Well, He Did Say It Was A Caricature...

by the Sandwichman

Paul Krugman:

There was an old tradition of economics that focused on the origins and nature of economic institutions. This tradition was very influential before World War II.

But it proved not at all helpful during the Great Depression. My caricature version is that when the Depression hit, institutional economics, asked for advice about what to do, replied that well, it’s all very complicated, and has deep historical roots, and … Meanwhile, Keynesian economists, using very simple mathematical models, basically said "Push this button — we need more G".

My version -- still a caricature -- would go something like this: institutionalists, who "captured the powers of government during the first two terms of the Roosevelt administration" were quick to embrace Keynes's ideas. The policies of the New Deal were a mixture of Keynesian and institutionalist reforms. After the war, under intense pressure from business orthodoxy, the more radical implications of a Keynesian-institutionalist synthesis were played down (see the controversy over the 1947 Laurie Tarshis textbook) in favor of Samuelson's "apolitical" Keynesian-neoclassical synthesis. Institutionalists were thus recruited, absorbed, and demoted rather than competitively surpassed.

A Most Excellent Pair of Nobels

Bravo to the Swedes for selecting Oliver Williamson and Elinor Ostrom as econ Nobellers. (Nobellians? Nobelistas?) Williamson was on everyone’s short list; transaction cost economics is largely traceable to him. (Coase of course was already honored, but Williamson did more to develop and apply the germinal ideas.) Ostrom was a big surprise. She rarely publishes in economics journals (she’s officially a political scientist), and her approach is antithetical to mainstream economic thinking in almost every particular of content and method. The two make a balanced pair: Williamson uses institutional analysis to argue that hierarchy is needed if we are to uphold market discipline, and Ostrom uses it to support collective action. Much will be made of the fact that Ostrom is the first woman to win this prize, a true scandal that is not erased by moving from N=0 to N=1. It is revealing that this pioneer operates largely outside the realm of professional economics.

Incidentally, whether consciously or not, the Nobel committee has endorsed Paul Krugman’s point that, to move forward, economics has to abandon its obsession with mathematical elegance at the expense of genuine insight and usefulness. Not every economist has to be non-mathematically oriented as Ostrom and Williamson, but the discipline suffers if it cannot accord equal respect to those who do the sort of work exemplified by these two winners.

Really Bad Journalism About Europe

When I was a little kid I liked the picture puzzles that asked you to find all the mistakes—the dog with three ears, the plant growing upside-down, the mirror image that wasn’t a mirror image. Maybe that’s why I took a perverse pleasure in reading this thoroughly awful bit of “reporting” about Europe’s economic prospects. Of course, the problem in cases like this is never simply incompetence (although that has to be a factor), but also ideological zeal, which causes “serious” commentators to assume that, if there’s a problem, it has to have something to do with populist meddling with free markets.

So let’s see how many errors we can find:

Crisis Leaves Europe in Slow Lane
By NELSON D. SCHWARTZ and MATTHEW SALTMARSH

PARIS — Two years ago, Europe was growing more rapidly than the United States, and the Old Continent finally seemed prepared to tackle longstanding economic challenges like rigid labor markets, runaway government spending and a rapidly aging population.

But as Asia and the United States emerge from the global economic crisis, Europe appears likely to be the world’s laggard, threatening a return to the dark days of “Eurosclerosis.” Leaders who once spoke optimistically of fundamental changes aimed at enhancing productivity have turned to the more prosaic tasks of protecting jobs and avoiding painful political choices.

“Asia” (all of it?) and the US are emerging? Europe (all of it?) lagging? There is no statistical support at all for this sweeping generalization, and in any case it’s much too soon to tell.

“It’s worse than being back to Square 1,” said Gilles Moëc, a senior economist in London for Deutsche Bank.

That’s true for everyone.

And just when it is needed most, the political will to address Europe’s bigger economic problems seems absent, according to many experts across the region and around the world.

When he was elected president of France in 2007, Nicolas Sarkozy spoke of the need for a “rupture,” including the loosening of a highly regulated labor market to better compete in the global economy.

Excuse me: how can the world’s largest deficit country, or at any rate its journalists, lecture those with whom they have bilateral deficits? Some individual European countries have overall surpluses, some (like France) overall deficits, but none is as off the rails as the US. What better measure than the trade balance is there of the ability to “compete in the global economy”? And even if there were a problem on this front, why should we assume that the cause is excess regulation of labor markets? Those who are paying attention know that the trend of recent economic research has been against the rigid labor market hypothesis.

But now, “President Sarkozy has gone, if not 180 degrees, then at least 90 degrees in the opposite direction,” said Charles Wyplosz, director of the International Center for Monetary and Banking Studies in Geneva. “The things he talked about then still need to be done if we want to have growth, but the crisis has slowed some of the impetus for change.”

In Germany, Angela Merkel, who was elected last month to a second term as chancellor, has also avoided taking on the country’s powerful unions and its regional banks. She has embraced the “social market economy” and has insisted there is no alternative to relying on exports rather than consumers to drive growth.

OK, now we’re getting into really silly territory. First you tell us that Germany has to switch from exports to domestic demand, and then you say it has to attack the unions. I suppose this means that the surge of domestic spending has to come from the bosses. And why the swipe at the Landesbanks? They’re the main reason why Germany has the world’s most productive small and medium-sized firms. I guess they should stop financing capital equipment and switch over to playing shell games with securitized mortgages or some other clever avocation. Like our guys do it.

In addition, her government has come under withering attack from elsewhere in Europe for providing billions of euros in aid to keep the automaker Opel at the possible expense of workers in Belgium, Britain and Spain.

With Europe plagued by huge manufacturing overcapacity, other automakers are likely to suffer further losses. After surging this year on cash-for-clunkers incentives in many countries, car sales in Western Europe are expected to drop 5 to 6 percent next year, according to Credit Suisse.

Yes, cash for clunkers was a bad idea—there as well as here.

In Germany, where the automobile industry is as much a symbol as beer at Oktoberfest, Credit Suisse projects that sales to individual buyers will fall 21 percent, in contrast with an expected 18 percent increase in the United States.

A minor detail: the German auto industry depends primarily on exports; any surge in US demand will mean a corresponding surge in imports.

It is not just the auto sector that is threatened: analysts also contend that recent stress tests applied to the Continent’s banks were not as effective as those used in the United States.

The only folks who think the US tests were stringent are in the banking industry or the Obama administration. (Remind me again, what’s the difference?)

Despite losses on both American subprime debt and local loans in boom-to-bust economies in Spain, Ireland and the Baltics, “the banking system has not really been restructured,” said Nicolas Véron, a research fellow at Bruegel, a policy center in Brussels. As a result, Europe runs the risk of repeating Japan’s “lost decade” in the 1990s, when huge losses clogged bank balance sheets and inhibited new lending.

Certainly true, but also true of the US. Big writedowns are yet to come on both sides of the Atlantic. See the IMF estimates, for instance.

The slowdown is an abrupt reversal from the period leading up to the crisis. Ireland’s economy grew 5 percent a year from 1999 to 2007 and became known as the Celtic Tiger, while unemployment fell during sustained growth in Europe’s biggest economies, Germany and France.

Underscoring the new pessimism, new statistics released Wednesday showed a 0.2 percent contraction in the euro zone in the second quarter, worse than forecast.

“The Europeans are losing out,” said Simon Johnson, a professor at the Sloan School of Management at the Massachusetts Institute of Technology. “The Europeans are the biggest losers of the economic crisis, even though the home of subprime madness was the U.S.”

And the greatest challenge Europe faces is over-reliance on US trade deficits.

To be sure, the American economy is not out of the woods yet, either, with unemployment still on the rise, homeowners still burdened by mortgage debts and Washington offering few details about how it will cure its own huge government deficits.

But the euro’s recent surge against the dollar mostly reflects higher interest rates on the Continent rather than optimism about Europe’s prospects, and the stronger currency actually makes European exports less competitive globally.

The euro-dollar exchange rate is not an indicator of economic health for either party. It could reflect carry trade factors, as the article asserts, or the continuing effects of the US current account deficit (down but not out), or simply a return to the pre-crisis status quo, before the wave of panic that hit international capital markets.

Already, the euro zone’s share of world trade has slipped to 28 percent in 2008 from 31 percent in 2004, according to the World Trade Organization.

The share of world exports is a valid measure of economic vibrancy, but why would total trade, which can be swelled, as it is in the US case, by imports, indicate anything meaningful?

Economies in Spain, Ireland and Greece are all expected to keep shrinking in 2010, while the region’s economic powerhouse, Germany, ekes out a 0.3 percent gain, according to a bleak new outlook from the International Monetary Fund.

And there are signs that Europe’s anemic economic performance will translate into less political power. European countries had an outsize voice in the Group of 7, the world’s principal economic forum since the mid-1970s. But late last month, world leaders said that elite club would soon be eclipsed by the Group of 20, a much more global assembly that includes emerging economic giants like Brazil, China and India.

But this change is not occurring because European growth is slow, but because growth—or at least reserve accumulation—has taken off in a new set of countries.

Though symbolic, the shift from the G-7 to the G-20 crystallized fears that the world economy would actually be steered by what C. Fred Bergsten, director of the Peterson Institute for International Economics, calls the G-2 — the United States and China. “Ideally, it would be the G-3, but Europe doesn’t speak with a single voice and they can’t coordinate and function the same way the U.S. and China can,” Mr. Bergsten said.

That’s what the Lisbon treaty was supposed to deal with. If someone can sequester Vaclav Klaus in one of the CIA’s black sites for a few months (they could torture him by showing old newsreels of John Maynard Keynes), Europe might find its single voice after all.

What is more, the economic crisis has also paralyzed European efforts to come to grips with longer-term factors inhibiting growth, like an aging work force and slowing population growth in many countries.

Slower population growth is absolutely OK. It is growth per capita that counts, not growth itself. Less population, all else being equal, means less pressure on the environment.

Over the next 25 years, Western Europe’s population is expected to increase just 0.7 percent, to 189.8 million, from its current 188.5 million, compared with a 20 percent increase in the United States over the same period, according to the United Nations. At the same time, the overall population is getting older across the region, from the Russian border to the Atlantic.

The best way to compensate for an aging population — and therefore fewer workers — is higher productivity. But that indicator, too, has been moving in the wrong direction. After rising smartly in the 1970s and 1980s, productivity in the last decade and a half has inched up 0.9 percent annually in Europe, compared to 1.7 percent in the United States, Mr. Moëc said.

But as long as productivity growth exceeds growth in the dependency ratio (nonworkers as a share of total population), Europe will be fine, as will the US. And if, for any reason, Europe wants a younger population, and a larger one, there are lots of folks in Africa and the Middle East who will be willing to help them out.

“Productivity growth in the U.S. has not been spectacular lately, but it’s been much better than Europe, and the U.S. doesn’t have this massive demographic problem,” he said. “Until now, we thought of the demographic issue as theoretical, but it’s starting to bite.”

Over the long term, that is likely to require workers to rethink the generous social benefits, long vacations and early retirement plans they once took for granted.

Yes, these things were so much more affordable in the 1970s and ‘80s; after decades of economic growth people need to realize how much less affluent they are. That’s why we have productivity growth: to reduce our ability to enjoy free time.

Louise Richardson, 65, had planned to retire now as chief executive of the Older Women’s Network, a charity based in Dublin. She will now have to delay that at least two years because of the toll the financial crisis has taken on her retirement savings.

“I can’t retire. I can’t afford to,” said Ms. Richardson, a widow whose savings have dropped to 80,000 euros, or $118,000, from 240,000 euros over the last decade. “My pension’s been completely knocked off its trolley. The money was just swallowed up.”

Swallowed up by demographics? By rigid labor markets? Or by a global financial crisis whose motor was the unsustainable borrowing by deficit countries—some of them European (Ireland, England, Spain), but the main culprit ours truly?

The Obama Peace Prize

There is much that Obama is doing that is not particularly peaceful. However, I think that the strongest argument for him deserving it is in a post by me still up here on good news about US-Iran relations. His agreement with Iran about their enriched uranium is a serious move towards reducing the threat of nuclear war in the Middle East, including importantly because it reduces the probability of an Israeli strike by Israel on Iran. This outcome, on the very first day of negotiations, reflected some very smart moves by Obama, including his cancellation of the ABM sites in Eastern Europe, which brought the Russians on board. Also, I would say that the timing of his announcement in Pittsburgh about the second reactor in Iran was perfect.

Beyond this, those who are so loudly complaining about the prize, I am waiting to hear from any of them who was more deserving of it this year who has not already gotten it? Should we give it to the leader of Sri Lanka for ending the war by defeating the Tamil Tigers and killing their leader? Any other candidates?

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.