...the implications of 'positional competition' for economic growth as a policy objective have been spelled out...").
Admittedly, there is some discussion going on of what kind of spending is desirable in a stimulus package. But this is neither a secondary question nor a transitory one. It is, as Arndt termed it, the realistic question. When the question becomes "what kind of growth" instead of "how much growth," then some things that have in the past been growing may come to be excluded from the calculus as kinds of growth we don't actually want because they don't benefit society and they impose unacceptable costs on the environment, sociability, etc. It could even be that the sum total of those expendable kinds of growth results in a decline in Gross Domestic Product, which at any rate is not a good measure of social welfare.
Hitherto the "weapon of mass destruction" in defense of economic growth has always been the assumption that only through continued and fairly brisk growth could full employment be attained. That assumption is not tenable for two reasons. One, the political linkage between growth and full employment has been broken... and it has been broken by proponents of growth. Two, the claim to exclusivity relies on the reactionary political assertion that work-time reduction cannot play a positive role in maintaining full employment. That assertion is groundless.
Beyond Growth: The Rise and Fall (and Posthumous Return) of Political Keynesianism
by the Sandwichman
The ghost of Montagu Norman notwithstanding, the fact that there are bad -- or even stupid -- arguments against something is not, in itself, a good argument for it. Some sort of stimulus package is, at this point, a foregone conclusion. Whether or not StimPack™ '09 is "big enough" or whether or not it will work as intended are questions the Sandwichman will leave for more learned Thebans to debate. What Sandwichman wonders is "what's growth got to do with it... do with it?"
Once upon a time, Keynesian policy was about "full employment", defined as a balance between the number of job seekers and the number of positions available. Then economic growth came to be seen as a prerequisite for attaining full employment. Then full employment was defined downward to the so-called natural rate or the non-accelerating inflation rate of unemployment (NAIRU). Now, even that natural rate seems too high a target for fiscal policy to aim at all at once. Full employment has become an empty promise.
Meanwhile, starting back as early as the 1950s, with John Kenneth Galbraith's The Affluent Society, questions began to emerge about the social and/or environmental efficacy of economic growth as a prime policy objective. Doubts compounded in the 1970s, with the Club of Rome's Limits to Growth and Fred Hirsch's Social Limits to Growth.
Now suddenly, after 30 years of neo-liberal orthodoxy -- a regression Hirsch presumed was unthinkable -- we're being beamed back to the pre-Reagan era for a refreshing blast of old-time Keynesian pump-priming. Happy days are here again! What am I missing? All those insights into the inherent contradictions of Keynesian demand management. The stuff about conservation of resources and the distinctions between the material economy and the positional economy.
What if the StimPack™ '09 answers we have are for problems people don't have? "They've got other problems and we don't have any answers."
The ghost of Montagu Norman notwithstanding, the fact that there are bad -- or even stupid -- arguments against something is not, in itself, a good argument for it. Some sort of stimulus package is, at this point, a foregone conclusion. Whether or not StimPack™ '09 is "big enough" or whether or not it will work as intended are questions the Sandwichman will leave for more learned Thebans to debate. What Sandwichman wonders is "what's growth got to do with it... do with it?"
Once upon a time, Keynesian policy was about "full employment", defined as a balance between the number of job seekers and the number of positions available. Then economic growth came to be seen as a prerequisite for attaining full employment. Then full employment was defined downward to the so-called natural rate or the non-accelerating inflation rate of unemployment (NAIRU). Now, even that natural rate seems too high a target for fiscal policy to aim at all at once. Full employment has become an empty promise.
Meanwhile, starting back as early as the 1950s, with John Kenneth Galbraith's The Affluent Society, questions began to emerge about the social and/or environmental efficacy of economic growth as a prime policy objective. Doubts compounded in the 1970s, with the Club of Rome's Limits to Growth and Fred Hirsch's Social Limits to Growth.
Now suddenly, after 30 years of neo-liberal orthodoxy -- a regression Hirsch presumed was unthinkable -- we're being beamed back to the pre-Reagan era for a refreshing blast of old-time Keynesian pump-priming. Happy days are here again! What am I missing? All those insights into the inherent contradictions of Keynesian demand management. The stuff about conservation of resources and the distinctions between the material economy and the positional economy.
What if the StimPack™ '09 answers we have are for problems people don't have? "They've got other problems and we don't have any answers."
House Republicans Want an Inadequate Stimulus Bill
Eric Cantor writes:
The stimulus may be too big? Inflation and higher interest rates? This guy really doesn’t get it – does he? The letter to President Obama by Paul Krugman should go to the top of the read pile for Representative Cantor.
We Republicans believe we can help mitigate those risks if we are given a meaningful place at the table ... Specifically, we want to keep the stimulus bill -- as well as all other future economic "rescue" measures -- limited in scope and transparent. Our country has no other choice. The Congressional Budget Office (CBO) issued a sobering report that this year's deficit will likely climb to over 8 percent of U.S. gross domestic product, or $1.2 trillion. That's higher than at any point since World War II -- and those figures don't even account for the forthcoming stimulus. Such heavy borrowing runs the risk down the line of rampant inflation, which scares away foreign capital while making the purchasing power of the dollar weaker for American consumers.
The stimulus may be too big? Inflation and higher interest rates? This guy really doesn’t get it – does he? The letter to President Obama by Paul Krugman should go to the top of the read pile for Representative Cantor.
Saturday, January 17, 2009
Measuring the Cost of TARP
The CBO blog has a very useful discussion of how to measure the cost of TARP:
One view – popular among certain economists including yours truly – is that the deals under TARP are nothing more than asset trades. If the government exchanges $100 in cash for $100 in other assets, there is no expenditure and no deficit cost. As the Administration uses this cash basis for deficit accounting, it overstates the deficit by ignoring the present value of future recoveries.
But this view is an extreme one if what the government gets back for its $100 in cash outflows is actually assets worth less than $100. CBO is saying here that the government may be getting back $75 in present value terms for every $100 in cash outlays. If this holds up for the rest of the $700 billion in TARP funds, then taxpayers will have spent $175 billion on net to bail out these troubled financial institutions. Not as shocking as $700 billion but still a hefty price for the laissez faire policy of letting these institutions walk away with the upside of risk taking but having the rest of us bear the downside risk.
Through December 31, 2008, the Treasury disbursed $247 billion to acquire assets under that program. CBO valued those assets using discounted present-value calculations similar to those generally applied to federal loans and loan guarantees, but adjusting for market risk as specified in the legislation that established the TARP. On that basis, CBO estimates that the net cost of the TARP’s transactions (broadly speaking, the difference between what the Treasury paid for the investments or lent to the firms and the market value of those transactions) amounts to $64 billion—that is, measured in 2008 dollars, we expect the government to recover about three quarters of its initial investment. The Office of Management and Budget’s (OMB’s) report on the TARP, issued in early December, only addressed the first $115 billion distributed under the program. CBO and OMB do not differ significantly in their assessments of the net cost of those transactions (between $21 billion and $26 billion), but they vary in their judgments as to how the transactions should be reported in the federal budget. Thus far, the Administration is accounting for capital purchases made under the TARP on a cash basis rather than on such a present-value basis—that is, the Administration is recording the full amount of the cash outlays up front and will record future recoveries in the year in which they occur. That treatment will show more outlays for the TARP this year and then show receipts in future years.
One view – popular among certain economists including yours truly – is that the deals under TARP are nothing more than asset trades. If the government exchanges $100 in cash for $100 in other assets, there is no expenditure and no deficit cost. As the Administration uses this cash basis for deficit accounting, it overstates the deficit by ignoring the present value of future recoveries.
But this view is an extreme one if what the government gets back for its $100 in cash outflows is actually assets worth less than $100. CBO is saying here that the government may be getting back $75 in present value terms for every $100 in cash outlays. If this holds up for the rest of the $700 billion in TARP funds, then taxpayers will have spent $175 billion on net to bail out these troubled financial institutions. Not as shocking as $700 billion but still a hefty price for the laissez faire policy of letting these institutions walk away with the upside of risk taking but having the rest of us bear the downside risk.
Friday, January 16, 2009
Policy by Ponzi
by the Sandwichman
Is change.gov's Citizen's Briefing Book the best thing since SinceSlicedBread.com? Is it a matter of good intentions thwarted by (abysmally) bad design? Or is it a timely and revealing demonstration of the principle of "positional economic goods" and thus an illustration of why economic growth is likely to disappoint our aspirations?
Three years ago, the Service Employees International Union held a contest seeking ideas on how to "strengthen the economy and improve life for working men and women and their families." People were encouraged to submit ideas and vote for their favorite ideas. The most popular ideas then became finalists from which the contest winners were selected by a panel of judges.
The functional design of the website was hideous. The most evident flaw was that the early leaders were displayed on the sites front page, giving them a formidable advantage. It was also possible to game the system by registering multiple times and voting repeatedly for your own idea. Once a gamester had elevated their idea to the top five, they could sit back and let it accumulate innocent votes.
It's hard to believe that no lessons were learned from the SlicedBread fiasco and no further developments have been made in online participatory software. The cynic might argue that these things are strictly public relations exercises and that thus there are no lessons to be learned or improvements that need to be made. But even in terms of p.r., the ersatz quality of the participation might just piss thoughtful people off instead of giving them the satisfaction of having had their say.
This is an example of the kind of situation Fred Hirsch identified as a feature of the "positional economy" in his Social Limits to Growth.
Hirsch's point was that the presence of these scarce or potentially congested goods or services undermined the ideal that economic growth could lift all boats. Improvements in the material economy would tend to raise the relative demand for -- and cost of -- scarce positional goods and thus lead to disappointment. Hirsh's prime example of crowding is in the demand for prestige jobs. College education once offered access to such employment but with the democratization of higher education, the screening of job applicants became more intense and required higher credentials for entry to any given level of employment.
Although Hirsch doesn't consider Ponzi schemes, his concept could equally explain the role of such episodes in the saga of economic growth. A Ponzi scheme rewards early participants with the proceeds from later entrants. In crude outline, it is little different than the employment/education credentials story except that it cuts out the "waste" of actually acquiring the subsequently-devalued credential. In an economy that increasingly values positional goods, the Ponzi is a strictly positional investment. One might even suggest that as the "real economy" of work, employment credentials, production and income acquires a greater element of positional distribution of wealth, the lessons learned there translate into a greater propensity to engage in Ponzi-like speculative bubbles.
Is change.gov's Citizen's Briefing Book the best thing since SinceSlicedBread.com? Is it a matter of good intentions thwarted by (abysmally) bad design? Or is it a timely and revealing demonstration of the principle of "positional economic goods" and thus an illustration of why economic growth is likely to disappoint our aspirations?
Three years ago, the Service Employees International Union held a contest seeking ideas on how to "strengthen the economy and improve life for working men and women and their families." People were encouraged to submit ideas and vote for their favorite ideas. The most popular ideas then became finalists from which the contest winners were selected by a panel of judges.
The functional design of the website was hideous. The most evident flaw was that the early leaders were displayed on the sites front page, giving them a formidable advantage. It was also possible to game the system by registering multiple times and voting repeatedly for your own idea. Once a gamester had elevated their idea to the top five, they could sit back and let it accumulate innocent votes.
It's hard to believe that no lessons were learned from the SlicedBread fiasco and no further developments have been made in online participatory software. The cynic might argue that these things are strictly public relations exercises and that thus there are no lessons to be learned or improvements that need to be made. But even in terms of p.r., the ersatz quality of the participation might just piss thoughtful people off instead of giving them the satisfaction of having had their say.
This is an example of the kind of situation Fred Hirsch identified as a feature of the "positional economy" in his Social Limits to Growth.
"The positional economy... relates to all aspects of goods, services, work positions, and other social relationships that are either (1) scarce in some absolute or socially imposed way or (2) subject to congestion or crowding through more extensive use."With tens of thousands of "ideas" submitted, each one only gets a few seconds of front-page exposure before being buried in the database. However, ideas that grab an initial advantage continue to get exposure as "most popular" and thus continue to obtain even more votes. In the end, the highest-ranked ideas will not necessarily be the best ideas or even those that might have been ranked highest if all participants had somehow indefatigably viewed and voted on each idea.
Hirsch's point was that the presence of these scarce or potentially congested goods or services undermined the ideal that economic growth could lift all boats. Improvements in the material economy would tend to raise the relative demand for -- and cost of -- scarce positional goods and thus lead to disappointment. Hirsh's prime example of crowding is in the demand for prestige jobs. College education once offered access to such employment but with the democratization of higher education, the screening of job applicants became more intense and required higher credentials for entry to any given level of employment.
Although Hirsch doesn't consider Ponzi schemes, his concept could equally explain the role of such episodes in the saga of economic growth. A Ponzi scheme rewards early participants with the proceeds from later entrants. In crude outline, it is little different than the employment/education credentials story except that it cuts out the "waste" of actually acquiring the subsequently-devalued credential. In an economy that increasingly values positional goods, the Ponzi is a strictly positional investment. One might even suggest that as the "real economy" of work, employment credentials, production and income acquires a greater element of positional distribution of wealth, the lessons learned there translate into a greater propensity to engage in Ponzi-like speculative bubbles.
Non-arguments Against the Fiscal Stimulus
Greg Mankiw has another post where the reader might think there is some argument against the Obama fiscal stimulus proposal – but once again, the reader finds nothing:
Beyond dropping a couple of well known names, what does this passage substantively tell us? Cochrane says the Keynesian multiplier has fallacies but fails to identify a single one. Sargent may be right that we have learned a lot in the last sixty years but exactly what lessons apply to this policy debate. This piece does not say. In other words, this passage is absolutely worthless as it says nothing of substance at all.
Then again, when Greg tried to tout the Fama theory by accounting identity approach – he took a rather harsh drubbing. Better to offer meaningless nothings than what appears to be a substantive argument until actually thinks about it. Maybe there are legitimate arguments against this fiscal stimulus – but for all his efforts, Greg Mankiw isn’t exactly producing convincing ones!
John Cochrane, a professor at the University of Chicago Booth School of Business, says that among academics over the last 30 years, the idea of fiscal stimulus has been discredited and in graduate courses, it is "taught only for its fallacies." New York University economist Thomas Sargent agrees: "The calculations that I have seen supporting the stimulus package are back-of-the-envelope ones that ignore what we have learned in the last 60 years of macroeconomic research."
Beyond dropping a couple of well known names, what does this passage substantively tell us? Cochrane says the Keynesian multiplier has fallacies but fails to identify a single one. Sargent may be right that we have learned a lot in the last sixty years but exactly what lessons apply to this policy debate. This piece does not say. In other words, this passage is absolutely worthless as it says nothing of substance at all.
Then again, when Greg tried to tout the Fama theory by accounting identity approach – he took a rather harsh drubbing. Better to offer meaningless nothings than what appears to be a substantive argument until actually thinks about it. Maybe there are legitimate arguments against this fiscal stimulus – but for all his efforts, Greg Mankiw isn’t exactly producing convincing ones!
Obama Drinks Social Security Kool-Aid
This morning's Washington Post has a front page story that not only says social security deficits start in 2011 (2017 according to the Trustees intermediate projection), but reports that Obama has now specifically included social security as an item to be dealt with in the broader analysis of longer term deficit reduction. The precise quote, " 'Social Security can be solved," he said with a wave of his left hand," with him then going on to accurately note medicare and the health system as the more important and more difficult problem. There is no word on what he intends to do or even what sort of mechanism he intends to set up for figuring out how to do it, whatever it is. The only real positive here is that, perhaps looking to the bright side of that piece on huffingtonpost, there will be no privatization scheme as part of any proposal from his administration.
I see two factors in this. The first is the noxious influence of Larry Summers being in the apparent catbird seat as "economics czar." He was part of the Clinton group that was pushing this kool-aid back in the late 1990s. The other may be a more short-term political motive. In particular, "blue dog" Democrats are reportedly unhappy about the scale of the deficits in the fiscal stimulus and want to see some moves to lowering longer term ones. The most important figure in this is Kent Conrad of ND, Chairman of the Senate Finance Committtee, who in late 2007 was part of an effort with Treasury Secretary Paulson to cook up a deal involving both fica tax increases and future benefit cuts for social security, Conrad having long been a deep drinker of the ss kool-aid baloney. That effort was killed from both the left ("no benefit cuts, leave social security alone") and the right, particularly Dick Cheney ("no new tax increases"). Again, Obama's platform called for a possible imposition of fica on higher income individuals, "if needed" in 2019, with no call for benefit cuts. But the Conrad gang wants that, and I have long pointed out that any change would involve benefit cuts, as Republicans will simply filibuster any tax increase that does not also involve benefit cuts. As it is, I hope that Obama's plan runs into complications, and that in the end, nothing is done with or to social security.
I see two factors in this. The first is the noxious influence of Larry Summers being in the apparent catbird seat as "economics czar." He was part of the Clinton group that was pushing this kool-aid back in the late 1990s. The other may be a more short-term political motive. In particular, "blue dog" Democrats are reportedly unhappy about the scale of the deficits in the fiscal stimulus and want to see some moves to lowering longer term ones. The most important figure in this is Kent Conrad of ND, Chairman of the Senate Finance Committtee, who in late 2007 was part of an effort with Treasury Secretary Paulson to cook up a deal involving both fica tax increases and future benefit cuts for social security, Conrad having long been a deep drinker of the ss kool-aid baloney. That effort was killed from both the left ("no benefit cuts, leave social security alone") and the right, particularly Dick Cheney ("no new tax increases"). Again, Obama's platform called for a possible imposition of fica on higher income individuals, "if needed" in 2019, with no call for benefit cuts. But the Conrad gang wants that, and I have long pointed out that any change would involve benefit cuts, as Republicans will simply filibuster any tax increase that does not also involve benefit cuts. As it is, I hope that Obama's plan runs into complications, and that in the end, nothing is done with or to social security.
Wednesday, January 14, 2009
Huffingtonpost Tells Liberal Democrats To Drink "Fix Social Security Now" Kool-Aid
Scott Bittle and Jean Johnson called posted yesterday on huffingtonpost "Why Liberals Should Want Obama To Take On Social Security Now," at http://www.huffingtonpost.com/scott-bittle-and-jean-johnson/why-liberals-should-want_b_157490.html. They claim that Obama's remark last week about looking at "entitlement spending" meant he wants to look at social security, and, of course, they buy the most moronic and hysterical projections about social security. If nothing is done now, "everyone will lose." Gag. While the system has not had such large surpluses now that we are in recession, it remains a fact that in nearly half of the years of the past decade, the system did better than the "low cost" projection under which the system never runs a deficit.
More specifically, Bittle and Johnson make four points: 1) that change now will be OK because the public does not want private accounts. That may be true, but to get Republicans on board we are talking about having to take benefit cuts for somebody, either now or in the future that may well not be needed at all. 2) Doing something now will "avoid a generation war." Why is this? There is no change that can be made that is not going to impact one group more than another. None. The supposed Bush plan would have hit a particular group very hard who were born over a six year period. This is just fantasy land stuff. 3) That doing something to social security is "easier than fixing health care." But, as Obama's campaign certainly knew, the big problem in entitlement spending is the sharply rising projections for health care costs, with the medicare fund already running the deficits that the social security fanatics keep freaking out might happen in 2017 or thereafter for social security. Health care may be harder, but it is far more important. And, as Bush discovered, social security is not all that easy, although perhaps these clowns think it is because they also have this delusion that somehow there is some solution that is not going to impact different age groups differently. Wrong. 4) The Dems are (will be) in control of both the WH and the Congress. So, this means they should do something both unnecessary and stupid? Of all the priorities we face right now, fooling with social security must be rock bottom, and at least the Obama campaign figured this out. Let us hope that the Obama administration remembers it as well after they get into power.
More specifically, Bittle and Johnson make four points: 1) that change now will be OK because the public does not want private accounts. That may be true, but to get Republicans on board we are talking about having to take benefit cuts for somebody, either now or in the future that may well not be needed at all. 2) Doing something now will "avoid a generation war." Why is this? There is no change that can be made that is not going to impact one group more than another. None. The supposed Bush plan would have hit a particular group very hard who were born over a six year period. This is just fantasy land stuff. 3) That doing something to social security is "easier than fixing health care." But, as Obama's campaign certainly knew, the big problem in entitlement spending is the sharply rising projections for health care costs, with the medicare fund already running the deficits that the social security fanatics keep freaking out might happen in 2017 or thereafter for social security. Health care may be harder, but it is far more important. And, as Bush discovered, social security is not all that easy, although perhaps these clowns think it is because they also have this delusion that somehow there is some solution that is not going to impact different age groups differently. Wrong. 4) The Dems are (will be) in control of both the WH and the Congress. So, this means they should do something both unnecessary and stupid? Of all the priorities we face right now, fooling with social security must be rock bottom, and at least the Obama campaign figured this out. Let us hope that the Obama administration remembers it as well after they get into power.
Getting the Most Bang for the Stimulus Buck
by the Sandwichman
Dean Baker has made this old Sandwichman very, very happy. Point seven of Dean's "Yes, We Can Make the Stimulus more Stimulating":
UPDATE: You can now vote for this idea at the "Citizen's Briefing Book" on the change.gov website!
Dean Baker has made this old Sandwichman very, very happy. Point seven of Dean's "Yes, We Can Make the Stimulus more Stimulating":
7) Pay for shorter workweeks and more vacationsWow. Wow. The other six points are great, too. But this is my favorite.
The United States lags the rest of world in that its workers are not guaranteed any vacation time, sick leave, or family and parental leave. In Europe, five or six weeks a year of paid vacation is standard. Also, all Western European countries guarantee their workers some amount of paid sick leave and paid parental leave.
The stimulus gives us a great chance to catch up with the rest of the world. The government could make up the pay for two years for any paid cutback in hours, up to 10 percent of total hours worked in a year and $3,000 per worker. This means that if a firm offered workers who previously had no paid vacation five weeks of vacation a year, the government would provide a tax credit to pick up the tab, up to $3,000 per worker. Similarly, if they extended 10 days of paid sick leave, the government would provide a tax credit for the amount actually used. If employers of 70 million workers (half of the labor force) received an average tax break of $2,500, the cost would be $170 billion a year.
UPDATE: You can now vote for this idea at the "Citizen's Briefing Book" on the change.gov website!
Tuesday, January 13, 2009
Fiscal Stimulus Skeptics: Jonah Goldberg Outdoes Kevin Hassett
Just one day after my nomination, I have to rescind and give my nomination for the dumbest criticism of the Obama fiscal stimulus to Jonah Goldberg. After 7 paragraphs of Goldberg’s typical meaningless ramblings, we finally get this:
Where to begin? Hassett never did offer an estimate the estimated benefits but Obama’s own economists have – and the benefits can be readily measured at the estimated reduction in the enormous GDP gap that we would have if this fiscal proposal is not passed. To suggest running a transitional deficit is more costly that having a large GDP gap must have Art Okun rolling over in his grave!
Hassett did offer an estimate of the 2009 deficit - $1.2 trillion. I guess Mr. Goldberg is not aware that Federal spending is running at an annual clip in excess of $3 trillion. Of course, the nominal expenditures of the Federal government were less in 2000 – they were only $1.86 trillion. Now in real per capita terms, the difference between 2008 and 2000 spending wasn’t that large but there is no way any knowledgeable person can write “the deficit this year would equal the total cost of the federal government in 2000”.
As far as the amount of funds pledged for bailouts – these represent asset trades not expenditures. Again - any knowledgeable person who has followed this story would have known that. But then Jonah Goldberg has proven countless times, he does not qualify as a knowledgeable person.
As far as the crack about the smartest people with the best ideas not arguing we need a stimulus package as large as what Obama has proposed, most of the economists I’ve been reading are saying that the fiscal stimulus should be larger not smaller. But then again – Jonah Goldberg is infamous for not reading up on a topic before his writes one of his op-eds on it. I used live in Los Angeles and was generally proud of my hometown newspaper so I often questioned why the Los Angeles Times would embarrass itself with the serial stupidity that comes from the pen of Jonah Goldberg. His latest is just another example of what made me wonder.
Update: One of those smartest people who Mr. Goldberg apparently never bothers to read has a bang for the buck piece that provides rough estimates of the reduction in the GDP gap per dollar of fiscal stimulus:
If one is concerned about how much the deficit has to rise to get on back on the path towards full employment, then one should favor increases in government purchases over tax cuts according to this analysis. Some conservatives pretend to care about the deficit but then they also tend to favor the tax cut route. Me thinks these conservatives haven’t exactly thought this one through very carefully.
That might overstate it a bit, because some naysayers can be heard. Economist Kevin Hassett of the American Enterprise Institute, for example, notes that whatever the benefits of the proposed stimulus, they probably don't outweigh the enormous costs of the debt we would incur. As a result of the stimulus, the deficit this year would equal the total cost of the federal government in 2000. That's on top of $7.76 trillion in bailouts pledged by the government, according to Bloomberg News. The real reason the stimulus package will be gigantic is not that the smartest people with the best ideas say it needs to be. It's that Obama's real priority is to get the bill out as quickly as possible, which means every constituency gets something, including Republicans.
Where to begin? Hassett never did offer an estimate the estimated benefits but Obama’s own economists have – and the benefits can be readily measured at the estimated reduction in the enormous GDP gap that we would have if this fiscal proposal is not passed. To suggest running a transitional deficit is more costly that having a large GDP gap must have Art Okun rolling over in his grave!
Hassett did offer an estimate of the 2009 deficit - $1.2 trillion. I guess Mr. Goldberg is not aware that Federal spending is running at an annual clip in excess of $3 trillion. Of course, the nominal expenditures of the Federal government were less in 2000 – they were only $1.86 trillion. Now in real per capita terms, the difference between 2008 and 2000 spending wasn’t that large but there is no way any knowledgeable person can write “the deficit this year would equal the total cost of the federal government in 2000”.
As far as the amount of funds pledged for bailouts – these represent asset trades not expenditures. Again - any knowledgeable person who has followed this story would have known that. But then Jonah Goldberg has proven countless times, he does not qualify as a knowledgeable person.
As far as the crack about the smartest people with the best ideas not arguing we need a stimulus package as large as what Obama has proposed, most of the economists I’ve been reading are saying that the fiscal stimulus should be larger not smaller. But then again – Jonah Goldberg is infamous for not reading up on a topic before his writes one of his op-eds on it. I used live in Los Angeles and was generally proud of my hometown newspaper so I often questioned why the Los Angeles Times would embarrass itself with the serial stupidity that comes from the pen of Jonah Goldberg. His latest is just another example of what made me wonder.
Update: One of those smartest people who Mr. Goldberg apparently never bothers to read has a bang for the buck piece that provides rough estimates of the reduction in the GDP gap per dollar of fiscal stimulus:
But if $100 billion in spending raises GDP by $150 billion, and the marginal tax rate is 1/3, $50 billion of the spending comes back in additional revenue. So bang for the buck - increase in GDP per dollar of added debt - is 3, not 1.5. Since the main concern about stimulus is that it will add to government debt, it’s this bang for the buck measure, rather than the multiplier, that’s relevant. And 3 sounds a lot better than 1.5 ... Bang for the buck also heightens the contrast between effective and ineffective stimulus policies. Stay with c = 0.5, t = 1/3, and look at the effects of a tax cut; the multiplier is 0.75, half that for public investment, but bang for the buck is 1, only 1/3 that for investment.
If one is concerned about how much the deficit has to rise to get on back on the path towards full employment, then one should favor increases in government purchases over tax cuts according to this analysis. Some conservatives pretend to care about the deficit but then they also tend to favor the tax cut route. Me thinks these conservatives haven’t exactly thought this one through very carefully.
Monday, January 12, 2009
Hassett and the Paradox of Thrift
I nominate Kevin Hassett for the worse argument yet against the Obama fiscal stimulus:
Financial institutions lend money to those who wish to invest more than they save. Our current problem is not that there is too much private investment – rather it is that there is too little private investment. OK, financial institutions may have made certain loans that defaulted – to which they are now lending less. But that is not the same thing as “financial institutions borrowing too much money”.
As Keynes noted – when the private sector invests less than it saves, an insufficiency of aggregate demand may lead to a recession unless the public sector decides to engage in fiscal stimulus. Yet, Hassert is advocating fiscal restraint which would further increase the national savings schedule leading to the well known paradox of thrift. Herbert Hoover would be proud!
On top of this silliness, we get:
Nominal revenues will have risen by 20%! Wow! Oh wait – the price-level will have risen by about 25% so real revenues will have declined even in absolute terms. Real revenues per capita or revenues as a percent of GDP – you know the drill! While it may be true that Federal spending relative to GDP increased during the Bush Administration – any suggestion that real Federal spending per capita doubled would be laughable in the extreme.
We are in the midst of a crisis caused by so many financial institutions borrowing too much money. Somehow, a critical mass of policy makers now believes that the correct response is for the U.S. government to borrow too much money.
Financial institutions lend money to those who wish to invest more than they save. Our current problem is not that there is too much private investment – rather it is that there is too little private investment. OK, financial institutions may have made certain loans that defaulted – to which they are now lending less. But that is not the same thing as “financial institutions borrowing too much money”.
As Keynes noted – when the private sector invests less than it saves, an insufficiency of aggregate demand may lead to a recession unless the public sector decides to engage in fiscal stimulus. Yet, Hassert is advocating fiscal restraint which would further increase the national savings schedule leading to the well known paradox of thrift. Herbert Hoover would be proud!
On top of this silliness, we get:
How could the deficit increase so much, so fast? Part of the story is the decline in revenue, which the CBO forecasts will be $166 billion less than it was in 2008, a 6.6 percent decline. But relative to 2000, revenue has actually increased from $2 trillion to a scheduled $2.4 trillion in 2009. The deficit has skyrocketed because spending has grown from $1.8 trillion in 2000 to a projected $3.5 trillion in 2009, fully 95 percent higher. Of course, all that happened mostly on a Republican watch.
Nominal revenues will have risen by 20%! Wow! Oh wait – the price-level will have risen by about 25% so real revenues will have declined even in absolute terms. Real revenues per capita or revenues as a percent of GDP – you know the drill! While it may be true that Federal spending relative to GDP increased during the Bush Administration – any suggestion that real Federal spending per capita doubled would be laughable in the extreme.
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