Who is Dan Hunt?

by the Sandwichman,

A powerful comment on Krugman's blog in response to "Reinventing 1934 macro." Who is Dan Hunt?

This is a misreading of Schumpeter entirely. The problem with inflation is not that it doesn’t work to east the pain, it’s that it has side effects that make the cure worse than the disease. I’d like to understand why that point of view is as callous as you’ve tried to paint it Mr. Krugman, both here and in your magazine article. I presume as well you disagree with any medical procedure that involves pain, irrespective of its result on final outcomes?

In any case, if memory serves Mr. Krugman, you are one of the economists who has pointed out how much more severe each successive financial crisis has become. And yet you see no linkage with these teachings you so deride. To deepen the irony, as I understand it, you are currently looking to build a model of Minsky moments. Who was it again, that Hyman Minsky studied under at Harvard? Yea…. Joseph Schumpeter. And what was one of Hyman Minsky’s most renowned teachings? That new-Keynesians such as yourself have dangerously misunderstood Keynes, leading to mistaken policy proposals such as that de jour. May I suggest a book?

Your grasp of recent events is no better. This wasn’t a housing boom and bust, just the latest chapter in the ongoing, nearly three-decade-long credit bubble, painstakingly cultivated by self-styled slayers of business cycles like yourself. One could also trace the 80’s real estate bubble and S&L crisis, the late 90s stock bubble and all manner of other speculative manias from then to now (commodity futures anyone?) to the same underlying credit fueled phenomenon. It’s as Keynes called it- casino capitalism, only in this version, the only safe bet is the one against the house.

The legacy of all that bad policy are deep, painful maladjustments to modes of consumption and production that have been postponed for decades now. Does US goods producing productivity justify the massive chasm between its wage and per-capita consumption levels and those of its emerging market trading partners? Does it make sense that all we do here is produce ’services’, drive big cars and live in 5 bedroom homes with two car garages? As a cockney might say, yeur arvin’ a laugh.

That mess cannot be fixed painlessly. Resources and investment have been terribly misallocated- people have developed the wrong expertise, whole countries have developed (or underdeveloped) the wrong infrastructure, people have grown accustomed to the wrong lifestyles, companies have researched the wrong developments, for the wrong markets, etc. etc. That’s not going to have serious costs manifesting themselves in poor outcomes in people’s lives? More laughs. It simply cannot, and if the last 30 years have taught us anything, it is the absolute necessity of such adjustments. The necessity of periodic retrenchment, pain and unemployment when commerce and intermediation is organized as it is in a capitalist economy.

That does not mean we need ignore the lessons of Keynes with regard to what happens when there are bad loans, then bad banks and all manner of misappropriated savings, then collapsing asset prices and effects on intermediation, animal spirits etc. What it does mean, is that we cannot let expedients have worse consequences than that which we hope to expedite. And we have. In spades. This stimulus and all the inflationist monetary nonsense you have advocated that have gone along with it, are just more of the same.

Dean's Big Idea (once again)

By the Sandwichman,

Maybe when Dean Baker first floated this idea (back in January) it was too soon and people weren't worried enough yet about unemployment. Dean was ahead of the curve. Now that everyone is wringing their hands about the jobs crisis, one of the hand wringers will take notice enough to at least say why not. Sandwichman is not holding his breath, though:

There are many ways that the federal government can boost demand, with more aid to state and local government probably topping the list in terms of priorities. However, to get large numbers of workers back to work quickly, the best route is a tax credit to shorten normal working time.

The basic logic is very simple; the tax credit effectively pays employers to hire more workers, with each worker putting in fewer hours. If we used the tax credit to pay employers of 100 million workers to work 5 percent fewer hours, while keeping their take-home pay unchanged, then in principle they should want to hire 5 percent more workers, or five million workers. This can be done quickly and will involve more employment in the private sector, not make work public sector jobs. That should make the conservatives happy.

There undoubtedly will be some gaming of such a tax credit, but there is some waste/fraud in everything we do. The prospect of having 15 million people unemployed for much of the next two years is unacceptable. Having used trillions of dollars in loans to bail out the richest people in the country, it is time that the government take some bold steps to help everyone else.

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.'"