Leftist Econophysics

There is a branch of econophysics that has attracted serious attention from some Marxist and other leftist economists. This is the series of studies of income and wealth distributions. Traditionally income has been thought to reflect lognormal distributions, which can arise endogenously from random processes from an initially equal distribution. In fact, labor income appears to follow such a pattern. However, wealth appears to follow the power law distributions of financial asset returns, unsurprisingly, that have fatter tails than lognormal distributions, that is, greater inquality with more people far off into the upper end of the distribution. Econophysics studies of this began around a decade ago, appearing in places like Physica A and European Physical Journal B by people like Levy and Solomon and also Dragulescu and Yakovenko, although John Angle showed some of the things in the early 1990s in the Journal of Mathematical Sociology.

Then it was figured out by people like Yakovenko and some others that income distribution looks lognormal for most of its lower portion, where it is determined by labor outcomes, but that its upper portion looks more like a more unequal power law, a la wealth and financial market returns. The class nature of this then began attracting the attention of some leftist economists such as Allin Cottrill and Paul Cockshott, who have now coauthored a book, Classical Econophysics, with Gregory John Michaelson, Ian P. Wright, and Victor Yakovenko. More of these studies, some done by economists such as Mauro Gallegati and some of his coauthors, including some physicists, have appeared in the 2005 book, Econophysics of Wealth Distributions, ed. by Chatterjee, Yagarladda, and Chakrabarti, Milan: Springer.

Outside of the Vortex

Parts of Australia are experiencing unprecedented changes in temperature and rainfall patterns. These changes are associated with an unexpected phenomenon emerging in the Indian Ocean and also in the behaviour of the Antarctic Vortex combined with steadily increasing temperatures from rising greenhouse gases and the depletion of the ozone layer. Observed together they suggest the very strong possibility that Australians are now facing abrupt climate change.[1] This is bringing very prolonged drought and extraordinary heat to the most heavily peopled and treed (mostly Eucalypt) regions of the country. As if this prospect is not frightening enough, it can be seen that climate is not the only threshold that is being crossed. The flashpoint for eucalypt vapour is also being breached by high daytime temperatures. This appears to guarantee the setting off of huge fire infernos in these semi-urban ‘forests’ on a scale that many would simply not be able to imagine.

Southeast Australia has been suffering from a drought over the last 15 years that is of an intensity that has not (as far as we are aware) been experienced before. This has left the landscape very dry. Climatologist Caroline Ummenhofer, a research fellow with the University of New South Wales says that “normally drought conditions over eastern Australia are associated with El Nino, La Nina cycles in the Pacific Ocean (temperature changes that affect the rainfall and circulation over the whole Pacific Ocean and the surrounding areas).” [2]

However, “El Nino is not able to explain this latest drought” says Ummenhofer. “Instead what we found is actually that the cause lies in Indian Ocean temperatures.” “The Indian Ocean has a similar phenomenon to the El Nino, La Nina cycle. It's called the Indian Ocean Dipole, and it's a naturally occurring phenomenon and has been known for some time to influence Australian climate and Australian weather. The dipole oscillates between positive and negative phases and has neutral years in between as well, so the negative and the positive are the two extremes. And the normal wet conditions that you experience over south-east Australia are linked to the negative Indian Ocean dipole event which we haven't seen over the last seventeen years…..the last India Ocean Dipole event of the negative phase occurred in 1992. That is unusual. We haven't anywhere in the record over the last 120 years that we've investigated seen a similarly prolonged period without a single negative event”

Ummenhofer observes that most of the world’s oceans are getting warmer, but particularly the Indian Ocean. “There might be indications that this could lead to changes in the characteristics of Indian Ocean dipole events.” [3]

The Antarctic Vortex near the South Pole is, like its equivalent in the Arctic pole region, a persistent, large-scale cyclone in the middle and upper troposphere and the stratosphere. Polar vortexes are most powerful in the hemisphere's winter, when the temperature gradient is steepest, and diminishes or can disappear in the summer. [4]

The Intergovernmental Panel on Climate Change Third Assessment Report incorporated a chapter [5] on ‘radiative forcing’[6] which noted “several … anthropogenic [man-made] causes for global climate change” These factors, that could be interacting with each other, including rising concentrations of greenhouse gases, the effects of man-made particulates in the atmosphere, and ozone depletion in the stratosphere.

The IPCC noted that scientific studies on these ‘forcings’ observed that the radiative effects of aerosols circulating in the atmosphere, whilst being largely confined to the Northern Hemisphere, may “propagate into the Southern Hemisphere via atmospheric dynamics”. In addition to this, the polar vortex in both the north and south hemispheres were strengthened and the westerly winds in the mid latitudes were contracting and thus moving closer to the poles. These changes, the report noted, may be arising from the rising greenhouse gas concentrations as well as from ozone depletion in the stratosphere.

The implications behind the fact that the westerly winds are moving closer to Antarctica are quite frightening for Australians. “it appears the vortex is shifting gear, and is spinning faster and faster, and getting tighter. As it does it’s pulling the climate bands further south dragging rain away from the continent out into the southern ocean.” [7]. In short, it means that Australia’s unprecedented and horrific drought may not go away!

Climate (like other complex systems) does not behave in a simple linear fashion. That is, simple linear extrapolation is not always possible. Sudden changes in a regime (such as rainfall) can occur over wide areas. This is what’s happened over Australia, even before the 1992 Indian Ocean dipole shift and the contraction of the southern vortex. Around 1945 Australia’s summer half-year rainfall increased over large areas in the eastern part of the continent. However, in 1967-72 there was a sudden decrease in rainfall in south-west of Western Australia which has not reversed since. [8] “Now the same thing is happening to Melbourne.” In 2003 rainfall there had fallen by nearly 20% in the previous 7 years. [7] This dangerous pattern has continued and, at present, almost every mainland capital city is on increasingly severe water restrictions.

Similar examples of sudden changes in system behaviour often arise from an element of the system reaching a limit or threshold at which instability sets in, and the system moves into a new stable state. When the system is close to a threshold even quite small random events or trends can force the system into a different state. Distance from a threshold of this sort is a measure of system resilience or ability to cope with small variations in conditions (Scheffer et al., 2001). [9]

So, indeed it does look like Australia is going through abrupt and dangerous climate change right now.

One very important question comes immediately to mind. How resilient is Australia’s society and infrastructure now? Are they ready to deal with the biggest challenge in the nation’s history? After the most horrific fires ever recorded? After 15 years of intense heat and drought?

What other thresholds, apart from climate-related ones, are Australians dealing with? One critical and almost entirely overlooked threshold is the flashpoint for eucalyptus oil. “The flash point of a flammable liquid is the lowest temperature at which there can be enough flammable vapour to ignite, when an ignition source is applied.” [10] The ‘flash point’for the vapours that rise from Australia’s ubiquitous native trees is a mere 49 degrees Celsius. On Black Saturday this year [11] the temperatures, in the shade, were around 47 degrees Celsius. In the full sun, however, temperatures are about 5-6 Celsius degrees hotter!

Another threshold associated with industrial tree plantations is the level of fuel loads that are amenable to control by our fire departments. The Canberra fire chief reported, soon after that city’s plantation fires encroached and burnt out hundreds of houses in this urban environment, that the fuel load in tree plantations 3-7 years of age was the limit reached before the fires could be brought under control. [12]

Those individuals living in southern Australia have every reason – whether they know it or not - to feel horrified by their prospects for next summer and for many summers after that. After all, “the past decade has recorded the largest expansion ever in [Eucalypt niten and Radiata pine tree] plantation cover in this country” with an average annual planting of 76,000 hectares per year since 1997. [13],[14]. “The majority…is concentrated along the southern and eastern coasts, Tasmania and Western Australia.” [15].

Up until ‘Black Saturday’ Australians had been lulled into a false sense of security. Many families had no knowledge of the need for fire plans or of local geography as “ the hottest day on record on top of the driest start to a year on record on top of the longest driest drought on record on top of the hottest drought on record” approached. [16] Residents are largely oblivious to the enormous hazards the intense and ubiquitous plantings of Eucalypt and Radiata pine monocultures pose to their safety. Residents of the burnt out Victorian township of Marysville saw “what looked like an atomic bomb”[17] coming over the top of the town but had no idea as to the nature of its genesis.

But the truth is that the Black Saturday fires entailed the convergence of two huge fire balls that erupted in a tree plantation estate at East Kilmore and joined with another fire front that appeared to begin at a timber mill in the Murrindindi complex of heavily logged native forest and extensive industrial tree plantations further east [18] [19]. “A two-kilometre stretch of power line in Kilmore East … snapped during strong winds and record heat about 11am last Saturday [7th February 2009]. Within minutes a nearby pine forest was ablaze. Within six hours the fire had destroyed nearly every building in the towns in its path….”[20] . Around 4pm the Victorian Country Fire Authority (CFA) had advised the public that “the fire [was] gaining strength as it head[ed] towards pine plantations near Wandong” [21]where a large bluegum plantation lay within a kilometer of the town. [22] Within 12 hours an ominous line of closely spaced fire fronts stretched all the way from very large East Kilmore/Murrindindi merged inferno through the Bunyip State Forest down to Druoin and Warragul; to within approximately 40 kilometres of the other very large fire complexes around Churchill. The Churchill fire, in turn, began one kilometre south-east of the town in a pine plantation. The flames, out of control, spread rapidly, threatening communities in Hazelwood South and the Jeeralangs. Traralgon South, Callignee, Woodside, Yarram, Carrjung, Gormandale and many more communities came under threat….”[23].

“We have seen the future” says Clive Hamilton. [24]. Some people ask whether Australians will continue to survive living within our tall Eucalypt forest digs. Perhaps the real forests will survive, though the trees may change; become stunted and sparse. With a few more fires the ugly industrial tree plantations will surely disappear. The surviving human residents will learn from the wombat and go underground.

[1] “…A working definition of 'abrupt climate change' is given in Alley et al. (2002): ‘technically, an abrupt climate change occurs when the climate system is forced to cross some threshold, triggering a transition to a new state at a rate determined by the climate system itself and faster than the cause’.

From: IPCC, AR4, WGI, Chapter 10 Global Climate Projections, Future Abrupt Climate Change, ‘Climate Surprises’, and Irreversible Changes.
As quoted in:
Abrupt Climate Change
http://www.global-greenhouse-warming.com/abrupt-climate-change.html

[2] The El Nino Southern Oscillation (ENSO) is a particular pattern of disruption in the interaction between the ocean and the atmosphere that occurs every two to seven years when strong westward-blowing trade winds over the Pacific ocean subside and warm western Pacific water slowly moves back eastward. The upwelling of the cool, nutrient rich, eastern Pacific water (that supports large fish populations) is interrupted. When this happens fish die and climatic changes kick in that affect many parts of the planet. The possible interrelationship between El Nino and the simultaneous droughts on the Australian and other continents was first realized in 1972-73. See:
El Niño - Southern Oscillation (ENSO). Learning Module.
http://ess.geology.ufl.edu/usra_esse/el_nino.html

[3] Behind the big dry
Air Date: Week of February 13, 2009
http://www.loe.org/shows/segments.htm?programID=09-P13-00007&segmentID=1

[4] Polar vortex
From Wikipedia, accessed on 12th March 2009
http://en.wikipedia.org/wiki/Polar_vortex

[5] Houghton et al., 2001, Chapter 6. IPCC Third Assessment Report.

[6] “In climate science, radiative forcing is (loosely) defined as the change in net irradiance at the tropopause. "Net irradiance" is the difference between the incoming radiation energy and the outgoing radiation energy in a given climate system and is thus measured in Watts per square meter. The change is computed based on "unperturbed" values, as defined by the Intergovernmental Panel on Climate Change (IPCC) as the measured difference relative to the year 1750, the defined starting point of the industrial era. A positive forcing (more incoming energy) tends to warm the system, while a negative forcing (more outgoing energy) tends to cool it. Possible sources of radiative forcing are changes in insolation (incident solar radiation), or the effects of variations in the amount of radiatively active gases and aerosols present. Because the IPCC regularly assesses the radiative forcing, it also has a more specific technical definition - see "IPCC usage" section….”
Radiative forcing
From Wikipedia. Accessed on 18th March 2009
http://en.wikipedia.org/wiki/Radiative_forcing

[7] Drought Vortex
18th September 2003
* Reporter: Karina Kelly * Producer: Andrew Holland * Researcher: Mark Horstman
http://www.abc.net.au/catalyst/stories/s948858.htm

[7] Drought Vortex
18th September 2003
* Reporter: Karina Kelly * Producer: Andrew Holland * Researcher: Mark Horstman
http://www.abc.net.au/catalyst/stories/s948858.htm

[8] (e.g., Deacon, 1953; Kraus, 1954; Gentilli, 1971; Pittock, 1975; Allan and Haylock, 1993). As quoted in ‘Climate Change: An Australian Guide to the Science and Potential Impacts’ Edited by Barrie Pittock. 2003. http://www.climatechange.gov.au/science/guide/pubs/science-guide.pdf

[9] ‘Climate Change: An Australian Guide to the Science and Potential Impacts’ Edited by Barrie Pittock. 2003. http://www.climatechange.gov.au/science/guide/pubs/science-guide.pdf

[10] What is the difference between <>& <> of a material ?
http://answers.yahoo.com/question/index?qid=20070508041915AAXk4XT

[11] Black Saturday: the day the worst bushfires in Australian recorded history broke out was on 7th February 2009.

[12] Interview ABC TV: ‘7:30 Report. Kerry O’Brien and Phil Koperberg, NSW Fire Chief. After the Canberra Megafire and its later inquiry, it was reported that to have any hope of ‘managing’ such a fire, fuel build up would need to be as low as 4-5 tonnes per hectare or less. This degree of fuel loading is apparently reached in plantations by 3-7 years.


[13] “The major funding channel funding the elevated planting program is via managed investment schemes” (MIS) which is a widely unpopular financial lurk comprised of billions of dollars of taxpayer subsidies, exemption from land planning and environmental laws. Exemption from landtax, lower local rates payments and extraordinary grants, taxpayer funded infrastructure and other extraordinary subsidies. All for a handful of chosen private corporations. See, for instance:
(i) The MIS anomaly is in land tax law’ by John Lawrence. Tas Country. Page 12. 16th January 2009. [John Lawrence is an economist working as an accountant in public practice.]
(ii) “The Weekly Times asked the tax office in the past why it allowed MIS companies to charge more than $9000 a hectare to establish blue gum plantations, when it cost the non-MIS sector $3000/ha...”

End MIS Excesses of the Past
January 7, 2009
http://www.weeklytimesnow.com.au/article/2009/01/07/39675_opinion-news.html
(iii) MIS raises hackles by Matilda Abey. January 9, 2009
http://www.weeklytimesnow.com.au/article/2009/01/09/39711_latest-news.html

(iv) for a more complete list see the archives of the Tasmanian Times: www.tasmaniantimes.com

[14] “The schemes raised more than $1.01 billion in 2004-5 [alone] despite wide spread drought conditions.”
Growing the Forestry Enterprise in Australia
Gary Bacon, Centre for Forestry and Horticultural Research, Griffith University. 18th April 2007
http://www.forestry.org.au/pdf/pdf-public/conference2007/papers/Bacon%20paper%20april%2018.pdf

[15] Australian forest plantations – a review of ‘Plantations for Australia: the 2020 vision’. Rural and Regional Affairs and Transport Reference Committee. Senate Committee Report. Page 5. September 2004.

[16] http://bravenewclimate.com/2009/02/10/heatwave-update-and-open-letter-to-the-pm/
the heatwave in Australia on 7th February 2009:
http://bravenewclimate.files.wordpress.com/2009/02/heatwavemap.jpg

[17] ‘Blithe Oblivion’ by Kate Legge. The Weekend Australian Magazine. 7-8th March 2009. Page 20.

[18] Kilmore East Murrindindi Complex fire map. 3rd March 2009

http://www.myenvironment.net.au/index.php/me/content/download/1316/7713/file/media_map_kilmoreEast_murrindindi_20090303_0421_a4.pdf

[19] Fire/land tenure map of the Murrindindi fire that burnt through Marysville overlaid onto the latest NASA satellite Infrared Image.25/02/2009 8:46 am
http://www.myenvironment.net.au/index.php/me/resources/bush_fire/research/fire_land_tenure_map_of_the_murrindindi_fire_that_burnt_through_marysville_overlaid_onto_the_latest_nasa_satellite_infrared_image

[20] Huge fire class action launched
* Cameron Houston and Michael Bachelard
· February 15, 2009
| http://www.theage.com.au/national/huge-fire-class-action-launched-20090214-87pg.html?page=-1

[21] Townships under ember attack as fires rage
ABC - February 7, 2009, 4:18 pm
http://au.news.yahoo.com/a/-/mp/5306005/townships-ember-attack-fires-rage/

[22] Bluegums within a 1 km of Wandong.
Google Earth Image Circa April 2005 of Midway Wandong Plantations. Sunday Creek, Pine Creek and Dry Creek catchments.
http://www.baddevelopers.green.net.au/Docs/Midway3Wandong.htm

[23] Churchill and District News. February 2007
http://www.cdnews.com.au/

[24] Bushfires: Don’t mention the c word. Clive Hamilton
http://www.crikey.com.au/Politics/20090209-Dont-talk-about-the-warming-.html

WaPo Still Hoping to Mess With Social Security

Fred Hiatt is the editorial page editor of the Washington Post. In the March 16 issue he actually has a signed column praising the Obama approach to transportation policy. In the midst of this he also writes, "maybe we can hope for reform of social security and health care too." While we need reform of health care, we do not need it for social security, and the WaPo editorial page, and just about all its regular columnists, have been among the most consistent trumpeters of the "social security is in crisis!" baloney that just persists and persists in Washington, with them also pushing the theme of "entitlements crisis," viewing social security as in the same league as health care.

Fortunately, after worries that Obama was buying into this baloney with his "Entitlements Summit," it increasingly appears that he is reverting to his campaign position of not wanting to do anything to social security, or at least not wanting to do anything to the benefits side, with the key player on this being probably Peter Orszag, OMB Chief, who has made it clear that the real problem is indeed health care. As for social security, what I have said umpteen gazillion times still holds: it ain't broke and it don't need no fixin'.

Physics and Economics

Jim Devine posted an article on Benoit Mandelbrot on my pen-l list condemning economists' appropriation of physics. I covered some of the humorous history of the economists' machinations at becoming physics like in The Invisible Handcuffs. You will especially appreciate the exchange between Macleod and James Clerk Maxwell.

Mandelbrot:

http://www.sciam.com/blog/60-second-science/post.cfm?id=benoit-mandelbrot-and-the-wildness-2009-03-13

The extract from my book:

http://michaelperelman.wordpress.com/2009/03/16/physics-and-economics/

Obama Budget: Mankiw Rehashes Old Spin

Greg Mankiw calls President Obama a deficit dove who loves to spend. Mankiw also accuses the White House of economic optimism:

they expect their policies to bring the recession to a swift conclusion. For the next four years, they forecast an average growth rate of 4 percent. The unemployment rate is projected to fall to 5.2 percent in 2013.Not everyone is so sanguine. The administration forecast is “way too optimistic,” said Nariman Behravesh, chief economist at IHS Global Insight and author of the excellent primer “Spin-Free Economics.”

OK – if one expects the recession to be deeper and more prolonged than the White House, why would one be upset that the White House is pursuing fiscal stimulus? Mankiw’s economic pessimism and his call for a more deficit hawk position strikes me as inconsistent.

Mankiw also repeats this line:

In a second term for Mr. Obama, with the economy recovered and unemployment stabilized at 5 percent, federal outlays would be 22.2 percent of G.D.P. — well above the average of 20.2 percent over the last 50 years.

Didn’t we already address this claim with:

A New Era of Responsibility - Renewing America’s Promise does show that the projected Federal outlay to GDP ratio for 2019 under President Obama’s proposed changed in the budget will be 22.6% as Greg claims but what Greg did not tell us is that the baseline budget projected Federal outlays to be 23.2% of GDP by 2019.

Update: The deficit hawks at the Concord Coalition does not agree with Mankiw’s deficit dove characterization:

A further complication is that many of the budget’s main components are linked in an effort to control the net effect on the deficit. Maintaining this linkage is critical for fiscal responsibility. However, it will prove to be a formidable political hurtle because it challenges the free lunch mentality that has taken root in Washington. New initiatives, popular with many Congressional leaders, are paired with tax increases and spending cuts that are not as popular ... Nothing in the budget directly alters the drift toward fiscal unsustainability, which is primarily driven by the projected growth of the three largest entitlement programs -- Medicare, Medicaid and Social Security. Under the budget, spending on these programs declines by just $32 billion relative to baseline assumptions through 2019 ... As the president acknowledges, any effort to permanently improve the fiscal outlook beyond the 10-year budget window will require more fundamentally addressing the structural causes of the long-term imbalance -- demographic changes and rising health care costs. While there is plenty of room to debate the priorities, assumptions, and details, it cannot be said that the Obama administration has taken a timid approach in its first budget. It confronts a broad array of challenges and does not pretend that we can have something for nothing.

While the Concord Coalition goes onto to note several factors that might work against President’s goal of long-term fiscal restraint, it is much more informative and balanced than Mankiw’s spin.

Grasping Reality with Both Hands Bound to the Standard Model

by the Sandwichman

Brad DeLong meanders out to the edge of the abyss of knowing but at the last minute pulls back in horror, clutching his standard model teddy bear to his breast...

The 1929-1950 period saw the last sharp decline in the American workweek--a decline that does not mean that the economy was depressed and performing poorly in 1959 or 1949 (or 1939) relative to 1929, but instead that Americans had decided to take a substantial part of their increased technological wealth and use it to buy increased leisure.

Can you say A-N-A-C-H-R-O-N-I-S-M? The 1929-1950 period did indeed see the last sharp decline in the American workweek. But in what sense did Americans choose to buy increased leisure? They were, first of all, compelled by hardship to reduce their hours of work. They only chose shorter hours through work-sharing as an alternative to even greater unemployment. Secondly, Americans chose to legislatively impose shorter hours through the Fair Labor Standards Act. And if it wasn't for the strident objection of business they would have chosen the even shorter 30-hour workweek of the Black Connery bill. But the income/leisure choice standard model that Brad invokes doesn't approve of the imposition of shorter hours by legislation.

A second anomaly in Brad's historical interpretation that Americans decided to take increased wealth as leisure is that this choice mysteriously stopped occurring after the 1950s even though wealth continued to increase vigorously. Funny (peculiar) Americans somehow choose to take more of their "increased wealth" as leisure precisely at the time their wealth is decreasing precipitously and then choose not to take it as leisure when their wealth is actually increasing.

Wait a minute! Did I say Americans chose to take their increased wealth as leisure when their wealth was actually decreasing? But the standard model says... Can somebody help me out here? If wealth is decreasing, in what sense is it "increasing"? Brad?

"...Americans had decided to take a substantial part of their increased technological wealth and use it to buy increased leisure..."

I'm sure the math explains it double-plus good, though.

I do agree with Brad, however, that the sharp decline in the workweek, 1929-1950 was a good thing, at least in retrospect. Sometimes bad circumstances can impose necessities that turn out to be blessings. In this case, I would like to see an economist take on the proposition that the sharp decline in the workweek during the 1929-1950 period established a strong foundation upon which the post-war economy was built. I would love to see Brad DeLong or Paul Krugman take it on.

That hypothesis, by the way, is consistent with Keynes's view of the long-term problem of full employment and with Chapman's theory of the hours of labour.

If a sharp decline in the workweek can be (part of) the foundation of one exceptional period of prosperity, who is to say that another sharp decline in the workweek couldn't be part of the solution to the current crisis? For example, see Dean Baker's proposal for work time reduction as stimulus.

Please discuss.

Nice Blogs

Blogroll has been updated and expanded. If you have suggestions for good BLOGS with a concentration on economics, post them in the comments. They don't have to be on the left.

X-Efficiency and Economic Dogma

I just added a draft -- quickly composed today -- of section to put in my new book. It will go into a section showing the lengths to which economists would go to avoid dealing with work, workers, and working conditions. This is one of the episodes where economists risked dealing with the subject. Any comments would be very much appreciated.

Thank you very much

I cannot load pdf files here. Maybe someone can figure out how I can do so. I have to point you to another site.

http://michaelperelman.wordpress.com/2009/03/14/x-efficiency-and-economic-dogma/

The Evil Asians and their Savings Glut

Alan Greenspan has a self-serving piece in the Wall Street Journal.

Those evil Asians with their savings glut did us in & poor Alan was powerless.

He should read

Auerbach, Robert D. 2008. Deception and Abuse at the Fed: Henry B. Gonzalez Battles Alan Greenspan's Bank (Austin, TX: University of Texas Press).

Some very interesting stuff there, Alan.

Washington Times on Long-term Growth Rates

The Washington Times tries to ridicule Paul Krugman:

Harvard economics Professor Greg Mankiw thinks that Mr. Obama's growth forecasts are overly optimistic and that the federal deficit will be a lot larger than Mr. Obama thinks. He was chastised by Princeton's Paul Krugman, a Nobel Prize winner in economics, who on his New York Times blog claims that Mankiw can only make the predictions that he does because of "more than a bit of deliberate obtuseness." He titled his post on Mankiw, "Roots of Evil." Last Wednesday, Mankiw responded to Krugman's attacks by suggesting: "Well, Paul, if you are so confident in this forecast, would you like to place a wager on it and take advantage of my wickedness?" Krugman has still not responded. It seems even a Nobel Prize winner isn't willing to lay money on Mr. Obama's rosy projections.

I’m not sure why one would be waging a bet against the US economy in the first place but I don’t blame Professor Krugman for ignoring this silliness. Speaking of silliness, the Washington Times lead this pathetic op-ed with:

The Obama administration is basing its budget forecasts on the economy growing an eyebrow-raising 15.6 percent above inflation between 2008 and 2013 - a drop of 1.2 percent this year followed by an average of 4 percent growth over the following four years. That's very impressive growth for any period of time.

So for the first five years, the Obama administration is forecasting a growth rate less than 3 percent – which would mean that its forecast for a 9-year interval would have average annual growth that is less than 3.5 percent. Did the author of this op-ed not realize that the average annual growth rate for the last half of the 20th century was about 3.5 percent?

Finish the Sentence

by the Sandwichman

What a delusion, to think that by spending twenty-six years digging, with a sliver of broken reason, a tunnel whose starting point is your mattress you would finally…

Louis Aragon, Paris Peasant, p. 47

Health Care Costs for Employers: Amity Shlaes v. Greg Mankiw

Steve Benen has a little fun with the latest nonsense from Amity Shlaes:

I'm a big science-fiction fan, so when I heard that conservative writer and FDR critic Amity Shlaes had compared contemporary politics to "The Matrix," I was anxious to see what she'd come up with.

But it was this claim that caught my eye:

Take one of the biggest problems in the U.S. economy today: jobs. Long before “subprime” or “cram down” became routine components of our language, we understood that employers need incentives to create new jobs to replace ones that are disappearing. We knew too that health-care costs are a growing deterrent to hiring or rehiring. Between 1996 and 2005 health care costs for employers rose by 34 percent relative to payrolls.

Didn’t Greg Mankiw and Doug Elmendorf suggest that this cost is fully passed onto workers in the form of lower wages? While I suggested that this may be an extreme assumption as to the lack of elasticity of the labor supply curve (see this post), Shlaes is arguing that none of these costs are passed onto workers in the form of lower wages. Maybe she should have read her own source:

Most economists believe that health insurance premium costs are ultimately passed back to employees in the form of reduced wages, so long-run compensation costs for employers are not affected by rising health care prices.

What is the Crisis About? Fictitious Capital or the Destruction of Wealth?

This short essay briefly describes the financial side of my interpretation that the crash reflected a disconnect between the underlying investment in the economy and its financial representation -- what Marx called fictitious capital. The stock market people call this realignment, "destruction of wealth," even though what is destroyed is the illusion of wealth. The illusion may have been capable of purchasing valuable things so long as other people accept that illusion.

Long ago people accepted the illusion as an illusion and went on with their business. Here is what a former governor of Illinois wrote:

Ford, Thomas. 1854. History of Illinois (Chicago: S. C. Griggs and Co.).

227: "Our Whig friends contended that the continual and violent opposition of the democrats to the banks destroyed confidence; which, by-the-bye, could only exist when the bulk of the people were under a delusion. According to their views, if the banks owed five times as much as they were able to pay and yet if the whole people could be persuaded to believe this incredible falsehood that all were able to pay, this was 'confidence'."

Ordinary people understood what was happening. Here is an incident from Chicago about the same time:



Peyton, John L. 1869. Over the Alleghenies; extracted in Warren S. Tryon, ed. A Mirror for Americans, 3 vols. (Chicago: University of Chicago Press, 1952): III, pp. 589-607.

605: Visiting Chicago in 1848, Peyton objects to taking wildcat notes from an obscure Atlanta bank [meaning that the unregulated bank probably had little or nothing backing up its money]. The hotelkeeper responds, is discussing notes:

"Why, sir, ... this hotel was built with that kind of stuff .... I will take "wild cats" for your bill, my butcher takes them of me, and the farmer from him, and so we go, making it pleasant all around. I only take care ... to invest what I may have at the end of a given time in corner lots .... On this kind of worthless currency, based on Mr. Smith's [the issuer's] supposed wealth and our wants, we are creating a great city, building up all kind of industrial establishments, and covering the lake with vessels -- so that suffer who may when the inevitable hour of reckoning arrives, the country will be the gainer, Jack Rossiter [the speaker] will try, when this day of reckoning comes, to have "clean hands" and a fair record .... A man who meddles, my dear sir, with wild-cat banks is on a slippery spot, and that spot the edge of a precipice."

A few years earlier, a Philadelphia banker wrote about this arrangement to the famous economist, David Ricardo:

Raguet, Condy. 1821. "Letter to David Ricardo, 19 April." In David Ricardo. Minor Papers on the Currency Question, 1809-1823, Jacob Harry Hollander, ed. (Baltimore: The Johns Hopkins Press, 1932): pp. 201-3.

202: "The circulating medium is there [in interior of the country] principally depreciated and inconvertible paper, and so far is the delusion still kept up, that in Kentucky and Tennessee new banks without a specie capital or [any] obligation to pay their notes and gold or silver, have lately been established."


202: "You state in your letter that you find it difficult to comprehend why persons who have a right to demand coin from the Banks in payment of their notes, so long forbore to exercise it. This no doubt appears paradoxical to one who resides in the country were an act of Parliament was necessary to protect a bank, but the difficulty is easily solved. The whole of our populations are either stockholders of banks, or in debt to them. It was not in the interest of the first to press the banks and the rest were afraid. This is the whole secret. Any independent man who is neither a stockholder nor a debtor, who would have ventured to compel the banks to justice, would have been persecuted as an enemy of society, and during the whole period of suspension of specie payments, not an instance occurred in this City of a suit being brought before a court of Justice. A friend of mine in New York was however bold enough to attempt it toward the close of the scene ... The Banks became alarmed, and began to call in their loans -- the local currency of New York became 5 percent better than it was -- millions of dollars worth of goods ordered from Europe were countermanded."

Here is the way a modern capitalist sees the same situation. Steve Palmer posted this on Lou Proyect's Marxism list:

Davies, Megan and Walden Siew. 2009. "45 Percent of World's Wealth Destroyed: Blackstone CEO." Reuters (10 March).
http://www.reuters.com/article/wtUSInvestingNews/idUSTRE52966Z20090310
Private equity company Blackstone Group LP (BX.N) CEO Stephen Schwarzman said on Tuesday that up to 45 percent of the world's wealth has been destroyed by the global credit crisis. "Between 40 and 45 percent of the world's wealth has been destroyed in little less than a year and a half," Schwarzman told an audience at the Japan Society. "This is absolutely unprecedented in our lifetime"."

Even Sam Malone Has Been Laid Off

While Sam Malone and the Boston bar called Cheers were only make believe, Eddie Doyle tended bar at the Bull & Finch since 1974. One has to love the tag “Senior Liquor Dispersement Engineer”. Alas, Eddie has been laid off:

a few weeks ago he was told by Tom Kershaw, owner of the Cheers bar, that the recession had hit his industry and he was being laid off. Doyle, who is in his late 60s, said he's surprised but not bitter. "I'm a casualty of the economic situation that we're in," said Doyle, who spent part of this week cleaning out his office. Kershaw acknowledged that it was a difficult decision. "Business is way off," he said, adding that he would continue to send Doyle a weekly paycheck until the end of the year. "It was very tough. Personally, for me, it was a disaster. Eddie and I have been friends for 40 years."

Defending The Fed

Now that everybody is all over the Fed for all of our problems, I guess I shall be idiosyncratic and defend the institution. I think that they are struggling mightily, as well as the can, against an overwhelming tide that is now engulfing the entire world economy. They saw it coming, and at an early point engaged in very innovative wave of policymaking, including taking on the role of world central banker this past fall after the Minsky Moment of mid-September. It is easy to say, "well look how bad things are," but I think this is one of those situations where things would be far worse if they had not done what they had, and I am hard pressed to think of an alternative set of policies they could have done that would have made things better.

Now, I am not defending the Fed under Greenspan. Clearly there was an overly loose policy in 2003-2004 that aggravated the housing bubble. While Bernanke and others justified this on "complexity" grounds of worrying about asymmetries associated with a possible Japanese-style deflation (which we are now facing much more seriously), my cynical side says it was Greenspan wanting to help W. get reelected so that he, Greenspan, would not be on the receiving end of the sort of whining he got from W.'s dad after he supposedly was responsible for Clinton beating him in 1992 on an "It's the economy, stupid!" campaign. However, I think that in the last two and a half years, the leaders of the Fed have been aware that trouble was coming and were preparing for it, with their immediately rolling out alternative lending bodies and policy approaches immediately upon the eruption of troubles in the subprime markets in August, 2007.

A further piece of evidence is the speech that then New York Fed president, Timothy Geithner, gave in Hong Kong on September 15, 2006, "Hedge funds and derivatives and their implications for the financial system". While the opening part of the speech was pretty pollyannaish, the latter half of it was pretty scary, given the nature of Fedspeak, never wanting to spook the markets and trigger a crash that might be avoided. I shall close by simply quoting from it.

Understanding and evaluating “tail events”—low probability, high severity instances of stress—is a principal, and extraordinarily difficult, aspect of risk management. These challenges have likely increased with the complexity of financial instruments, the opacity of some counterparties, the rapidity with which large positions can change, and the potential feedback effects associated with leveraged positions.

Yes, folks, the Fed knew.