De Facto Partition Of Libya Coming?

The new war in Libya is so new and fluid that it is hard to determine what is really going on or will go on, but I think a highly likely outcome will be a de facto partition of Libya. While the mandates from the Arab League and the UN Security Council only supported a no-fly zone to prevent Qaddafi's forces from killing civilians from the air, and this is the official position of the US, many leaders in the US and more openly in France and Britain, which are very prominent in the military action, have stated that the goal is to support the rebels and remove Qaddafi, with both Obama and Clinton effectively supporting this with statements that Qaddafi has lost legitimacy and should step down. Some observations I have not seen made elsewhere follow.

That a partition that could become semi-permanent may be the result arises from the obvious possibility of a military stalemate. Without the move to no-fly zone, it is likely that Qaddafi's forces would have fully defeated the rebels, having reached the outskirts of Benghazi, the rebel capital, after having retaken most of the major oil towns to the southwest of Benghazi, although one major city in the west, Misurata, continues to be held by the rebels. Even with his air force subdued, Qaddafi retains the superior edge in ground military force. It is unlikely the rebels can defeat him without outside ground support, and it is increasingly looking like there will be no active support from any Arab country in the air, and much less likely on the ground. Obama has stated the US will not deploy (and there will be major resistance to doing so from the US military), leaving only maybe the Brits and French to do so, but my guess is they will be reluctant to do so in sufficient force to overthrow Qaddafi without the US or Arabs involved, and parts of the rest of the world becomning more critical (both Russia and China have expressed "regret" over this new military action, despite their abstention in the UNSC vote because of the Arab League resolution). So, a likely outcome is a military stalemate after some further shuffling of the positions on the ground.

If Misurata falls to to Qaddafi's forces while the rebels control much of the east, what will emerge will look like the longstanding historical division between Tripolitania in the west and Cyrenaica in the east, the names of Roman provinces in those areas (a third province in the southwest, Fezzan, is essentially part of the western zone). Throughout most of history they have not been jointly ruled, and when they have, they have been distinct provinces. There are deep differences, with the population in the west having a substantial Berber element (Qaddafi and his tribe are actually "Arabized Berbers," that is, ethnic Berbers who speak Arabic). The east has often been ruled by whomever was ruling Egypt (and Egypt is the only Arab nation that might or could enter the action on the ground, and the current Arab League president, Amr Moussa, who is the main person responsible for their resolution, is running for President of Egypt and strongly supports the rebels). There have even been religious differences, with the east basically Maliki Sunnis, whereas there continues to be a Khariji Muslim community in the west, mostly concentrated in the Berber areas. More broadly, Tripolitania in the west has had long periods of independence, either de facto or de jure, including during the "Barbary pirates" period when the US warred with Tripolitania in the early 1800s, a period when Cyrenaica was under Ottoman rule (the Ottomans got back into Tripolitania later in the 1800s).

There is a further warning here having to do with history, specifically the fact that among the leading countries involved in this military action are the three European countries that ruled parts of modern Libya prior to its independence as a kingdom in 1951, namely Italy, France, and the UK. Italy began taking over Libya from the Ottomans in a war in 1911-12, although it was not able to subdue Tripolitania until 1923, with Libya as a unified entity under Italian rule declared in 1934. During WW II, the French came in from Algeria and took Fezzan in the southwest in 1943, while the British took control of the coastal provinces in warfare with Germany during 1941-42. Italy formally surrendered control in 1947, and the UN established a mandate under the joint control of France and Britain. In 1949, the British established a kingdom in Cyrenaica (capital, Benghazi) under Idris al-Senussi. When Libya was granted full independence in 1951, Idris was made king of all of Libya, but with the capital in Tripoli, triggering much resentment in the west of this rule by easterners, an important point in the current situation. In 1963 the old provinces were officially dissolved in favor of smaller administrative units. Qaddafi seized control in 1969, and while he is a despicable leader and human being whom I would love to see overthrown, when he falls back on old pan-Arab anti-colonialist rhetoric, he is not entirely talking through his hat in the eyes of many obervers around the world who know their history.

New Interview with Michael Perelman

I had a nice interview at the Left Forum with a representative of very interesting platform. I was mostly covering material from The Invisible Handcuffs. Even if you are not hearing me, you might want to check out the entire site.

http://mantlethought.org/content/left-forum-2011-interview-michael-perelman

Kling Responds to Krugman in a Strange Way

Menzie Chinn agrees with Paul Krugman that real interest rates during the 1980’s were very high, but then he also notes an email from Arnold Kling that tries to defend the original blog post:

The topic was not crowding out. It was liquidity traps.

I would argue that this is an odd way to respond for a couple of reasons. One is simply that we were not in a liquidity trap during the early 1980’s. Secondly – why do we care whether we are in a liquidity trap or not? The reason has to do with whether fiscal stimulus will lead to crowding-out. A lot of the arguments against fiscal stimulus assume either that we are near full employment (which of course we are not) or that the LM curve is not flat. In other words – the fear of crowding-out. While these arguments made sense during the early 1980’s, they do not make sense now. So I would argue that the topic has always been crowding-out.

Arnold Kling is Not the First Economist to be Confused About the Reagan Deficits and Interest Rates

Arnold Kling confused nominal versus real interest rates here:

Many people predicted that the Reagan deficits would produce soaring interest rates. The deficits appeared, but the 10-year interest rate peaked before the Reagan tax cuts took effect and plummeted in the latter half of 1982, in spite of then-record deficits.

Paul Krugman responds:

The Reagan years were marked by two things: large budget deficits — although much smaller as a percentage of GDP than we’re seeing now — and a huge disinflation, engineered by Paul Volcker. So we need to look at real, not nominal interest rates — and real rates were in fact very high by historical standards during the Reagan years. 10-year bond rates ranged between 8 and 9 percent in the later Reagan years, while inflation generally ran under 4 percent. And may I say, I thought that this was part of what every economist knows — the story of the tight-money loose-fiscal mix of the Reagan era is, literally, a textbook case that’s in just about every undergrad macro book.

Not much to add except to note a couple of other economic papers that fell into Kling’s muddled thinking including something the American Economic Review published in March 1985 by Paul Evans entitled: “"Do Large Deficits Produce High Interest Rates?". His conclusion was no with part of his evidence being the same Reagan years. Alan Reynolds noted this paper and its Barro-Ricardian Equivalence explanation in defense of the Bush43 tax cuts. Reynolds goes onto to assert:

Confronted with this evidence, some began to say that it was not nominal interest rates that were driven up by deficits but real interest rates. But the only way deficits could raise real rates without raising nominal rates would be if deficits caused inflation to fall, which does not make sense.

I guess that since the Volcker tight money policy coincided with the Reagan fiscal stimulus, one could abuse the term “cause” to say deficits caused inflation to fall. I prefer to suggest that Reynolds was just being silly with this paragraph. Let’s also note the reason Barro-Ricardian Equivalence is supposed to make fiscal stimulus something that is not going to impact interest rates even in a full employment economy. The proposition is that households will fully save and not consume their tax cuts if they are not accompanied with at least some expectation of future spending cuts. But we should recall that U.S. consumption did jump after the Reagan tax cuts even though we never saw appreciable spending cuts. In a words – national savings fell, which in the full employment classical world that Robert Barro, Paul Evans, and Alan Reynolds live in means an increase in real interest rates. Which is exactly what we saw during the 1980’s.

The Oil Empires Strike Back

It is increasingly clear that the Arab nations with lots of oil to export also have better means to crush their uprisings than the leaders in such non-oil exporters as Tunisia and Egypt. Thus, King Abdullah of Saudi Arabia has sent troops in to Bahrain, allowing the Sunni monarch there to use his police to move harshly against the largely Shi'i dissidents, even though the Shi'a are about 2/3 of the local population (there is a substantial population of expat workers, mostly Hindu Indians). The US has a naval base there, although reportedly the US administration has been unhappy about this move by the Saudis. But the Saudis apparently do not want any infection into their Shi'a, who, only 12% of the Saudi population, are concentrated in the oil-producing Eastern Province (and are heavily active in the oil industry itself).

In Libya we are reminded that the sine qua non of a successful revolutionary movement is when the lower levels of the military turn against their commanders and the national leadership to side with the rebels. That has not happened there subtantially for two reasons. The more widely reported one has been Qaddafi's ability to hire mercenaries given his oil funds. The other is that he enjoys the support of some of Libya's tribes, including the nation's largest one. This means that the civil war component probably does outweigh the revolutionary component, and despite the Arab League voting for a free fly zone (with Algeria and Syria abstaining), it looks that Qaddafi's troops are successfully heading towards the rebel capital of Benghazi. This could be all over soon, and it was never very likely that a free fly zone would have done anything anyway, given that Qaddafi has managed to retain the loyalty of most of the military on the ground (unfortunately in my opinion).

BTW, Syria has experienced its first demonstration, although only a small and brief one. However, given how repressive the regime is and how long it has been in power, plus the fact that the rulers there largely belong to a religious minority that is only about 10% of the population, the Shi'i Alawites (part of the reason they are friendly with Iran), it is a bit surprising there have been none earlier (and they are not oil exporters either).

Unsurprisingly, good reporting on both of these events can be found at http://www.juancole.com and http://xrdarabia.org .

Job Killing Spending Cuts

Larry Bivens reports on how a few freshmen Republican Congressmen are being criticized by their constituents for voting to eliminate the Workforce Investment Act:

Jim Golembeski, executive director of the Bay Area Workforce Development Board, which administers WIA services at five regional jobs centers and three smaller sites in 10 counties in Northeastern Wisconsin, says he would have to shut down his operation if the cuts are approved. As a result, about 30 people would be out of work, he said, in addition to many others who would not receive needed services it provides. The House-passed bill would eliminate funding for the remainder of the current fiscal year and provide no money for fiscal year 2012, which begins Oct. 1, according to an analysis by the Center on Budget and Policy Priorities. Wisconsin would lose $12.5 million in funding for the program for the rest of the calendar year, affecting 23,700 participants in the programs serving adults, dislocated workers and youths.

As a Keynesian economist, I would argue that the reduction in government spending leads to a further reduction in aggregate demand, which not only means the loss the 30 jobs that Mr. Golembeski refers to but likely some private sector jobs via the multiplier effect. I guess Republican politicians might argue that this Keynesian emphasis on aggregate demand is misplaced preferring to argue that high unemployment is due to a mismatch of worker skills and the needs of employers. Even if one held this view – how does eliminating a program that is designed to enhance worker skills do anything but make the labor market situation worse?

Price Indices: Let Them Eat iPads!

David Taintor notes the backlash that New York Federal Reserve President William Dudley’s received when he said:

"Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful," Dudley said in Queens ... You have to look at the price of all things."

That statement may have gone over well with my neighbors on the Upper East Side of Manhattan where these well to do citizens do purchase all sorts of gadgets such as iPads and where food is not an overwhelming part of their consumption basket. But I would to venture to suggest that in some other New York neighborhoods, their consumption basket does not include gadgets such as iPads. Mr. Dudley should admit that we don’t all have the same consumption basket when he says we have to look at the price of all things.

Interview with Michael Perelman

Suzi Weissman interviewed me about The Invisible Handcuffs for the last 20 minutes of her show. The earlier guests are top notch.


http://archive.kpfk.org/parchive/mp3/kpfk_110311_170030bts_suzi.MP3

Frontiers of Price Indexing or Product Placement?

"Let them eat iPad." That was the cry Friday after William Dudley, head of the Federal Reserve Bank of New York, acknowledged to an audience in Queens, N.Y., that food prices had gone up before adding that some prices are lower. "Today you can buy an iPad 2 that costs the same as an iPad 1 that's twice as powerful."

Barley, Richard. 2011. "Comedy Fit." Wall Street Journal (12-13 March): p. B 18
http://online.wsj.com/article/SB10001424052748703555404576194993426238806.html?mod=ITP_businessandfinance_8

The Attack on Unions in Selig Perlman's Wisconsin

The Wisconsin attack on unions is sadly ironic, given the progressive tradition of the state. One of the progressives who whom I have not seen mentioned was Selig Perlman (1888-1959). He was an important economist at the University of Wisconsin and teacher of the son of Robert La Follette, who was, like his father a governor of the state. Later, I had the privilege of knowing his son Mark, I wonderful man with an amazing breadth of economic knowledge and experience. Putting information together from Mark and my father, our families came from nearby each other. I always addressed him as Cousin Mark.


In an undergraduate class, we read Perlman's book, A Theory of the Labor Movement. I remember my teachers' explanation of the book more than the book itself, which I have not read in the last 50 years. Perlman was a former Marxist, who saw the unions as a bulwark against communism. I don't know whether he influenced later scholars' ideas that, by giving workers a voice, unions dampened their revolutionary spirit. I suspect that his analysis had some influence on Jay Lovestone's CIA-sponsored project to encourage (capitalist-friendly) trade unionism around the world.

Obviously, Perlman was not radical, but he still was sympathetic to the working class. Now that the Soviet Union is gone, unions no longer serve such a purpose. Instead, they are treated as a parasitic force that eats into the profit rate. Hopefully, this nonsense will cause a strong enough reaction to ensure that nothing like this happens again.

Now's the Time

I have been an Obamophile from the get-go and I worked hard for him in both the primary and the general election. I have not been disappointed with him, on the contrary. But I do not understand why he is sitting on his hands while Gaddafi massacres his people. We need a no-fly zone immediately - it may well be too late.

The Ricardian Equivalence Bubble

Suddenly it’s everywhere. Justin Yifu Lin (the chief economist at the World Bank), Tyler Cowen, Paul Krugman, Nick Rowe, our own PGL: hot debate about how Ricardian equivalence applies to the current economic situation. There’s just one minor problem: Ricardian equivalence is an absurd idea, with not a shred of evidence or logic to support it.

Behind the imposing moniker dreamed up by Robert Barro, RE simply says that government debt must eventually be paid down to zero. If the government borrows $1B this year, it must run a surplus of $1B some time in the future. If spending is constant, this means taxes have to go up.

I pointed out the vacuity of this idea in a previous post, so I won’t repeat myself. The question of the day is, why should anyone give RE more than a moment’s attention? In particular, why would smart economists with state-of-the-art training be debating the fine points of what RE would mean if it were true?

The only answer I can give is that the theory can be decked out with lots of math (overlapping generations ratex models of the behavioral response to knowledge of future taxes), enhancing the reputations of all involved. The fact that RE simply assumes a nonexistent and impossible state of affairs plays no role.

That, in a nutshell, is what’s wrong with economics.

Michael Perelman at the Left Forum

I will be on a panel: The Struggle Against Mainstream Economic Ideology

H. Panel Session 4-Saturday 5:00 p.m. - 6:50 p.m

Michael Meeropol

Doug Henwood

Howard Sherman

Michael Meeropol


Michael Perelman

37 E321

I would enjoy meeting some of you whom I know only via the Internet

Is The Arab Uprising A Revolution?

There is not a definite answer to this as it depends on how one defines a revolution. However, one distinction I keep seeing being made is between a civil war and a revolution, with numerous commentators discussing whether the situation in Libya is more a revolution or a civil war. Hard fact is that most serious revolutions involved periods that were also civil wars: France, Russia, and China for starters.

I think a useful place to start, if not necessarily to end up, is to consider the view of that old revolutionary, Karl Marx. For him it involved the uprising of an oppressed class against a ruling class, these defined in terms of control of the means of production. A full-scale revolution involved a change of the mode of production in his terminology, along with the replacement of one ruling class with another. The archetypal model for Marx was the French Revolution, in which the bourgeoisie replaced the landed aristocracy, and capitalism replaced feudalism, although there was Thermidor and reaction, and Napoleon declaring himself Emperor and naming new aristocrats, with the Bourbon Restoration following. So, maybe it was not so successful after all, even if in fact Napoleon went around Europe smashing feudal institutions all over the place and did create the modern nation state of France. As it is, we may be stuck with Chou En-Lai's reply to Henry Kissinger regarding the outcome of the French Revolution, "Too soon to tell."

What is going on in the Arab world looks to me most like what came in Europe in 1848, an international uprising with some similarities across nations as well as differences, although in the short run a failure, if not in the longer run. In some countries the ruler is a monarch, but so far none of those have been overthrown. Tunisia and Egypt were essentially military dictatorships, overthwrown by would-be democrats, although we need to wait and see what will happen, with some ugly anti-women and anti-Christian demonstrations in Egypt. As for Libya, recent developments suggest that Qaddafi may not fall after all. Too soon to tell.

Critique of Public Investment Based on Another Misapplication of Ricardian Equivalence

Antonio Fatás rightfully blasts the following from Justin Yifu Lin:

But how can the Ricardian trap be avoided, i.e. an outcome where the government stimulus fails to boost aggregate demand because economic agents expect future tax increases to pay for larger deficits and thereby increase savings? To avoid the Ricardian trap, it is important to go beyond conventional Keynesian stimulus of “digging a hole and paving a hole” by investing in projects which increase future productivity."

Antonio notes:

No one can disagree with the statement that if the government can choose between different spending projects, they should select the one with the highest return (in terms of productivity and income). But we need to understand that the advise for the government to invest in productive investment applies at all times (good and bad). What is different when there is spare capacity is that "pure demand" policies can bring the economy closer to potential in a shorter period of time. By doing so they will be increasing the overall output and income of the country. And this additional income is the source of potential increases in private spending and tax revenues. This is the intuition behind the Keynesian recipe for times of high unemployment, which is consistent with the concerns of Justin Yifu Lin.

Let me add one other important element to this critique of this supposed critique of Keynesian policies from the Chief Economist of the World Bank. Ricardian Equivalence might hold that a permanent increase in government purchases would lead to an increase in permanent taxes, which would cause private consumption to fall by an equal amount. But even if a temporary increase in government investment were squandered say on building new pyramids or another damn baseball park for a team like the Yankees (with all due apologies to my neighbors who may be Yankee fans), standard lifecycle models of consumptions (e.g., Ricardian Equivalence) do not predict a fully offsetting reduction in consumption.