Sandwichman's Obituary

by Tom Walker

Yesterday -- in response to defamatory allegations from Barkley Rosser that he had "stepped over the line", engaged in "indefensible personal attacks" and "meretricious name calling," was "seriously misrepresentating" reported research and should "clean up your act" -- the Sandwichman asked for a vote of confidence from his EconoSpeak colleagues. So far, the response has been a resounding abstention. Even the plaintiff, Rosser, has expressed his wish that the matter be resolved without any drastic resolution.

Ever feisty but non-litigious, the Sandwichman confided to me that to drink the Hemlock now seemed sweeter to him than swallowing the bile of his colleagues' "impartiality". With that, the Sandwichman began reciting (a tad too melodramatically for my taste) verse from Dante's Inferno:

All of these made a tumult whose presence
Whirled darkly through the timeless air like grains
Of sand in permanent turbulence.

And I, seeking to ease my brain's
Horror, said, " Master, what am I listening to?
Who are these people so defeated by their pains?"

And he to me: " The dismal souls who
Suffer this condition had lives neither odious
Nor commendable; having embraced neither of the two,

They mingle now with that chorus
Of cowardly, self–serving angels who were
Neither faithful to God nor rebellious.

To preserve its beauty heaven kicked them down here,
While deep Hell refused to take them,
Lest they be scapegoats for the wicked there."

In the past, I confess I've been tempted at times to kill off Sandwichman just so I could write his obituary. That's how it is with personae and noms de plume. Brendan Behan once claimed there's no such thing as bad publicity, unless it's your obituary. Michael Jackson proved him wrong by cashing in on his. Given the dank limbo of abstentiousness, it seems reasonable, in a kind of Through the Looking Glass, way to publish Sandwichman's obituary -- or at least the first draft of his obituary -- in advance of the verdict and the execution. Sandwichman can always come back and say that reports of his death were greatly exaggerated. Or maybe not.

Sandwichman, July 11, 2000 - October 24, 2009?

Sandwichman's remit -- believe it or not -- was never about the reduction of working time as "the answer" for unemployment. It was, from the moment of his virgin birth, concerned with discourse about working time. More specifically about how dialogue about the potential benefits of work time reduction has been vigorously and mendaciously suppressed by economists. For centuries. One of the perennial tactics of that suppression has been to ridicule advocates as kooks, quacks and monomaniacal cranks.

Alas, this latter tactic also works when defenders of the exclusion want to change the subject from censorship to some alleged personality disorders of those who document the censorship. But the Sandwichman was not "obsessed", it was his job to carry the prophetic, end-is-'nigh signs he bore. On the Sandwichman's front board was the quote (not from Mark Twain) "'Taint what a man don't know that hurts him; it's what he knows that just ain't so." and on the back, the lines by Bertolt Brecht:

In your house
Lies are roared aloud.
But the truth
Must be silent.
Is it so?

That, not Mary Steward's doggerel about decreasing the hours and increasing the pay, was the Sandwichman's motto.

In the days before his execution, the Sandwichman posted a critique of policy proposals for dealing with unemployment put forward by Jamie Galbraith, Randall Wray and Tim Bartik for the New America Foundation. The substance of the critique hinged on a paradoxical statement by Jamie Galbraith that job guarantees were "the last taboo". The paradox was that two of the three contributors proposed this "last taboo" policy while none of them so much as mentioned work sharing or work time reduction. Sandwichman argued that the real last taboo must be that policy idea on which the contributors remained silent.

As if to vindicate the Sandwichman's snarky complaint, Tim Bartik of the Upjohn Institute responded with a comment that called Dean Baker's policy brief to offer tax credits for work time reduction "interesting" and called attention to an article on short time compensation in the Upjohn Institute newsletter for July. The article, by Katharine Abraham and Susan Houseman argued that "The absence of STC benefits is a significant gap in U.S. social insurance policy that should be plugged." So Tim Bartik obviously knew about Dean's interesting policy brief and the significant gap in policy but still there was no mention of work time policy proposals in the policy roundtable background paper. None. Which of course was the Sandwichman's point.

Job guarantees are roared aloud.
But work sharing
Must be silent.
Which, then, is the last taboo?

As I was writing this obituary, I noticed a new comment appeared on the last taboo post containing an apology of sorts from Barkley Rosser, "I also apologize to anyone who has found my recent tone overdone or inappropriate." What the semanticists call a "no-fault apology." I turned to tell Sandwichman the goods news but was alarmed to see him slumped over in his armchair, the fatal drained cup lying on its side on the floor, just out of reach of his limp hand.

I must leave off at this point and see if I can revive my friend and avatar...

The Anti-Carbon-Capping Left: Simply Confused

It has to be said: the leftist assault on the very idea of capping carbon emissions stems from deep confusion over what a cap consists of, how taxes would be used, where the leakages lurk, and what effect all these things have on who pays what. Every now and then, I am embarrassed by the public face of the left; this is one of those times.

This diatribe has been provoked by a new wave of silliness in response to tomorrow’s international day of action on climate change. You can read about it on Common Dreams, and you may also butt up against it in your own community, as I have in Olympia. (A fake issue of our local daily newspaper, dubbed The Olympiun, has several articles hyping the anti-cap line.) It’s a veritable anti-cap convergence. Read on for the particulars.



In a nutshell, here’s what the anti-cappers say. 1. A carbon cap means “carbon trading”, and “carbon trading” means that there will be no real emission reduction, because carbon permits will be traded for pseudo-reductions in agriculture, forestry and foreign investment projects. 2. “Carbon trading” is typical neoliberal claptrap, market idolatry, a scheme to pad the pockets of speculators, the next bubble primed to burst. 3. The solution is a carbon tax, which has nothing to do with market idolatry, guarantees real reductions, and makes the true climate villains pay through the teeth.

It’s all wrong, every bit of it.

1. A carbon cap requires a system of permits: you need a permit to emit a certain amount of carbon. Cap the permits and you have a carbon cap. There is nothing the matter yet. The problem comes with all the bells and whistles. (a) Instead of capping carbon upstream at its source (the extraction or import of carbon fuels), you cap it industry by industry. Then you have the coverage problem: which industries or uses are covered by the system, and which are not. The less coverage, the more leakage. (b) Instead of insisting on a permit, you give emitters the alternative of purchasing an “offset”, a promise (hope) that an equivalent amount of emissions will be averted by buying into some land use scheme, a foreign investment, etc. We can expect quite a bit of leakage here too. (c) Instead of auctioning the permits and rebating the revenue to households, you could give them away. Since the value of the permit is there regardless, it will be passed along to consumers, while the recipient of the freebie enjoys windfall profits.

A perfect carbon cap would have none of these defects, and the more coverage, fewer offsets and more auction we can get, the better.

2. A carbon permit system, with a cap on total permits, is what economists would call a quantity control. A tax is a price control. The first, if it can contain leakage, directly controls carbon emissions. The second relies on markets to arrive at whatever emission reduction occurs. Which one is more market-dependent? Moreover, a truly upstream cap would apply to only a handful of energy companies who would have little need to trade their permits between one another. It would be nearly all cap and very little trade—kind of like a cap on fishing permits to protect fish stocks.

3. A perfect carbon tax would be better than a deeply flawed cap (e.g. Waxman-Markey-Boxer-Kerry), but who says our actually existing political system will produce a perfect tax? All the same problems can crop up. (a) A carbon tax can be set too low, as is the case, for instance, in the recently announced French tax. (b) It can have only partial coverage, taxing some activities but not others. (c) It can reduce your tax liability in return for your contribution to an offset, with the additional leakage that implies. (d) It can funnel tax revenue to whatever the policy-makers want: nuclear power plants, biofuels, even coal companies. Nothing about the idea of a tax prevents this.

In the end, the choice of tax vs cap comes down to two things. (a) Since we don’t know how high a price it will take to bring carbon emissions down to a sustainable level, should we set the level and later find out about the price, or set the price and later find out about the level? (b) Can we have a more rational public discussion about what carbon cap to set, or what tax?

You tell me, what’s “leftist” about denouncing a carbon cap and demanding a carbon tax?

Meretricious Economic Theory

by the Sandwichman
meretricious a. of or befitting a prostitute; (of ornament, literary style, etc.) showily but falsely attractive; [f. L meretricius f. meretrix -tricis harlot [mereri be hired; see -trix) + -ous] Concise Oxford

What Trucker Said!

Blogger Tim said...

"I do think there is merit in trying to move towards shorter annual work hours as in much of Western Europe, not so much because it solves our long-term economic problems, but because it would increase the quality of life."

If economics is not about improving the quality of life then what good is it?

Trucker, I love you, man!

From Giveaways to Charitable Donations: Stavins on Carbon Permit Allocations

For the life of me, I can understand why intelligent, well-educated people end up in the sort of conceptual morass that Robert Stavins finds himself in. In his latest post, Stavins accuses a group of Republican senators of misunderstanding the benign nature of Boxer-Kerry’s carbon permit handouts. This isn’t a giveaway, he says, it’s an honorable contribution to honorable recipients. No doubt these senate holdouts are confused about a great many things, but in this instance it looks like they are basking in enlightenment and Stavins is the clueless one.



To arrive at his judgment, Stavins lumps together the bulk of the free allocations and says, “about 80% of the value of allowances [accrue] to consumers, small business, and public purposes.” Hmmmm. So free handouts to electrical utilities are actually benefits to users? So what gets people to reduce their consumption of electricity in order to meet the carbon caps—brownouts? (Actually, it’s a non-problem because the caps will be illusory—more in a moment.) And giveaways to small businesses aren’t giveaways? And giveaways to businesses in return for getting them to do things more in accord with “public purposes” aren’t giveaways? You could say they are good giveaways to very nice people, but Stavins doesn’t want to defend that position. I don’t blame him.

Still, Stavins admits that handing out carbon permits for free is not the best option. He would prefer using them as government revenue, allowing us to cut other taxes. Since he thinks the efficiency of our economy is hampered by “distortionary” taxes, this would be all to the good. Of course, carbon auction revenues constitute a sales tax, and bear the original sins of such taxes—regressivity and volatility. And nothing more than libertarian ideology supports the view that progressive income taxes are economically harmful. A number of European countries tax at much higher rates than we do and somehow manage to maintain high levels of productivity and income, and even run trade surpluses against lower-taxed America.

Ultimately, if I thought this bill would really protect us against catastrophic climate change, I might overlook a few hundred billion dollars of special interest theft. You have to set priorities. But the loopholes elsewhere in the package, particularly the system for allowing carbon emitters to buy their way out with offsets, will guarantee that targets set for 2020 will not even come close to being realized. From a political standpoint as well, there is no way the bill can squeeze users of carbon fuels enough to get the job done, since almost nothing is allocated to protect household budgets. Imagine a program that deliberately pushes gas, oil and coal prices much higher than they have ever been before and gives nothing back to most households. Imagine being a politician who has voted for this program and has to face the next election.

And Stavins thinks that senators who refuse this kool aid are confused?

Hoisted From Comments

From Tim Bartik, Senior Economist, Upjohn Institute

Several points:

1. We need to distinguish between dealing with the current unemployment crisis and dealing with our long-term labor market problems. Some policy solutions may do both, but many may be more appropriate only as short-term solutions, or only as long-term solutions.

2. The current unemployment crisis is severe enough that we need to explore a variety of solutions. Work-sharing should be considered. Public service jobs should be considered. Some sort of employer tax credit for new job creation should be considered. Counter-cyclical revenue sharing should be considered. The issue for all of these is: what job creation impact are they likely to have, and at what cost.

3. Dean Baker recently has an interesting policy brief at CEPR that presents some numbers on work-sharing as a solution to the short-term unemployment crisis. My colleague Sue Houseman at the Upjohn Institute has an article with Katherine Abraham in our July newsletter that looks at short-time compensation via the UI system as a way of encouraging work sharing.

4. As for work-sharing and our long-term economic problems, I am less convinced than the Sandwichman seems to be that work-sharing is "the answer" to our long-term economic problems. I think this claim requires a high standard of proof, as most deeply rooted economic and social problems do not permit one "answer". I do think there is merit in trying to move towards shorter annual work hours as in much of Western Europe, not so much because it solves our long-term economic problems, but because it would increase the quality of life.

Tim Bartik
Senior Economist, Upjohn Institute

JMK for Dummies, Abridged, Revised and Further Abridged Edition

by the Sandwichman

Once upon a time, Paul Krugman wrote, "Taken in moderation, green cheese can be good for your health." That was good enough for Argentina in 2000. But for the US in 2009, Professor Krugman has revised his prescription in accord with Barry Goldwater's famous maxim, "extremism in the defense of recovery is no vice; moderation in the pursuit of economic growth is no virtue." To put Krugman's green cheese reference in context, though, it would be helpful to examine the evolution of the concept since John Maynard's use of it in his General Theory of Employment, Interest and Money.

The original read as follows:

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 was needed to operationalize Keynes's prescription was a mathematical model. But even metaphorical green cheese would tend to gum up the works of such a model, so the Harrod and Domar version of Keynesianism dutifully substituted economic growth for full employment.

Unemployment develops, that is to say, because people want employment; — men cannot be employed when the object of desire (i.e. full employment) 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 economic growth is practically the same thing and to have an economic growth factory (i.e. a central bank and expansionary fiscal policy) under public control.

By the late seventies, old time religion Keynesianism was knocked off its pedestal by Hayek and Friedman. So a revised, non-accelerating inflation rate of unemployment edition had to be developed under the editorship of Alan Greenspan:

Inflation develops, that is to say, because people want economic growth; — men cannot be employed without inflation when the object of desire (i.e. growth) 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 embezzlement is practically the same thing and to have an embezzlement factory (i.e. a central bank) under public control.

Superficially, one might assume that with the Greenspan version, green cheese had pretty much reached the end of the road. But no. In keeping with the high-speed communication nature of the Internets, Keynes's General Theory of Employment, Interest and Money can now be expressed as a four letter acronym, "ICHG":

I Can Has Greencheeze?

(Funny cat photo to follow in due course.)

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.