Only One Decade

[Preliminary ramblings and portents of the Southern hemisphere Summer approaching.]

At our local seaside the sea level is rising and undermining the vegetation growing along the beach. Several lengths of concrete bicycle-way have been washed away by the rising water along with the wooden-slatted footpaths leading to favoured swimming areas. A light pole next to a bridge that crosses the Cam River (where this water-body meets the sea) has completely toppled. At high tide the salty spray rises up into the air about thirty feet and is now encroaching on the railway line that runs parallel to the shore. The shape of the beach has changed significantly.

All of these changes have happened very quickly; maybe in the last 9 months or so. The weather has also changed. This winter was Australia's hottest on record. Where I live, in North West Tasmania, the fourth wettest winter known has just passed. Winters in the last five years have been extraordinarily dry. Strange things happened in the garden and in the native forests these last two months. The manferns unfurled their fronds three months too early. Fruit trees and the blueberry bush flowered unexpectedly.

On mainland Australia the Murray River has dried up completely in some areas. Where water exists the river could more aptly be described as a creek. Level 4 water restrictions have been imposed in all towns along its meandering banks - in the 'wet' season. That means that the use of garden hoses is prohibited. Outdoor taps can only be used to fill buckets. The backyard vegetable gardens struggle to exist as native galahs and other birds converge on them for feed in an otherwise sparse landscape.

Three weeks ago the Premier of the Australian state of Victoria warned that next summer the fire season is going to be even worse than last February when 624 fires burnt out of control there and almost two hundred people lost their lives; thousands lost homes. The koala may soon be listed as endangered.

I feel very afraid.

Two months ago:

"...unless we quickly stabilise the earth’s atmosphere at 350 parts per million (ppm) or less, the subsequent increase in global warming will cause the complete loss of Arctic sea ice this decade. Carbon dioxide levels are now at 387ppm and rising every day. The rapid loss of Arctic sea ice (predicted by some scientists to be completely melted within four years; many others sometime this decade) will remove the reflective protection the ice currently affords us, and allow the unprecedented release of billions of tonnes of methane (much more powerful than carbon dioxide) from the permafrost beneath the ice, leading to a surge in global warming we will be powerless to halt. To avoid the near term possibility of runaway climate change we have to dramatically cut our emissions, possibly by as much as 100 per cent within a decade. Not only that; we must remove carbon dioxide from the atmosphere because the level of carbon dioxide in the atmosphere has already exceeded a level considered safe. The science is telling us we have just one decade to turn this around. Otherwise we face chaotic weather events; the failure of major ecosystems; the destruction of communities as natural resources disappear and ultimately, the destruction of our species. [1]"

AND, this week:

"Not only is the Arctic serving as a warning, the warming there is accelerating global climate change"

"Instead of reflecting heat, the Arctic is absorbing it as the sea ice diminishes, thus speeding up global warming; "Methane, trapped in permafrost and on the sea bed, is escaping into the atmosphere."

"...increased melt from the Greenland ice-cap threatens to raise sea levels and alter the flow of the Gulf Stream, essential to keep Europe warm."

On the Economics of emissions reductions and global warming:
"... the real scaremongers are those who say we cannot afford climate action - that it will hold back economic growth; They are wrong. Climate change could spell widespread disaster [and] the price of failure in Copenhagen would be high not just for future generations, but for this generation." [2]

[1] There is only one moral, ethical approach to climate change
By Fiona Armstrong - posted Thursday, 25 June 2009
http://www.onlineopinion.com.au/view.asp?article=9077

[2] UN Secretary General quoted this week at:
United Nations announcement of pending Climate Disaster by Karlin .....
Date: 3rd September 2009 5:42:34 PM
http://www.curezone.org/blogs/fmp.asp?i=1483976

A Dynamic Stochastic Cargo Cult

by the Sandwichman

"It was a hodgepodge of unsupported arguments, outright mistakes, and impenetrable jargon designed to 'test' its host journal's intellectual integrity."

In the end, I resorted to parody for a simple pragmatic reason. The targets of my critique have by now become a self-perpetuating academic subculture that typically ignores (or disdains) reasoned criticism from the outside. In such a situation, a more direct demonstration of the subculture's intellectual standards was required.

"But there is one feature I notice that is generally missing in cargo cult science."

It's a kind of scientific integrity, a principle of scientific thought that corresponds to a kind of utter honesty--a kind of leaning over backwards. For example, if you're doing an experiment, you should report everything that you think might make it invalid--not only what you think is right about it: other causes that could possibly explain your results; and things you thought of that you've eliminated by some other experiment, and how they worked--to make sure the other fellow can tell they have been eliminated.

Details that could throw doubt on your interpretation must be given, if you know them. You must do the best you can--if you know anything at all wrong, or possibly wrong--to explain it.

...And it's this type of integrity, this kind of care not to fool yourself, that is missing to a large extent in much of the research in cargo cult science.

A Different Environmental Threat: Peak Rare Minerals, China, and Green Technology

One of the keys to Green Technology may be buried in China. It has only recently begun to appear in the media, but for very different reasons. A couple of years ago, the New Scientist published a piece about the risks of the scarcity of rare minerals.

Cohen, David. 2007. "Earth's Natural Wealth: An Audit." New Scientist Issue 2605 (23 May): pp. 35-41.

Three facts are bringing this looming shortage to the attention of mainstream media. First, the US is dependent on exports of these minerals, while China is the main exporter. Second, these minerals are crucial for high technology, including both military and so-called Green Technologies.

My next encounter with the rare earth problem came in David Cay Johnston's wonderful book. Here are my notes:

Johnston, David Cay. 2007. Free Lunch: How The Wealthiest Americans Enrich Themselves at Government Expense (And Stick You With The Bill) (New York: Portfolio).

37: "In 1982, competing groups of scientists around the world found a way to combine iron and boron with a somewhat rare earth called neodymium to make extremely powerful and lightweight magnets. These magnets quickly found a market in computer hard drives, high-quality microphones and speakers, automobile starter motors, and the guidance systems of smart bombs."

38: "General Motors created a division to manufacture these magnets, calling it Magnequench .... Then in 1995 the automaker decided to sell the division. Because the deal was for only $70 million it attracted little attention. The buyer was a consortium of three firms .... but the real parties behind the purchase were a pair of Chinese companies -- San Huan New Material High-Tech Inc. and China National Nonferrous Metals. Both firms were partly owned by the Chinese government. The heads of these two Chinese companies are the husbands of the first and second daughters of Deng Xiaoping, then the paramount leader."

38: At the time, GM was trying to get a toehold in China. One of the Goddard's was at the time vice minister of the Chinese State Science and Technology Commission, which had the responsibility for acquiring military technology by any means.

39: The Clinton administration agreed the sale under the condition that the new owners keep the production and technology in the United States. The new owners began to buy factories in the United States including GA Powders, an Idaho firm that used government money to develop a monopoly on the production powerful methods. Then the Chinese company shut down American production and moved everything to China.

The reference to Deng is interesting, as you will see in a moment.

In any case, Clinton agreed to give China access to this high technology so that GM could peddle its low technology.

According to Keith Bradsher in the New York Times "A single mine in Baotou, in China's Inner Mongolia, produces half of the world's rare earths. Much of the rest -- particularly some of the rarest elements most needed for products from wind turbines to Prius cars -- comes from small, often unlicensed mines in southern China. China produces over 99 percent of dysprosium and terbium and 95 percent of neodymium. These are vital to many green energy technologies, including high-strength, lightweight magnets used in wind turbines, as well as military applications."

Bradsher, Keith. 2009. "China Tightens Grip on Rare Minerals." New York Times (31 August): p. B 1.http://www.nytimes.com/2009/09/01/business/global/01minerals.html?scp=1&sq=terbium&st=Search

The Prius uses a battery built around the technology that GM was developing. The Wall Street Journal reported:

"The Prius, according to a report by commodities consultant Jack Lifton, uses at least 12 kg of rare-earth metal lanthanium for each battery."

Yap, Chuin-Wei. 2009. "Might the Prius One Day Get a Chinese Heart?" Wall Street Journal (4 September): p. C 12.http://blogs.wsj.com/chinajournal/2009/09/04/might-the-prius-one-day-get-a-chinese-heart/

Now back to Deng. Bradsher reported:

"Deng Xiaoping once observed that the Mideast had oil, but China had rare earth elements. As the Organization of the Petroleum Exporting Countries has done with oil, China is now starting to flex its muscle."

So windmills and Cruise Missiles need the stuff. So does the Prius -- the presumptive answer to GM, which gave up on the technology. The Wall Street Journal Reports:

All this comes in the mainstream media today, because China is moving to prevent (or perhaps only limit) the exports of these mineral. The effect will be to force the rest of the world to move might of its production of high technology to China. China explains its reluctance to export by the need to put tighter environmental controls on the highly polluting technology used to extract these minerals. More likely, Deng's vision seems to be coming to pass.

Some companies are trying to open up new options. The previously cited Wall Street Journal article reports:

"Companies like Toyota and Sumitomo have already started to develop alternative rare earth sources in places like Kazakhstan and Vietnam. The trouble is it takes a long time to develop a rare earth mine on a commercial scale. Dudley Kingsnorth, a prominent industry consultant, notes it took the Mt. Weld mine in Australia more than 10 years to get going."

So stay tuned, so long as we get the minerals to keep our electronics working.

Actually Existing Death Panels

We used to hear about "actually existing socialism," which was neither as bad as its worst critics said nor as good as its biggest fans said, with it ready to collapse in Europe 20 years ago for a variety of reasons. Lots of opponents of health care reform have been ranting about "death panels" that somehow might come into being due to it.

The problem is that we already have "actually existing death panels." They are called private health insurance companies that turn down more than 20% of payment requests, at least in California on average. A non-trivial number of these turndowns result in death, although it is hard to determine how many, although I suspect that our much poorer life expectancy number in the US is at least partly due to this.

Of course, many people go the other route and have too expensive medical procedures done anyway to save their lives. The upshot is that in 2007 the Journal of Medicine found that over 60% of personal bankruptcies in the US were due at least partly to medical spending, thousands of people per year. The number per year in Britain, France, Germany (and a much longer list of countries)? A big fat zero.

The Importance Of A Single Individual

I am talking about the late Senator Edward M. Kennedy. While some hoped that his death would inspire a push to achieve his lifelong passion, decent health care reform, it is now increasingly looking like his untimely death will guarantee that the public option part of it will not be included in whatever might still be adopted. It is not his fault, as he asked the Massachusetts legislature and governor to change their rules so that a successor to him could get seated quickly. However, they have not done so, and now it looks like the Dems will have only 59 seats in the Senate when health care reform comes to a head.

The problem? That darned cloture vote, which needs 60 to pass it and shut down the certain Republican filibuster. So, we are now seeing the spectacle of Obama negotiating with a single senator, moderate Maine Republican Olympia Snowe who supported his stimulus package, so as to get that 60th vote. And the word is that her price is "no public option," with the rumors rife that Obama will let it go when he speaks on Wednesday. Teddy, you died too soon...

The Truth - Blowin' in the Wind

The story is told of a Australian whose favorite hobby is ballooning who decided to practice her favourite sport one Sunday afternoon. She miscalculates the wind and gets blown across the Pacific Ocean and lands in a field someplace in America. As she is lying there half-stunned in the basket, an American rushes up and says, "What happened?" The Australian woman says, "Where am I?" The American replies, Why, you are in a basket in the middle of a field." To which the Aussie woman asks, "Are you an economist?" Yes I am, how did you know?" said the American. "Because the information you have given me is completely accurate and totally useless."

The nationalities and genders and occupations of the individuals have been changed for the hell of it. The joke comes from Howard J Ruff's 'How to Prosper During the Coming Bad Years - A crash Course in Personal and Financial Survival' written in 1978. On the same page he refers to the 1973 US Budget deficit that was reported to be $3.5 billion but was actually $95 billion. A truth in government accounting bill introduced by then Congressman Phil Crane died a quick death.

Poetical Economics

Pocock, Thomas Love. 1825. "Pan in Town." In The works of Thomas Love Peacock: including his novels, poems (London: R. Bentley and Son, 1875): pp. 222-27, p. 222.
LINK

"The country Banks are breaking:
The London banks are shaking:
E'en quakers now are quaking:
Experience seems to settle,
That paper is not metal,
And promises of payment
Are neither food nor raiment."

Job Loss Revisionism

by the Sandwichman

The biggest problems with the "better than expected" or "slowing pace" interpretations of the monthly BLS employment situation is that no one really knows what the final numbers will be. An underlying factor in this month's not-as-bad-is-good news is that last month's not-as-bad-is-good news turns out to be worse than earlier reported. (See here for a handy table of BLS monthly revisions).

Warning, you can get whiplash from all the stops and starts in the data. With a total -49,000 revision to the June and July numbers, the total *additional* job losses announced today for the past three months was -265,000, which is higher than the originally announced figure for July. In July, the revisions of May and June employment were upward by a total of +43,000 jobs, so the aggregate job losses announced last month came to -204,000. So, all told the news was worse for August than for July by -61,000 jobs.

The preliminary report for June was -467,000 jobs. Last month that was revised to -443,000 jobs. Today it was revised again to -463,000. There's nothing wrong with refining the numbers as more complete data come in. What is objectionable is the trumpeting of supposed "trends" that are entirely within the bounds of the survey's margin of error.

Stagflation kills Capitalism

Every now and again I look at the pieces of the economic history I've compiled and find myself mulling over a picture that emerges that appears to describe the imminent collapse of capitalism itself. However, the evidence points to stagflation rather than 'the market' as the chief culprit in bringing a quick end to our industrial and consumer way of life. The market hasn't failed because it simply hasn't been employed by what John Perkins (former 'economic hit man') calls the global 'corporatocracy'.

The other interesting observation is that the capitalist system appears to have been almost continuously propped up since the late 1960s by ever-increasing loads of sovereign, corporate and personal debt. Despite insolvency.

1972 – 1981 – The price of oil increased nine-fold. This fueled stagflation. Important changes occurred within the World Bank as a result of the energy crisis. It moved from supporting protection for infant industries and state planning and lending for state-owned enterprises to a commitment to trade liberalization and abandoned its support for public enterprises.

1987 – "A confidential World Bank report found little or no evidence that the Bank's lending has caused significant movement toward greater reliance on markets."[1]

"The [World] bank is notorious for giving bad advice....Bank aid has helped many countries build unneeded steel factories, underused airports, and roads that crumble as soon as they are completed. The World Bank is currently run like a Soviet factory, concerned only with meeting its quantitative production goals…. Bank officers have pressured Third World governments to borrow more than they wished to borrow, a practice having dire results for the country… A Congressional Research Service study concluded in 1980, "The Bank is seen as presiding over the buildup of debts which will ultimately be defaulted."[2] ....Despite the fact that 56 Third World countries have now fallen behind in their debt repayments, the bank continues to push for ever greater lending--both by itself and by commercial banks--to Third World governments…. In 1968, Robert McNamara became bank president and dedicated the bank to achieving ever higher loan levels. Between 1968 and 1981, when McNamara resigned, the bank's lending levels increased twelvefold, from $883 million to over $12 billion, and they have continued soaring since then." [3]

[1] Elliot Berg and Alan Batchelder, "Structural Adjustment Lending: A Critical View," CPD discussion paper no. 1985-21, World Bank (January 1985), p. 22. As quoted in: The World Bank Vs. the World Poor by James Bovard. September 28, 1987
http://www.cato.org/pubs/pas/pa092.html

[2] Cited in A. Hughes, "Is the World Bank Biting Off More Than It Can Chew?" Forbes, May 26, 1980, p. 123.As quoted in: The World Bank Vs. the World Poor by James Bovard. September 28, 1987. http://www.cato.org/pubs/pas/pa092.html

[3] The World Bank Vs. the World Poor by James Bovard. September 28, 1987. http://www.cato.org/pubs/pas/pa092.html

Only Another Dinosaur

In 1970, Lewis Mumford wrote an interesting paragraph - under the image of New York's World Trade Centre, as above. In his book 'They Myth of the Machine - The Pentagon of Power' the following text appears:

"The Port of New York Authority's World Trade Center, 110 stories high, is a characteristic example of the purposeless giantism and technological exhibitionism that are now eviscerating the living tissue of every great city. The Port authority, a quasi-governmental corporation, was in origin a happy political invention, first installed in London; but unfortunately its social functions have been subordinated to pecuniary motivations: and its executives have conceived it their duty to funnel more motor traffic into the city, through new bridges and tunnels, than its streets and its parking spaces can handle - while contributing to the lapse of a more adequate system of public transportation that included railroad, subway, and ferry. This policy has resulted in mounting traffic congestion, economic waste, and human deterioration - though with a constant rise in land values and speculative profits. These baneful results were anticipated and graphically depicted by Clarence S Stein, then Chairman of the New York State Housing and Regional Planning Commission, in his article on 'Dinosaur Cities' in the 'Survey Graphic', May 1925. Stein there described the breakdown - already quite visible - resulting from housing congestion, water shortage, sewerage pollution, street clogging, traffic jams, and municipal bankruptcy. But Dinosaurs were handicapped by insufficient brains, and the World Trade Centre is only another Dinosaur."

I deeply suspect, as Lewis Mumford does, that disastrous designs and decisions at the highest levels of world society will perpetuate to (likely imminent and global) catastrophe.

"The suppression of personality is already so complete in an automated economy that the reputed heads of our great organizations are as incapable of changing its goals as the lowliest filing clerk. It is the system itself that, once set up, gives orders."

And It Ain't Shinola... II

by the Sandwichman

Wherein the Sandwichman assesses the validity of the claim by Lanoie, Raymond and Shearer that:

...little empirical work has been done to measure the consequences of work sharing. ...data that would permit the direct measurement of the productivity effects of work sharing has generally not been available....

Counterpoised to the above statement is the observation made by Chris Nyland in Reduced worktime and the management of production (1989) that a "vast mass of [empirical] research has been undertaken into how the relationship among effort, efficiency and time manifests itself within the production process (page 45)."

(see also And It Ain't Shinola, Part I)

To be sure, "work sharing" is only a particular application of reduced worktime and, for the most part, the "vast mass" of research deals with circumstances that differ in important ways. However, that broader research also bears on the narrow issue of work sharing in important ways. Most important is the issue of isolating the effects of the worktime change on output. This is difficult to do at the best of times. When the matter is clouded by poor implementation, short time horizons and a simultaneous increase in the length of the working day, the results have to be taken as fundamentally inconclusive.

To Lanoie, et al.'s credit, they do acknowledge several of the confounding factors. However, their cursory theoretical discussion and even shallower grounding in the specialized literature lead them to understate the ambiguity of their empirical findings and thus to vastly overstate the significance of their results: "the results suggest that work sharing has induced a significant reduction in productivity." The results suggest no such thing. On the contrary, what the results suggest to someone with a grounding in the working time literature is that it may be a misnomer to even call the schedule change "work sharing". Why not call it a 10% pay cut with an attempted speed-up?

The "classical" empirical studies of working time and output are Abbe's analysis of the introduction of an eight-hour day at the Carl Zeiss optical works in 1900, Vernon's investigation of work schedules in British munitions factories during World War I and Kossoris's study in the U.S. during World War II. All of these studies found significant gains in productivity from shorter work days and work weeks and even larger productivity losses from increased days and weeks. Another important finding was the time lag of several months before the productivity gains would take hold. In Abbe's research and several of the Vernon and Kossoris case studies reductions in working time resulted in actual gains in aggregate output per worker, not just gains in hourly productivity.

In 1924, Otto Lipmann of the Institute of Applied Psychology in Berlin collected all of the then known material on the relation between the hours of work and volume of production. The volume presented "about 700 separate data on the effects of changes in hours of work on output... and a bibliography of about 400 works." Sounds more like Nyland's vast mass than Lanoie's little empirical work. However, Lipmann pointed out, "A comparatively small portion only of the data collected and compiled by the Institute is scientifically satisfactory." Lipmann ventured a general impression of the then already vast mass of data:

The more exact the observations on which a report is based the more frequently do they represent the effects of a reduction in hours as good, or explain the absence of good effects by other causes. On the other hand information based on estimates very frequently reports bad effects of reductions in hours of work.

By 1965, Lipmann's vast mass of data would seem only half vast by comparison with the "huge empirical literature on the relationship between working hours and productivity" reviewed by D.G. Brown (cited by Scott and Spadavecchia): 1,233 firm level studies from the U.S. and U.K., "52 per cent of observations involving a decrease in hours indicated that this did not significantly reduce output."

This is not to say that reducing the hours of work always causes higher productivity. The circumstances of the change and how it is implemented can be as important -- sometimes more important -- than the particular change in hours. In particular, "work sharing" may not conform to the productivity boost because of workers' fear of a shortage of demand. They may, consciously or not, slow down in an effort to "make the job last." Of course, if there is an actual shortage of work, there may also be more involuntary down time during the course of the working day. An increased capacity for work may not be matched by an increased opportunity to use that capacity. Nevertheless, a fall in output isn't necessarily evidence that the change in schedule caused that decline. Again, Lipmann,

The relation between hours of work and hourly output is by no means simple or direct, that is to say, a change in hourly output occurring simultaneously with a change in hours of work is not necessarily (post hoc ergo propter hoc) an effect of the latter change.

In addition to Nyland's book, cited above, another text that surveys the empirical work on hours of work and output is Stress and performance effectiveness by Alluisi and Fleishman, some of which is taken from earlier contract research Alluisi did for NASA. They state:

From the very earliest studies, improvements in industrial productivity have generally been found following reductions in the total hours of work in both the workday and the workweek.

This broad consensus contradicts Ohanian's assertion that the SINGLE study by Lanoie et al, "is evidence that worksharing that reduces the number of days an employee works, even keeping the length of the workweek fixed, also reduces output per hour." The error of such a conclusion is amplified by Lanoie et al.'s evident (self-reported) lack of familiarity with the (vast) empirical literature related to their study.

What bank 'deregulation' really means. The case of Iceland

The recent financial history of Iceland (see below) presents a birds-eye-view of capitalism left completly to its own devices. When its most ardent defenders - inevitably a mere handful of individuals - are left completely unfettered in their commercial exploits from morals, ethics, rules and law. Here lies a contemporary tribute to the formidable nonsense of the modern 'free market'. A small number of insiders are deemed to have superior wisdom due to their ability to confound the great majority of people as to the real meaning of their actions. They are then 'free' to print money and raid public and common assets at will.

"Gigantic loans, it has been revealed, were taken out abroad by a few individuals and without the full knowledge of the Icelandic people. Now the nation seems to be responsible for having to pay them back….."[1]

The modern version of the Viking Raiders set out to buy up Britain's High Street using $250,000 of borrowed money for every man, woman and child in Iceland.


2009 – February 1st. Following the resignation of the previous cabinet (see January 26, 2009), a new government is formed in Iceland by the Left-Green Movement and the Social Democratic Alliance. The new government will be in office for only a few months, until fresh elections in the spring.

2009 – January 26th. The Government of Iceland resigns.

2009 – January 25th. Power to the People! The Minister of Commerce and Banking announced his resignation this morning. He moreover announced that he had dismissed the director and board of the Financial Supervisory Authority. Meanwhile, the Central Bank board operates under the auspices of the Prime Minister who has done nothing but declare his unfailing devotion to Davíd Oddsson and his cronies at the bank. elections will be held this spring. That’s definite. And it’s a huge relief, although the greatest worry is that there won’t be any renewal within the political parties and that all we will have is the same old people, whom nobody trusts any more.

2009 – January 23rd. Prime Minister of Iceland Geir Haarde calls a general election for the spring, two years early.

2009 – January 20th. The Icelandic finance ministry says the country’s economy is forecast to shrink by 9.6 percent in 2009. In addition, it predicts no growth in 2010.

2009 – January 20th. It’s 10 pm and the protests are intensifying

2008 – December 24th. 2008 – December 24th. A crowd gathers outside an Icelandic bank. “Pay your own debts,” they yelled as they visited one bank office after another in Iceland’s capital. “Don’t make the children pay.”

2008 – December 18th. IMF Says Financial Stability of Iceland Has Improved

2008 – December 2nd. Icelanders Storm Central Bank

2008 – November 26th. The annual rate of inflation in Iceland rises to a record high of 17.1 percent.

2008 – November 20th. Credit collapse numbs Icelanders. Some analysts are predicting that inflation will reach up to 30% this winter. Jobs are being lost at a rate of up to 5,000 a month. In a country whose entire population is only 300,000, the impact is huge. Many monthly mortgage payments doubled overnight when the value of the Icelandic Krona crashed.

2008 – November 20th. IMF approves loan to Iceland. Iceland becomes the first Western European nation to get an IMF loan since Britain in 1976.

2008 – November 15th. ‘The Big Chill”. Gigantic loans, it has been revealed, were taken out abroad by a few individuals and without the full knowledge of the Icelandic people. Now the nation seems to be responsible for having to pay them back….. And here is the nub. Iceland's banks borrowed more than $250,000 for every man, woman and child in Iceland, and placed an impossible burden on the modest reserves of the central bank in the event of default. And default they have. 23
2008 – November 3rd. Inflation in Iceland (caused by high levels of borrowing in the country and by large investment sums flowing in, in response to high interest rates) was exacerbated by the practice of the Central Bank of Iceland issuing liquidity loans to banks on the basis of newly-issued, uncovered bonds— effectively, printing money on demand.

2008 – October 28th. Icelandic Central Bank Raises Interest Rate to 18% from 12% due to problems in the country’s banking system.

2008 – October 20th. Iceland’s financial authorities formally announce the establishment of new Glitnir, Landsbanki, and Kaupthing banks. The old banks were taken over by the government two weeks previously as their condition had deteriorated due to the global credit crisis.

2008 – October 17th. Iceland Defaults Triggering More CDO Woes

2008 – October 15th. Iceland Cuts Interest Rates from Record High of 15.5% down to 12%.

2008 – October 9th. The Economist noted that Icelandic households took on a large amount of debt, equivalent to 213% of disposable income, which led to inflation.

2008 – October 8th. Britain uses anti-terror legislation against Iceland. Icelandic Government seizes the country’s largest bank, Kaupthing. The assets of Landsbanki were frozen by the British Government.

2008 – October 7th. Icelandic Government takes control of the country’s second and third largest banks - Landsbanki and Glitnir.

2008 – October 6th. Icelandic Government guarantees all deposits in local banks. Trading in Major Icelandic Shares Suspended.

2008 – October 5th. A rumour that Iceland is in danger of not being able to get food and oil due to the lack of credibility of its currency. Iceland’s currency is in free fall as inflation and interest rates rage upward.

2008 – September 29th. Icelandic Government takes large stake in the country’s third-largest bank, Glitnir. The bank ran into short-term funding problems.

2008 – September 22nd. Qatari Royal Buys Stake in Soon-to-Collapse Icelandic Bank

2008 – September. In the 12 months leading up to September 2008 the inflation rate in Iceland was 14% compared to a target of 2.5%. The Central Bank of Iceland held interest rates high (15.5%). Overseas investor money poured into the country in response, leading to monetary inflation. The money supply grew 56.5% in the twelve months to September 2008. This compared with 5.0% GDP growth.

2008 – May 19th. Scandinavians arrange emergency funds to keep hedge fund pirates from destroying Iceland.

2008 – March. The cost of private deposit insurance for deposits in Landsbanki and Kaupthing was already far higher (6–8½% of the sum deposited) than for other European banks.

2008 – February 22nd. Financial Website Warns of Icelandic Bank’s Instability, Bank Will Later Collapse

2007 – February 1st. The króna, which was ranked by The Economist in early 2007 as the most overvalued currency in the world (based on the Big Mac Index),[115] . The Icelandic currency further suffered from the effects of carry trading.

2001 – Banks deregulated in Iceland. This set the stage for the Icelandic banks to acquire huge debt when foreign companies were accumulated.
__________________oOo__________________

[1] The big chill
Financial Times, Sat 15 November 2008
By Robert Jackson
http://www.ft.com/cms/s/0/8641d080-b2b4-11dd-bbc9-0000779fd18c.html?ftcamp=rss&nclick_check=1

Fawcett: "The Regulation of the Hours of Labour by the State" (abridged) IV

by the Sandwichman

One last note on Fawcett's 1872 lecture. Can an economist talk about the hours of work without invoking the specter of 'fallacy'? Apparently not. Fawcett's charge of fallacy, however, is not the classic lump-of-labor version:

It is, however, probable that motives very different from these actuate many who most earnestly appeal to the State to impose a legal limit upon the day's work. This particular movement may be, to a great extent, regarded as a revival of the old fallacy that the wages of labour can be regulated by law.

Signs are not wanting to show that the opinion widely prevails, although it is rarely distinctly avowed, that if a law were passed reducing the day's work from ten hours to nine hours, as much would ultimately be paid for nine as for ten hours' labour. If, however, this should prove to be the case, then it would appear that the State has the power to regulate the remuneration of labour; it would consequently follow that wages depend upon legal enactments, and are not regulated by the recognised principles of economic science.

I shall not attempt [don't you love those pseudo-disavowals that introduce the mention of something with the phrase, "not to mention..."] to argue the case by referring to such well-known facts as that Parliament for centuries tried to control the wages of labour, and that all the numberless statutes that were passed to effect this object signally failed. Neither shall I refer to the general principles of political economy to establish the conclusion that the wages of labour cannot be controlled by the State. Such reasoning would not, in any way, affect the opinions of those who are most strongly in favour of the hours of labour being regulated by the State. According to their views the interposition of the State in this matter involves very different consequences, and is to be defended by very different arguments from any attempt which may be made to fix the rate of wages by Act of Parliament.

In case you're wondering, Fawcett's argument proceeds from the above to the case argued in installment II of this series: namely, that if the hours of work were indeed too long then employers would in every instance be compelled to yield to demands from the workers to shorten them (in spite of the unprecedented nature of the workers' triumph at Newcastle). The mind reels.

And It Ain't Shinola...

by the Sandwichman

Wherein the Sandwichman documents the appalling intellectual vacuity of Lee E. Ohanian's "What -- or Who -- Started the Great Depression?" so the referees at the Journal of Economic Theory don't have to. Not that they would anyway.

First, let's cut to the chase. Ohanian summarizes his operative theory on pages 48 and 49. I will quote the section in full at the bottom of this post. For now, the two key sentences are "Any monetary explanation of the Depression requires a theory of a very large and very protracted monetary non-neutrality.... The non-neutrality is quantitatively large in the Hoover economy because Hoover's wage maintenance and work-sharing program reduces steady state hours and capital stocks [emphasis added]."

So what is the mechanism by which Hoover's program reduced capital stocks? For the answer to that, we take you back to pages 28-29 to an explanatory footnote about Ohanian's specified model. Again, I will present the full footnote at the bottom, but the key phrases are: "Capital input in this model is variable, and is equal to the capital stock scaled by the length of the workweek, or hours per worker." and "This treatment is also reasonable because there is evidence that worksharing that reduces the number of days an employee works, even keeping the length of the workweek fixed, also reduces output per hour."

The evidence Ohanian refers to is a 2001 article by Lanoie, Raymond and Shearer (hereafter Lanoie), "Work sharing and productivity: Evidence from firm level data." It is fair to point out that Lanoie is the only article in the paper's reference list dealing with the productivity effects of work-sharing. The article in question deals with a single, year-long "experiment" at a Canadian telecommunications firm in the early 1990s.

On first impression, the relevance to Hoover and the Great Depression of this single 1990s example may seem remote. But on closer inspection, it becomes laughable. The program was not simply a work-sharing arrangement. It was also a change in schedule to a nine-hour day precipitously imposed by management. Furthermore, the productivity impacts were found to be task specific. To generalize from this particular example to work sharing during the Hoover administration strains credulity, let alone plausibility. But here, in the authors' own words, are the peculiarities of the Canadian experiment that would be enough to disqualify it as in any way typical or representative of the Hoover-era experience:

These results suggest that the impact of work sharing on productivity is 'task specific' and that longer operations (both types of installations), for which the coordination cost is likely to be higher, are broadly more affected. As discussed earlier, another possible contributing factor to the decrease in productivity is the change in the work schedule that was introduced along with the work sharing programme. Namely that workers changed from working 8 hours a day for 5 days a week to working 9 hours a day for 4 days a week. It is possible that the extra hour tacked on to the end of the day was much less productive than the hours worked on the fifth day of the week. Unfortunately, without information on daily production, the data set does not permit identification of such effects. Certain officials also mentioned that managers were not well prepared to operate in this work sharing environment (the whole operation was implemented with a very short notice), and that coordination problems occurred not only between technicians, but also between technicians and dispatchers. One further possibility is that worker morale may have been negatively affected by the work sharing programme. Given that technicians were not given a choice of whether or not to participate in the programme whereas other types of workers were, technicians may have felt they were being unfairly treated (Akerlof, 1982). The fact that absenteeism increased following the introduction of the programme lends support to this interpretation.

To reiterate:

• impact on productivity was task specific;
  
• change in the work schedule was introduced along with work sharing; from 8 hours a day for 5 days a week to 9 hours a day for 4 days a week;
  
• managers were not well prepared to operate in this work sharing environment (the whole operation was implemented with a very short notice;
  
• technicians were not given a choice to participate (other employees were); morale may have been negatively affected.

What is absent from Lee Ohanian's article is any explanation of why he thinks the above 'evidence' is remotely relevant to his Great Depression theory. What does this say about the peer review process at the Journal of Economic Theory? Perhaps they should take a lesson from Navin Johnson's father:



Summary of Ohanian's theory, pages 48-49:

Any monetary explanation of the Depression requires a theory of a very large and very protracted monetary non-neutrality. Such a theory has been elusive because the Depression is so much larger than any other downturn, and because explaining the persistence of such a large non-neutrality requires in turn a theory for why the normal economic forces that ultimately undo monetary non-neutrality were grossly absent in this episode. That is, if the Depression is largely the result of monetary forces, then the size and the duration of the monetary non-neutrality were remarkably well outside estimates from any other period.

This paper provides such a theory for a large and protracted monetary non-neutrality. The non-neutrality is quantitatively large in the Hoover economy because Hoover's wage maintenance and work-sharing program reduces steady state hours and capital stocks. The non-neutrality persists in this model because it is a transition from a non-distorted steady state to the Hoover distorted steady state.

Footnote, page 28-29:

Capital input in this model is variable, and is equal to the capital stock scaled by the length of the workweek, or hours per worker. In the model, utilization falls in manufacturing, which is consistent with actual manufacturing utilization during the Depression. It is worth pointing out two issues about tieing [sic] the decline in utilization to hours per worker. One is that some of the decline in utilization was due to plant closings, rather than a shorter workweek across all plants. Another is that some worksharing was such that workers were employed for fewer days, but the plant could have had the same workweek length. I am unaware of data that can provide any type of detail on these distinctions, however, so I will treat the model as a parsimonious tool for capturing low capital input during the Depression, as it will allow the model to be consistent with actual manufacturing output per hour. This treatment is also reasonable because there is evidence that worksharing that reduces the number of days an employee works, even keeping the length of the workweek fixed, also reduces output per hour (see Lanoie, Raymond, and Shearer).

Letter to a Portuguese Journalist

I was just asked some questions by a Portuguese journalist. Here is my response:

click here: (.pdf) or here: letter-to-a-journalist