Traps and multipliers

Tyler Cowen has a post where he says that it is inconsistent to hold both that there is a liquidity trap and that the fiscal multiplier is large. He says that if the government spends more on cement - say- when we are in a liquidity trap, the cement supplier will simply add the proceeds to his money hoards and that's the end of the matter. I find this puzzling, to say the least. The liquidity trap doesn't mean that you have an unlimited demand for money balances. It means that you regard money and bonds - due to the zero interest rate- as perfect substitutes. So monetary policy, which substitutes money for bonds in private sector balance sheets, can't work. In normal times, this substitution can't happen without a fall in the interest rate, which would then be stimulative. In a liquidity trap, giving the cement supplier, or anybody else, money in exchange for bonds doesn't change anything; but giving the cement maker money to produce cement increases her income, and thus, to some extent her spending, and thus someone else's income and yadda yadda. Am I missing something basic here?

Muzzling Money in Politics

The open display of campaign financing to influence Congressional votes in health care and financial regulation shows, if we needed more evidence, that McCain-Feingold isn’t working. Here’s another approach.

Instead of trying to choke off political money at its source, make the donations blind. Create an intermediary, a Campaign Finance Administration, to collect the money from donors and make payments to candidates or parties, and require all donations to go through it. Donors could select any recipients they choose and earmark their contributions for them, but the agency would maintain confidentiality over how much was given and who it was directed to. On a regular basis they would deliver a check to each candidate, combining all the donations made within the latest period. The goal is to permit donors to spend their money to promote their political objectives, but to reduce their leverage over politicians between elections.

It’s like the secret ballot, which was used to combat vote-buying in the heyday of urban political machines. You can still vote for any bozo you want, but you can’t sell your vote because you can’t demonstrate that you actually did what you were paid for.

I won’t say it will solve all our problems, but it’s a fairly simple step that shouldn’t raise any constitutional hackles.

Nobel Speculations

This is probably dumb, but I am going to indulge in Nobel speculations. My main forecast is that there are two leading fields of economics that are way ahead of the rest for being the focus of this year's prize. The first is environmental economics because 1) one has never been given for the field, and 2) the Swedes are supportive of the upcoming Copenhagen summit on global warming. The second would be behavioral finance because that continues to be a major global issue, and in the past the committee has given finance-related prizes to neoclassical types whose theories now lie in ruins and discredited. As with last year, this will not be a year for any new classical or rational expectations types like Barro or Sargent or Fama, although all kinds of people out there somehow think they deserve it. More details under the fold (hopefully).

So, if it is for environmental I think it is likely recipients will have some link to the global warming issue. This probably rules out some more radical and heterodox founders like Herman Daly or Allen Kneese or Richard Norgaard whom I would applaud. It also rules out some more mathematical folks like Partha Dasgupta or Richard Starrett or William Brock or Geoffrey Heal, and I would not hold my breath either for local favorite and former Nobel committee member, Karl-Goran Maler either.

Those with global warming cred would include Nicholas Stern and William Nordhaus and Robert Stavins, any of whom might get it. However, the most interesting and deserving combo, requiring not to be too heterodox and also have a global warming link but also more innovative and important in my opinion would be a Graciela Chichilnisky-Hirofumi Uzawa-Martin Weitzman combo. Chichilnisky has been involved in the UN efforts and is the main inventor of the important "green golden rule" idea. Also, she would finally be the first woman to get it. Uzawa is most famous globally for his important neoclassical growth theory papers from the 60s, but in recent years has become a sort of Amartya Sen of Japan, its most revered economist and Wise Old Man, who has become a strong environmentalist and written more philosophical and deep papers on global warming. There is rumbling in Sweden about Fujita of Japan not getting it with Krugman last year, and no Japanese has gotten it. Finally, besides making very insightful points about fat tails in the global warming issue, Weitzman's "Prices and Quantities" paper is enormously influential within the field.

On behavioral finance the obvious person would be Robert Shiller. He could get it alone. Or an obvious addition would be Richard Thaler. Going for three, either Benoit Mandelbrot, the most deserving in my view but may be too odd for the committee, or Kenneth Rogoff.

Here is a list of other possibilities, lower in probability this year in my view but not out of the question: Oliver Williamson with Tirole or somebody else (Geoff Hodgson claims that Williamson is the most cited economist of all time), Gordon Tullock-Anne Kreuger (another woman) possibly with Janos Kornai for rent seeking, Richard Easterlin for happiness, Paul Romer for endogenous growth (lower probability because too close to last year's award), William Baumol or Albert Hirschman for general grand old man wisdom.

Muddle Class Task Force

by the Sandwichman

"We don't think that 'less bad' is good. 'Less bad' is not our measure of success." -- Vice President Joe Biden

Dear Joe, Christy, Larry, Peter, Terrell, Jared, Curly and Moe,

Wake up!

Vice President Biden assures Americans that the Recovery Act, by some estimates, has already saved and created a million jobs. Think of it! A million jobs! That's like a one with six zeros after it.

Meanwhile, buried deep in the BLS employment report today is mention of the "benchmark revision" for 2008, subtracting 825,000 jobs. Those job losses don't show up in the monthly statistics or even in the revisions. They only show up a year later in the benchmark revision. The prime suspect for the extent of the discrepancy is the BLS birth/death model, which added a net total of 904,000 717,000 "imputed" jobs to the fiscal 2008 employment situation reports. So far this year there have been 707,000 815,000 imputed jobs added to the BLS reports. If 90% of we assume those jobs don't actually exist, as in 2008, then the cumulative statistical distortion is 1.5 1.6 million jobs. That's more than half again as many phantom jobs created by statistical miscalculation as estimated to be saved and created by the Recovery Act!

"Less bad" may indeed not be good. But getting worse somewhat more slowly is not even "less bad". It is just plain worse.

Eight months ago, when the "White House Task Force on Middle Class Working Families" was announced, the Sandwichman sent Jared Bernstein a draft submission, outlining the role that work-time reduction could play in a full-employment strategy. A month and a half later, I posted a final version of the submission and submitted a summary to the Task Force along with a link to the full document.

I am posting it again for your information...

Publish at Scribd or explore others: Economics environment working families

Sincerely,

The Sandwichman

P.S. -- except I keep getting error messages when I try to submit this to the White House Task Force webpage.

Good News On Iran-US Relations

I am very pleased by the reports today of agreements made yesterday in the 5+1 talks with Iran, despite natterings by various nabobs of negativism and paranoid hysteria. The posts for the past two days by Juan Cole at http://www.juancole.com are in my mind very useful. He reminds people of some basics that are regularly forgotten in the drumb beat of propaganda that most of the US media hands out about Iran. It has not invaded another country since the 1700s; it has an official policy (based on a fatwa by its Supreme Leader) against acquiring nuclear weapons; it has an official policy of no first strikes (fitting in with its long history of non-aggression); all the uranium it has enriched is at a level far below being able to be used for nuclear weapons; both the IAEA and an official NIE of the US government (from the Bush presidency) state that it does not have an active nuclear weapons program. And, to add to all that, the democratic opposition to the current government opposes increasing sanctions on Iran.

In any case, it now looks like Obama made good use of his private conversation with Putin, which went on for much longer than expected and out of which there were no reports, given the constructive role that Russia is playing at this time in regard to this situation. Sometimes there is good news, and it does appear that having a president who is both smart and well informed is a good thing once in awhile.

Putting America to Work?

Shovel Off to Buffalo

by the Sandwichman

Former Clinton Secretary of Labor, Robert Reich, thinks deficit spending on infrastructure is a panacea for unemployment:

Let me say this as clearly and forcefully as I can: The federal government should be spending even more than it already is on roads and bridges and schools and parks and everything else we need. It should make up for cutbacks at the state level, and then some. This is the only way to put Americans back to work. We did it during the Depression. It was called the WPA.

The Sandwichman sympathizes with Reich's sentiment. But why can't a university professor and ex-Secretary of Labor rise above cracker-barrel wisdom and deal with real facts on the ground. The fact is the unemployment rate among 16-24 year olds is already nearly 20 percent and the underemployment rate, including discouraged job-seekers and economic part-timers is over 30 percent. That's three-zero -- thirty percent.

Not all the unemployed are qualified construction workers.

In fact, it's likely a relatively small proportion are. Even if they were, it's not likely that building all the roads, bridges, schools and parks WE NEED would require enough labor to employ them all... unless you're going to opt for those eight-person crews with one shovel. And another catch is that those infrastructure projects will also require the services of people whose skills and credentials are already in short supply -- thus creating bottlenecks.

No, spending even more on all those public works projects is not such a brand-new, fabulous, fool-proof panacea. Ahem. Did you know the patron saint of fiscal stimulus, John Maynard Keynes, didn't exactly have the house of pancakes bottomless coffee pot of government spending in mind?

Don't take my word for it. Read Lord Robert Skidelsky's "Keynes: The Return of the Master." Everybody else is. Even at the OECD. But even Skidelsky is being a bit coy in the latest book. He says, "Over time... the high-investment policy should yield to the encouragement of consumption through redistributing income from the higher to the lower-saving section of the population. This should be coupled with a reduction in the hours of work." That's a lot vaguer than what Keynes actually wrote and also much vaguer than what Skidelsky wrote about Keynes a decade ago.

The bottom line is that Keynes's ultimate solution for unemployment now is WORKING LESS and not "spending more". Maybe Keynes was wrong, eh? But in that case the burden of proof is on the advocates of more stimulus to show why Keynes was wrong or at least to honestly acknowledge that what they propose is NOT what Keynes advocated.

Watering the Tree of Liberty

I have recently been reading Connor Cruise O'Brien's book on Burke, The Great Melody, which I highly recommend, especially as an antidote to the highly selective uses of Burke by pop conservatives like Brooks and Will. So anyway, I also picked up another book by O'Brien, The Long Affair, which is, in the first place, about Jefferson's fascination with the French Revolution - what O'Brien calls his cult of the French Revolution, and his full-throated defense of Terror in the name of "Liberty." But the thesis is much bigger than that. O'Brien wants to undermine the liberal white-washing of Jefferson, especially when it comes to race. He points out that Jefferson was bitterly opposed to the very idea of a multi-racial society and that the only way he could contemplate slavery ending would be with the freed slaves immediately shipped back to Africa.

The final chapter finds O'Brien worrying, circa 1996, about the prospects of American democracy. He says that American civic religion cannot be adapted to a genuinely multi-racial democracy without jettisoning Jefferson from the pantheon. And he worries that this in turn may produce a schism, with the return of what has been repressed in the liberal portrait of Jefferson ( the release of "the spell-binding and anarchic racist prophet within Jefferson") in which Jefferson would become "the prophet and patriot of the fanatical racist far right in America."

Needless to say, reading this in the wake of the news story from this past summer about the guy who showed up at one of Obama's town-halls with a loaded gun, wearing a shirt inscribed with the "watering the tree of liberty with the blood of tyrants" quote from Jefferson - well, it was beyond chilling.

Will The Fed Unwind Its Enormous Balance Sheet Via Reverse Repos?

A few days ago at Econbrowser, Jim Hamilton showed the latest Fed balance sheet and quoted scattered reports that Bernanke and the Fed are contemplating the use of "reverse repos" to unwind the Fed's balance sheet, which has been about three times its normal size since last September, "Federal Reserve reverse repurchases". The balance sheet was initially ballooned by such entities as the TAF and the CPLF, which picked up all kinds of things, from banks and whatnot in the US economy to something like $600 billion in euro-junk. However, there has been a noticeable shift since January, with that stuff getting unwound, and the main item keeping the balance sheet thick with liabilities being a massive increase in repurchase (repo) agreements. Indeed, this has long been the main tool by which the Fed has engaged in open market expansion operations. The new report is that they are hoping to drain these through reverse repos, but are hoping to do so without "tightening." Hmm, we shall see...

The Blowing Winds Of Climate Change in Australia

Last Sunday, 27th September, the Australian state of Tasmania was battered by exceptionally strong winds that brought down thousands of trees, ripped off roofs and guttering from houses, tore power lines and blocked many rural roads with large piles of debris from fallen limbs and trunks of trees from adjacent forests and plantations.

Today, two and a half days after the event, our house is one of the 2,700 still without power.[1] There are at least a dozen large trees on our bush block that lie with their roots protruding out of the ground. Fortunately the local road is now just cleared enough to allow access to vehicles but powerlines are down; they lie in a neighbour's paddock. A tree still leans precariously onto electricity wires only half a kilometre away.[2]

The sheer force of the winds were beyond the experience of local people. Farmer Hayes approached on his tractor this morning. He simply nodded his head in his usual mode of gleeful resignation and declared that we can now expect this sort of thing from now on. "We may as well get used to it."

Only four days earlier a red dust cloud "70 times the level rated hazardous" to health [3] enveloped large parts of New South Wales and southern Queensland; an area approximately 1,500 kilometres long by 400 kilometres wide [4].... to be more precise. This was yet another unprecedented event. No other single dust storm of such magnitude has occurred before, although the last one in October 2002 came close.

Paramedics attended hundreds of calls to distressed, choking individuals. Airline flights were cancelled or redirected to other cities. Traffic was held up for hours due to low visibility. However, the repercussions for Australian farmers after the loss of roughly four million tonnes of soil is yet to be felt.

It is hard to avoid the conclusion that this month heralds the new winds of climate change in Australia. The portents are so many that most people in this hotter and dryer island continent are pretty well convinced that the weather we have now is entirely new and ominous.

Abrupt and stark changes are happening in Australia's climate[5] and landscape so frequently they're becoming a type of online diary entry for me. This winter just ended was Australia's hottest on record.[6] It followed only a few month's after Australia's most catastrophic summer [7] which, in turn, was followed by massive fire outbreaks in Southern Australia.[8] These six hundred odd fires in one state alone were yet another example of a tragedy whose enormity (like the vast majority of other recent changes) is unprecedented in its scale and effect.

The blunt truth is that the changes in our climate give Australia its new reality. It gives it now; it gives it with or without our acceptance. Things have already become very complicated.

Unfortunately, the climate didn't wait for us.


[1] http://www.examiner.com.au/news/local/news/disasters-accidents/2700-still-without-power-and-it-could-be-days-for-some/1634901.aspx

[2] I write from the house of a family member.

[3] 'Air-quality readings off the chart' Aden Creswell and Angus Hohenboken. The Australian, page 6. 24th September 2009.

[4] 'Red Centre causes havoc in big city' The Australian. Page 1. 24th September 2009.

[5] Outside of the Vortex. Brenda Rosser
http://econospeak.blogspot.com/2009/03/outside-of-vortex.html

[6] Only a Decade. Brenda Rosser
http://econospeak.blogspot.com/2009/09/only-one-decade.html

[7] Australia's Catastrophic Summer of 2009. Brenda Rosser. Jan/Feb 2009
http://econospeak.blogspot.com/.../australias-catastrophic-summer-of-2009.html

[8] Australia's Catastrophic Summer - Update. Brenda Rosser. February 2009
http://econospeak.blogspot.com/2009/02/australias-catastrophic-summer-update.html

Worth Quoting

"The 'flexibility' explanation of unemployment is wrong." -- Bell and Blanchflower, "What Should Be Done about Rising Unemployment in the UK?" February 2009, page 15. To elaborate on that point:

In a recent article, Howell et al (2007) econometrically examined the impact of these rigidity variables, or what they call Protective Labor Market Institutions (PLMIs), and concluded that: "while significant impacts for employment protection, benefit generosity, and union strength have been reported, the clear conclusion from our review of these studies is that the effects for the PLMIs is distinctly unrobust, with widely divergent coefficients and levels of significance." Indeed, in his published comments on the Howell et al. article, Jim Heckman (2007) argues that the authors "…are convincing in showing the fragility of the evidence on the role of labour market institutions in explaining the pattern of European unemployment, using standard econometric methodology." Freeman (2007) also finds the evidence for the impact of these institutional variables less than convincing "despite considerable effort, researchers have not pinned down the effects, if any, of institutions on other aggregate economic outcomes, such as unemployment and employment."

Fooled by Randomness

"Hysteria seems especially out of place when people proclaim that the large losses triggered by derivatives could threaten the stability of the world financial system. While enormous leverage and extraordinary potential losses from derivatives will continue to receive banner headlines, a number of international study groups have concluded that a spreading worldwide financial crisis caused by derivatives is highly unlikely. Speculators who take large risks will continue to risk ruin, and some financial institutions -- even large ones -- will continue to fail. But a systematic undermining of world financial stability caused by derivatives trading does not deserve to be on the top of anyone's worry list." -- Burton G. Malkiel, A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, p. 415, 2007 (revised and updated, but not updated quite enough)

It's On!

by the Sandwichman

David Blanchflower's keynote address to the OECD Policy Forum: "How can Labour Market and Social Policies best help workers weather the storm of the crisis?." Page 19 (the punchline):

Keynes’ Biographer Lord Robert Skidelsky

"Keynes’s big idea was to use macroeconomic policy to maintain full employment. His specific suggestion was to use monetary policy to secure a permanently low interest rate and fiscal policy to achieve a continuously high level of public or semi-public investment.

"Over time, as the returns on further additions to capital fell, the high-investment policy should yield to the encouragement of consumption through redistributing income from the higher to the lower-saving section of the population. This should be coupled with a reduction in the hours of work. In short, the object of macro-policy should be to keep the economy in 'quasi-boom' till the economic problem was solved and people could live 'wisely, and agreeably, and well.'"

Washington Post Puffs Gold Buggery

The business section of today's Washington Post contains one of the most ridiculous news stories I have seen yet. I would not mind if this were a column, but "What's Making Gold a Hot Commodity" by Frank Ahrens is supposedly a news story, and as such it should not contain whoppingly erroneous statements without some correction. So, Ahrens himself says the following: "In the long term, with each new dollar introduced into the system, each dollar you hold becomes worth less. That's more than just inflation, which we think of as simply rising prices. That's debasement of not only our currency, but the globe's reserve currency." It may well be that nonsensical thinking such as this has pushed the price of gold back over $1,000 per ounce again, but why should a business section reporter repeat it without the slightest doubt. It is not even good monetarism, as monetarists only view money supply expansions beyond growth of real output and not offset by velocity changes as inflationary.

A bit later, Ahrens uncritically quotes Peter Boockvar, an equities trader at Miller Tabak: "It amazes me that any self-respecting central banker is not alarmed that gold is over $1,000 an ounce and the dollar is trading at all-time record lows." All-time record lows? Only against gold. Currently the dollar is about 1.46 against the euro, while it hit 1.5990 in July 2008. It is around 92 against the yen, but in 1995 got as low as 79.95. It is a bit over 1.5 against the pound, but was at 1.98 last year (and further back in history was over 4.0). Utter drivel.

I do recognize that later in the article Ahrens brings up some factors that might caution people a bit against buying gold too frenziedly, such as how much of it is held by central banks, and how little demand for it is due to industrial use (only about 10%). But he never mentions that it has already been above $1,000 twice before, only to fall back, and in the late 1970s was much higher in real terms, at well over $800, only to fall very far below that and stay well below that for decades. The warnings could have been a bit clearer, along with avoiding mindlessly repeating totally ridiculous non-facts spouted by wacko gold bugs.

OECD Jobs Crisis Policy Forum

As part of the OECD Labour and Employment Ministerial meeting on the Jobs Crisis, taking place in Paris on Monday and Tuesday, there will be a policy forum engaging "the social partners, researchers, Ministers and representatives of the civil society." (One wonders what the difference is between "social partners" and "representatives of the civil society". Are the partners not civil?). Professor David Blanchflower will be the keynote speaker at the Policy Forum.

Blanchflower is a "happiness" economist and, as a member of the Bank of England's Monetary Policy Committee, was early in warning of the impending credit crisis. He has also been in the front lines warning of the jobs crisis and now writes a weekly column for the New Statesman.

The Policy Forum's website presents four questions for discussion at the forum:

- Are standard employment policies adequate to respond to the crisis?

- Do these measures need to be reinforced or complemented by other less conventional measures?

- What should be done to minimize the risk that the current steep rise in unemployment will become persistent into the recovery and beyond?

- How can dialogue with social partners and other stakeholders facilitate the design and implementation of the most suitable labour market and social policy package to help workers weather the storm of the crisis?

The Sandwichman sent Professor Blanchflower his response to these four questions and is pleased that he has acknowledged the email. Below are the responses.

1. "Are standard employment policies adequate to respond to the crisis?"

Certainly not.

2. "Do these measures need to be reinforced or complemented by other less conventional measures?"

Yes, see below.

3. "What should be done to minimize the risk that the current steep rise in unemployment will become persistent into the recovery and beyond?"

The traditional trade union prescription for high unemployment put forward in the 19th century, in the 1930s and even as late as the 1950s and 1960s was to reduce the hours of work. Samuel Gompers said, "So long as there is one man who seeks employment and cannot find it, the hours of work are too long." John Maynard Keynes agreed. In a 1945 letter to T.S. Eliot, Keynes explained, "The full employment policy by means of investment is only one particular application of an intellectual theorem. You can produce the result just as well by consuming more or working less. Personally I regard the investment policy as first aid. In U.S. it almost certainly will not do the trick. Less work is the ultimate solution." Keynes expressed the same opinion more formally in a 1943 Treasury Department memorandum on "The Long Term Problem of Full Employment".

A fuller explanation of the theory underlying the trade union position can be found in Dorothy Wolff Douglas's 1932 Journal of Political Economy article on "Ira Steward on Consumption and Unemployment". For the context of Keynes's views on working less and their centrality to Keynes's thought, see the conclusion to Robert Skidelsky's 1998 paper, "Keynes and Employment Policy in the Second World War." In light of the uncanny convergence between Steward's ideas on unemployment and Keynes's, it would be a serious mistake to overlook them.

4. "How can dialogue with social partners and other stakeholders facilitate the design and implementation of the most suitable labour market and social policy package to help workers weather the storm of the crisis?"

Dialogue on the relationship between unemployment, wages and reduction of the hours of work has been effectively banished from mainstream economics by the bogus accusation that proponents of shorter working time commit a "lump of labor fallacy". Even the unions in the US have finally acceded to the shibboleth. Below is the abstract to my 2007 Review of Social Economy article, "Why Economists Dislike a Lump of Labor":

"The lump-of-labor fallacy has been called one of the “best known fallacies in economics.” It is widely cited in disparagement of policies for reducing the standard hours of work, yet the authenticity of the fallacy claim is questionable, and explanations of it are inconsistent and contradictory. This article discusses recent occurrences of the fallacy claim and investigates anomalies in the claim and its history. S.J. Chapman's coherent and formerly highly regarded theory of the hours of labor is reviewed, and it is shown how that theory could lend credence to the job-creating potentiality of shorter working time policies. It concludes that substituting a dubious fallacy claim for an authentic economic theory may have obstructed fruitful dialogue about working time and the appropriate policies for regulating it."

The unreasoning antagonism of contemporary economists to shorter hours of work is not unprecedented. Mark Blaug's 1958 article, "The Classical Economists and the Factory Acts," revealed how most of the 19th century political economists opposed the reduction of hours on the basis of "principles" that owed nothing to any actual economic analysis. Fortunately, that earlier opposition was overcome by persistent agitation. The current impasse, though, has been hard-wired into theoretical models that owe more to their fanciful premises than to their mathematical rigor.