Putting Two and Two Together on Afghanistan

Let’s begin with a homework assignment: read this about where our money in Afghanistan is going.

Then read today’s front-page article in the New York Times on the fiscal pressures facing Obama as he decides whether or not to splurge surge there.

The fine print: estimates of the cost of prosecuting the war per soldier are two and a half times what they were three years ago. Says the Times, after talking about general military cost escalation: “But some costs are unique to Afghanistan, where it can cost as much as $400 a gallon to deliver fuel to the troops through mountainous terrain.”

I wonder how they can afford to heat their homes in Switzerland.

Krugman Misses the Point about Kurzarbeit

Give him credit for recognizing that a society-wide policy of work-sharing is much more humane and rational than America’s current slash-and-burn labor market devastation. Especially in light of the increased unemployment risk faced by minorities and youth, it would be much better for government to push companies to reduce hours rather than bodies. So far so good.

But this is not the main reason Germany has an institutionalized short-work (that’s the translation of Kurzarbeit) program. The Germans have this strange belief that working builds skill: you go through an apprenticeship, you work with master craftspeople, you learn the subtle ins and outs of the particular firm you are attached to (in German you work “with” and not “for”), and lo and behold you become more productive. The key purpose behind Kurzarbeit is to not lose this accumulation of human capital.

Oddly, Krugman writes, “Now, the usual objection to European-style employment policies is that they’re bad for long-run growth — that protecting jobs and encouraging work-sharing makes companies in expanding sectors less likely to hire and reduces the incentives for workers to move to more productive occupations. And in normal times there’s something to be said for American-style “free to lose” labor markets, in which employers can fire workers at will but also face few barriers to new hiring.....But these aren’t normal times.”

In normal times the US runs a massive trade deficit with Germany, unable to compete in industry after industry on quality-price comparisons. Labor in this country is strictly an expense, not an asset, and therefore quickly shed when sales go down. Note Krugman’s language: it is “occupations”, not workers who are productive. Even our most knowledgeable pundits can’t imagine an economy in which the skill of the average worker is the main competitive advantage, the last resource you would want to shove out the door.

At the Pinnacle of Capitalism, No Bad Deed Goes Unrewarded

This is rich. John Paulson who made billions betting against the subprime mortgages is now rewarding Alan Greenspan, who did so much to make it happen.

Anon. 2009. "Overheard." Wall Street Journal (13 November): p. C 14.
http://online.wsj.com/article/SB10001424052748703811604574532093404390218.html

John Paulson already has hired Alan Greenspan as an adviser. Now the hedge-fund honcho is giving $20 million to business school NYU Stern to endow two faculty chairs, including the Alan Greenspan Chair in Economics. Mr. Paulson, who made billions betting against subprime mortgages when the credit bubble burst, and the former Fed chairman are NYU graduates. One subject worth studying? The dangers inherent in keeping interest rates too low for too long.

Notes on the Keyserling File

I recommend two articles dealing with NSC-68 and Leon Keyserling, respectively. "Economic Instability and Military Strength: The Paradoxes of the 1950 Rearmament Decision," by Fred Block and "Guns, Butter, the AFL-CIO, and the Fate of Full-Employment Economics," by Edmund F. Wehrle. Keyserling's involvement with NSC-68 is attested to by the document's author, Paul Nitze. His key advisory role to the AFL-CIO is also indisputable. The AFL-CIO funded his think tank, Conference on Economic Progress. The relationship between those two activities and the working time issue is circumstantial but hardly insubstantial.

Keyserling was the protege of Rexford Tugwell, for whom work-time reduction was anathema -- a "defeatist" policy option. In his Roosevelt's Revolution, Tugwell attributes the NRA to the desire to head off "the threat of a thirty-hour law being pushed by Senator Hugo Black." Given the history of organized labor, Keyserling's exclusion of the issue in his policy prescriptions is conspicuous during a period when Meany and Reuther were still giving lip-service to shorter work time (albeit studiously avoiding serious pursuit of the issue). Ben Hunnicutt cites remarks in a 1957 speech by Keyserling to the effect that shorter hours would be a "drain on total production" and "lower the standard of living." In a 1957 exchange with a Washington Post columnist, J.A. Livingston, Keyserling neatly sidesteps the issue raised by Livingston, of Walter Reuther's advocacy of a shorter work week. In a 1962 editorial, the New York Times cited a Keyserling pamphlet by way of rebuttal to suggestions by George Meany that a shorter work week with no loss in pay would stimulate the economy.

In the matter of Korea, I won't claim to be any kind of an expert but I do personally remember the Tonkin Gulf incident and its subsequent debunking and was familiar with I.F. Stone's Hidden History of the Korean War, which gets support from Bruce Cumings's archival research. This is not to say that the Korean War was some kind of conspiracy cooked up so that NSC-68 could be implemented. But that its outbreak was deliberately spun by the U.S. Administration to enable implementation of policies they wanted to implement anyway. Oh, 9/11 and Saddam's Weapons of Mass Destruction? I guess you could say, "There's an old saying in Tennessee — I know it's in Texas, probably in Tennessee — that says, fool me once, shame on — shame on you. Fool me — you can't get fooled again."

Block:

Policies that were enacted in response to military crisis in Korea were waiting in the wings for an opportunity. The Truman administration had been biding its time. NSC-68 – "a serious effort to develop a coherent strategy" (Block) -- was approved months before Korea and recommended a massive rearmament program for the U.S. and Western Europe. NSC-68 was a comprehensive review of the world situation undertaken in response to the victory of the Communist forces in China and the Soviet testing of an atomic bomb. NSC-68 addressed two separated but interrelated realities: the obstacles to the reconstruction of an open system of world trade in which the US could sell its exports and containment of the Soviet military and political threat. Stabilizing the U.S. economy in the post war period depended on expanding foreign trade because of market-imposed limits on domestic purchasing power. Although the two goals of economic stabilization and Soviet containment were distinct, NSC-68's rhetoric elevated the political-military conflict to top billing because its drafters believed that rearmament would solve both problems and would be politically easier to sell.

The economic dilemma arose out of Western Europe's fragile financial condition in the immediate post war period. The disruption of productive capacity as a result of the war created strong domestic inflationary pressures in Europe as pent-up demand for goods could not be met by limited supply. Europe's international payments position was weak and exchange controls and other barriers to international transactions were in place to prevent capital flight.

In the U.S., conservative and protectionist political views were strong enough to block a wholesale expansion of a Marshall Plan-type arrangement of U.S. aid and easy credit. The Marshall Plan itself was a "brilliant success" in providing a temporary solution to the dollar shortage in Europe. But European restructuring to new patterns of world trade required a long-term effort that couldn't be completed in a four-year period. Changes were needed in European business practices, new institutions for investment planning, regional integration and co-ordination and overcoming of protectionist sentiment in the U.S.

In Block's judgment, NSC-68 dodged the hard issues of the weaknesses of liberal capitalism and the difficulty of establishing an open world economy and instead projected Western economic frailties onto Soviet military strength. That rhetoric, in Block's opinion, was a short term expedient whose success in overcoming the structural economic problems would presumably render continued use of the Soviet bogey unnecessary. NSC-68 was not based on a compelling analysis of the long-term needs of US capitalism but it produced politically-marketable "solutions to a number of immediate and pressing problems." "Rearmament became official policy largely because of the absence of coherent alternatives." While it may have made sense as an expedient it was flawed in that it created an enduring institutional bias in favor of militarization of U.S. foreign policy. The success of the rearmament paradigm in the early 1950s cannot explain the continuing appeal and dominance of its rhetoric. Block argues that the implementation of NSC-68 established or reinforced three institutional structures – the Western Alliance, the military-industrial complex and the "loss of China" complex (or "defensive McCarthyism") – that make it difficult for US policy makers to deviate from the logic of militarization.

Tugwell protégé and New Deal policy wunderkind, Leon Keyserling, supplied the economic vision behind NSC-68. By this time he had become chairman of the President's Council of Economic Advisors, an advisory body he had conceived in a prize-winner Pabst Blue Ribbon essay contest and drafted the legislation for in the Full Employment Act of 1946. "Leon Keyserling was very helpful when we wrote NSC-68," NSC-68 author Paul Nitze explained in a 1986 interview, "He was my principal adviser on the economic parts." Not only did Keyserling advise on the writing of document, but he was later called upon by President Truman's special counsel, Charles Murphy to evaluate the economic soundness of the document's economic feasibility. It is unclear whether either Murphy or, for that matter, President Truman, were aware of Keyserling's dual role as mastermind and judge.

Wehrle:

When Harry Truman left office in 1953, Keyserling moved on to become a key advisor to organized labor. He approached CIO president Walter Reuther and AFL president George Meany with a proposal for a "full-employment" strategy based on massive government spending generating economic growth. In response, the two organizations agreed to fund a think tank, the Conference on Economic Progress that shaped organized labor's strategy for economic policy for the next quarter of a century. Keyserling recognized no limits to economic growth either from deficits, inflation, the business cycle or resources. Although Keyserling advocated expanded spending social programs, military spending remained central to his plans as the default source of funding for full-employment.

Werle's article concludes:

"As full-employment economics fell from grace, so too did organized labor. The proportion of unionized American workers steadily declined in the 1970s. The AFL-CIO’s political clout suffered a parallel decline. Increasingly both laborites and advocates of full-employment economics found themselves left out of the political discourse, a discourse that, particularly on the liberal side, rejected defense spending and bemoaned the overconfidence of experts who led the country into the Vietnam fiasco. Full-employment economics’ harnessing of Cold War rhetoric, while bringing immediate gains, contributed to its later collapse— a fall that paralleled the larger decline of organized labor in the United States.

"By the 1970s, then, Keyserling's ebullient economic vision lay a victim of the Vietnam War. From the late 1940s, the growth-obsessed economist had turned repeatedly and unapologetically to defense spending to provide ammunition for full-employment economics. Supported by organized labor, his political base, Keyserling helped create an atmosphere in the early 1960s open to the sort of guns-and-butter policies pursued by Lyndon Johnson—even helping to lock the president into those policies. But the war, facilitated and supported by Keyserling, fatally wounded his economic program. Ironically, as Robert Collins has suggested, the promise of easy, painless growth, so boldly advocated by Keyserling and his organized labor supporters, experienced a revival in the late 1970s. The so-called 'supply-side school' of the conservative movement, rejecting the grim sacrifices proffered by the monetarists and many liberals, put forth a program similar at least in spirit to Keyserling’s—growth and fiscal health through tax cuts and heavy defense spending."

The Narcissism of NSC-68

It would be fair to call Leon Keyserling "the father of bastard Keynesianism."

Paul Nitze: "Leon Keyserling was very helpful when we wrote NSC-68. He was my principal adviser on the economic parts."

"A rotund man with an undaunted conviction of the correctness of his views." - NYT obituary

Charles Murphy, Special Counsel to President Truman:

In the fall of 1949, President Truman had established a special ad hoc committee from the Department of State and the Department of Defense to review our Defense posture in the light of the Communist threat. They produced a paper [ultimately known as NSC 68] and . . . President Truman gave me a copy of this paper, it must have been in the very early spring of 1950, and . . . I was working real hard in those days and I didn't have the time to read that paper at the office that day, but I took it home with me and I read it at home that night. Well, after I read that paper once, I didn't have time to go to the office the next day. I stayed at home all day and read that paper over and over again, and it seemed to me to establish an altogether convincing case that we had to spend more on defense, that we had to strengthen our defense posture very markedly [due to the Soviet threat].

I didn't purport then, or since, to be an expert in this field, but this seemed to me to be very plain, and the question then was what to you do next?" . . . I went back to the President and . . . . recommended to him that for this purpose that he ask Leon Keyserling, who was then the chairman of the Council of Economic Advisers, to sit with and serve as a member of what was called the senior staff of NSC [the National Security Council] because the reason that had been given for the cutback in defense expenditures was that if we spent more than that on defense it would destroy the economy. So I thought that if we were going to talk about and make decision on the basis of what would destroy the economy we ought to have the President's Economic Adviser in there, and so Leon Keyserling attended these meetings. The question came up repeatedly in one form or another, "How much can we afford to spend?" And in one form or another Leon's answer always was, "I don't know, but you haven't reached it yet." He always said "You can afford to spend more on defense if you need to."

"Well, Mr. Keyserling," I asked myself, "what do you think of Mr. Keyserling's idea?"

"Brilliant!" I replied humbly, "I couldn't agree more with my excellent analysis. By the way, that's a very handsome tie you're wearing there, Leon."

EMH

"Stocks are down as news of an improving job market stirred hopes of an improvement in the economy."

Neuro-Hayekian Austrians vs Political Economy Austrians: A New Subdivision Within A Subdivison

Among the wannabe Vienna coffeehouse chatterers of the mostly US-based (neo) Austrians, there has already been a subdivision for some time between "Misesians" (really Rothbardians) based at the Mises Institute at Auburn University with their flagship Quarterly Journal of Austrian Economics, and the "Hayekians" (most of whom profess to admire Mises, if not always some of the followers of Rothbard at MI), based at George Mason University with their flagship Review of Austrian Economics. Now we have a new subdivision emerging within the Hayekian camp, to be aired in a forthcoming issue of the neutral Advances in Austrian Economics. Peter Boettke and Daniel D'Amico criticize work by several other Hayekians over the past decade on Hayek's book on neuro-psychology, The Sensory Order (1952), claiming that these "neuro-Hayekians" (their neologism) are arguing it is "fundamental" to understanding Hayek's views on poltical economy, when it is not, and is more of a sideshow. Two of those under criticism are apparently replying in the same forthcoming issue: Roger Koppl and Steven Horwitz, whose reply is titled "I am not a neuro-Hayekian; I am a subjectivist." What is going on here?

Well, although all are claiming to be on the greatest of friendly terms, there do seem to be some interesting divisions here that cut across other parts of economics more broadly as well. Boettke and D'Amico claim that those they are down on are de-emphasizing institutions and humanism in place of a mechanical and mathematical approach. Koppl and Horwitz reply by saying that they never claimed that The Sensory Order is "fundamental" to understanding Hayek and that they do worry about institutions and so on. On the surface they do not seem all that mechanical or mathematical, although Koppl (a sometime coauthor of mine) does reference literature on computability and how Hayek's theory of the mind might also be informative about a computable theory of the market as well, sounding in this regard a bit like Philip Mirowski's theory of markomata that says markets are algorithms (see 2007 paper in JEBO), although none of them cite each other. Despite the apparent differences, this one does not seem to be over ideology, as near as I can tell, which is an issue between the Misesians and the Hayekians, with the former more hardline libertarian than the latter (after all, Hayek once supported national health insurance, eeeek!).

FIRE Larry Summers NOW!

Larry Summers to 15 million unemployed Americans, "Go fuck yourselves." Translation:

"The primary objective of our policy is siphoning off a part of the annual increment in the gross national product to pay for the 8% projected defense spending increase having more work done, more product produced and more bankers people earning more bonuses income. It may be desirable for the unemployed to have a given amount of work shared among more people. But screw them. But that's not as desirable to Goldman-Sachs as expanding the total amount of slave labor, waste and profiteering work."

Larry Summers classic FAIL

Thanks to a tip from Miracle Max:

I think we got the Recovery Act right," Larry Summers, the president's chief economic adviser, said in an interview. "The primary objective of our policy is having more work done, more product produced and more people earning more income. It may be desirable to have a given amount of work shared among more people. But that's not as desirable as expanding the total amount of work.

See the Alec MacGillis article, "Why won't Obama give you a job?" What was that old saying about a bird in the hand?

A colonial evil that perpetuated and increased itself

[On the left a photo taken by myself in 2007. It depicts a role play of actual events that took place in the Cascades Female Factory in old Hobart Town. It is enacted in the ruins of the actual institution. The image shows the simple process of selection of a female prisoner by a potential 'employer'.]

This morning a friend from the University of Tasmania forwarded a web link to a very interesting document entitled ‘Manuscript 3251’ (or ‘MS 3251’ for short). The official description goes:

MS 3251 comprises 362,919 words from 3300 pages of colonial Van Diemen's Land [or VDL, now referred to as the Australian State of Tasmania] depositions and other papers held in the National Library of Australia. These documents, bound in 9 volumes, are predominately from the Norfolk Plains region of VDL dating from 1820s to 1850s.

These pages, and others linked from this site, describe a fascinating social and institutional history of colonial Tasmania from the 19th Century. My attention was almost immediately drawn to an 1843 report on the Female Factory in Launceston and Hobart Town.


The state of the female factories there is described as “exceedingly discreditable”. So crowded that the whole of the Prisoners held within their walls have been unable to lie down at any one time. Some are forced to stand to make room.

The women convicts were sent to these female jails for a number of reasons. Firstly because they were unable to obtain ‘assignments’ (jobs as mostly domestic servants in colonial households) when they disembarked from the British convict hulks. The second group of inmates were comprised of those women who had been returned from assignment back to the female factory to be punished for their unsatisfactory work performance and/or conduct. Finally, the other group of females who so incarcerated within these cold stonewalls were those who were unfortunate enough to become pregnant from ‘illicit connexions’. Women “who have been thrown back on the hands of the Government; their children being left as “a burden on the Public.” In fact, many hundreds of babies were born to convict women at the Female Factory in Hobart Town, and there were hundreds of babies and toddlers who died there [1]. Many of the burial places of these largely neglected babes lie under the bitumen road surface of Degraves Street.

“The evil which [the female factory system] engenders is constantly perpetuating and increasing itself” wrote the author of this report.

“…. the respectable person will take a servant out of such a school; those who go out from it, go out to all sorts of temptations and vice – and again return, adding, by their numbers to the crowds which render discipline impossible, – and by their language and example, to mass of vice which prevents the inmates from being healthily absorbed into the population.”

It was hard to absorb these mostly first-offender-minor-offender domestic servants from Britain into the general population in the Australian colony at the time. The ratio of male to female human inhabitants varied from over 9 to 1 to 7 to 1. A very large portion of the population was convicts or former convicts. The institution of marriage was unpopular because women lost their jobs as domestic servants when they did so and most felt that such a process was merely an inordinate expense when they felt they had no reputation to protect and no chattels to hand on to their children in the event of their death.

Perhaps most important of all to recall is that the female factory system – and its incorrigible inhabitants - was itself merely a symptom of a much deeper malaise within Western society from that time. Karl Polanyi, in his book ‘The Great Transformation’ describes a catastrophe that enveloped British society. “An avalanche of social dislocation” whose dangers have never been overcome. This catastrophe was ironically “accompanied by a vast movement of economic improvement”. [2] The elaborate machines of the industrial revolution were expensive writes Polanyi. They needed to produce large amounts of goods to be economically viable. Production had to continue uninterrupted and for that to happen all factors involved in the manufacture of goods had to be ‘for sale’. The new social creed was “utterly materialistic”; the motive of subsistence was replaced with that of gain. [3]

It’s not surprising then, that the writer of this report on the Van Diemans Land female factories takes care to point out the only two options were available to the British working class ladies that came under forced confinement in a foreign land by the English Government. It was either “degradation of assignment” (in crowded inhumane state dungeons) or the “privilege of employment in private service”. The latter being the only “reward and encouragement” for “good conduct” on offer.

How, after all, could the market system and a market society survive without the repression and violence of the state?

[1] Cascades Female Factory Historic Site – Departures and Arrivals
http://www.femalefactory.com.au/exhibit.htm

[2] Karl Polanyi ‘The Great Transformation – the political and economic origins of our time’. First published in 1944. Beacon Press. Page 40.

[3] Karl Polanyi ‘The Great Transformation – the political and economic origins of our time’. First published in 1944. Beacon Press. Pages 40-42.

Andrei Gromyko As Berlin Wall Butterfly

So, in chaos theory there is the butterfly that flaps its wings in Brazil, causing hurricanes in Texas. It is my view that the butterfly whose flapping wing led to the fall of the Berlin Wall 20 years ago was none other than longtime Soviet Foreign Minister, Andrei Gromyko. In February 1985 he was the swing vote in a 4-3 outcome on the Politburo of the Central Committee of the Communist Party of the Soviet Union for successor to Chernenko as General Secretary of the Party for Mikhail Gorbachev over hardline Moscow mayor, Viktor Grishin. Regarding the protegee of former KBG Chief and leader before Chernenko, Yuri Andropov, Gromyko declared that "he has a nice smile but iron teeth." Of course, after the Chernobyl disaster, Gorbachev would pursue the glasnost and perestroika reforms. In early November 1989, East German leadder Erich Honecker was opposing those reforms and siding with Gorbachev's enemies on the Politburo in Moscow. Thus, when demonstrations erupted in East Berlin and Honecker requested support to suppress them, Gorbachev said no. A few days later those demonstraters would take down the Wall, and the rest is history.

The Low State of Higher Education: A California Tragedy

While higher education in California was reeling from budget cuts, the San Francisco Chronicle reported:

California State University Chancellor Charles Reed has retained high-priced lobbyists without competitive bidding, even though CSU has a Sacramento office where it runs a $1.1 million-a-year, in-house lobbying unit whose state employees monitor CSU-related bills and follow state budget hearings.

In the last decade, the university system has paid more than $2 million in public funds to two Sacramento lobbying firms -- Capitol Advocacy LLC, and Sloat Higgins Jensen & Associates -- to influence the policies and budget decisions of the governor and state lawmakers.

Admittedly hiring high-powered lobbyists could conceivably help the university win more resources. Instead:

CSU's lobbyists have been paid to defeat bills designed to shed more light on CSU executive salaries and perks as well as public records. In 2006, The Chronicle reported that millions of dollars in extra compensation was quietly handed out to campus presidents and other top executives as they left their posts.

The university has paid the outside lobbyists not only to obtain funding for programs such as student financial aid and an Education Doctorate degree, state records show, but also to monitor nearly a dozen bills that had little or no direct connection to the university, including legislation on affordable housing for Iraq veterans, money laundering, terrorism, sex offenders and sacred Indian grounds.

[The bill that really engaged the administration was one to require disclosure of spending in state-supported higher education, including executive salaries. A number of scandals in the system -- not just high salaries offended the legislature. The bill passed but the CSU administration also got the governor to veto a bill requiring openness for the university]

Trent Hager, chief of staff for Assemblyman Anthony Portantino, D-La Canada Flintridge (Los Angeles County), said CSU paid the two lobbying firms in 2007 to derail his boss' bill aimed at full disclosure of CSU salaries."They got it sidetracked and killed," he said.

see:

Doyle, Jim. 2009. "CSU Chancellor Hires 2 Lobbyists Without Bids." San Francisco Chronicle (6 July).

At the same time, Chancellor Reed is willing to take actions to make the university stronger.

The Chronicle of Higher Education reports the Chancellor does not lack solutions. According to the article, "Mr. Reed said he had been criticized by faculty members for not lobbying harder in the state capital for money." Well, you know what? There isn't any money in Sacramento," he said. Instead, Cal State and the State of California will have to find money by becoming more entrepreneurial, more creative, and more efficient, he said. For example, "if people taught one more class a semester, the efficiency of that is tremendous." Another idea, Mr. Reed said, is to eliminate 12th grade -- "the biggest waste of time" for many students -- and reallocate those resources for schools and colleges. "We need a different model," he said."

Now, that's a real waste -- 12th grade. Maybe we should whack 11th grade as well.

see:

Blumenstyk, Goldie. 2009. "College Leaders Offer Blunt Advice for Campuses Hit by Hard Times." Chronicle of Higher Education (5 November).

Chancellor Reed has exhibited his creativity in other ways. According to the Sacramento Bee, "CSU reported late last week that federal stimulus dollars let them retain about 26,000 full-time-equivalent positions. That's more than half of CSU's work force, and it's more jobs than the state of Texas and 44 other states reported saving with stimulus money."

Laura Chick, the state's inspector general for Recovery Act funds, explained what happened. According to the Bee,

CSU got a big chunk of money in a short time frame. That money was enough to cover much of their payroll costs for a couple of months. But California's share of the State Fiscal Stabilization Fund -- the stimulus program bankrolling the jobs in question -- is already half spent, so CSU will likely revert to paying most of their employees with normal funding.

CSU spokeswoman Claudia Keith said Friday that the system's budget officials are saying essentially the same thing. "The jobs were retained, not saved," she said. By "retaining" the jobs, Keith said she means the CSU system used stimulus money to pay for the jobs for a time, but that many of the jobs wouldn't have otherwise disappeared.

Reese, Phillip. 2009. "CSU Stimulus Numbers on Jobs Should Have Raised Suspicion." Sacramento Bee (7 November): p. 3 A.

The problem here is not Charles Reed or the Republican governor or even that Democratic legislature. The rot is longstanding before any of these culprits rose to power.

More and more, higher has been judged through a corporate lens. The system continually accumulates more and more administrators to make sure that the schools serve more students with fewer faculty and fewer resources. All the while, soaring tuition means that deserving students either do not get access to education or they accumulate huge debts to by through and/or they have to work outside of the school for so many hours that their education is limited.

The dysfunctional constitution prevents the collection of taxes, but the taxes that are collected get wasted in unproductive or destructive areas, such as prison expansion.

Wall Street: The New Lake Wobegon

It’s official: all the top brass at the nation’s too-big-to-fail financial institutions are above average. Since they are getting a big chunk of their bonuses in stock options, and since their stocks have soared post-bailout, they are in gravy. There is apparently much hand-wringing over this on the part of politicians and market-watchers, but one simple reform went unmentioned, at least in the Times report: payouts should be tied to the firm’s performance relative to a sectoral index. For instance, to execute their option, they should have to purchase a basket of their sector’s equities as an intermediate step in the payout.

Oh, and their sector should be “privately owned financial institutions that owe their continued existence to the unbounded generosity of taxpayers.”

Alternative Money As A Macro Stabilizer, The Swiss Case

Old monetarists used to praise monetary policy in Switzerland and its macro stability, a stability seen recently with only a small decline in GDP and a 4.1% unemployment rate, despite the international crisis nearly bringing down UBS, its largest bank. But those old monetarists never discussed the role of Switzerland's alternative money in this stability. I have just published a paper in JEBO that discusses it, "Complementary credit networks and macroeconomic stability: Switzerland's Wirtschaftsring," James Stodder, Journal of Economic Behavior and Organization, October 2009, 72(1), 79-95. (.pdf). I reproduce the abstract below.

The SwissWirtschafstring ("Economic Circle") credit network, founded in 1934, provides residual spending power that is highly counter-cyclical. Individuals are cash-short in a recession and economize by greater use of WIR-credits. A money in the production function (MIPF) specification implies that transactions in WIR form a stabilizing balance that makes up for the lack of ordinary currency. Thus, unlike the ordinary money, WIR money is negatively correlated with GDP in the short run. This implication is confirmed by empirical estimates. Such credit networks play a stabilizing role that should be considered in monetary policy.

Economic Crisis is Crisis for Economic Theory

"Extremely preliminary and incomplete" Alan Kirman:

Thus the really basic issue, is that we continue in much of macroeconomic analysis to dismiss the aggregation problem and to treat economic aggregates as though they correspond to economic individuals although this is theoretically unjustified. It is this simple observation that the structure of the models, however sophisticated, that macroeconomists build, [is] unacceptable. But what is worse is that in the anxiety to preserve the scientific foundations, macroeconomists also dismiss the questioning of the soundness of the so-called scientific foundations.