It’s 2009: Why Are We Still Dealing with Voodoo Climate Economics?

You would think the basic facts would be clear by now, but you would be wrong. A New York Times article this morning on Missouri’s fear of higher electricity prices under carbon regulation had lines like:

[Politicians from Missouri] are concerned that the new costs would get passed on to consumers...., to farmers from rural Missouri and to employers like the energy-hungry Noranda aluminum plant in New Madrid in the southeast of the state, which has 1,000 workers. And they worry that in an already wounded economy, increased costs could turn one of the relatively few economic blessings into a blight.

Where to begin? The whole point of issuing permits for carbon is to dramatically raise the cost of burning these fuels; people are supposed to cut back on goods and services that use them, thereby preserving a liveable planet. There is no “would” or “could” about it: if we want to limit climate change we have to get hundreds of millions of people to change their consumption habits (and firms to change their production methods). Since we don’t want to do that with regulations, police and prisons, we will do it with prices.

Given that, the core economic problem is how to carry out this program with the minimum cost to the well-being of our fellow humans. Part of this is about efficiency, getting the most carbon reduction for the lowest cost. Another part is about investment and innovation, building a low-carbon economy that produces a high quality of life for all of us. But front and center are those higher prices that we will have to pay for goods that continue to require carbon fuels.

In the voodoo view of the world, money just disappears down a black hole. Consumers pay higher prices, the economy suffers, and that’s the end of the story. It doesn’t take much economic sophistication, however, to notice that the money has to go somewhere—specifically, it finds its way to the companies that acquire carbon permits in the first place, and that’s why the permits are valuable. Now, either those companies get the permits for free and make out like bandits, or the permits are auctioned. If they’re auctioned, the money from those hard-pressed Missourians is now in the hands of the government agency that ran the auction. At this point we have a new sales tax. But we don’t want a new sales tax. So the government agency can simply rebate all the money back to the public, ideally on a simple, equal per capita basis. This means that the folks from Missouri highlighted in the Times article would be earning carbon revenues and not just paying them. They can stimulate their economy by spending this loot on other items that don’t pump carbon into the atmosphere and whose prices haven’t gone up.

True, on average people in some regions will come out somewhat ahead or behind on the deal, based on the sort of energy infrastructure that’s currently in place, current commuting patterns, climate and such. No doubt a carefully constructed policy package would offer sweeteners to the more impacted areas, like extra investment funds. But these considerations are second-order compared to the voodoo vision of higher prices that just vanish into thin air.

Orthodoxy Entrenching Itself Against Reality At Notre Dame

Mark Thoma at economists view links to a posting at Open Economics about the latest situation at Notre Dame University regarding its economic departments, http://openeconomicsnd.wordpress.com/2009/04/08/the-state-of-heterodox-economics-at-notre-dame. As most know, the original economics department (now called "ECOP") there had many heterodox people in it, and the administration set up a new "econometrics" department to run the econ grad program in an explicitly "neoclassical" way. There was much protest by many, with basically nobody outside of there defending this, and the critics including many prominent conventional economists, such as Robert Solow, who declared, "the last thing we need in economics is another third-rate MIT graduate program." But the Notre Dame people proceeded with this, although the new department's chairman, Robert Jensen, declared a goal of "equality" between the two departments.

This latest posting reports that the goal of equality is being seriously tossed under the bus, with a collapse in teaching for the coming fall by ECOP. Lying behind this is total inequality in staffing. Four people were hired for the coming year for the econometrics department, bringing it to 19 faculty, whereas there are two retiring from ECOP without any replacements being hired, bringing their numbers down to 7. The poster, nkrafft, reports that these decisions are "being made somewhere between the dean's office and the provost's office." But the outcome has been denounced widely, with 200 people showing up for a talk by "Wolff" (probably Robert, but...?), and him denouncing this as ridiculous in the face of how the credibility of the orthodox approach has collapsed during the current crisis situation. Dumping heterodox and hiring orthodox looks very silly indeed, especially for an institution that is supposedly concerned with its social conscience.

Kill or Buy?

by the Sandwichman

Anonymous in the comments suggests folks are not getting what the Sandwichman is trying to say because S. is, shall we say, too circumspect. Sandwichman suspects Anon. has a point. Here's how Anonymous sums up the case:

1. Reduction of working hours is what this crisis is all about. You have a choice, reduce working hours, or eat dog food, and buy ammo - it is up to you.

2. 163,000 people are losing their jobs each and every week. Now you may think this is a statistic, but in very short order you will be taught how palpable and real those numbers are.

3. Dirt cookie anyone..

That pretty much sums up what the Sandwichman is trying to say. And has been trying to say for, oh, about 14 years.

During that time it has also become clear that there are lots of propeller heads out in the blogosphere in full-frontal denial. They'll hang their lame-ass, whiny objections on the slenderest threads of textbook technicalities. Like, "If all of the crane operators in the country cut their hours it would not create hours for anyone else, very few people can competently operate a crane."

Oh yeah? Well, if all the crane operators in the country up and quit their fucking jobs and were replaced by newly-minted ones it wouldn't create 12-fucking-million jobs, either, asshole. We're not talking about college textbook exercises and pretty mathematical formulas, here. We're talking about a totally fucked-up economy that is collapsing. "You have a choice, reduce work hours, or eat dog food, and buy ammo..."

"The Poor Man's Son, whom Heaven in its Anger has Visited with Ambition..."

by the Sandwichman

And it is well that nature imposes upon us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind. -- Adam Smith, Theory of Moral Sentiments,

The "deception" Smith was referring to in the sentence quoted above was the idea that strenuous effort would bring riches, which in turn would bring ease. He ridiculed that belief on the part of the individual but concluded his parable of the poor man's son by praising the deception from the standpoint of society as the providence of an "invisible hand."

How many people ruin themselves by laying out money on trinkets of frivolous utility? What pleases these lovers of toys is not so much the utility, as the aptness of the machines which are fitted to promote it.... They walk about loaded with a multitude of baubles… of which the whole utility is certainly not worth the fatigue of bearing the burden.

Nor is it only with regard to such frivolous objects that our conduct is influenced by this principle; it is often the secret motive of the most serious and important pursuits of both private and public life.

The poor man's son, whom heaven in its anger has visited with ambition, when he begins to look around him, admires the condition of the rich. He finds the cottage of his father too small for his accommodation, and fancies he should be lodged more at his ease in a palace. He is displeased with being obliged to walk a-foot, or to endure the fatigue of riding on horseback. He sees his superiors carried about in machines, and imagines that in one of these he could travel with less inconveniency. He feels himself naturally indolent, and willing to serve himself with his own hands as little as possible; and judges, that a numerous retinue of servants would save him from a great deal of trouble. He thinks if he had attained all these, he would sit still contentedly, and be quiet, enjoying himself in the thought of the happiness and tranquillity of his situation. He is enchanted with the distant idea of this felicity. It appears in his fancy like the life of some superior rank of beings, and, in order to arrive at it, he devotes himself for ever to the pursuit of wealth and greatness. To obtain the conveniencies which these afford, he submits in the first year, nay in the first month of his application, to more fatigue of body and more uneasiness of mind than he could have suffered through the whole of his life from the want of them. He studies to distinguish himself in some laborious profession. With the most unrelenting industry he labours night and day to acquire talents superior to all his competitors. He endeavours next to bring those talents into public view, and with equal assiduity solicits every opportunity of employment. For this purpose he makes his court to all mankind; he serves those whom he hates, and is obsequious to those whom he despises. Through the whole of his life he pursues the idea of a certain artificial and elegant repose which he may never arrive at, for which he sacrifices a real tranquillity that is at all times in his power, and which, if in the extremity of old age he should at last attain to it, he will find to be in no respect preferable to that humble security and contentment which he had abandoned for it. It is then, in the last dregs of life, his body wasted with toil and diseases, his mind galled and ruffled by the memory of a thousand injuries and disappointments which he imagines he has met with from the injustice of his enemies, or from the perfidy and ingratitude of his friends, that he begins at last to find that wealth and greatness are mere trinkets of frivolous utility, no more adapted for procuring ease of body or tranquility of mind than the tweezer-cases of the lover of toys; and like them too, more troublesome to the person who carries them about with him than all the advantages they can afford him are commodious.

If we consider the real satisfaction which all these things are capable of affording, by itself and separated from the beauty of that arrangement which is fitted to promote it, it will always appear in the highest degree contemptible and trifling. But we rarely view it in this abstract and philosophical light. We naturally confound it in our imagination with the order, the regular and harmonious movement of the system, the machine or oeconomy by means of which it is produced. The pleasures of wealth and greatness, when considered in this complex view, strike the imagination as something grand and beautiful and noble, of which the attainment is well worth all the toil and anxiety which we are so apt to bestow upon it.

And it is well that nature imposes upon us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth. The earth by these labours of mankind has been obliged to redouble her natural fertility, and to maintain a greater multitude of inhabitants. …

The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition. These last too enjoy their share of all that it produces. In what constitutes the real happiness of human life, they are in no respect inferior to those who would seem so much above them. In ease of body and peace of mind, all the different ranks of life are nearly upon a level, and the beggar, who suns himself by the side of the highway, possesses that security which kings are fighting for.

Frivolous trinkets and baubles fit the category of superfluous goods alright and the poor man's son is motivated by a desire to emulate his superiors. In pursuing his ends, the poor man's son relies more on fantasy than rational calculation. But Smith's parable doesn't fit into our counter-narrative entirely. That's O.K. It doesn't fit into the standard Economic Man mold either. Instead, Smith marshals a truck-load of irony and consummate story-telling magic to recuperate a rather paradoxical and sardonic version of Homo oeconomicus.

The poor man's son's striving succeeds only in acquiring for him a body wasted with toil and disease, a mind "galled and ruffled by the memory of a thousand injuries and disappointments which he imagines he has met with from the injustice of his enemies, or from the perfidy and ingratitude of his friends..." and, at long last, the realization that his dogged pursuit of wealth and greatness was a sham.

No matter. It was all for the best! (La di da.) The invisible hand saw to it that the benefits trickled down to the poor -- even including the beggar on the sunny side of the street.

It is easy to be charmed by Smith's eloquence. Thus charmed, the reader is led by a succession of small, seemingly-logical steps to a gross exaggeration and distortion of the futility of riches and the disagreeableness of strenuous effort. In narrative terms, Smith's poor man's son falls down a well but then eventually stumbles upon a hidden door that opens to reveal a magical kingdom. The graphic equivalent is an Escher drawing of a perpetually ascending staircase, exploiting the artifice of perspective drawing to the point of impossibility.

When Smith eventually invokes his invisible hand to pull a redemptive rabbit out of the hat, the enchanted reader gasps with surprise, relief and credulity... and presumably lets pass the preposterous notion that, "the beggar, who suns himself by the side of the highway, possesses that security which kings are fighting for." The deception is neither Nature's nor Providence's but the triumph of Smith's story-telling artifice.

In Wealth of Nations, Smith talks about leisure in radically different terms than he does in these picaresque vignettes of the poor man's son and the beggar sunning himself by the side of the highway.

In Book Five, Chapter 1, Part 3 Article II, "Of the Expense of the Institutions for the Education of Youth," Smith contrasts the common people who "have little time to spare for education... their labour is both so constant and so severe, that it leaves them little leisure and less inclination to apply to, or even to think of, anything else."

By contrast, "The employments of people of some rank and fortune are seldom such as to harass them from morning to night. They generally have a good deal of leisure, during which they may perfect themselves in every branch either useful or ornamental knowledge of which they may have laid the foundation, or for which they may have acquired some taste in the earlier part of life."

So, the common people have little leisure while those of rank and fortune have a good deal of leisure. And what does the invisible hand have to say about that? Here's the argument again from The Theory of Moral Sentiments :

The rich only select from the heap what is most precious and agreeable. They consume little more than the poor... they divide with the poor the produce of all their improvements.... In what constitutes the real happiness of human life, they [the poor] are in no respect inferior to those who would seem so much above them. In ease of body and peace of mind, all the different ranks of life are nearly upon a level...

Now, unless we grant that "little" is nearly upon a level with "a good deal," Mr. Smith is having us on. This difference also has to be viewed in the context of the classical Aristotelean view that leisure is the activity proper to humans in which they find their fulfillment or happiness. In discussing leisure, Smith is not talking about time off to drink or play cards. So, in what constitutes the real happiness of human life -- that is to say, leisure -- the rich and the poor are, by Smith's own admission, not on a level. Therefore, his invisible hand image cannot be on the level, either.

In conclusion, both the dominant narrative of Economic Man and the Persona parsimoniae counter-narrative resonate in Smith's parable of the poor man's son, albeit with strong doses of inversion, paradox and magical thinking. The extravagant nature of the parable's lesson -- and specifically of its recuperative image of the invisible hand -- is made evident by comparing Smith's claims to passages in the Wealth of Nations.

Defense Spending Increases or Cuts – the Role of Nominal Confusion

Brian Beutler thinks much of the press is confused about what Defense Secretary Gates and President Obama want to do with the Defense Department budget:

The big news from yesterday (still settling in across Washington) is that President Obama and Defense Secretary Robert Gates teamed up to propose a sweeping overhaul of the defense budget--calling for the elimination of unnecessary systems and spending the savings on special forces, intelligence equipment, and other tools of counterinsurgent warfare. In other words, by retooling the Pentagon, Obama and Gates plan to move a lot of money around, but they also plan to increase the overall defense budget. In the final year of the Bush administration (and excluding the costs of the wars in Iraq and Afghanistan) the defense budget was $513 billion. In FY 2010, if Gates and Obama get their way, it will be $534 billion--$534 billion that will be spent much differently than last year's outlays were. But you'd never know that from the news coverage.

Brian says the Wall Street Journal gets it right with this:

Mr. Gates's proposed baseline 2010 Defense Department budget of $534 billion is up 4% from last year.

That would be a 4% nominal increase so the natural question would be what is the expected increase in the price-level over the same period? OK, I suspect expected inflation is so low that we are still talking about a real increase even after the adjustment from nominal to real increases. For example, this source notes that the nominal interest rate on 5-year government bonds is 1.65%, while the interest rate on indexed bonds of the same maturity is 0.93% so we are likely talking expected inflation that is less than 1%.

My real complaint is with this reporting, which got a lot of liberal blog attention yesterday:

Obama assigned Gates to rein in spending for the 2010 fiscal year that begins in October. U.S. defense spending is set to reach $654.1 billion for the current budget year, including war costs, a 72 percent gain since 2000.

How do we interpret a 72 percent nominal increase since 2000 in terms of a real increase? Table 1.1.4 from this source provides various price indices both for 2000 and for 2008. While the GDP deflator increased by 22.5% over this period, the deflator for defense purchases increased 36.57%. Interestingly, table 1.1.5 reports a 98.46% increase in national defense spending but in real terms, that translates into only 62% in real spending if we use the GDP deflator. The reported increase according to table 1.1.6, however, is only 45% as BEA uses the specific deflator for defense purchases. While it is clear that reporters should be using inflation-adjusted figures when reporting defense spending increases over time, it is not clear which deflator should be used in their reporting especially when the relative price of defense related spending has increased.

No argument on what we do about climate change

Another industrial burn of native forest. The South Esk catchment in Tasmania this month. Picture taken by Rob Blakers.

Last week Barkley Rosser gave a very brief description on the nature of a debate that occurred at James Madison University campus after a talk given by Pat Michaels from the Cato Institute as well as an economist from the 1970s ‘new right’ Heritage Foundation of the name David Kreutzer.

Barkley mentioned discussion about the possibility of ‘fat tails’ and, what Michaels referred to as the ‘non-trivial possibility’ of a combination of nonlinear effects [in climate change] that would lead to a sharp rise in temperature.

This discussion, as described, is what should rightfully be labeled as ‘academic’. The real debate about climate change is over. Climate change has occurred and no one, apart from business lobby groups and their funded organisations, disagrees about what should be done to address our crisis.

Whether or not global temperatures rise by 2C or 14C in the foreseeable future is quite irrelevant to our immediate challenge. We need to move to clean and renewable forms of energy and other forms of technology and practice as quickly as we possibly can.

"Not even Mills, or Chomsky in his New Mandarins essay, could have anticipated the world of the Heritage Foundation, of "Kissinger Associates," of numberless power-worshipping, power-seeking magazines and institutes interlocking across the dissemination of culture, priority, information, and opinion. But Mills did write, in 1942:

When events move very fast and possible worlds swing around them, something happens to the quality of thinking. Some men repeat formulae; some men become reporters. To time observation with thought so as to mate a decent level of abstraction with crucial happenings is a difficult problem."

The Chorus and Cassandra, Christopher Hitchens. 1985
http://www.vho.org/aaargh/fran/chomsky/cassandra.html

More Larry Summers

"During his senior year of college, Summers was considering graduate school in both theoretical physics and economics. For weeks, he anguished over whether to pursue his passion (physics) or the family business (in addition to his economist parents, Summers has two uncles -- Paul Samuelson and Kenneth Arrow -- who won Nobel prizes in the field). After he finally decided on the latter, he explained his thinking to Rollins: "What does a bad theoretical physicist do for a living? He walks into an office, sits at a desk, and stares at a plain white sheet of paper." "But," Summers added, "there's a lot of work in the world for a bad economist"."

Scheiber, Noam. 2009. "Free Larry Summers." The New Republic (1 April).
http://www.tnr.com/story_print.html?id=aaa57c05-d73e-4321-8893-70d5b45577d1

Summers and the Street

The New York Times has a follow-on story that tracks Larry’s career in exile, when he was a celebrity part-timer at the Shaw hedge fund. Reading between the lines, the piece is eager to do two things: explain how someone with limited investment experience could be worth $5 million for less than 50 days of work per year, and persuade us that Larry’s stint on the street has increased his qualifications to run US economic policy.

Here are a few items missing from the story.

1. Summers’ false confidence in the Street’s risk models surfaced during his presidency at Harvard. According to this story in the Boston Globe, Summers funneled a large chunk of Harvard’s endowment into derivatives and ran a ship intolerant of dissent. This was before his time at Shaw, so perhaps you could excuse the careless investing as the result of being too far down on the learning curve. In any case, the endowment has been hit hard, and the university has been forced to retrench.

2. The Times article repeats the common error of attributing Summers’ foreshortened reign at Harvard to his one ill-considered (but diagnostic) comment about women and science. In fact, there were several contributing factors, and perhaps the decisive one was his unbending support of Andrei Schleifer. For those who don’t know, Schleifer, a star economist and close friend of Summers, was awarded a contract from the US Agency for International Development to advise in setting up financial markets in post-Soviet Russia. To make a long story short, Schleifer and his wife used the occasion to enrich themselves through rigged contracts and insider trading, the Russian economy was damaged, US-Russia relations were ruptured, and Harvard was forced to pay back $26 million to USAID in response to a finding of fraud. In response, Summers not only defended Schleifer, he gave him an endowed chair. This destroyed Summers’ credibility in the eyes of many on the faculty. For more details, see this account by David Warsh and follow the link to the article by David McClintick in Institutional Investor.

3. The deep question underlying US economic policy at this moment is whether the goal is to restore the status quo prior to the meltdown—the players, the institutions, the paradigm—or whether to let the older order collapse and build a different kind of system to replace it. Everything about Larry’s experience on the Street predisposes him to take the first course.

4. At the heart of the matter is an interesting paradox about Summers himself. He has a reputation for ferocious brilliance, largely on the basis of face-to-face interactions. Economists value quickness in understanding complicated models, and Larry is very, very quick. My first-person experience was minimal (we shared a single AEA panel), but enough to see that he must be difficult to keep up with. Despite his reputation, however, he hasn’t really planted his flag in the economic literature. He has coauthored several influential papers, mainly empirical, mainly important because they identified significant patterns in the data before others saw them. In a sense, they constitute a written version of his verbal skills. His name is not associated, however, with any substantive advance in economic theory or method.

For me, the most telling line in the Times story is this:

It was at that time [after his demotion from president to professor at Harvard], to the surprise of some colleagues, that Mr. Summers seriously contemplated his options on Wall Street in part because he believed his chances to return to a prominent position in Washington had dimmed, friends say.

Summers apparently never considered the option of simply remaining a professor of economics and making a more indelible mark on the discipline. There are many ways to interpret this. It could be that a simple professorship felt too “small” after more than a decade spent on larger stages. Perhaps he did not like the academic life—the round of lectures, seminars, writing and reading. Or perhaps he realized that his gifts for quickness and intensity would never yield the highest payoffs in the world of intellectual production, where persistence and depth are ultimately more valuable.

Could Someone Let Robert Lucas Know That The Balanced Budget Multiplier Is Not Zero?

I thought Robert Lucas had a very strong grasp of macroeconomics – maybe not:

But, if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder -- the guys who work on the bridge -- then it's just a wash. It has no first-starter effect. There's no reason to expect any stimulation. And, in some sense, there's nothing to apply a multiplier to. (Laughs.) You apply a multiplier to the bridge builders, then you've got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn't going to help, we know that.

Hat tip to Brad DeLong who is worried that Chicago-School economists believe certain falsehoods such as:

deficit-financed spending increases have no short-term stimulative effects on nominal spending

Since Kevin Quinn noted that Wikipedia’s discussion of Ricardian Equivalence had the same error, let’s see how Wikipedia describes the balanced budget multiplier:

Since only part of the money taken away from households would have actually been used in the economy, the change in consumption expenditure will be smaller than the change in taxes. Therefore the money which would have been saved by households is instead injected into the economy, itself becoming part of the multiplier process. In general, a change in the balanced budget will change aggregate demand by an amount equal to the change in spending.

Not only does this sound much more logical than what Professor Lucas claimed, it is also what is typically described in most economic textbooks. As long as the marginal propensity to consume is less than unity, there is something to apply a multiplier to. So might Professor Lucas explain to us why he thinks the marginal propensity to consume is equal to unity – especially when we are talking about temporary increases in government purchases and their implications for taxation over the long-run?

"On Luxury, Idleness and Industry"

by the Sandwichman

Having proposed the counter-narrative to Economic Man, I will now undertake to test it rigorously and exhaustively by examining it's presence in numerous and various texts. I begin with Benjamin Franklin because he is indelibly associated with the work ethic and Economic Man's incarnation as "self-made".


In addition to his star performance on the U.S. one-hundred dollar bill, for Max Weber, Franklin personified the "spirit of capitalism". One might say the myth of Franklin (if not the man himself) personified Economic Man. The Weber connection is crucial because it was Weber who argued, in "Marginal Utility Theory and 'the Fundamental Law of Psychophysics'," for the methodological canonization of Economic Man, an argument subsequently pursued by Lionel Robbins in his Essay on the Nature and Significance of Economic Science.

In a letter to Benjamin Vaughn, dated July 1784, Franklin wrote:

It has been computed by some political arithmetician, that, if every man and woman would work for four hours each day on something useful, that labour would produce sufficient to procure all the necessaries and comforts of life: want and misery would be banished out of the world, and the rest of the twenty-four hours might be leisure and pleasure.

What occasions then so much want and misery? It is the employment of men and women in works that produce neither the necessaries nor conveniences of life, who, with those who do nothing, consume necessaries raised by the laborious...

Look round the world, and see the millions employed in doing nothing, or in something that amounts to nothing, when the necessaries and conveniences of life are in question. What is the bulk of commerce, for which we fight and destroy each other but the toil of millions for superfluities, to the great hazard and loss of many lives by the constant dangers of the sea?...

A question may be asked; Could all these people now employed in raising, making, or carrying superfluities, be subsisted by raising necessaries? I think they might....

It is, however, some comfort to reflect that, upon the whole, the quantity of industry and prudence among mankind exceeds the quantity of idleness and folly....

One reflection more, and I will end this long rambling letter... Our eyes, though exceeding useful, ask, when reasonable, only the cheap assistance of spectacles, which could not much impair our finances. But the eyes of other people are the eyes that ruin us. If all but myself were blind, I should want neither fine clothes, fine houses, nor fine furniture.

This is easy! In the counter-narrative post, I wrote, "Persona parsimoniae has two different kinds of preferences -- organic needs and aspirations for social distinction. The means for satisfying those desires are limited absolutely, not just transiently, by physical laws and/or social institutions. And utility is mostly a function of habit [and emulation] rather than calculation."

In the passage cited above, Franklin distinguished between two kinds of wants or preferences -- for the "necessaries and conveniences of life" and for "superfluities" the desire for which arises from "the eyes of other people", that is to say from the desire for social distinction and emulation. With regard to physical and social limits, Franklin is optimistic. He speculates that people could be converted from producing superfluities to producing necessaries and conveniences and he is reassured that there is more industry and prudence among mankind than there is idleness and folly. Note that for Franklin "leisure and pleasure" contrast with "idleness and folly", which constitute the "toil of millions for superfluities".

Economic Man -- complete set of preferences, rationality, utility maximization and all -- might feel some ambivalence toward Franklin's scenario. One the one hand, the "toil of millions for superfluities" offers untold opportunities for profit. On the other hand, such idle toil occasions "so much want and misery," surely not the ideal picture of utility maximization for the population as a whole. Would that there were yet some other other hand -- invisible, perchance? -- to reconcile the desire for gain with the general well being!

The Genius of Larry Summers

Casual readers of the press might be put off by the fact that Larry Summers received $2.7 million last year just for giving speeches, including a $135,000 appearance at Goldman Sachs. Maybe they think he was being buttered up by companies whose business plan now consists of siphoning off taxpayer money by the tanker load. They shouldn’t jump to conclusions though.

I have it from a confidential source that Summers’ performance was worth every penny, and then some. What does a speaker have to do to earn four times the median full-time wage in a single night? You name it, Summers did it. “He was awesome, just awesome”, says Monique (not her real name). “You think you’re just getting an economist, but he was so much more than that—an artist, an entertainer and one of the greatest minds of the last 500 years.”



The first thing to realize is that Summers doesn’t just walk onto the stage like any other former college professor turned policy czar. Sure, he has a flashy PowerPoint, but “Inconvenient Truth” doesn’t begin to touch it. “It was like a stadium rock concert,” explained Monique, “with a light show and incredible special effects. I thought I would never be able to actually see the world economy, but there it was. In fact, with the 3-D glasses he handed out, you would swear you were actually in the world economy.” Unfortunately, near the end of the talk the complex circuitry behind the stage shorted out, and the world economy spectacle came to a sudden end. Cleanup crews had to work long into the night to gather up countries that had literally melted down as a result of a series of electrical fires. But the audience loved it, and even the crash-and-burn finale worked brilliantly as theater.

But lets talk about Larry himself. First of all, remember that he is not only an economist, but was president of Harvard University, often walking into classes with a bewildering array of subject matter—physics, archaeology, literary theory—and wowing students with his ability to lead a cutting-edge discussion that their professors could only envy. So don’t assume that Summers simply gave a speech about the economy. “I would call it performance art,” offered Monique. “He gave us poetry, music and insight into emerging economic trends. The highlight came when Larry, who had worked himself into a very funky rap groove, began rapping in tongues so that dozens of languages, some maybe going back to the stone age, were bouncing off the walls. People were going wild. And the amazing thing is that all of it had something to do with managing complexity in a flat world framework.”

For an encore, Summers fielded questions from the audience. Here he demonstrated his legendary capacity for passing quick judgment: he devised innovative business strategies on the fly, identified market niches that no one had noticed before in fifteen emerging economies and successfully predicted the contours of future government bailouts of the financial sector, right down to the tiniest loophole. “He changed my life,” Monique concluded. “It was his entertainment that opened me up and made me receptive, but the economic vision was irreplaceable. I thought I was maximizing wealth before I heard Larry, but I didn’t know the half of it.”

So the bottom line is that, at $135,000 for two hours, Larry was doing Goldman Sachs a big favor. He doesn’t owe them, they owe him.

Unemployment – Worse Than Reported

BLS reports:

Nonfarm payroll employment continued to decline sharply in March (-663,000), and the unemployment rate rose from 8.1 to 8.5 percent

Sandwichman observes:

The 663,000 job losses reported comes on top of a 86,000 downward revision in the January number, making the net loss 749,000. Moreover, the average monthly revision since September 2008 has been 158,000 jobs. There have been no upward revisions.

While the rise in the unemployment rate since September 2008 (6.2% to 8.5%) sounds bad, the fall in the employment to population ratio from 61.9% to 59.9% paints a worse picture. I’ve always been bothered by how BLS reports the unemployment rate in its first sentence leaving the reader to only learn that the participation rate also fell – as in from 66.0% as of September 2008 to the March 2009 level of 65.5%. This participation rate was 66.1% as of November 2007, so as BLS reports that the unemployment rate increased from 4.7% to 8.5%, what this really means is that the employment-population ratio fell from 63.0% to 59.9%.

For those of you who might be following the neo-Hooverite nonsense from the governor of South Carolina, it is interesting (or was that tragic) to know that the unemployment rate for this state reached 11.0% as February 2009.

The Counter-Narrative

by the Sandwichman

The problem with 'critique', as Emery Roe pointed out, is that in practice critique serves to intensify uncertainty because it doesn't offer a clear alternative. Thus critique may inadvertently increase pressure to hold onto familiar scenarios, no matter how discredited they may be. A counter-narrative conceives of a rival hypothesis and policy options.

The case I have been essaying in a pair of recent posts -- Not Working is Another Subject and Is Economic Man Parsimonious? -- is that the working time literature constitutes a counter-narrative to the standard 'story' that dominates economics. That standard story is not an analysis per se, a methodology or even a set of assumptions. It is more like a disposition -- an arrangement of scenic, character and action elements that renders the subsequent argument familiar and believable. The framing narrative determines whether a specific argument will seem reasonable or not. Thus it functions as effectively to exclude non-conforming arguments as to certify respectable ones.

The construct of Economic Man has been defended on grounds of 'simplicity' (or parsimony), even though it is only superficially simple. It has been critiqued to death... but to little avail. HESCI, or Persona parsimoniae, is at least as parsimonious as Economic Man.

Economic Man has a complete set of preferences and chooses rationally the most efficient means to maximize utility. Persona parsimoniae has two different kinds of preferences -- organic needs and aspirations for social distinction. The means for satisfying those desires are limited absolutely, not just transiently, by physical laws and/or social institutions. And utility is mostly a function of habit [and emulation] rather than calculation.

There you have it. The counter-narrative. Did the earth move for you? Or are you asking, "is that all there is?" Just in case it's the latter, I continue...

The characteristics I have just now ascribed to Persona parsimoniae are neither deductive nor arbitrary. They were transmitted culturally in a discourse tradition. That is to say they were told and retold from generation to generation. That doesn't make them 'true' any more than the telling and retelling of the features of Economic Man validates the truth of the latter's features. It does, however, suggest that they are both comprehensible and believable, at least to some audiences.

There are important corollaries to the main features of Persona p. that are specific to the issue of working time. For example, better rested workers are able to be more productive and also both wiser and more expansive in their consumption behaviors. That observation might suggest that Economic Man is more like a sub-species of Persona parsimoniae whose hours of labor have already optimized. Or to put it more panoramically, Economic Man is that lucky duck for whom the basic economic problem of subsistence is "no problem".

The narrative paths taken by Economic Man and Persona parsimoniae, respectively, differ in interesting ways. Each can be represented by a circular flow diagram relating the elements of accumulation/investment, production, income/consumption and leisure/disposable time. The standard story assigns priority to accumulation and investment, which enhances productivity leading to increased incomes and the potential choice of leisure. The counter-narrative posits leisure as the foundation for increased income and consumption, which thus drives productivity gains and, consequently, accumulation and investment.

Each path incorporates its own version of a digression from the circuit. In the standard story, leisure represents a sort of exit from the economic circuit. In the counter-narrative, accumulation beyond some natural limit leads to superfluity: waste, a crisis of over-production or the destruction of value through war or the proliferation of luxury consumption for parasitic functionaries and the idle rich.

Revisionists

by the Sandwichman

March unemployment wasn't as bad as the BLS reported. It was worse. The 663,000 job losses reported comes on top of a 86,000 downward revision in the January number, making the net loss 749,000. Moreover, the average monthly revision since September 2008 has been 158,000 jobs. There have been no upward revisions. So it would come as no surprise if the revised number for March alone (that is excluding revisions of previous months) was closer to that 749,000 figure than to 663,000.

A Package for Labor

Behind the debate over whether GM and Chrysler should be bailed out or dispatched into bankruptcy is the curious history of the US labor movement. Unlike most other industrialized countries, where unions fought for and achieved a role in economy-wide institutions, the US fashioned its labor movement employer-by-employer and occasionally industry-by-industry. The result was, even in its heyday during the 1950s, a lopsided unionism that had great clout in a few sectors and regions and was virtually absent everywhere else. During the long decades of decline, the remaining union redoubts, like the top tier of auto manufacturing (final assembly and the top rung of suppliers), became islands in a sea of unbridled employer power. This is why the demand that the UAW run up the white flag as part of an auto bailout challenges what is left of the labor movement as a whole.

In fact, autos present us with a paradox. America desperately needs a revitalized labor movement, and smashing the union that has been at the heart of labor’s struggle ever since the sit-downs of the last depression is hardly the way to begin. The retiree benefits that have emerged as the main item of dispute—should the assets that fund them be converted into the funny money of common stock?—are the legacy of this struggle, guarantees that all workers should have but only a few were able to win. At the same time, it makes no economic sense at all for the auto industry to serve as a funding mechanism for a small piece of an otherwise absent welfare state. The sector needs to shrink, and it needs a clean financial slate that only big concessions from bondholders and workers can provide. So how to reconcile these two perspectives?



The only solution is for labor to be able to break out of its bunker mentality and gain a broad presence throughout the economy. There are two parts to this. First, a large portion of the legacy obligations of the auto producers and other unionized manufacturers should be socialized as part of a general reform of social insurance in the US. As Jamie Galbraith has eloquently argued, this is a time for expanding Social Security, not cutting it. And some form of universal health insurance, kickstarted by a fund like the one Obama has proposed, would address the health aspects of auto’s retiree overhang. In fact, this is what UAW pioneers like Walter Reuther wanted all along, but they had to fall back on collective bargaining when the political channel was shut down by resurgent Republicanism after WWII.

The second part has to do with active workers. The tragedy of UAW givebacks is that any other job these workers might find will be so much worse. This points us toward the solution: quick passage of the Employee Free Choice Act and a commitment to worker representation as a central feature of the next economy. The truth is, we are going to see a lot of restructuring once the economy recovers; this is a dreadful economic episode, but it is also a period of creative destruction. To speed up the recovery and accelerate the shift to an economically and environmentally sustainable future, we will need rapid disinvestment in some industries and the creation of new capacity in others. This will also have a geographical side; the new world is always built at some distance from the old. The only way to do this in a labor-friendly way is for workers to have a say everywhere, and this means systematic labor law reform. (The EFCA is just a beginning; there is a much larger agenda that reaches beyond the single mechanism of collective bargaining.)

Politically, we need a package deal: substantial abrogation of the UAW contract benefits combined with pro-labor reforms in labor law and the social safety net. I know this is tricky: you put it all on the table and run the risk that the benefits are eviscerated while none of the reforms go through. Nevertheless, this seems to me to be the only coherent way to think about the situation.