Bernanke’s Saving’s Glut Hypothesis - Contradiction Number Two.

[Continued from ‘Bernanke’s Saving’s Glut Hypothesis. Contradiction Number One']

In his March 2005 musings [1] on the reasons for a so-called global savings glut Ben Bernanke asserted that the US current account deficit was, by definition, “the excess of U.S. payments to foreigners over payments received in a given period.”

Thus the entire official meaning of ‘current account deficit’ hinges on the US Federal Reserve’s definition of what a ‘foreigner’ is. And what is a ‘foreigner’? Today most world ‘trade’ is dominated by giant transnational corporations (TNCs) who exchange goods, services and money within themselves and/or network with other TNCs. [2] The vast majority of these giant conglomerates are of US in origin. What that effectively means is that the US controls most global ‘trade’[3].

“According to the Forbes Magazine’s ranking of 2007, the first five largest corporations of all times are not industrial but financial institutions.”

It is no coincidence that four out of five of these were from the US. [4]


A single US corporation, Walmart is China's fifth-largest export market, ahead of Germany and Britain [5] and “Wal-Mart is responsible for approximately 10 percent of the United States' trade deficit with China.” [6], [7]

In fact, a new international system has emerged since the 2nd world war. It is unipolar and hierarchical. It is empire. "The United States has become the global 'world state' or 'world power' to which there is no challenger. There are now "extremely high levels of economic and financial integration" that "motivate cooperation especially in trade….[The US] "sets its own legal and moral standards admitting to no external sources of authority." [8], [9]

There is incontrovertible evidence that the US has come to its own unique definition of what is ‘foreign’ in its trading accounts with the rest of the world. As explained above, US companies dominate world commercial exchanges and transact with each other across national boundaries. Much of this trade is unrecorded in that the money transactions that do occur are often understated. The strong trend is for these large firms’ accounting statistics to be designed to actually ‘create’ losses in order to avoid taxation.[10]

The establishment of a myriad of shell companies using offshore tax havens often makes it impossible to trace or measure the proceeds of international transactions. Further, up until early in 2008 the US Treasury’s definition of the words ‘foreign and ‘domestic’ was based on where the commercial entity was "created or organised". In May 2008 the definition of 'domestic' was changed. The purpose of this move was to exclude from 'domestic' those entities 'created or organised' outside of the US and who also had 'substantial foreign ownership'. [11] But the dubious definition of 'foreign' remained.

So where are we headed with this creeping loss of meaning. Despite a reigning US President now wearing Democrat robes ‘preferred nomenclature’ remains the order of the day. In Reagan’s time, just as it is at present, nations that are to be rolled back have governments that are called ‘terrorist’. Countries that are to be supported against unwanted insurgencies are still called ‘democratic’. But in things financial we now have a cleverer and more constant application of propaganda. We can see that money and goods that never change hands is now considered ‘trade’.

"Let us begin by committing ourselves to the truth, to see it like it is and to tell it like it is, to find the truth, to speak the truth and live with the truth."

Richard Nixon's nomination acceptance speech, Miami, August 8th 1968

[1] The Global Saving Glut and the U.S. Current Account Deficit
http://www.federalreserve.gov/boarddocs/speeches/2005/200503102/

[2] It's NOT international trade. Don't be fooled.
Brenda Rosser. Thursday 24th July 2008
http://econospeak.blogspot.com/2008/07/its-not-international-trade-dont-be.html

[3] The term ‘trade’ itself is open to question when a vast quantity of exchanges happen within the same global corporation or network of such companies.

[4] These corporations are: Citigroup, Bank of America, JP Morgan Chase, American International Group. HSBC Holdings is the other, a U.K. bank with approximate assets of $ 1.6 trillion.
From: ‘Finance-Military Complex’
http://democracyandsocialism.com/Articles/FinanceMilitaryComplex.html

[5] The Economic Crisis: A Wal-Mart Economy Dimension. Michael Perelman. Econospeak 18th October 2008

[6] Wal-Mart's 'China Price' By Joshua Holland, AlterNet. Posted November 7, 2005.
http://www.alternet.org/workplace/27829

[7] A board member of the Reserve Bank of Australia - Roger Corbett - is a Member of the Board of Directors of Wal-Mart Stores, Inc as well as Fairfax Media Limited (one of Australia's oligopoly media empires). He is also Deputy Chairman, Non-Executive Director of PrimeAg, a corporation established in December 2007 and that has set its sights on a massive land and water grab in Australia using a lot of investor money from overseas.

[8] 'Towards a Hierarchical International System? THIS Network.Department of Political Science and International Relations, University of Tampere, Finland. Working Papers 1/2005

[9] The trillion-dollar TARP bailout of large US financial corporations in 2008 displayed the readiness of America to abandon the austerity programs and principles it imposed on other countries (nations suffering from large current accounts, trading deficits and insolvent trading institutions just like America) when it suited.

[10] See the large number of online discussions relating to the practice of ‘transfer pricing’ in exchanges within and between TNCs.

[11] CFIUS Review of Foreign Investment: U.S. Treasury Department Proposes New Regulations to Govern National Security Review of Foreign Investment in the United States
Sullivan & Cromwell LLP - May 8, 2008
http://www.sullcrom.com/publications/detail.aspx?pub=444

After Copenhagen

Copenhagen was a disaster, but it was a disaster foretold, the cul-de-sac for a strategy that was flawed from its inception. The only question now is whether climate activists and political leaders will sink another year or two of our precious time into repeating the errors of the past, or whether we can all make a clean break.

There are more flaws with the Kyoto-Copenhagen agenda than I can enumerate, but here are the big ones:

1. There is an inherent conflict between the environmental requirements for greenhouse gas mitigation, as those policies are currently posed, and the constraint of political feasibility in a world of electoral democracies (or even tolerated dictatorships, as in China). We need deep, deep cuts in fossil fuel use. The only way to get there is to raise the price of these fuels far beyond anything the world has ever seen. But democratic polities will punish any politician who acts to impoverish them. This is not about the economic cost of forestalling catastrophic climate change; it is about the distributional impact. When carbon prices skyrocket, those who pay suffer and those who receive flourish. This problem is not addressed by sidestepping the issue with bland, distribution-blind capping commitments. Rather, those commitments are revealed as false when governments refuse, for obvious political reasons, to carry them out.

2. The strategy of buying off developing countries through payment for forest preservation or “clean development” is ultimately incoherent and unmanageable. (a) There is no scientific basis for treating a ton of carbon temporarily “fixed” in a forest the same as a ton sequestered for virtual eternity as fossil fuels left in the ground. It violates elementary understanding of the carbon cycle, and no forest ecologist I know defends the idea. This means that science cannot provide any formulas to resolve political disputes over which forest practices to reward and by how much. (b) And there is no political resolution either, because there are too many types of forests and other sinks, too many practices, over too many countries, with too much money on the line. (c) The notion of offsets to finance clean development is self-contradictory. The economic challenge is to fundamentally change what development means by decarbonizing it. This can only happen if prices rise to prohibitively high levels from the standpoint of current practices. Offsets seek to suppress price increases and delay this transition, so at best all they can hope to achieve is to replicate current best practice in developing countries—although their actual performance is far below even this standard.

The contradictions of Kyoto-Copenhagen were buried under layers of diplomatic verbiage, but they never went away. The closer we got to the point at which we had to devise a real, working agreement, the more intractable they become.

This is not the place to spell out a new strategy in detail, but the flaws of the existing one point the way.

1. Revenue recycling must be built into the fundamental architecture of any GHG mitigation scheme in order to sell it to a democratic electorate. All, or nearly all, of the money people pay in much higher energy prices must be returned to them, and the promise to do this must be credible. It cannot go to oil producers, government coffers, or even the fine projects advocated by environmental groups. No politician will dare to impose such prices if households see the money going out but not coming back in. Some version of a rebate program is imperative. This means, in turn, that carbon caps or taxes cannot be used in a substantial way for payments to the developing world.

2. The goal of mitigation policy must be brutally simple: to phase out, as rapidly as possible, the use of coal, then petroleum, then natural gas. Everything else, although important, is secondary. Yes, we need energy R&D, better agriculture and land use policies, infrastructure investments and the rest, but the central mechanism that ratchets down our climate forcing must apply specifically to fossil fuels. Leave them in the ground. Politically, I believe this prioritizing is coherent; it is only in a world of extraordinarily high fossil fuel prices that we will get the electoral support we need for public spending to shift our development trajectory.

As a practical matter, I recommend separating adaptation from the mitigation framework; it really doesn’t belong, and it shouldn’t be an obstacle to emergency preventive action. Rather, funding for adaptation should be combined with Millennium Development Goals, biodiversity preservation and similar “global public goods” within a new framework of global public finance. The United States should, as a matter of extremely high priority, join in the work of the Leading Group on Innovative Finance for Development, and together we should put into place financial transaction taxes, taxes on international shipments of goods that present negative externalities (like arms and scarce nonrenewable resources), and solidarity levies like the already-existing airline ticket tax. Together, these mechanisms could raise funds of $100B or more. Add expanded debt relief, shutting down tax havens and a few other virtuous actions, and we could have the financing to meet all the most urgent global goals, including adaptation to unavoidable climate change.

So where can this new politics come from? The road from here to there probably passes through the major social and environmental NGO’s, but they are unlikely to change course on their own. There needs to be pressure from below. I hope the failure of Copenhagen spreads the message that time is very short, and politics needs to be focused on solutions. The day has passed for vague mantras like “another world is possible”. The only world we have is in serious danger, and those who understand what is at stake need to be militantly practical.

Video of My Colloquium Lecture

I have uploaded a video of my colloquium lecture, which is now at
http://www.archive.org/details/MichaelPerelmanColloquiumTalk

Hillary and Me

Hillary Clinton seemed to make a very generous offer in Copenhagen. She promised the poor nations of the world that if they agreed to a compromised climate change program the US would be willing to contribute to $100 billion program to help them by 2020. Maybe I have this wrong, but I could do one better in the same sort of flim-flam. I would be willing to contribute to a $200 billion program that would help these countries if they would agree to accept a compromised program. I even would be to contribute to $1 trillion program -- of course, neither I nor Hillary have made any commitment as to whether we would put up a nickel or serious money.

Samuelson And The Sons Of Samuelson On The Random Walk

The point I made in an earlier post about Paul Samuelson has become clearer due to debates on other blogs, most notably on Marginal Revolution, with the paper, "Proof that properly anticipated prices fluctuate randomly," Industrial Management Review, 1965, available at http://www.ifa.com/Media/images/PDF%20files/samuelson-Proof.pdf. This famous paper, cited by Krugman recently as presenting one of Samuelson's eight (nine really) most important original ideas, has been widely misinterpreted by his followers, a case of the "sins of the Sons of Samuelson." It has been interpreted as an early example of showing that markets follow random walks, which in turn are examples of market efficiency in conformance with rational expectations. Pretty much of this is either a misinterpretation or just plain outright false.

This latter argument depends on very strong assumptions such as Gaussian distributions of noise. Samuelson's proof is very general, allowing for probability distributions to drift over time (ultimate skewness) as well as to have varying variance (fat tails), and even not to rule out speculative trading by agents. He explicitly states in the conclusions that his theorem does not establish any sort of efficiency outcome to such trading.

Many, including most textbooks (such as Campbell, Lo, and MacKinlay) have simply missed the boat on this, identifying Samuelson with an efficiency result, and then proclaiming him to be wrong because such things as technical trading can make money sometimes. The problem arises from confusing "properly anticipated" with "rational expectations" or at least ratex in a simplistic formulation. Samuelson's result implies that agents are anticipating even the endogenous influence of other traders as well as the usual gaggle of exogenous shocks, and is very general to the form of the probability distribution, thus being perfectly consistent with such outcomes as the peso problem identified in an MIT Ph.D. thesis by Ken Rogoff in 1979. Indeed, Samuelson himself declares his result to be so general as to border on being empirically untestable, and lmost "vacuous," his term. It has been his "sinful sons" who have narrowed it down by making stronger assumptions to claim for it things Samuelson himself never claimed for it (indeed, explicitly denied, such as an implied market efficiency result).

Cheney Dream Of US Oil Companies In Iraq Down The Tubes

Late reports made it clear that indeed former VP Cheney was conforming to all those reports about certain US leaders wanting to invade Iraq at least partly so that US-based oil companies could get their mitts on Iraqi oil. Well, now the central government of Iraq has held auctions on the major outstanding fields, and the only US company to get a major concession was Exxon Mobil. Doing much better than any US company were Dutch-British-based Royal Dutch Shell, Russia's Lukoil, along with several companies out of China and France. Juan Cole reported on this on Monday at http://www.juancole.com, claiming that oil production there will be limited because of ongoing security concerns (which scared off publicly held US oil companies). Cole disagrees with Ben Lando at iraqoilreport.com, who forecasts that after these deals, Iraqi oil production could rise to compete with Saudi Arabia's, thereby helping to hold down the price of oil.

There remains an ongoing dispute between the Iraqi central government and the Kurdish regional government over oil concessions, with the Kurds cutting their own separate deals not recognized by the central government, with more fly-by-night companies banned from the central government's auction. The most important US company in Kurdistan is that run by some of the Hunt family, who had inside information from intel sources during the Bush administration. In any case, the idea that US oil companies would dominate Iraqi oil production in the long run, now looks to have pretty much gone down the tubes.

Samuelson And Academic Anti-Semitism

Paul Samuelson was probably the last of the major economists to experience serious academic anti-Semitism, having experienced Harvard refusing to hire him in 1940 despite his prominence at the time, as well as probably the last one to personally know Keynes, Schumpeter, and Hayek. This put him in a special position to comment on the discussion of their respective anti-Semitisms as studied by Melvin Reder, "The anti-Semitism of some eminent economists," History of Political Economy, 2000, 32, 833-856. In footnote 2 of his "A few remembrances of Friedrich von Hayek (1899-1992)," Journal of Economic Behavior and Organization, Jan. 2009, 69(1), 1-4., Samuelson said the following (noting that Schumpeter was his strongest supporter for being hired at Harvard):

Most of my gifted mentors, born in the nineteenth century, lacked today's 'political (and ethnic) correctness.' There were of course some honorable exceptions among both my Yankee and European teachers. Reder (2000) has provided a useful exploration of such unpleasantries. Central to his expositions were appraisals of the triad John Maynard Keynes, Joseph A. Schumpeter, and Friedrich Hayek on the subject of anti-semitism.

Unexpectedly, I was forced in the end to conclude that Keynes's lifetime profile was the worst of the three. In the record of his letters to wife and other Bloomsbury buddies, Keynes apparently remained in viewpoint much the same as in his Eton essay on the subject as a callow seventeen-year-old. Hayek, I came to realize, seemed to be the one of the three who at least tried to grow beyond his early conditioning. The full record suggests that he did not succeed in fully in cleansing those Augean stables. Still a B grade for effort does trump a C-.

I note a curious irony in that about the same time that Samuelson was not getting hired at Harvard largely due to anti-Semitism (although Schumpeter reportedly alleged that it was due to jealousy of Samuelson's brilliance by his erstwhile peers), Milton Friedman had the same experience at my alma mater, the supposedly progressive University of Wisconsin-Madison, where he was not renewed for a position after one year of appointment. No, this was not institutionalist progressives upset about his pro-laissez faire views, which were not particularly public at that time. Rather, the other issues involved besides the evident anti-Semitism on the part of certain supposedly progressive institutionalists was that he was identified as being a mathematically oriented econometrician who thus threatened the institutionalism then dominant in the department. Over two decades later the final victory of policy-oriented econometrics in the department over the old institutionalists would be led by another Jewish econometrician, Arthur Goldberger, who died at 79 on Dec. 11. Just to really tie all this up in a knot, the very worthy and justly eminent Goldberger (whom I knew and admired personally) was a student of Nobelist Lawrence Klein (with many saying he should have shared the Nobel with Klein), who in turn was a student of Samuelson, although it is a famous old wisecrack that "Samuelson never ran a regression in his lifeюЭ

Paul Samuelson RIP

My favorite example of Samuelson's wit is his "algorithm" for solving the Transformation Problem:

1. Write down labor values

2. Erase

3. Write down prices.

And then I think he said, "Voila," if memory serves! (I should confess that when I first read it, I was spitting: at that time I thought, a., that the TP was solvable and, b., that it was very important that it be solved -ah, youth!- and how dare Samuelson ridicule the likes of me).

Of everything he did that I know, I think Samuelson 1958 was the best. A beautiful, simple, funny and earth-shaking paper that changes the way you see the world forever. Anyway, he was a mensch. RIP.

Bernanke's Saving's Glut Hypothesis. Contradiction Number One.

In March 2005 the Governor of the Federal Reserve in the US, Ben Bernanke, gave a talk on the reasons for the emergence of a global savings glut during the period beginning from the mid 1990s.[1]

He made specific note of the increasing value of the US dollar in the period from 1996 to early 2000. He ascribed this change to “The development and adoption of new technologies and rising productivity in the United States together with the country's long-standing advantages such as low political risk, strong property rights, and a good regulatory environment. These factors, he said, made the U.S. economy exceptionally attractive to international investors during that period.

"Consequently, capital flowed rapidly into the United States, helping to fuel large appreciations in stock prices and in the value of the dollar."

However, economist Robert Brenner, draws attention to the G-3 economies' deliberate manipulations of global currency markets in 1995.

"With the so-called Reverse Plaza Accord of spring-summer 1995, the G-3 economies did a complete about face. By way of the Plaza Accord of 1985, the leading capitalist powers had agreed to drive up the mark and the yen to reverse the devastation of a US manufacturing sector ravaged by the high dollar. Ten years later, they did the opposite, agreeing to push down the mark and yen to revive German and Japanese manufacturing sectors that had been driven into crisis by the low dollar." [2]

So the US dollar was set artificially lower (relative to the Yen and the German mark) in 1985 in order to aid the ailing US domestic manufacturers, according to Robert Brenner. US producers were suffering (with low global demand for their products) as a result of an equally artificial high value of the US dollar that prevailed in the years before 1985.

[Some history: Between 1972 and 1981 the global price of oil increased nine-fold; fueling stagflation. In 1979 Paul Volker from the US Federal Reserve increased global interest rates in order to prop up a resultant ailing US dollar. That's also when the US-dominated World Bank moved to a commitment to global trade liberalization and abandoned its support for public enterprises.[3]

In summary, Bernanke's rationale for the strong US dollar from the years 1996 - 2000 doesn't appear to stand up to historical evidence. If the US benefited from such a profitable investment environment then why didn't that result in a boom in US manufacturing and a resolution of that nation's trade deficit in those years? The opposite, in fact, occurred.

[1] Remarks by Governor Ben S. Bernanke at the Sandridge Lecture, Virginia Association of Economics, Richmond, Virginia
Governor Bernanke presented similar remarks with updated data at the Homer Jones Lecture, St. Louis, Missouri, on April 14, 2005.
March 10, 2005

The Global Saving Glut and the U.S. Current Account Deficit
http://www.federalreserve.gov/boarddocs/speeches/2005/200503102/

[2] STOCK MARKET KEYNESIANISM ….
WHAT IS GOOD FOR GOLDMAN SACHS IS GOOD FOR AMERICA - THE ORIGINS OF THE CURRENT CRISIS. Robert Brenner, Center for Social Theory and Comparative History, UCLA
18 April 2009
This text appears as the Prologue to the Spanish translation of the author’s Economics of Global Turbulence (Verso, 2006) which was published by Akal in May 2009.

[3]'JECOR' was the name of a program instituted by the American power elite to recyle the petro-dollars from the Middle East after the enormous price hikes in this commodity. Petrodollars were used (amongst other things) to hire American firms to industrialise Saudi Arabia with the overall management and fiscal responsibility delegated to the US Department of Treasury. The commission so set up was “independent to the extreme”. Ultimately, it would spend billions of dollars over a period of more than twenty-five years, with virtually no congressional oversight. Because no US funding was involved, Congress had no authority in the matter, despite Treasury’s role. ”

Source: David Holden and Richard Johns, ‘The House of Saud: The Rise and Rule of the Most Powerful Dynasty in the Arab World (New York: Holt Rinehart and Winton, 1981), p359. As quoted in ‘Confessions of an Economic Hitman’ by John Perkins. Page 84. Published by Ebury Press Random House, 20 Vauxhall Bridge Road, London SWIV 2SA. 2005. ISBN 978091909109

Fiscal Stimulus – Spending Increases v. Tax Cuts

Greg Mankiw thinks we should try a different kind of fiscal stimulus than the one passed earlier this year. Of course, the one passed earlier this year was a mix of spending increases and tax cuts (see for example Nate Silver). Some of us argued that including tax cuts lowered the bang for the buck from the stimulus package but Greg disagrees:

Successful stimulus relies almost entirely on cuts in business and income taxes. Failed stimulus relies mostly on increases in government spending.

Greg is citing evidence from periods when the interest rate was positive. Gauti Eggertsson asks What Fiscal Policy Is Effective at Zero Interest Rates? His abstract reads:

Tax cuts can deepen a recession if the short-term nominal interest rate is zero, according to a standard New Keynesian business cycle model. An example of a contractionary tax cut is a reduction in taxes on wages. This tax cut deepens a recession because it increases deflationary pressures. Another example is a cut in capital taxes. This tax cut deepens a recession because it encourages people to save instead of spend at a time when more spending is needed. Fiscal policies aimed directly at stimulating aggregate demand work better. These policies include 1) a temporary increase in government spending; and 2) tax cuts aimed directly at stimulating aggregate demand rather than aggregate supply, such as an investment tax credit or a cut in sales taxes. The results are specific to an environment in which the interest rate is close to zero, as observed in large parts of the world today.

This is immediately followed by table one showing a government spending multiplier equal to 2.27 whereas the labor tax multiplier is negative 0.81. Hat tip to Paul Krugman.

Banking Lending – the President Today and Paul Samuelson Over 60 Years Ago

President Obama expects our banks to expand lending:

President Obama pressed Wall Street bankers at the White House on Monday, urging them to make more loans and modify mortgages to help taxpayers who propped their banks up with federal bailouts. "My main message in today's meeting was very simple: America's banks received extraordinary assistance from American taxpayers to rebuild their industry," Obama said. "Now that they're back on their feet, we expect an extraordinary commitment from them to help rebuild our economy." The president was expected to pressure the nation's top dozen bank chief executives to open up the lending spigots to help the economic recovery.

It is true that the Federal Reserve is doing all it can to increase bank loans and the money supply and the Federal government did institute that TARP “bailout” of our major banks. Yet, banks have chosen to let reserves skyrocket. Paul Krugman notes that the recently departed Paul Samuelson sort of predicted this back in 1948:

Today few economists regard Federal Reserve monetary policy as a panacea for controlling the business cycle. Purely monetary factors are considered to be as much symptoms as causes, albeit symptoms with aggravating effects that should not be completely neglected. By increasing the volume of their government securities and loans and by lowering Member Bank legal reserve requirements, the Reserve Banks can encourage an increase in the supply of money and bank deposits. They can encourage but, without taking drastic action, they cannot compel. For in the middle of a deep depression just when we want Reserve policy to be most effective, the Member Banks are likely to be timid about buying new investments or making loans. If the Reserve authorities buy government bonds in the open market and thereby swell bank reserves, the banks will not put these funds to work but will simply hold reserves.

Samuelson was arguing back then that we might need more vigorous fiscal stimulus in situations like the one we have today. I think our President understands this as well but then there certain members of Congress who do not.

Two Important Iranian Blogs

Socialist Inside Iran Differ on the Green Movement:
http://iranianvoicesintranslation.blogspot.com/2009/12/socialists-inside-iran-differ-on-green.html

Feminist Political Scientist Analyzes Transformations in Iranian Society Today:
http://www.payvand.com/news/09/sep/1120.html

Destruction in Higher Education vs. Destruction of Higher Education

The Pen Is Mightier Than the Sword.

On Friday, protesters destroyed property at the home of Robert J. Birgeneau, Chancellor of the University of California, Berkeley. This action violated the law. At the same time, the law condoned a far deeper destruction of education throughout the state. The governor and the legislature decimated public education, all the way from the primary schools to the state's university system.

For the most part, business applauded the state's stance. Why not? Education will have no choice but to turn to the private sector to run public schools or to take stakes in the universities, as BP has done with the University of California, Berkeley.

Affluent taxpayers, who can afford private education, can rest easy, knowing that increase taxes are not on the horizon. Many ignorant people, whipped up by a false populism, also cheer on the shrinking of the state.

The loss of the Chancellor's planters and windows is regrettable, but they will be easily replaced. In contrast, the educational system may never recover.

The protesters did not constitute a threat. In fact, their actions may not even been productive.

Woody Guthrie once wrote: "Some will rob you with a six-gun, And some with a fountain pen.” Alas, we know who holds the fountain pens.

Was The Late Paul A. Samuelson "The Foremost Academic Economist Of The Twentieth Century"?

The New York Times online obituary section has just posted the death of Paul A. Samuelson at his home in Belmont, MA at the age of 94. The first sentence of the obit labels him "the foremost academic economist of the twentieth century." Whether he was or not, the death of this recipient of the second Sveriges Riksbank Prize in Economic Science in Memory of Alfred Nobel back in 1970 is of one who was unquestionably an enormously influential, whose real influence has somewhat slipped into the background in recent years as attention to many others has surged forward. Often when he has been thought of or mentioned, it has been in criticism by many from many different sides, as he is seen as the father of the postward neoclassical synthesis, promulgated most influentially in his textbook, whose 19th edition (now done by Nordhaus) has just come out with many changes from what it used to be (many not for the better), although the deeper intellectual influence has been his Ph.D. thesis, published in 1947 as _The Foundations of Economic Analysis_, with his publishing career dating all the way back to 1937, on many topics. His influence is so great in so many areas that the key papers by him that lie behind the standard textbook accounts in many areas do not even bother to cite them.

I have been critical of Samuelson myself, and gave him quite a hard time the first time I met him in person 38 years ago. However, starting with that encounter, I must confess that while he may be the ultimate origin of much that is misguided in deeply entrenched conventional economic thought, he himself was generally personally aware of the flaws and limits of many of his own ideas, even as near the end he insisted on reasserting some of them more strongly than ever. However, I would say that the greater sins have been by simplifying followers of his, the "sons of Samuelson," who have been more responsible for codifying and spreading and enforcing the more simplistic versions of what he posited. The man himself was more complicated and self-aware than many gave him credit for , and he is indeed the last of the giant economic thinkers whose professionally active roots go back clearly into the Great Depression.

An Open Letter to the Union of Concerned Scientists Regarding its Criticism of the Cantwell-Collins Bill

Dear UCS,

As one of the economists who signed in support of the UCS campaign for climate change legislation, I have to express my disappointment with your response to the Cantwell bill.


1. It is by far the best bill before Congress. It has two features that any serious environmentalist should enthusiastically support: no offsets and upstream (comprehensive) permitting. This is the right architecture. It is simply shocking to me that the bill would be criticized on exactly these grounds! You appear to endorse offsets as a means to secure an international agreement, as if this discredited approach were the only basis for moving forward globally. Clearly UCS is not paying attention to the current discussion around the validity of offsets.

2. You criticize the 2020 targets in Cantwell, but specific targets are meaningless. No matter what bill is passed, Congress will be revisiting these targets every year or two as new scientific evidence emerges and political winds shift (for better or worse). Any target announced today for more than a decade into the future is purely symbolic. What matters is getting the architecture right, so that, if there is political support for more stringent goals, they can be accomplished expediently.

3. Remarkably, UCS sees fit to attack the Cantwell bill on the other feature it gets right: it auctions all the permits and distributes most of the money back to households. Aside from the other justifications for this approach, it is now clear that this is the only way there can be enough political support for serious GHG mitigation. UCS' advocacy for spending carbon revenues on its own desired projects is politically naive. (a) UCS and its environmental allies will not control the allocation process. If Congress gets to parcel out these funds, you can be sure that most will go into "clean coal", biofuels, etc. (b) Carbon revenues are available to be allocated only if Congress passes a bill with a reasonably tight cap, provisions for auction, and few or no offsets. But this will be achieved only if the electorate is convinced it will not be at the expense of their household budgets. Only revenue recycling can accomplish this.

So why on earth has UCS adopted this position? Can it be because you have decided that Kerry et al. is the horse to ride, and that any other approach is a distraction? If so, you should say this and not trot out implausible and disingenuous arguments.

Again: I am really disappointed in UCS. I can't see myself signing any more of your petitions in the future, and in saying this I know I speak for many other environmentally-aware economists.

Peter Dorman