Another Clumsy Attack on the European Social Model

The New York Times, supposedly the reliable voice of bleeding-heart liberalism, has repeatedly attacked European welfare state institutions in its news pages. The latest assault was published today, informing us that pensions and other social benefits are no longer “affordable” and that the coddled European public must wake up and face reality. All such “analyses” require the reader to accept without questioning the strange notion that social programs that were instituted decades ago when Europe was substantially poorer have now become, after a long run of economic growth, too expensive to bear.

You might wonder how the article’s author (Steven Erlanger) deals with this conundrum. Wisely, he doesn't even try. A quarter of the article is taken up with man-on-the-street interviews, in which selected students, workers and pensioners say what Erlanger wants them to say. (No one says anything different; apparently European public opinion is monolithic on this issue.) The article tells us that the dependency ratio, the number of retired people as a proportion of the working population, has increased, but it doesn’t point out that economies have grown even faster. (The ratio of real economic growth to growth in the dependency ratio over the period 1980-2005 is 2.4 for the countries that now make up the Eurozone, and a whopping 6.6 for the US. Don’t let Pete Peterson hear about this.)

The article suggests that all sorts of damage has been caused by excessive concern for the old, the sick and other insufficiently productive citizens, with the result that “the region generally lacks competitiveness in world markets.” I have to rub my eyes every time I see a comment like this. Let’s get this straight: journalists tell Europeans to emulate America’s high-octane approach to economic efficiency when the Eurozone has approximately balanced trade with the rest of the world, while the US runs the largest trade deficits the world has ever seen.

It is true that the current economic stall, combined with immense, ill-considered financial bailouts, has diminished the fiscal space available to governments everywhere. This is a problem of, well, stalled economic growth and unwise bailouts. Europe, like the US, needs to deal with this. But those problems have nothing to do with “unaffordable” social welfare programs. On the contrary, maintaining transfers to the most vulnerable households is not only the right thing to do, it is also an excellent vehicle for sustaining effective demand in a downturn.

Maybe, if you prowled the cafes and restaurants of Europe long enough, you might find an interviewee or two to stick up for social solidarity.

Social Security: On the Chopping Block Again?

Out of FireDogLake comes a new report that the Deficit Commission Obama set up is getting ready to carve out hunks of Social Security, perhaps by zipping the cuts through a lame duck session of congress.

Bad ideas with money behind them never die, do they? Is it time yet to pull our old writings out of the archives and spread the word that, no, Social Security is not in trouble, and that cutting it would be bad for our people and bad for the economy?

Bashing BP Is "Un-American"?

So, Rand Paul has just denounced Barack Obama as being "un-American" (do we need a special House committee for this?), for criticizing British Petroleum's behavior in the Gulf of Mexico. Something funny about this is not just the name, but indeed the ownership: while there are certainly some American stockholders, BP is overwhelmingly British, indeed was substantially owned by the British government itself for many decades from WW I up into the Thatcher era. Since when is it "un-American" to bash a British company for misconduct?

Rand Paul, Title II of the 1964 Civil Rights Act, and Becker’s Hypothesis on Discrimination

Rand Paul says he would have voted for the 1964 Civil Rights Act but he would have preferred that Title II not be included. Now it is not surprising that a libertarian would be opposed to government discrimination. The real issue is whether a government should be allowed to limit private discrimination. My favorite summary of what Rand Paul is saying can be found here:

The libertarian answer in this instance is that property rights trump civil rights, and that the state should prioritize enforcing those.

Gary Becker summarized the literature on the economic effects of discrimination as part of his 1992 Nobel Lecture. Libertarians could emphasize one aspect of Becker’s writing:

in a world with constant returns to scale in production, two segregated economies with the same distribution of skills would completely bypass discrimination and would have equal wages and equal returns to other resources, regardless of the desire to discriminate against the segregated minorities ... A literature has developed on whether discrimination in the marketplace due to prejudice disappears in the long run.

A fair reading of Becker’s Nobel Lecture, however, would note that he believed that private discrimination by the majority does injure the minority. Is this the kind of economic policy Tea Party types such as Rand Paul are advocating?

Manufacturing Uncertainty in the Gulf

According to this morning’s New York Times, British Petroleum, with apparent cooperation from the US government, is making an all-out effort to obstruct measurement of the ongoing Deepwater Horizon oil blowout. University researchers have been prevented from approaching the scene, and whatever data are being collected are being withheld from the public. A possible scenario is that numbers will be released only after the flow has stopped, that they will not be viewed as credible, but it will be too late to correct them.

This is a very big deal for BP and their contractors. They are looking at vast potential liability for damages from Florida to Texas, not to mention the Caribbean islands, who are truly innocent potential victims. At some point there will be lawsuits, testimony, juries, and awards. Down the road it will be of great value to have uncertainty over the amount of oil involved in the disaster. If I’m a BP lawyer, I want to say “Maybe this damage was caused by us, but maybe not, because we just don’t know the exact extent of the spill. We will be happy to accept responsibility for damages that can be proved, but we don’t think we should be made to pay just on someone’s speculation.”

BP’s legal team is no doubt emphasizing that effective defense against liability began on day one of the blowout and continues until the end of the process. It would be interesting to know what motives impel cooperation on the government’s side.

I hope the political focus is sharpened: we need the most accurate possible measurements of how much petroleum is entering the gulf and how and where it is being transported, starting right now.

UPDATE: My crude economic speculation is corroborated by actual investigation. And someone should tell the good people at NRDC that squeezing BP dry in court is not a secondary matter to the current cleanup; it is society's first line of defense against future eco-malfeasance.

Fiscal Policy: Arizona Governor May Have a Point

While I think Jan Brewer – Arizona’s governor – should be made to pay for signing into law SB1070, the horrific immigration law, her support of
Proposition 100 is commendable. Fiscal restraint during weak aggregate demand is generally bad economics but state governments often are forced into such measures by their requirements to annually balance their budget. If the choice is between reducing government purchases versus a temporary tax increase, then on Keynesian grounds the latter is the least undesirable move as it likely has less of an impact effect on aggregate demand. Then again – state governments would not be faced with such Draconian choices had we decided to increase Federal revenue sharing by more than what barely got through the Senate.

Google: Goof or Snoop?

Google’s extraordinary acknowledgment that they have been collecting private internet transmissions in the process of constructing their Street View database raises questions that have not yet been properly aired. The don’t-be-evil crew has had its specially equipped cars crawling urban streets around the world, creating the photographic record that enables map searchers to see street-level images when they click on a location. This already alarmed privacy hawks in Europe (where privacy laws are much stricter than here), since it means that everyone’s home, and maybe their car, pets, lawn furniture and messages to the postman, are on display before the whole world. But the new disclosure goes a lot further.

Google says its cars were using the locations and IP addresses of wi-fi hotspots along its route to verify its position, a plausible notion because the data collected from the different cars have to be concatenated, and discrepancies would cause headaches. How then to explain why Google collected not only this minimal information, but also “snippets” of email and the websites users were visiting at the time of the drive-by?

In its repeated public apologies, Google claims that collecting and storing these data was an accident, a coding error, a breakdown in communication between multiple teams collaborating on the project. This is not credible. Even if it were necessary to acquire all the information streaming from these users to identify their location—which seems strange to me, but I’m not a network geek—whatever technique used to extract the few items they needed could have been used to expunge the rest. Can anyone really believe that vast quantities of personal data were not only captured but stored at significant expense simply because of an oversight?

And let’s take it one step further. Google’s business model is to sell your personal data to advertisers, nothing more or less. The ads you see on search pages and to the side of Gmail messages have value because they are tailored to the content of your internet activity. Google captures the content and sells the ads. They have every incentive to capture as much content as they can.

Distilling ad-relevant data from messy, real-life internet use is extremely difficult, which is one reason why Google employs lots of very smart people. Their struggle to constantly improve on this distillation is fed by the massive web data to which the company has access. This is where the Street View cars come in: as a byproduct of their positioning system, they were collecting random web activity which Google could not otherwise obtain.

A key question for investigators, then, should be whether the personal data Google admits to collecting and storing was used by any unit of the company for analytical purposes.

Beyond this, we should recognize the paradox at the heart of Googledom. In many ways this is an admirable company, driven by idealism. Their business model allows them to offer a range of very high-quality services for free. They have a commitment to making the world’s information more accessible to the ordinary user, which is mostly a good thing. But in the final analysis, the money comes from advertisers, and they pony up because Google’s individual-level data permits a degree of customization marketers could only have dreamed of until recently. This generates a powerful financial incentive for Google to undermine privacy whenever the opportunity arises, as it does every time you use one of their tools. This company, and others in the same line of work, needs to be tightly regulated.

Neoliberal Neoconservatism at War with the Troops

For all the talk about support the troops, hypocrisy is the order of the day. Neoconservatives applaud new wars, while neoliberals want to do it inexpensively, so long as the cuts don't harm the bottom line of their favorite military contractors.

The easiest way to do that is to shortchange the soldiers. I apologize for the length, but the punchline comes toward the end of this possibly excessively-long note.

Just as right-wing politicians go to great lengths to protect fetuses, only later to trash them if they have the gall to be born to poor families, the government acts with similar hypocrisy toward former troops who have become veterans.

Recent scandals have shined a harsh light upon poor treatment of former soldiers. As a result, the military created so-called Warrior Transition Units, which turned out to perhaps be even worse, including a number of suicides. Here are my notes from a recent New York Times article.

Dao, James and Dan Frosch. 2010. "Feeling Warehoused in Army Trauma Care Units." New York Times (25 April): p. A 1.

Created in the wake of the scandal in 2007 over serious shortcomings at Walter Reed Army Medical Center, Warrior Transition Units were intended to be sheltering way stations where injured soldiers could recuperate and return to duty or gently process out of the Army. There are currently about 7,200 soldiers at 32 transition units across the Army, with about 465 soldiers at Fort Carson’s unit.

But interviews with more than a dozen soldiers and health care professionals from Fort Carson’s transition unit, along with reports from other posts, suggest that the units are far from being restful sanctuaries. For many soldiers, they have become warehouses of despair, where damaged men and women are kept out of sight, fed a diet of powerful prescription pills and treated harshly by noncommissioned officers. Because of their wounds, soldiers in Warrior Transition Units are particularly vulnerable to depression and addiction, but many soldiers from Fort Carson’s unit say their treatment there has made their suffering worse.

Some soldiers in the unit, and their families, described long hours alone in their rooms, or in homes off the base, aimlessly drinking or playing video games.

“In combat, you rely on people and you come out of it feeling good about everything,” said a specialist in the unit. “Here, you’re just floating. You’re not doing much. You feel worthless.”

At Fort Carson, many soldiers complained that doctors prescribed drugs too readily. As a result, some soldiers have become addicted to their medications or have turned to heroin. Medications are so abundant that some soldiers in the unit openly deal, buy or swap prescription pills.

[...]

At least four soldiers in the Fort Carson unit have committed suicide since 2007, the most of any transition unit as of February, according to the Army.

[...]

In many cases, the noncommissioned officers have made it clear that they do not believe the psychological symptoms reported by the unit's soldiers are real or particularly serious. At Fort Hood, Tex., a study conducted just before the shooting rampage there last November -- which found that many soldiers in the Warrior Transition Unit thought their treatment relied too heavily on medication -- also concluded that a majority of the cadre believed that soldiers were faking post-traumatic stress or exaggerating their symptoms.

In response, the Army initiated a study -- a standard response to a problem one wishes to avoid. Again, briefly from the New York Times: Shanker, Tom. 2010. "Pentagon's chief of personnel, Clifford Stanley, wants a more-caring military ." New York Times (9 May)

In the job just 10 weeks, Clifford Stanley, the Pentagon's chief of personnel, already has forced out two senior deputies, including one overseeing the high-priority -- and highly scrutinized -- program caring for troops wounded in Iraq and Afghanistan.

Stanley said his goal was for the Pentagon's vast personnel operation to be "more responsive, sensitive to and aware of our constituency."

[...]

...he is trying to "hold up a mirror of compassion and caring" to reflect a more welcoming face of the Pentagon leadership.

[...]

...Service members, spouses and families have sought more in health care and education benefits to help compensate for their sacrifices in protecting the nation. Advances in battlefield medicine have saved the lives of many grievously wounded, but they now require costly rehabilitation and care. And the Pentagon is only beginning to learn how best to treat wounds that are not visible, to the brain and to the spirit.

All of a sudden, we hear something else. Neoliberalism replaces neoconservatism: care for the troops becomes another one of those lavish government programs, which must be cut back in order to be able to afford the next war. Caring for disposable soldiers siphons off valuable money required to pay for necessary hardware.

Whitlock, Craig. 2010. "Pentagon Asking Congress to Hold Back on Generous Increases in Troop Pay." Washington Post (8 May)

The Pentagon, not usually known for its frugality, is pleading with Congress to stop spending so much money on the troops.

Through nine years of war, service members have seen a healthy rise in pay and benefits, with most of them now better compensated than workers in the private sector with similar experience and education levels.

Congress has been so determined to take care of troops and their families that for several years running it has overruled the Pentagon and mandated more-generous pay raises than requested by the George W. Bush and Obama administrations. It has also rejected attempts by the Pentagon to slow soaring health-care costs -- which Defense Secretary Robert M. Gates has said are "eating us alive" -- by raising co-pays or premiums.

[...]

In the midst of two long-running wars in Iraq and Afghanistan, defense officials are increasingly worried that the government's generosity is unsustainable and that it will leave them with less money to buy weapons and take care of equipment.

[...]

Clifford L. Stanley, the undersecretary of defense for personnel, told a Senate committee in March that rising personnel costs could "dramatically affect the readiness of the department" by leaving less money to pay for operations and maintenance. Overall, personnel expenses constitute about one-quarter of defense spending.

Health care alone is projected to cost the military $51 billion next year, nearly one-tenth of the Pentagon's budget, excluding the costs of the wars in Iraq and Afghanistan. Since 2002, wages have risen 42 percent, compared with about 32 percent for the private sector. Housing and subsistence allowances, which troops receive tax-free, have gone up even more.

[...]


Other well-meaning programs to support service members and their families have turned into budgetary Frankensteins.

In February, the Pentagon abruptly shut down a new tuition-assistance program for military spouses after it was overwhelmed with applicants. Defense officials had set aside $61 million for the program, which reimburses tuition costs of up to $6,000 per person, but discovered they might need as much as $2 billion to satisfy unexpected demand.

Congress chastised the Pentagon for mismanaging the program, which has since resumed, though defense officials aren't sure how they will pay for it.

So, there you have it. Compassion be damned. We must fight against the budgetary Frankensteins so we can fight more wars.

Child Labor Showdown in The Hague

I am just back from the Global Conference on Child Labor, put on in The Hague last week by the International Labor Organization (ILO) and the Dutch Ministry of Social Affairs and Employment. There was a dramatic confrontation behind the scenes, and I will tell you how it went, but it won’t make any sense without a large dose of background, so bear with me.

From the standpoint of global governance, child labor falls under the aegis of the ILO and its International Program on the Elimination of Child Labor (IPEC). The ILO is the UN agency that deals with labor issues, and it has a unique governance structure, with a Governing Body (like a board of directors) composed not only of government officials but also representatives of unions and employer federations. The Governing Body meets in Geneva in June and votes on international conventions written by ILO staff. These conventions are then submitted to national governments for ratification and become the legal framework for official international coordination.

There are two main conventions concerning child labor. Convention 138 sets forth the minimum age stipulations that are supposed to apply to various kinds of child labor. To be exact—and this is my own terminology—this convention defines four different sorts of activity, each with its own rules:

• Full labor market participation. This means participating in the labor market exactly as an adult; the minimum age is 18, when a person is no longer deemed a “child”.



• Restricted labor market participation. This is the same as full participation, except that work that would be especially hazardous at a younger age and work that conflicts with education are prohibited. The minimum age is 15 in developed countries, 14 in less developed countries.



• Light work. This refers to a much more modest set of activities, less demanding in time and effort; there is a lot of scope for countries to determine what it does or doesn’t allow. The minimum age is 13 for developed countries, 12 otherwise.



• Beneficial work. The convention does not restrict tasks children might perform for a few hours per week that are beneficial for them and their families (even if the kids don’t want to do it at the time). Think of washing the dishes after dinner or feeding the chickens in the back yard.

Incidentally, “work” in this context includes not only paid employment, but also unpaid but economically productive activity in the household or in family enterprises. In fact, the majority of child laborers work as members of their family, most in agriculture.

Convention 182 focuses on the worst forms of child labor (WFCL). These are divided into two groups. The “unconditional” worst forms are those that are inappropriate under all circumstances, things like prostitution, soldiering, bonded labor, and smuggling. The other category is hazardous work, which is identified at the national level and based on evidence of harmful physical or psychological impacts. Many children working in subsistence agriculture are regarded as being exposed to excessive hazards, such as dangerous equipment, chemicals, extreme temperatures, large animals and physical stress.

In its latest report, the ILO estimates that 215 million children are engaged in child labor as defined by Convention 138, and that 115 million of them are in hazardous work. There are no reliable global estimates for unconditional WFCL.

The ILO has adopted the goal, ambitious or delusional depending on your point of view, of eliminating all WFCL by the year 2016. (This is one year after the 2015 deadline for the Millennium Development Goals, which are related but different.) Whether or not this goal is reached, it is used as a framework for mobilizing resources, fostering programs around the world and setting local targets. The Hague conference was organized as a check-in to determine the rate of progress so far and to set priorities for the next three years. There will be a follow-up conference in Brazil in 2013, a last rallying event before the 2016 target.

The main product of the conference was a roadmap document, suggesting what governments, international agencies and civil society (employers, unions and NGO’s) should be doing for the next three years. It went through several iterations, with a final negotiating session on the first night of the conference. It will be submitted to the ILO’s Governing Body next month.

That’s the background; here’s the story.

At the eleventh hour, at this final negotiating session, the US government delegation, supported by the employers, raised several fundamental objections to the proposed roadmap. In particular, they opposed any mention of Convention 138 or action against child labor in general. According to their demands, the only issue was Convention 182; we should eliminate the WFCL but sidestep the rest. They also opposed any reference to particular economic sectors like agriculture. Somehow the world is supposed to remove WFCL with a fine scalpel, leaving all other issues untouched.

The talks went on and on into the night, adjourning at 3 am. Every time the majority group (most governments, international agencies, NGO’s, unions) offered a compromise, the US team would step out into the hallway, pull out their cell phones and call Washington for instructions. The message was always the same: fight over every word, every comma. In the end, the only compromise allowed was a reference to child labor and Convention 138 in the preamble; the action items were scrubbed clean. Officially, the international community abstains from making any commitment to address child labor unless it is specifically hazardous. Half of the estimated child labor is to be eliminated, the other half ignored, at least for the next several years.

Just to be fair, the US government remains a generous donor to efforts targeting child labor—generous in the context of overall global parsimony. They provide the main external support for IPEC, and they fund a variety of important national programs in poor countries. On the other hand, it is exactly this level of funding that gives the US such an outsized ability to veto proposals at international forums: the infamous Golden Rule. (The one with the gold makes the rules.)

One small but telling irony: on the eve of the conference a rump group of academics organized by a German faction that calls itself “child labor protagonists” sent out a manifesto on the conference email list. Using militant language, they denounced efforts to eliminate child labor as elitist and ethnocentric. This is just another example of Europeans trampling other cultures underfoot, they said. Moreover, the only legitimate question is what children want. They want to work, as we know (because they are working), so let them work. The only intervention they recommend is supporting “unions” of child workers, which will supposedly lead to better and better-paid work. They called for the repeal of Convention 138 and the downsizing or elimination of IPEC. They demanded that child workers (or at least the ones affiliated with their organizations) be represented at international meetings. They should be happy at the outcome of the conference; thanks to the US government and the employers, they have made progress toward at least some of their goals.

What makes all of this such a strange spectacle is the actual situation on the ground. Suppose the primary goal is to remove 115 million children from hazardous work. That’s a lot of kids. You aren’t going to do this by creating thousands or millions of narrowly targeted intervention programs, teams of trained labor inspectors and social workers who will go out into communities and identify these children one by one. No, it is possible only by using broad spectrum methods that address non-hazardous forms of child labor as well. The most important of these is the provision of supplementary income to poor parents of school-age children. These income transfer programs, which often include requirements that children attend school or that their families take part in health and nutrition programs, have a wonderful track record of reducing child labor while also improving living standards. Everyone who studies child labor agrees on this. So what is the point of going to the mat over whether the roadmap rigorously excludes any mention of child labor that is not hazardous? That’s a real question: I’m wondering whether there is any motivation behind the US position beyond pure neoliberal ideology. (The same question could be asked of the “protagonistas”: in the end, is it all about freedom of contract in the labor market?) I don’t know the answer—I’m just asking.

Move Aside, Piven and Cloward—The New Evil Genius is Paulo Freire

Maybe I’m jumping to conclusions, but read this from an article about the new anti-ethnic studies bill in Arizona:

The new law, which takes effect at the end of the year, is a victory for Tom Horne, the state superintendent of public instruction, who has fought for years to end Tucson’s ethnic studies programs, which he believes teach students to feel oppressed and resent whites.

“The most offensive thing to me, fundamentally, is dividing kids by race,” Mr. Horne said.

“They are teaching a radical ideology in Raza, including that Arizona and other states were stolen from Mexico and should be given back,” he continued, referring to the Mexican-American studies classes. “My point of view is that these kids’ parents and grandparents came, mostly legally, because this is the land of opportunity, and we should teach them that if they work hard, they can accomplish anything.”

Mr. Horne, a Republican who is running for state attorney general, said he also objected to the textbook “Pedagogy of the Oppressed” by Paulo Freire.

Paulo Freire? Textbook? I’d love to see Arizona’s schoolkids try their luck with Freire’s dense left-Hegelian classic, which, by the way, deals with an entirely different set of issues.

The complete non sequitur of bringing up Freire, and the “textbook” nonsense, both suggest that Horne knows nothing at all about this topic. That in turn implies there may be a new intellectual conspiracy theory circulating among the far right. If so, get ready to hear that the triumph of secular humanism and collectivism in the indoctrination camps known as public schools all issue from this nefarious treatise by the former Brazilian theorist and activist.

I’m waiting to hear what Glenn Beck has to say about the hidden threat of “dialog”.

Mulligan On Gilligan's Island Over Housing Bubble

Casey Mulligan has gone overboard to Gilligan's Island in his latest fantasy about what happened in the housing market running up to 2006, "Was there a good reason for the housing boom?" http://caseymulligan.blogspot.com. While he admits that there might have been a little bit of a bubble, maybe, he is full of how it was mostly fundamentals. What were they? Well, the first one is that during 2002-06, people rather suddenly wanted lots more space in their housing because they were buying more stuff and wanted room to put it in. Funny about that, given how many people were buying more stuff by taking out home equity loans on the rising prices of their homes in order to buy a lot of that extra stuff.

The other is something I have not previously heard a single person mention, although in this Chicago wonderland, people do not have to know what they need to know in order to know it. In this case, it is an expectation of lower housing costs in the future due to computerization and cyberization of the mortgage lending and completion process, obviously something of great importance to people not planning to sell a home soon or buying one in that period long before these wonderful improvements would arrive (which have not yet, by and large, but we cannot disprove that this expectation was operating to push up the fundamental, can we?).

Regarding numbers, Mulligan is especially worked up about the Case and Shiller index for housing prices in major cities not having fallen all the way back to its low in 1997. It is at about 1.0 now, which it was in 1991 and 2000, with the low in 1997 around 0.8 and the high in 2006 at 1.4. If one looks at the price-to-rent ratios from around six months ago (latest I could find from Calculated Risk), http://www.calculatedriskblog.com/2009/11/house-prices-real-prices-price-to-rent.html, one finds that as of last November this index was at about 1.10, which was what it was in 2002, peaking at just under 1.35 in 2006, with it being 100 in 1990, and somewhat under that around 1997.

Maybe there has been some upward movement of the fundamentals as measured by rents, but nowhere nearly enough to justify all the whooping that Mulligan carries on about in this piece. But what can one expect from a guy who blamed the rising unemployment as we went into the Great Recession on a sudden outbreak of laziness on the part of workers?

Feldstein v. Thoma on Fiscal Policy and Aggregate Demand

I would have thought Martin Feldstein would better understand the Barro-Ricardian Equivalence proposition:

President Obama proposes to increase tax rates on high-income households while making the existing tax rates permanent for taxpayers below the top tax brackets. While the increase would hit only a relatively small fraction of all households, that group represents a large share of total taxes and of private spending. Raising their tax rates would be a substantial blow to overall spending and therefore to GDP growth.

While it is true that high-income households represent a large share of consumption, the issue is what is the marginal propensity to consume out of a change in disposable income created by a two-year increase in current tax obligations? For households who do not face borrower constraints and would therefore most likely behave in a fashion predicted by life cycle models of consumption, the impact on consumption demand would most likely be very modest at best. The Barro-Ricardian Equivalence proposition would go so far as to suggest that delaying a tax increase needed to restore long-run fiscal sustainability would have no effect on aggregate demand.

Fortunately Mark Thoma offers us this more reasoned assessment of the role of fiscal policy and aggregate demand:

Shifting the tax cuts to people who are more likely to spend the extra money rather than put it into savings would provide an even larger boost to the economy. It's also worth noting that if the worry is about the effect on the economy and the deficit, it would also be possible to allow the tax cuts to expire and then replace the missing demand with additional temporary government spending

If Luskin is Selling Stocks – Isn’t It Time to Buy?

A friend of Brad DeLong reads the latest from Donald Luskin and then writes:

Wow! His record as a perfect contrary indicator remains untarnished!

Luskin thinks the stock market is overvalued with his “reasoning” being:

There were a lot of good reasons for stocks having risen as they did. First, we came from a terrible panic in March, 2009, when they were deeply oversold. Then as the rally progressed, it was fueled by a huge increase if corporate earnings, as the economy came out of deep recession. But all these things are cyclical. At the lows, earnings were depressed, and prices were depressed even more, so the price/earnings ratio for the S&P 500 was about 10. That's about as low as it gets. There have been times when it as lower, but that's about where it was at the worst in the Great Depression. At the highs in late April, the price/earnings ratio had risen to about 15. That's about as high as it gets. Sure, it got higher in the crazy years in the late 1990s. And there have been other exceptions. But that's about where it was at the highs in October 2007. So what we've seen was simply running from the low bound of the p/e ratio to the high bound; a classic cycle.

Price to earnings ratios of 15 are not really that high if one expects earnings growth to continue. Our chart shows US corporate profits for each quarter from 2001 to 2009. Does Donald Luskin really think that corporate profits cannot continue to grow?

"Europe Must Rewrite Social Contract As Price Of $1 Trillion Lifeline" - WaPo

Yep, there it is, the subheadline under "A new reality for the old world" for an upper left-hand corner, front page story by Howard Schneider on the front page of today's Washington Post. Wow. Except that this is one of the most distorted and off-the-wall headlines to appear in such a place in a long time, with the obvious agenda of wanting to say the same for the US (time for that deficit commission to cut social security anyone?).

What is true is that for a country (e.g only Greece so far) to borrow from the newly established fund, put up by EU countries and the IMF and backed by the ECB, with a further backing by the US Fed, which has reopened its closed-down currency swap lines, it must engage in serious budget deficit reduction. Quite likely that will involve both spending cuts and tax increases, as have been voted for now by the Greek parliament, despite the riots in the streets by opponents of this.

However, let us be clear. First of all, this is not at all a statement or policy about "Europe" as a whole at all, much less social contracts in general. As of 2006 Greece had a lower percentage of GDP going to social spending (24.2%) than the EU average (26.9%). Countries with the highest percentages include some that have much less severe budget deficit problems, e.g. Germany, Sweden, France, Austria, the Netherlands. This is a problem of tax collections and corruption and underground economies, not of an out-of-control "social contract."

European Economics at a Crossroads

I am pleased to announce the publication of my book with David Colander and Richard Holt, European Economics at a Crossroads, being issued in both hardcover and paper back simultaneously from Edward Elgar. Several years in the producing, this book is the sequel to our 2004, The Changing Face of Economics: Conversations with Cutting Edge Economists, which created a bit of a stir by arguing for the possible existence of "non-orthodox mainstream" economists, with someone like George Akerlof being an example of this peculiar breed. We also argued strongly for viewing the economics profession and intellectual development as being a complex adaptive process.

The new book continues this argument, but focuses on European economists and economics. The additional arguments involve the relationship between European economics and US economics. The former long protected many more heterodox intellectual traditions within national language traditions and publications and practices. However, this was also associated with hierarchical and stifling setups. The pressure to move to English and imitate US standards and practices, partly driven by Europeans attending US universities and returning to Europe, has both weakened these hierarchies and moved much of Europe to imitate US economics in many ways. We argue that while some of this is a good thing, there is a serious danger of imitating leftover third-rate orthodox US economics at its worst. Based on its past traditions, Europe has the opportunity to develop its own alternative and possibly superior approaches.

Following two opening chapters laying out these arguments and their connection with our earlier complexity arguments, there are a set of interviews with Alan Kirman, Ernst Fehr, Cars Hommes, Mauro Gallegati and Laura Gardini, Tonu Puu, Soren Johansen and Katarina Juselius, Geoffrey Hodgson, Joan Martinez Alier, and Robert Boyer. These are followed by two reflective interviews discussing the others and broader issues with Janos Kornai and Reinhard Selten.