Thursday, August 13, 2009

Why Deficits Have Not Increased Interest Rates: Brad DeLong Makes Me Go Huh?

Brad DeLong makes an interesting observation:

it is astonishing. Between last summer and the end of this year the U.S. Treasury will expand its marketable debt liabilities by $2.5 trillion--an amount equal to more than 20% of all equities in America, an amount equal to 8% of all traded dollar-denominated securities. And yet the market has swallowed it all without a burp


If Brad wanted to mock the standard new classical belief that we are always near full employment so any significant fiscal stimulus would drive up interest rates, this observation would be a nice rebuttal along the lines of the old fashion Keynesian notions that we are both below full employment and are in a liquidity trap. But what he writes seems to combine two very different propositions as if they were the same thing:

The standard Chicago "Ricardian equivalence" argument is that government deficits have no effect on nominal aggregate demand because private savings rise dollar-for-dollar with the government's deficit. The magnitude of the tax cuts associated with the stimulus package are running at about $25 billion per quarter--an extremely small share of the rise in Treasury borrowings. Otherwise, Chicago says, supply-and-demand are supposed to rule--and a sharp increase in Treasury borrowings is supposed to carry a sharp increase in interest rates along with it to crowd out other forms of interest sensitive spending.


If all of the fiscal stimulus had been in the form of tax cuts (what the Republicans advocated), Ricardian equivalence would hold that none of it would have been consumed, which would mean no outward shift of the IS curve. Of course, interest rates did not increase as the national savings schedule was unaffected. That what the first sentence in this passage says - but then the last sentence does something else. It talks about what would happen if fiscal policy did lower the national savings schedule and hence shift out the IS curve under new classical thinking.

To be fair, much of the Obama fiscal stimulus was in the form of higher government purchases (note some of us wanted all of it in the form of higher purchases) which would shift outward the IS curve. That this occurred with no increase in interest rates strikes me as evidence that we are both below full employment and are in a liquidity trap. I suspect this is what Brad is trying to say here.

Hours of Labour 10

by Sydney J. Chapman (translated and condensed by the Sandwichman)

It would seem, therefore, that at least two reasons can be derived from economic theory for state intervention in the matter of the hours of labor, if it is assumed that the state can discover what is best for the country. One is to correct the tendency of people engaged in industry to agree upon an amount of sacrifice to money-making, which means a large future loss, involving the next generation, for a small present gain; the other is to fortify, if needful, the resistance of workers to the disposition of some employers to secure a greater product at the expense of the workers' convenience. This conclusion would, however, be too hasty a deduction.

Economic matters are settled, not merely by the self-regarding forces that we have hitherto emphasized, but also by social conceptions, embodied in public opinion and class notions of what is right and proper that defy expert analysis and any accurate evaluation as influences. These social conceptions, which are not deliberately framed on a rationalistic basis, but proceed insensibly as it were from the needs of human life, are less intermixed with religious elements now than they used to be, but are none the less powerful. Resting on the seventh day is not at present a religious observance to the extent it was in the past, but it has not universally been found necessary to supplement the declining religious sanction with a legal sanction. How far progress that runs counter to tendencies determined solely by self-regarding forces may be left to the operation of these incalculable motives that sway every community can be settled only by careful observation. It is sufficient now to recognize their existence, and to point to the reductions of the hours of labor in recent years.

I do not propose to consider here the merits of legislation for establishing standards for the hours of labor, except to observe, first, that Government interference aimed at securing reasonable hours for adult males in all the diversified industries of a country would entail elaborate, elastic, and frequent legislation and would no doubt be accompanied by many grave errors; and secondly, that a prima facie case can be made out for the regulation of the hours even of adult males by authoritative boards or by statute, when labor is weakly combined and hours are evidently sweated hours, and evidence is forthcoming that they are detrimental to health or vigor. Nor do I propose to consider whether it might not be better to suffer for a time present ills in the hope that there would grow up in the community an adequate power of self-regulation, possibly accompanied by valuable social consequences that otherwise might never have been elicited. I am hopeful that public opinion, directed by economic and ethical enlightenment will in the future become an increasingly effective factor in progress, apart from its expression in law. Even to-day, in view of the dependence of producers on demand, neither employers nor trade unions can afford to brave for long public sentiment, though unorganized, when it is aroused. Public sentiment in the years ahead may be expected to respond more sensitively to incidents in its surroundings that offend against social conceptions of what is right and proper. The cases of children, young persons, and women, which bring in special considerations, must be ruled off from the subject matter of this address.

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Wednesday, August 12, 2009

"Technological Unemployment" Redux

by the Sandwichman

A while ago, an anonymous commentator on this blog made the sage observation that the phrase "technological unemployment" is an unfortunate one and a distraction from the real issue -- "a feint to blame on technology what is simply a matter of economic policy."

The Sandwichman agreed with the point but was resigned to continue using the phrase. No longer. Last week in a Washington Post op-ed, Gregory Clark demonstrated the utter infelicity of the idea behind the phrase. In Clark's fevered imagination, robots were on the brink of permanently displacing human labor of the more ordinary sort and the only solution was to increase taxes on the "winners" to support the "losers".
So, how do we operate a society in which a large share of the population is socially needy but economically redundant? There is only one answer. You tax the winners ... to provide for the losers.
Clark's dystopian musings evoked a colossal harrumph from the usual free marketeer suspects such as Will Wilkinson and Tim Worstall, including the charge that Clark committed a lump of labor fallacy.

In this case, the Sandwichman upholds the objection. Clark commits the fallacy! Perhaps he got his future scenario from the Flight of the Conchords send up:
The distant future, the year 2000...

The future is quite different to the present.
Yes, what with there being no more stairs and all.
And most importantly, no more humans.
Finally, robotic beings rule the world.

The humans are dead,
The humans are dead.
We used poisonous gases
And we poisoned their asses.
The humans are dead.
(Yes they are dead.)
The humans are dead.
(I confirm they are dead.)
It had to be done
(They look like they`re dead)
O.K., let's reboot this untechnological unemployment misnomer.

Technology doesn't destroy jobs. What technology does is make possible and make necessary either increased consumption, increased leisure or both. Unemployment results not from a quantity of jobs deficit but from an adjustment deficit. Unemployment results, that is to say, from a failure to establish a new income, consumption and work time regime commensurate with the new production potential offered by the technological advance.

Furthermore, adjustment is no more "automatic" than is technological change. Hello? Has anyone ever heard of "patents"? Or of government financial subsidies to research and development. On the contrary, adjustment should be considered an inherent part of the reciprocal process of technological innovation.
Why it is not treated as such by so-called economists is a question 26,000,000 unemployed and underemployed Americans deserve an answer to.

The Wild Lives of Early Economists

To give you a flavor of where my new book is heading:

Here is the first & only sentence of the introduction and the first sentence of the book:

Besides describing some of the brilliant accomplishments of the colorful founders of economics, this book will also discuss their dark side, including a few murders, over and above crimes more commonly associated with economists. At the same time, these economists’ lives and work will throw light on both contemporary economics and economies.

Before discussing the work and life of William Petty (1623-1687), it might be of interest to note that he has the unique distinction of being the only economist in history credited with having brought a person back from the dead. We will get back to that feat later.

Tuesday, August 11, 2009

William Petty and Global Warming

I'm working on a book about 17th century and early 18th economics, beginning with William Petty. After describing his wild personal life, I'm trying to make the connection between Petty's emergence and the global climate at the time. Please tell me if this is too far-fetched.

The Sun Shines on William Petty

Mother Nature may have smiled upon William Petty, whose maturity coincided with a short, but welcome break in the Little Ice Age. Shortly before Petty's death in 1687, the cold weather returned. For example, the winter of 1683‑4 was particularly harsh (Lamb 1982, p. 223).

Today, when the threat of global warming looms large, people might be more sensitive to the profound effects of the weather. In earlier periods of cold weather created equally harmful results. One long‑term study of the effects of weather over the centuries concluded: "cooling impeded agricultural production, which brought about a series of serious social problems, including price inflation, then successively war outbreak, famine, and population decline successively. The findings suggest that worldwide and synchronistic war‑peace, population, and price cycles in recent centuries have been driven mainly by long‑term climate change" (Zhang et al. 2007, p. 19215).



David Hackett Fischer's The Great Wave: Price Revolutions and the Rhythm of History paints the stark picture of the times of Petty's youth:

"Famine, pestilence, and economic depression were accompanied by war. During the entire century from 1551 to 1650, peace prevailed throughout the continent only in a single year 1610. These conflicts were remarkable not only for their frequency but also their ferocity."


"During the early seventeenth century, the armies of Europe reached their largest size since the Roman era. Their upkeep imposed heavy costs at the same time that public revenues were reduced by the combined effect of famine, pestilence, war, depression, regressive taxation and monetary inflation. They also were put to use in most of Europe." [Fisher 1996, pp. 96‑97]

Fisher went on to add: "The greatest works of literature, painting, philosophy and theology in this era commonly expressed a mood of increasing pessimism and despair" (Fisher 1996, p. 100). During the second half of the Seventeenth Century, conditions were improving grain prices tended to fall (Fisher 1995, p. 105).

None of this is meant to suggest that the world suddenly became a comfortable place of peace and prosperity. The winter of 1683‑4 was particularly cold. In addition, Petty's own work with the Royal Society was closely associated with preparing for military adventures. Some of his later writings suggested that the prospects for war with France were favorable. And finally, an optimistic belief in progress was not unknown during the cold period. Samuel Hartlib, Petty's own promoter was a case in point.

Nonetheless, the optimistic swagger of Petty's proposals fell on more fertile ground as future prospects were looking better. More broadly, economic thinking tends to follow one of two paths. First, some give an ideological justification of the status quo, arguing that what is happens to be the optimal arrangement for now and for the future. Others offer proposals for improvement. At times, such as the warming mid‑seventeenth century, when new possibilities seem to be opening, such proposals are more likely to fall on fertile ground.

For example, even though Hartlib's musings about information might seem quite modern in light of the Internet, he never exercised much influence. Petty, who also had his share of far‑fetched ideas, was generally recognized as an "universal
ercised much influence. Petty, who also had his share of far‑fetched ideas, was generally recognized as an "universal genius," even by many who disagreed with him.

Hours of Labour 9

by Sydney J. Chapman (translated and condensed by the Sandwichman)

I now would like to compare specifically the effect on wages with the effect on the working day of the mechanical action of pure competition. In the matter of wages, if workers were too weak to have much influence in settling their pay, competition between employers, were it keen and unchecked by combination, would at least secure to the workers as a wage, for a given working day, their marginal worth (within limits set by social friction) in view of their then state of efficiency. Thus in the circumstances supposed the worker would tend to get approximately the utmost possible – apart from the question of the reaction of wages on efficiency – in an active society based on free enterprise, for we may take it that in such a society the bidding of individuals against one another for labor would continue at least up to the known marginal worth of labor.


Observe, however, that the existence of such bidding may imply that new businesses are being established, or that old-established employers are anxious to make considerable extensions because old-established employers, knowing that similar workmen must be paid the same, might avoid a course of action that resulted in a gain less than the loss involved in the elevation of wages. It is doubtful whether employers would as a rule assume that if they did take steps leading to an advance in wages others would do so, for, not unnaturally, employers are commonly indisposed to disturb rates of wages except for strong reasons. Even if employers were endowed with a powerful telescopic faculty, they would not necessarily invest in paying wages in excess of the workers' present marginal productivity (for the purpose of enhancing their future physical and mental vigor) because of the danger that some workers would find employment elsewhere, thus transferring to rival employers the returns from the long-sighted investments made in them.

Other things being equal, of course, the higher the efficiency of labor the greater is the gain, not only of the workman, but also of the employer. Now, as regards the working day, we have already seen that uncombined employers might keep it longer than would be desirable from their point of view, for the same reasons for which they might keep wages lower than would be desirable from their point of view. These reasons are, I repeat again, short-sightedness, or fear of incurring an expense the fruits of which other employers might reap. In this respect competition between employers is equally defective in its bearing on wages and in its bearing on the length of the working day. But, from the perspective of the quality of life of the workers, it has an additional defect in its bearings on the length of the working day; for although competition between employers in an competitive economy would bring about the length of working day that the workers would choose at the wages making it possible, the choice of the workers is apt to be distorted by a limited awareness of the positive effect of shorter hours on productivity and hence wages.

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Monday, August 10, 2009

My Youthful Encounter with Nuclear Warfare

Today is the anniversary of the dropping of the atomic bomb. It brings to mind a useful experience.

Sometime in the mid- or early-1950s, I was having dinner at my great aunt's house with my brother, my parents, and my mother's cousin, Morris Fiterman (sp?). Morris was a medical doctor, who served in the Army as an hospital administrator and was a close friend of the President's son, John Eisenhower. Morris was telling us about his work on any military commission to decide whether or not to use nuclear weapons against North Korea. He said that military rejected the idea only because the prevailing winds would have brought too much radiation down upon South Korea and the US soldiers.

I don't remember any of the other details, except what he told us about the Bataan Death March in which the Japanese army supposedly starved American prisoners. He said that the rations given to the Americans were identical to the Japanese. He also said that the Japanese prisoners complained that their American captors were putting their lives at risk by feeding them unpalatable food, such as bacon and eggs.

Lindsey Graham Frames the Health Insurance Debate

Ezra Klein interviews the Republican Senator from South Carolina with the highlight line being:

My belief is that no private-sector entity can survive over a long period of time competing against the government.


Peter Harbage and Karen Davenport a few months ago argued that this is the essential reason we need a public option – a theme being echoed by progressives recently:

Lack of competition in this critical marketplace means poor transparency and accountability, resulting in costly health care that harms our national health, bleeds our personal finances and the federal budget, and hinders our economic competitiveness. None of this is acceptable amid the worst slide in economic growth in 60 years. Fortunately, our nation’s health insurance market can be fixed with a big dose of what fixes most sectors of our economy—healthy, well-supervised competition. One of the best ways to introduce this much-needed competition is for the federal government to offer a public health insurance plan that can compete with private insurers within an insurance “exchange” that ensures public and private health insurance plans compete equally and transparently in the public marketplace.


Maybe someone should ask Senator Graham whether he supports this lack of competition or whether he has an alternative means for introducing more competition.

Calling Spirits fron the Misty Deep: Bob Eisner edition

The Administration needs to get people out there - such as Jared - hammering away at the difference between government consumption and government investment and drawing the relevant consequences for thinking about the effects of budget deficits. High deficits, for example, as the economy moves back towards potential output, will raise the level of the real interest rate relative to what it would have been. But if the deficits are to finance bridges to somewhere, and especially if it is for public investment that complements rather than substitutes for private investment, then worrying about the higher rate is just as misplaced as worrying about the interest rate consequences of a private investment boom. The neat thing about judicious public investment is that it's good for stimulus and good for growth. It's good for stimulus because it doesn't lower and may raise permanent income and so need not lower consumption at all, or even increase it, increasing the bang for the buck of G. And it's good for growth: does anyone think that the post-war to '73 golden age of growth had nothing at all to do with things like the construction of the interstate highway system and the GI bill? And Jared, or someone, could hammer away at the differences in the investment composition of the G we got from Bush's gang versus now, and how that would matter in a rational accounting - with the capital budgeting the late Bob Eisner called for - of the big bad Deficit.

Sunday, August 9, 2009

Challenging Professor Glaeser

by the Sandwichman

Harvard Professor Edward Glaeser confuses the Jevons Paradox and the lump of labor fallacy.
The cash-for-clunkers policy seems based on the mistaken view that the number of miles traveled is independent of the price or pleasure of driving. I call this the 'lump of travel fallacy,' which is one of a family of lumpy errors that all assume things will stay fixed when they won’t...

The original lump fallacy is the 'lump of labor fallacy.' This fallacy holds that there is a fixed amount of work to be done in society, so restricting working hours will reduce unemployment. Encouraged by this logic, European polities have long restricted work hours. The history of Europe’s labor markets illustrates that more regulations makes hiring less attractive and reduces the total amount of work done in a society.
Dear Professor Glaeser,

You have an excellent point about the cash-for-clunkers program ("Program has clunky reasoning," Boston Globe, Aug 8). Unfortunately, you mess it up by referring to the wrong "economic principle". The idea that people will travel more in their snazzy new, more fuel efficient cars is an example of the Jevons Paradox not the lump of labor fallacy.

Moreover, the example that you presents to illustrate your fallacy claim is an inept distortion both of the original lump of labor fallacy and of recent employment history in Europe. The original lump claim was an anecdotal complaint about restrictions on output.

The tactic of attributing the motivation for reduced work time policies to some underlying fallacy is an intellectually dishonest smear. I've documented the history of the lump of labor claim about shorter working time and I challenge you, Professor Glaeser, to openly debate my rebuttal of the fallacy claim, with regard to reducing the hours of work.

Yours sincerely,

Tom Walker,
author, "Why Economists Dislike a Lump of Labor" Review of Social Economy, Fall, 2007,
http://tinyurl.com/lumpoflabor

Outrageous Poverty and the Blue Dogs

OK, you all know about Paris Hilton's $325,000 doghouse. Then the Wall Street Journal chimed in with an article by a British physician informing the American public that dogs get better health care than ordinary humans in the British medical system. Thank God for those good U.S. insurance corporations that protect us from such a fate. And thank God for warning us of the dangers of single payer.

Dalrymple, Theodore. 2009. "Man vs. Mutt." Wall Street Journal (8 August).

Then Barbara Ehrenreich published a brilliant piece showing how governments are criminalizing poverty -- yes, making it a crime to threaten society by sleeping on the street or some such violent act. Yet, dogs, are free to behave that way.

Ehrenreich, Barbara. 2009. "Is It Now a Crime to Be Poor?" New York Times (August 8)


From all this I have now learned that dogs have become the standard by which we must judge humanity. When workers complement bosses for treating them like dogs, we will understand. Poor people should aspire to enjoy canine cuisine.

Makes you want to join the Blue Dogs (or should that be Blue Bloods?). Or might there be a better system for organizing society? I don't have time to go any further. I have to get back to reading Kapital.
The criticism of religion ends with the teaching that man is the highest essence for man - hence, with the categoric imperative to overthrow all relations in which man is a debased, enslaved, abandoned, despicable essence, relations which cannot be better described than by the cry of a Frenchman when it was planned to introduce a tax on dogs: Poor dogs! They want to treat you as human beings!

Marx, A Contribution to the Critique of Hegel’s Philosophy of Right


Hours of Labour 8

by Sydney J. Chapman (translated and condensed by the Sandwichman)

We are assuming throughout, it must be remembered, that the wage will always be the worker's marginal worth – that is, what would be lost if he were dismissed – and that he knows it. Actually, of course, there is frequently an appreciable discrepancy between the marginal worth of labor and its wage, and the usual connection between them has not been commonly understood by the wage-earning classes. It would seem from the records of labor movements as if the worker's fear – based as much on ignorance as on distrust – lest the longer day should mean no more pay, though the weekly product would be greater, has protected him against the injurious consequences of short-sightedness; but I am inclined to think that the dominant force in these labor movements has consisted in ideals of life, formed half instinctively, which are unconnected with views, fallacious or otherwise, concerning the mechanics of distribution. Bad arguments have been used to justify good ends. To these ideals of life I shall refer again.


Actually, the actions of both employers and employed, in so far as they are governed by self-regarding motives, will compromise between immediate impulses and long-sighted calculations. Long-period results that are not very remote will usually be factored in, and employers as well as workers may aim at them, because the former may think the length of time a worker usually stays with one firm sufficient to justify a slight present sacrifice made with the object of securing improvement in the worker's efficiency.

The above analysis explains not only disagreements between employers and workers as regards the normal working day, but also the friction that is constantly generated in the matter of "overtime." Without the admission of overtime, heavy losses might be experienced by an industry in view of the inelasticity of its production and fluctuations in the market in which it sold; but, on the other hand, overtime once admitted sometimes tends to be worked out of proportion to the special need for it, and workers are apt to suspect that it is being used unfairly to extend the normal day.

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Friday, August 7, 2009

The Fundamental Truth of Basic Facts III

by the Sandwichman

Moving right along from Liberty Lobby Carothers and Brookings Institute Moulton we arrive at Thomas Nixon Carver's December 1931 presentation at the annual meeting of the American Economic Association, summarized in the American Economic Review for March 1932. Professor Carver was best known for his contribution to the abstinence theory of interest from the perspective of marginal productivity.

Professor Carver detected four 'errors' in the reasoning of those who advocate shorter working time as cure for unemployment:

First, shorter hours does not reduce unemployment, "it only smears it more evenly." Instead of 10% unemployed and 90% employed, everyone would be employed 90% of the time and unemployed 10% of the time.

Second, more leisure doesn't increase the demand for goods unless it is accompanied by greater purchasing power. Furthermore, leisure could just as easily be spent in the cultivation of the arts and graces. "If the cult of leisure should result in the popularization of Gandiism [sic], humanism or any of the highbrowisms, it would decrease the desire for material goods."

Third, if shorter working time is accompanied by an increase in wages to hold total income constant it will raise the unit cost of products, resulting in decreased sales. "Even though each worker produces less, it may not take any more workers to produce the reduced volume than it took before." Besides, even though workers' money income stayed the same, price increase would mean their real income went down.

If instead of reducing the hours of work, the money wages of workers were reduced, this would result in lower prices, expanded employment and more or less level real wages. Shorter work time bad; lower wages good.

Fourth, it is a mistake to assume that shorter hours would have the same effect globally as it might when applied in only one or a few industries.
"If, as the purchasing power of money wages falls, money wages are advanced in order to keep real wages at the old level, that will send the cost of production still higher, reduce the quantities that can be purchased by those who are not wage workers, call for a still smaller volume of production, and completely nullify any supposed advantage to the unemployed."


Ten Lost Years

by the Sandwichman

We interrupt the cheering for the better-than-expected, less-bad-than-previous-months unemployment increase for the following announcement:
Seasonally adjusted private nonfarm employment, August 1999: 108,959,000.

Seasonally adjusted private nonfarm employment, July 2009: 108,924,000(Preliminary).
A loss of 35,000 private jobs in TEN (10) years.

Unemployment Rate Falls as Employment-Population Ratio Declines

BLS reports even more job losses in July:

Nonfarm payroll employment continued to decline in July (-247,000), and the unemployment rate was little changed at 9.4 percent


But the unemployment rate was 9.5 percent in June. Had the Administration been Republican, Lawrence Kudlow would be hailing this report as good news. Paul Krugman offers a different tone:

Some readers have asked how it’s possible for unemployment to fall when the economy is still losing jobs, albeit at a slower rate. The answer is a bit annoying. First, the jobs number and the unemployment number are based on different surveys — a survey of establishments in the first case, a survey of households in the second. Sometimes employment rises by one measure while falling by the other, although it happens that this month there isn’t much difference in the jobs number.


The household survey also showed job losses – with its figure being 155,000, which drove the employment-population ratio down from 59.5% to 59.4%. The labor force participation rate, however, also fell from 65.7% to 65.5%. The employment picture got a little worse last month or as Paul concludes:

the employment situation is drifting down, but not plunging — occasional mixed signals are likely. No big deal. The basic story is that things are sort of stabilizing — but they’re definitely not improving yet.