Kash Mansori has resumed his economist blogging – something that makes all economist bloggers better off. Welcome back and thanks for making me laugh at the Uwe Reinhardt story about the boxer and the economist , which reminds us that not everyone necessarily gains from a movement towards free trade. But let me humbly suggests that this story needs something – a third player.
The usual economist parable as to why there are both winners and losers from free trade might go something like this. As we removed the trade restrictions from importing apparel from China, American households were able to buy quality clothing at lower prices. Chinese apparel workers also benefited from higher wages. But American apparel workers suffered reductions in their real income from the increase in competition from Chinese workers. While aggregate American income rises, some Americans suffer losses. The compensation principle suggests that it ispossible for the winners from free trade to compensate the losers in such a way that everyone is left better off. Of course in the real world this compensation is rarely executed.
Let me recast Kash’s and Uwe’s story by noting that one of my friends is indeed a former professional boxer and not is a personal trainer who I sometimes work out with (we’ll call him Jay). Jay is still in incredible shape and if he were to punch someone in the nose, it will really hurt. Let me be the economist and let’s pretend that I just start dating a very sexy lass (we’ll call this hypothetical hottie Kay). Kay decided to come watch one of my training sessions with Jay and afterwards Jay had an intense desire to punch me in the nose. So he asked Kay how much he would have to pay her to get permission to punch her new boyfriend out. Kay pulls me aside and say “honey, I really need $3000”. When I told her that Jay’s punches are devastating, she promised that she would more than make up for the pain later that evening. So I told her to go negotiate with Jay. She was elated that he actually offered her $5000 to let him punch me in the nose. The deal was consummated when he hit me so hard in the nose that it broke and I bled a lot. But he did give her the $5000. The only problem is that when she saw how awful my face looked, she said: “oh dear, you are now so ugly that I can’t go home with you. And we certainly are not having sex”.
So let’s recap on this notion that free trade supposedly makes everyone better off. Jay got want he wanted and Kay is now $5000 richer. But all I got was a broken nose. Compensation principle – FEH!
Thursday, February 24, 2011
Wednesday, February 23, 2011
The Most Dangerous Union in the World
Several commentators have remarked about the sudden outbreak of class struggle in the United States. I see the brutal behavior of the state and federal governments as an indication of the failure of class struggle.
Let me explain. Back in the 1960s, when United States was enjoying the so-called Golden of economic prosperity, profits were weakening. By the late 1960s, the organized right wing began to harness the energy of the tea party of the day, which took hold with the defeat of Barry Goldwater. Using its almost unlimited source of funding, wealthy businesspeople and corporations began to create a solid network of organizations to remake the country by undoing the gains made during the and New Deal, and even emulating the political landscape of the late 19th century. The Cato Foundation, the Heritage Foundation, right wing legal offices, and a host of other activist operations led a systematic assault on anything and anybody who seem to know represent a barrier to profit maximization.
This movement was extraordinarily successful, so much so that they even co-opted the Democratic Party, which had previously offered a meek resistance to business demands. By the 1990s, the results were clear to anybody who bothered to take notice of the economy. On the eve of the Great Recession, the results were so obvious that only the most stubborn ideologues could fail to see that virtually all of the economic growth since 1970 had been captured by a very small elite. I told this story in a book entitled The Confiscation of American Prosperity: From Right-Wing Extremism and Academic Economics to the Next Great Depression, published in 2007, just as the stock market peaked.
The ideological justification of this confiscation was that business prosperity would create a tsunami of productivity by following the right-wing regimen. The entire population would benefit.
Productivity did increase — not spectacularly — but which is still stagnated. Job security eroded. Protections previously guaranteed by regulatory agencies or the law quickly disappeared.
Despite the idea that the economy somehow suffered from an over burden of taxes and regulations, the more these hindrances to prosperity fell by the wayside, the worse the economy performed. Profits became concentrated in the financial sector, but much of the rest of the economy faltered.
Scapegoats had to be found. Already, during the Nixon administration, the right wing became adept at recruiting working-class support, using racism and cultural discomfort as fuel. Ironically, one of the first groups successfully recruited were craft unions, a minority of whose members attacked antiwar demonstrators. A parade of scapegoats march across the political landscape. Braless hippies, Blacks, unwed teenage mothers, welfare recipients, immigrants, and now public workers, especially teachers.
The results were always the same. The right would win more victories. The overall economy would still perform sluggishly. And the next scapegoat would step forward. Even when the culprit is obvious, scapegoats still must be found. For example, with the collapse of the financial scams in 2007, blame was shifted to Fannie Mae and Freddie Mac, and even more ridiculously to an obscure rule that had been passed two decades earlier.
For example, private-sector unions became virtually powerless on the national scene. In this environment, jobs disappeared. Disappointed union members would be vulnerable to the relative prosperity of public sector workers, who had pensions and medical coverage. Similarly, people who had lost their pensions to fraudulent banking schemes often became more upset with the relatively comfortable conditions of public sector workers.
One union stood out by its successes. It is not generally called a union, but so long as we can abuse reality by calling corporations people, we can call the Chamber of Commerce a union. This union is so powerful that the present United States must come before as a humble supplicant. This union was at the forefront of the deconstruction of the New Deal.
The time has come to stop blaming the victim. Somehow, we have to learn to fight back in this one-sided class warfare. We have to learn to explain that more of the same medicine that made us sick is not going to cure us. We have to learn to identify the architects of this disaster — the political manipulators, the right wing foundations and their benefactors, and if we want to begin a legitimate fight against unions, let’s start with the Chamber of Commerce.
Let me explain. Back in the 1960s, when United States was enjoying the so-called Golden of economic prosperity, profits were weakening. By the late 1960s, the organized right wing began to harness the energy of the tea party of the day, which took hold with the defeat of Barry Goldwater. Using its almost unlimited source of funding, wealthy businesspeople and corporations began to create a solid network of organizations to remake the country by undoing the gains made during the and New Deal, and even emulating the political landscape of the late 19th century. The Cato Foundation, the Heritage Foundation, right wing legal offices, and a host of other activist operations led a systematic assault on anything and anybody who seem to know represent a barrier to profit maximization.
This movement was extraordinarily successful, so much so that they even co-opted the Democratic Party, which had previously offered a meek resistance to business demands. By the 1990s, the results were clear to anybody who bothered to take notice of the economy. On the eve of the Great Recession, the results were so obvious that only the most stubborn ideologues could fail to see that virtually all of the economic growth since 1970 had been captured by a very small elite. I told this story in a book entitled The Confiscation of American Prosperity: From Right-Wing Extremism and Academic Economics to the Next Great Depression, published in 2007, just as the stock market peaked.
The ideological justification of this confiscation was that business prosperity would create a tsunami of productivity by following the right-wing regimen. The entire population would benefit.
Productivity did increase — not spectacularly — but which is still stagnated. Job security eroded. Protections previously guaranteed by regulatory agencies or the law quickly disappeared.
Despite the idea that the economy somehow suffered from an over burden of taxes and regulations, the more these hindrances to prosperity fell by the wayside, the worse the economy performed. Profits became concentrated in the financial sector, but much of the rest of the economy faltered.
Scapegoats had to be found. Already, during the Nixon administration, the right wing became adept at recruiting working-class support, using racism and cultural discomfort as fuel. Ironically, one of the first groups successfully recruited were craft unions, a minority of whose members attacked antiwar demonstrators. A parade of scapegoats march across the political landscape. Braless hippies, Blacks, unwed teenage mothers, welfare recipients, immigrants, and now public workers, especially teachers.
The results were always the same. The right would win more victories. The overall economy would still perform sluggishly. And the next scapegoat would step forward. Even when the culprit is obvious, scapegoats still must be found. For example, with the collapse of the financial scams in 2007, blame was shifted to Fannie Mae and Freddie Mac, and even more ridiculously to an obscure rule that had been passed two decades earlier.
For example, private-sector unions became virtually powerless on the national scene. In this environment, jobs disappeared. Disappointed union members would be vulnerable to the relative prosperity of public sector workers, who had pensions and medical coverage. Similarly, people who had lost their pensions to fraudulent banking schemes often became more upset with the relatively comfortable conditions of public sector workers.
One union stood out by its successes. It is not generally called a union, but so long as we can abuse reality by calling corporations people, we can call the Chamber of Commerce a union. This union is so powerful that the present United States must come before as a humble supplicant. This union was at the forefront of the deconstruction of the New Deal.
The time has come to stop blaming the victim. Somehow, we have to learn to fight back in this one-sided class warfare. We have to learn to explain that more of the same medicine that made us sick is not going to cure us. We have to learn to identify the architects of this disaster — the political manipulators, the right wing foundations and their benefactors, and if we want to begin a legitimate fight against unions, let’s start with the Chamber of Commerce.
A Business in Decline?
With the end of unions, what can we do to help those good people who provide strike breakers?
http://www.modernindustrialservices.com/
http://www.modernindustrialservices.com/
Tuesday, February 22, 2011
Are Teachers Overpaid In The US?
An ongoing meme of those supporting Governor Walker's efforts to crush public unions in Wisconsin is the repeated claims that public workers are overpaid. There is plenty of evidence that this is not so, even with their greater benefits, but I think another piece of evidence may be useful, a cross-country comparison of teacher salaries. This is important given that at the state and local levels, teachers are the most numerous of public workers, and it is hard to compare them with private sector equivalents, who are not that numerous at the K-12 level.
So, according to OECD data reported by the New York Times for 2007, out of 33 OECD countries, the US is #26 in pay per GDP for primary school teachers with 15 years of experience. No, we are not overpaying our teachers, not at all.
OTOH, out of 18 countries listed for 2007, US general practitioners are #1 in pay per GDP. Big surprise.
While teachers are more likely to be publicly paid in all of these countries, doctors get a higher proportion of their pay privately in the US than in these other countries, although a substantial proportion is public. Yet, as has been widely reported, life expectancy and infant mortality rates in the US are way below those of other high income countries. We overpay our doctors while underpaying our teachers, and more generally there is no reason to believe that publicly paid teachers are somehow ripping off their fellow citizens.
So, according to OECD data reported by the New York Times for 2007, out of 33 OECD countries, the US is #26 in pay per GDP for primary school teachers with 15 years of experience. No, we are not overpaying our teachers, not at all.
OTOH, out of 18 countries listed for 2007, US general practitioners are #1 in pay per GDP. Big surprise.
While teachers are more likely to be publicly paid in all of these countries, doctors get a higher proportion of their pay privately in the US than in these other countries, although a substantial proportion is public. Yet, as has been widely reported, life expectancy and infant mortality rates in the US are way below those of other high income countries. We overpay our doctors while underpaying our teachers, and more generally there is no reason to believe that publicly paid teachers are somehow ripping off their fellow citizens.
Sunday, February 20, 2011
Value of a Statistical Life
Peter mentioned that he wrote a book on the value of a statistical life. I wrote about the subject in two books, neither of which were exclusively devoted to the subject. In The Confiscation Economic Prosperity I showed how the right wing used the concept to lowball the value of regulation.
In The Invisible Handcuffs, I looked at the subject from a different perspective, showing how economists get blackballed for trespassing away transactions into the labor process. Richard Thaler, who did the original research on the subject had the good sense to reject the idea. His adviser would not talk with him after that.
I think both approaches are interesting. Maybe you will take a peak.
In The Invisible Handcuffs, I looked at the subject from a different perspective, showing how economists get blackballed for trespassing away transactions into the labor process. Richard Thaler, who did the original research on the subject had the good sense to reject the idea. His adviser would not talk with him after that.
I think both approaches are interesting. Maybe you will take a peak.
Thursday, February 17, 2011
Ground Zero For American Labor: Madison, Wisconsin
I am watching the Ed Show, which is coming out of my hold hometown of Madison, Wisconsin. Big crowds are at the Capitol Square. Not sure how many were out today, but there were 30,000 yesterday. They are out to protest a completely unreasonable move by the new Republican Governor, Scott Walker, to eliminate collective bargaining for state workers. He claims that there is a budget crisis, which is wildly exaggerated, and has made no effort to negotiate with the workers. Both houses of the legislature went Republican in November, and he is trying to ram this change through, threatening to bring out the National Guard. But there has been a rising and peaceful demonstration against this. In response, 14 Dem state senators have left the state, causing a failure of quorum and blocking the move (they were led by Fred Risser, in the state senate since 1956, now the longest serving legislator in the US, who is completely articulate and on top of things).
Make no mistake, Ed Schultz is right. This is of significance across the country. The move in Wisconsin is the front edge of a major battle to crush the US labor movement. This is ground zero for American labor. There are apparently a few moderate Republicans in the senate holding back from backing Walker's plan, but so far Walker has not negotiated. We shall see what happens, and it is very important, whatever the outcome.
Make no mistake, Ed Schultz is right. This is of significance across the country. The move in Wisconsin is the front edge of a major battle to crush the US labor movement. This is ground zero for American labor. There are apparently a few moderate Republicans in the senate holding back from backing Walker's plan, but so far Walker has not negotiated. We shall see what happens, and it is very important, whatever the outcome.
Back in the News: The Embarrassment Known as the Value of a Statistical Life
Some economic ideas thrive only in the darkness: they are simply too weird and half-baked to withstand public scrutiny. Perhaps no concept better exemplifies this than the value of a statistical life, the sum of money that supposedly measures the value of a life saved or sacrificed by a government program. Few nonspecialists pay attention to the slow trickle of research articles on the topic, although the spotlight descends every few years, usually because of a scandal involving government proclamations that some people are worth more than others. (The prime case was the dispute that broke out over the economic analysis in the third IPCC report, which pegged the monetary value of an American life at ten times that of a Chinese or Nigerian life. The numbers were subsequently crossed out.)
Today’s New York Times draws our attention to the topic in a less charged context, the discrepancy between VSL’s posted by different federal regulatory agencies. It is a small issue in the larger scheme of things but still illuminating in what it reveals about the economic profession. (I should also admit that my interest is probably larger than yours, since I wrote a book on the subject 15 years ago.)
It is quite true, as the article reports, that agencies assign monetary values to human life in benefit-cost analyses. It is true that their numbers are based, more or less, on the work of Kip Viscusi and a few of his colleagues. It is also true that the numbers are drawn from regressions on wages, with the intention of identifying a wage premium for physical risk after controlling for other factors that affect labor market outcomes. Those parts of the story are correct.
What’s more important is what is missing:
1. The theoretical model underpinning all work in the field is vintage 1960s supply-and-demand analysis. There is no search and matching, no transaction costs, no bilateral bargaining, no repeated interaction between employer and employee, no unemployment. None of the VSL honchos, from Viscusi on down, have bothered to try to construct a model of wage compensation for risk using the methods all serious labor economists have now adopted. In fact, they would have a hard time doing this: equimarginal outcomes (of which wage compensation for risk is one) are few and far between in modern labor analysis.
2. The regression methods employed in the VSL studies are primitive and sloppy. They rarely account for obvious endogeneities in observed labor market phenomena. They are notoriously sensitive to omitted variables (as I showed in a paper I coauthored back when.) They don’t even take care of the basics, like accounting for the effects of grouped data (such as average injury rates assigned to individuals according to their industry or occupation) on significance estimates. It’s a real methodological backwater.
3. Practitioners seldom discuss the embarrassing fact that their wage regressions produce different values of life for different subsamples, without any obvious justification. Men’s lives are worth more or less than women. Whites are worth more than blacks. The lives of unionized workers are worth more than those not in unions, except when it’s the other way around. In fact, subsample results jump all of the map, a sure sign that the econometrics are not leading us to a stable underlying relationship.
4. The whole enterprise is conceptually vacuous. Are we identifying the willingness to pay for safety or the willingness to accept risk? (What difference do occupational safety regulations, which ostensibly set the default, play?) Why should wage rate differentials be entrusted with assigning the value of life and health? On what theoretical ground are these choices privileged over all other means of assigning values? How do we reconcile the view that workers are fully compensated for the risks they face at work with the all-too-evident politics of health and safety regulation? Why would workers forego this compensation by demanding tougher regulation? Why don’t employers factor in the ability to pay lower wages when they assess new regulatory demands? Why aren’t they funneling gobs of money to their safety consultants in order to cut wage costs without government prodding in the first place? Why is there such a complete disconnect between the world of the VSL “experts” and the one seen all over the world in the politics and law of workplace safety?
In the wake of the financial crisis, macroeconomists have been on the defensive. How could they have missed the buildup of asset bubbles and financial vulnerabilities, cheering on the very policies that brought us to the brink? But it isn’t only this particular tribe: as the VSL morass demonstrates, there are other clumps of cultishness in the profession—fields and subfields whose reputations are built on mutual citation and a willingness to set aside serious intellectual standards. In the end, the problem is that economics is too often able to insulate itself from hard criticism: there is seldom a career cost to being shown to be in error. The questions on the table are why and what to do about it.
Today’s New York Times draws our attention to the topic in a less charged context, the discrepancy between VSL’s posted by different federal regulatory agencies. It is a small issue in the larger scheme of things but still illuminating in what it reveals about the economic profession. (I should also admit that my interest is probably larger than yours, since I wrote a book on the subject 15 years ago.)
It is quite true, as the article reports, that agencies assign monetary values to human life in benefit-cost analyses. It is true that their numbers are based, more or less, on the work of Kip Viscusi and a few of his colleagues. It is also true that the numbers are drawn from regressions on wages, with the intention of identifying a wage premium for physical risk after controlling for other factors that affect labor market outcomes. Those parts of the story are correct.
What’s more important is what is missing:
1. The theoretical model underpinning all work in the field is vintage 1960s supply-and-demand analysis. There is no search and matching, no transaction costs, no bilateral bargaining, no repeated interaction between employer and employee, no unemployment. None of the VSL honchos, from Viscusi on down, have bothered to try to construct a model of wage compensation for risk using the methods all serious labor economists have now adopted. In fact, they would have a hard time doing this: equimarginal outcomes (of which wage compensation for risk is one) are few and far between in modern labor analysis.
2. The regression methods employed in the VSL studies are primitive and sloppy. They rarely account for obvious endogeneities in observed labor market phenomena. They are notoriously sensitive to omitted variables (as I showed in a paper I coauthored back when.) They don’t even take care of the basics, like accounting for the effects of grouped data (such as average injury rates assigned to individuals according to their industry or occupation) on significance estimates. It’s a real methodological backwater.
3. Practitioners seldom discuss the embarrassing fact that their wage regressions produce different values of life for different subsamples, without any obvious justification. Men’s lives are worth more or less than women. Whites are worth more than blacks. The lives of unionized workers are worth more than those not in unions, except when it’s the other way around. In fact, subsample results jump all of the map, a sure sign that the econometrics are not leading us to a stable underlying relationship.
4. The whole enterprise is conceptually vacuous. Are we identifying the willingness to pay for safety or the willingness to accept risk? (What difference do occupational safety regulations, which ostensibly set the default, play?) Why should wage rate differentials be entrusted with assigning the value of life and health? On what theoretical ground are these choices privileged over all other means of assigning values? How do we reconcile the view that workers are fully compensated for the risks they face at work with the all-too-evident politics of health and safety regulation? Why would workers forego this compensation by demanding tougher regulation? Why don’t employers factor in the ability to pay lower wages when they assess new regulatory demands? Why aren’t they funneling gobs of money to their safety consultants in order to cut wage costs without government prodding in the first place? Why is there such a complete disconnect between the world of the VSL “experts” and the one seen all over the world in the politics and law of workplace safety?
In the wake of the financial crisis, macroeconomists have been on the defensive. How could they have missed the buildup of asset bubbles and financial vulnerabilities, cheering on the very policies that brought us to the brink? But it isn’t only this particular tribe: as the VSL morass demonstrates, there are other clumps of cultishness in the profession—fields and subfields whose reputations are built on mutual citation and a willingness to set aside serious intellectual standards. In the end, the problem is that economics is too often able to insulate itself from hard criticism: there is seldom a career cost to being shown to be in error. The questions on the table are why and what to do about it.
Wednesday, February 16, 2011
What Social Security Deficit?
A lot of folks are giving our President credit for this:
I would say too much credit – although in fairness the President was responding to this question:
Kevin Drum does deserve a lot of credit:
A lot of the current Tea Party hysteria has to do with the current Federal deficit and as Kevin’s chart shows, we are currently running Social Security surpluses. In fact, we have been running surpluses for quite some time adding to the Trust Fund’s assets. Some projections have currently promised benefits outstripping tax revenues such that the Trust Fund’s assets may be depleted in just over 30 years. Fine – then we may have to do some minor changes in either the pay-ins or pay-outs in the future but Social Security is not part of the alleged Federal deficit crisis. But that’s never stopped the modern leaders of the Republican Party from raiding the Trust Fund to bankroll the General Fund irresponsibility that they have created over the past 30 years.
Now, you talked about Social Security, Medicare and Medicaid. The truth is Social Security is not the huge contributor to the deficit that the other two entitlements are.
I would say too much credit – although in fairness the President was responding to this question:
You’ve been talking a lot about the need for tough choices in your budget, but your plan does not address the long-term crushing costs of Social Security, Medicare, Medicaid -- the real drivers of long-term debt. Can you explain that?
Kevin Drum does deserve a lot of credit:
But unless you believe that the United States is literally going to collapse in the near future, Social Security isn't. Period. The weird thing about this is that Social Security isn't even hard to understand. Taxes go in, benefits go out. Unlike healthcare, which involves extremely difficult questions of technological advancement and the specter of rationing, Social Security is just arithmetic. The chart on the right tells you everything you need to know: Right now, Social Security costs about 4.5% of GDP. That's going to increase as the baby boomer generation retires, and then in 2030 it steadies out forever at around 6% of GDP.
A lot of the current Tea Party hysteria has to do with the current Federal deficit and as Kevin’s chart shows, we are currently running Social Security surpluses. In fact, we have been running surpluses for quite some time adding to the Trust Fund’s assets. Some projections have currently promised benefits outstripping tax revenues such that the Trust Fund’s assets may be depleted in just over 30 years. Fine – then we may have to do some minor changes in either the pay-ins or pay-outs in the future but Social Security is not part of the alleged Federal deficit crisis. But that’s never stopped the modern leaders of the Republican Party from raiding the Trust Fund to bankroll the General Fund irresponsibility that they have created over the past 30 years.
Tuesday, February 15, 2011
Why Does Boehner Not Care About Unemployment: We’re Broke or Just Stupid?
Ed O’Keefe gets the facts right. Federal employment in 2010 was 2.65 million as compared to 2.63 million in 2002. As he notes, Federal employment per 1000 in US population actually fell from 9.1 to 8.4. It was 13.3 in 1962:
Brian Beutler reports the latest from the Speaker of the House:
We truly are ruled by idiots!
Still others noted that the size of the federal workforce compared to the overall U.S. population has dropped steadily since the 1960s, thanks to a booming population and cutbacks made during the Reagan and Clinton years.
Brian Beutler reports the latest from the Speaker of the House:
If House Republicans succeed in cutting tens of billions of dollars in discretionary spending over the next six months, some of the most immediate victims will be federal employees, many of whose jobs will be slashed as their agencies pare back. At a press conference in the lobby of RNC headquarters Tuesday morning, House Speaker John Boehner (R-OH) shrugged this off as collateral damage. "In the last two years, under President Obama, the federal government has added 200,000 new federal jobs," Boehner said. "If some of those jobs are lost so be it. We're broke." ... Boehner didn't cite a source for the claim that Obama had added 200,000 employees to the federal payroll.
We truly are ruled by idiots!
Monday, February 14, 2011
Demonstrations Spreading To Sunni Arab Oil Exporters?
In an earlier post I noted that most of the predominantly Arab Sunni nations with anti-government demonstraters were not substantial oil exporters (and also were generally net food importers). I noted the exceptions on not having demonstrations of Morocco and Syria, which continue to be exceptions, despite a few rumbles in each, and various commentators in the US predicting that Syria will get it. We shall see, quite possibly a matter of wishful thinking.
On the oil exporter side Algeria was already noted as a partial exception, and indeed demonstrations appear to have returned there. Also, the first Gulf oil exporter to have demonstrations has joined the headlines, Bahrain. Regarding Algeria, I have already noted that it has an unpleasant past of a reasonably democratic election having its results overturned by a military coup, with that regime still in power, with their clearly being ongoing resentment. I also note that while Algeria does export oil, it is 23rd in the list of nations for oil exports per capita, so it is not a major oil exporter.
Bahrain is somewhat higher on that list, but it has the unique problem for a Gulf state of having a Shi'i majority (about 65% of the population) while being ruled by a Sunni monarchy. There have been some efforts to loosen rule a bit there (local elections allowed), but there have been long ongoing charges of anti-Shi'i discrimination by the regime, so this is not your ordinary Arab Sunni state. Also, Bahrain has long been the Gulf HQ of the US Navy's 5th fleet, which has also long been a source of substantial resentment by much of the population.
There are reports that there may be a re-eruption of demonstrations in Iran. Of course, it is neither Arab nor predominantly Sunni, and has its own history of political problems, including quite recently, despite its oil exporting status. On that one, we shall see.
Along with forecasts of trouble in Syria, I keep reading forecasts by various commentators that there will be demonstrations in Saudi Arabia. My take on that is that this is wishful thinking. Do not count on it, in fact, I forecast that there will not be.
OTOH, there are rumblings in Libya, where Gaddafi has been the longest in place dictator in the Arab Sunni world. May not come to anything as he has long been spreading the wealth, but he has been in so long and been so repressive, that his time may well be up, or at least there might be a challenge to his rule.
On the oil exporter side Algeria was already noted as a partial exception, and indeed demonstrations appear to have returned there. Also, the first Gulf oil exporter to have demonstrations has joined the headlines, Bahrain. Regarding Algeria, I have already noted that it has an unpleasant past of a reasonably democratic election having its results overturned by a military coup, with that regime still in power, with their clearly being ongoing resentment. I also note that while Algeria does export oil, it is 23rd in the list of nations for oil exports per capita, so it is not a major oil exporter.
Bahrain is somewhat higher on that list, but it has the unique problem for a Gulf state of having a Shi'i majority (about 65% of the population) while being ruled by a Sunni monarchy. There have been some efforts to loosen rule a bit there (local elections allowed), but there have been long ongoing charges of anti-Shi'i discrimination by the regime, so this is not your ordinary Arab Sunni state. Also, Bahrain has long been the Gulf HQ of the US Navy's 5th fleet, which has also long been a source of substantial resentment by much of the population.
There are reports that there may be a re-eruption of demonstrations in Iran. Of course, it is neither Arab nor predominantly Sunni, and has its own history of political problems, including quite recently, despite its oil exporting status. On that one, we shall see.
Along with forecasts of trouble in Syria, I keep reading forecasts by various commentators that there will be demonstrations in Saudi Arabia. My take on that is that this is wishful thinking. Do not count on it, in fact, I forecast that there will not be.
OTOH, there are rumblings in Libya, where Gaddafi has been the longest in place dictator in the Arab Sunni world. May not come to anything as he has long been spreading the wealth, but he has been in so long and been so repressive, that his time may well be up, or at least there might be a challenge to his rule.
Sunday, February 13, 2011
Austerity -- Force Molting the American Working Class
Michael Pollan described how laying hens are force molted -- deprived of food and light and water in order to squeeze out some extra eggs before they die. This practice reminds me of the mantra that politicians spout: Everybody has to make sacrifices (except for the rich and powerful who need more tax cuts and deregulation). Anyway, capital can always find cheaper hens in the impoverished corners of the world.
"… the American laying hen, who passes her brief span piled together with a half-dozen other hens in a wire cage whose floor a single page of this magazine could carpet. Every natural instinct of this animal is thwarted, leading to a range of behavioral “vices” that can include cannibalizing her cagemates and rubbing her body against the wire mesh until it is featherless and bleeding. Pain? Suffering? Madness? The operative suspension of disbelief depends on more neutral descriptors, like “vices” and “stress.” Whatever you want to call what’s going on in those cages, the 10 percent or so of hens that can’t bear it and simply die is built into the cost of production. And when the output of the others begins to ebb, the hens will be “force-molted” -- starved of food and water and light for several days in order to stimulate a final bout of egg laying before their life’s work is done."
Pollan, Michael. 2002. "An Animal’s Place." The New York Times Magazine (10 November).
http://michaelpollan.com/tag/animal-welfare/
"… the American laying hen, who passes her brief span piled together with a half-dozen other hens in a wire cage whose floor a single page of this magazine could carpet. Every natural instinct of this animal is thwarted, leading to a range of behavioral “vices” that can include cannibalizing her cagemates and rubbing her body against the wire mesh until it is featherless and bleeding. Pain? Suffering? Madness? The operative suspension of disbelief depends on more neutral descriptors, like “vices” and “stress.” Whatever you want to call what’s going on in those cages, the 10 percent or so of hens that can’t bear it and simply die is built into the cost of production. And when the output of the others begins to ebb, the hens will be “force-molted” -- starved of food and water and light for several days in order to stimulate a final bout of egg laying before their life’s work is done."
Pollan, Michael. 2002. "An Animal’s Place." The New York Times Magazine (10 November).
http://michaelpollan.com/tag/animal-welfare/
Thursday, February 10, 2011
Why the Efficient Market Hypothesis (Weak Version) Says Nothing about the Ability to Identify Bubbles
One answer we keep hearing to that entirely reasonable question, “Why didn’t economists predict the crash?”, is that economic theory, in the form of the Efficient Markets Hypothesis, proves that reliable prediction is impossible. Sure, it is argued, some people like Brad Schiller and Dean Baker were jumping up and down and pointing to a housing bubble, but there are always Cassandras, and it is purely coincidental that these particular Cassandras turned out to be right. No doubt there are a range of other economists saying all sorts of things today, and in retrospect a few of them will be right too. But no one outpredicts the market on a regular basis, so there is no reliable way to know whose predictions today will prove correct in the future. This, we are told, is the lesson we need to learn from the EMH.
The logical fallacy here is so obvious that I would not bother with this post if it were not for the persistence of the EMH defense. So here goes.
First, for those not already versed, there are two levels of the EMH. The strong level says that market prices reflect the fundamental forces acting on an economy: there is no better measure of the true opportunity cost of something than its market price, or prediction of the future supply and demand conditions than its appropriate future, etc. This is known to be false, due to systematic biases and anomalies like overshooting, calendar effects, etc. That is not at issue.
The discussion largely centers around the weak version which says that, while market prices may not always be a great guide to real economic forces, their movements are not systematically predictable. At every moment, prices reflect all the forecasts of all the market participants who, between them, have access to all potential information and ways of utilizing it. A price moves only when new information arises. But to be truly new, this information has to be unpredictable—otherwise it is simply an inference from information that already exists. Because the information is unpredictable, so is its effect on prices. The randomness of price movements in turn implies that no one can outperform the market in betting on where they will go.
I have no problem with this. The fallacy arises when this argument is invoked to deny the possibility that economists can identify bubbles in real time. If you’re so smart you can spot a bubble, why aren’t you rich? If people could spot bubbles with any predictability, then the EMH would be wrong—but we know it’s right.
Let’s put aside the possibility that even the weak EMH can be wrong from time to time. We don’t need to go there; the error is more basic than this.
Let’s put ourselves back in 2005. It is two years before the unraveling of the financial markets, but I don’t know this; all I know is what I can see in front of me, publicly available 2005 data. I can look at this and see that there is a housing bubble, that prices are rising far beyond historical experience or relative to rents. The “soft” warning signs are all around me, like the explosion of cheap credit, the popularity of credit terms predicated on ever-rising prices, and the talk of a new era in real estate. Based on my perceptions, I anticipate a collapse in this market. What can I do?
If I am an investor, I can short housing in some fashion. My problem is that I have no idea how long the bubble will go on, and if I take this position too soon I could lose a bundle. In fact, anyone who went short in 2005 and passed on the following two years are price frothery grossly underperformed relative to the market as a whole. Indeed, you might not have the liquidity to hold your position for two long years and could end up losing everything. Of course, it is also possible that the bubble could have burst a year or two early and your bets could have paid off. What the EMH tells us is that, as an investor, not even your prescient analysis of the fundamentals of the housing market would enable you to outperform more myopic investors or even a trading algorithm based on a random number generator.
The logical error lies in confusing the purposes of an investor with those of a policy analyst. Suppose I work for the Fed, and my goal is not to amass a personal stash but to formulate economic policies that will promote prosperity for the country as a whole. In that case, it doesn’t much matter whether the bubble bursts in 2006, 2007 or 2010. In fact, the longer the bubble goes on, the more damage will result from its deflation. At the policy level, the relevant question is whether trained analysts, assembling data and drawing on centuries of experience in financial manias, can outperform, say, tarot cards in identifying bubbles. The EMH does not defend tarot.
To profit from one’s knowledge of a market condition one needs to be able to outperform the mass of investors in predicting market turns, which the EMH says you can’t do. Good policy may have almost nothing to do with the timing of market turns, however.
The logical fallacy here is so obvious that I would not bother with this post if it were not for the persistence of the EMH defense. So here goes.
First, for those not already versed, there are two levels of the EMH. The strong level says that market prices reflect the fundamental forces acting on an economy: there is no better measure of the true opportunity cost of something than its market price, or prediction of the future supply and demand conditions than its appropriate future, etc. This is known to be false, due to systematic biases and anomalies like overshooting, calendar effects, etc. That is not at issue.
The discussion largely centers around the weak version which says that, while market prices may not always be a great guide to real economic forces, their movements are not systematically predictable. At every moment, prices reflect all the forecasts of all the market participants who, between them, have access to all potential information and ways of utilizing it. A price moves only when new information arises. But to be truly new, this information has to be unpredictable—otherwise it is simply an inference from information that already exists. Because the information is unpredictable, so is its effect on prices. The randomness of price movements in turn implies that no one can outperform the market in betting on where they will go.
I have no problem with this. The fallacy arises when this argument is invoked to deny the possibility that economists can identify bubbles in real time. If you’re so smart you can spot a bubble, why aren’t you rich? If people could spot bubbles with any predictability, then the EMH would be wrong—but we know it’s right.
Let’s put aside the possibility that even the weak EMH can be wrong from time to time. We don’t need to go there; the error is more basic than this.
Let’s put ourselves back in 2005. It is two years before the unraveling of the financial markets, but I don’t know this; all I know is what I can see in front of me, publicly available 2005 data. I can look at this and see that there is a housing bubble, that prices are rising far beyond historical experience or relative to rents. The “soft” warning signs are all around me, like the explosion of cheap credit, the popularity of credit terms predicated on ever-rising prices, and the talk of a new era in real estate. Based on my perceptions, I anticipate a collapse in this market. What can I do?
If I am an investor, I can short housing in some fashion. My problem is that I have no idea how long the bubble will go on, and if I take this position too soon I could lose a bundle. In fact, anyone who went short in 2005 and passed on the following two years are price frothery grossly underperformed relative to the market as a whole. Indeed, you might not have the liquidity to hold your position for two long years and could end up losing everything. Of course, it is also possible that the bubble could have burst a year or two early and your bets could have paid off. What the EMH tells us is that, as an investor, not even your prescient analysis of the fundamentals of the housing market would enable you to outperform more myopic investors or even a trading algorithm based on a random number generator.
The logical error lies in confusing the purposes of an investor with those of a policy analyst. Suppose I work for the Fed, and my goal is not to amass a personal stash but to formulate economic policies that will promote prosperity for the country as a whole. In that case, it doesn’t much matter whether the bubble bursts in 2006, 2007 or 2010. In fact, the longer the bubble goes on, the more damage will result from its deflation. At the policy level, the relevant question is whether trained analysts, assembling data and drawing on centuries of experience in financial manias, can outperform, say, tarot cards in identifying bubbles. The EMH does not defend tarot.
To profit from one’s knowledge of a market condition one needs to be able to outperform the mass of investors in predicting market turns, which the EMH says you can’t do. Good policy may have almost nothing to do with the timing of market turns, however.
Omar Suleiman and the Job Title that Dare Not Speak its Name
So what is it with these American press reports from Egypt? Why are print journalists unable to write and broadcast journalists unable to say the words “Omar Suleiman, Head of the Secret Police” or even “Omar Suleiman, director of intelligence services under Mubarak”? Has anyone else noticed this? What could possibly explain this across-the-board withholding of core information?
Job Killing Spending Cuts
The Republicans have come up with a list of spending cuts that appear to sum to a mere $35 billion a year – sort of pennies on the dollar as far as balancing the budget without tax increases. In that list is a reduction in the IRS budget of $593 million, which will make tax evasion even easier. Kent Hoover, however, is more concerned with what is being cut – as we all should be:
Not exactly a recipe to promote future economic growth – is it? Public investment not only promotes long-term growth but is also an effective means for reducing the current aggregate demand gap. Of course, some might argue (incorrectly in my view) that a sizeable portion of the 9 percent unemployment problem comes from a mismatch of job opportunities and the current skills of those looking for work. But if this is the new conservative excuse for massive unemployment – then please explain why the Republicans want to reduce spending on jobs training by $2 billion?
Many of the budget cuts would come in programs that are dear to Obama’s heart, including spending on scientific research, loan programs to support alternative energy, and infrastructure investments. Let’s start with research. Republicans propose cutting $1.1 billion from the Department of Energy’s Office of Science, which is the nation’s largest supporter of basic research in the physical sciences. The plan calls for a $1 billion budget cut at the National Institutes of Health, the federal government’s medical research agency. The Centers for Disease Control would see its funding drop by $755 million. Agricultural research would be cut by $246 million.
Not exactly a recipe to promote future economic growth – is it? Public investment not only promotes long-term growth but is also an effective means for reducing the current aggregate demand gap. Of course, some might argue (incorrectly in my view) that a sizeable portion of the 9 percent unemployment problem comes from a mismatch of job opportunities and the current skills of those looking for work. But if this is the new conservative excuse for massive unemployment – then please explain why the Republicans want to reduce spending on jobs training by $2 billion?
Why Is Obama Channeling Beck And Palin On Egypt?
It looked for awhile as if the Obama administration was going to side with the demonstraters in demanding that Hosni Mubarak resign, and there was even a unanimous resolution out of the US Senate to this effect. But the administration has been backtracking since, appearing to support maintaining Mubarak in power for some unspecified transition period, even as the street demonstrations increase in size. Are they channeling the Glenn Beck-Sarah Palin line that if Mubarak goes, Egypt will go radically Islamist and we will end up with a radical Caliphate from Mauretania to the Philippines?
This is more mysterious given that a bipartisan Working Group on Egypt was formed last spring, with members ranging from Human Rights Watch member, Tom Malinowski, to former Bush official and neocon, Elliott Abrams, which has been warning that there would be a popular uprising in Egypt against the regime and that the US needed to support this movement. Instead, the administration cut funding for the Endowment for Democracy, which had been developing links with the secular, democratic opposition, and essentially looked the other way at the time of the seriously rigged Egyptian election in November.
Now we know that Israeli leaders very much want Mubarak to stay, as well as the Saudis and Jordanians and some other neighbors, but it is seriously unclear who in the administration it is who is getting to Obama to push a line that seems both morally wrong and politically/diplomatically stupid. Is it the State Department, the CIA, the US military, some or all of the above? Whoever it is, this seems to be a serious mistake on Obama's part, the sooner undone, the better.
This is more mysterious given that a bipartisan Working Group on Egypt was formed last spring, with members ranging from Human Rights Watch member, Tom Malinowski, to former Bush official and neocon, Elliott Abrams, which has been warning that there would be a popular uprising in Egypt against the regime and that the US needed to support this movement. Instead, the administration cut funding for the Endowment for Democracy, which had been developing links with the secular, democratic opposition, and essentially looked the other way at the time of the seriously rigged Egyptian election in November.
Now we know that Israeli leaders very much want Mubarak to stay, as well as the Saudis and Jordanians and some other neighbors, but it is seriously unclear who in the administration it is who is getting to Obama to push a line that seems both morally wrong and politically/diplomatically stupid. Is it the State Department, the CIA, the US military, some or all of the above? Whoever it is, this seems to be a serious mistake on Obama's part, the sooner undone, the better.
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