First-Rate

I just read a wonderful book: The Ornament of the World: How Muslims, Jews and Christians created a Culture of Tolerance in Medieval Spain, by Maria Rosa Menocal. Abd Al-Rahman I's Cordoba was described as 'the ornament of the world' by a certain nun whose name escapes me. Menocal means it to apply more generally to Islamic Spain under the Ummayads and in the post-Ummayad but pre- Almodovar period of the "taifas," where various city-states competed for power. She calls Islamic Spain in this period a "first-rate" place, citing F. Scott Fitzgerald (in The Crack-Up): " the mark of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time."

Speaking of which, Brad Delong, one of my favorite bloggers, recently did another of many periodic posts featuring Edmund Burke. I have always wondered how he squares his evident admiration for Burke's thought (which I share) with his otherwise by-the book utilitarianism (which I don't share!) I suspect Brad is a first-rate intelligence! Me, not so much.

Gandhi, Buber and the Politics of Palestine

The New York Times has an interesting but minimally informed piece this morning on Gandhi’s advice concerning the Jewish settlement, and ultimate seizure, of Palestine. It brings up the Indian sage’s exchange of views with Martin Buber, the great Jewish philosopher and educator who fled Germany in the 30s and became an advocate for the kibbutz as a model of social and spiritual development. Buber was undoubtedly right that nonviolent resistance was an absurd strategy against the Third Reich. This was an enemy that openly embraced force and terror; there was no “soul” to appeal to.

I will leave it to others to complain about the way the article passes over the long history of nonviolent resistance in the occupied territories. What I missed was the great flash of insight that, if my memory is correct, jumps off the page toward the end of Buber’s Paths in Utopia. (I don’t have my copy with me.) After extolling the kibbutz as a model of egalitarian economic and community life fit for human regeneration in a dark time, Buber emphasizes that “inside” and “outside” social relations are inextricably linked. It will be impossible, he says, for Jews to retain the liberatory aspects of their social order if their relationship with Arabs is one of domination and exclusion. You can’t practice mutuality in one direction and exploitation in another: the psychological wall crumbles. This follows immediately, of course, from the point of view he expressed in I and Thou (Ich und Du), which insists on the universality of all truly engaged human interactions.

Buber endorsed a binational state because, for him, not only social justice, but also a community in full consciousness, was indivisible.

Michael Perelman, International Economist Manqué

I see that PBS is going to broadcast a review of the world of George Shultz. I fear that they will leave out the time that Schulz was interested in promoting my career. While Secretary of State under Ronald Reagan, Schultz's son, Alex, took a class from me. At first I knew him only as a very good and personable student. Later, I discovered his family ties.

Knowing that the sins of the father should not fall on the son, I always had fun feelings for Alex. One day after returning from vacation, Alex told me that he had a number of arguments with his father based on ideas he picked up in my class. He told me that at one point his father responded, "that man should not be teaching in this country." Knowing Shultz's position as Secretary of State, I awaited a call. Was I going to be made ambassador to France? Or perhaps advising the world a rational method of organizing society.

After a few seconds, I began to realize that no such offer was on the horizon. I would more good remaining in Chico with the opportunity to other enlighten children of the power elite.

I never heard from Alex after he left Chico. I wish them the best and hope that did not get entangled in the dark networks of Hoover, Bechtel, or the other nefarious organizations with which his father associated.

How Slippery Is Hayek's Slope In Road To Serfdom?

Puffed by Rush Limbaugh and Glenn Beck, Hayek's Road to Serfdom has been surfing the best seller lists recently, the new edition with the long scholarly introduction by Bruce Caldwell, which I doubt many buyers will read. They are using it to bash Obama and charge him with being a socialist-fascist-nazi-communist, etc., starting with his health care proposal, all of course failing to notice that Hayek in RTS came out for national health insurance and some degree of more general social insurance. But, hey, we want to wave the book like Red Guards waving Chairman Mao's Thoughts, not read the thing. Please.

As it is, there is a new entry in a long running debate. Many observers, perhaps most prominently Paul Samuelson in a bunch of his Principles texts, saw Hayek as promoting a "slippery slope" argument, that any move towards a welfare state by the US or UK or other western democracies, would put them onto "the road to serfdom," which, of course, history has shown to be a bunk argument, even if the tea partiers are now invoking Hayek to repeat it along with Limbaugh and Beck. Hayek himself, with Caldwell agreeing, have argued that this is a misreading of RTS, and that Hayek was really focusing on the dangers of Soviet-style command central planning, with Hayek writing angry letters to Samuelson about this matter.

Now we have a new entry into this with an article by Andrew Farrant and Edward McPhail, "Does F.A. Hayek's Road to Serfdom Deserve to Make a Comeback?" in the July/August issue of Challenge, 53(4), 96-120, http://mesharpe.metapress.com/app/home/issue.asp?referrer=parent&backto=journal.1.58:linkingpublicationresults.1:106043.1 (requires subscription or payment to read, unfortunately). Anyway, they say that Samuelson was right all along, and that one can find passages in RTS where Hayek certainly looks like he is making the strong version of the slippery slope argument that he later realized was an embarrassment, even if it is probably the source of the renewed sales. Thus, Farrant and McPhail would say that Limbaugh and Beck are more on the money here than Caldwell, even if they are ignoring Hayek's call for social insurance (a clear sign that he did not view any and all such moves as going onto the slippery slope).

Young Ben Bernanke, Economist

In 1983, Ben Bernanke published an interesting article in which he proposed that the real service that banks perform is the development of long-term working relationships, which give them the informational wherewithal to allocate capital efficiently.

Bernanke, Ben S. 1983. "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression" American Economic Review, 73: 3 (June): pp. 257-76.

He elaborated on this idea in:

Bernanke, Ben. 1993. "Credit in the Macroeconomy." Federal Reserve Bank of New York Quarterly Review, 18: 1 (Spring): pp. 50-70.



Surprising, then that today Bernanke is so protective of a banking system dominated by firms that rely on fees and trading profits rather than the traditional function of banks, which was to take in deposits, which they supposedly doled out to the businesses that were potentially the most efficient users of that money based on their accumulated information.

Since then, banks have changed and so has Bernanke. This new generation of banks perform no such service. Instead, they mostly dominate a zero-sum game in which come at the expense of others, who lack the same access to information and economies of scale.

Obviously, these large banks perform some services, which are of use. I have two questions. Is it possible that another kind of financial provider could offer the same services with less risk? Even more broadly, is it possible that these large banks in fact the economy was so much risk, that whatever services they may provide does not offset the damage is that they create?

Noh Explanation

OK, this is an exaggeration. Eric Alterman’s valiant attempt to identify the systemic roots of America’s political insanity does identify a number of prime suspects: the anti-democratic rules of the political game, the role of money, right wing media, background framing and ideology. It would be nice to be able to do something about them.

But coming up with a purely American explanation for what is clearly an international phenomenon violates the first principles of clear thinking. Progressive politics has hit a cul-de-sac in every advanced industrial economy. Not even the Great Recession/Reset/Whatever has lifted the constraints. Conservatives rule everywhere, and populism is in the hands of the loony right. One way or another, the scale of the explanation has to match the scale of the explanandum.

Inducing the Madness of Crowds

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.

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?

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.

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.

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

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.

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).

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.

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.