The Free Market: Looting, Shooting, and Polluting

I uploaded a Youtube post. I used up my time before I was able to pull everything together. Here is the url:

http://www.youtube.com/watch?v=cuznKDUbemw

Schäuble: Bankrupt

Amazing.  Schäuble’s opinion piece in the FT is titled “Why austerity is only cure for the eurozone”, and his argument is

Piling on more debt now will stunt rather than stimulate growth in the long run. Governments in and beyond the eurozone need not just to commit to fiscal consolidation and improved competitiveness – they need to start delivering on these now.

and

There is some concern that fiscal consolidation, a smaller public sector and more flexible labour markets could undermine demand in these countries in the short term. I am not convinced that this is a foregone conclusion, but even if it were, there is a trade-off between short-term pain and long-term gain. An increase in consumer and investor confidence and a shortening of unemployment lines will in the medium term cancel out any short-term dip in consumption.

Cutting employment and income will increase confidence in future employment and income—did I hear that right?  That must be why there is such a positive market reaction every time a new round of statistics points toward contraction.

And, incidentally, how are all the world’s governments going to simultaneously increase competitiveness?

It’s unfortunate, to put it mildly, that our economic futures depend on people like this.

Environmental Regulation and Jobs

The short answer is that it’s the wrong question.  Now for the longer answer.

A Further Sign of Academic Idiocy

I proposed a guest speaker for this semester. Our chair told me that I may not be able to extend the invitation. The University is exploring the possibility of charging for the use of rooms. I am reminded of Charles Davenant, one of the subjects of my new book, who wrote, "Everyone is on the scrape for himself, ... each cheating, raking, and plundering what he can, and in a more profligate degree than ever was known." Davenant 1701, pp. 300-301. At least the restrooms are still free for the moment.

Cutting Teacher Compensation: A Demand and Supply Model

Eric Kleefeld reports:

about double the number of Wisconsin public school teachers have retired this year when compared to the past two years, before Scott Walker's anti-union law -- which stripped away most collective-bargaining rights for public-sector unions, and required greater contributions by public employees for their healthcare and pensions -- was ever proposed or much less passed."It wouldn't make sense for me to teach one more year and basically lose $8,000," said Green Bay teacher Ginny Fleck, age 69, who has 30 years of experience.

I know some of these Republican governors cite the fact that total compensation for public school teachers is above the national average for all workers, but it is also true that their compensation is below the national average for college educated workers. A case can be made that school teachers were already undercompensated. Cut their compensation and the textbook demand and supply model would predict a shortage of workers as we move along the supply curve. OK – there may be unemployed workers in other sectors ready to take these vacancies but:

Many of these positions will be filled, though no comprehensive statistics are available. But the issue does remain that the school systems have spontaneously lost an unusual amount of total experience. "You can't get experience through a book, you've got to teach," said Green Bay teacher C.J. Peters, who for her own part has retired after 24 years. "I think a lot of talent has been lost."

Irene and the Broken Window “Fallacy”

Doug Matacons argues that Paul Krugman is wrong with what Doug calls the “broken window fallacy”:

What this argument ignores, and what people like Krguman and this Politico reporter refuse to recognize is the simple fact that destruction does not create wealth. The money that will be spent to rebuild, repair, and recover from Irene will doubtless line the pockets of the various contractors that will be hired to perform said work, but to argue that it “creates wealth” is simply a fallacy. By some estimations, the losses from Hurricane Katrina will total in the tens of billions of dollars. That’s wealth that doesn’t exist anymore, it’s gone. The money that will be will be used to pay for the recovery already exists and, rather than being invested in other projects, it will go toward repairing the damage caused by natural disaster. A home damaged by Hurricane Irene will be no more valuable after it is repaired than it was the day before the storm hit, for example. And this analysis doesn’t even take into account the losses from lower consumer spending that businesses will feel as a result of the storm, all of which will reverberate out into the economy as a whole.

Doug then applies to Frédéric Bastiat for this line of new classical thinking:

It is not seen that, since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library. In brief, he would have put his six francs to some use or other for which he will not now have them.

Yes – economists like Krugman and Keynes must be “bad economists” for looking out at the real world and recognizing that we are far from full employment. I would like to give a lot of credit to Irwin Kellner for this:

The bad news is pretty obvious: Countless houses and cars were smashed by fallen trees; there was lots of water damage from the storm itself, as well as from the water that spilled over from nearby rivers and lakes — and even from the ocean. Widespread power outages left millions in the dark, spoiling food and depriving people of air conditioning. Many businesses had to shut their doors for as long as a week. For retail outfits, this is lost revenue that is unlikely to be made up. The damages have yet to be totaled up, but estimates of $7 billion or so seem to be common ...For their part, restaurants either forced to close their doors or bereft of their usual complement of customers will not be able to make up these lost receipts. The same goes for other retailers like gasoline stations and department stores. Theaters will be unable to make up for the last-minute walk-ins at canceled performances. Cities like New York, which shut down their mass-transit systems and waived tolls on bridges and tunnels, will be unable to recoup these losses as well. Although occurring more than halfway through the third quarter, the effects of this storm could be enough to reduce growth in the gross domestic product by anywhere from a half to a full percentage point.

In other words, Irwin starts with all those negative impacts from Irene that we can see. But Irwin goes onto to note the boost to aggregate demand expected to come in the last quarter of this year. Is Irwin being a bad economist for not seeing the crowding-out effects that Bastiat talked about? Of course not! Shall we repeat? We are far from full employment!

The Long Depression And the Great Recession

A substantial debate over the nature of the the deflation in the US during the 1873-1896 period has erupted on marginal revolution, http://marginalrevolution.com/marginalrevolution/2011/08/the-deflation-of-1873-1896.html#comments . Much of the debate centers on reevaluations of the path of real US output during the so-called "Long Depression" of 1873-79, with newer sources arguing that declline in real output only lasted from 1873-1875, thus arguing that it was not as bad as many thought, and while indebted farmers were hurt by deflation, particularly by the 1890s, this was a golden age of the American economy and a model for laissez-faire policy, with the deflation itself generally a good thing outside of agriculture (whose falling prices helped the rest of the economy).

I am less interested in the matter of deflation and more in the comparison with the current Great Recession period. Indeed, in their book, This Time is Different: 800 Years of Financial Folly, Reinhardt and Rogoff distinguish crises/recessions that do not involve the entire financial sector from those that do, arguing that the latter involve much longer and slower recoveries. For the US economy they list three such episodes, the 1870s, the 1930s, and today, with the current situation perhaps most resembling the events of the 1870s. In looking at the debate on marginal revolution, I am struck even more by the similarities, given this newer data.

So, both had two years of outright decline: 1873-75 and 2007-09. Both involved major financial crashes of international scale, with the downturns international also. The 1870s one started in Germany with a major selloff of silver after the Franco-Prussian War that then spread to the rest of the world, hitting the US most dramatically in a crash on May 9, 1873 arising from financing problems in the US railroad industry, particularly the failure of the Cooke Company after the failure of its bond issue for building the Northern Pacific, the second transcontinental railway. This was particularly important in that the railroad industry was the largest employer in the US economy outside of agriculture, and its leading sector.

The data is most dramatically seen in railroad consturction itself. In fact, the post-Civil War boom in such construction had peaked in 1871, but the decline in production accelerated, going from 6,000 miles worth in 1872 to just over 4000 miles worth in 1873, then plunging to barely over 2000 miles worth in 1872, and dropping further to under 2000 miles in 1875, the bottom.

Now here is where the similarity to the present day becomes clearest, despite the carrying on by some in the marginal revolution discussion to the effect that after 1875 everything was just fine. It wasn't, and it is no accident that the period to 1879 is viewed as depressed. Yes, railroad construction began to recover, just as output did in the US starting in late 2009. But it did so only fitfully and basically remained flat and low during the 1876-78 period, fluctuating around 3000 miles of construction, much as we have seen a very weak recovery since the bottom in 2009. Only in 1879 did construction surge again up to 5000 miles, followed then by the biggest surge of all as the 1880s would prove to be by far the leading decade of rail construction, only to be followed by a nearly total collapse in the 1890s, the decade that gave us the populist movement.

Why Would Eric Cantor Insist on Paygo for Irene Disaster Relief?

Eric Cantor stated his position:

"Yes there's a federal role, yes we're going to find the money -- we're just going to need to make sure that there are savings elsewhere to continue to do so," Cantor told Fox News on Monday.

Cantor has suggested before that we don’t have the money for additional government spending. And I guess if one were foolish enough to believe we were near full employment, one might worry about the crowding-out of private spending. Cantor, however, undermines both claims with his August 29 memo that claims its agenda is to create new jobs with part of his policy message being tax cuts. On policy grounds – Cantor has no principled reasons for this application of paygo.

Thomas Hoenig and the Ever-Expanding Universe of Excuses for High Interest Rates

It’s now a week old—an internet lifetime—but we shouldn’t let this pass without comment.  In an interview with Gretchen Morgenson, departing Fed district president Thomas Hoenig offers this bizarre justification for his votes against near-zero interest rates since the 2007 collapse:

We as a nation have consumed more than we produced now for well over a decade. Having very low rates for an extended period of time encourages us to continue focusing on consumption, but to correct our imbalances, we have to focus on production.

Global imbalances made me do it!  Think for a moment, however, and the argument makes no sense at all.

Understanding Debt

The “embeddedness” argument of the economic sociologists and anthropologists applies supremely to debt.  If you have any doubt, read this captivating interview with David Graeber (via Naked Capitalism).  Here’s a nice quote, pulled from near the end, after a long discussion of monetary and credit practices in different times and places:

What’s been happening since Nixon went off the gold standard in 1971 has just been another turn of the wheel – though of course it never happens the same way twice. However, in one sense, I think we’ve been going about things backwards. In the past, periods dominated by virtual credit money have also been periods where there have been social protections for debtors. Once you recognize that money is just a social construct, a credit, an IOU, then first of all what is to stop people from generating it endlessly? And how do you prevent the poor from falling into debt traps and becoming effectively enslaved to the rich? That’s why you had Mesopotamian clean slates, Biblical Jubilees, Medieval laws against usury in both Christianity and Islam and so on and so forth.

Since antiquity the worst-case scenario that everyone felt would lead to total social breakdown was a major debt crisis; ordinary people would become so indebted to the top one or two percent of the population that they would start selling family members into slavery, or eventually, even themselves.

Well, what happened this time around? Instead of creating some sort of overarching institution to protect debtors, they create these grandiose, world-scale institutions like the IMF or S&P to protect creditors. They essentially declare (in defiance of all traditional economic logic) that no debtor should ever be allowed to default. Needless to say the result is catastrophic. We are experiencing something that to me, at least, looks exactly like what the ancients were most afraid of: a population of debtors skating at the edge of disaster.

The name that is missing from this interview (I don’t know about the book) is J. M. Keynes.  Keynes had clearly confronted the moral aura surrounding debt, and his approach to monetary policy above all tried to strike a pragmatic balance between the interests of creditors and debtors.

Economic Policy For A Post-Qaddafi Libya

Yesterday Juan Cole at http://www.juancole.com posted "How to Avoid Bush's Iraq Mistakes in Libya," listing ten matters and noting that "arqana," or "Iraqization," is now an Arabic word, and is not used favorably by anybody anywhere, even if some neocons continue to attempt to turn the Bush-Iraq mess into something admirable. Of the ten points Cole makes (all of which I agree with to varying degrees), five have to do with economic policy.

Point 5 is that the Libyans should avoid "privatizing everything." In Iraq we brought in a bunch of young idealistic pro-free-marketers who attempted this, only to have many of these previously state-owned factories/enterprises, simply go out of business, thereby exacerbating the major economic problems facing Iraq. They should have learned from the transition from the Soviet model in the former Soviet bloc. Countries that attempted sudden privatizations, such as Russia, ended up with badly managed companies being bled dry by corrupt owners. More successful cases, such as Poland, engaged in gradual and carefully managed privatizations. Libya should follow that example, not the idiocy in Iraq (or Russia).

Hallig Hooge

I’m just back from a trip to the North Frisian Islands.  Tens of thousands flock there for vacations each summer, inundating the long, car-choked island of Sylt and the much nicer but still busy Amrum.  My strongest impression, however, was the lonely landscape of Hallig Hooge, the small island just NW of Pellworm.

Governor Christie Calls Cap and Trade Gimmicky

The governor of New Jersey is receiving criticism from rightwing nuts for admitting the obvious - that climate change is real and that human activity plays a role. I’m sorry but that is not the real story. The policy decision was for his state to do nothing:

Gov. Chris Christie Thursday declared the nation’s first regional cap-and-trade program designed to reduce air pollution a failure and promised to pull New Jersey out of it by the end of the year. While acknowledging humans contribute to climate change, Christie called the Regional Greenhouse Gas Initiative a "gimmicky" partnership and said it does nothing to reduce the gases that fuel the problem.

Christie joined other opponents of cap and trade by complaining how it would raise the cost of doing business as if this were a “job killer” – the new buzz word for rightwingers when they oppose something. But isn’t that the whole point of cap and trade – to induce private agents to shift their activities away from those that add to greenhouse emissions via the price system.

Christie’s decision to withdraw from this regional cap-and-trade program is bad policy but this is the kind of policy decision conservatives are turning to in order to gain political favor with rightwing nuts. But I guess this was not enough for some people.

The Imminent Fall From Power of Muammar al-Qaddafi

See http://www.juancole.com for details of the uprising in Libya's capital, Tripoli, emanating from the working class districts in the eastern part of the city. With rebel forces having now captured most of the key towns around Tripoli and moving in, and with many of his top officials defecting, it looks like the end is near for the Qaddafi regime, one of the longest ruling in the world at over 40 years.

Shortly after the uprising began I was one of the first to forecast (here) the serious possibility of a partition and stalemate between the rebel East and the loyalist West. This was based on the long historical, ethnic, religious differences between the old Roman province of Cyrenaica in the East and Tripolitania in the West, and for many months it looked as if that would be the case, with the border at Brega in the center of the main oil region. But things have finally gone the rebels' way after a long time and external support by NATO (or some of it).

Smacking Down Self-Plagiarism - The Bruno Frey Affair Becomes Official

The latest issue of the Journal of Economic Perspectives (JEP) has just gone up online and includes the replication of a letter exchange between its editor, David Autor of MIT, and Bruno Frey, regarding accusations that a paper published by Frey and two coauthors (Benno Torgler and David Savage) self-plagiarized three other papers by them appearing earlier in the Proceedings of the National Academy of Sciences (PNAS), the Journal of Economic Behavior and Organization (JEBO), which I was editing when that paper was submitted and accepted and published (and was the first version submitted to any journal), and Rationality and Society (R&S). None of these highly similar papers cited any of the other ones. In his letter, addressed to the editors of the other journals as well as to Orley Ashenfelter, President of the AEA and John Siegfried, longtime AEA Secretary-Treasurer, Autor accuses Frey of having engaged in conduct "ethically dubious and disrespectful to the American Economics Association [publisher of the JEP], the JEP and the JEP's readers." Frey, speaking on behalf of one coauthor, his former student Benno Torgler (Savage is currently Torgler's student, and they both pleaded for Savage not to be punished), stated "we deeply apologize" and "This is deplorable." (referring to their conduct). This can all be found at http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.25.3.239