Gun Nuts Roll the Virginia Senate

As I predicted, Democrats are now kowtowing in fear to the jackboots of the National Rifle Association. While Democrats control the Virginia Senate, 21-19, yesterday that body passed a bill, 23-17. to allow people to carry concealed weapons into restaurants serving alcohol, although its backers say it is reasonable because they are not allowed to consume alcohol themselves and must inform somebody in the restaurant that they are packing heat. Goody. There is a bill still alive to close the "gun show loophole" that made it out of a committee, but everybody is forecasting it will not pass the whole Senate. As it is, this new bill will easily pass the GOP-controlled Assembly, although I do not know what Governor Kaine will do with it. In any case, all the hysterical gun rights advocates freaking out that everybody is out to take away their rights are way off base here in Virginia, as I forecast in an earlier posting on this subject. The gun nuts have won another one.

Defense Spending in 2010: Rightwingers Portray Increase as a Cut

Josh Rogin has an irony for us:

The Obama administration has given the Pentagon a $527 billion limit, excluding war costs, for its fiscal 2010 Defense budget, an Office of Management and Budget official said Monday. If enacted, that would be about $14 billion more than the $513 billion allocated for fiscal 2009 (PL 110-329), including military construction funds, and it would match what the Bush administration estimated last year for the Pentagon in fiscal 2010. But it sets up a potential conflict between the new administration and the Defense Department’s entrenched bureaucracy, which has remained largely intact through the presidential transition. Some Pentagon officials and congressional conservatives are already trying to portray the OMB number as a cut by comparing it with a $584 billion draft budget request compiled last fall by the Joint Chiefs of Staff for fiscal 2010.

I’ll concede that a 2.7 percent nominal increase is not a large increase. Whether this represents a real increase greater than 2.7 percent or less than 2.7 percent depends on whether we have deflation or inflation over the year. But what the Joint Chiefs of Staff had requested represented a 13.6 percent nominal increase.

Robert Kagan tried to argue:

Pentagon officials have leaked word that the Office of Management and Budget has ordered a 10 percent cut in defense spending for the coming fiscal year, giving Defense Secretary Robert Gates a substantially smaller budget than he requested.

The rest of Kagan’s op-ed claimed that President Obama wants to cut defense spending. I hear my boss wants to increase my pay by only 3 percent this year so maybe I should go into his office and request a 13 percent increase. That way – I can tell everyone he wants to cut my pay by 10 percent (as compared to my wish list).

If this had been a domestic spending program that got a 3 percent increase rather than a 13 percent increase and some liberal screamed “spending cuts”, one would think Tony Blankley would mock the liberal:

I have been told by sources at the Pentagon that they have been told to not expect full funding of all existing programs. And there is evidence that Obama has apparently been planning to force cuts on our military for some time.

Tony trusts his Pentagon sources? I guess he did not read Spencer Ackerman who first wrote:

Late last week, the White House Office of Management and Budget told the Pentagon to “substantial[ly]” restrain its planned fiscal 2010 budget, which the Bush administration beefed up by $60 billion over the 2009 budget before leaving office.

Spencer added:

Here’s where it helps to have Defense Secretary Bob Gates impose some discipline. Getting eight percent more, outside the costs of the wars (!), during a time of global economic distress is, you know, really generous. An OMB official told Rogin that the Bush-drafted request was a “wish list” for conceivable defense spending — a classy little sayonara to the incoming Obama team — not a realistic budget. Gates has been telling anyone who will listen that the budget is coming down, hard choices are going to have to be made, and people are going to have to stop whining and reconcile themselves to this new reality. So it’ll be interesting to see if he starts with this budgetary gem. But! I hear that he may send OMB a letter objecting to the $527 billion (outside of the wars!) ceiling.

Note that Spencer wrote this two days ago – and yet Kagan misrepresented the story yesterday, while Blankley misrepresented it today.

Heritage and the National Review Adopt the Treasury View

David Freddoso of the National Review interviews Brian Riedl of Heritage (not Cato - my apologies) in the The Case for No Stimulus:

The grand Keynesian myth is that you can spend money and thereby increase demand. And it’s a myth because Congress does not have a vault of money to distribute in the economy. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. You’re not creating new demand, you’re just transferring it from one group of people to another. If Washington borrows the money from domestic lenders, then investment spending falls, dollar for dollar. If they borrow the money from foreigners, say from China, then net exports drop dollar for dollar, because the balance of payments must adjust. Therefore, again, there is no net increase in aggregate demand ... There is this notion that the redistribution of money from savers to spenders creates new spending. But that assumes that people store their savings in their mattresses. That may have been true in the 1930s, but today, people use their savings to pay down debts or invest. Or they put it into the bank, who in turn lends it to others to spend. Therefore, savings circulate through the investment side of the economy, which counts just as much in the GDP as the consumption side of the economy ... The government is going to have to raise interest rates in order to convince people to lend them the full amount they need. We’re already facing a deficit of $1.2 trillion this year, and 700 billion next year. We borrowed $700 billion for TARP, and now we’re going to borrow $800 billion for this stimulus package.

Hang on a second – Riedl notes that Keynesian insufficiency of aggregate demand may have existed in the 1930’s so that an increase in national savings does not automatically become investment demand but he argues for complete crowding-out ala the classical full employment model is the only relevant view for today’s economy. Has he been asleep for the past couple of years? Does he not know how far the employment-population ratio has declined or how low Treasury bill interest rates are? I know we should expect incredible stupidity from the National Review but this one really takes the cake!

Footnote: Thanks for Tom Bozzo for noting that Riedl is with Heritage and not Cato (I do get these two confused at time). It also seems that Tom's Angrybear colleague Sammy recognized Riedl's appropriate association even if Sammy did not realize (at first) that Riedl's argument was the discredited Treasury view.

Update: While I should thank Tom Bozzo for linking to this over at Angrybear, I am appalled by the critical comments from folks who have not been following this discussion of how Eugene Fama stumbled in his revival of the Treasury view. Apparently, my former colleagues at Angrybear do not read Brad DeLong who has even written a paper on this.

Iraq Update

Now that W. is out and a moderately calm set of provincial elections have been held in Iraq (although none in Kurdistan) that apparently will strengthen the hand of the current, pro-central-authority government, with declining, if not gone, violence more generally, it may well be that there will be little need to post much in the future on Iraq, and hopefully President Obama will be able to proceed with his plans to withdraw US troops over the next 16 months without a major catastrophe happening. While there continue to be loose ends, especially regarding the relationship between Kurdistan and the rest of Iraq and the matter of the distribution and control of oil revenues (see on this the ever informative Ben Lando at http://www.iraqioilreport.com), in many ways the situation may be finally reverting to what it looked like it might be when I wrote a column on the war on the day that Tikrit fell in April 2003, which was before all the unforeseeable screwups by the US from disbanding the Iraqi military to torturing prisoners at Abu Ghraib had happened to make truly royal mess of things. So, in this update at this time of transition, I shall go back to that moment when the war looked at its best to see how things stand. I forecasted three likely positives and three likely negatives of the war, with the latter outweighing the former in my view then and now, all of them having come true.


Positives:

1. The most important was to end the massive human rights violations by Saddam Hussein. This was followed by serious violations by others, although hopefully this is now subsiding, and this positive may finally be more seriously in place. on net after a lot of horrors.

2. Reduction of US military presence in Saudi Arabia, which had been sore point for al Qaeda. This was relatively trivial, but was achieved a long time ago.

2. Ending of international economic sanctions against Iraq. Also achieved a long time ago, but this was for a long time overshadowed by the general economic catastrophe that has engulfed Iraq since, now easing, although the recent fall in oil prices is not helping.

Negatives:

1. I forecast that the Christian population of Iraq would suffer discrimination and persecution by governments dominated by sectarian Shi'a. This happened, and today the Christian population of Iraq is about half what it was before 2003. Keep in mind that this has been one of the oldest Christian populations in the world, many of them speaking Aramaic, the language of Jesus himself, although one never hears about this from the Christian Right wingnut crowd.

2. I forecast that for the same reason the Christians would suffer, so would women generally. This does not seem to have occurred in Kurdistan, but there have been many problems in the rest of the country, with most observers saying that the status of women is generally worse off than before the war. Two sources are an older more detailed one, a report by the US ABA accessible at http://www.abanet.org/rol/publications/Iraq_status_of_women_update.2006.pdf, and a more recent but less detailed on by Women for Women International issued last year on International Womens' Day describing the status of women in Iraq as a "national crisis." A comment on that report is at http://www.womensmedia.cener.com/ex/030608.html.

3. And the worst was that I forecast that the US would lose support around the world and especially among Muslims as we would get bogged down and do bad things. I do not think I need to detail how accurate that forecast became.

Before ending this I want to address the matter of the "surge," which so many commentators have claimed was a "success" and how Obama and others should give credit to Bush for pushing it. I am sorry, but I do not buy it. The alternative was the in-place DOD plan to start drawing down troops back in 2006 that Bush turned around to increase troops there. As near as I can tell there were three bases for the claim of the surge bringing success.

The first was the turn of tribal sheikhs in al Anbar province against Al Qaeda in Iraq. However, this happened before the surge and was independent of it, other than the US giving the sheikhs arms. But this could have been done without the surge.

The second was the increase in rule by the central government in Basra in the South. The US role in this mostly involved bombing and little in the way of troops. Again, this could have been done without the surge.

Finally, there is the decline in violence in Baghdad. However, this was due to the ending of the neighborhood ethnic cleansing that had gone on for a long time, with the Shi'a-Sunni population ratio going from 2 to 1 to 3 to 1. The one area the surge might have helped slightly here was that to enforce this walls have been built between the neighborhoods, which damage the economy, but do help keep violence down. Apparently US troops helped with that, so maybe there we have one minor positive to be credited to the surge.

Retaliation – the Problem with Expenditure-Switching Policies

As I tried to present the discussion so far as to the Buy American provisions floating around Congress in their hotly debate ideas as to how to stimulate U.S. aggregate demand, Barkley reminds us that foreign governments might retaliate with their own expenditure-switching policies:

In 1930, the US passed the Smoot-Hawley tariff in order to preserve US jobs. This was a fixed exchange rate world under the gold standard. There was full bore reaction by other countries, most significantly the British Commonwealth ones, but others as well, and world trade declined sharply, certainly exacerbating the plunge into the Great Depression, although the degree of its role remains a matter of debate. However, I am unaware of any economist anywhere who argues that American jobs were saved by this catastrophic policy. Now there is a hard international political economic reality here that is being ignored. The just-ended Davos conference included fiercesome denunciations of the US for having triggered what is now the most widespread global recession ever. Merchandise trade declined in November at an annualized rate of 45%, while the big conference in Washington supposedly agreed on avoiding protectionism for at least a year, and in mid-January the US put a bunch of trade sanctions on the EU (no more Roquefort cheese to be had in the US anytime soon). Without doubt, such a stupid move by the US would this time also trigger massive reactions and the very serious danger of a full-blown trade war. No way this is going to help the world economy, much less the US one, although certain sectors might do better in the short run (Krugman's argument).

To be fair, Paul Krugman is hoping for more expenditure-adjusting policies:

Now ask, how would this change if each country adopted protectionist measures that “contained” the effects of fiscal expansion within its domestic economy? Then everyone would adopt a more expansionary policy — and the world would get closer to full employment than it would have otherwise.

Whether or not such a global scale movement towards autarky would induce more global fiscal stimulus is an issue I’ll leave to those smarter about these things than me, but I thought it was interesting that even Mitch McConnell understands what Barkley is saying:

I don't think we ought to use a measure that is supposed to be timely, temporary, and targeted to set off trade wars when the entire world is experiencing a downturn in the economy

While we are experiencing some improvement in our net exports, the reason has more to do with our falling demand for imports than it does with rising exports. Real exports fell during 2008QIV and it is not surprising to see why if one reviews the information in table 1.1 of the IMF’s World Economic Outlook. World output slowed in 2008 – particularly among the advanced economies. This slowdown is projected to continue during 2009. The growth in world imports/exports also slowed – particularly among the advanced economies.

Any attempt by the U.S. to increase its aggregate demand via expenditure-switching policies will reduce the net exports of our trading partners. Given that our trading partners are also likely to face insufficient aggregate demand during 2009, Senator McConnell’s concern about setting off a trade war appears to be a legitimate one.

Harding’s Alleged Small Government Economic Miracle

Jim Powell wants us to believe that reducing the size of the Federal government is the key to getting the economy back to full employment:

Which U.S. president ranks as America’s greatest depression fighter? Not the fabled Franklin Delano Roosevelt … America’s greatest depression fighter was Warren Gamaliel Harding. An Ohio senator when he was elected president in 1920, he followed the much praised Woodrow Wilson — who had brought America into World War I, built up huge federal bureaucracies, imprisoned dissenters, and incurred $25 billion of debt. Harding inherited Wilson’s mess — in particular, a post–World War I depression that was almost as severe, from peak to trough, as the Great Contraction from 1929 to 1933 that FDR would later inherit. The estimated gross national product plunged 24 percent from $91.5 billion in 1920 to $69.6 billion in 1921. The number of unemployed people jumped from 2.1 million to 4.9 million ... Federal spending was cut from $6.3 billion in 1920 to $5 billion in 1921 and $3.2 billion in 1922. Federal taxes fell from $6.6 billion in 1920 to $5.5 billion in 1921 and $4 billion in 1922.

Spencer spots a flaw in Powell’s reporting of GDP:

First, the 24% plunge in GDP he cites is nominal GDP, not real GDP. The drop in real GDP was about 5%, as compared to the 26% drop in 1929-33.

So with prices falling during this period, the decline in any real variable is less than the decline in the reported nominal variable, which should hold for those reported declines in government spending and tax figures. Alas, Spencer only tells us the qualitative direction of the general price level, which of course is a lot more informative than the disinformation from Mr. Powell. This source, however, lets us know that the CPI fell by 10.85% in 1921 and 6.1% in 1922. In real terms, Federal spending and taxes were still lower in 1922 than they were in 1920, but Powell’s abuse of nominal figures greatly exaggerates not only the size of the post World War I recession but also the size of the decline in Federal spending and taxes.

Then again, it is not unusual to see Federal spending and taxes fall after a major war. Our chart was created using information from this source and shows total government revenue in real terms (2000$) from 1902 to 1940. The size of the government during the years preceding World War I appears to be a lot smaller than the size of the government in 1922. And we should note that real Federal revenues rose for the rest of the 1920’s eclipsing real Federal revenues in 1920.

Spencer is right – Jim Powell has put forward a lot of disinformation in his National Review column. But that is nothing new for those who write for the National Review!

How the Five-Day-Week Prolonged the Depression!

by the Sandwichman

Hooray for Harold L. Cole and Lee E. Ohanian! They have raised, in an admittedly inept and backward manner, an issue that many Keynesians and New Deal apologists seem to have trouble acknowledging. (See also Brad DeLong and Eric Rauchway).

The goal of the New Deal was to get Americans back to work. But the New Deal didn't restore employment. In fact, there was even less work on average during the New Deal than before FDR took office. Total hours worked per adult, including government employees, were 18% below their 1929 level between 1930-32, but were 23% lower on average during the New Deal (1933-39). Private hours worked were even lower after FDR took office, averaging 27% below their 1929 level, compared to 18% lower between in 1930-32.

Even comparing hours worked at the end of 1930s to those at the beginning of FDR's presidency doesn't paint a picture of recovery. Total hours worked per adult in 1939 remained about 21% below their 1929 level, compared to a decline of 27% in 1933. And it wasn't just work that remained scarce during the New Deal. Per capita consumption did not recover at all, remaining 25% below its trend level throughout the New Deal, and per-capita nonresidential investment averaged about 60% below trend. The Great Depression clearly continued long after FDR took office.

The hours of work decreased during the New Deal! Think of that! People worked fewer hours at the end of the 1930s than they did when Roosevelt took office. Of course, Cole and Ohanian think that was a bad thing, just like they think high wages were a bad thing. They also seem to believe that the Depression would have ended sooner if the market had been left alone to work out its kinks. Yeah, right. I don't want to live through that experiment.

But we do know that one part of what did happen was that the hours of work were reduced. They weren't reduced as much as William Green's AFL wanted them to be or as much as the Black-Connery bill would have mandated -- to 30 hours a week. The reduction in hours was permanent -- a permanent withdrawal of superfluous labor power from the market. Wartime mobilization withdrew labor power from the market in another way, by putting 12 million men in uniform and sending them overseas.

But here's the point: recovery from the Depression was not just about public works and fiscal policy. It was also about enforcing a reduction of working time. Cole and Ohanian are on to something, even if their interpretation of it is ass backwards.

To put Cole and Ohanian's free market mindset into perspective, I've posted, below the jump, the introduction to the October 1926 issue of the Pocket Bulletin, Official Publication of the National Association of Manufacturers, which announced its theme on the cover as "Will the Five-Day-Week Become Universal? IT WILL NOT!"

The Five-Day-Work Week; Can It Become Universal?

Presidents of Numerous Large Establishments Employing Hundreds of Thousands of Men in Various Lines of Manufacture, Declare Tendency to Less Work and More Pay Will Leave Us Wide Open for European Onslaught

Will Henry Ford's five-day week, just put into operation in his plants, and now urged as ideal by labor leaders, be adopted generally by the industries of the country?

It will not!

For the following chief reasons:

1. It would greatly increase the cost of living.

2. It would increase wages generally by more than 15 per cent and decrease production.

3. It would be impracticable for all industries.

4. It would create a craving for additional luxuries to occupy the additional time.

5. It would mean a trend toward the Arena, Rome did that and Rome died.

6. It would be against the best interests of the men who want to work and advance.

7. It would be all right to meet a sales emergency but would not work out as a permanent thing.

8. It would make us more vulnerable to the economic onslaughts of Europe, now working as hard as she can to overcome our lead.

These are some of the conclusions drawn by the presidents of some of the largest industrial concerns in the country, members of the National Association of Manufacturers and employing thousands of workers in various phases of industry.

Mankind does not thrive on holidays. Idle hours breed mischief. The days are too short for the worthwhile men of the world to accomplish the tasks which they set themselves. No man has ever attained success in industry, in science, or in any other worthwhile activity of life by limiting his hours of labor.

Buy American: Is There a Trade-off Between Free Trade and Full Employment?

Paul Krugman gets partial credit for expounding on an argument made by Dani Rodrik (here and here):

The economic case against protectionism is that it distorts incentives: each country produces goods in which it has a comparative disadvantage, and consumes too little of imported goods. And under normal conditions that’s the end of the story. But these are not normal conditions. We’re in the midst of a global slump, with governments everywhere having trouble coming up with an effective response ... how would this change if each country adopted protectionist measures that “contained” the effects of fiscal expansion within its domestic economy? Then everyone would adopt a more expansionary policy — and the world would get closer to full employment than it would have otherwise. Yes, trade would be more distorted, which is a cost; but the distortion caused by a severely underemployed world economy would be reduced. And as the late James Tobin liked to say, it takes a lot of Harberger triangles to fill an Okun gap.

As we noted, Dani was assuming a fixed exchange rate model. I suspect Paul is also assuming a fixed exchange rate model:

And one part of the problem facing the world is that there are major policy externalities. My fiscal stimulus helps your economy, by increasing your exports — but you don’t share in my addition to government debt.

We also noted that Nick Rowe considered the implications of floating exchange rates:

Nick’s floating exchange rate version of the model, however, has the exchange rate automatically adjust such that the ultimate change in net exports is zero. In this case, the multiplier for fiscal policy is 5 and the multiplier for mercantilist policy is zero. In other words, a $200 increase in government purchases still achieves the goal of increasing real GDP by $1000. Lesson learned – floating exchange rates can achieve the same goal as Dani’s mercantilism. There is one difference, however, between the two approaches. Mercantilism often works by protecting the import competing sector. Under floating exchange rates, we are more likely to see increased employment in the export sector.

Let’s expound on this in three ways. First of all – the choice between floating v. fixed exchange rates plus protection (as we noted earlier) comes down to whether one wants the benefits of fiscal stimulus to accrue partly to the export sector v. whether one wants a lot of the benefits to accrue to sectors such as the steel industry. A lot of economists who argue against the Buy American provisions on the grounds of efficiency are implicitly favoring the export sector over the import competing sectors.

Secondly, some rightwing pundits fear that a dollar devaluation will prove inflationary. I think most economists would argue that the kind of real devaluation that Nick is referring to will have only a modest impact on the overall price index. Besides, the Federal Reserve seems to be more afraid of deflation that a little inflation.

The third point comes from several of the comments surrounding Nick’s contribution – that being that we may be in a Bretton Woods II era if the Chinese government maintains a fixed exchange rate. In other words, the lessons learned from Dani’s and Paul’s fixed exchange rate model are not as easily dismissed as applying to the current situation. Paul noted that if we had better international coordination of macroeconomic and exchange rate policies, we might not need protectionism. Alas, such coordination does not seem to be on the horizon.

Update: Nick Rowe adds more to this debate.

The Source and Remedy of the National Difficulties

by the Sandwichman

How is it that notwithstanding the unbounded extent of our capital, the progressive improvement and wonderful perfection of our machinery, our canals, roads, and of all other things that can, either facilitate labour, or increase its produce; our labourer, instead of having his labours abridged, toils infinitely more, more hours, more laboriously...?

At the request of Michael Perelman, the Sandwichman is posting, below the jump, the 1821 pamphlet, The Source and Remedy of the National Difficulties, Deduced from Principles of Political Economy in a Letter to Lord John Russell. I've toyed with the idea of doing a point-by-point serialization so that people could digest and discuss the extraordinary logic and rhetoric of the piece. By my count, there's around 44 discrete "points" so such a serialization would be a vast undertaking. I think I'll wait and see how much popular clamor there is for such a serialization... 

Published anonymously in 1821, The Source and Remedy was, according to Frederick Engels, "saved from falling into oblivion," by Karl Marx, who, in published writings up to the time of Engel’s remark, had scarcely mentioned the pamphlet in a cryptic footnote in Volume I of Capital. Engels acclaimed the pamphlet as “but the farthest outpost of an entire literature which in the twenties turned the Ricardian theory of value and surplus value against capitalist production in the interest of the proletariat.” 

For his part, Marx declared in his unpublished notebooks that the pamphlet was an advance beyond Adam Smith and David Ricardo in its conscious and consistent distinction between the general form of surplus value or surplus labour and its particular manifestations in the form of land rent, interest of money or profit of enterprise. In commenting on the pamphlet, Marx returned several times to what he upheld as the "fine statement": "a nation is really rich if no interest is paid for the use of capital, if the working day is only 6 hours rather than 12. WEALTH IS DISPOSABLE TIME, AND NOTHING MORE." 

Marx noted that Ricardo had also identified disposable time as the true wealth with the difference for Ricardo, however, that it was disposable time for the capitalist that constituted such wealth, thus the ideal should be to maximize surplus value relative to total output. One of those citations occurs in Marx's Grundrisse, immediately after the following characteristically revolutionary proposition: "Forces of production and social relations -- two different sides of the development of the social individual -- appear to capital as mere means for it to produce on its limited foundation. In fact, however, they are the material condition to blow this foundation sky-high." 

Indeed, in his reinterpretation of Marx's critical theory, Time, Labor and Social Domination, Moishe Postone placed the issue of disposable time at the "essential core" of Marx's analysis in Capital. Although Postone didn't emphasize the pamphlet itself, he highlighted a passage from the same paragraph in the Grundrisse that concludes with the pamphlet's "fine statement."

Just how successful Marx was in saving the 1821 pamphlet from oblivion remains to be seen. Obviously, the pamphlet was spared from total oblivion or I wouldn't be writing this. A copy of it was included in the microfilm Goldsmiths-Kress Library of Economic Literature. Routledge republished it in 2005 as part of a ten-volume collection of Owenite Socialism : Pamphlets and Correspondence edited by Gregory Claeys (price?: 3891.66 Euros -- socialism ain't cheap y'know). 

Aside from the few references by Marx and Engels, there have been scattered mentions of the pamphlet but, to my knowledge, no sustained consideration, which seems odd considering the importance that Engels -- and in his manuscripts, Marx -- assigned to it. 

Perhaps one of the difficulties has been the anonymity of its authorship. That problem would appear to have been resolved by a disclosure in the biography of the 19th century editor and literary critic, Charles Wentworth Dilke, Papers of a Critic, written by his grandson, Sir Charles Wentworth Dilke. The younger Dilke reported having found an annotated copy of the pamphlet, acknowledging authorship, among his grandfather's papers. Subsequent authorities on Dilke and on the literary journal he edited for [30?] years, The Athaeneum, appear satisfied with the plausibility of this attribution, given Dilke's writing style, his proclivity for anonymous and pseudonymous publication, his political inclinations and his subsequent career. There doesn't appear to have been any concerted effort to either definitively establish or to refute Dilke's authorship. So Dilke qualifies as the leading and, so far, only candidate for authorship. 

If Dilke was indeed the author, this presents at least two rather significant bits of context to the pamphlet as well as several minor but intriguing ones. First, Dilke was an ardent disciple of William Godwin. The poet, John Keats, who was a close friend and next-door neighbor referred to him as a "Godwin perfectability man". He was said to have retained this political inclination throughout his life. Second, in his career as editor of the Athaeneum, Dilke campaigned famously against journalistic "puffery" -- the practice of publishers placing in literary journals, for a fee, promotional material for their books under the guise of independent reviews. Both of these contextual items could be significant for an interpretation of The Source and Remedy precisely because the pamphlet lends itself comfortably to a reading as a Godwinist tract (rather than a pre-Marxist one) but also to a reading as a polemic against yet another brand of puffery -- political economic puffery. As for "turning the Ricardian theory of value against capitalist production," such an intention would hardly seem to fit an essay that on its closing page counts among the great advantages of the measures proposed therein that "their adoption would leave the country at liberty to pursue such a wise and politic system of financial legislation as would leave trade and commerce unrestricted." 

The Source and Remedy of the National Difficulties appears to have had something to say somewhat distinct from the message Marx took away from it. In his various notes on the pamphlet, Marx seems to have paid closest attention to the first six pages of the 40-page pamphlet and to have glossed over the rest somewhat disparagingly or with an eye to the arresting quote. 

In his discussion of the pamphlet in Theories of Surplus Value, for example, the reader may wonder if Marx is actually still talking about the pamphlet after a few pages or has gone off on a tangent inspired by the pamphleteer having overlooked the impact of unemployment on wages. It has to be cautioned, though, that Marx's extended comments on the pamphlet appeared in manuscript notes that were published posthumously. They are not polished, fully thought out positions directly intended for publication. 

Although the first six pages are indeed interesting, in the context of the pamphlet as a whole their function is to set the stage for the crucial pair of questions that appear on page seven. That is, after deducing from principles of political economy that capital, left to its natural course, would soon do away with further accumulation, the author asks why that seemingly inevitable result has never happened and how it is that with all the presumably labor-saving wonders of modern industry, workers work longer hours and more laboriously than ever before. 

Dilke's answer was that government and legislation act ceaselessly to destroy the produce of labor and interfere with the natural development of capital. They do this indirectly by, on the one hand, maintaining "unproductive classes" at a constant proportion to productive laborers and on the other by enabling the immense expansion of "fictitious capital," based ultimately on protectionism and government finance. Government does these things so that it may raise an enormous level of revenues that it couldn't through direct taxation of the laboring population, because "it would have been gross, open, shameless, and consequently impossible." 

Instead, it makes the holders of this fictitious capital "particeps criminis" in a stratagem to exact a much-enlarged revenue. As partner in crime, the capitalist lays claim to a generous portion of the booty. Not surprisingly, war is a "powerful cooperator" in this relentless process of destroying the produce of labor and expanding the claims of fictitious capital. 

 As for the "natural" claims of surplus value exacted by the capitalist, Dilke viewed it as causing the laborer "no real grievance to complain of," a position at least apparently at odds with Marx's views of exploitation and almost certainly incompatible with Engels' assertion that the pamphlet turned Ricardian theory "against capitalist production." 

Not only was Dilke not opposed to capitalist production, he described it as leading to a Utopian condition of freedom if only it was left to unfold according to its nature. In his note, Marx objected that the pamphleteer had overlooked two things in coming to such a sanguine conclusion about the trajectory of capitalist accumulation. One was unemployment; the other Marx never got around to specifying. 

 Dilke's reasoning, although thought provoking, is far from airtight. He confesses in his closing pages that his argument "is not so consecutive, that the proofs do not follow the principles laid down so immediately as I could have wished. The reasoning is too desultory, too loose in its texture." Whether such regrets are heartfelt or simply an obligatory rhetorical gesture of modesty is hard to say. The subject matter itself is elusive and no treatment of it could be exempt some flaws. 

But, nevertheless, the case he presents is an original and important one that has as far as I know been overlooked by Marx and his intellectual heirs. The part of the argument that Marx appropriated to his own analysis -- the author's consistent reference to surplus value as the general form underlying profit, rent and interest was ultimately incidental to Dilke's main points that nature places a limit on accumulation and that the surpassing of those natural limits occurs only as a result of government intervention, which, in effect mandates excess exploitation of labor.

There is a problem that arises from Marx appropriating the (for Marx) correct premise of the pamphlet without first having systematically refuted the author's own deductions from it. What if Dilke's deductions were either equally or more plausible than Marx's? Rather than being a focal point of class struggle, might not surplus value then be "no real grievance to complain of?" Rather than underpinning a contradiction fated to blow the foundation of capital sky-high, might not the tension between "things superfluous" and disposable time have the potential to be adjusted like wing flaps to help bring capital in for a soft landing?

By things superfluous, I refer, first, to the unholy trinity of fictitious capital, unproductive labor and inconvertible paper money and second, to their commodified expression as luxury goods. What I am suggesting is that for Dilke it seems that the primary contradictions of capitalism (to use Marx's expression) lay not so much between capital and labor as between real and fictitious capital, productive and unproductive labor, convertible and inconvertible money, necessities and luxury goods. 

This internalizing of the contradictions recalls Solzhenitsyn's observation in the Gulag Archipelago that, "the line separating good and evil passes not through states, nor between classes, nor between political parties either, but right through every human heart, and through all human hearts." Might we not ask if it's not only the line between good and evil that passes through every human heart but also the line between labor and capital, proletariat and bourgeoisie? From the standpoint of the arguments presented in The Source and Remedy, a proletarian revolution would be entirely unnecessary. Ironically, the non-necessity of the revolution would arrive precisely at the moment in which such a revolution would have become possible.

Keeping Score

Your anonymous, absentee administrator is pleased to see site traffic here breach the daily thousand level. I thought it must be due to the recent Krugman link, but in fact there have been spikes in the past as well. If you check the Sitemeter link (bottom, right column), you can see a new plateau of 16,000 visitors a month was hit on September of 2008. This past month it was 26,000. In general the blog is doing pretty well for a group of deep thinkers. Of course, there is really nothing like it on the left. Among economics blogs of all political stripes, this was ranked 19th, ahead of 'Freakonomics' and other illustrious characters.

We should give a special shout-out to Diane Warth of Karmalised for help on the site management front.

Congratulations to all, and remember folks, the more you post the more readers you will get.

Milton Friedman and Paul Krugman on the Current Fiscal Policy Debate

Paul Krugman was gracious enough to say our discussion of Ricardian Equivalence exposed a higher-level fallacy with respect to some recent fiscal policy skeptics. Paul also extends the argument in a way that I suspect even Milton Friedman would approve:

suppose that the government introduces a new program that will cause it to spend $100 billion a year every year from now on. To pay for this, it will have to raise taxes by $100 billion a year, permanently — and if consumers take this into account, they might well cut their spending enough to offset the increase in government purchases. But suppose the government introduces a one-time, $100 billion program to repair bridges over the next year. The government will have to issue debt to pay for this, and will have to service that debt, requiring higher taxes — say, $5 billion a year. That’s a much smaller impact on consumers’ future after-tax income than the permanent program. So much less of the spending rise will be offset by a fall in consumer demand. (I’m not considering the effect of the spending in raising income, which would probably cause consumer demand to rise rather than fall.) So economic theory — Milton Friedman’s theory! — says that spending is a more effective form of stimulus than tax cuts.

This is also a very nice statement of the Barro-Ricardo equivalence proposition, which of course, is an extension of Friedman’s permanent income hypothesis.

"From 2002 to 2008, the five biggest Wall Street securities firms [Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley] paid an estimated $190 billion in bonuses. Those companies churned out $76 billion in combined profits during the same period. Last year, the companies had a combined net loss of $25.3 billion, yet paid bonuses of roughly $26 billion."

Lucchetti, Aaron and Matthew Karnitschnig. 2009. "On Street, New Reality on Pay Sets In: Financial Firms Race to Reset Compensation Policies as U.S. Government Aims to Set Some Limits." Wall Street Journal (31 January): p. B 1.
http://online.wsj.com/article/SB123336341862935387.html?mod=todays_us_money_and_investing

Marx before Minsky

Previously, I made the case that the financial meltdown was basically a delayed response to the severe neglect of investment in plant, equipment, and infrastructure. I also explained the cause of this neglect.

http://radicalnotes.com/content/view/73/39/

Here, I'm going to discuss the financial side of the crisis, which, while secondary, is still important.

This crisis has been nicely described as a Minsky moment, but it may just as well be described as a Marx moment. Marx's term fictitious capital and the more conventional discounted present value are not entirely different, but Marx's expression emphasizes the fact that the future is both unknown and unknowable.


As Keynes explained very well, the future takes on an appearance of being known, but this knowledge is not knowledge at all. It is merely an extrapolation of the past.

There was a time when the returns from holding General Motors stock would have seemed very predictable, almost as much as an investment with Bernie Madoff.

Anticipating Hyman Minsky, Marx realized that over time people would become less risk averse and the risk-corrected discounted present values would start to rise. Extrapolating, this trend would be expected to continue.

What I did, many years ago, in Karl Marx's Crises Theory: Labor, Scarcity and Fictitious Capital (New York: Praeger, 1987) was to explain that this psychological phenomenon would tend to delink prices from underlying values. Expensive corporate headquarters would be built into the overhead costs of business. At the same time, as such capital values accumulate, measures of invested capital will increase, pulling down the rate of profit. Hunting for yields to maintain profit rates will set off bubbles, further promoting an even more speculative environment. Over time, this speculative psychology will eliminate the limited coordinating powers of the market and set the stage for a future crisis.

When the crisis comes, much of the fictitious capital will disappear, bringing prices more in line with underlying values.

In a sense, this part of Marx's crisis theory is not that far from Hayek's, but I think that Hayek may have taken this from Marx without attribution.

All this sounds very Minskyian. Of course, Minsky knew his Marx, just as he knew his Keynes. And Keynes, though never really studied Marx by his own confession, was surrounded by people who did.

Does Protection Have No Impact on Aggregate Demand?

Nick Rowe makes an argument against the “Buy American” provisions that I have made in the past:

Most (all?) economists agree that in a global recession, when each country wants to boost demand for the goods it produces, policies which steer demand to domestically-produced goods are individually rational (provided other countries don't retaliate), but collectively irrational when all countries do the same. I think most economists are wrong. It's not just collectively irrational, but individually irrational as well, at least for countries with flexible exchange rates ... In normal times, outside of a liquidity trap, an expansionary fiscal policy will put upward pressure on interest rates as the demand for money increases with higher income. Or the central bank raises interest rates to offset the increased demand to keep inflation on target. An increase in domestic interest rates will cause a capital account inflow, which causes the exchange rate to appreciate. The exchange rate appreciation will cause net exports to fall. The fall in net exports offsets the expansionary fiscal policy. Under imperfect capital mobility the offset will be partial. Under perfect capital mobility there will be full offset, for a small open economy. So in normal times, part or all of the increased demand from an expansionary fiscal policy will be lost due to a decline in net exports. Some or all of the extra demand just leaks out to foreign countries.

Nick then admits that if we are in a liquidity trap, the interest rate to capital account channel is cut off so a fiscal stimulus does not necessarily crowd-out net exports but then he writes:

A "buy domestic" policy will not shift demand towards domestic goods. If it did, so that imports fell and net exports increased, the current account surplus would merely cause the exchange rate to appreciate so that net exports fell to their original level. The current account must stay the same, because the capital account stays the same, because the interest rate differential stays the same, because interest rates stay the same.

Dani Rodrik, however, takes another view:

Yes it does. And not just in theory, but also in practice. The evidence comes from the 1930s, and from the work of Ben Bernanke himself (along with other scholars like Barry Eichengreen). The important finding is that countries that devalued their currencies by getting off the gold standard were able to recover more quickly, thanks in part to an increase in their net exports relative to countries that stayed on gold. Note that a currency depreciation amounts to a policy of combining import tariffs with export subsidies--hence the mercantilist intent and effect.

Dani also notes:

How much of a boost to economic activity will a fiscal stimulus provide? For those who believe that we have entered a Keynesian world of shortage of aggregate demand--me included--the answer depends on the Keynesian multiplier. The size of this multiplier depends in turn on three things in particular, the marginal propensity to consume (c), the marginal tax rate (t), and the marginal propensity to import (m). If c = 0.8, t = 0.2, and m = 0.2, the Keynesian multiplier is 1.8 (=1/(1-c(1-t)+m)). A $1 trillion fiscal stimulus would increase GDP by $1.8 trillion. Now suppose that we had a way to raise the multiplier by more than half, from 1.8 to 2.8. The same fiscal stimulus would now produce an increase in GDP of $2.8 trillion--quite a difference. Nice deal if you can get it. In fact you can. It is pretty easy to increase the multiplier; just raise import tariffs by enough so that the marginal propensity to import out of income is reduced substantially (to zero if you want the multiplier to go all the way to 2.8). Yes, yes, import protection is inefficient and not a very neighborly thing to do--but should we really care if the alternative is significantly lower growth and higher unemployment? More to the point, will Obama and his advisers care?

I guess Nick can come back and say Dani was assuming fixed exchange rates. So how is this all supposed to work out under fixed interest rates but floating exchange rates?

Our model is essentially:

Y = D(Y) + X(Y, e)

where Y = real GDP, D = domestic demand, X = net exports, and e is the real exchange rate. Let’s consider a hypothetical economy known as Obamia that has a domestic marginal propensity to spend = 0.8 and a marginal propensity to import = 0.2 and wants to increase real GDP by $1000 (think of America as one billion times the size of Obamia). Under fixed exchange rates and no trade protection, the multiplier is 2.5 so government purchases would have to be raised by $400 if no other policy tool was used. As real GDP rose increased by $1000, imports would increase by $200.

But suppose that the conservative part of Obamia balks at a large fiscal stimulus and its leaders reach some bipartisan compromise of having government purchases rise by only $200. Dani’s point is that if we adopt a mercantilist policy to increase the net export schedule by $200, then we can still achieve the real GDP goal.

Nick’s floating exchange rate version of the model, however, has the exchange rate automatically adjust such that the ultimate change in net exports is zero. In this case, the multiplier for fiscal policy is 5 and the multiplier for mercantilist policy is zero. In other words, a $200 increase in government purchases still achieves the goal of increasing real GDP by $1000. Lesson learned – floating exchange rates can achieve the same goal as Dani’s mercantilism. There is one difference, however, between the two approaches. Mercantilism often works by protecting the import competing sector. Under floating exchange rates, we are more likely to see increased employment in the export sector.

The House's Modern-Day Hoovers

Time to turn the microphone over to Colbert I. King:

The pain of this recession was apparently lost on Boehner and his House Republicans. Their public fretting over the future impact of deficits on today's children and grandchildren is disingenuous. In truth, what really gets them hot and bothered is the thought of government taking on more responsibility to fight this deepening recession, and the huge amount of public spending it will take to pull the economy out of the doldrums. It so happened that the Republican standard-bearer in the 1920s, Herbert Hoover, felt that way, too. Hoover's distaste for government, and his belief that business was the answer to the country's economic tailspin, got Democrat Franklin Delano Roosevelt elected president in 1932. In their slavish devotion to Hooverism, today's Republicans are repeating the mistakes that banished their party to the political wilderness in the '30s.