Exit Strategy Redux

by the Sandwichman,

In his New Statesman column yesterday, This crisis is far from over yet, David Blanchflower talks about his travels to Paris last week to deliver the keynote address at a meeting of OECD employment and labor ministers. He takes a swipe at George Osborne, the Conservative Party's shadow chancellor of the exchequer, who, in last week column, he lambasted for Tory proposals to cut government spending through public sector pay cuts and layoffs.

The Sandwichman posted the following comment to the column:

David,

In the backgrounder to your keynote address in Paris last week you concluded with a quote from Keynes's biographer, Lord Skidelsky, which included the following observation:

"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."

Let's call that "the exit strategy". Evidently Osbourne's stimulus exit strategy is to go cold turkey. The US experience with that approach in 1937 doesn't bode well. Between September 1937 and January 1938, US industrial production fell as much as it had in the 20 months from October 1929 to July 1931.

Keynes wrote, in a 1945 letter to T.S. Eliot, that the "ultimate solution" to unemployment was working less. He saw investment as first aid. So, yes, the stimulus is a start. But what are the next steps? More stimulus, then more and more and yet more? What is the exit strategy?

Keynes proposed an exit strategy: redistribute income and reduce hours. But nobody is talking about that yet. All we hear is, on the one hand, "more stimulus!" and, on the other "restraint!". I would like to hear your views on the specific exit strategy that Keynes proposed. See, in particular, his 1943 memorandum, "The Long-Term Problem of Full Employment" and, of course, his 1945 letter to T.S. Eliot.

Exit Strategy?

M. King Hubbert, 1940:

By the year 1937 industrial production was again approaching and in some instances exceeding the previous all-time high in 1929. At this stage the spokesmen of business, still imbued with the doctrines of the economists concerning the efficacy of 'confidence' and apparently unaware that the government spending was the only important source for making up the deficit in the business budget, set up a hue and cry for the government to balance its budget. Promises to balance the budget were made and the excess of government expenditures over receipts was reduced from 4.8 billions of dollars in 1936 to 2.8 in 1937. The immediate consequence of this was the most drastic curtailment of industrial production yet known. Between September, 1937 and January, 1938--but 4 months--the volume of industrial production dropped by an amount which in the 1929 'crash' required the 20 months from October, 1929 to July, 1931.

Let Them Eat Platitudes, Part II

by the Sandwichman

Richard Lipsey stirs up the following omelette of platitudes in a review of Peter Victor's Managing Without Growth: Slower by Design, Not Disaster:

On employment, in spite of dire predictions, continued growth has created many more jobs than it has destroyed, holding North American unemployment to levels that can be dealt with fairly easily by public policy.

Where to begin? I guess with the observation that the cliché Lipsey undoubtedly had in mind is "technology has created many more jobs than it has destroyed." But this still evades the burning question, why would an emeritus professor of economics, who has written a prize winning book on technology and economic growth, need to reach for a cliché precisely at the moment he is addressing the core issues of employment and growth?

Perhaps Professor Lipsey's complacent opinion about how easily unemployment can be dealt with by routine public policies offers a clue. One might ask, if it's so easy why is the official unemployment rate in the U.S. now 9.8%? Why is youth unemployment and underemployment at an astounding 32%? Perhaps Professor Lipsey hasn't heard that a long bout of unemployment in youth has future employment consequences that last a lifetime? Lipsey mixes up his clichés about technology and growth because his concept of the relationship between public policy and employment is also a cliché: public policy creates jobs by stimulating growth. Sure, there are so-called "active labor market policies" but they are ineffectual in the absence of sufficient demand for labor. They are only supplementary to the main game, which is growth, growth, growth.

Of course Peter Victor's point is all about how we cannot continue with such one-dimensional growth-obsessed policies because of resource constraints and the environmental consequences of greenhouse gases and other pollutants. And not only are there environmental limits to growth but social limits as well, as Fred Hirsch eloquently demonstrated 30 years ago. In his review, Lipsey takes no note of Victor's extensive discussion of the centrality of the growth imperative in economics, based largely on H.W. Arndt's 1978 gem, The Rise and Fall of Economic Growth. A Study in Contemporary Thought. If he had, he might have noticed that the growth compulsion in economics relates back to the view that you can't have full employment without economic growth.

Like any other self-fulfilling prophecy, experience has shown that, indeed, if you eschew any other policy for achieving full employment, then you can't have full employment without the only policy that you do allow. The old hammer/nail principle. But the converse is not true. You can have economic growth without full employment. And the single-minded pursuit of "only one particular application of an intellectual theorem" over more than a half century has eroded the effectiveness of that strategy. To put it simply, you need more economic growth per job created today than you would have 60 years ago. The GDP is much, much bigger than it was 60 years ago, both in absolute terms and per capita.

What this loose coupling of growth and employment implies for the great green utopian fantasy of uncoupling fossil fuel consumption and greenhouse gas emissions from economic growth is grim indeed. Yes, you can easily achieve relative uncoupling of greenhouse gas emissions per dollar of GDP. But since a large component of GDP is the measurement of energy consumption and throughput, such a relative uncoupling has to be accompanied by a more than compensating increase in market economic activity elsewhere if you are still going have economic growth. And if the rationale for economic growth is that you need it to generate jobs, then you're going to have to have an ever greater increase in non-energy intensive economic growth to offset the diminishing job-creating effectiveness of the growth policy.

And what is it all for? To ensure the expansion of superfluous labor time. That is to say the point of it all is to expand the amount of work being done regardless of whether or not that work is socially necessary for the production of sufficient material wealth to comfortably feed, clothe, house and educate the entire population.

What is the alternative? Disposable time.

Rare Earths, Common Corruption

An earlier note discussed the question about the possible impending scarcity of rare earth minerals.

http://michaelperelman.wordpress.com/2009/09/06/a-different-environmental-threat-peak-rare-minerals-china-and-green-technology/

Shortly thereafter, the esteemed representative, Jerry Lewis (I prefer the other comedian) put a $3 million earmark for an already profitable US mining company in the House Defense Bill. Should one be surprised that, along with two private equity funds, Goldman Sachs is the owner?

Allen, Jonathan. 2009. "Critics Blast $3m Mining Handout." Politico (6 October).
http://www.politico.com/news/stories/1009/27947.html

Be Patient, Peons!

by the Sandwichman

Writing for the American Enterprise Institute, University of Michigan professor of economics and finance, Mark J. Perry offers his "thoughtful and timely analysis" on "When Will the 'Jobless Recovery' End?":

Bottom Line: The good news is that we are probably in the early stages of the 12th economic expansion since World War II. The bad news is that it might take until 2011 for the “jobless recovery” to end, and it might also take that long before the NBER makes it official declaration that the recession is over. We should probably be prepared to be patient.

No, the bad news is... something about cake. Yeah, that and have a happy "World Day for Decent Work", dues-payers!

Anomaly

by the Sandwichman

Chris Nyland wrote the following in 1986:

"Traditionally worktime has become a major political and economic issue at times of high unemployment. During periods of economic crisis the labour movement invariably puts forward the argument that standard times should be reduced to spread the available work amongst as many individuals as possible. [emphasis added]"

Nyland predicted that demands from organized labor would intensify as decay of the capitalist economies proceeded. As we now know, that didn't happen. Nyland was right that previously worktime had become a major issue during times of high unemployment. He was almost right that the argument was "invariably" put forward by unions. "Usually" would have been a more judicious word. But his extrapolation from past experience that demands would intensify was falsified by the course of events -- at least in North America and in other English-speaking countries. The question is "why?"

There are any number of facile answers to that question. The Sandwichman has heard them all. (Yes, Trucker, I know all about health insurance premiums.) But there are no well thought out answers forthcoming -- most conspicuously from organized labor itself. My two candidates for possible explanations come from Herbert Marcuse and Paolo Virno.

The Marcuse excuse would be that the balance between work and leisure have reached a tipping point where any substantial increase in leisure would move work out of its privileged central role in everyday life. This is something "the authorities" cannot and will not tolerate.

The Virno gloss proceeds from the observation that the boundaries between work and non-work have become permeable and imprecise and thus leisure, work and unemployment cease to appear as clear-cut contraries or alternatives. For example, why should those who are paid for "leisurely" work (that is to say knowledge work with a high social content) seek to exchange it for more "arduous free time" (isolation and amusing-ourselves-to-death entertainment)?

What those two explanations have in common, I suppose, is the notion that a great deal of the paid work that is done today is superfluous, "treadmill" work. This is not to say that it is superfluous to the individuals who have to perform it and rely on income from it. On the contrary, the objective nonnecessity of much work makes it all the more subjectively precious. Because... the wolf of unemployment lurks just outside the cubicle. The nonessential thus presents itself as a "matter of life or death."

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.