Juan Cole today (http://www.juancole.com) reports on the controversy over a recent paper by Gillespie et al, some geographers, in the MIT International Review, which has also gotten a lot of media attention. By doing analysis from space they claim that Osama bin Laden is probably hiding in the largest city in frontier zone of Pakistan near the Afghan border, Parachinar, and even identify three building complexes in it as likely locations for him to be. The obvious implication is for the US military to bomb the heck out of those buildings, or maybe at least to drop some Special Forces or whomever into there to try and capture him.
Cole reprints a letter from a former resident of the area to the MIT International Review, Murtaza Haidar, a professor at Ryerson University. Haidar points out a reason why Gillespie and crew are almost certainly wrong, and why it would be a major mistake for anybody to attack the place. While this zone is overwhelmingly Sunni Muslim, as is bin Laden and his closest followers, the city of Parachinar is inhabited overwhelmingly by Shi'i Muslims, with the city under siege and attack by their neighbors. Al Qaeda and the Taliban in the area have been responsible for the deaths of many Shi'a, so that there is simply no way that anyone from either group would be remotely welcome in Parachinar, most especially bin Laden himself. But , this is not the first time we have seen American "experts" calling for military action on the basis of ideas from outer space that are not at all in touch with the facts on the ground.
Friday, February 20, 2009
Raymond J. Keating is Silly
by the Sandwichman
Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. Karen Kerrigan is President and C.E.O. of the Council and is chairperson of the Coalition to End Union Violence, a project of the Small Business Survival Committee (of which she is chairman and founder). These folks and organizations share an office suite on L Steet in D.C. with Grover Norquist and his American's for Tax Reform. Get the picture? Cogs in the vast right-wing Wurlitzer.
Keating also happens to have the distinction of being the only economist the Sandwichman knows of who has published a commentary on Dean Baker's shorter work-time proposal.
But the Sandwichman only brings up the matter of Raymond J. Keating's silliness to underscore the fecklessness of prominent liberal economists whose silence on Baker's proposal for shorter working time amounts to a tacit endorsement of the Keating/Kerrigan/Norquist growth-at-any-cost paradigm.
Raymond J. Keating is silly. The silent liberals are feckless.
Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. Karen Kerrigan is President and C.E.O. of the Council and is chairperson of the Coalition to End Union Violence, a project of the Small Business Survival Committee (of which she is chairman and founder). These folks and organizations share an office suite on L Steet in D.C. with Grover Norquist and his American's for Tax Reform. Get the picture? Cogs in the vast right-wing Wurlitzer.
Keating also happens to have the distinction of being the only economist the Sandwichman knows of who has published a commentary on Dean Baker's shorter work-time proposal.
These are serious and rather grim economic times.It may be germane to point out that Keating is one of those climate change denial guys and that Kerrigan's outfits are funded by the likes of Exxon and R.J. Reynolds Tobacco. According to her bio on Inc., "A seasoned player in the conservative movement, Kerrigan made a name for herself by playing a key role in derailing the Clintons' health care plan." Smoking good. Health care bad. Tax cuts good. Unions bad.
After all, the current recession is over a year old, and real GDP growth in the fourth quarter of last year registered a dire -3.8 percent. And nobody sounds cheery about 2009.
Belying such seriousness, however, there are a lot of silly ideas being kicked around when it comes to economic policy.
Consider the suggestion made by Dean Baker, co-director of the Center for Economic and Policy Research, in a commentary piece in the Jan. 28 New York Daily News.
Baker argued that President Barack Obama and Congress should be "creating incentives for companies to reduce the workweek and work year for many Americans." He claims that this would "provide a quick boost to the economy and jobs - and lasting gains in reduced unemployment."
Hmmm, working and producing less somehow translates into higher economic growth. Lower productivity then must be a plus for the economy. Baker claims that with certain tax incentives, workers could get paid the same for less work, more workers would have to be hired, and apparently all this would be just ducky for business.
Does any of this make sense? Of course not. Lost productivity, higher business costs and reduced economic growth would result if this were implemented.
But the Sandwichman only brings up the matter of Raymond J. Keating's silliness to underscore the fecklessness of prominent liberal economists whose silence on Baker's proposal for shorter working time amounts to a tacit endorsement of the Keating/Kerrigan/Norquist growth-at-any-cost paradigm.
Raymond J. Keating is silly. The silent liberals are feckless.
The Lucas Critique
I see the eminent Nobelist has explained to all of us why the Stimulus hasn't a chance in Hell. This is a man who told Arjo Klamer (in Conversations With Macroeconomists) that macroeconomics, before he bestrid (?) it, Colossus-like, was a complete waste of time, since it was devoted to explaining a fiction invented by Keynes. The "fiction?" Why, Involuntary Unemployment, of course! So let's pay careful attention to what he has to say about fixing things. What is there to fix, after all. Ain't broke!
Thursday, February 19, 2009
Bard College has fired Joel Kovel
I am biased since I admire Joel. Lou Proyect has done an excellent job in putting the case into context.
http://louisproyect.wordpress.com/2009/02/19/bard-college-terminates-joel-kovel/
http://louisproyect.wordpress.com/2009/02/19/bard-college-terminates-joel-kovel/
Great Moments in Labor Relations
In a Letter from the Gatling Gun Company to B&O Railroad in 1877:
"... we have the honor to suggest that you strengthen yourselves now against such emergencies in the future, by providing yourselves with Gatling guns."
Full letter here:
http://groups.google.com/group/maryland-labor-history?pli=1
"... we have the honor to suggest that you strengthen yourselves now against such emergencies in the future, by providing yourselves with Gatling guns."
Full letter here:
http://groups.google.com/group/maryland-labor-history?pli=1
5,000 Characters
by the Sandwichman
The White House Task Force on Middle Class Working Families has increased their comment submission length from 500 to 5000 characters. The Sandwichman submitted the following 4,994 character summary, along with a link to a longer version:
The key to addressing the issues of work and family balance, labor standards, equitable distribution of the fruits of economic progress and protection of the environment lies in regulating and limiting the hours of work. In the absence of countervailing union pressure or government policy, there is a structural bias that leads to the prevalence of socially and environmentally harmful long hours of work. This summary outlines the case for work time reduction and draws attention to a promising policy innovation to redress the current imbalance. A full, hyperlinked version of this submission is available [at the end of this post].
American families have changed substantially since the 1960s but many policies aimed at assuring income security have remained unchanged since the New Deal of the 1930s. Today, two-thirds of all families with children are either single-parent or dual-earner families. Between 1979 and 2000, the hours worked per year by married couples with children increased by 16 percent, or nearly 500 hours. Bernstein and Kornbluh noted that without that increase in hours worked, the incomes of middle- and lower-income families would have stagnated or declined. That conclusion, however, overlooks the possibility that the increased supply of hours may itself have contributed, through a feedback effect, to wage stagnation.
Most work-family advocates in the U.S. focus on the need for family-friendly policies such as child-care, paid family leave and flexible scheduling that mitigate the effects of a seemingly immutable working time regime. "The challenge," though, Kornbluh has noted, "is to frame work-life balance as a broader political economy issue."
Historically, work-life balance was framed as a broader political economy issue in labor agitation for shorter working time. For nearly a century, from the 1860s to the 1950s, American labor unions also put forward the reduction of working time as their focal strategy for combating unemployment. After the Second World War, though, the unions' enthusiasm for shorter hours waned. Instead, the AFL-CIO primarily focused its efforts on urging government spending to foster economic growth and only sought shorter hours as a "last resort."
What changed between the 1930s and the 1960s was the acceptance of the idea that government spending could stimulate economic growth. Although popularly referred to as "Keynesianism," Keynes himself did not accept the idea that boundless expansion of production and consumption was worthwhile for its own sake. Instead, he specified working less as the "ultimate cure" for unemployment. The imperative for growth was a notion added by later economists.
Continued economic growth, fostered by government fiscal and monetary strategies, has led to an increase in effective demand for what Hirsch called positional goods. Competition for these socially or physically scarce or congested goods draws resources away from the output of final consumption goods and also exacts a personal cost in terms of time pressure. Individuals are compelled to spend more time in market activities and thus have less time to spend in non-commercial pursuits such as production for home consumption, leisure and sociability. "This has helped to upset a long-held expectation about the potential fruits of economic growth – namely, that they will be taken increasingly in the form of relief from material pursuits."
Rosnick and Weisbrot estimated that if European countries adopted the long working hours prevailing in the U.S., they would consume 25 percent more energy. Conversely, if the U.S. adopted working times closer to the European average, it would consume 20 percent less energy. Assuming that the intensity of greenhouse gas emissions per unit of GDP continues to decline at a rate consistent with the historical trend, economic growth averaging 2.5 percent annually would increase emissions by around 75 percent over the next 30 years. Meanwhile, poverty and unemployment will creep steadily upward. The alternative to continual economic growth and a resulting environmental and/or social catastrophe is to reduce the average hours of work for the bulk of the working population and increase employment opportunities for the unemployed and the underemployed.
Dean Baker has proposed government subsidies for shorter hours and vacation pay as part of the economic stimulus plan.
The White House Task Force on Middle Class Working Families has increased their comment submission length from 500 to 5000 characters. The Sandwichman submitted the following 4,994 character summary, along with a link to a longer version:
The key to addressing the issues of work and family balance, labor standards, equitable distribution of the fruits of economic progress and protection of the environment lies in regulating and limiting the hours of work. In the absence of countervailing union pressure or government policy, there is a structural bias that leads to the prevalence of socially and environmentally harmful long hours of work. This summary outlines the case for work time reduction and draws attention to a promising policy innovation to redress the current imbalance. A full, hyperlinked version of this submission is available [at the end of this post].
American families have changed substantially since the 1960s but many policies aimed at assuring income security have remained unchanged since the New Deal of the 1930s. Today, two-thirds of all families with children are either single-parent or dual-earner families. Between 1979 and 2000, the hours worked per year by married couples with children increased by 16 percent, or nearly 500 hours. Bernstein and Kornbluh noted that without that increase in hours worked, the incomes of middle- and lower-income families would have stagnated or declined. That conclusion, however, overlooks the possibility that the increased supply of hours may itself have contributed, through a feedback effect, to wage stagnation.
Most work-family advocates in the U.S. focus on the need for family-friendly policies such as child-care, paid family leave and flexible scheduling that mitigate the effects of a seemingly immutable working time regime. "The challenge," though, Kornbluh has noted, "is to frame work-life balance as a broader political economy issue."
Historically, work-life balance was framed as a broader political economy issue in labor agitation for shorter working time. For nearly a century, from the 1860s to the 1950s, American labor unions also put forward the reduction of working time as their focal strategy for combating unemployment. After the Second World War, though, the unions' enthusiasm for shorter hours waned. Instead, the AFL-CIO primarily focused its efforts on urging government spending to foster economic growth and only sought shorter hours as a "last resort."
What changed between the 1930s and the 1960s was the acceptance of the idea that government spending could stimulate economic growth. Although popularly referred to as "Keynesianism," Keynes himself did not accept the idea that boundless expansion of production and consumption was worthwhile for its own sake. Instead, he specified working less as the "ultimate cure" for unemployment. The imperative for growth was a notion added by later economists.
Continued economic growth, fostered by government fiscal and monetary strategies, has led to an increase in effective demand for what Hirsch called positional goods. Competition for these socially or physically scarce or congested goods draws resources away from the output of final consumption goods and also exacts a personal cost in terms of time pressure. Individuals are compelled to spend more time in market activities and thus have less time to spend in non-commercial pursuits such as production for home consumption, leisure and sociability. "This has helped to upset a long-held expectation about the potential fruits of economic growth – namely, that they will be taken increasingly in the form of relief from material pursuits."
Rosnick and Weisbrot estimated that if European countries adopted the long working hours prevailing in the U.S., they would consume 25 percent more energy. Conversely, if the U.S. adopted working times closer to the European average, it would consume 20 percent less energy. Assuming that the intensity of greenhouse gas emissions per unit of GDP continues to decline at a rate consistent with the historical trend, economic growth averaging 2.5 percent annually would increase emissions by around 75 percent over the next 30 years. Meanwhile, poverty and unemployment will creep steadily upward. The alternative to continual economic growth and a resulting environmental and/or social catastrophe is to reduce the average hours of work for the bulk of the working population and increase employment opportunities for the unemployed and the underemployed.
Dean Baker has proposed government subsidies for shorter hours and vacation pay as part of the economic stimulus plan.
The government could give employers an incentive to provide paid time off now by giving tax breaks to cover all or most of the paid time off…There would undoubtedly be technical challenges to implementing a scheme such as that outlined by Baker. But there are challenges to implementing any stimulus package or policy reform.
This is a neat form of stimulus because it directly gives employers an incentive to hire more workers, as can be easily shown…
If employers of 50 million workers took up the deal, then this 6 percent would translate into 3 million jobs…
Wednesday, February 18, 2009
Does Eric Cantor Heart the Economic Consequences of Mr. Churchill?
Josh Marshall says he is a big Winston Churchill fan but doubts that Republican House Whip Eric Cantor knows much about Mr. Churchill’s political career. Josh makes this claim after reading this:
Should we remind both of them about a piece Lord Keynes wrote in 1925 entitled The Economic Consequences of Mr. Churchill? Churchill as Chancellor of the Exchequer had the British pound return to the gold standard after the First World War at too what turned out to be too high of a value. Keynes correctly predicted adverse economic consequences. British macroeconomic policy during this period also was the kind of macroeconomic mix the U.S. saw in the early Reagan years – tight money combined with tax cuts. The prices of British exports such as coal and textiles became uncompetitive on world markets leading to deflation and unemployment. As Keynes predicted, this strong pound policy also caused a trade deficit. The Reagan macroeconomic mix also created a fall in net exports, which contributed to the 1982 recession.
Churchill later recognized that the 1925 return to the gold standard was a mistake. One would think that U.S. Republicans would recognize that had we chose to repeat Herbert Hoover’s policies, we would be making an even greater economic mistake. But then Eric Cantor hearts Churchill’s leadership during this period. Go figure.
But Rep. Eric Cantor (Va.), the House minority whip who led the fight to deny Obama every GOP vote for the plan, is studying Winston Churchill's role leading the Tories in the late 1930s, a principled minority that was eventually catapulted into power over the Labor Party. He calls the stimulus bill "a stinker."
Should we remind both of them about a piece Lord Keynes wrote in 1925 entitled The Economic Consequences of Mr. Churchill? Churchill as Chancellor of the Exchequer had the British pound return to the gold standard after the First World War at too what turned out to be too high of a value. Keynes correctly predicted adverse economic consequences. British macroeconomic policy during this period also was the kind of macroeconomic mix the U.S. saw in the early Reagan years – tight money combined with tax cuts. The prices of British exports such as coal and textiles became uncompetitive on world markets leading to deflation and unemployment. As Keynes predicted, this strong pound policy also caused a trade deficit. The Reagan macroeconomic mix also created a fall in net exports, which contributed to the 1982 recession.
Churchill later recognized that the 1925 return to the gold standard was a mistake. One would think that U.S. Republicans would recognize that had we chose to repeat Herbert Hoover’s policies, we would be making an even greater economic mistake. But then Eric Cantor hearts Churchill’s leadership during this period. Go figure.
Tuesday, February 17, 2009
Happy Birthday, Dear Leader!
Yesterday was the 67th birthday of Kim Il Jong, the "Dear Leader" of the Democratic Peoples' Republic of (North) Korea.
In a column in today's Washington Post, the knowledgeable Selig Harrison reports on a trip he took about a month ago to Pyongyang, where met with top leaders and discussed possible options for deals on nuclear weapons. Apparently Kim did have a stroke last August, and while still participating a bit in decisions, is no longer running the government in any detail. The person on top effectivel now is his brother-in-law, Chang Soon Teak. Furthermore, the hardline National Defense Commission is on top, and Harrison was not allowed to meet with any of the "pragmatists" he has met in the past who favor a friendlier deal with the US and the rest of the world. Upshot is that they will not negotiate regarding the plutonium produced during the Bush years that is now "weaponized." They might negotiate on not producing any more, but there is a much harder line now in place there, unfortunately.
In a column in today's Washington Post, the knowledgeable Selig Harrison reports on a trip he took about a month ago to Pyongyang, where met with top leaders and discussed possible options for deals on nuclear weapons. Apparently Kim did have a stroke last August, and while still participating a bit in decisions, is no longer running the government in any detail. The person on top effectivel now is his brother-in-law, Chang Soon Teak. Furthermore, the hardline National Defense Commission is on top, and Harrison was not allowed to meet with any of the "pragmatists" he has met in the past who favor a friendlier deal with the US and the rest of the world. Upshot is that they will not negotiate regarding the plutonium produced during the Bush years that is now "weaponized." They might negotiate on not producing any more, but there is a much harder line now in place there, unfortunately.
China on the Buy American Provisions
AP reports on an editorial from the Xinhua News Agency:
I suspect that Robert Scott will find this claim that China is an advocate of free trade hard to shallow:
While Greg Mankiw wants to pretend that “China favors free trade, even if U.S. doesn’t”, one has to wonder if he also endorses the Chinese government’s policy of maintaining an undervalued yuan.
Update: Just in case someone reminds us that the exchange rate used to be 8.28 yuan per dollar and is now only 6.83 yuan per dollar, our graph shows this but it also shows that after this 17.5 percent exchange rate change, the exchange rate has not appreciably changed since July 2008. Just after the Presidential election, Bloomberg reported:
It would seem that government officials in both nations view the exchange rate as part of the overall trade policy stance.
Measures in a $789 billion U.S. stimulus package that favor American goods are a "poison" that will hurt efforts solve the financial crisis, an editorial by China's official news agency said. Provisions in the U.S. stimulus bill approved Friday favoring American steel, iron and manufactured goods for government projects are protectionist measures that could trigger trade disputes, said the editorial issued late Saturday by the Xinhua News Agency. "History and economics have told us, facing a global financial crisis, trade protectionism is not a solution, but a poison to the solution," the editorial said. U.S. labor groups that pushed hard for inclusion of the measures have argued that their main purpose is to ensure that U.S. Treasury dollars are used to the fullest extent to support domestic job creation. China has promised to avoid "Buy China" protectionist measures in its own multibillion-dollar stimulus effort, and appealed to other governments to support free trade.
I suspect that Robert Scott will find this claim that China is an advocate of free trade hard to shallow:
The growth of U.S. trade with China since China entered the World Trade Organization in 2001 has had a devastating effect on U.S. workers and the domestic economy ... A major cause of the rapidly growing U.S. trade deficit with China is currency manipulation. China has tightly pegged its currency to the dollar at a rate that encourages a large bilateral surplus with the United States. Maintaining this peg required the purchase of about $460 billion in U.S. treasury bills and other securities in 2007 alone. This intervention makes the yuan artificially cheap and provides an effective subsidy on Chinese exports. The best estimates place this effective subsidy at roughly 30%, even after recent appreciation in the yuan (Cline and Williamson 2008).
While Greg Mankiw wants to pretend that “China favors free trade, even if U.S. doesn’t”, one has to wonder if he also endorses the Chinese government’s policy of maintaining an undervalued yuan.
Update: Just in case someone reminds us that the exchange rate used to be 8.28 yuan per dollar and is now only 6.83 yuan per dollar, our graph shows this but it also shows that after this 17.5 percent exchange rate change, the exchange rate has not appreciably changed since July 2008. Just after the Presidential election, Bloomberg reported:
Barack Obama's calls for changes in China's yuan policy may put the president-elect on a collision course with the U.S.'s second-largest trade partner, which is holding the currency stable to support its export-led economy. Obama said China must stop manipulating the currency in a letter to the National Council of Textile Organizations released on Oct. 24. The People's Bank of China has kept the yuan almost unchanged against the dollar since mid-July as it shifts focus from countering inflation to sustaining growth amid a global credit crisis. The Foreign Ministry said last week the U.S. shouldn't blame its trade deficit on exchange rates.
It would seem that government officials in both nations view the exchange rate as part of the overall trade policy stance.
Reading Hicks (so Brad DeLong won't have to)
by the Sandwichman
In his diatribe against David Harvey, Brad DeLong invoked the authority of John R. Hicks more than once. "He (Harvey) doesn't understand Keynes, probably never read Hicks..."
And most tellingly,
Of course, the story is more complex than that, even, and for Pasinetti's full take on Hick's Conversion there is no substitute for reading the article, even if for no other reason than to relish Joan Robinson's acerbic remark that:
So much for "knowing more about Keynesian economics than Joan Robinson". DeLong thus cited as definitive a "little analytical toy" that the toy-maker himself repudiated and cherry picked quotes from a Joan Robinson who elsewhere disparaged the very toy that DeLong upheld as definitive. Sheesh.
I don't want to belabor 'uncle' J.R.'s culpability for "little analytical toys" and "simplifying assumptions" that made the neo-classical economist's work more excitingly elegant, remunerative and less relevant to the real world. But I do want to mention Hicks's assumption about the hours of work that has displaced an important argument from neo-classical economics that, if widely known, would decisively demonstrate the futility of the tautologies contemporary neo-classicals amuse themselves with -- Sydney Chapman's theory of the hours of labor. Think of it as the labor version of the Cambridge Capital Controversy.
As Chris Nyland wrote some twenty years ago, Chapman's theory essentially confirmed Marx's regarding the extensive and intensive dimensions of the hours of work. Sadly, with few exceptions, Marxists appear no more eager than neo-classicals to examine this theoretical convergence.
In his diatribe against David Harvey, Brad DeLong invoked the authority of John R. Hicks more than once. "He (Harvey) doesn't understand Keynes, probably never read Hicks..."
And most tellingly,
And it is at this point that we draw on neoclassical economics to save us--specifically, John Hicks (1937), "Mr. Keynes and the Classics," the fons et origo of the neoclassical synthesis. Hicks's IS curve gives us a menu of combinations of levels of production and interest rates at which private investment spending and public deficit spending are financed out of the flow of savings.Presenting the J.R. Hicks of "Mr. Keynes and the Classics" and his IS curve as the ultimate authority on Keynes is disingenuous. In the 1970s, Hicks himself repudiated his earlier formulation. But meanwhile its adoption by the US proponents of the "Keynesian neo-classical synthesis" could best be understood as an effort to inoculate economics against the more radical implications of Keynes's theory. A footnote from an essay by Luigi Pasinetti elaborates:
A simplified didactical tool, a mere device of exposition, had become so widespread as to become misleading -- too restrictive a tool for the purpose of accurately conveying Keynes's complex original message. Hicks kept on re-thinking his theory and slowly moving away from his original IS/LM formulation. In the late 1960s, early 1970s, he courageously took a break-away step. He strongly criticised, and actually, explicitly repudiated his successful little analytical toy. To stress his break-away, he went as far as declaring openly that he had ceased to be a neoclassical economist (in his words: "J.R. Hicks, [is] a 'neoclassical' economist now deceased..."). And in order to underline his change of mind, he even ceased to sign his articles by the name of J.R. Hicks and began to sign them by the name of John Hicks (in his words: "Clearly I need to change my name... John Hicks [is] a non-neoclassic who is quite disrespectful towards his 'uncle' [J.R.].
Of course, the story is more complex than that, even, and for Pasinetti's full take on Hick's Conversion there is no substitute for reading the article, even if for no other reason than to relish Joan Robinson's acerbic remark that:
John Hicks noticed the difference between the future and the past and became dissatisfied with the IS/LM but (presumably to save face for his predecessor, J.R.) he argued that Keynes's analysis was only half in time and half in equilibrium.
So much for "knowing more about Keynesian economics than Joan Robinson". DeLong thus cited as definitive a "little analytical toy" that the toy-maker himself repudiated and cherry picked quotes from a Joan Robinson who elsewhere disparaged the very toy that DeLong upheld as definitive. Sheesh.
I don't want to belabor 'uncle' J.R.'s culpability for "little analytical toys" and "simplifying assumptions" that made the neo-classical economist's work more excitingly elegant, remunerative and less relevant to the real world. But I do want to mention Hicks's assumption about the hours of work that has displaced an important argument from neo-classical economics that, if widely known, would decisively demonstrate the futility of the tautologies contemporary neo-classicals amuse themselves with -- Sydney Chapman's theory of the hours of labor. Think of it as the labor version of the Cambridge Capital Controversy.
As Chris Nyland wrote some twenty years ago, Chapman's theory essentially confirmed Marx's regarding the extensive and intensive dimensions of the hours of work. Sadly, with few exceptions, Marxists appear no more eager than neo-classicals to examine this theoretical convergence.
Monday, February 16, 2009
Capturing the Success of Non-traditional Monetary Policy: Are BAA Interest Rates a Good Metric?
While President Obama is about to sign a bill that provides significant fiscal stimulus for the ailing U.S. economy, most economists would likely argue that this is a necessary but not sufficient condition for restoring full employment. Ben Bernanke made the following observations on January 13, 2009:
The abrupt end of the credit boom has had widespread financial and economic ramifications. Financial institutions have seen their capital depleted by losses and writedowns and their balance sheets clogged by complex credit products and other illiquid assets of uncertain value. Rising credit risks and intense risk aversion have pushed credit spreads to unprecedented levels, and markets for securitized assets, except for mortgage securities with government guarantees, have shut down. Heightened systemic risks, falling asset values, and tightening credit have in turn taken a heavy toll on business and consumer confidence and precipitated a sharp slowing in global economic activity. The damage, in terms of lost output, lost jobs, and lost wealth, is already substantial.
We noted that the credit crunch is consistent with being in a liquidity trap as Paul Krugman also noted:
conventional monetary policy has lost effectiveness. Yes, there are other things the Fed could do — and it’s doing them, on an awesome scale. But they’re controversial, precisely because, unlike conventional monetary policy, they involve picking and choosing among potentially risky investments.
Bernanke also noted:
The Federal Reserve has responded aggressively to the crisis since its emergence in the summer of 2007 ... As indications of economic weakness proliferated, the Committee continued to respond, bringing down its target for the federal funds rate by a cumulative 325 basis points by the spring of 2008. In historical comparison, this policy response stands out as exceptionally rapid and proactive … Although the federal funds rate is now close to zero, the Federal Reserve retains a number of policy tools that can be deployed against the crisis ... Other than policies tied to current and expected future values of the overnight interest rate, the Federal Reserve has--and indeed, has been actively using--a range of policy tools to provide direct support to credit markets and thus to the broader economy. As I will elaborate, I find it useful to divide these tools into three groups. Although these sets of tools differ in important respects, they have one aspect in common: They all make use of the asset side of the Federal Reserve's balance sheet. That is, each involves the Fed's authorities to extend credit or purchase securities.
The chairman of the Federal Reserve went on to describing in some detail these non-traditional monetary policy tools. The fact that interest rates on short-term government debt fell from around 5 percent in early 2007 to near zero now – with longer-term rates falling from around 5 percent to around 3 percent at the end of 2008 is testimony that the Federal Reserve did all it could do using conventional monetary policy and yet interest rates on BAA rated corporate debt rose from just over 6 percent as of late 2006 to around 9.5 percent towards the end of October 2008. While the beginning of the recession preceded the enormous spike in interest rates on BAA rated corporate debt, the panic signals over the credit crunch were the result of the unprecedented surge in credit spreads towards the end of 2008.
The title of this post suggests that watching the BAA interest rate may be a decent proxy for the success of non-traditional monetary policy. It is a metric that can be followed on a daily basis and is readily understood. If the proximate problem is high credit spreads and if investment demand is sensitive to the BAA interest rate, then this metric should be closely related to the policy problem and how it gets transmitted to the real economy.
So if one accepts my premises that the BAA interest rate is a good metric for the success of non-traditional monetary policy – how are we doing? I would submit that we have seen some – but not nearly enough – success. After all, an interest rate of 7.9 percent is not as burdensome as an interest rate of 9.5 percent. However, these interest rates are still quite high.
An Important Question (that is never asked)
by the Sandwichman
Brad DeLong wrote: "The question of should Americans be working less, and why aren't we working less already, is an important one. It has nothing to do with whether the Obama stimulus is doomed to fail:"
I disagree. Harvey's argument is not that there is a technical imposibility to a stimulus that worked (the Treasury view) but that there are political obstacles to implementing a stimulus that is large enough and appropriately targeted. My claim is that one of the political obstacles to the appropriate targeting of a stimulus is the systematic exclusion of one of the three "ingredients of a cure" prescribed by Keynes.
Keynes was very explicit. He viewed investment as first aid. He viewed work time reduction as the ultimate solution. But political Keynesianism over the past 60 years has applied first aid over and over again and has systematically excluded Keynes's ultimate solution. Now if Brad thinks Keynes was wrong, that's another matter. Show why. But you can't just assert that it has "nothing to do with whether the Obama stimulus is doomed to fail". In medicine, you don't keep applying first aid over and over and never address the fundamental problem. Is it not the same in economics?
Brad DeLong wrote: "The question of should Americans be working less, and why aren't we working less already, is an important one. It has nothing to do with whether the Obama stimulus is doomed to fail:"
I disagree. Harvey's argument is not that there is a technical imposibility to a stimulus that worked (the Treasury view) but that there are political obstacles to implementing a stimulus that is large enough and appropriately targeted. My claim is that one of the political obstacles to the appropriate targeting of a stimulus is the systematic exclusion of one of the three "ingredients of a cure" prescribed by Keynes.
Keynes was very explicit. He viewed investment as first aid. He viewed work time reduction as the ultimate solution. But political Keynesianism over the past 60 years has applied first aid over and over again and has systematically excluded Keynes's ultimate solution. Now if Brad thinks Keynes was wrong, that's another matter. Show why. But you can't just assert that it has "nothing to do with whether the Obama stimulus is doomed to fail". In medicine, you don't keep applying first aid over and over and never address the fundamental problem. Is it not the same in economics?
David Harvey vs. Brad DeLong Dustup!
In a post that Andrew Jackson, social and economic policy director of the Canadian Labour Congress, calls "absolutely brilliant and compelling," David Harvey argues that the stimulus package is bound to fail. On the one hand, the current package is not big enough and on the other hand, the US can't finance a big enough stimulus package because of its recent debt history. Brad DeLong calls Harvey's argument "intellectual masturbation." To which Harvey responds, lamenting the arrogance of neoclassical economists.
And now, the Sandwichman jumps into the fray with his two cents worth...
A distinction needs to be made between “Keynesianism” (even Harvey’s “strong”, “true” or “full-fledged” Keynesianism) and what Keynes actually thought about economic stimulus and full employment.
Keynes viewed government investment in infrastructure as “only one particular application of an intellectual theorem”. The other two were consumption and reduction of the hours of work. We hear about the first two applications, consumption and investment, incessantly but it was the third strategy, working less, that Keynes pronounced the “ultimate solution” to full employment. See his 1943 Treasury Department memorandum on “The Long Term Problem of Full Employment” and his 1945 letter to the poet, T.S. Eliot.
Keynes was concerned with full employment, not with economic growth. It was his successors who shifted the emphasis from the one to the other. They did so, I would argue, to suit their mathematical models more than anything. Be that as it may, in the 1970s Fred Hirsch showed how economic growth drained resources from both non-market activities and even from final consumption goods. Increased competition for scarce positional goods diverted resources into intermediate goods.
There remains a taboo against talking about work-time reduction as a possible response to the crisis. Dean Baker (he who ‘called’ the housing bubble in 2002) wrote a pair of op-ed pieces a few weeks ago in the Guardian and the New York Daily News calling for tax breaks for work time reduction. I have seen no uptake of Dean’s suggestion from the stable of liberal Keynesian economists — Krugman, et. al.
And now, the Sandwichman jumps into the fray with his two cents worth...
A distinction needs to be made between “Keynesianism” (even Harvey’s “strong”, “true” or “full-fledged” Keynesianism) and what Keynes actually thought about economic stimulus and full employment.
Keynes viewed government investment in infrastructure as “only one particular application of an intellectual theorem”. The other two were consumption and reduction of the hours of work. We hear about the first two applications, consumption and investment, incessantly but it was the third strategy, working less, that Keynes pronounced the “ultimate solution” to full employment. See his 1943 Treasury Department memorandum on “The Long Term Problem of Full Employment” and his 1945 letter to the poet, T.S. Eliot.
Keynes was concerned with full employment, not with economic growth. It was his successors who shifted the emphasis from the one to the other. They did so, I would argue, to suit their mathematical models more than anything. Be that as it may, in the 1970s Fred Hirsch showed how economic growth drained resources from both non-market activities and even from final consumption goods. Increased competition for scarce positional goods diverted resources into intermediate goods.
There remains a taboo against talking about work-time reduction as a possible response to the crisis. Dean Baker (he who ‘called’ the housing bubble in 2002) wrote a pair of op-ed pieces a few weeks ago in the Guardian and the New York Daily News calling for tax breaks for work time reduction. I have seen no uptake of Dean’s suggestion from the stable of liberal Keynesian economists — Krugman, et. al.
Sunday, February 15, 2009
The Proposition That the GOP Cares About the Burden of the Debt is Bogus
Mark Thoma listened to John McCain so we did not have to:
Mark does a nice job of noting why this rhetoric is misplaced. Jeff Frankel has a related and interesting post noting that while the fiscal stimulus may not be enough to get us back to full employment, it may raise danger signals in international financial markets:
While Jeff is correct about the hypocrisy of the modern Republican Party, I think he could have gone further. Not only did these Republicans support the Bush43 increase in the debt to GDP ratio, they still praise the fiscal policies of the Reagan-Bush41 era, a period when the debt to GDP ratio doubled.
I would also beg to differ that a transitional period where the debt to GDP ratio rose as a result of a short-term fiscal stimulus that was necessary to avoid a major recession will lead to fiscal ruin. We have seen much larger increases in the debt to GDP ratio before without fiscal ruin but as Robert Barro noted in his On the Determination of the Public Debt (Journal of Political Economy, 1979), U.S. policymakers before the advent of the modern Republican Party was committed to retiring public debt over time.
In 1993, the Clinton Administration passed a deficit reduction package that included tax increases. Unfortunately – he got even less support from Senate and Congressional Republicans than President Obama received for the legislation he is about to sign. David Waldman reminds of the incredibly petty and stupid things said by Republican Congressional leaders in 1993. These leaders did not care about fiscal responsibility back then and their newly found devotion to fiscal austerity today sounds insincere. But as Barro’s 1979 paper suggests – we eventually need to get back to the pre-Reagan fiscal stance of using fiscal stimulus only during times of recessions or other national emergencies. We will not get there unless the Republican Party changes its ways or disappears as a force in American politics.
I saw Senator McCain on CNN talking about how the stimulus package is, essentially, reaching into the pockets of future generations and transferring their wealth to the present generation.
Mark does a nice job of noting why this rhetoric is misplaced. Jeff Frankel has a related and interesting post noting that while the fiscal stimulus may not be enough to get us back to full employment, it may raise danger signals in international financial markets:
The 2009 fiscal-year deficit is already expected to exceed $1.2 trillion, so we are talking about deficits thereafter that could surpass 10 per cent of GDP. This is far above the levels that are considered danger signals when they come from any other country. Until now, the US has not been “any other country;” The rest of the world has been willing to finance American profligacy cheerfully. But there have already been signs in the last few weeks that the prospect of this much Treasury debt coming onto the markets is already beginning to push bond prices down and long-term interest rates up. My feeling is that if the current stimulus package were to break the $1 trillion mark, it might truly alarm international financial investors, who would in that case stop acquiring dollar assets, thus precipitating the hard landing of the dollar that so many of us have feared for so long. In those circumstances, the Fed would lose the ability to keep interest rates low, and we could be in even worse trouble than today. Everything would be different if we had spent the last 8 years preserving the budget surpluses that Bill Clinton bequeathed to George Bush. Then we would have paid down a big share of the national debt by now, instead of doubling it. We would be in a strong enough fiscal position to undertake the expansion today that we really need. In that light it is ironic, to say the least, that the politicians who are warning against the size of the stimulus bill (”generational theft”), particularly the Congressmen who are voting against it, are mostly the same Republicans who supported the original fiscal policies that gave us the doubling of the national debt: the huge long-term tax cuts of 2001 and 2003 and the greatly accelerated rate of government spending. What we need now is a fiscal policy that maximizes short-run demand stimulus relative to long-run damage to the national debt. Lots of bang for the buck. The Republicans supported fiscal policies that did the opposite. Lots of buck for the bang.
While Jeff is correct about the hypocrisy of the modern Republican Party, I think he could have gone further. Not only did these Republicans support the Bush43 increase in the debt to GDP ratio, they still praise the fiscal policies of the Reagan-Bush41 era, a period when the debt to GDP ratio doubled.
I would also beg to differ that a transitional period where the debt to GDP ratio rose as a result of a short-term fiscal stimulus that was necessary to avoid a major recession will lead to fiscal ruin. We have seen much larger increases in the debt to GDP ratio before without fiscal ruin but as Robert Barro noted in his On the Determination of the Public Debt (Journal of Political Economy, 1979), U.S. policymakers before the advent of the modern Republican Party was committed to retiring public debt over time.
In 1993, the Clinton Administration passed a deficit reduction package that included tax increases. Unfortunately – he got even less support from Senate and Congressional Republicans than President Obama received for the legislation he is about to sign. David Waldman reminds of the incredibly petty and stupid things said by Republican Congressional leaders in 1993. These leaders did not care about fiscal responsibility back then and their newly found devotion to fiscal austerity today sounds insincere. But as Barro’s 1979 paper suggests – we eventually need to get back to the pre-Reagan fiscal stance of using fiscal stimulus only during times of recessions or other national emergencies. We will not get there unless the Republican Party changes its ways or disappears as a force in American politics.
Nassim Nicholas Taleb and I Make Peace
I finally received an email reply from Nassim Nicholas Taleb. He wrote, "you are off the hook" I checked, and the innaccurate (and insulting) material that he had on his website about me has been removed. I thank him for reconsidering the matter and correcting the situation. While I have been critical of him on several counts, I am largely in agreement with his analysis of the current situation and the broader problem of "black swans," or to use the more conventional terminology of Keynes and Knight, fundamental uncertainty. I also repeat that his books contain much interesting information and are fun to read.
Regarding barbell investment strategies, there is no single one that necessarily will do well all the time, and Taleb has stated that. He has indeed more fundamentally made the point that we all must keep this profound degree of uncertainty in mind. I also remind that there are many different forms that barbell strategies can take, and that one might be doing well even as others might not be doing well. In any case, I welcome an end to this feud that probably should never have occurred in the first place.
Regarding barbell investment strategies, there is no single one that necessarily will do well all the time, and Taleb has stated that. He has indeed more fundamentally made the point that we all must keep this profound degree of uncertainty in mind. I also remind that there are many different forms that barbell strategies can take, and that one might be doing well even as others might not be doing well. In any case, I welcome an end to this feud that probably should never have occurred in the first place.
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