The 'medium' is what you actually do.

In 1970 Charles A Reich wrote his book 'The Greening of America' in praise of the cultural protest movement of the 1960s.. It was one of the most personally influential books I have read.

Over the years since Reich's publication the mainstream media have placed much emphasis on the relative affluence of the young people of '60s generation. Leading journalists and TV hosts often supposed that an unprecedented rise in material wealth was somehow causative of the rebellious spirit that was the hallmark of the youth at that time.

It is clear, however, that great waves of alienation with modern western society had already swelled in the hearts of many individuals that were born in a different time altogether. As much as many former hipsters would hate the thought, the real depths of dissent that shaped the events of the 1960s may have actually come from their parents' and earlier generations. A small, particularly articulate and thoughtful number of people such as the likes of Martin Luther King, Charles Reich (as above), John Kenneth Galbraith, C Wright Mills, John Fitzgerald Kennedy, Robert Kennedy, Lewis Mumford, Laurence J Peter, Barry Commoner, Karl Polanyi and others took the limelight and shaped the thoughts of many a draft-dodger and pot-smoking greenie.

What was new and potentially revolutionary was the new medium of television and the ubiquity of cheap books; these people mostly understood how to use these media to best advantage. They knew well the ways and means by which public consciousness was actively manipulated and sought to explain this predicament to their large audiences.

In 1970, for instance, Charles Reich drew upon the thinking of Marshall McLuhan to explain how the medium of our lives was the real message:

"....let us borrow some thinking frm Marshall McLuhan. A young boy asks his father, "What do you do, Daddy?". Here is how the father might answer:
"I struggle with crowds, traffic jams and parking problems for about an hour. I talk a great deal on the telephone to people I hardly know. I dictate to a secretary and then proof-read what she types. I have all sorts of meetings wtih people I don't know very well or like very much. I eat lunch in a big hurry and can't taste or remember what I've eaten. I hurry, hurry, hurry. I spend my time in very functional offices with very functional furniture, and I never look at the weather or sky or people passing by. I talk but I don't sing or dance or touch people. I spend the last hour, all alone, struggleing with crowds, traffic and parking."

More likely, the father would respond to his son by saying:

"I am a lawyer. I help people and businesses to solve their problems. I help everybody to know the rules that we all have to live by, and to get along according to these rules."

Reich moves his focus onto the trapped realm of the modern 'liberal-intellectual'. No matter how great their sophistication, he says, they still keep to such goals as excellence, approval of colleagues, recognition and achievement. They may have fewer myths or illusions, but their despairing view of life's possibilities bar their way to a new consciousness and their dependence on goals involving outside approval deprives them of courage to be themselves.

To profess freedom without a change in personal consciousness it seems to me is like wanting the thunder and lightening without the rain, to want the sun without the heat and the light.

“No creature can learn that which his heart has no shape to hold.”**

** 'All the Pretty Horses', McCarthy 1992

Why Japanese Health Care is Bad

Harden, Blaine. 2009. "Health Care in Japan: Low-Cost, for Now: Aging Population Could Strain System." Washington Post. (7 September).

Half a world away from the U.S. health-care debate, Japan has a system that costs half as much and often achieves better medical outcomes than its American counterpart. It does so by banning insurance company profits, limiting doctor fees and accepting shortcomings in care that many well-insured Americans would find intolerable.

But many health-care economists say Japan's low-cost system is probably not sustainable without significant change. Japan already has the world's oldest population; by 2050, 40 percent will be 65 or older. The disease mix is becoming more expensive to treat.

So, public intervention of the medical system is obviously bad. The problem is that the Japanese health system makes the mistake of failing to let enough people die. The article does admit that a healthy lifestyle is also a factor, but let's hope that the US does not follow Japan.

Why Capitalism Fails... and Minsky Punts!

by the Sandwichman

The Boston Globe today carries an op-ed by Stephen Mihm, a history professor at the University of Georgia, highlighting the aptness of Hyman Minsky's financial instability hypothesis:

Modern finance, he argued, was far from the stabilizing force that mainstream economics portrayed: rather, it was a system that created the illusion of stability while simultaneously creating the conditions for an inevitable and dramatic collapse.

In other words, the one person who foresaw the crisis also believed that our whole financial system contains the seeds of its own destruction. "Instability," he wrote, "is an inherent and inescapable flaw of capitalism."

"But does Minsky’s work offer us any practical help?" Mihm asks. Part of the solution, he continues, is to have the Federal Reserve act as a lender of last resort to distressed firms. Nothing new there. But the other part is more radical: to have the government act as employer of last resort, guaranteeing a job to anyone who wanted one.

The political objections to the latter policy would seem at first glance to be insurmountable. But hold on a minute. A few years ago, the "house-price bubble" only existed in the fevered rantings of a smattering of chronic doomsayers. Today, who has heard of the "youth jobs crisis"? No one. Crisis? What crisis? Here's the chart again. Read it and weep.

Employment-Population Ratio - 16-24 yrs. Seasonally Adjusted
Digging deeper into the data, it gets worse. Long story short: youth employment has been COLLAPSING since the bursting of the dot.com bubble in 2000. There was no recovery for youth employment during the last "boom" -- only a leveling off. In the context of the youth employment crisis -- which will not be solved by a traditional bastard Keynesian fiscal-spending stimulus -- a far-reaching government jobs program might become politically feasible. But would it be economically feasible? Sandwichman doubts it. (to be continued...)

The Futility of Financial Regulation: Lessons from Science and Professional Football

The Wall Street Journal does not make the connection explicit, the editors must realize that the sophisticated investors, who own luxury boxes (or even professional football teams), will get the message: financial regulation is futile. The offense has a scientific advantage over the defense. No matter what strategy the defense uses, the offense can find a way to overpower it. The Journal even gives scientific analysis to make this point. Of course, the possibility remains, of moving from a competitive capitalistic game to a more cooperative system will eliminate the need for offenses and defenses. Notice the similarity between the analysis of football and neoclassical descriptions of the economy.

Futterman, Matthew. 2009. "Behind the NFL's Touchdown Binge As Scoring Soars, One Professor Sees Parallels in Nature; the 'River Basin' Theory." Wall Street Journal (10 September).

The NFL has become so fast and efficient that last season, teams each scored 22.03 points per game, the highest since 1967, while all the league's 32 teams combined for 11,279 points—the most in NFL history.

The game has become less cluttered. Offenses averaged just 3.09 turnovers (interceptions and fumbles) per game, the lowest of all time by more than 10%, and offensive lines allowed just 4.04 sacks per game—also the lowest ever. Even place kickers set a new mark: They made a record-high 84.5% of their field-goal attempts.

Adrian Bejan a professor of mechanical engineering at Duke University, likens the NFL's evolution to a river's effect on its basin. (Stay with us, here.) Over time, a river relentlessly wears away its banks and, as a result, water flows faster and faster toward its mouth. When obstacles fall in its way, say, a tree, or a boulder -- or in the case of an NFL offense, beefy linebackers like the Baltimore Ravens' Ray Lewis or the Chicago Bears' Brian Urlacher -- it will figure out how to wear those away, too.

"The game is a flow system, a river basin of bodies that are milling around trying to find the most effective and easiest way to move," says Prof. Bejan. "Over time you will end up with the right way to play the game, with the patterns that are the most efficient."

In 1996, Prof. Bejan, who began following the NFL after coming to the U.S. from Romania to attend college, came up with a theory about natural phenomena known as the Constructal Law. The theory, he says, can be used to explain the evolution of efficiency in everything from river basins to mechanical design. By extension, he says, it could also be applied to the explosion of offense in the NFL.

Tom Lemming, the recruiting expert and analyst for CBS College Sports, says no one on the college level has figured out how to neutralize the speed of the spread offense, either. "The offense always sets the agenda, and the defense plays catch-up," Mr. Lemming says.

Considered more broadly, Constructal Law may be the closest thing to a grand unified theory for the evolution of sports. In a sports context, the river is the relentless search for the easiest way to score or win more often. In soccer, there is the indefensible through-ball, passed between two defenders to a striker sprinting into open space. In basketball, the two-handed set shot eventually gave way to finding the tallest, fastest players who could jump the highest and dunk.

Cochrane's Complaint

by the Sandwichman

Paul Krugman has no interesting ideas whatsoever about what caused our current financial and economic problems, what policies might have prevented it, or what might help us in the future, and he has no contact with people who do. "Irrationality" and advice to spend like a drunken sailor are pretty superficial compared to all the fascinating things economists are writing about it these days.

How sad.

How sad, indeed. All the fascinating things economists are writing about "it" these days! What does the word "it" refer to? What caused our current financial and economic problems? What policies might have prevented it? What might help us in the future? Perhaps a little math would help:

Math in economics serves to keep the logic straight, to make sure that the "then" really does follow the "if," which it so frequently does not if you just write prose.

That depends on what the meaning of the word "if" is. Or the word "it". And "what". Professor Cochrane's mistake was not waiting a week before uncorking his rant and giving himself the opportunity of filing it in the unsent-rants file where it belongs.

I did learn this from Cochrane's essay: "the central empirical prediction of the efficient markets hypothesis is precisely that nobody can tell where markets are going.... . This is probably the best-tested proposition in all the social sciences." Hello? That is indeed a fascinating thing. Markets are efficient because nobody can tell where they are going. That is to say, if nobody can tell where they are going; then markets are efficient. Or, to put it more bluntly, if there is a Goldman, Sachs; then there is no such thing as an efficient market. Notwithstanding the non-trivial detail that the term "efficient" in the proposition is either a non sequitur or a tautolgy. What are efficient markets efficient at? Being inscrutable!

The catch is there will always be a Goldman, Sachs. The inherent tendency of all markets is toward monopolization and manipulation. It is precisely because people will not settle for the "nobody can tell" fairy tale that markets get rigged. To pretend that actually existing markets are somehow almost the same thing as efficient markets is no different than pretending that actually existing socialism was virtually a workers' paradise or that the moon is made of green cheese and the central bank is a green cheese factory. It's all dress up and make believe.

Like Paul Krugman, John Cochran has no interesting ideas whatsoever about what caused our current financial and economic problems, what policies might have prevented it, or what might help us in the future, and he has no contact with people who do.

Aftermath

A comment on Krugman's blog:

As an Economics graduate student and tutor of first year economics, I’d have to say Maths has helped me a lot come to grips and simplify into english with a lot of economic concepts for my own benefit and that of my students.

Job-Market Slack as "Leading Indicator"

by the Sandwichman

A couple of days ago, the Sandwichman characterized the employment-as-a-lagging-indicator meme as a prescription for doing nothing. Yesterday, over on Macroblog, David Altig contemplated, "Economists got it wrong, but why?" concluding, "I've yet to see the evidence that progress requires moving beyond the intellectual boundaries in which most economists already live." That comment sent the S-man down memory lane to a WSJ debate on job market slack Max Sawicky and Sandwichman had with David Altig back in the boom times of August, 2005.

Max and I were of the opinion that the job market was then slack in spite of a nominal 5% unemployment rate. David Altig leaned toward the interpretation that changes in labor force participation were being driven by demographic trends and the informed choice of participants and non-participants. In hindsight, I wish we had followed up on the demographic clue. Decomposing the employment-population ratio by age groups produces the following arresting picture:

Employment-Population Ratio - 16-24 yrs. Seasonally Adjusted
While the drop-off since September 2008 has been steep, the decline began in December 2006, three months before unemployment bottomed out for 16-24 year olds. Perhaps more auspicious, the "peak" employment-population ratio for 16-24 year olds during the last recovery barely climbed above it's trough following the 2001 recession. As they say, the youth of today is the future -- or the canary in the coal mine. The above chart is "evidence that progress requires moving beyond the intellectual boundaries in which most economists already live" whether David Altig sees it that way or not.

Taking Liberties with History

by the Sandwichman

At the "Library of Economics and Liberty" blog, Bryan Caplan, an Associate Professor of Economics at George Mason University, and an adjunct scholar of the Cato Institute, is impressed by Lee Ohanian's historical contribution: "But his history genuinely advances our knowledge of the Hoover phase of the Great Depression."

The Sandwichman duly points out a few flaws in Ohanian's historiography.

Monetary Economists: One-Third Are Ill-Fed

Ryan Grim at the Huffpost has set off a buzz by claiming that the Federal Reserve exercises undo influence over the economics profession. By his count, there are about 1500 economists specializing in monetary theory and policy, and about a third are employed or otherwise lubricated by the Fed at any one time. He cites several sources who have witnessed the corrupting influence of Fed contracts and invitations, as well as outright censorship. Fed staff and veterans dominate the editorial boards of several journals, including the Journal of Monetary Economics. Is this a conspiracy?

I think Grim’s tale relies too much on partial equilibrium analysis. A better model would incorporate all the functional relationships: how journal publication influences hiring at top graduate departments, how the curriculum in these departments molds the next generation of economists, how students self-select in their education and career choices once they know the biases of their professors, how the self-reproducing ideological bent of the profession influences the Fed, the IMF and other policy/research outfits, and how the ideological and practical demands of the finance sector influence and are influenced by academic research. You can’t pull one piece out of this puzzle and say it controls all the others.

Any good DSGE modeler would tell you this.

Joblessness by Design

by the Sandwichman

My earlier message on kurzarbeit drew a response from Jon Messenger of the ILO who wrote a policy brief on work sharing for the International Labour Conference in Geneva last June. Following up from Jon's bibliography and subsequent sources it becomes apparent that there is an active discussion going on in Europe about work sharing as a response to the current JOBS CRISIS -- with the OECD, the ILO and the TUC all advocating subsidies for short-time working (or "work-sharing").

This is the kind of thing that Dean Baker was calling for last January but nobody (in the USA) has taken up. After all, employment is a lagging indicator. Right? Wrong. According to the Conference Board, non-farm employment is a coincident indicator. Which is to say, when economists talk about employment being a lagging indicator, they are spouting BS.

The "employment is a lagging indicator" meme is a prescription for doing nothing about unemployment other than waiting for the (initially jobless) "recovery" to eventually restore a tolerable level of employment. Of course if government does nothing about unemployment while expanding credit and investment then employment-as-lagging-indicator becomes a self-fulfilling prophecy. The jobless recovery is jobless BY DESIGN.

Organization for Economic Cooperation and Development: "Short-time working subsidies or reduction in social security contributions will help preserve viable jobs, if they are well-targeted on firms facing a temporary fall in demand and workers who will find it difficult to get another job if made redundant."

International Labour Organization: "In the context of the current global economic recession there has been a growing interest in work sharing as a labour market policy tool aimed at preserving existing jobs."

Trades Union Congress: "We are advocating access to a subsidy package for private sector employers who make short-term reductions in staff hours or temporary lay-offs as a means to save costs and give their businesses a better chance of survival."

Seeing the Crisis Coming...

From the Financial Times (via Andrew Jackson at the Progressive Economics Forum)

Official models missed the crisis not because the conditions were so unusual, as we are often told. They missed it by design. It is impossible to warn against a debt deflation recession in a model world where debt does not exist. This is the world our policymakers have been living in. They urgently need to change habitat.

I [Dirk Bezemer] undertook a study of the models used by those who did see it coming...

Can we save the planet by working less?

by the Sandwichman

The Ecologist features an article by Ewan Kingston making the environmental case for work time reduction.

Assorted Economic History Highlights Since June 2009

2009 – September 8th. Option ARM Disaster Arrival: Mortgages More Problematic than Originally Thought. $134 Billion Recasting in Next Two Years. As of today, 46 percent of option ARM loans are 30 days late! Nearly half the entire batch of these loans. 75 percent of all outstanding option ARMs are in California, Arizona, Nevada and Florida. 94 Percent opted to make only minimum payment. In the recent report put out by Fitch Ratings, only 3.5% of the approximately 1 million option ARM loans have been modified; of the modified option ARMs 24 percent re-default after 90 days while the untouched loans default at a rate of 37 percent after 90 days. These numbers will increase. Modification means for the most part, all that is done is the term is extended, or interest is cut, but the bank is still able to claim the home is worth the bubble price and therefore allows the bank to keep the “asset” on the books for full face value.

2009 – September 7th. US Senate must raise federal debt limit beyond $12T. Bruce Josten (lobbyist for the US Chamber of Commerce) said that the high level of debt is a reality during the recession, but it's unsustainable and needs to be reduced by reforming Medicare and Social Security.

2009 – September 2nd. Krugman: It may be that Greenspan and Bernanke also wanted to celebrate the Fed’s success in pulling the economy out of the 2001 recession; conceding that much of that success rested on the creation of a monstrous bubble would have placed a damper on the festivities...

2009 – September 1st. Go to Pittsburgh, and defy the G20 heads of state, bankers and finance ministers meeting there on 25th and 26th September 2009. The longer we speak in the language of global capitalism, the longer we utter platitudes about the free market—even as we funnel hundreds of billions of taxpayer dollars into the accounts of large corporations—the longer we live in a state of collective self-delusion.

2009 – August 23rd. Steve Keene says we’re living in the biggest financial bubble in global history. We’ve got to cope with the process of deleveraging. Neoclassical economists use models that ignore almost completely time and credit and they treat money as ‘neutral’. Money is not neutral. We need to redefine assets (eg house valuations no more than 10 times annual rent, time-limited shares that expire after 25 years). In Australia there is $2 trillion dollars of aggregate private debt. If 5% deleveraging occurs that takes out $100 million from the economy. We can only solve this crisis by reducing the debt by ‘fiat’.

2009 – July 31st. James Galbraith on the disastrous US approach to the global economic crisis. “In the economic sphere, that problem lies essentially with the transfer of resources and power to the top and the dismantling of effective taxing power over those at the top of the system. (The speaker noted that the effective corporate tax rate for the top twenty corporations in the US is under two percent.) The effect of this is to create a “trained professional class of retainers,” who devote themselves to preserving the existing, unstable system… Fundamental reform, and “bottom-up” recovery strategies based on social insurance and public investment are therefore blocked from the outset…”

2009 – July 2nd. US: “we’ve had 1 million foreclosures since January 1, 2009”

2009 – July 2nd. Daily highlights for the US. Private sector jobs fell 473,000 in June. Chrysler June sales down 42%. SEC approved a proposal that takes power away from stock brokers in deciding who sits on corporate boards. Credit Card Companies raising interest rates and fees.

2009 – July 1st. Australia's trade deficit doubles in May (MarketWatch)

2009 – July 1st. Lending to emerging markets in crisis. “even a blind orangutangs can see that the European currency crisis is days if not hours away.”

2009 – July 1st. In Europe souring loans and festering portfolios of securitised mortgages still plague a number of national banks. Belgium’s third-largest bank, KBC, has had three successive rounds of aid, and they still can’t target the problem. Moody’s, the rating agency that recently issued a warning about the credit risk at 30 Spanish banks, is expected to lower its outlook for the Greek banking sector because of a sharp rise in non-performing loans. In Ireland, the nationalized Anglo-Irish Bank still has a contaminated loan book that has emerged as threat to the country’s sovereign credit rating. Nonperforming loans at Russian banks are even more worrisome… in Sweden, the imploding Latvian economy has hobbled Swedbank, a huge provider of loans in the Baltics.

Overview of the problems as of July 2009. The US has committed $23.7 trillion in “total peotential federal government support”. It represents about half of annual world GDP. the $23.7 trillion recently committed for U.S. bailouts and loan guarantees represents about $80,000 for each man, woman, and child in America. A level of investment even a substantial fraction that size could pay for all needed job training while ensuring universal provision of basic necessities during the transition. What would we be getting for our money? A collective sense that, in a time of crisis, no one is being left behind. Without the feeling of cooperative buy-in that such a safety net would help engender, similar to what was achieved with the New Deal but on an even larger scale, economic contraction could devolve into a horrific fight over the scraps of the waning industrial period.

2009 – June 15th. Washington Post Op-Ed by Timothy Geithner and Larry Summers. It “emphasizes what is plainly true: the crisis arose from failures of regulation and the remedies will require fundamental change.” *A Consumer Financial Safety Commission, *bring over-the-counter derivatives under control *institute clearing houses (implying standardization of contracts). These proposals are meeting opposition from the bank lobbies.

Kurzarbeit Macht Freizeit

From this morning's Globe and Mail:

While other countries were bailing out major companies by purchasing their shares and debt or taking ownership stakes, the German government took a different tack this year, bailing out payrolls instead...

Jakob Widner gives details of an Austrian version of the scheme:

The model for this procedure is known as Kurzarbeit, which literally translates as 'short work'. According to the model, employees accept a reduction in working hours of between 10% and 90%. The allowance paid by the employer is a (staggered) flat rate depending on the income level of the employees affected. A supplement of 15% to this flat rate is payable if the employee agrees to attend professional training courses during the period of Kurzarbeit.

Here is another report. And another:

In the Czech Republic, and throughout Europe, companies, employees and even governments have absorbed much of the shock of the recession through schemes like short-time working or irregular hours, unpaid leave, training leave or by using production workers in other positions. Just last week, The Prague Post reported on another government proposal to create a four-day work week, with government subsides to help make up some of the lost salaries from that fifth day.

Did Krugman Get it Right on How the Economists Got it Wrong?

Since this is about economics, the answer has to be “Yes and No”, and in fact it is.

I won’t rehash his points; if you haven’t already read his essay you should right now. But here’s what I think:

Krugman Gets it Right

Economists are much too enamored of elegance in their models. The shortest path to elegance turns out to be a pernicious set of assumptions—that the economy can be represented entirely as a nexus of instantaneous exchanges, that the people and organizations who make these exchanges have a single goal that they maximize with unfailing precision, that all decisions are made in perfect isolation from one another and are not subject to social dynamics, and that all functions (production, utility) in the economy are as well-behaved as North Korean schoolchildren at a patriotic pageant. Drop those assumptions and the math gets messy—and probably unpublishable.

There are authoritarian dynamics within the economics profession itself. The nice concept of rival theories competing with evidence and arguments doesn’t apply; debates are settled with coercion and ridicule.

Somehow finance disappeared from macroeconomics. The instability of financial institutions and other credit intermediaries was shunted off the table and out of sight. You can read macro textbooks from the principles level on up to grad school and see nary a mention of balance sheets in any context other than money multipliers. This takes its most extreme form in Miller-Modigliani (firms) and Ricardian Equivalence (government): debt or equity, borrow or tax, it’s all the same. And it is all the same if balance sheets don’t matter.

Krugman Gets it Wrong

The zero lower bound for interest rates in a financial crisis is a red herring. Real interest rates can easily go negative, and have repeatedly, if inflation can be stoked by monetary authorities. The deeper problem has to do with default risk, as Stiglitz showed in his Nobel-worthy work on credit markets. In fact, bringing default back into economic modeling is the point behind reintroducing balance sheet analysis.

At a general level, however, I think Krugman missed the key piece of the story: economics does not respect the most important criterion that separates science from non-science, the drive to minimize Type I error (false positives). Neither in modeling nor in econometrics do economists ever ask, what would constitute a critical test of my hypothesis—a result that would hold only if my hypothesis were true? Instead, a much lower standard is commonplace: what result would be consistent with my hypothesis? This loose standard has allowed absurd, readily falsifiable propositions to dominate economic thinking and classroom instruction for decades. Worse, being caught in a Type I error has no apparent career consequences for economists. Can you think of a “cold fusion” episode in economics that ended with researchers being disgraced and humiliated?

Not even a global financial crisis can have this effect.