I stay away from debating whether regulation or taxes beat cap and trade on limiting CO2 emissions, because I don't think it is something to be settled theoretically. Or -- worse -- speculatively, say, on the grounds that we distrust markets more than we distrust the state. Or vice versa. As far as I'm concerned, both markets and the state are undesirable, because we collectively can't control them effectively. So, we need to disolve them, which can only result from a long series of revolutions. So, for the time being, the issue ultimately boils down to empirical measure and -- on the practical side -- a lot of trial and error.
The general theory appears straightforward to me. Well, kind of. Paul Krugman recently wrote in his blog that cap and trade and Pigouvian taxes (or subsidies for that matter) are essentially equivalent. I think he meant it in the following sense:
If you know the supply (or marginal cost) and demand (or marginal benefit) functions, private and social (i.e. without and with the external effects), then you can always determine the socially optimal level of CO2 emissions, level that you can then split into shares and allocate them to people, who can then trade them in a market. If people follow the script of their market functions (i.e. if the assumptions that underpin market functions hold), then the amount of emissions would be capped at the socially optimal level.
Similarly, if you know the supply and demand functions, you can always determine a Pigouvian tax (or subsidy) to induce producers to reduce emissions from the privately optimal level to the socially optimal one. All is required is setting the tax (or subsidy) at an amount equivalent to the size of the net external cost at the privately optimal (but socially inefficient) level of emissions. That forces emitters to internalize the net external cost, who then willingly limit their production to the socially optimal level.
Quick and dirty actions to solve practical problems beat no action at all in the hope that a perfect solution will fall from the sky. The practical experiences of taxation and cap and trade need to be studied very carefully -- something I've not done. But from afar I can see a few thorny practical issues, even if measuring the level of emissions were simple:
How on earth do you determine the private and social supply and demand functions? For example, the location and shape of estimated supply and demand functions is highly sensitive to the period of time considered. Basically, choose a sufficiently long period of time, and you can always make the elasticities arbitrarily large. With arbitrarily large elasticities, very tiny taxes (or subsidies) would -- in theory -- do the job. So, what is the relevant period of time? This wrecks all approaches, including plain regulation (i.e. telling emitters how much CO2 to emit, period). And this is separate from the technical, empirical issues of estimating market functions (well, their elasticities, from which you can integrate costs and benefits).
Another issue I find daunting is that supply and demand, private and social, are continuously shifted by a bunch of factors without prior notice: technology, consumption patterns, prices of virtually everything else. Basically, a perfect regulator would have to re-calibrate dynamically, continuously (or at least with such frequency that the benefits of recalibration are not offset by the associated transaction costs), the socially and privately optimal levels. Otherwise, there'd be garbage-in garbage-out with any of the approaches.
Then the practical issues of administering the approach, in the face of the profit motive, the incentives of public servants, the motivations of the public, etc.
By the way, I haven't seen anybody challenging what I believe is a fundamental presumption under cap and trade as is, namely that the national shares of allowed CO2 emissions are to be allocated to the emitters only. (Am I right that this is the presumption?) I'd expect to hear left-wing economists denouncing this as sheer theft. The rights of ownership over the atmosphere are assumed to belong exclusively to the main CO2 emitters? How about the rest of us? To start with, I would expect cap and trade allocating permits to everybody following a simple egalitarian rule: one (equal) share per person. We can then decide whether to trade it in the market or make origami figures with them.
I'm sure that something like this would be easier to implement than land reform in Mexico. If it worked, we could then confidently extend the practice to the myriad of other net externalities resulting from capitalism -- environmental and social. For example, if manufacturers produce gadgets along with garbage and sick workers; if TV, Frito Lay, and Pepsi produce pleasure along with stupidity, obesity, and consumerism; if banks produce whatever they produce along with crashes that ruin our lives; etc., then as rank-and-file users of the natural and social environment, we are entitled to the same allowance of permits to destroy nature and society as everybody else.
It would not be the end of markets and the state, but at least we'd be talking!
Wednesday, December 9, 2009
Tuesday, December 8, 2009
From Lumps of Labor to Common Pool Resources
The lump of labor charge has a long and complicated history, surviving several explanatory twists and turns and passing effortlessly from the propaganda mills of employer associations, to newspaper columns to introductory economics textbooks. If, on the one hand, claimants were remiss in providing textual evidence to support their claims of fallacy, their insistence that shorter work time advocates invariably committed the fallacy creates a double bind for the concept of economic man.
If workers are notoriously irrational about the question of selling their labor, how can they be generally assumed to be rational economic actors? One possible answer would be to say that it would be rational for workers individually or in small units to act as though there is a lump of labor even though in the aggregate, it does no good. That argument would resemble the paradox of thrift, with the difference that economists down through the ages have not devoted so much energy chastising and ridiculing savers. Less charitably, it would appear that the economists' perennial attachment to the fallacy claim discloses a profound and hypocritical ambivalence – that is to say, a lack of rigorous commitment – toward their supposedly rational economic actor. They don't really mean it. Rational economic man is only rational when it suits the economists' argument.
Leaving aside the ridiculous notion of a lump of labor of fixed quantity, viewing the labor supply as a collective or common pool resource may not be all that far-fetched. In "Foundations for Environmental Political Economy," John Dryzek explored the prospects of an alternative to economic man -- a Homo ecologicus. Dryzek dismissed previous efforts at posing an ethical, environmentalist economic subject as flawed by wishful thinking and reductionism. "The ecophilosophical house is an attractive dwelling but nobody has any idea how to build it." On the contrary, "we know how to build the microeconomic house, but it is an ugly and incommodious dwelling?"
The alternative Dryzek proposed was based on his interpretation (or over-interpretation, as Dryzek confesses) of Nobel laureate Elinor Ostrom's work on Common Pool Resources. That new political economy would be one that can account for instrumental rationality – and even deploy it in its proper place – but that also can point to alternatives grounded in something firmer than wishful thinking. Those alternatives can't be entirely specified in advance because they evolve over time in response to changed circumstances. However, their general characteristics can be deduced from past experience.
Those alternatives rely not only on subjectivity but also on inter-subjectivity; that is, on communicative rationality. What distinguishes the successful case studies Ostrom documented is that "individuals repeatedly communicate and interact with one another… they can learn whom to trust, what effects their actions will have on each other and on the common pool resource, and how to organize themselves to gain benefit and avoid harm. These practices and learning constitute a kind of social capital upon which they can build institutional arrangements for resolving difficulties." People learn to act differently. They begin to behave more "straightforwardly" toward each other and less strategically.
Successful institutions of this sort rarely come into being through explicit contracts. More often they evolve through long periods of informal, collective learning about what works and what doesn't. Another approach to these institutions would involve more deliberate experimentation with institutional innovations. For such institutional reconstruction to take place, however, it is essential that participation "move beyond the narrow community of political economists and political theorists and into society at large."
One such deliberate experiment would be to retrieve a lump of labor counter-narrative, modifying the conventional myth "just a bit" – but in a way that makes "all the difference in the world." Instead of a fallacious assumption, this re-functioned lump could stand for an ethic of collective and cooperative working behavior. In this ethic, people "hold up their own end," but they also do not run out too far ahead of everybody else. They "share and share alike" the burdens, the rewards, the pain and the joy of work.
The traditional craft workers' ethic involved treating employment as something very similar to a common resource. That is to say, it included the proposition of a "lump of labor" to be divided up between the available hands. That is, not an abstractly 'fixed' amount of work, but a concretely given quantity. It follows from such an ethic that if there aren't jobs enough to go around, those who have one should share by giving up some of their hours. Whether or not that idea makes sense in terms of industrial efficiency, as an ethical proposition it is no more or less fallacious than the golden rule or the Ten Commandments. It is simply the inevitable reciprocal movement to co-operation.
Although economists have traditionally insisted that the lump-of-labour idea is a fallacy, one economist, Sir Sydney Chapman, suggested that even if it was a fallacy, it might have prevented workers from competing ruthlessly for jobs and thus undermining their standard of living. If so, it led them to do the right thing even if it was for the wrong reason. Chapman may have almost hit upon something rather profound. What if we view the so-called lump-of-labor as an ethical proposition rather than as an economic assumption – fallacious or otherwise? Collectively, working people would be better off if they joined in refusing to compete in a race to the bottom. Of course some individuals might have to forgo receiving more than their share of the "economic progress" that would result from competition between workers and the resulting low wages. But where does it say that it is ethical for a few people to benefit at the expense of the many? Furthermore, by collectively conserving work effort, the workers acting co-operatively could achieve higher levels of productivity than otherwise as well as build greater social solidarity and security.
What I'm getting at here is not only that labor can be regarded as another common pool resource among many but that it is the common pool resource par excellance – a case that can provide the most far-reaching and democratically vital instance of a CPR. Donald Stabile alluded to something similar when he noted, in "Accountants and the Price System: The Problem of Social Costs," that "Human labor is also the primary constituent of the society whose values must be part of any criterion of social evaluation. The appropriate starting point in any policy directed at social costs is with those imposed on labor."
In his article, Stabile focused on the perspectives introduced by John Maurice Clark in his Studies in the Economics of Overhead Costs. Clark argued that labor should be treated, socially, as an overhead cost of doing business rather than as a variable cost of the employing firm because the cost of maintaining the worker and his or her family "in good stead" has to be borne by someone whether or not that worker is employed. "If all industry were integrated and owned by workers, what would be the relation of constant to variable expense? ...it would be clear to worker-owners that the real cost of labor could not be materially reduced by unemployment."
Commenting on the movement of accountants during the 1970s that sought changes in the way social costs were accounted for on the corporate account books, Stabile concluded that the movement had not developed useful concepts for examining social costs. To explain why it had failed, Stabile placed the ideas of social cost accounting in an institutionalist context, using the perspective on social costs set forth by Clark and by K. William Kapp. In their work, Clark and Kapp introduced a framework that included a process of social evaluation, a process in which analysis of the social costs of labor is central. Such an outlook is missing from the works of social cost accountants, "Market values are a weak thread from which to hang a whole system of value," Stabile argued, "but accountants cling to it doggedly. Without an alteration of this basic tenet of accounting, social cost accounting cannot develop into a criterion of social value."
Returning once again to the thought experiment of the hypothetical state where all industry is integrated and owned by workers, here is an instance of a non-market process of social evaluation whose results can readily be readily be worked out with little hesitation, unemployment would be regard as waste rather than as a regrettable but necessary measure for containing the cost of labor. This is another way of saying that a social accounting for unemployment would come to a very different assessment of economic "efficiency" than would a narrowly financial one. The "fallacy" of the lump of labor thus results from the refusal of workers to arbitrarily limit their perspective to the narrow, self-interested terms favored by business propagandists and economists. "In any highly developed discipline," wrote Eugene McCarthy and William McGaughey, in Nonfinancial Economics: The Case for Shorter Hours of Work:
If workers are notoriously irrational about the question of selling their labor, how can they be generally assumed to be rational economic actors? One possible answer would be to say that it would be rational for workers individually or in small units to act as though there is a lump of labor even though in the aggregate, it does no good. That argument would resemble the paradox of thrift, with the difference that economists down through the ages have not devoted so much energy chastising and ridiculing savers. Less charitably, it would appear that the economists' perennial attachment to the fallacy claim discloses a profound and hypocritical ambivalence – that is to say, a lack of rigorous commitment – toward their supposedly rational economic actor. They don't really mean it. Rational economic man is only rational when it suits the economists' argument.
Leaving aside the ridiculous notion of a lump of labor of fixed quantity, viewing the labor supply as a collective or common pool resource may not be all that far-fetched. In "Foundations for Environmental Political Economy," John Dryzek explored the prospects of an alternative to economic man -- a Homo ecologicus. Dryzek dismissed previous efforts at posing an ethical, environmentalist economic subject as flawed by wishful thinking and reductionism. "The ecophilosophical house is an attractive dwelling but nobody has any idea how to build it." On the contrary, "we know how to build the microeconomic house, but it is an ugly and incommodious dwelling?"
The alternative Dryzek proposed was based on his interpretation (or over-interpretation, as Dryzek confesses) of Nobel laureate Elinor Ostrom's work on Common Pool Resources. That new political economy would be one that can account for instrumental rationality – and even deploy it in its proper place – but that also can point to alternatives grounded in something firmer than wishful thinking. Those alternatives can't be entirely specified in advance because they evolve over time in response to changed circumstances. However, their general characteristics can be deduced from past experience.
Those alternatives rely not only on subjectivity but also on inter-subjectivity; that is, on communicative rationality. What distinguishes the successful case studies Ostrom documented is that "individuals repeatedly communicate and interact with one another… they can learn whom to trust, what effects their actions will have on each other and on the common pool resource, and how to organize themselves to gain benefit and avoid harm. These practices and learning constitute a kind of social capital upon which they can build institutional arrangements for resolving difficulties." People learn to act differently. They begin to behave more "straightforwardly" toward each other and less strategically.
Successful institutions of this sort rarely come into being through explicit contracts. More often they evolve through long periods of informal, collective learning about what works and what doesn't. Another approach to these institutions would involve more deliberate experimentation with institutional innovations. For such institutional reconstruction to take place, however, it is essential that participation "move beyond the narrow community of political economists and political theorists and into society at large."
One such deliberate experiment would be to retrieve a lump of labor counter-narrative, modifying the conventional myth "just a bit" – but in a way that makes "all the difference in the world." Instead of a fallacious assumption, this re-functioned lump could stand for an ethic of collective and cooperative working behavior. In this ethic, people "hold up their own end," but they also do not run out too far ahead of everybody else. They "share and share alike" the burdens, the rewards, the pain and the joy of work.
The traditional craft workers' ethic involved treating employment as something very similar to a common resource. That is to say, it included the proposition of a "lump of labor" to be divided up between the available hands. That is, not an abstractly 'fixed' amount of work, but a concretely given quantity. It follows from such an ethic that if there aren't jobs enough to go around, those who have one should share by giving up some of their hours. Whether or not that idea makes sense in terms of industrial efficiency, as an ethical proposition it is no more or less fallacious than the golden rule or the Ten Commandments. It is simply the inevitable reciprocal movement to co-operation.
Although economists have traditionally insisted that the lump-of-labour idea is a fallacy, one economist, Sir Sydney Chapman, suggested that even if it was a fallacy, it might have prevented workers from competing ruthlessly for jobs and thus undermining their standard of living. If so, it led them to do the right thing even if it was for the wrong reason. Chapman may have almost hit upon something rather profound. What if we view the so-called lump-of-labor as an ethical proposition rather than as an economic assumption – fallacious or otherwise? Collectively, working people would be better off if they joined in refusing to compete in a race to the bottom. Of course some individuals might have to forgo receiving more than their share of the "economic progress" that would result from competition between workers and the resulting low wages. But where does it say that it is ethical for a few people to benefit at the expense of the many? Furthermore, by collectively conserving work effort, the workers acting co-operatively could achieve higher levels of productivity than otherwise as well as build greater social solidarity and security.
What I'm getting at here is not only that labor can be regarded as another common pool resource among many but that it is the common pool resource par excellance – a case that can provide the most far-reaching and democratically vital instance of a CPR. Donald Stabile alluded to something similar when he noted, in "Accountants and the Price System: The Problem of Social Costs," that "Human labor is also the primary constituent of the society whose values must be part of any criterion of social evaluation. The appropriate starting point in any policy directed at social costs is with those imposed on labor."
In his article, Stabile focused on the perspectives introduced by John Maurice Clark in his Studies in the Economics of Overhead Costs. Clark argued that labor should be treated, socially, as an overhead cost of doing business rather than as a variable cost of the employing firm because the cost of maintaining the worker and his or her family "in good stead" has to be borne by someone whether or not that worker is employed. "If all industry were integrated and owned by workers, what would be the relation of constant to variable expense? ...it would be clear to worker-owners that the real cost of labor could not be materially reduced by unemployment."
Commenting on the movement of accountants during the 1970s that sought changes in the way social costs were accounted for on the corporate account books, Stabile concluded that the movement had not developed useful concepts for examining social costs. To explain why it had failed, Stabile placed the ideas of social cost accounting in an institutionalist context, using the perspective on social costs set forth by Clark and by K. William Kapp. In their work, Clark and Kapp introduced a framework that included a process of social evaluation, a process in which analysis of the social costs of labor is central. Such an outlook is missing from the works of social cost accountants, "Market values are a weak thread from which to hang a whole system of value," Stabile argued, "but accountants cling to it doggedly. Without an alteration of this basic tenet of accounting, social cost accounting cannot develop into a criterion of social value."
Returning once again to the thought experiment of the hypothetical state where all industry is integrated and owned by workers, here is an instance of a non-market process of social evaluation whose results can readily be readily be worked out with little hesitation, unemployment would be regard as waste rather than as a regrettable but necessary measure for containing the cost of labor. This is another way of saying that a social accounting for unemployment would come to a very different assessment of economic "efficiency" than would a narrowly financial one. The "fallacy" of the lump of labor thus results from the refusal of workers to arbitrarily limit their perspective to the narrow, self-interested terms favored by business propagandists and economists. "In any highly developed discipline," wrote Eugene McCarthy and William McGaughey, in Nonfinancial Economics: The Case for Shorter Hours of Work:
…there is a tendency for thought processes to become so specialized and refined that its respected practitioners appear to lose common sense. If medieval philosophers counted the number of angels that could dance on the head of a pin, some contemporary economists deal in equally strange and fictitious concepts. To many of them, it would seem, money is reality, while leisure is an empty spot in time devoid of wealth-producing activities.
From GDP To Well-Being: Economics On The Road To Sustainability
Just back from the conference in Ancona, Italy, bearing the title of this post, papers from which can be accessed at http://fromgdptowellbeing.univpm.it/doc/final_programme.pdf. I gave a plenary talk on "Complex ecologic-economic dynamics and sustainability: Post Keynesian perspectives." Audience dominated by happiness researchers, who are split between happiness and satisfaction, with a smaller group of "capabilities" people arguing with them, who are in turn split between followers of Amartya Sen and Martha Nussbaum. Fewer sustainability types, with some trying to link to the happiness people, with one paper arguing that people in Latin America are happier when temperatures in winter are warmer, but are not much happier if highest temperatures in summer are cooler, although too much cloudiness and rain makes people less happy (so much for the psychological benefits of fighting global warming). I posed a "Principle of Appropriate Management Scale" based on the work of Elinor Ostrom, which triggered a lot of heated discussion.
This crowd was dominated by many policy wonks and technical statistical types (another plenary was by Enrico Giovannini, pres. of the Italian Statistical Association), with a lot of focus on how to redo national income accounts to account for happiness and sustainability, with Giovannini claiming that the "1980s social indicators movement failed" without explaining how or why. Much of what people there were discussing looks similar: laundry lists of things that should counted using all kinds of indexes, with a lot of funding for this and stated political support from UN, G-20, OECD, and EU. Bottom line may still be bottom line, however, with Finance ministers opposing. After all, suppose a member country of the EU is found to have high happiness and high sustainability, but low GDP and lousy budget balances: should it receive EU aid or provide it? Oh, and "social leisure" increases happiness, while unemployment lowers it.
This crowd was dominated by many policy wonks and technical statistical types (another plenary was by Enrico Giovannini, pres. of the Italian Statistical Association), with a lot of focus on how to redo national income accounts to account for happiness and sustainability, with Giovannini claiming that the "1980s social indicators movement failed" without explaining how or why. Much of what people there were discussing looks similar: laundry lists of things that should counted using all kinds of indexes, with a lot of funding for this and stated political support from UN, G-20, OECD, and EU. Bottom line may still be bottom line, however, with Finance ministers opposing. After all, suppose a member country of the EU is found to have high happiness and high sustainability, but low GDP and lousy budget balances: should it receive EU aid or provide it? Oh, and "social leisure" increases happiness, while unemployment lowers it.
Monday, December 7, 2009
A Rationalization for Educational Downsizing
Moskowitz, Ron. 1970. "Professor Sees Peril in Education." San Francisco Chronicle (30 October).
Governor Reagan's aide Roger Freeman, who later served as President Nixon's educational policy advisor, while he was working at the time for California Governor Ronald Reagan's reelection campaign, commented on Reagan's education policy: "We are in danger of producing an educated proletariat. That's dynamite! We have to be selective about who we allow to through higher education. If not, we will have a large number of highly trained and unemployed people."
Jedell, Hugh. 1931. "Warns Germany on Overeducation: Sees Economic Waste." New York Times (1 November): p. 56.
New York Times article from the 1930s captures the sentiment: "The steadily rising tide of engineering students in German universities, with consequent overcrowding in the engineering profession, has moved the General Federation of German, the Association of Industrial Technologists and several other organizations to issue a public warning that a sterile, educated proletariat is being produced without a chance of gainful occupation while millions are wasted on its training."
Governor Reagan's aide Roger Freeman, who later served as President Nixon's educational policy advisor, while he was working at the time for California Governor Ronald Reagan's reelection campaign, commented on Reagan's education policy: "We are in danger of producing an educated proletariat. That's dynamite! We have to be selective about who we allow to through higher education. If not, we will have a large number of highly trained and unemployed people."
Jedell, Hugh. 1931. "Warns Germany on Overeducation: Sees Economic Waste." New York Times (1 November): p. 56.
New York Times article from the 1930s captures the sentiment: "The steadily rising tide of engineering students in German universities, with consequent overcrowding in the engineering profession, has moved the General Federation of German, the Association of Industrial Technologists and several other organizations to issue a public warning that a sterile, educated proletariat is being produced without a chance of gainful occupation while millions are wasted on its training."
On That Misleading Unemployment Rate Statistics (Once Again)
The employment survey indicated the number of people working fell but then the household survey showed a lower unemployment rate. While some say this is good news, the best I think we can say is that it does not suck as much as what we saw in terms of changes in prior months.
The phenomena of a falling unemployment rate during a period when the employment survey shows a decline can be attributed to a couple of possibilities both of which were present during November. The household survey showed an increase in employment even if the employment survey indicated a decline. Some labor market economists would argue that the employment survey is a more reliable indicator of recent labor market developments. But we should also note that while the household survey suggested an absolute increase in employment, the employment to population ratio (graphed as EP) remained at a paltry 58.5 percent. So why did the reported unemployment rate decline – because the labor force participation (LFP) continued to decline. Yes – the unemployment rate has skyrocketed since 2006 but the real message is that the decline in the labor force participation rate masks the horrific decline in the percentage of the employment that is employed.
On a political note, however, this administration isn’t exactly crowing about how wonderful the labor market is (recall the previous administration often cheered whenever the reported unemployment rate showed even the slightest dip) as it is willing to admit we need to do a lot more to stimulate this economy and put people back to work.
The Attack on Carbon Caps
I am not going to beat around the bush: my side on the issue of climate change is getting hammered. At first, it looked as though there might be a real chance to set up a system of carbon permits—just for fossil fuels, no offsets, all permits auctioned, the money redistributed back to the public. This is approximately what Obama proposed when he ran for president, and back in those days, whenever I would give a talk about climate change mitigation and outline the program, nodding heads could be seen everywhere. (And not falling asleep either.)
But that was then. Once the proposals started getting hashed out in Congress, it was one disaster after another. Permits were pushed downstream, with bickering over which activities should be under the cap. They were given away rather than sold. Nearly all of them could be offset. What little permit revenue remained was dangled in front of special interests to get them to sign on. Our simple, clean efficient carbon cap was in ruins.
And now I am being clobbered by the Left. Without a question, those who denounce “carbon trading” have won the debate among activists, as illustrated by today’s New York Times op-ed from Jim Hansen, the climate science guru. A carbon cap means cap-and-trade, and this means trade, which means market ideology and financial legerdemain, says Hansen, repeating the now-dominant line. What we need, he says, is a tax, which is pure, unsullied by grubby politics, and sure to be handed back to the people the way we (me and my ilk) wanted permit revenues to be.
So what will it be? Stick with my old beliefs and watch them fade into irrelevance, or join the new activist army that opposes mandatory carbon caps?
I’ve decided to keep on fading. They say it is a sign of mental illness to continue repeating behavior that doesn’t do any good, but once again I will make the arguments that have failed to persuade in the past.
1. A comparison between a nasty, highly compromised carbon cap and a pure, hypothetical carbon tax is meaningless. Once the carbon lobby gets its hands on a tax, the picture will be just as ugly. You can bet that whole industries will be exempted from the tax. You will be able to dodge the tax by making contributions to tree-planting or some other activity across the globe (offsets). The tax revenues will go into the same special interest trough that permit revenues have trickled into. And of course the tax will be much, much too low.
2. How on earth did activists come to believe that adopting a tax approach to environmental problems instead of a mandatory permit system was “resisting the market”? Think about this for a moment. What does it mean to rigorously enforce a tax? It means that people really have to pay it; the tax can’t be evaded. How that translates into carbon reduction, however, depends on the market. Maybe the price effects of the tax will be enough to get the reduction we need, maybe not. It is a big experiment, and favoring a tax means you are willing to take the chance that price adjustments alone will not be enough to decarbonize industrial economies after centuries of increasing carbon density. A rigorously enforced cap, however, is exactly that: it guarantees that no more than that amount of carbon will be allowed to enter the marine-terrestrial-atmospheric carbon cycle. The experiment, in that case, is on the side of prices—we will find out, through trial and error, how much prices have to rise for this to happen. So which approach places more trust in markets? And which puts a priority on meeting ecological goals rather than economic ones?
3. Offsets, under either caps or taxes, vitiate the whole effort. A ton of carbon temporarily diverted from the atmosphere (and lodged in a sink like a forest) is not the same as a ton sequestered from the carbon cycle in geological time (hydrocarbons under the earth). Determining additionality (that projects wouldn’t be undertaken without the offset) is a practical and metaphysical impossibility. Incentives to deceive and cut corners are rife. Many offset projects have other, detrimental effects, like driving traditional peoples from their forest homes or creating local pollution hotspots. The cap vs tax debate, in this context, is a distraction, since either mechanism can be undermined by offset loopholes.
4. Upstream controls are simplest, fairest and most effective in forestalling catastrophic climate change. Policy should target the sources, not the uses, of carbon inputs. This means controlling the extraction of fossil fuels and, in a national context, their importation as well. There are few companies in this business, and hardly any sophisticated technology is needed for monitoring. Doing this avoids the pork barrel debate over who should or shouldn’t be covered under the system, and it offers the most comprehensive option, with the greatest impact on mitigation. Once again, the cap vs tax debate is a distraction, since either approach has to deal with how upstream or downstream the implementation will be.
5. It is essential that all revenues collected from the system be recycled back to the public. It is now clear beyond dispute that there will never be sufficient political support for effective carbon policy as long as it is believed that household budgets will pay the price. No politician has the courage to risk the electoral backlash from high energy prices, not only in the US, but also in Europe, where programs have been gamed to keep impacts minimal. There is only one way out: promise to return to the public all the money sucked in by higher energy prices, and build that promise into the architecture of the system, so it is truly credible. Hansen is right that a simple per capita distribution of the revenues captured by carbon levies would do the trick, but, one more time, this is not simply about caps vs taxes. True, taxes at least avoid the problem that carbon permits may not be auctioned (and this is in their favor), but there is nothing intrinsic to tax collection that guarantees that the money will go where Hansen and I both want it to.
6. The biggest drawback to taxes compared to caps is political, however. If we have learned anything in the last few years, it is that there is immense inertia that stands in the way of serious climate policy. This is due above all to the power of the carbon lobby, but also to the complexity of the issue and genuine nervousness on the part of the public over the potential economic effects of so sweeping a change. It is essential, then, to pay attention to how the debate is framed. I think Bill McKibben is exactly right about this: we must put the scientific evidence at the center of the argument and demand policies that meet physical targets for climate mitigation. We may lose that battle, but it’s our best chance. If we go for a tax system, however, the debate centers around how big a tax we should impose. This pushes science into the background and foregrounds economic effects. I am surprised that Hansen prefers to wage that battle; I think it’s a loser.
One minor quibble about Hansen’s article, although it illuminates the rush-to-judgment taking place among climate activists. He writes:
"Consider the perverse effect cap and trade has on altruistic actions. Say you decide to buy a small, high-efficiency car. That reduces your emissions, but not your country’s. Instead it allows somebody else to buy a bigger S.U.V. — because the total emissions are set by the cap.
"In a fee-and-dividend system, every action to reduce emissions — and to keep reducing emissions — would be rewarded. Indeed, knowing that you were saving money by buying a small car might inspire your neighbor to follow suit. Popular demand for efficient vehicles could drive gas guzzlers off the market. Such snowballing effects could speed us toward a pollution-free world."
Hansen is a very smart guy, but here he makes several elementary mistakes. (1) His definition of altruism is weird. Most of us would think that if you voluntarily take on an extra share of a collective burden, allowing others to take on less, you were being altruistic. (2) There is an implicit and irrational moralism just below the surface: driving an SUV is wrong and the people who do it are bad. But SUV’s are a problem only because of their environmental effects; if the rest of us, by cutting way back on fossil fuel use, make it possible for a few to continue to drive these dinosaurs, so what? You know, maybe there are people who really need a big, heavy vehicle for the kind of work they do or where they live. Driving a big car is not intrinsically sinful, but only if it comes at the expense of the common good. (3) So let’s redefine altruism in Hansen’s way, as curbing climate impacts even beyond the targets set by policy. This is not difficult in a system of carbon permits. Put some money into a mutual fund whose purpose is to buy permits and retire them unused. (4) If there is a demonstration effect from switching to more energy-efficient technologies, this will work under a permit system exactly as it would under a tax. In either case, energy will become more expensive, and people will be looking to save. Hansen is right that herd effects could be extremely powerful, and this is why we need some system, whether caps or taxes, to get a critical mass of new technology adopters.
None of these arguments is very complicated, and I’m sure with a little reflection Hansen would have seen them too. But there was no reflection. What we have is an ideological stampede, with powerful framing and peer effects. Rational discussion has been overwhelmed, and within a few months we have seen virtually the entire activist climate community converting to a new party line: the solution is to abandon “carbon trading” and pledge allegiance to a carbon tax.
Everywhere I go I hear echoes of this line. Nothing I say makes any difference, because the debate is already over. My activist friends smile at me tolerantly, knowing that they don’t have to come up with answers because everything I say is irrelevant.
So here I am, wallowing in my dysfunctionality, making the same arguments that have failed to convince time after time. Can you think of a Plan B?
But that was then. Once the proposals started getting hashed out in Congress, it was one disaster after another. Permits were pushed downstream, with bickering over which activities should be under the cap. They were given away rather than sold. Nearly all of them could be offset. What little permit revenue remained was dangled in front of special interests to get them to sign on. Our simple, clean efficient carbon cap was in ruins.
And now I am being clobbered by the Left. Without a question, those who denounce “carbon trading” have won the debate among activists, as illustrated by today’s New York Times op-ed from Jim Hansen, the climate science guru. A carbon cap means cap-and-trade, and this means trade, which means market ideology and financial legerdemain, says Hansen, repeating the now-dominant line. What we need, he says, is a tax, which is pure, unsullied by grubby politics, and sure to be handed back to the people the way we (me and my ilk) wanted permit revenues to be.
So what will it be? Stick with my old beliefs and watch them fade into irrelevance, or join the new activist army that opposes mandatory carbon caps?
I’ve decided to keep on fading. They say it is a sign of mental illness to continue repeating behavior that doesn’t do any good, but once again I will make the arguments that have failed to persuade in the past.
1. A comparison between a nasty, highly compromised carbon cap and a pure, hypothetical carbon tax is meaningless. Once the carbon lobby gets its hands on a tax, the picture will be just as ugly. You can bet that whole industries will be exempted from the tax. You will be able to dodge the tax by making contributions to tree-planting or some other activity across the globe (offsets). The tax revenues will go into the same special interest trough that permit revenues have trickled into. And of course the tax will be much, much too low.
2. How on earth did activists come to believe that adopting a tax approach to environmental problems instead of a mandatory permit system was “resisting the market”? Think about this for a moment. What does it mean to rigorously enforce a tax? It means that people really have to pay it; the tax can’t be evaded. How that translates into carbon reduction, however, depends on the market. Maybe the price effects of the tax will be enough to get the reduction we need, maybe not. It is a big experiment, and favoring a tax means you are willing to take the chance that price adjustments alone will not be enough to decarbonize industrial economies after centuries of increasing carbon density. A rigorously enforced cap, however, is exactly that: it guarantees that no more than that amount of carbon will be allowed to enter the marine-terrestrial-atmospheric carbon cycle. The experiment, in that case, is on the side of prices—we will find out, through trial and error, how much prices have to rise for this to happen. So which approach places more trust in markets? And which puts a priority on meeting ecological goals rather than economic ones?
3. Offsets, under either caps or taxes, vitiate the whole effort. A ton of carbon temporarily diverted from the atmosphere (and lodged in a sink like a forest) is not the same as a ton sequestered from the carbon cycle in geological time (hydrocarbons under the earth). Determining additionality (that projects wouldn’t be undertaken without the offset) is a practical and metaphysical impossibility. Incentives to deceive and cut corners are rife. Many offset projects have other, detrimental effects, like driving traditional peoples from their forest homes or creating local pollution hotspots. The cap vs tax debate, in this context, is a distraction, since either mechanism can be undermined by offset loopholes.
4. Upstream controls are simplest, fairest and most effective in forestalling catastrophic climate change. Policy should target the sources, not the uses, of carbon inputs. This means controlling the extraction of fossil fuels and, in a national context, their importation as well. There are few companies in this business, and hardly any sophisticated technology is needed for monitoring. Doing this avoids the pork barrel debate over who should or shouldn’t be covered under the system, and it offers the most comprehensive option, with the greatest impact on mitigation. Once again, the cap vs tax debate is a distraction, since either approach has to deal with how upstream or downstream the implementation will be.
5. It is essential that all revenues collected from the system be recycled back to the public. It is now clear beyond dispute that there will never be sufficient political support for effective carbon policy as long as it is believed that household budgets will pay the price. No politician has the courage to risk the electoral backlash from high energy prices, not only in the US, but also in Europe, where programs have been gamed to keep impacts minimal. There is only one way out: promise to return to the public all the money sucked in by higher energy prices, and build that promise into the architecture of the system, so it is truly credible. Hansen is right that a simple per capita distribution of the revenues captured by carbon levies would do the trick, but, one more time, this is not simply about caps vs taxes. True, taxes at least avoid the problem that carbon permits may not be auctioned (and this is in their favor), but there is nothing intrinsic to tax collection that guarantees that the money will go where Hansen and I both want it to.
6. The biggest drawback to taxes compared to caps is political, however. If we have learned anything in the last few years, it is that there is immense inertia that stands in the way of serious climate policy. This is due above all to the power of the carbon lobby, but also to the complexity of the issue and genuine nervousness on the part of the public over the potential economic effects of so sweeping a change. It is essential, then, to pay attention to how the debate is framed. I think Bill McKibben is exactly right about this: we must put the scientific evidence at the center of the argument and demand policies that meet physical targets for climate mitigation. We may lose that battle, but it’s our best chance. If we go for a tax system, however, the debate centers around how big a tax we should impose. This pushes science into the background and foregrounds economic effects. I am surprised that Hansen prefers to wage that battle; I think it’s a loser.
One minor quibble about Hansen’s article, although it illuminates the rush-to-judgment taking place among climate activists. He writes:
"Consider the perverse effect cap and trade has on altruistic actions. Say you decide to buy a small, high-efficiency car. That reduces your emissions, but not your country’s. Instead it allows somebody else to buy a bigger S.U.V. — because the total emissions are set by the cap.
"In a fee-and-dividend system, every action to reduce emissions — and to keep reducing emissions — would be rewarded. Indeed, knowing that you were saving money by buying a small car might inspire your neighbor to follow suit. Popular demand for efficient vehicles could drive gas guzzlers off the market. Such snowballing effects could speed us toward a pollution-free world."
Hansen is a very smart guy, but here he makes several elementary mistakes. (1) His definition of altruism is weird. Most of us would think that if you voluntarily take on an extra share of a collective burden, allowing others to take on less, you were being altruistic. (2) There is an implicit and irrational moralism just below the surface: driving an SUV is wrong and the people who do it are bad. But SUV’s are a problem only because of their environmental effects; if the rest of us, by cutting way back on fossil fuel use, make it possible for a few to continue to drive these dinosaurs, so what? You know, maybe there are people who really need a big, heavy vehicle for the kind of work they do or where they live. Driving a big car is not intrinsically sinful, but only if it comes at the expense of the common good. (3) So let’s redefine altruism in Hansen’s way, as curbing climate impacts even beyond the targets set by policy. This is not difficult in a system of carbon permits. Put some money into a mutual fund whose purpose is to buy permits and retire them unused. (4) If there is a demonstration effect from switching to more energy-efficient technologies, this will work under a permit system exactly as it would under a tax. In either case, energy will become more expensive, and people will be looking to save. Hansen is right that herd effects could be extremely powerful, and this is why we need some system, whether caps or taxes, to get a critical mass of new technology adopters.
None of these arguments is very complicated, and I’m sure with a little reflection Hansen would have seen them too. But there was no reflection. What we have is an ideological stampede, with powerful framing and peer effects. Rational discussion has been overwhelmed, and within a few months we have seen virtually the entire activist climate community converting to a new party line: the solution is to abandon “carbon trading” and pledge allegiance to a carbon tax.
Everywhere I go I hear echoes of this line. Nothing I say makes any difference, because the debate is already over. My activist friends smile at me tolerantly, knowing that they don’t have to come up with answers because everything I say is irrelevant.
So here I am, wallowing in my dysfunctionality, making the same arguments that have failed to convince time after time. Can you think of a Plan B?
Lump Dumped
The 19th edition of Paul Samuelson's textbook, Economics has dropped the lump-of-labor fallacy.
Choosing the subjects for this text required many hard choices. To select these topics, we continually survey teachers and leading scholars to determine the issues most crucial for an informed citizenry and a new generation of economists. We drew up a list of key ideas and bid farewell to material we judged inessential or dated. At every stage, we asked whether the material was, as best we could judge, necessary for a student's understanding of the economics of the twenty-first century. Only when a subject passed this test was it included. The result of this campaign is a book that has lost more than one-quarter of its weight in the last few editions and has trimmed three chapters for this edition. Farm economics, the history of labor unions, Marxian economics, advanced treatment of general equilibrium, regulatory developments, and the lump-of-labor fallacy have been trimmed to make room for modern financial theory, real business cycles, and global public goods.
Pirate Finance
So it turns out that the Somali pirate industry has developed its own financial sector, improving the allocation of resources and pooling risk. It is possible for a wider cross-section of Somali society to share in the gains-from-seizure enjoyed by this industry, while successful buccapreneurs are rewarded with more access to capital.
The story is told in this piece from the Financial Post. It points out that pirate activity takes place in a region that is effectively autonomous, politically and economically; in fact, there is no other way to make a living in the pirate zone except to hold boats for ransom, especially with the loss of traditional fishing grounds. This means that piracy has had to absorb a broader demographic than just 20 year-old male desperados.
Pirate enterprises are listed on the local stock exchange, and shares trade among investors of modest means. The article doesn’t go into the analytical side of share prices, unfortunately. 72 pirate enterprises are listed, most of them start-ups. (Just as competitive incentives can lead to over-fishing, they can lead to over-piracy.)
The article concludes on this heart-warming note:
The story is told in this piece from the Financial Post. It points out that pirate activity takes place in a region that is effectively autonomous, politically and economically; in fact, there is no other way to make a living in the pirate zone except to hold boats for ransom, especially with the loss of traditional fishing grounds. This means that piracy has had to absorb a broader demographic than just 20 year-old male desperados.
Pirate enterprises are listed on the local stock exchange, and shares trade among investors of modest means. The article doesn’t go into the analytical side of share prices, unfortunately. 72 pirate enterprises are listed, most of them start-ups. (Just as competitive incentives can lead to over-fishing, they can lead to over-piracy.)
The article concludes on this heart-warming note:
Piracy investor Sahra Ibrahim, a 22-year-old divorcee, was lined up with others waiting for her cut of a ransom pay-out after one of the gangs freed a Spanish tuna fishing vessel.
"I am waiting for my share after I contributed a rocket-propelled grenade for the operation," she said, adding that she got the weapon from her ex-husband in alimony.
"I am really happy and lucky. I have made $75,000 in only 38 days since I joined the 'company'."
Newsflash: AFL-CIO Calls for 35-hour Workweek
SHORTER WORKDAY — SHORTER WORKWEEK
RESOLUTION NO. 160
The time has come for wide-scale reduction in hours of work so that more people may be employed.
Even after recovery of production levels from the 1958 recession, there is persistent unemployment of 5 percent or more of the labor force. It shows no sign of receding from this intolerably high level. And a carrying forward of past trends indicates so-called normal unemployment will mount steadily until major steps are taken specifically to correct it.
Advancing technology is reducing the need for industrial manpower. More goods and services can be provided with fewer workers. From 1953 to mid-1959, total manufacturing output increased by 16 percent, but the number of production and maintenance workers was reduced by 10 percent.
Moreover, technological change and the accompanying increasing productivity are gaining momentum with the stepups in industrial research, uses of automation and new types of more efficient equipment, industrial applications of atomic energy, raw materials improvement, and other scientific advances.
Unless some of the benefits of the accelerating rate of technical advance are taken in the form of shortening of time at work, rather than in reduction of number of employees, unemployment will mount steadily. The technological progress is making shorter hours not only possible but essential.
In the past, progress reductions in standard worktime to the 10-hour day, the 6-day week, the 8-hour day and the 5-day week were each sharply resisted by industrial leaders as unthinkable changes which would prove disastrous for the moral fiber of workers and the economic and social well-being of the Nation.
Today, with few exceptions, there is a more realistic attitude, a general recognition that the present 8-hour day and 40-hour week are standards which should and will be reduced as part of general national progress. The only questions are: When? To what new standards?
We believe the appropriate and necessary time to start is now. The current combination of relatively high-level economic activity plus a great slack in the labor force presents the economic situation in which we can introduce, absorb, and immediately benefit from a general shortening of work hours.
Shorter hours are effective in staving off unemployment only if they are put into effect before unemployment pressures mount uncontrollably. If we delay we may get shorter hours, not as a constructive preventive measure but in an undesirable work-sharing, cut-wage form forced on us as a product of overwhelming unemployment. The soundest time to proceed is immediately, to meet the clear and present danger while we still have the flexibility afforded by a period of comparatively healthy economic activity.
Some may argue that a reduction in hours may not be the most efficient way to combat unemployment. Whether or not it is the plain fact is that other ways which may theoretically be more efficient are not doing the job.
We do not contend that shorter hours alone are the cure-all for all employment problems. We will continue to press with all the vigor at our command for the other public and private economic actions needed to generate sufficient steady economic expansion and growth in employment opportunities to maintain full employment.
But without a reduction in hours as a key element in an anti-unemployment program, the other measures we can realistically expect to be taken are not adequate to the task of controlling unemployment in an economy with as high a rate of technological advance as ours.
Shorter hours are of course extremely valuable for non-economic reasons as well. Socially and morally it is desirable that part of our progress be taken in reduction of the hours each worker is required to labor. A shorter workweek would enable greater opportunity and incentive for broadened social and cultural pursuits and development of bettered family life.
For many of the Nation's workers, increasing travel time to and from work as a result of congestion of cities and dispersal of industry has eaten into off-work time. Shorter hours of work would remedy such loss of personal time.
American labor is not wedded to any fixed form of hours reduction. Different affiliated unions may concentrate on different variations, either reductions in hours per day, days per week, per year, or per working life.
Additional paid vacations and holidays should continue to be negotiated but unless the amount of such paid time off now common is expanded, such improvements would provide only a very slight reduction in average hours worked per week over the year.
The more substantial reductions in hours needed are most readily available through reductions in the standard workweek. Such reductions are being sought and have already been achieved in bargaining by a growing number of unions. Experience accumulated with standard workweeks shorter than 40 hours have well demonstrated the practicability and desirability of shorter workweek schedules.
Collective bargaining alone, however, will not achieve adequate hours reductions as rapidly and widely as needed by the economy, for it is proceeding on an industry-by-industry and company-by-company basis.
Legislative action is required to meet the overall problem. Legislative action can provide hours reduction on the wide scale needed to achieve maximum beneficial results.
The existing 40-hour workweek standard of the Fair Labor Standards Act, first established 20 years ago, should be amended to provide for a standard 7-hour day, 35-hour week.
Even apart from the immediate need to counteract growing unemployment, this is a step required for reasonable forward progress. The changes in our economy in the past 20 years, the upturn in industrial technical advance, and the growth of the labor force combine to enable us both to establish a 35-hour standard workweek and to produce all the goods and services our Nation consumes.
The value of hours reduction is not an isolated phenomenon restricted to the United States. Workers in other lands will also gain from reductions in time they must spend at work.
The adoption of a strong international instrument in the form of a convention on hours standards will be before the International Labor Organization at its next annual conference. Most foreign workers still work longer hours than customary in the United States, but we are happy that wide progress is being made in hours reduction. As in the United States, the movement to shorter hours in other parts of the world is well warranted by the needs of workers and by advancing mechanization and technology: Now, therefore, be it
Resolved, That shorter hours of work must be attained as a vital means of maintaining Jobs, promoting the consumption of goods and converting technical progress into desirable increased employment rather than Into increased unemployment. Our economy should and can support concurrently both shorter hours and production of additional goods and services.
We call upon Congress to take as rapidly as possible the steps needed to amend the Fair Labor Standards Act to provide for a 7-hour day and a 35-hour week.
The AFL-CIO also urges its affiliated unions to press in collective bargaining for reduction in hours of work with no reduction in take-home pay.
We urge the International Labor Organization to adopt an international convention to aid in the needed spreading of improvement in hours standards around the world.
Saturday, December 5, 2009
Community Jobs Forum
Thank you so much for signing up to hold a community jobs forum in your area. Just like the Jobs and Economic Growth Forum hosted by the President at the White House, these events are opportunities to gather ideas for continuing to grow the economy and putting Americans back to work. Hearing from working Americans and communities across the country means understanding what’s really happening on the ground, what’s working, and what’s not.From what you have heard about the President’s Jobs Forum, what seems relevant to your community?:
That the whole affair seems glib, perfunctory, amateurish and superficial (if that's not too redundant). Fifty years ago, the Senate Special Committee on Unemployment Problems, chaired by Senator Eugene McCarthy, held hearings in 25 communities in addition to Washington D.C. over the course of four months
What parts of your local economy are working or thriving? What businesses and sectors are expanding and hiring?:
Well the bankers are doing just fine. And the military-industrial complex. The insurance industry and the big pharmaceuticals manufacturers. Not to mention the unofficial drug dealers. Oh yes, and the stock market is up, up, up.
What parts of your local economy are not working or thriving? What businesses and sectors have been hit the hardest? What are people struggling with the most?:
Youth, who have an unemployment rate of 18% and a U6 underemployment rate of around 30%.
What are the opportunities for growth in your community? What businesses and sectors seem poised to rebound? What do you see as the "jobs of the future"?:
Toxic waste removal. Cancer treatment. Greenhouse gas emissions. Species extinctions. With the polar ice caps melting there will no doubt be jobs in the future for people to build and operate dikes and drainage pumps around coastal cities. Swimming instructors?
What are the obstacles to job creation in your community? What could make local businesses more likely to start hiring?:
Stupidity. Leon Keyserling's NSC-68 brainchild. Supply-side voodoo economics. Larry Summers. More of the same.
What other issues and ideas should the President consider?:
Read this: Submission to the White House Task Force on Middle Class Working Families.
Describe your event:
A blog post.
PS: Your answers to the above questions are welcome in the comments. I will summarize the suggestions and submit them to the White House site.
Kurzarbeit or Trojan Horse?
Jacob Funk Kirkegaard for the Peterson Institute for International Economics raises an interesting objection to emulating European Kurzarbeit programs. Considering the Peter G. Peterson connection, Kirkegaard's recommended short term remedy might set off a few alarm bells among the "don't touch Social Security, it's not broken" crowd (but see also Bartik and Bishop at the EPI):
What conclusions should the Obama administration draw from Europe’s success with work-sharing measures?
With the US unemployment rate at 10.2 percent, it may be too late to expand "work sharing programs" from the current 17 state-level programs. Government-supported "work sharing programs" similar to those in core Europe work to preserve existing employment rather than to create new jobs. Hence such programs disproportionately benefit skilled workers, whom companies will prefer to "hoard," as they are more likely to find employment elsewhere if laid off. This type of insider-outsider dynamic has been very prevalent in Europe during the crisis, where increases in unemployment despite work sharing programs have been heavily concentrated among people on temporary work contracts. Additional protection for "insiders" is clearly not what the US labor market needs at the moment.
Instead, in the short term, Congress should implement a temporary holiday for Social Security and Medicare payroll taxes for new hires. This could provide an urgently needed, powerful broad-based and immediately implementable job creation stimulus for the US labor market.
Friday, December 4, 2009
Growthmanship: The Rock and the Hard Place
President Obama:
As Eugene McCarthy and Bill McGaughey pointed out in their 1989 book, Nonfinancial Economics: The Case for Shorter Hours of Work,
Given the 'choice' between the guns-and-butter swindle of Keyserling and NSC-68 and the Reagonomics supply-side swindle, I'd opt for none of the above. There IS an alternative. But it requires valuing people more over money and time over tax revenues. So it won't happen. Or it will only happen over the dead bodies of most economists. "In any highly developed discipline," McCarthy and McGaughey wrote,
Now, if we can't grow our economy, then it is going to be that much harder for us to reduce the deficit. The single most important thing we could do right now for deficit reduction is to spark strong economic growth, which means that people who've got jobs are paying taxes and businesses that are making profits have taxes -- are paying taxes. That's the most important thing we can do.Yes, what Obama says is correct, as far as it goes. Let us not forget, though, that the "9-point-something trillion- dollar" debt (not "deficit") got racked up on the premise that this year's deficit would stimulate sufficient economic growth to enable "siphoning off" enough of the growth dividend in tax revenues to repay the deficit. The siphoning off phrase comes from NSC-68. We're living in the perpetual growth Utopia conceived by Leon Keyserling: debt requires growth, growth requires deficits, deficits accumulate debt, debt requires growth... The only thing "siphoned off" in this vicious circle is the option of taking a portion of productivity gains as increased leisure.
As Eugene McCarthy and Bill McGaughey pointed out in their 1989 book, Nonfinancial Economics: The Case for Shorter Hours of Work,
"The main reason that leisure is in disrepute among Treasury Department officials is that they can't tax it. A proposal such as the shorter workweek, which would redistribute the burden of work and its income more evenly, would reduce the tax collector's take from a given volume of economic activity. Therefore it cannot be."Few people recall that the "voodoo" of supply-side economics was supposed to be that it would induce (or compel?) people to WORK MORE HOURS. This was clearly stated by Paul Craig Roberts, Reagan's Assistant Secretary of the Treasury for economic policy in a Wall Street Journal oped published on March 19, 1981.
"For the supply-side policy to work, taxpayers don't have to respond to lower marginal tax rates by giving up vacations, going on a double shift and saving all their income. When you have a work force of more than 100 million people, small individual responses result in a large aggregate effect. If the average number of hours worked per week rises from 35 to 35.5, GNP rises by $24 billion."Well, folks, supply-side economics "worked" in the sense that it ratcheted up the working hours. It didn't work in the sense of generating a revenue dividend large enough to pay for the lower marginal rates. Oh, well. C'est la vie, eh?
Given the 'choice' between the guns-and-butter swindle of Keyserling and NSC-68 and the Reagonomics supply-side swindle, I'd opt for none of the above. There IS an alternative. But it requires valuing people more over money and time over tax revenues. So it won't happen. Or it will only happen over the dead bodies of most economists. "In any highly developed discipline," McCarthy and McGaughey wrote,
"there is a tendency to become so specialized and refined that its respected practitioners appear to lose common sense. If medieval philosophers counted the number of angels that could dance on the head of a pin, some contemporary economists deal in equally strange and fictitious concepts. To many of them, it would seem, money is reality, while leisure is an empty spot in time devoid of wealth-producing activities. Although U.S. economists in the postwar period have paid much attention to the techniques of financial manipulation by which governments might keep the economy on a prosperous course, they have paid far too little attention to the way people actually work and live. That approach has produced its own set of problems, more than a few of which appear now to be coming home to roost."
LONG-TERM PROBLEM OF FULL EMPLOYMENT: the third phase
"As the third phase comes into sight; the problem stressed by Sir H. Henderson begins to be pressing. It becomes necessary to encourage wise consumption and discourage saving,-and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours."
THE LONG-TERM PROBLEM OF FULL EMPLOYMENT
J.M. Keynes (May 1943):
1. It seems to be agreed today that the maintenance of a satisfactory level of employment depends on keeping total expenditure (consumption plus investment) at the optimum figure, namely that which generates a volume of incomes corresponding to what is earned by all sections of the community when employment is at the desired level.
2. At any given level and distribution of incomes the social habits and opportunities of the community, influenced (as it may be) by the form and weight of taxation and other deliberate policies and propaganda, lead them to spend a certain proportion of these incomes and to save the balance.
3. The problem of maintaining full employment is, therefore, the problem of ensuring that the scale of investment should be equal to the savings which may be expected to emerge under the above various influences when employment, and therefore incomes, are at the desired level. Let us call this the indicated level of savings.
4. After the war there are likely to ensure [sic] three phases-
(i) when the inducement to invest is likely to lead, if unchecked, to a volume of investment greater than the indicated level of savings in the absence of rationing and other controls;
(ii) when the urgently necessary investment is no longer greater than the indicated level of savings in conditions of freedom, but it still capable of being adjusted to the indicated level by deliberately encouraging or expediting less urgent, but nevertheless useful, investment;
(iii) when investment demand is so far saturated that it cannot be brought up to the indicated level of savings without embarking upon wasteful and unnecessary enterprises.
5. It is impossible to predict with any pretence to accuracy what the indicated level of savings after the war is likely to be in the absence of rationing. We have no experience of a community such as ours in the conditions assumed, with incomes and employment steadily at or near the optimum level over a period and with the distribution of incomes such as it is likely to be after the war. It is, however, safe to say that in the earliest years investment urgently necessary will be in excess of the indicated level of savings. To be a little more precise the former (at the present level of prices) is likely to exceed £m1000 in these years and the indicated level of savings to fall short of this.
6. In the first phase, therefore, equilibrium will have to be brought about by limiting on the one hand the volume of investment by suitable controls, and on the other hand the volume of consumption by rationing and the like. Otherwise a tendency to inflation will set in. It will probably be desirable to allow consumption priority over investment except to the extent that the latter is exceptionally urgent, and, therefore, to ease off rationing and other restrictions on consumption before easing off controls and licences for investment. It will be a ticklish business to maintain the two sets of controls at precisely the right tension and will require a sensitive touch and the method of trial and error operating through small changes.
7. Perhaps this first phase might last five years,-but it is anybody's guess. Sooner or later it should be possible to abandon both types of control entirely (apart from controls on foreign lending). We then enter the second phase, which is the main point of emphasis in the paper of the Economic Section. If two-thirds or three-quarters of total investment is carried out or can be influenced by public or semi-public bodies, a long-term programme of a stable character should be capable of reducing the potential range of fluctuation to much narrower limits than formerly, when a smaller volume of investment was under public control and when even this part tended to follow, rather than correct, fluctuations of investment in the strictly private sector of the economy. Moreover the proportion of investment represented by the balance of trade, which is not easily brought under short-term control, may be smaller than before. The main task should be to prevent large fluctuations by a stable long-term programme. If this is successful it should not be too difficult to offset small fluctuations by expediting or retarding some items in this long-term programme.
8. I do not believe that it is useful to try to predict the scale of this long-term programme. It will depend on the social habits and propensities of a community with a distribution of taxed income significantly different from any of which we have experience, on the nature of the tax system and on the practices and conventions of business. But perhaps one can say that it is unlikely to be less than 7 per cent or more than 20 per cent of the net national income, except under new influences, deliberate or accidental, which are not yet in sight.
9. It is still more difficult to predict the length of the second, than of the first, phase. But one might expect it to last another five or ten years and to pass insensibly into the third phase.
10. As the third phase comes into sight; the problem stressed by Sir H. Henderson begins to be pressing. It becomes necessary to encourage wise consumption and discourage saving,-and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours.
11. Various means will be open to us with the onset of this golden age. The object will be slowly to change social practices and habits so as to reduce the indicated level of saving. Eventually depreciation funds should be almost sufficient to provide all the gross investment that is required.
12. Emphasis should be placed primarily on measures to maintain a steady level of employment and thus to prevent fluctuations. If a large fluctuation is allowed to occur, it will be difficult to find adequate offsetting measures of sufficiently quick action. This can only be done through flexible methods by means of trial and error on the basis of experience, which has still to be gained. If the authorities know quite clearly what they are trying to do and are given sufficient powers, reasonable success in the performance of the task should not be too difficult.
13. I doubt if much is to be hoped from proposals to offset unforeseen short-period fluctuations in investment by stimulating short-period changes in consumption. But I see very great attractions and practical advantage in Mr Meade's proposal for varying social security contributions according to the state of employment.
14. The second and third phases are still academic. Is it necessary at the present time for Ministers to go beyond the first phase in preparing administrative measures? The main problems of the first phase appear to be covered by various memoranda already in course of preparation. insofar as it is useful to look ahead, I agree with Sir H. Henderson that we should be aiming at a steady long-period trend towards a reduction in the scale of net investment and an increase in the scale of consumption (or, alternatively, of leisure) but the saturation of investment is far from being in sight to-day The immediate task is the establishment and the adjustment of a double system of control and of sensitive, flexible means for gradually relaxing these controls in the light of day-by-day experience
I would conclude by two quotations from Sir H. Henderson's paper, which seem to me to embody much wisdom.
"Opponents of Socialism are on strong ground when they argue that the State would be unlikely in practice to run complicated industries more efficiency than they are run at present. Socialists are on strong ground when they argue that reliance on supply and demand, and the forces of market competition, as the mainspring of our economic system, produces most unsatisfactory results. Might we not conceivably find a modus vivendi for the next decade or so in an arrangement under which the State would fill the vacant post of entrepreneur-in-chief, while not interfering with the ownership or management of particular businesses, or rather only doing so on the merits of the case and not at the behests of dogma?
"We are more likely to succeed in maintaining employment if we do not make this our sole, or even our first, aim. Perhaps employment, like happiness, will come most readily when it is not sought for its own sake. The real problem is to use our productive powers to secure the greatest human welfare. Let us start then with the human welfare, and consider what is most needed to increase it. The needs will change from tune to time, they may shift, for example, from capital goods to consumers' goods and to services. Let us think in terms of organising and directing our productive resources, so as to meet these changing needs, and we shall be less likely to waste them."
Thursday, December 3, 2009
Why I am a Sadist
Come along, my friend, come alongGet aboard and ride this train
Nothing on this train to lose
Everything to gain
One lesson I have learned over the past 15 years is that those with "nothing to lose and everything to gain" are the last people in the world who will board this train. In 1967 or 68 I saw the film of the Peter Weiss play, Marat/Sade. A while later I found that a nearby library had an LP recording of the performance and I listened to it over and over, taking to heart the Marquis de Sade's speech to Marat as Charlotte Corday was trying to gain entry to his apartment:
SADE: that's how it is Marat
That's how they see your Revolution
They have toothache
and need their teeth pulled
Their soup's burnt
They shout for better soup
A woman finds her husband too short she wants a taller one
A man's shoes pinch
he sees his neighbor's shoes fit comfortably
A poet runs out of poetry
and desperately gropes for new concepts
For hours an angler casts his line
Why aren't the fish biting
And so they join the revolution
thinking the revolution will give them everything
a fish
a new pair of shoes
a poem
a new husband
a new wife
So they storm all the citadels
and there they are
and everything is just the same
the soup burnt
verses botched
a worn and stinking partner in bed
and all that heroism
which drove us down to the sewers
well we can talk about it to our grandchildrem
if we have any grandchildren
More Dean
On The Arena at POLITICO:
"In November, voters are going to be thinking about jobs. If the unemployment rate is over 10.0 percent, as is widely projected, there is little doubt that they will blame the Democrats. This means that he must start generating jobs quickly. Fortunately, we know how to do this. If the United States were to go the route of work sharing, using flexible employment credits to provide an incentive to employers to reduce work hours while leaving pay unchanged, then we can quickly get back to more levels of employment.
"The basic logic is very simple. If everyone works 5 percent fewer hours, then we need 5 percent more workers. That would translate into 7 million additional jobs in an economy with 140 million workers. We don't have to speculate as to whether this policy can work. We already know that it can. Germany has suffered a sharper drop in output than the United States, yet its unemployment rate is 7.6 percent, the same as it was before the downturn. In the United States we are experiencing the recession with 15 million people unemployed, in Germany they are experiencing the recession in the form of shorter workweeks and longer vacations.
"President Obama can also do something to make the (honest) deficit hawks happy. He can impose a tax on financial speculation. The sort of short-term trading that helped get us into these mess. A modest tax on this speculation can easily raise more than $1 trillion over the next decade, while helping to make the financial markets more stable.
"Resetting towards an agenda that creates jobs quickly and kicks Wall Street speculators in the face will make President Obama and the Democrats very popular next November."
"In November, voters are going to be thinking about jobs. If the unemployment rate is over 10.0 percent, as is widely projected, there is little doubt that they will blame the Democrats. This means that he must start generating jobs quickly. Fortunately, we know how to do this. If the United States were to go the route of work sharing, using flexible employment credits to provide an incentive to employers to reduce work hours while leaving pay unchanged, then we can quickly get back to more levels of employment.
"The basic logic is very simple. If everyone works 5 percent fewer hours, then we need 5 percent more workers. That would translate into 7 million additional jobs in an economy with 140 million workers. We don't have to speculate as to whether this policy can work. We already know that it can. Germany has suffered a sharper drop in output than the United States, yet its unemployment rate is 7.6 percent, the same as it was before the downturn. In the United States we are experiencing the recession with 15 million people unemployed, in Germany they are experiencing the recession in the form of shorter workweeks and longer vacations.
"President Obama can also do something to make the (honest) deficit hawks happy. He can impose a tax on financial speculation. The sort of short-term trading that helped get us into these mess. A modest tax on this speculation can easily raise more than $1 trillion over the next decade, while helping to make the financial markets more stable.
"Resetting towards an agenda that creates jobs quickly and kicks Wall Street speculators in the face will make President Obama and the Democrats very popular next November."
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