Occupation at UC Santa Cruz

Occupation Statement

"Let’s be frank: the promise of a financially secure life at the end of a university education is fast becoming an illusion. The jobs we are working toward will be no better than the jobs we already have to pay our way through school. Close to three-quarters of students work, many full-time. Even with these jobs, student loan volume rose 800 percent from 1977 to 2003. There is a direct connection between these deteriorating conditions and those impacting workers and families throughout California. Two million people are now unemployed across the state. 1.5 million more are underemployed out of a workforce of twenty million. As formerly secure, middle-class workers lose their homes to foreclosure, Depression-era shantytowns are cropping up across the state. The crisis is severe and widespread, yet the proposed solutions – the governor and state assembly organizing a bake sale to close the budget gap – are completely absurd.

"We must face the fact that the time for pointless negotiations is over. Appeals to the UC administration and Sacramento are futile; instead, we appeal to each other, to the people with whom we are struggling, and not to those whom we struggle against. A single day of action at the university is not enough because we cannot afford to return to business as usual. We seek to form a unified movement with the people of California. Time and again, factional demands are turned against us by our leaders and used to divide social workers against teachers, nurses against students, librarians against park rangers, in a competition for resources they tell us are increasingly scarce. This crisis is general, and the revolt must be generalized. Escalation is absolutely necessary. We have no other option.

"Occupation is a tactic for escalating struggles, a tactic recently used at the Chicago Windows and Doors factory and at the New School in New York City. It can happen throughout California too. As undergraduates, graduate students, faculty, and staff, we call on everyone at the UC to support this occupation by continuing the walkouts and strikes into tomorrow, the next day, and for the indefinite future. We call on the people of California to occupy and escalate."

Mankiw, Posner, Krugman (and Leonard) on Skidelsky on Keynes

by the Sandwichman

Paul Krugman in the Guardian and N. Gregory Mankiw in the Wall Street Journal have written reviews of Robert Skidelsky's Keynes, The Return of the Master. Now Richard Posner in the New Republic gives the book prominent mention in his essay on "How I Became a Keynesian." That's pretty respectable buzz.

But only Andrew Leonard on Salon.com really gets it:

To your run-of-the-mill market fundamentalist, questions of ethics are irrelevant. Capitalism works by satisfying consumer needs and wants. Government should stay out of the way. But Keynes is on the comeback trail because our present-day predicament shows this to be manifestly untrue.

Let me give the microphone to Skidelsky. In a paragraph and a half, he asks a set of questions that are at the heart not just of his book, but of our existence on this planet.

Keynes looked forward to a saturation of wants. But he did not see this as a natural, but an ethical terminus. Wants were to be controlled not by the size of the stomach, but by a generally accepted conception of "sufficiency" for the good life.

In terms of arithmetic, he was almost spot on in his predictions of growing wealth, but attitudes have changed less than he expected. Although real incomes in rich countries have doubled in the last thirty years, the populations of these countries work harder than ever and are no happier. This raises the question of why they are still on the growth treadmill. Is it because capitalism needs constantly to expand markets, and ensnare by advertising more and more people into useless consumption? Is it because economists have ignored the fact that, as societies become wealthier, positional goods -- goods which satisfy not our needs, but our longing for status -- become more and more desirable? Is it because globalization has made affluence too insecure and too uneven in its spread for most people in wealthy societies to ease off work? Or is it because we lack any agreed idea of the good life in the name of which we can say "enough is enough"?

If Keynes were alive today, these would be questions he would be asking. And after reading "Keynes: The Return of the Master," one can only conclude that we would be well-served to have him out and about, confounding the status quo with his impertinence.

Posner bites but can't quite swallow:

And then the challenge to society would be the management of unprecedented voluntary leisure. This was a popular 1930s theme--think of Huxley's Brave New World--but it underestimated the ability of business to create new wants, and new goods and services to fulfill them.

That was merely a mistake, an oddity in Keynes's belief in the possibility of perpetual boom.

Mankiw is unable to find it with a flashlight:

According to Keynes, economic downturns are not a fundamental indictment of the market economy. Rather, recessions and depressions arise from insufficient aggregate demand. A smart government can remedy the problem with its monetary and fiscal policy—say, by printing up some money and spending it. Once the right policies are put in place, the thinking goes, the world is safe again for free markets.

Krugman is enthusiastic about the book but reserved about the prescription:

Surely it's possible to make the case for a less profound reconstruction of economics than Skidelsky advocates...

To again give the microphone to Skidelsky: "Down with Keynsianism, and up with Keynes!"

Econospeak #19 blog for Econ students?

Yesterday an outfit called Online Universities Weblog posted a list of "100 Best Blogs for Econ Students." http://www.onlineuniversities-weblog.com/50226711/100-best-blogs-for-econ-students.php Blogs were listed in order with numbers in categories, with Econospeak at #19 and in the first category of "General." This was posted on Marginal Revolution with little comment, although some of the commenters there made negative remarks about the list (perhaps because Marginal Revolution came in at #86 under the "Hard Times" category, even though some its allied libertarian blogs were very near the top, Econlog at #2 and Cafe Hayek at #3.

In any case, I do not think I want to make too much about the numerical ranking, but I do think it is interesting to get the recognition, and pretty early on in the list, whoever these folks are. Most recently Econospeak is 57th in the Gongol.EconDirectoy ranking based on views per page among economics blogs. Just before Max stepped aside, Maxspeak was at 12th. This blog has been as high as in the low 40s, but more recently has been floating around in the 50s and 60s. I further note that the Online Universities Weblog people gave no criteria or reasons for their selection or rankings, if they even are rankings at all, which is unclear.

Did the Green Revolution Succeed in India?

Saby Ganguly (an Indian business writer who was a former editorial consultant to the World Organization of Building Officials (WOBO), an affiliate of the United Nations) wrote a report on the success of the green revolution in India entitled: “From the Bengal Famine to the Green Revolution”

Yield per unit of farmland, Ganguly wrote, “improved by more than 30 per cent between 1947 [when India gained political independence from the British] and 1979 when the Green Revolution was considered to have delivered its goods."
HOWEVER
The ‘green revolution’ didn’t begin until 1967 so the writer is counting 20 years of increasing agricultural yield from India’s ‘Land Transformation Program’ and only 12 years of increasing yield from the Green Revolution. The tick for success in this period, however, is given by Ganguly to the GR. This is also irrespective of the fact that the variety of crops used in the GR needed more water, more fertilizer, more fungicides and other chemicals.

Then, later in the article, Saby Ganguly switches tack altogether and refers to the green revolution as being a success in terms of the extra gross domestic product (GDP) generated. That is, the author changes the evaluation methodology for the GR. Extra food yield per unit of land is discarded as a measurement. Instead the GR’s worthiness is now linked to the large number of new jobs created in chemical and fertilizer production and distribution, in ‘scientific’ research, in the building of dams for irrigation and so forth.

India eventually became a food exporter the writer notes. However, farmland areas were increased to grow more food under both the Indian Land Transformation Program and the Green Revolution. Saby Ganguly then makes a rather extraordinary understatement in his summation:

“Even today, India's agricultural output sometimes falls short of demand.”

Someone had to point out to him "there are over 200 million hungry people in India today. The FAO estimate that 61% of children under the age of five are malnourished in India, ranking it second highest in the world."

I wondered why Saby Ganguly limited his analysis of the GR to 1979 and not beyond. Very much later in the article he writes: "In 1979 and 1987, India faced severe drought conditions due to poor monsoon..."

That isn’t the end of the drought story, however. In 2004 it was written:
"In last four years India has been experiencing fluctuating foodgrains production but it had never witnessed such a steep fall as in 2002-03 when the decline in foodgrains production is apprehended to be anywhere between 13-14 percent. This is attributed to the worst drought the country has ever experienced. The month of July that normally records highest rainfall in monsoon in India, registered the lowest rainfall in the past 100 years..."[1]

And:
"In the Punjab (known as the bread basket of India), wheat yields have been dropping for a decade because the water table is also dropping – by a metre a year. Debt and farmer suicides are both rising. "[2]

I know that this year the drought in India has caused enormous distress. “A late monsoon and the driest June for 83 years in Northern India is exacerbating the effects of widespread drought.” [3]

India now has a water shortage problem and the Green Revolution was always premised on the ready availability of water. Where to now for agriculture in general in a dryer world allover and where energy scarcity also casts a long shadow?

In April last year the 'International Assessment of Agricultural Knowledge, Science and Technology for Development' (IAASTD) bureau[4] issued a report entitled 'Agriculture at the Crossroads'.[5]

The IAASTD noted that the mounting crisis in food security around the world is “of a different complexity and potentially different magnitude than the one of the 1960s.” Their report called for a paradigm shift in the way agriculture was carried out as well as in the types of technology used. Hundreds of scientists from around the world that contributed to the IAASTD report and recognized that “Knowledge systems and human ingenuity in science, technology, practice and policy is needed to meet the challenges, opportunities and uncertainties ahead.” Their reports concluded: This recognition will require a shift to nonhierarchical development models” in agriculture.

More on this report later. It can be downloaded here.

[1] Macro-economic overview of India: Agriculture
http://www.indiaonestop.com/economy-macro-agro.htm

[2] The Future of Food - episode 1
http://coopette.com/blog/the-future-of-food-episode-1

[3] http://www.guardian.co.uk/world/2009/jul/12/india-water-supply-bhopal

[4] The IAASTD was initiated in 2002 by the World Bank and the Food and Agriculture Organization of the United Nations (FAO) as a global consultative process to determine whether an international assessment of agricultural knowledge, science and technology (AKST) was needed.

[5] http://www.agassessment.org/reports/IAASTD/EN/Agriculture%20at%20a%20Crossroads_Synthesis%20Report%20(English).pdf

Blueprint for a better world: take Friday off... forever

by the Sandwichman

The New Scientist last week ran a cover story on "radical ideas that could transform our lives" including redefining the bottom line and implementing a four-day workweek.

Trash the Economy, Save the Planet

So here’s the good news: global CO2 emissions are on track to fall 2.6% this year, thanks to the struggling world economy. This is not exactly unexpected, since the environment prospers whenever the economy doesn’t. I remember how quickly the air in Pittsburgh and Gary improved in the early 1980s, when the large rolling mills were shuttered forever.

You could see this as a recipe for long-run sustainability. Forget about wind, solar and energy efficiency. Just let the finance honchos go back to their ancienne regime bonus system, concentrate all banking in a few hands, let them “innovate” in a new generation of complex, unfathomable instruments, blanket their operations in secrecy and promise to bail them out if anything goes wrong. Then we can enjoy many more years of effort-free carbon abatement. But wait—that’s what we’re already doing.

This means Obama was right to tell the carbon conferees today that the US is taking effective measures to reduce its carbon footprint. He was being a little disingenuous, however, when he said “the recent drop in overall U.S. emissions is due in part to steps that promote greater efficiency and greater use of renewable energy.” There was another, bigger part he forgot to mention.

Norman Borlaug's Death

Lou Proyect did a nice piece on Borlaug’s legacy.

http://louisproyect.wordpress.com/2009/09/20/food-imperialism-norman-borlaug-and-the-green-revolution/#comment-44559

In January 1975, I was invited to debate Norman Borlaug at Santa Barbara Community College. Because of his fame, it was scheduled for a very large auditorium. For some reason, he did not or could not show up, but participated via some video hookup on a movie screen.

I attacked the Green Revolution on several points: Water equity, pesticides, credit dependency, the Rockefeller interests in seeing greater consumption of petrochemicals, displacement of small farmers, etc.

He was condescending, but because it was California in the 1970s, I think that the majority was with me. But then, as we aging basketball players say, “the older get, the better I was.”

Estimating U-6 Labor Underutilization

by the Sandwichman

U-3: Total unemployed, as a percent of the civilian labor force (official unemployment rate).

U-6: Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.

It turns out that there are some 2008 annual data on part-timers and marginally attached workers that enable the reconstruction of a U-6 for 18-24 year olds. In 2008 there were 1,036,000 16-24 year olds working "part time for economic reasons" and 1,733,000 16-24 year olds "marginally attached" to the labor force. Added to the 2,830,000 officially unemployed, they bring the total of labor force underutilization in 2008 to 5,599,000 for a U6 rate of 24.3%. The U-3 rate for 2008 was 12.8%.

Assuming a constant ratio between U-3 and U-6 over time suggests a current (August 2009) U-6 rate for 16-24 year olds of 34.4%. Alternatively, assuming a constant percentage point margin between the two measures gives 29.6%. A third method, using the ratio of current U-3 to current U-6 for the general population yields an estimate of 31.5%.

An Economic History From 1998

My highlights from research on 1998 (with umpteen revisions tonight).

I was wondering whether the massive drop in oil prices that year was engineered in order to facilitate economic collapse in Russia, but having looked at this graph, it appears that such a scenario more likely could have happened in the late 1980s; if it occurred at all?

When were the impacts of the banking system's use of a new and unregulated form of 'high-power money' (in 1994) felt? I refer to money created through what has been referred to as "arcane procedures and instruments"; like 'zero-reserve sweeps'. These novel banking processes resulted in an enormous expansion of the money base that was largely concealed from public scrutiny. More on this topic here.

1998 – May 7th. Greenspan:

"We need an understanding if we are to minimize the chances that 'we' will experience a systematic disruption beyond our degree of comprehension or our ability to respond effectively..."

1998 – Global currency crisis associated with the the failure of Long term Capital Management. It was a currency trader. With the guidance of the US Fed all of the banks got together when it started to collapse and propped up the currency markets. Underscored is “the fact that

“deregulation” has created an economic monster which requires more and more tinkering from the stewards of the system.”[1]

1998 – August 31st. Russia’s economic problems helped sent the Dow Jones Industrial Average to its second biggest single-day drop ever, 512 points.

1998 US IP owners imposed draconian new US copyright regime.[2]

Late 1990s. The percentage of people belonging to the middle class in the “old industrial countries” began to decline from the late 1990s to the present (August 2008). Making up for the falling incomes of First World workers for some years after 2000 was an increase in consumer credit. In 2007 a “popular default” broke out in the US. [3]

1998 – Present (2007. China’s huge labor surpluses absorbed through debt-financed investments in huge mega-projects that dwarf the already huge Three Gorges Dam. [4]

1998 – Book: The Buying of the Congress: How Special Interests Have Stolen Your Right to Life, Liberty, and the Pursuit of Happiness. Today ... there is no leadership or protest against our subjugation to the powerful economic interests that have captured our Congress and our politics. We are tired, and there is no alternative but to protest. (An appendix lists 32 leading members of Congress, along with each of their top ten career patrons (corporations and lobbying PACs). It's a depressing picture.) [5]

1998 – Doug Nolan’s Credit Bubble Bulletin begins.

1998 Hugo Chavez elected President in Venezuela (loss of oil to US)

1998 – Economic Giantism hastens

1998 – February 4th. US House of Reps Sub Committee. On the Asian Financial Crisis

1998 – Greenspan quote:

"Nor should we require individual banks to hold capital in amounts sufficient to fully protect against those rare systemic events which, in any event, may render standard probability evaluation moot. The management of systemic risk is properly the job of the central banks. Individual banks should not be required to hold capital against the possibility of overall financial breakdown. Indeed, central banks, by their existence, appropriately offer a form of catastrophe insurance to banks against such events."[6]

Late 1990s – The economy was growing, unemployment was creeping downward. Wages were increasing only modestly. Greenspan kept interest rates low, knowing that the workers’ fear of unemployment would continue to keep wages in check. The low interest rates fuelled the dotcom bubble. [7]

1998 – George Shultz vetted Bush Jr for the job as US president and put together the team behind his presidency. [8]

1998 September 21st. US Fed Reserve and 16 major Wall Street investment banks meet to organise a financial bailout of the hedge fund that they had all lent money to – Long Term Capital Management. There was real fear that the bond market would seize up as creditors rushed for the exits. The US Federal Reserve pushed billions of dollars of liquidity into the markets.

The US Fed denies involvement in the LTCM bailout.

"Perhaps [Paul Volker's] highest profile stance since his Fed days was taken during the Long-Term Capital Management fiasco of 1998. Volcker questioned the "bailout" of LTCM by the consortium of investment banks.

"Why should the weight of the federal government be brought to bear to help out a private investor?" [9]

1998 – October 6th. IMF head, Michel Camdessus, warns of global systemic crisis.

"We are speaking not just of countries in crisis, but of a system in crisis, a system not yet sufficiently adapted to the opportunities and risks of globalisation."[10]

1998 – October. Former chairman of the US Federal Reserve Board Paul Volcker said in a [then] recent speech to the International Finance Institute, published in the Financial Times:

“The problems we see with such force today are systemic--they arise from within the ordinary workings of global financial capitalism. ... Consider the latest bit of evidence from the US itself; one unsupervised and unregulated financial institution--an institution boasting the most elaborate models of market behaviour and sophisticated advisors--carried the possibility, by testimony of the US Federal Reserve, of pulling down the financial tent." [11]

[Volcker was referring to the multi-billion dollar bailout of the Long Term Capital Management hedge fund.]

1998 – October. As President Bill Clinton was warning of the worst financial crisis in 50 years, and calling for strong global leadership, the war against his administration being waged by powerful sections of the American bourgeoisie was intensifying with the House judiciary committee recommending an unrestricted investigation as to whether ground existed for his impeachment.[12]

1998 – November. Failure by the Organization of Petroleum Exporting Countries (OPEC) to cut production at its meeting in November 1998 prompted prices to collapse to a 12-year low of $10.35 a barrel in New York the following month.

1998 – Robert Rubin (then US Treasury Secretary) and Alan Greenspan persuaded Congress to change banking laws to permit the merger of Travelers Insurance, Citibank and Citigroup

1998 – October 21st. Discussing the 1998, 1987 and 1929 crashes. (Select Committee of the US Treasury. Minutes of evidence). Mr Davies: “It seems to me that we are somewhere in between the 1987 episode and the 1929 episode—hopefully a great deal closer to the 1987 episode…. So the Fed lost control of interest rates and to some extent sadly that has happened in recent weeks, although nothing like to the same degree…. The other element of the perverse policy was that fiscal policy generally was far too tight, so a combination of those events led to ten years of depression…. the world economy is generally weaker going into this crash than was true in 1987. Therefore, rebound would be slower and the background is weaker, so we will not get the rebound that we saw in 1988. Professor Minford: “after a big crash like 1987, which was on the same scale if not rather bigger than the share market crash we have seen in the last couple of months, that it was easy to turn round. We overdid it in retrospect…. There is no lack of liquidity today. In fact, some people maintain there is too much. Money supply in the United States is clearly growing quite robustly at this moment. All this points to the fact that we do have the ability to respond to this; and all the evidence is that we are responding to it…”

[1]Rigging the Market: The Secret Maneuverings of the Plunge Protection
Team
Mike Whitney, Information Clearing House, 09/14/06
http://www.undollars.com/archives/arch_undollar.whitney_9_17_06.htm

[2] The Bear's Lair, by Martin Hutchinson
http://www.prudentbear.com/articles/show/2070
The decline of Western incomes. July 23, 2007

[3] The crisis of the global economy
A report of the Institute of Globalisation and Social Movements, Moscow
By Vasily Koltashov
Translated by Renfrey Clarke, Links – International Journal of Socialist Renewal
http://links.org.au/node/517

[4] THE NEW IMPERIALISM: ON SPATIO-TEMPORAL FIXES AND ACCUMULATION BY DISPOSSESSION, David Harvey -- http://titanus.roma1.infn.it/sito_pol/Global_emp/Harvey.htm

[5] Lewis, Charles and the Center for Public Integrity. The Buying of the Congress: How Special Interests Have Stolen Your Right to Life, Liberty, and the Pursuit of Happiness. New York: Avon Books, 1998. 416 pages. ISBN 0-380-97596-3
http://www.namebase.org/cgi-bin/nb01/fB

[6] Greenspan 1998
http://www.federalreserve.gov/boarddocs/Speeches/1998/19980226.htm

[7] Michael Perelman. Chapter 2 of his draft book ‘The Invisible Handcuffs’.
http://michaelperelman.wordpress.com/2008/07/22/second-chapter-of-the-invisible-handcuffs-of-capitalism-how-market-tyranny-stifles-the-economy-by-stunting-workers/

[8] George Pratt Shultz: Profile of a Hit Man
by Scott Thompson and Nancy Spannaus
This article appears in the December 10, 2004 issue of Executive Intelligence Review.
http://www.larouchepub.com/other/2004/site_packages/econ_hitmen/3148shultz1.html

[9] Paul Volker - Part 2. Brian Trumbore
President/Editor, StocksandNews.com
http://www.buyandhold.com/bh/en/education/history/2000/paul_volker2.html

[10] Tuesday, 6 October, 1998, 19:41 GMT 20:41 UK
IMF chief warns of world crisis
http://news.bbc.co.uk/2/hi/187695.stm

[11] Conflicts dominate Washington meeting
World leaders at International Monetary Fund conference
acknowledge global economic crisis
By Nick Beams
8 October, 1998
http://www.wsws.org/news/1998/oct1998/econ-o08.shtml

[12] Conflicts dominate Washington meeting
World leaders at International Monetary Fund conference
acknowledge global economic crisis
By Nick Beams
8 October, 1998
http://www.wsws.org/news/1998/oct1998/econ-o08.shtml

A Negatively Sloped Hicksian Labour Supply Curve?

by the Sandwichman

The report of French President Nicholaus Sarkozy's Commission on the Measurement of Economic Performance and Social Progress, issued Monday, contains 184 instances of the word 'leisure'. The following, though, is from the Reflections and Overview of the Commission's principals, Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi:

Surely, if one society chooses to limit its consumption of material goods, enjoying more leisure, including time devoted to culture, the arts, and community engagement, it should not be counted against it. Citizens in such a society might be far happier than in one which works longer hours, spending less time both with the family and in the community. Citizens in the hardworking society complain that, while they are working hard for the family, they have no time left for the family. Yet, our conventional measures would attribute better economic performance to the harder-working and unhappier society: both incomes and growth would be higher. Furthermore, the increase in average working time may be itself the consequence of the society’s malfunctioning. If inequality becomes pervasive, the number of persons who have to work harder to ensure their living may greatly increase (there is a negatively sloped Hicksian labour supply curve): they may claim that they have no choice but to work harder (though of course they could, were they willing to accept a much lower standard of material consumption than other citizens). It would be questionable whether this evolution is welfare-enhancing, even if GDP increases as a consequence.

If leisure is a normal good... But, what if leisure isn't a normal good?

The canonical labor supply model treats leisure as a normal consumption good, which is questionable, to put it mildly. Below a culturally-determined income threshold, non-working time ceases to be available for use as leisure and instead becomes unemployment -- that is, a disutility rather than a utility. Likewise, for most occupations, there is an optimal length of working day and week in which the work itself enhances quality of life, aside from the income received from working. That optimum is likely to be rather dynamic and unstable. Indifference curves do not provide a suitable representation of these effects taken together.

At the end of their Reflections, the authors express the hope that their report will provide the impetus for a broader discussion of "societal values, for what we, as a society, care about, and whether we are really striving for what is important." This is a discussion, incidentally, that Sydney J. Chapman called for 100 years ago in the concluding paragraph of his "Hours of Labour":

Tangible things force themselves upon our attention as the more intangible do not, and some of us who have an economic bent of mind get into the way, in consequence, of thinking too much of the quantity of external wealth produced and too little of the balance between internal and external wealth. In ultimate terms, to those who care to put it that way, all wealth is life, as Ruskin insisted. There hardly appears to be any risk of a general underrating of external goods, but there is some risk of an underrating of the new needs of the life lived outside the hours devoted to production – which should themselves be, not a sacrifice to real living, but a part of it – and of an underrating of the dependence even of productive advance upon the widespread enjoyment and proper use of adequate leisure and an adequate income.

Sidney Chapman's theory of the hours of labour, published in September 1909 in The Economic Journal, was acknowledged as authoritative by the leading economists of the day. It provided important insights into the prospects for market rationality with respect to work time arrangements and hinted at a profound immanent critique of economists' excessive concern with external wealth. Chapman's theory was consigned to obscurity by mathematical analyses that reverted heedlessly to outdated and naïve assumptions about the connection between hours and output. The centenary of the theory's publication offers an occasion to reconsider what has been lost by economists' neglect of Chapman's theory.

Notre Dame To Dissolve Heterodox Economics Department

The link to the story in the Chronicle of Higher Education is http://chronicle.com/article/Notre-Dame-to-Dissolve/48460. The bad guy in this is the dean, who wanted to have a "highly ranked" graduate program in economics (there was already a conventional econ department in the business school, but that was under another dean). So, he took away the grad program from the famous and productive, but heterodox and book-publishing (many of them very influential and important, check out Phil Mirowski's work) department. They set up what orthodox economist Robert Solow warned would be a "third rate MIT department," which he said we did not need another of. Now the axe is falling, and the heterodox department is to be completely eliminated. Supposedly the remnant tenured faculty will be scattered among other departments where they will be allowed to teach their upper level courses, but no principles or intermediate theory ones.

The department contains a number of important economists. Mirowski is the author of Machine Dreams and More Heat than Light. David Ruccio is the editor of Rethinking Marxism. Amitava Dutt is a development economist who is the author of numerous books, and there are others. This is a sad day, especially in light of the discredit that economic orthodoxy is standing in now.

Minsky Punts, Part II

by the Sandwichman

"Employment is the bottom line of the current crisis. It is essential that governments focus on helping jobseekers in the months to come," stated Angel Gurria, Secretary General of the Organization for Economic Co-operation and Development yesterday at the launch of its Employment Outlook 2009. The OECD report anticipates that unemployment in the OECD countries could reach 57 million people and an unemployment rate of 10%. It points out that young people have been hardest hit by the jobs crisis.

Would a Minsky-inspired "job guarantee program" be an economically feasible response to that jobs crisis? Randal Wray is probably the best-known current advocate of such a program. In August, Wray posted a brief description of the idea along with some references for further reading. The Sandwichman's familiarity with the debate around the job guarantee idea comes largely from a discussion in Robert LaJeunesse's book, Work Time Regulation as Sustainable Full Employment Strategy, in which LaJeunesse sought to show why work time regulation would be superior to a jobs guarantee.

LaJeunesse's main objection to the job guarantee idea is that it expands work and consumption instead of questioning the compulsion for and ecological sustainability of perpetual, artificially-induced economic growth. Peter Victor's book, Managing without Growth, and the Sustainable Development Commission's report, Prosperity without Growth?, give persuasive evidence in support of such criticism.

While the Sandwichman agrees wholeheartedly with LaJeunesse's ecological critique, he also has microeconomic concerns about job guarantees. But first, before outlining those difficulties, more on the dimensions of the jobs crisis, and particularly the youth jobs crisis.

The official unemployment rate in August for 16-24 year olds was 18.2%. That's the seasonally adjusted "U3" number, using the narrow definition of unemployment. The BLS doesn't give "alternative measures of labor underutilization" by age categories. For the general population, the broadest measure if underemployment, U6, is 16.8% or about one and three-quarters times the official rate of 9.7%. Using the ratio of U6 to U3 to arrive at a conservative estimate of youth underemployment gives a total of 31.5% combined underemployment and unemployment.

Another way to gauge the real dimensions of the youth unemployment crisis is to look at the historical trend of the employment ratio. The current employment ratio of 46.6% is 8.5 percentage points lower than the 33 year-average. But even that average is skewed by the collapse of labor market participation that has occurred since 2001. Between January 2001 and December 2003, labor market participation of 16-24 year olds fell from 66% to 60.5%. But after that it remained virtually flat until January 2007 when it resumed its decline. In other words, although there was a modest recovery of three percentage points in the official unemployment rate the employment rate only regained about one percentage point from its 2001 recession low before heading downward again.

As the chart below shows, unemployment and under-participation leveled off at around 20% from 2003 to 2007 and then resumed their climb from near recession peak levels:


Scared yet? Returning now to Sandwichman's microeconomic objections to job guarantee schemes, there are three aspects that particularly trouble me. First is the historical precedent that explicitly "make work" jobs have always carried a stigma. This was true of the 19th century workhouse in Britain and of WPA jobs during the Great Depression.

Second, the necessity for some kind of administrative overhead -- managers, planners and staff -- must necessarily lead to the creation of a bureaucratic empire whose denizens will have a stake in the continuation and expansion of their institutional niche.

Finally, a job is not simply about the exchange of a certain amount of time and effort for a paycheck. Some kind of learning and social interaction goes on in the workplace. Not all of it is directly tied to the work. What kind of informal culture of "lifers" and "transients" is likely to emerge in buffer world of guaranteed jobs? What's to prevent the lifers (as well as the administrators) from devising schemes to divert the efforts of enrollees to their private interests?

Diminishing returns for each dollar of new debt

Or 'why the economic stumuli won't go very far'.

"According to Antal Fekete [1] if you take this chart further back, we used to get $3 of GDP for every $1 of debt. Sometime in the late '60s, the line crossed below $1, meaning every new Dollar of debt returned less than that in GDP. Antal thinks we actual went negative in 2006, but regardless of whether his data is the same as this chart, we are approaching that point. This is truly a point of no return. This means every new $1 borrowed reduces GDP."[2]

Hmmm... could consumers be on strike whilst they pay off their debt? Could wealthy investors be purchasing gold and hiding it under their mattresses instead of creating 'real' wealth in the community? Could indebted oil-producing nations be hiking up the price of oil so that they can pay down their sovereign debt? And I wonder how much extra money is now being spent to repair the damage from (what used to be avoidable) climate change. So many questions and so few dollars!


[1] I do not subscribe to all of the view expressed by Antal Fekete. In particular, I am not a fan of 'the gold standard' because the application of it would not guarantee the absence of a debt bubble and the hoarding of 'gold' does make for a prosperous and healthy economy.

[2] Why The Stimulus Won't Work: The Marginal Productivity of Debt
http://yelnick.typepad.com/politick/2009/04/why-the-stimulus-wont-work-the-marginal-productivity-of-debt.html

How high energy prices create new economic 'norms'

Henry CK Liu wrote an interesting article in 2005 in which he outlines the rather dire implications for the US and global economy from rising energy prices. He claims, by the way, that the then quite dramatic rise in the price for gasoline was not the result of peak oil. Rather, he appears to say in this case, it came from high refinery costs. Please correct me if I've misinterpreted that point (and others). It is conceivable that the high cost of debt experienced by the petroleum cartel could also (easily) be added to the price of oil.

I've summarised the ten points Mr Liu has made on the subject below:

Fact 1: Energy prices are so basic to the global economy that, when they rise, the same material quantity in transactions simply involves greater cash flow. Higher oil prices do not take money out of the global economy but shift the profit to different sectors. Foreign oil producers must then shift their dollars back into US Treasury bonds or other dollar assets as part of the rules of the game of US dollar hegemony. A rise in monetary value of assets adds to the monetary wealth of the economy.

Fact 2: High energy costs translates into reduced consumption in other sectors unless higher income can be generated from the increased cash flow. Wage rises have a long time lag behind price increases. Workers may be able to increase their income by working longer hours in the meantime. The latter does not necessarily translate into productivity increases.

Fact 3: As cash flow increases for the same amount of material activities, the GDP rises while the economy stagnates. Purchases and sales amount to the same (maybe less) at a higher price and profit margin and with slightly more employees at lower pay per unit of revenue. The inflation from rapidly rising energy costs resulted in businesses hedging to protect themselves in the expanding structured finance world.

Fact 4: The impact of the sharp rise in energy prices results in asset values – in fact the entire commodity price chain - being in a upward spiral. It becomes possible to carry more debt without affected the debt-to-equity ratio. In effect this gives substance to a debt bubble and represents a defacto depreciation of money that is misidentified as growth.

Fact 5: High energy prices threaten the economic viability of some commercial sectors.

Fact 6: No interest-rate policy from any central bank can contain energy-cost-related inflation. Central banks can and do create debt bubbles.

Fact 7: War is a gluttonous consumer of oil. Waging war will translate therefore into rising dollar interest rates due to a higher US federal budget deficit. This is recessionary for the globalised economy but an economic stimulant in the US as long as collateral damage from the war occurs somewhere else.

Fact 8: In a debt bubble, oil in the ground can be more valuable than oil above ground because it can serve as a monetizable asset through asset-backed securities (ABS) in the wild, wild world of structured finance (derivatives). Also gasoline prices will not come down because there is no economic incentive to fix the shortage of crude oil refinery capacity. Refineries are among the most capital-intensive investments and the return on new investment will need continued high gasoline prices to pay for it.

Fact 9: The reason the US imports oil is that importing is cheaper and cleaner than extracting domestic oil – not because the US has a shortage of proven oil reserves.

Fact 10: Fifty-dollar oil [+] will buy the US debt bubble a little more time. Despite all the grandstand warnings about the need to reduce the US trade deficit, a case can be made that the United States cannot drastically reduce its trade deficit without paying the price of a sharp recession that could trigger a global depression.

From:
The real problems with $50 oil
By Henry C K Liu May 26, 2005
http://www.atimes.com/atimes/Global_Economy/GE26Dj02.html

When Did The US Housing Bubble Begin?

In his most recent post on "Economics and its Discontents" on economic principals, David Warsh asserts that the US housing bubble occurred during 2003-06. In a thread following a post on this on Economist's View, I questioned this and said that it began in 1998, only to get a lot of criticism from others, with alternative beginning points being posed, including 2000 and 2001. I replied by noting that if one looks at the price-to-rent and price-to-income ratios for housing from both of the two indexes available (Case and Shiller and OFHEO, the latter having the bubble peaking in early 2007, while Case and Shiller say mid-2006) that showed these ratios taking off in 1998, although basically nobody noticed at the time because we were nearing the end of the dramatic dot.com bubble that crashed hard in early 2000. One can find a source for the OFHEO one here and for the Case and Shiller one here.

Now, part of what has people nonplussed I think is that both Kindleberger and Minsky used to argue that most bubbles start with some sort of identifiable "fundamentals displacement" that starts some price or prices on an upward path that then turns into a speculative bubble. But it is hard to identify such a displacement for housing in 1998. However, it seems that this is the case for some other of the really large bubbles of history, including the Mississippi one of 1719-20, the South Sea one of 1720, the 1920s stock market bubble, the 1980s one as well, and probably the dot.com bubble also. I wrote about this back in 1991 in my book, From Catastrophe to Chaos: A General Theory of Economic Discontinuities (repeated in second edition, 2000) on p. 61 as follows.

In all four of these cases the bubbles emerged after relatively long periods of general economic growth. Thus it may be that the trigger of these bubbles was a critical accumulation of general confidence and enthusiasm without any specific displacement of any fundamental being involved. It may well be that other episodes which have apparently begun with fundamental displacements may in fact have been "misspecified fundamentals" on the part of the participants. They mistakenly forecast that the initial displacement represented the future trend of the fundamental and the collapse of prices came when the illusion vanished. In this respect the lack of a clear initial displacement may be a way of identifying a pure speculative bubble. The pure bubble simply emerges from the swelling sea of boundless optimism, like Aphrodite from the froth.