After losing a fortune speculating in the South Sea Bubble, Isaac Newton reportedly said that he could calculate the motions of heavenly bodies, but not those of the madness of crowds.
Today, millionaires and billionaires are pretty much united in the proposition that even kind of social provision must wither in order that the state can afford to clean up the mess that the wealthy have created. In addition, raising their taxes is not only unfair, but destructive of health of the economy. Yves Smith's opinion piece in the Times, largely lifted from her wonderful book, ECONned, reports how corporations are hoarding their cash. They have also been investing in their own stock, which raises executive bonuses, which helps to amplify the obscene redistribution of income.
Of course, common sense shows that austerity is the worst policy in the face of an economic decline. In a market economy, without consumer demand, business activity dries up.
I can understand why the millionaires and billionaires promote their self-interested ideology. I can also understand why the democrats have joined in the millionaire and billionaire ideology rather than upset their base -- the millionaires and billionaires.
What I cannot understand is why more people have not caught on to this game. Yes, a small number of sensible economists have spoken up, but without any real effect. Instead, supposedly progressive people go along with the Democrats on the ground that the Republicans would be worse. But again, why have so few people seen behind this good cop/bad cop game?
The New York Times can publish an article describing how destructive austerity has been in Ireland
Alderman, Liz. 2010. "In Ireland, a Picture of the High Cost of Austerity." New York Times (29 June): p. A 1.
http://www.nytimes.com/2010/06/29/business/global/29austerity.html?ref=business&pagewanted=all
However, buried within a mass of millionaire and billionaire ideology, such information has no effect.
Of course, people are angry, but the millionaires and billionaires have been able to divert this anger for their own purposes. Of the 538 members of Congress, none of them gives any indication that they have a clue. Of course, some of them know very well what is happening, but fear speaking out, lest the millionaires and billionaires come after them.
Given this mess, we live in an era of induced madness. Virtually nobody gives any indication that s/he has the sense of Isaac Newton to recognize this as madness, which now appears as common sense. Congratulations to Pete Peterson and his ilk -- at least until this mess you are creating falls apart.
Friday, July 9, 2010
Thursday, July 8, 2010
From the Rubble
This morning’s report on the failure clear earthquake rubble from the streets of Haiti connects with something I’ve often thought about. Anyone who spends time in the urban agglomerations of the developing world is familiar with the rubble problem; it is just more extreme in Haiti. How big a deal is it? Not massive, but traffic moves much more slowly on torn-up streets, and in day to day life the stuff is ugly and just gets in the way.
Now flash back to 1945 and the end of the wars in Europe and the Pacific. In the great bombed-out cities like Berlin and Tokyo, ordinary citizens, mostly women, cleared the rubble with whatever tools they could find. No one paid them, but they worked with grim determination until the job was done. For a visual impression, see the opening scenes of Fassbinder’s classic “Marriage of Maria Braun”.
Why then and not now? It isn’t because Europeans and Japanese are intrinsically “harder-working”; you can see tremendous amounts of hard work taking place around piles of rubble in impoverished cities today. I suspect a correct answer to this question would take us a long way toward understanding how and why development takes place.
One element is that the “rubble women” knew what their cities had looked like before the war, and this gave them a vision of and confidence in the post-rubble city of the future. The task was brutal but it had a clear end-point.
Whatever its role in a more complete explanation, this observation is useless for development policy. It is like Robert Putnam’s implicit advice for the Mezzogiorno in Making Democracy Work: have the right twelfth century. Port-au-Prince does not have a rubble-free past its residents can draw on to guide their path to a rubble-free future. All the same, the resources needed to solve this problem are right there in full view. How can they be mobilized?
Now flash back to 1945 and the end of the wars in Europe and the Pacific. In the great bombed-out cities like Berlin and Tokyo, ordinary citizens, mostly women, cleared the rubble with whatever tools they could find. No one paid them, but they worked with grim determination until the job was done. For a visual impression, see the opening scenes of Fassbinder’s classic “Marriage of Maria Braun”.
Why then and not now? It isn’t because Europeans and Japanese are intrinsically “harder-working”; you can see tremendous amounts of hard work taking place around piles of rubble in impoverished cities today. I suspect a correct answer to this question would take us a long way toward understanding how and why development takes place.
One element is that the “rubble women” knew what their cities had looked like before the war, and this gave them a vision of and confidence in the post-rubble city of the future. The task was brutal but it had a clear end-point.
Whatever its role in a more complete explanation, this observation is useless for development policy. It is like Robert Putnam’s implicit advice for the Mezzogiorno in Making Democracy Work: have the right twelfth century. Port-au-Prince does not have a rubble-free past its residents can draw on to guide their path to a rubble-free future. All the same, the resources needed to solve this problem are right there in full view. How can they be mobilized?
Not Bai-ing It
When Matt Bai first appeared on the scene, I thought, This looks like something interesting: a journalist who specializes in the center-left, doesn’t particularly identify with it, and can write about it with objectivity. It sounds like a nice idea—too bad the actual work is so shoddy.
I should have learned by now, but each new Bai essay sets out an appealing framework, an approach that promises some sort of new insight. Then comes the letdown.
This is how it went with his piece in this morning’s New York Times on how “the argument over fiscal policy represents the churning of a cultural fault line that has defined and destabilized Democratic politics pretty much since the onset of the Great Society”. Ah, I thought, now we are going to get to the political substructure behind Obamanomics, the deeper reason why this administration is kowtowing to fiscal conservatives and Wall Street barons.
No such luck. First off, the guy just doesn’t get the facts right.
1. A deficit projection for 2020 is not a meaningful guide to policy today (there will be a lot big surprises during the next ten years), and a public debt of 90% of GDP, while not desirable, is far from “staggering”. Matt should take a look around the OECD, or back into our own history for that matter.
2. If you wanted to reduce fiscal deficits, the least meaningful step would be to call for “scaling back entitlements”. Social Security runs a surplus, which it will live off of for another three decades or so. Medicare is a big worry, but mostly because health care costs have metastasized. The government currently pays over half of all health expenses in the US, but if we can’t control these costs we’ll be broke no matter who pays for them. Meanwhile, the big drivers of fiscal deficits since the Clinton-era surpluses have been tax cuts and wars. You want to stem the red ink? Start there.
3. “Fiscal responsibility” has nothing to do with modern political conservatism, at least not since Reagan. Republicans have pumped up deficits with their anti-tax, pro-war fixations, to an extent that surpasses the ambitions of even the most wild-eyed liberals. Take a look at those unreconstructed 60s Democrats: they want to undo the Bush tax cuts and even increase taxes on upper incomes and capital gains. They want to tax financial transactions. They want to tax carbon. In short, they want to stuff the “beast”, not starve it.
And the basic premise behind this article is just a cop out. The capture of the Democratic party by its pro-finance wing is not a “cultural” event. It has nothing to do with the songs on Obama’s iPod or whether Bill Clinton did or did not inhale. It has everything to do with the rise of the finance sector, the emergence of a new view of corporations as portfolios (and therefore congruent with finance), and the dominance of the wealth-holding constituency, the top tenth or so of households, in an era of ever-increasing inequality. Exactly how the tectonic forces within the national and global economy have their expression in politics is murky and complex. Journalists could do a world of good by illuminating it. In my imaginary parallel universe there is someone like Bai, but much more informed and aware, covering this beat.
I should have learned by now, but each new Bai essay sets out an appealing framework, an approach that promises some sort of new insight. Then comes the letdown.
This is how it went with his piece in this morning’s New York Times on how “the argument over fiscal policy represents the churning of a cultural fault line that has defined and destabilized Democratic politics pretty much since the onset of the Great Society”. Ah, I thought, now we are going to get to the political substructure behind Obamanomics, the deeper reason why this administration is kowtowing to fiscal conservatives and Wall Street barons.
No such luck. First off, the guy just doesn’t get the facts right.
1. A deficit projection for 2020 is not a meaningful guide to policy today (there will be a lot big surprises during the next ten years), and a public debt of 90% of GDP, while not desirable, is far from “staggering”. Matt should take a look around the OECD, or back into our own history for that matter.
2. If you wanted to reduce fiscal deficits, the least meaningful step would be to call for “scaling back entitlements”. Social Security runs a surplus, which it will live off of for another three decades or so. Medicare is a big worry, but mostly because health care costs have metastasized. The government currently pays over half of all health expenses in the US, but if we can’t control these costs we’ll be broke no matter who pays for them. Meanwhile, the big drivers of fiscal deficits since the Clinton-era surpluses have been tax cuts and wars. You want to stem the red ink? Start there.
3. “Fiscal responsibility” has nothing to do with modern political conservatism, at least not since Reagan. Republicans have pumped up deficits with their anti-tax, pro-war fixations, to an extent that surpasses the ambitions of even the most wild-eyed liberals. Take a look at those unreconstructed 60s Democrats: they want to undo the Bush tax cuts and even increase taxes on upper incomes and capital gains. They want to tax financial transactions. They want to tax carbon. In short, they want to stuff the “beast”, not starve it.
And the basic premise behind this article is just a cop out. The capture of the Democratic party by its pro-finance wing is not a “cultural” event. It has nothing to do with the songs on Obama’s iPod or whether Bill Clinton did or did not inhale. It has everything to do with the rise of the finance sector, the emergence of a new view of corporations as portfolios (and therefore congruent with finance), and the dominance of the wealth-holding constituency, the top tenth or so of households, in an era of ever-increasing inequality. Exactly how the tectonic forces within the national and global economy have their expression in politics is murky and complex. Journalists could do a world of good by illuminating it. In my imaginary parallel universe there is someone like Bai, but much more informed and aware, covering this beat.
Tuesday, July 6, 2010
Who Should Own The Tea Parties?
According to WaPo today, the TV ad shows red coats with guns about to shoot down colonial revolutionaries, when, a Dodge Challenger roars out of the woods with an American flag on it, driven by George Washington, who vanquishes the red coats and then steps out to declare "Here's a couple of things America got right: cars -- and freedom." When I watched the July 4th parade in Harrisonburg, by far the largest contingent were members of the Shenandoah Valley Tea Party handing out pamphlets supporting tax cuts and smaller government, the pamphlets very slick and showing funding support from the Heritage Foundation and various other conservative entities. A friend who was in the parade supporting a local Democratic candidate emailed friends about feeling threatened by gun-toting people in the parade, particular the Tea Partiers.
So, it has been taken for granted that the political Right owns the Tea Parties. After all, the original tea party was to protest a tax on tea, right? Not so simple, actually. The original slogan was "No taxation without representation," not "no taxation." It was pro-democracy, not anti-tax or anti-government. And all the taxes we have have been instituted by democratically elected Congresses and legislatures and city or county councils or boards of supervisors. There are many progressive aspects of the American Revolution, not just arguments for going back to the late nineteenth century. Tea partiers cite the 10th amendment to argue that the federal government should not be regulating the environment or providing social security or health insurance, ignoring that the Constitution calls for support of the general welfare.
Another aspect often ignored by the Tea Partiers is the relative social liberalism of many of the Founding Fathers on many issues (although not on slavery or attitudes towards the Indians or women). These men were deists who believed in the separation of church and state. The claims that the US is a "Christian nation" were refuted by even the most religious of them, John Adams, as president in our treaty with the Barbary States in 1798. Franklin and Washington were Masons before their official religions (and Franklin did not have one at all). When they attended the Episcopal churches to which they belonged, neither Washington nor Jefferson took communion, and Jefferson declared a favoritism for Unitarianism, which John Adams was a card carrying member of at his death, while Washington had a Masonic funeral. It is perhaps ironic that some of these folks are aware of these attitudes, as the recent effort by the Texas School Board to remove the teaching of Jefferson as an important political figure for his support of separation of church and state shows.
In any case, I think that progressives need to claim, or perhaps re-claim, their heritage in the American Revolution and not let it be taken over by this collection of hypocrites and lunatics.
So, it has been taken for granted that the political Right owns the Tea Parties. After all, the original tea party was to protest a tax on tea, right? Not so simple, actually. The original slogan was "No taxation without representation," not "no taxation." It was pro-democracy, not anti-tax or anti-government. And all the taxes we have have been instituted by democratically elected Congresses and legislatures and city or county councils or boards of supervisors. There are many progressive aspects of the American Revolution, not just arguments for going back to the late nineteenth century. Tea partiers cite the 10th amendment to argue that the federal government should not be regulating the environment or providing social security or health insurance, ignoring that the Constitution calls for support of the general welfare.
Another aspect often ignored by the Tea Partiers is the relative social liberalism of many of the Founding Fathers on many issues (although not on slavery or attitudes towards the Indians or women). These men were deists who believed in the separation of church and state. The claims that the US is a "Christian nation" were refuted by even the most religious of them, John Adams, as president in our treaty with the Barbary States in 1798. Franklin and Washington were Masons before their official religions (and Franklin did not have one at all). When they attended the Episcopal churches to which they belonged, neither Washington nor Jefferson took communion, and Jefferson declared a favoritism for Unitarianism, which John Adams was a card carrying member of at his death, while Washington had a Masonic funeral. It is perhaps ironic that some of these folks are aware of these attitudes, as the recent effort by the Texas School Board to remove the teaching of Jefferson as an important political figure for his support of separation of church and state shows.
In any case, I think that progressives need to claim, or perhaps re-claim, their heritage in the American Revolution and not let it be taken over by this collection of hypocrites and lunatics.
Monday, July 5, 2010
Insight on Iran
Mohammad Maljoo, an impressive young economist whom I met a few years ago, published an important article on the relationship between Green Movement and labour movement in Iran.
At a time when we know so little about the reality of Iran, Mohammad's insights are important.
http://www.merip.org/mero/mero062610.html
At a time when we know so little about the reality of Iran, Mohammad's insights are important.
http://www.merip.org/mero/mero062610.html
Thursday, July 1, 2010
Dwight Armstrong Of the Gang That Could Not Bomb Straight Dies
As reported in the NY Times a few days ago, Dwight Armstrong died of lung cancer at age 58 in Madison, Wisconsin. At 3:40 AM on Aug. 24, 1970, almost 40 years ago, he and the other three members of the New Year's Gang, parked a Ford Econoline full of gasoline-soaked ammonium nitrate next to Sterling Hall (once the home of the econ dept.) on the University of Wisconsin campus, and set it off, making the largest terrorist explosion in the US up to that time. They were targeting the Army Mathematics Research Center (officially the "Army" had been dropped from the name by then, although it continued to be funded by the US Army). However, they were The Gang That Could Not Bomb Straight, having earlier in the year set off a bomb in the Primate Center, thinking it was the Selective Service office, which was across the street. So, instead of the (A)MRC, they blew up a bunch of physics labs, injuring four, and killing post-doc, Robert Fassnacht, who was reported to be anti-Vietman War in his views, and was the father of three children. In many ways, this was the highwater mark in terms of intensity of the anti-Vietnam War movement in the US, although badly bungled as the participants later admitted.
Dwight was a kid from the east side of Madison whose dad worked at the Oscar Mayer plant. Dwight had been a high school dropout and was a personally troubled individual who was arrested in Indiana in 1987 for running a meth lab. He was apprehended in 1977 and served two years in jail. The main leader of the New Year's Gang was his older brother, Karl Armstrong, who was the first apprehended in 1972, and served seven years in jail. Karl runs a fruit juice stand on the Library mall these days in Madison. David Fine was the youngest and from Maryland. He was apprehended in 1975 and served four years, later becoming a paralegal in Oregon. The fourth, Leo Burt from Pennsylvania, has not been apprehended to this day.
I must note my own connection to all this. I was in grad school in econ at UW at the time, in between my first and second years. My father, the late J. Barkley Rosser, Sr., was the Director of the Center at the time. We disagreed about politics (and the war in particular), but I always personally respected him, and I always opposed the use of any sort of violence in protesting the War in Vietnam.
Dwight was a kid from the east side of Madison whose dad worked at the Oscar Mayer plant. Dwight had been a high school dropout and was a personally troubled individual who was arrested in Indiana in 1987 for running a meth lab. He was apprehended in 1977 and served two years in jail. The main leader of the New Year's Gang was his older brother, Karl Armstrong, who was the first apprehended in 1972, and served seven years in jail. Karl runs a fruit juice stand on the Library mall these days in Madison. David Fine was the youngest and from Maryland. He was apprehended in 1975 and served four years, later becoming a paralegal in Oregon. The fourth, Leo Burt from Pennsylvania, has not been apprehended to this day.
I must note my own connection to all this. I was in grad school in econ at UW at the time, in between my first and second years. My father, the late J. Barkley Rosser, Sr., was the Director of the Center at the time. We disagreed about politics (and the war in particular), but I always personally respected him, and I always opposed the use of any sort of violence in protesting the War in Vietnam.
Wednesday, June 30, 2010
The Tragicomedy of Iran Sanctions
"... the 2007 US sanctions against Iranian banks ironically ensured Iran's immunity from the global financial crisis that was about to explode."
Parsi, Massoud. 2010. "The Tragicomedy of Iran Sanctions." AlJazeera.net (22 May).
Parsi, Massoud. 2010. "The Tragicomedy of Iran Sanctions." AlJazeera.net (22 May).
The V-Bounce Man On The State Of Modern Macro
Recently the new president of the Minneapolis Fed, Narayana Kotcherlakota, also at the U. of Minnesota, and a longtime advocate of DSGE modeling, "apologized" for the poor performance of "modern" macro models in predicting/explaining the crash and recession of 2008, http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4428. He said that the models need much more complicated modeling of financial markets and dynamics, duh.
This led to James Morley of Washington University and Macroeconomic Advisers, who last year was forecasting a V-bounce recovery from the recession (which did not work, unfortunately), to write a critique of this paper, with which I largely agree, http://macroadvisers.blogspot.com/2020/06/emperor-has-no-clothes-ma-on-state-of.html. He points out that it is silly of Kotcherlakota to bemoan policymakers having fallen back on "long-discarded models" when considering such things as the fiscal stimulus, asking "Who is this 'we' who discarded those models?" He accurately points out that the best of these models, such as the one by Smet and Wouters, continue to rely on AR modeling of supposed exogenous shocks that have nothing to do with policy or anything else. In the end, he says that improved models should incorporate the ideas of Hyman Minsky, with which I strongly agree.
Others have commented on this, including Brad DeLong and also the estimable Mark Thoma at economists view, where there are extensive comments after his extensive excepts from Morley's paper, http://economistsview.typepad.com/economistsview/2020/06/the-state-of-modern-macro.html#comments.
This led to James Morley of Washington University and Macroeconomic Advisers, who last year was forecasting a V-bounce recovery from the recession (which did not work, unfortunately), to write a critique of this paper, with which I largely agree, http://macroadvisers.blogspot.com/2020/06/emperor-has-no-clothes-ma-on-state-of.html. He points out that it is silly of Kotcherlakota to bemoan policymakers having fallen back on "long-discarded models" when considering such things as the fiscal stimulus, asking "Who is this 'we' who discarded those models?" He accurately points out that the best of these models, such as the one by Smet and Wouters, continue to rely on AR modeling of supposed exogenous shocks that have nothing to do with policy or anything else. In the end, he says that improved models should incorporate the ideas of Hyman Minsky, with which I strongly agree.
Others have commented on this, including Brad DeLong and also the estimable Mark Thoma at economists view, where there are extensive comments after his extensive excepts from Morley's paper, http://economistsview.typepad.com/economistsview/2020/06/the-state-of-modern-macro.html#comments.
Monday, June 28, 2010
James Buchanan On Chicago School Thinking: Old And New
At the Summer Institute on History of Economics held a week ago or so at the University of Richmond, 90-year old Chicago Ph.D. (and Nobelist) James Buchanan gave a talk on the topic in the subject head. One can see it and the question and answer period (1 hour, 16 minutes) here. It is not what most regular readers of this blog would expect out of this old pro-laissez faire workhorse and father of the public choice school.
So, yes, he is for free markets, but in the Old Chicago School (of Frank Knight, Jacob Viner, and Henry Simons), it was known that they only work with the right laws and institutions, whereas the New Chicago School (Lucas et al; he views Friedman, Stigler, and Becker as "intermediates"), thinks that markets always work all the time, no matter what. This is not the case, because "rules and laws are Samuelsonian non-partitionable public goods." Yes, the attitudes of the New Chicago School are partly responsible for the recent crises. And Buchanan now has "radical views," wanting to "break up the big banks" and reimpose the Glass-Steagall Act, among other things.
One other thing that was sort of amusing to watch was how he handled incoherent questions, of which there were several. He would say, "I don't understand your question," and that would be that, and, frankly, I did not understand them either. Left the questioners rather hanging with their gibberish. And for others he would answer "I agree," period, although still others he gave long and insightful replies to. I guess when you are 90, you do not feel like wasting yours and other peoples' time.
So, yes, he is for free markets, but in the Old Chicago School (of Frank Knight, Jacob Viner, and Henry Simons), it was known that they only work with the right laws and institutions, whereas the New Chicago School (Lucas et al; he views Friedman, Stigler, and Becker as "intermediates"), thinks that markets always work all the time, no matter what. This is not the case, because "rules and laws are Samuelsonian non-partitionable public goods." Yes, the attitudes of the New Chicago School are partly responsible for the recent crises. And Buchanan now has "radical views," wanting to "break up the big banks" and reimpose the Glass-Steagall Act, among other things.
One other thing that was sort of amusing to watch was how he handled incoherent questions, of which there were several. He would say, "I don't understand your question," and that would be that, and, frankly, I did not understand them either. Left the questioners rather hanging with their gibberish. And for others he would answer "I agree," period, although still others he gave long and insightful replies to. I guess when you are 90, you do not feel like wasting yours and other peoples' time.
Sunday, June 27, 2010
Notes on the Epidemic of Privatization
Here are two snippets regarding the replacement of public provision of services with less desirable private sources.
Lewin, Tamar. 2010. "For-Profit Colleges Find New Market Niche." New York Times (24 June): p. A 17.
Grossman, Andrew. 2010. "Route to a Fare Profit? One Private Bus Operator Aims to Benefit From MTA's Pain." Wall Street Journal (25 June).
Kaplan University has an offer for California community college students who cannot get a seat in a class they need: under a memorandum of understanding with the chancellor of the community college system, they can take the online version at Kaplan, with a 42 percent tuition discount. The opportunity would not come cheap. Kaplan charges $216 a credit with the discount, compared with $26 a credit at California's community colleges.
For better or worse, the tough times for public colleges nationwide have presented for-profit colleges with a promising marketing opportunity.
In California, the memorandum of understanding also requires each community college taking part to sign a credit-transfer agreement with Kaplan -- and most of the state's 112 community colleges are not eager to do so. Thus far, Kaplan has no takers for its courses. "Faculty from across the state were uniformly irate and disappointed about the memorandum of understanding," said Jane Patton, president of the Academic Senate for California Community Colleges, partly because faculty members were not consulted.
Lewin, Tamar. 2010. "For-Profit Colleges Find New Market Niche." New York Times (24 June): p. A 17.
Where the Metropolitan Transportation Authority sees a sure-fire way to lose money, Joel Azumah sees dollar signs." "Mr. Azumah, the president, owner and sometimes-driver of TransportAzumah, thinks he can make money running buses along three routes that the MTA plans to shut down this weekend as part of deep service cuts to fill a yawning deficit. The MTA says it was losing almost $2 million a year on the X90, X25 and X29 express bus routes.
Grossman, Andrew. 2010. "Route to a Fare Profit? One Private Bus Operator Aims to Benefit From MTA's Pain." Wall Street Journal (25 June).
Friday, June 25, 2010
Austerity: A Prisoner’s Dilemma?
Maybe not, but it’s worth a look. The basic idea is that, leaving aside prices (which are flat or falling out to the horizon), fiscal policy can be viewed as having three macroeconomic impacts: on domestic demand, external demand, and fiscal space itself. Austerity is negative on the first and second, but positive on the third. Details (relatively speaking):
Domestic demand: This is immediate and can be assumed to follow some form of Keynesian determination. As long as the fiscal multiplier is greater than zero, cutting deficits will mean cutting income and jobs.
External demand: Similarly, domestic austerity will have a negative effect on demand among trading partners, depending on their bilateral exports (to you) as a share of their own GDP. So austerity in the US would have a large effect on its NAFTA partners, Mexico and Canada, but not much (directly at any rate) on a country like Hungary.
Fiscal space: Imagine that, in the current environment, the risk that bond markets may abandon your country is a sort of lottery. A sudden stop is the cost to be avoided, since it not only raises your borrowing costs, but also drastically narrows your policy autonomy. At any moment you have a given likelihood of losing this lottery over the relevant, multi-year policy horizon; austerity may lower this likelihood. (Actually, this is not clear, as the example of Spain, which was dropped by the markets just after announcing austerity, suggests. But let us make the assumption for the sake of the model.)
Thus, within a range of parameters, austerity could be a PD. This would be the case if the three PD criteria are met:
1. Incentive to defect: the benefits of greater fiscal space (reduction in the likelihood of being attacked by bond markets) outweighs the perceived direct effects on demand.
2. Disincentive to be the sole cooperator: the bond market costs of being the only country to run large fiscal deficits exceed the direct benefits to be had from greater domestic demand.
3. The superiority of mutual cooperation: each country regards itself as better off in a world in which everyone maintains stimulus rather than one in which every imposes austerity.
All are possible.
The first criterion, of course, depends mightily on the weight given by economic decision-makers on economic growth. At present, every country, save those who have no policy space left, is in the hands of the center-right. (I include Obama in this generalization.) For various political reasons, which differ in each country, this has dampened enthusiasm for the direct effects of Keynesian stimulus. Of course, the degree of openness is also germane. The US, for instance, can expect to have a much larger national income multiplier than the much more open European economies.
The second criterion is guaranteed for most deficit countries, the only exception being the US, which enjoys the privilege (and trap) of printing the world’s principal reserve currency. (The only example of bond markets turning against US sovereign debt was during the Carter presidency, but this was based on an inflationary spike, and inflation is not in the cards at this time.) Whether it may hold for surplus countries is an interesting question. Japan has been able to run up stupendous fiscal deficits at no bond market cost. China is more concerned about domestic prices and asset bubbles than bond traders. Germany—what is Germany worried about?
The third criterion depends in part on the other two, plus the extent to which each country depend on exports for its own demand. It could be true, but it depends on all the parameters described above.
Putting all of this together, it would be a project to assess the extent to which PD dynamics play a role in austerity—whether, in other words, the world faces a problem of competitive austerity. You would have to factor in not only the income multipliers and trade coefficients, incorporating n-round effects, but also the difficult-to-quantify perceptions of the costs of depressed income and employment, as well as the risks of a fickle bond market. It’s at least an article, possibly a book (or a doctoral thesis in IPE). Has it all been done before? I remember similar analyses in which the cost of cooperation (stimulus) was a trade deficit, but not the risk of bond market distress. I don’t recall how formal they were.
Thinking through all of this, I think the case for a PD is weak for most countries, and, even if it can be established, most of the policy interest is not at the level of collective action, but perceptions of the cost-benefit tradeoff of stimulus. In other words, unless one is in a world of uniformly small, highly open economies, I think aggressive Keynesianism can be justified one country at a time.
But I’m in the US, a non-small, relatively nonopen, and up to this point monetarily privileged player.
Domestic demand: This is immediate and can be assumed to follow some form of Keynesian determination. As long as the fiscal multiplier is greater than zero, cutting deficits will mean cutting income and jobs.
External demand: Similarly, domestic austerity will have a negative effect on demand among trading partners, depending on their bilateral exports (to you) as a share of their own GDP. So austerity in the US would have a large effect on its NAFTA partners, Mexico and Canada, but not much (directly at any rate) on a country like Hungary.
Fiscal space: Imagine that, in the current environment, the risk that bond markets may abandon your country is a sort of lottery. A sudden stop is the cost to be avoided, since it not only raises your borrowing costs, but also drastically narrows your policy autonomy. At any moment you have a given likelihood of losing this lottery over the relevant, multi-year policy horizon; austerity may lower this likelihood. (Actually, this is not clear, as the example of Spain, which was dropped by the markets just after announcing austerity, suggests. But let us make the assumption for the sake of the model.)
Thus, within a range of parameters, austerity could be a PD. This would be the case if the three PD criteria are met:
1. Incentive to defect: the benefits of greater fiscal space (reduction in the likelihood of being attacked by bond markets) outweighs the perceived direct effects on demand.
2. Disincentive to be the sole cooperator: the bond market costs of being the only country to run large fiscal deficits exceed the direct benefits to be had from greater domestic demand.
3. The superiority of mutual cooperation: each country regards itself as better off in a world in which everyone maintains stimulus rather than one in which every imposes austerity.
All are possible.
The first criterion, of course, depends mightily on the weight given by economic decision-makers on economic growth. At present, every country, save those who have no policy space left, is in the hands of the center-right. (I include Obama in this generalization.) For various political reasons, which differ in each country, this has dampened enthusiasm for the direct effects of Keynesian stimulus. Of course, the degree of openness is also germane. The US, for instance, can expect to have a much larger national income multiplier than the much more open European economies.
The second criterion is guaranteed for most deficit countries, the only exception being the US, which enjoys the privilege (and trap) of printing the world’s principal reserve currency. (The only example of bond markets turning against US sovereign debt was during the Carter presidency, but this was based on an inflationary spike, and inflation is not in the cards at this time.) Whether it may hold for surplus countries is an interesting question. Japan has been able to run up stupendous fiscal deficits at no bond market cost. China is more concerned about domestic prices and asset bubbles than bond traders. Germany—what is Germany worried about?
The third criterion depends in part on the other two, plus the extent to which each country depend on exports for its own demand. It could be true, but it depends on all the parameters described above.
Putting all of this together, it would be a project to assess the extent to which PD dynamics play a role in austerity—whether, in other words, the world faces a problem of competitive austerity. You would have to factor in not only the income multipliers and trade coefficients, incorporating n-round effects, but also the difficult-to-quantify perceptions of the costs of depressed income and employment, as well as the risks of a fickle bond market. It’s at least an article, possibly a book (or a doctoral thesis in IPE). Has it all been done before? I remember similar analyses in which the cost of cooperation (stimulus) was a trade deficit, but not the risk of bond market distress. I don’t recall how formal they were.
Thinking through all of this, I think the case for a PD is weak for most countries, and, even if it can be established, most of the policy interest is not at the level of collective action, but perceptions of the cost-benefit tradeoff of stimulus. In other words, unless one is in a world of uniformly small, highly open economies, I think aggressive Keynesianism can be justified one country at a time.
But I’m in the US, a non-small, relatively nonopen, and up to this point monetarily privileged player.
Record Heat, And Is Climate Control Legislation Dead?
Science Daily reports that May had the highest average global temperature on record with June quite likely to join it. Nevertheless, in his address to the nation about the BP oil spill, while President Obama called for the passage of clean energy legislation, he somehow neglected to add a call for the Senate to pass any sort of climate control legislation, whether of their own construction or some variation on the complicated cap-and-trade bill that Nancy Pelosi managed to barely get through the House of Representatives just over a year ago after a massive effort. It may be that this is due to the end of any sort of Republican support after Lindsey Graham jumped ship after Obama said we needed to pass immigration reform. Whatever the reason, I fear that this means that climate legislation is dead now, and probably for the foreseeable future, as I expect the Congress to become more hostile after this fall's election.
Mark Thoma at Economists View links to an essay by the ever-optimistic Robert Stavins, who runs through a variety of possible policies in the apparent wake of the failure to get the House bill through the Senate this year. In the end, he sides with some sort of market-based approach that "puts a price on carbon," whether a cap-and-trade or a carbon tax. However, in the face of the knee jerk opposition to any taxes by Republicans, he concludes that the best option to a "cap-and-trade bill in 2010" is one in 2011. I fear I agree, but I now fear that we are probably going to get nothing for the foreseeable future.
What is really annoying about this is that I think there was a window last fall or early winter, which got knocked out partly by the long drawn-out fight over health care, but also coincided at the last best moment when health care finally passed with the very snowy and cold winter in the crucial mid-Atlantic states, as well as the fallout from the wildly exaggerated and ultimately phoney "climategate" non-scandal about the emails from East Anglia, which were proven to be no big deal at all. But we had senators with their children making snowmen and houses on the Capitol lawn while the conservative talk machine spewed on and on about the scandal, since dismissed as such. So, now that we are experiencing record heat, funny that we see none of these people saying anything. They are too busy trying to get BP off the hook for the spill and trying to link Obama to Hitler for his efforts to get a compensation fund for the victims of the spill. Controlling global warming has gone by the boards off into the sunset of other political impossibilities.
Mark Thoma at Economists View links to an essay by the ever-optimistic Robert Stavins, who runs through a variety of possible policies in the apparent wake of the failure to get the House bill through the Senate this year. In the end, he sides with some sort of market-based approach that "puts a price on carbon," whether a cap-and-trade or a carbon tax. However, in the face of the knee jerk opposition to any taxes by Republicans, he concludes that the best option to a "cap-and-trade bill in 2010" is one in 2011. I fear I agree, but I now fear that we are probably going to get nothing for the foreseeable future.
What is really annoying about this is that I think there was a window last fall or early winter, which got knocked out partly by the long drawn-out fight over health care, but also coincided at the last best moment when health care finally passed with the very snowy and cold winter in the crucial mid-Atlantic states, as well as the fallout from the wildly exaggerated and ultimately phoney "climategate" non-scandal about the emails from East Anglia, which were proven to be no big deal at all. But we had senators with their children making snowmen and houses on the Capitol lawn while the conservative talk machine spewed on and on about the scandal, since dismissed as such. So, now that we are experiencing record heat, funny that we see none of these people saying anything. They are too busy trying to get BP off the hook for the spill and trying to link Obama to Hitler for his efforts to get a compensation fund for the victims of the spill. Controlling global warming has gone by the boards off into the sunset of other political impossibilities.
Wednesday, June 23, 2010
V.I. Arnol'd, RIP
This is a bit delayed, but WaPo only had the obit today. Anyway, on June 3, Vladimir Igorevich Arnol'd died of peritonitis in Paris at age 72. He was arguably the greatest living nonlinear dynamics mathematician and also the greatest still living to have come out of the old Soviet Union. A protegee of the late Andrei Kolmogorov, he finally solved the 13th of the Hilbert unresolved math problems from 1900. It involved the stability of nonlinear dynamical systems, including planetary motion. He wrote on catastrophe theory, never buying into either the excessive hype about it during its fad, while then avoiding the excessive dissing of it that came later.
He was the recipient of the Crafoord Prize, the Shaw Prize, and the Wolf Prize. He would have received the most prestigious of all math prizes, the Fields Medal, in 1974, but was forbidden by the Soviet government. He had signed letters protesting the suppression of political dissidents, although he was not one beyond signing these letters. He was a man of principle as well as of profound intellect.
He was the recipient of the Crafoord Prize, the Shaw Prize, and the Wolf Prize. He would have received the most prestigious of all math prizes, the Fields Medal, in 1974, but was forbidden by the Soviet government. He had signed letters protesting the suppression of political dissidents, although he was not one beyond signing these letters. He was a man of principle as well as of profound intellect.
Tuesday, June 22, 2010
Planet BP on the Gulf Oil Spill and Keynes on Digging Holes
Chapter 16 of the General Theory argued:
Benoit Faucon has some fun with Planet BP’s attempt to find the bright side of the Gulf Oil spill:
OK – we are far below full employment but even Keynes recognized that employment creating activity with a positive marginal productivity were a better way to restore full employment than activities with either zero marginal productivity (digging holes) or ones with negative marginal productivity (polluting the Gulf of Mexico).
If — for whatever reason — the rate of interest cannot fall as fast as the marginal efficiency of capital would fall with a rate of accumulation corresponding to what the community would choose to save at a rate of interest equal to the marginal efficiency of capital in conditions of full employment, then even a diversion of the desire to hold wealth towards assets, which will in fact yield no economic fruits whatever, will increase economic well-being. In so far as millionaires find their satisfaction in building mighty mansions to contain their bodies when alive and pyramids to shelter them after death, or, repenting of their sins, erect cathedrals and endow monasteries or foreign missions, the day when abundance of capital will interfere with abundance of output may be postponed. “To dig holes in the ground,” paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services. It is not reasonable, however, that a sensible community should be content to remain dependent on such fortuitous and often wasteful mitigations when once we understand the influences upon which effective demand depends.
Benoit Faucon has some fun with Planet BP’s attempt to find the bright side of the Gulf Oil spill:
But in Planet BP — a BP online, in-house magazine — a “BP reporter” dispatched to Louisiana managed to paint an even rosier picture of the disaster. “There is no reason to hate BP,” one local seafood entrepreneur is quoted as saying, as the region relies on the oil industry for work. Indeed, the April 20 spill on the Deepwater Horizon is being reinvented in Planet BP as a strike of luck. “Much of the region’s [nonfishing boat] businesses — particularly the hotels — have been prospering because so many people have come here from BP and other oil emergency response teams,” another report says. Indeed, one tourist official in a local town makes it clear that “BP has always been a very great partner of ours here…We have always valued the business that BP sent us.”
OK – we are far below full employment but even Keynes recognized that employment creating activity with a positive marginal productivity were a better way to restore full employment than activities with either zero marginal productivity (digging holes) or ones with negative marginal productivity (polluting the Gulf of Mexico).
Cutting Retirement Benefits May Be a Foolish Way to Reduce Government Deficits
Dean Baker criticizes the Federal deficit hawks fixation on cutting Social Security benefits. Well done! The Federal deficit problem is more of a long-term issue while the states face short-term deficit problems given their typical restriction of annually balancing budgets. Mary Williams Walsh notes, however, that state governments are also proposing to reduce retirement benefits:
Ms. Walsh notes that Colorado has tried to cut benefits for current workers and those already retired but the state is being sued over this breach of promise.
Many states are acknowledging this year that they have promised pensions they cannot afford and are cutting once-sacrosanct benefits, to appease taxpayers and attack budget deficits … But there is a catch: Nearly all of the cuts so far apply only to workers not yet hired. Though heralded as breakthrough reforms by state officials, the cuts phase in so slowly they are unlikely to save the weakest funds and keep them from running out of money. Some new rules may even hasten the demise of the funds they were meant to protect.
Ms. Walsh notes that Colorado has tried to cut benefits for current workers and those already retired but the state is being sued over this breach of promise.
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