In one of the more outrageous financial maneuvers, Sam Zell used the Tribune pension fund to help finance his takeover of the corporation, which let him beat down workers.
Tribune Co. Subpoenaed Over Employee Stock Plan
REUTERS
Published: April 10, 2009
The Labor Department subpoenaed the Tribune Company over its employee stock plan, which was crucial to the purchase of the company by the billionaire Sam Zell, left. The company disclosed the subpoena, issued in March, in a bankruptcy court filing and said it had handed over the documents. A Tribune spokesman was not available for comment.
The agency’s questions relate to the Employee Retirement Income Security Act, a law intended to protect people in employee retirement plans. The stock plan was an important piece of Mr. Zell’s plan to acquire the company in an $8.2 billion deal that involved $13 billion in debt. He intended for the stock plan to become the largest owner of the company, which would let it avoid corporate taxes. That, in turn, was supposed to help a company turnaround.
Saturday, April 11, 2009
Introducing the Obamawatch Lottery
I am offering a prize of $1 to the person who comes closest to guessing the date at which BHO first takes a courageous action that significantly challenges the ridh and powerful. I will begin with the date 2020.
The origins of the crisis in the concentration of wealth
In the 1970s the wealth of a select group of rich (in a few places such as Saudi Arabia and Texas in the USA) "swelled so hugely that the English language was scarcely capable of defining it." So said author Stephen Fay in his book on the Hunt brothers and Saudi silver bubble of the late 1970s entitled 'Beyond Greed'.
This new wealth was largely paid for by consumers of oil after OPEC and the oil corporations quadrupled the price of this commodity in 1973. As John Kenneth Galbraith warned at the time, the wealth did not 'trickle down' to the rest of us but instead created what he had feared: inflation, severe recession and unemployment around the world. The international economy became more vulnerable to unexpected shocks than at anytime since the 1930s.
The new super-rich were afraid - not so much of recession - but of inflation and taxation. They preferred therefore to gamble rather than to save. This new attitude reflected the problem money was having as a store of value as the US dollar (the world's reserve currency) lost its value and was no longer backed by gold. [2]
Importantly, the new rich of the 1970s could buy on a scale that had never been contemplated before. C Wright Mills had warned a good decade earlier that the social theories and values of 'liberalism' assumed "a world of small entrepreneurs. But it is quite clear that one of the most decisive changes over the last hundred years is the enormous increase in the scale of property units." [3]
The oil and corporate rich of the 1970s had impeccable credit credentials and they began to focus their purchase on things they believed would increase in value such as other corporations and precious metals; to be purchased with other people's money. They used loans from the world's biggest banks and brokerage houses.
Financialisation was reborn. The global invasion of petro and monopoly dollars on the world economy meant too much cash chased too few goods. Then US Presidents Carter and Reagan administrations made matters even worse when they addressed inflation by hiking interest rates. "The emerging-market borrowers began to suffer..." A strong US banking cartel ensured the loans of these weak and vulnerable nations were denominated in US dollars. "Zaire and Turkey had already defaulted in 1976 and 1977. After 1980 the high interest rates, close to 20% for six-month Libor, shook country after country off its perch." [4]
As we all appear to know now, the global economy continued to deteriorate from there. One public bailout of private concentrated wealth followed another.
The words of C Wright Mills written in the early 1960s resonate with a great deal of urgency today:
Should we be content to continue to assume 'the dominance of huge scale property'? If so, where is the counterveiling power to create our new 'group guarantee' of freedom and security?
[1] 'Beyond Greed' by Stephen Fay. Prologue, page 1. ISBN 0-670-644497-8. Viking Press, 1980.
[2] The US had developed a consistent balance of payments deficit due to that nation's pursuance of the Vietnam War as well as other factors such as the flawed nature of the Bretton Woods system and the dominance of US transnational corporations in world banking and trade that left most of the world short of reserve currency.
[3] The essay entitled 'Liberal values in the modern world' from 'Power, Politics & People - The collected essays of C Wright Mills' edited by Irving Louis Horowitz.
Oxford University Press, 1967 (reprint 1969)
[4] Oil, inflation, default
http://marcosaba.tripod.com/30annidiscandali.html
This new wealth was largely paid for by consumers of oil after OPEC and the oil corporations quadrupled the price of this commodity in 1973. As John Kenneth Galbraith warned at the time, the wealth did not 'trickle down' to the rest of us but instead created what he had feared: inflation, severe recession and unemployment around the world. The international economy became more vulnerable to unexpected shocks than at anytime since the 1930s.
The new super-rich were afraid - not so much of recession - but of inflation and taxation. They preferred therefore to gamble rather than to save. This new attitude reflected the problem money was having as a store of value as the US dollar (the world's reserve currency) lost its value and was no longer backed by gold. [2]
Importantly, the new rich of the 1970s could buy on a scale that had never been contemplated before. C Wright Mills had warned a good decade earlier that the social theories and values of 'liberalism' assumed "a world of small entrepreneurs. But it is quite clear that one of the most decisive changes over the last hundred years is the enormous increase in the scale of property units." [3]
The oil and corporate rich of the 1970s had impeccable credit credentials and they began to focus their purchase on things they believed would increase in value such as other corporations and precious metals; to be purchased with other people's money. They used loans from the world's biggest banks and brokerage houses.
Financialisation was reborn. The global invasion of petro and monopoly dollars on the world economy meant too much cash chased too few goods. Then US Presidents Carter and Reagan administrations made matters even worse when they addressed inflation by hiking interest rates. "The emerging-market borrowers began to suffer..." A strong US banking cartel ensured the loans of these weak and vulnerable nations were denominated in US dollars. "Zaire and Turkey had already defaulted in 1976 and 1977. After 1980 the high interest rates, close to 20% for six-month Libor, shook country after country off its perch." [4]
As we all appear to know now, the global economy continued to deteriorate from there. One public bailout of private concentrated wealth followed another.
The words of C Wright Mills written in the early 1960s resonate with a great deal of urgency today:
The meaning of freedom, positively put" has to be restated now, not as independence, but as control over that upon which the individual is dependent. Security, once resting on the small holding, has become, in the world of large property, anxiety - anxiety produced by the concentration process and by the manner of living without expectation of owning. Positively, security must be group-guaranteed; individual men can no longer provide for their own futures.."
Should we be content to continue to assume 'the dominance of huge scale property'? If so, where is the counterveiling power to create our new 'group guarantee' of freedom and security?
[1] 'Beyond Greed' by Stephen Fay. Prologue, page 1. ISBN 0-670-644497-8. Viking Press, 1980.
[2] The US had developed a consistent balance of payments deficit due to that nation's pursuance of the Vietnam War as well as other factors such as the flawed nature of the Bretton Woods system and the dominance of US transnational corporations in world banking and trade that left most of the world short of reserve currency.
[3] The essay entitled 'Liberal values in the modern world' from 'Power, Politics & People - The collected essays of C Wright Mills' edited by Irving Louis Horowitz.
Oxford University Press, 1967 (reprint 1969)
[4] Oil, inflation, default
http://marcosaba.tripod.com/30annidiscandali.html
Friday, April 10, 2009
Best Paragraph of the Day
110: "If a period of growth is followed by a period of depression, there are two possibilities: either the ruling group will modify its attitudes and behavior, or it will be replaced by another group. The aristocrat, Tancredi, tells an older-generation aristocrat, Fabrizio, 'we have to change everything in order to keep everything as it is'."
Burke, Peter. 1974. Venice and Amsterdam, A Study of Seventeenth Century Elites (London: Temple Smith).
Burke, Peter. 1974. Venice and Amsterdam, A Study of Seventeenth Century Elites (London: Temple Smith).
Academic Repression at Bowdoin College
URPE reports on a case at Bowdoin College where longtime URPE member and 29 year member of the economics department, Jonathan Goldstein, is under investigation for alleged academic misconduct in his research. Reports are now surfacing on the details, which some are comparing to the case of Ward Churchill, although this is a lower key case, with Goldstein's position substantially superior to that of Churchill's. Nevertheless, he has an angry dean out to get him for exposing Bowdoin's to potential incoming students Bowdoin's recent tilt toward athletics and away from academics. The paper he wrote has not been published, and the errors are very minor and would be corrected prior to any publication that the investigative committee are focusing on to charge misconduct. This is simply arbitrary academic repression.
One can access the details through several sources. Inside Higher Education (IHE) has a pretty detailed account at http://www.insidehighered.com/news, and the Foundation for Individual Rights in Education (FIRE) has a column up that its VP has just published in the Boston Globe at http://www.thefire.org. For anyone wishing to protest what is happening there, the email address for Bowdoin's president, Barry Mills, is bmills@bowdoin.edu.
One can access the details through several sources. Inside Higher Education (IHE) has a pretty detailed account at http://www.insidehighered.com/news, and the Foundation for Individual Rights in Education (FIRE) has a column up that its VP has just published in the Boston Globe at http://www.thefire.org. For anyone wishing to protest what is happening there, the email address for Bowdoin's president, Barry Mills, is bmills@bowdoin.edu.
Thursday, April 9, 2009
An Ecological Future: Marx and Wu Wei
I have just written a short paper that I will be presenting in China. Any comments would be appreciated.
Thank you very muchhttp://michaelperelman.wordpress.com/2009/04/10/an-ecological-future-marx-and-wu-wei/
Prosperity without growth
by the Sandwichman
Prosperity without growth, a report of the UK Sustainable Development Commission (March 30, 2009) concludes:
Prosperity without growth, a report of the UK Sustainable Development Commission (March 30, 2009) concludes:
The clearest message from the financial crisis is that our current model of economic success is fundamentally flawed. For the advanced economies of the western world, prosperity without growth is no longer a utopian dream. It is a financial and ecological necessity.Step 5 of the report's "12 Steps to a Sustainable Economy":
In a declining or non-increasing economy, working time policies are essential for two main reasons: 1) to achieve macro-economic stability; 2) to protect people’s jobs and livelihoods. But in addition, reduced working hours can increase flourishing by improving the work-life balance. Specific policies need to include: reductions in working hours; greater choice for employees on working time; measures to combat discrimination against parttime work as regards grading, promotion, training, security of employment, rate of pay and so on; better incentives to employees (and flexibility for employers) for family time, parental leave, and sabbatical breaks.The report's forward:
Every society clings to a myth by which it lives. Ours is the myth of economic growth. For the last five decades the pursuit of growth has been the single most important policy goal across the world. The global economy is almost five times the size it was half a century ago. If it continues to grow at the same rate the economy will be 80 times that size by the year 2100.Not everyone agrees that the unambiguous goodness of economic growth is a myth. Amity Shlaes (with elocution rivaling George W. Bush's):
This extraordinary ramping up of global economic activity has no historical precedent. It’s totally at odds with our scientific knowledge of the finite resource base and the fragile ecology on which we depend for survival. And it has already been accompanied by the degradation of an estimated 60% of the world’s ecosystems.
For the most part, we avoid the stark reality of these numbers. The default assumption is that – financial crises aside – growth will continue indefinitely. Not just for the poorest countries, where a better quality of life is undeniably needed, but even for the richest nations where the cornucopia of material wealth adds little to happiness and is beginning to threaten the foundations of our wellbeing.
The reasons for this collective blindness are easy enough to find. The modern economy is structurally reliant on economic growth for its stability. When growth falters – as it has done recently – politicians panic. Businesses struggle to survive. People lose their jobs and sometimes their homes. A spiral of recession looms. Questioning growth is deemed to be the act of lunatics, idealists and revolutionaries. But question it we must. The myth of growth has failed us. It has failed the two billion people who still live on less than $2 a day. It has failed the fragile ecological systems on which we depend for survival. It has failed, spectacularly, in its own terms, to provide economic stability and secure people’s livelihoods.
Today we find ourselves faced with the imminent end of the era of cheap oil, the prospect (beyond the recent bubble) of steadily rising commodity prices, the degradation of forests, lakes and soils, conflicts over land use, water quality, fishing rights and the momentous challenge of stabilising concentrations of carbon in the global atmosphere. And we face these tasks with an economy that is fundamentally broken, in desperate need of renewal.
In these circumstances, a return to business as usual is not an option. Prosperity for the few founded on ecological destruction and persistent social injustice is no foundation for a civilised society. Economic recovery is vital. Protecting people’s jobs – and creating new ones – is absolutely essential. But we also stand in urgent need of a renewed sense of shared prosperity. A commitment to fairness and flourishing in a finite world.
Delivering these goals may seem an unfamiliar or even incongruous task to policy in the modern age. The role of government has been framed so narrowly by material aims, and hollowed out by a misguided vision of unbounded consumer freedoms. The concept of governance itself stands in urgent need of renewal.
But the current economic crisis presents us with a unique opportunity to invest in change. To sweep away the short-term thinking that has plagued society for decades. To replace it with considered policy capable of addressing the enormous challenge of delivering a lasting prosperity.
For at the end of the day, prosperity goes beyond material pleasures. It transcends material concerns. It resides in the quality of our lives and in the health and happiness of our families. It is present in the strength of our relationships and our trust in the community. It is evidenced by our satisfaction at work and our sense of shared meaning and purpose. It hangs on our potential to participate fully in the life of society.
Prosperity consists in our ability to flourish as human beings – within the ecological limits of a finite planet. The challenge for our society is to create the conditions under which this is possible. It is the most urgent task of our times.
Tim Jackson Economics Commissioner Sustainable Development Commission, March 2009
"One of the things that we started out this conversation about -- growth with -- was what is humane? So really, being humane and having growth go together -- growth is humane. It's one of the ways -- the most efficient ways to be humane. We all agree on that."
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:
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.
[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.
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.
Wednesday, April 8, 2009
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:
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..."
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.That pretty much sums up what the Sandwichman is trying to say. And has been trying to say for, oh, about 14 years.
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..
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..."
Tuesday, April 7, 2009
"The Poor Man's Son, whom Heaven in its Anger has Visited with Ambition..."
by the Sandwichman
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 :
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.
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.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.
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.
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:
Brian says the Wall Street Journal gets it right with this:
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:
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.
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
Monday, April 6, 2009
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
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:
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.
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.
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