Why Oh Why Can't Jamie Galbraith Be More Like His Dad?

by the Sandwichman

Back in May, John Kay wrote on "A boom based on little more than a bezzle" in his Financial Times column:

Modern accountants... have been taught modern finance theory in which markets are efficient. They handle uncertainty by assuming that the market has already discovered and assessed all relevant information. They have also been taught the skills of pleasing clients....

If a question has no right answer in principle, then people will argue for the answer they want in practice.

"The 'bezzle'," Kay explained, "is one of John Kenneth Galbraith’s best inventions." Here is what Galbraith pere wrote,

To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in - or more precisely not in - the country's business and banks. This inventory - it should be called the bezzle. It also varies in size with the business cycle.

Karl Denninger also offered further definition of the bezzle in a March blog post. Note especially that in Galbraith's discussion that there is a period of time in which there is a net increase in psychic wealth. During this time, the bezzle is the measure of this (temporary) increase in (psychic) wealth. Might not even an imaginary increase of temporary wealth be a good thing?

John Maynard Keynes certainly thought so. His view had to do with "animal spirits" and the notion that too much uncertainty leads people to hoard money and thus depress economic activity. So if people thought they were wealthier, perhaps they would spend as if they were wealthier and... voila... they would become so! This is also sometimes known as the Coué method or "the power of positive thinking".

But Keynes wouldn't have been so blunt as to call it embezzlement, would he? Yup. True, he didn't use the word "embezzlement", but he explained his prescription in terms of telling people that green cheese is "practically" the same thing as the moon and using the central bank as a green cheese factory. But let's let JMK tell it:

Unemployment develops, that is to say, because people want the moon;--men cannot be employed when the object of desire (i.e. money) is something which cannot be produced and the demand for which cannot be readily choked off. There is no remedy but to persuade the public that green cheese is practically the same thing and to have a green cheese factory (i.e. a central bank) under public control.

What do you call it when you sell people green cheese and tell them its the moon? In Keynes's defense, he elsewhere explained that this green cheese prescription was meant to be a temporary fix, "first aid". Modern "post-Keynesians" simply don't acknowledge this limitation on the stimulus idea. It is as if the bezzle can go on for ever and when it gets discovered, can simply be replaced with a new and larger bezzle. The second and third applications of Keynes's intellectual theorem -- that is to say income redistribution and work time reduction -- don't exist for thick-as-a-post-Keynesianism.

The moral to this story is that when economic growth is fueled exclusively by debt expansion -- as it has been for the last 30 years -- that growth itself IS the bezzle. Why oh why can't Jamie Galbraith be more like his dad?

Separate Regulation from Statistical Reporting

This is the general principle. Those responsible for regulating an industry should not be the ones to collect and publish the numbers on it. There is an unavoidable conflict of interest: if they are being responsible, regulators want to influence the behavior of the industry they regulate; otherwise they are captured, which is worse. In either case, their motivations can interfere with disinterested data-gathering and the single-minded pursuit of accuracy.

We have already seen this in the field of occupational health and safety. OSHA requires firms to maintain logs of safety incidents, but, hoping to avoid OSHA’s regulatory reach, firms cook the books. There is substantial evidence that the statistics coming out of OSHA are deeply unreliable. Meanwhile, NIOSH, which has no direct hand in regulation. conducts its Census of Fatal Occupational Injuries, which, in its narrower domain, is comprehensive and credible.

So now the call has gone out for more transparency in the monetary and financial data reporting of the Fed. This is a step in the right direction, but the best course would be to hand off the job to another agency, like the Bureau of Economic Analysis, which regulates nothing at all, publishes tons of statistics and does an excellent job.

Does Inequality Get a Bad Rap?

A Goldman Sachs International adviser defended compensation in the finance industry as his company plans a near-record year for pay, saying the spending will help boost the economy. “We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all,” Brian Griffiths, who was a special adviser to former British Prime Minister Margaret Thatcher, said yesterday.

from: Binham, Caroline. 2009. "Goldman Sachs’s Griffiths Says Inequality Helps All." Bloomberg (21 October).

Some economiss actually believe this stuff. I wrote about this theory in The Confiscation of American Prosperity:

According to this theory, markets appropriately reward the rich and powerful because of their superior productivity. Consequently, they deserve every bit of what they earn. Supposedly, the best cure for poverty is to allow natural economic forces to follow their course. These economists are unapologetic about their stance. For example, when Finis Welch, who gave his prestigious Richard T. Ely lecture at the 1999 meeting of the American Economic Association, he provocatively titled his talk, "In Defense of Inequality." There, Welch proclaimed:


I believe inequality is an economic "good" that has received too much bad press .... Wages play many roles in our economy; along with time worked, they determine labor income, but they also signal relative scarcity and abundance, and with malleable skills, wages provide incentives to render the services that are most highly valued .... Increasing dispersion can offer increased opportunities for specialization and increased opportunities to mesh skills and activities. [Welch 1999, pp. 1 and 15]

Ludwig von Mises, an Austrian economist and one of the leading icons of libertarian economics, went even further than Welch, proclaiming: "Inequality of wealth and incomes is the cause of the masses' well‑being, not the cause of anybody's distress. Where there is a 'lower degree of inequality', there is necessarily a lower standard of living of the masses" (von Mises 1955).

Does inequality really get too much bad press, as Finis Welch suggests?

The Great Transition

by the Sandwichman

Now this is fun. The new economics foundation in the UK has come up with a report they call "The Great Transition". Here's the BBC viewpoint by Andrew Sims the nef policy director. Below is the description from their website.

A year on from the collapse of major banks, and less than 50 days before the UN Climate Change talks in Copenhagen, the new economics foundation is providing policymakers with the first comprehensive blueprint for an economy based on stability, prosperity, fairness, sustainability and well-being.

The report sets out seven main interventions, including a 'great revaluing' to ensure that prices reflect true social and environmental costs, 'a great rebalancing' that sets out a new productive relationship between markets, society and the state, and 'a great economic irrigation' that builds an 'ecology of finance' so that money and investment flows where it is most needed.

Specific policy proposals include:

• Creating a universal Citizen's Endowment of between £40,000 and £50,000 to give every adult an equal chance in life and the opportunity to invest in education, a business or local productive assets. This would be funded by a phased rise in inheritance tax on all estates up to 67% and go a major way to reducing the massive inequalities of inherited wealth in the UK.
  
• Land and property transferred to state and then redistributed to communities, forming community land trusts, where land is commonly owned and managed on a stewardship basis by communities, underpinning the provision of affordable or social housing.
  
• Redistributing working time by instituting a four day working week for all that would enable the 1/3rd reduction in GDP without major loss of jobs
  
• A major reorganisation of business, with publicly listed companies progressively transferring shares to their staff, giving them a real stake in and control over the companies where they work. This would lead to the creation of a series of co-operatives, operating in regulated markets, and subject to competition from new companies. Such a process would fundamentally change power relations within workplaces, creating a form of 'economic democracy'.
  
• New variable consumption taxes, replacing income tax, reflecting the social and environmental costs of goods. A windfall tax on the profits of fossil fuel companies, for example, could channel funds into clean energy projects.
  
• Direct government created credit for large-scale green energy and transport projects, channelled through a national Green Investment Bank
  
• A new national Housing Bank, offering people the opportunity to transfer a portion of their mortgage debt into equity and paying social rent on the balance.
  
• New regulations on private banks' reserve requirements directly related to the social and environmental value of investments, creating a 'race to the top' and reducing speculation and 'credit bubbles'

This is a bold vision. But nothing short of a Great Transition will be up to the task of tackling climate change, ending cycles of boom and bust and putting a stop to inequality. We show that not only is such a bold vision necessary, it is possible.

Galbraith's "Last Taboo": 84 - 0

by the Sandwichman

At the New America Foundation, James Galbraith, Randall Wray and Timothy Bartik offer their policy proposals for dealing with the jobs crisis. These three gentlemen apparently believe that the jobs crisis is merely a symptom of some mysterious financial or structural crisis that itself needs to be addressed by "better government regulation" or something like that there.

How to treat the symptom? Spend money! Bartik advocates a New Jobs Tax Credit and wage subsidies targeting 'disadvantaged' workers. Wray promotes his version of Hyman Minsky's Job Guarantee idea. Galbraith offers a laundry list of good things the government can spend money on: public sector jobs, higher education, early retirement, weatherizing houses, elder care, rehabilitating foreclosed houses, funding non-profits and last but not least a federal jobs pool such as Wray also advocates.

Galbraith calls the Job Guarantee idea "the last taboo". He is wrong. The last taboo is something none of the three mention: work time reduction. In French it is "la solution interdite." Ironically, Jamie's "last taboo" comment brings to mind his father's more salient insight about "the forbidden question" of resource conservation from some fifty years ago.

Government spending on all those nice things is all very well and good... as long as you don't have to worry about an exit strategy. The spending cure also ignores the real nature of the jobs crisis. Unemployment is not a symptom of the financial crisis. The financial crisis is a symptom of the employment crisis. To put it as simply as possible, industrial economies have failed to collectively adjust the hours of work to reflect the new realities of much higher levels of productivity.

Standard full-time hours of work have remained static over the last 30 years even as productivity has almost doubled in the last 30 years -- an increase of 84 percent -- while average weekly hours have fallen only 7 percent, notwithstanding sectoral and demographic changes in the workforce that have increased the incidence of part-time employment from 16.3 percent of the workforce in 1979 to 19.7 percent in 2009.

Most hours of work adjustment has taken place has been at an individual level rather than a collective one. That is to say more unemployment and underemployment. And this increasing precariousness of work has acted as a drag on wages. Adjusted for inflation, hourly wages have remained virtually flat. In today's dollars, the average hourly wage in September 1979 was three cents higher than the average wage today.

Let me repeat that: an 84 percent increase in hourly labor productivity and a 0 percent increase in hourly wages. WHAT PART OF 84 - 0 DO BARTIK, WRAY AND GALBRAITH NOT UNDERSTAND?

So, how did all the extra stuff get bought? Credit. Personal debt mushroomed over the last 30 years. Bartik, Wray and Galbraith's solution to the collapse of a debt-bubble is... wait for it... DEBT! Undoubtedly, some government deficit spending may be necessary to lubricate the transition. But deficits sufficient to prop up employment cannot go on forever. With Bartik's, Wray's and Galbraith's non-solutions, huge deficits would have to continue indefinitely.

Growth is not the answer. Thirty years of debt-fueled economic growth has eroded the job-creating capacity of growth. In hindsight, we would be a lot better off if workers had taken half of the productivity gains of the last 30 years in shorter working time. With a four-day workweek and a six-hour day, workers could have had roughly the same incomes they had in 1979. That's not a feasible policy solution right now. It takes time to make the adjustment. Any and all of the policy prescriptions offered by Bartik, Wray and Galbraith may be useful during the transition. But put forward as stand-alone cures, they are worthless. A spending policy without an exit strategy is like applying a band-aid where a tourniquet -- and then restorative surgery -- is needed.

Exit Strategy

by the Sandwichman

Wolfgang Münchau in the Financial Times writes:

Our present situation can give rise to two scenarios – or some combination of the two. The first is that central banks start exiting at some point in 2010, triggering another fall in the prices of risky assets. In the UK, for example, any return to a normal monetary policy will almost inevitably imply another fall in the housing market, which is currently propped up by ultra-cheap mortgages.

Alternatively, central banks might prioritise financial stability over price stability and keep the monetary floodgates open for as long as possible. This, I believe, would cause the mother of all financial market crises – a bond market crash – to be followed by depression and deflation.

In other words, there is danger no matter how the central banks react. Successful monetary policy could be like walking along a perilous ridge, on either side of which lies a precipice of instability.

For all we know, there may not be a safe way down.

"For all we know," as long as the solution is forbidden.

Where the Climate Critics Of Superfreakonomics Are Wrong

I have not yet read the now-heavily criticized chapter 5 of Superfreakonomics, due for release tomorrow, and, no, I am not going to defend them. That some of their critics are wrong about something does not make them right, although this particular matter is one that depends on their exact wording, which I have not yet seen. It looks from all the comments that they are probably way off the deep end on many things, way overstating the benefits of geoengineering for resolving global warming (yes, we should have research on it as a possible emergency backstop down the road; no we should not dump other approaches to go with it), focus too much on questionable sources they do not even quote accurately, and say a lot of other dumb things, such as their claim that solar power worsens global warming because the panels are black (no, they are mostly blue and they do combat global warming, although because of their high cost, they will not likely do so much in the near future). Where their critics are wrong is when they characterize the views of climatologists in the 1970s as not at all supporting the hypothesis of global cooling, that this was just a view of a couple of oddballs and some media stories.

The strongest expression of this argument can be found on the blog by climatologist William Connolley at http://scienceblogs.com/stoat/2009/10/superfreakonomics_global_cooli.php. His argument is also picked at Real Climate and is based on a paper he did with Peterson and Fleck in the very respectable Bulletin of the American Meteorological Society about a year ago. available at http://ams.allenpress.com/archive/1520-0477/89/9/pdf/i1520-0477-89-9-1325.pdf (if I have gotten that right). It looked at the articles published in top climatology journals during 1965-1979, characterizing them as "pro-global warming," or "pro-global cooling" or "neutral," and concluded that only 12% of them (7) were "pro-cooling," leading to the dismissive commentary. However, this is misleading on various counts. The main one is that there was a period in the early 1970s when the count was not all that far apart. The facts were that there had been global cooling from the late 1930s that lasted well into the 1970s. Researchers were aware of this and aware of a competition between warming CO2 emissions and cooling aerosol/particulates emissions, although not sure about the relative strength of the effects. As time passed, things became clearer, and as of 1975, there were more pro-warming articles cumulatively than cooling-plus-neutral ones, with this balance then shifting more strongly that way afterwards, indeed with no "pro-cooling articles" after 1977. Of course, if Levitt and Dubner characterize the 1970s as a period dominated by a pro-cooling "consensus," then they are clearly wrong. But their critics on this point need to be more careful about how they state things, with many seriously mischaracterizing the situation then.

Fossil Fuels Get Down and Dirty

The New York Times reports today that the united front of gas, oil, coal and electricity generating companies has splintered as climate legislation slowly advances in Congress. Where they once merged their voices, and dollars, in denial of climate change and against any curtailment of carbon emissions, they are now scrambling to secure advantages for their own industry in the fine print of Waxman-Markey-Boxer-Kerry. Gas wants special privileges for its product, since it has a lower carbon content than its fossil siblings. Oil is focused on removing subsidies for biofuels. Electrical utilities are split between those with a higher hydropower component (good for renewable portfolio standards) and those without, but both benefit from free allocation of permits. Only coal sits on the sidelines, denouncing the “hoax” perpetrated by several thousand communist-inspired climate scientists. (Although they will no doubt throw their weight behind carbon capture and storage provisions as the end draws near.)

Is this a good thing or a bad thing?

Mainstream environmentalists are tickled. When the well-heeled hydrocarbon lobbies were solid against climate change legislation, it was difficult to make progress. Now that they are pursuing competing agendas, they can be played off against each other, and some sort of a bill can go through. In fact, you could argue that the particular flavor of cap-and-trade that anchors WMBK is designed to achieve exactly that.

The downside, of course, is that the climate policy regime we end up with will be a product of this dogfight. Each fuel sector will have its own budget of free vs auctioned permits. Moneys collected by the government from whatever permits are auctioned will subsidize the industries with the greatest lobbying heft. Some energy products will see minimal price increases, others a lot. Ostensible carbon caps will have giant loopholes for offsets to benefit still other industries, largely determined by their own lobbying efforts.

The alternative strategy would have been to keep the system simple and without favoritism. Require a permit for extracting or importing hydrocarbon fuels, with a fixed formula for the amount of fuel per permit based on carbon content. Cap the permits to achieve carbon emission targets. Auction all the permits without exception, and return the bulk of the money to households to buffer them against the inevitable price jolt. Make no provision for offset loopholes.

The problem with this approach is that the fossil fuel interests, and the fuel-intensive industries most closely aligned with them, would resist monolithically to the end. The advantage is that such a bill, if passed, would be far more efficient economically, more equitable in its effects on income distribution, and, above all, would actually have a reasonable chance to meet its targets. Instead, we have a much greater chance of passing legislation that is filled with pork, regressive, and is almost guaranteed to fall well short of its headline emission reduction promises.

Capitalism as an Infectious Disease

Joseph Schumpeter once wrote, "the budget is the skeleton of the state stripped of all misleading ideologies."

Schumpeter, Joseph A. 1954. "The Economic Crisis of the Tax State." International Economic Papers, 4; reprinted in Schumpeter, Joseph A. 1991. The Economics and Sociology of Capitalism, ed. Richard Swedberg (Princeton: Princeton University Press): pp. 99-140.

Yesterday's post dealt with the way that budget choices create pressures that shape pension funds' choices, something like the way that people in desperate states make decisions that they would not make under ordinary circumstances. However, the skeleton ranges across the body of society. For example, ordinary people often must depend their pensions fall victim to a similar logic. In fact, one of the many objectives of the privatization of Social Security was to make workers identify with the objectives of capitalism. Andy Stern of SEIU suggests how that kind of thinking even infects the supposedly progressive union movement. Here is the exchange from Business Week:

Q: Has the recession led you to rethink the way you operate your union? What is the SEIU doing to prepare for a recovery?"

A: "Well, it's made us appreciate that we have to be better partners with our state governments and employers in terms of efficiency. It makes us appreciate that our pension funds are tied to the success of the economy. And it makes us very much want to come together with other Americans and employers and people in the nongovernmental part of our country and say we need to create a 21st-century American economic plan so Team USA can compete and win."

Bartiromo, Maria. 2009. "Union Leader Andy Stern on the Future of Big Labor." Business Week (28 September).

A Big Surprise: Bhagwati Defends Free Market Economics

Jagdish Bhagwati is a poster child for multiple intelligences. He is famous for having manipulated the equations of neoclassical trade theory with consummate skill, but whenever he jumps into a verbal argument he makes embarrassing errors of reasoning and commits the greatest sin of the disputant, failing to understand the views of the other side. When you read his screeds, you wonder why anyone pays attention.

So the first response I had to his latest outburst, Feeble Critiques: Capitalism's Petty Detractors, was to delete it. But then I thought, maybe there is something to learn from a critique of this guy—he can’t be that vacuous, can he? So I read it again. No, he is that vacuous, but now that I’ve invested the time I feel I have to say something about the experience.

Bhagwati is defending “capitalism”, by which he means a primary reliance on free, unconstrained markets in national and international affairs. He seems to be reacting especially against Joe Stiglitz, who has written widely on the inadequacies of neoliberalism, especially in the wake of the ongoing economic crunch. In typical Bhagwati fashion, he introduces his nemesis by mentioning that he shared a Nobel prize with George Akerlof, and then spending several sentences praising the latter to the skies, with nary a mention of the former. (I’m a big fan of Akerlof, but Stiglitz’ innovations in economics are of the highest order.) In other words, pure pettiness.

Then Bhagwati gets down to argument, sort of. He says that the current crisis is just a temporary speedbump on the path to universal riches—but, of course, to simply assert this is to assume what needs to be proved. He should read up on “begging the question”. (Perhaps his background in trade theory, a giant piece of question-begging in its entirety, has preconditioned him in this respect.) He invokes China and India as examples of countries that have adopted liberalism and prospered, without being aware that his critics dispute this. (To regard China as “liberal” is bizarre, and Dani Rodrik has written persuasively on why liberalization should not be seen as the basis for India’s accelerating growth rate.)

There are many pixels spilled over the effort to tar all critics of neoliberalism with the experience of the Soviet Union: you are either with us or with the Stalinists, for free markets or for central planning. What this has to do with someone like Stiglitz I can’t imagine. Add to Bhagwati’s reading list Whither Socialism?, Stiglitz’ post mortem on the formerly-existing mode of production.

What about the claim that trade competition from the poor countries, and especially China, have depressed wages in the US? Bhagwati cites his own work and that of two other authors, but does not given even a brief explanation for why his results should be regarded as a refutation of those who come up with something else. (He does make an ad hominem swipe at Paul Krugman: K’s paper on trade and wages was commissioned by Larry Summers, and, well, you know about him.) Homework assignment: look up “cherry-picking”.

We learn that the Washington Consensus was not imposed, but was taken up “with gusto” by India, China and Russia. This gusto business is a strange descriptor for the ex-USSR, as is “liberalism”, but the main problem is that critics of the Washington Consensus never claimed that China or India were bullied—rather, that most of Latin America, sub-Saharan Africa and southeast Asia were. To put it simply, debt was the lever, and China and India were the only two developing countries not laboring under massive debts to western banks (thanks to the policies Bhagwati deplores).

A few paragraphs later, Bhagwati launches into an attack on financial deregulation. It was an intellectual error, he says, and reflected not only cognitive capture by what he calls the “Wall Street–Treasury Complex”, but also “old-fashioned lobbying”. I was starting to warm to him, but then he attributes regulatory failure to leftists and protectionists. Hank Paulson, you see, is an “ardent environmentalist and graduate of liberal-leaning Dartmouth College” (guilt by matriculation) and Charles Schumer (the only politician identified by name) is a serial Japan-, then India-, then China-basher. If you’re Bhagwati, this proves financial deregulation was a conspiracy by the forces opposed to free markets.

In case you were wondering, it was not the private sector that gave us subprime mortgages either. This was a conspiracy hatched by populists within the government, who wanted to maximize home ownership. Granted, there have been many public programs that unwisely pushed people into mortgages who should have put their scarce savings somewhere else, but surely the folks at Countrywide had something to do with it too, not to mention the securitization bandwagon that was entirely of Wall Street’s doing. And is Bhagwati aware that housing bubbles have had a tendency to appear in the buildup to financial crises throughout modern history, or that there have been recent housing meltdowns in other countries (Spain, Ireland, England) with different sets of laws and policies? Add Reinhart and Rogoff to the man’s bookshelf, and maybe also Chapter 3 of the IMF’s latest World Economic Report.

Bhagwati concludes with a call for charity on the part of the rich and a safety net for the poor. This will keep the population pacified, he hopes, so that economists of a critical bent cannot “enjoy a success that they do not deserve.” Do I hear a rumbling among the ranks? Increase their rations and they won’t cause us any trouble....

On third thought, deletion would have been the best choice.

Reporters Don’t Need to Know Arithmetic....

to get a job at the New York Times. In an article about broadband adoption, after a reference to Finland’s promise to extend 100 Mbps service to its entire population, we read:

Finland occupies a compact 130,558 square miles, versus more than 3.5 million for the United States. The economics of broadband deployment are greatly affected by physical distances.

Right away something smelled fishy. As anyone who has been there will know, Finland can hardly be described as “compact”; it’s a land of wide open spaces, many of them inhabited by a fierce, warlike breed of mosquitoes. This may be why sitting indoors in front of a computer screen is the national pastime. But I digress.

Finland is smaller than the US but has fewer people. In fact, while the land area of the US is 30 times that of Finland, the population ratio is about 60:1. In other words, average population density is about twice as high in the US as Finland. Perhaps there are regional variations in density that offset the overall average for cost calculations, but that would need to be demonstrated, and in any case it doesn’t follow from the data given in the article.

OK, comparisons between the price of broadband in the US and Finland are a bit esoteric for the purposes of this blog. But the same standards are applied to economics stories with depressing consistency: as Dean Baker has shown, a large portion of the reportorial staff at our leading newspapers have problems with the concept of a denominator. (“Congress voted an extra $3 billion for program X, an exorbitant sum that will surely bankrupt our great-great-grandchildren....”)

Pension Fund Fraud: The Wall Street Journal vs. Unions

The Wall Street Journal posted a story about Orange County's pension fund, gloating that it outperformed the supposedly union dominated California state pension fund: CALPERS.

Jim Carlton and Tamara Audi. 2009. "Orange County Dodged Bullet by a Avoiding Calpers: Southern California Locale Decided to Stick with Its Small Pension Fund in 2006." (16 October): p. A 4.

Orange County had a chance three years ago to join the California Public Employees' Retirement System. Instead, county leaders stayed with a small Orange County pension fund, and now they feel vindicated for their stay-local strategy. While Calpers's investments went on to lose almost 30% of their value during the crash of financial markets last year, the Orange County Employees Retirement System, or Ocers, lost only 21%.

Now that Calpers has revealed that a former board member allegedly reaped $50 million in fees for arranging investments that could saddle state taxpayers with hundreds of millions of dollars in losses, those in Orange County who once lobbied to ditch Ocers are even happier their side lost the debate.

Calpers, whose board is dominated by union ties, has invested much more aggressively in equities.

In fact CALPERS lost big by investing in real estate and hedge funds. Also, Orange County had a curious investment history, when in 1994, its treasurer, Robert Citron, lost heavily investing in derivatives, which he did not understand. The county went bankrupt.

Of course, treasurers were expected to make big bucks as a way to keep taxes down. This sort of pressure still continues.

CALPERS's losses are also worth another look. Why did CALPERS get involved in so many risky ventures? I once confronted a member of the board, asking why they were taking on so much risk. I thought that they were just being foolish, but I had not thought everything through.

Here is a snippet from the Financial Times regarding CALPERS's investment strategy:

Calpers, for example, has invested $21bn in private equity and committed another $22bn. While last year its private equity investments had fallen by nearly a third, Joe Dear, its chief investment officer, expects to allocate more of its assets to private equity. Calpers, like other state pension schemes, needs the higher returns available from private equity if they are to meet the 7 to 8 per cent returns required to fulfill promises to scheme members. But a lot rides on cutting the charges that eat into returns.

Burgess, Kate and Martin Arnold. 2009. "Transparency Vital to Investors' Lobby." Financial Times (29 September).

Part of the problem is that the state does not adequately fund CALPERS -- another self-defeating policy. But the Wall Street Journal suggests that the problem is unions.

Ideologically Loaded Rhetoric of Mainstream Economics

A half-century ago, John Kenneth Galbraith had a marvelous description of the shaping of language regarding crises.

Galbraith, John Kenneth. 1958. The Affluent Society (Boston: Houghton Mifflin, 1998).

38: Marx's reference to the "capitalist crisis" gave the word an ominous sound. The word panic, which was a partial synonym a half century ago, was no more reassuring. As a result, the word depression was gradually brought into use. This had a softer tone; it implied a yielding of the fabric of business activity and not a crashing fall. During the great depression, the word depression acquired from the event described an even more unsatisfactory connotation. Therefore, the word recession was substituted to connote an unfearsome fall in business activity. But this term eventually acquired a foreboding quality and a recession in 1953-1954 was widely characterized as a rolling readjustment. By the time of the Nixon administration, the innovative phrase "growth recession" was brought into use.

I am presently reading Reinhart and Rogoff's new book.

Reinhart, Carmen M. and Kenneth S. Rogoff. 2009. This Time Is Different: Eight Centuries of Financial Folly (Princeton: Princeton University Press).

The book is an encyclopedic study of crises through the lens of monetarism and public finance. The authors also casually bandy about the expression, "financial repression," for any policy that inconveniences the financial system.

I wonder what the academic economics community would think of a book that routinely described economic policies in terms of labor repression. I suspect that no matter what the quality of the book might be such language would automatically convict the author of unacceptable bias.

Did Lawrence Kudlow Say That President Obama is Doing a Great Job?

No - this quote:

I have long believed that stock markets are the best barometer of the health, wealth and security of a nation. And today's stock market message is an unmistakable vote of confidence for the president.

was written back on June 20, 2007 when George W. Bush was the President. Then again - Paul Krugman has had fun with it on a couple of occasions.

Of course, most well informed people would argue that the stock market is not the same thing as the labor market. I guess Mr. Kudlow could distance himself from his quote back then by acknowledging the error in his old thinking.

Senator Snowe on the Public Option

Eric Zimmerman watches MSNBC's Morning Joe so we don’t have to:

"The public option would be problematic," Snowe told MSNBC's Morning Joe when asked what changes to the bill could cost Democrats her vote. "As I've said I'm against a public option because I think the government would be another vast new bureaucracy, and also create a disproportionate advantage in the marketplace. And inevitably government's not going to do it better."

Does this make any sense at all? I know conservatives love to think government run organizations are horribly inefficient. But if a government run insurance company is not going to provide lower cost health insurance – how does the Senator think that it will have an advantage in the marketplace? And even if the government run insurance company does provide lower cost health insurance – isn’t this what we’d hope from competition?