Some Like it Hot. So What?

In the world of climate economics, Richard Tol is a major name.  If his most recent post on the topic is any indication, he should pick another line of work.  Tol points to the desire of many people, including some of his economist colleagues, to move to warmer locations as “revealed preferences for climate”.  His final paragraph hedges a bit, but leaves the impression that the sunbirds are telling us something about policy:

Obviously, one cannot compare the individual impact of moving to a warmer climate with the impact of global warming, but at the same time it is clear that both Dublin economists specifically and intra-European migrants generally do not object to a warmer environment.

Yes, people move to warmer climates.  They lie under sun lamps and bake in saunas.  Thermo- and phototropism have nothing to do with the risks of climate change, of course.  The major risks are:

• sea level rise that inundates, or ravages with storm surges, coastal areas that are home to much of the world’s population

• the extinction of species that cannot adapt at the rate at which their environment is changing

• an increase in the frequency and severity of severe weather events

• the loss of water storage in glacial formations

• shifts in rainfall patterns that could subject more regions to drought, fire and other hazards

• loss of agricultural productivity in tropical and many temperate regions

• and above all, the potential for positive feedback mechanisms (release of methane from peat bogs, permafrost and clathrates) that could trigger runaway, catastrophic increases in atmospheric carbon concentrations.

Personal preferences for a few degrees of temperature more or less have nothing to do with it.  Tol seems to be another poster child for the tendency of economic expertise to coexist with appalling ignorance about just about everything else.  Is economics worse this way than other fields, or am I just more sensitive to it because it rubs off on my reputation as well?

Montserrat Figueras

This extraordinary singer died a few days ago at the age of 69.  She had it all: purity of tone, deep personal expression, the ability sing in a vast array of styles, from Arabic and Sephardic to medieval to opera to folk song.  If you haven’t heard El Cant de la Sibilla, her recreation of a medieval religious incantation, or Ninna Nanna, her complication of lullabies from around the world and across the ages, you are missing something wonderful.

She was one of a kind.

Critique of the Political Scene Today?

As faction is the effect of that loose government which is unavoidable in a time of war and trouble; so, while faction is suffered to continue, it is a perpetual bar to better administration; for it emboldens the bad, and terrifies the good. Is a lunatic, whom the physician cannot approach without danger to himself. Some statesmen, therefore, when it rages high, withdraw from affairs, and will not administer the physic of their councils till the fit is over.

--Charles Davenant. 1698.

Is The Italian Crisis A Possible Self-Fulfilling Prophetic Negative Bubble?

Many observers are declaring Italy to be the key to whether the euro will collapse and along with it possibly most of the world economy. Having removed the near term problem from office, Silvio Berlusconi, the markets are not satisfied with the appointment of respected economist technocrat, Mario Monti, to replace him, with bond yields continuing to rise, thus threatening to bring about a crisis. What is it that Monti is or even can do to stop this?

Quite likely not a damned thing. Looking at supposed fundamentals, there should not be a problem with Italy. It is one of only four Eurozone nations that is currently running a primary budget surplus. The others are Luxembourg, Belgium, and Germany. Where is the problem?

Well, some say, aha!, look at the national debt to GDP ratio, a too high 120%. However, not only has Italy had a ratio such as this for a long time, and even been higher prevously, such as in the early 1990s, it has a much higher share of its debt domestically held, Italy has a much higher savings rate than most European nations (on the order of 17%). This would explain the NY Times story today that as long as Italians continue to hold their own debt, the euro will be saved.

What about proposals being made in Italy? One is that the retirement age be raised from 65 to 67. Maybe this should be done, but again, Italy has a primary budget surplus, and 65 is higher than quite a few other European nations have as a retirement age. And if such a "reform" is passed, it will have little near term impact on the budget balance, although maybe doing so will induce that magic effect of "raising confidence," thus bringing down the interest rates.

The other is labor market reforms, particularly to open up various professions to more entry and competition. This will be hard to pass, but I think there may be reasons for doing this, and this may well help increase the growth rate, which has been low for a solid decade, and needs some stimulus, however achieved. But, again, this is not likely to affect the budget balance at all. Why this would bring down overly high interest rates is also very unclear aside from hoping for the "confidence fairy" to suddenly appear.

That the confidence fairy has not appeared with the removal of Berlusconi is disturbing. It looks increasinigly to me that these high interest rates are simply a self-fulfilling negative bubble on Italian bonds unjustified by any actual fundamental phenomena. Even with the high interest rates, most reports suggest that Italy can manage to avoid any defaults for at least another year. It is not Greece, or even the less troubled Portugal, Ireland, or Spain. It is basically solvent. The only real threat is the high interest rates, apparently existing because of the fear of what high interest rates can do, a possible self-fulfilling prophecy, an empty, if still dangerous negative bubble.

In Politics, Let No Mean No

The recent elections in Spain point once again to a flaw in the voting procedures of all supposedly democratic countries: they prevent citizens from expressing what they actually think in the voting booth.

Do you suppose there was a sudden outpouring of love for the Spanish right?  More likely, there was an outpouring of disgust for the Socialists and the economy-without-a-future over which they preside.  The ballot, however, did not offer the opportunity to vote against the party in power, only for the opposition.  Thus the conservative Popular Party will enter government with what it claims is the support of the majority, when the reality is that is probably has less support than it had at the time of the previous election—which it lost.

There is a simple solution: provide voters with the option of either voting for a candidate or party, if they want to express support, or against a different one if they want to express rejection.  The final tally would be the number of votes for minus those against.  In a two party/candidate race the final result would be the same.  In a multi-party race, voters would have to think strategically about whether their feelings are more concentrated for or against any particular alternative.  In either case, you would see clearly the extent to which democracy was working, in the sense of producing a government that citizens actually support.

My guess is that, given a negative option, the people of Spain would have delivered two verdicts, one against their current rulers and the other, only somewhat less intense, against their future ones.  They should have had that chance.

Lessons for the Eurozone from US Fiscal Federalism

If the euro disintegrates because of a failure to take short-term measures needed to support it, we won’t have to worry about long run governance issues.  Just in case the e-zone gets through the immediate crisis, however, here are a few thoughts based on US experience.

A Business Cycle Theory Suitable for a Parallel Universe

I just glanced at Tyler Cowen’s model of a Eurozone downturn and noticed there are a couple of minor elements missing—the trade imbalances between the surplus and deficit countries in the period leading up to the financial crisis, and the financial crisis itself.

That’s right: Cowen explains the current Euromess without any reference to what transpired in 2008.  Imagine how much worse it would be if the crisis that actually happened actually happened.

Education with a Twist—An Oliver Twist

Let’s let the newt speak for himself:

You say to somebody, you shouldn’t go to work before you’re what, 14, 16 years of age, fine. You’re totally poor. You’re in a school that is failing with a teacher that is failing. I’ve tried for years to have a very simple model. Most of these schools ought to get rid of the unionized janitors, have one master janitor and pay local students to take care of the school. The kids would actually do work, they would have cash, they would have pride in the schools, they’d begin the process of rising.

I don’t know what your reaction was, but the first thing that popped into my mind was, why take it out on the janitors?  If the school was failing it wasn’t their fault.  According to Gingrich, it’s the teachers who can’t make the grade.  So why not put the kids to work following lesson plans, going over last year’s standardized tests, etc.?  There would be as much pride in this as in cleaning toilets.

But let’s not get hung up on details.  Isn’t it nice having a historian running for president—someone who knows what was really good about the good old days?

Piggy No. 3: German?

Speaking of Germany and economic virtue, here is a question about the Walt Disney classic, Three Little Pigs. Take a look at the third little piggy, the one who builds his house of bricks.  He wears overalls.  In American pop culture circa 1933 (the date of the cartoon’s release), only farmers and Germans wore overalls, and I don’t see a farm.  Also, the first two piggies play the flute and fiddle, while No. 3 has a piano with sheet music.

Am I reading in too much?  (I do not see the framed portrait of dear old dad as a string of Würstchen as a corroborating clue, by the way.)

The German Obsession with Inflation

As a footnote to the previous post, here is an observation about the German obsession with inflation.  Media accounts always bring up the hyperinflation of the 1920s and its supposed role in ushering in the Third Reich.  This is bad history: a decade transpired between the inflationary madness of 1923 and the handing off of the chancellorship to Hitler.  That trope should be buried once and for all.

More generally, while the experience of the ‘20s is invoked by Germans themselves, I think it’s little more than a convenient rationalization.  Most Germans are generations removed from this era; it has as little relevance for them as, say, the great Mississippi flood of 1927 has for those living along its banks today.

The real reason is that Germany is a country of savers.  The savings rate is high, and savings are distributed broadly.  Saving is valorized by the culture; you could argue that it is seen as the greatest virtue of all, above courage, generosity and all the rest.  It is an act of self-denial that looks to the future—one’s own and that of the generations to come.  To have savings is to be free.  Germans see the capital stock of the country as the product of their own savings, and to a large extent they are right.  The mass savings institutions, the Sparkassen and the Postbank and savings banks, constitute the bulk of German finance.  Germany is a savocracy.

The great threat to savings is inflation.  Long before hyperinflation destroys savings altogether, modest inflation chips at their edges.  Policies that permit inflation to increase penalize savers, and this makes them immoral, since saving is the epitome of morality.  Better to allow your economy to go down in flames than to resort to the wickedness of the printing press; at least, in the rubble, you will have your savings to draw on.

Among other things, this perspective fails to take account of where savings come from.  Yes, they come from choices people make, but they also come from the income that make those choices possible.  Cut someone’s salary in half, and no matter how virtuous they are, their savings will take a hit.  And a significant part of German income derives, directly and indirectly, from its trade surplus with debtor countries like the Eurozone peripherals and the US.  In other words, the virtue of savings is inseparable from the vice of debt.  Simple accounting identities require this to be true, but it to point it out is to remove yourself from respectable public opinion in Germany.

Of course, it’s easy for me to see this as an American, the product of a massively indebted society buffered by the exorbitant privilege of minting the world’s currency....

The Power of One

European institutions, including the Eurozone, remain treaty organizations whose members are sovereign countries.  This is why important policy decisions have to be unanimous.  As a result, we have heard the lament that small, wayward countries have an unwarranted veto power and can hold everyone else hostage.  You know, the Finns, the Slovaks and their ilk.

In fact, the small and weak do not have this power.  If they try to throw sand in the gears, they will be put in their place one way or another.  A country like Finland, for instance, is simply too vulnerable to political and financial pressure to try to dictate Eurozone policy single-handedly.  Was anyone surprised when the True Finns, a party that campaigned on xenophobic nationalism, backed down and allowed the latest Greek financing package to go through?

The real threat to multilateral institutions has always been the veto power of the strong.  This is true of the US within the UN system, and it is increasingly clear that it is true of Germany in the current euro fiscal crisis.  As the moment of reckoning draws near, and as the need for a true lender of last resort to backstop euro-denominated credit becomes inescapable, one after another, the members of the zone are falling into line and demanding that the ECB mature into a real central bank.

Everyone except Germany.  Angela Merkel draws her line in the sand: “If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen.”  Hans-Werner Sinn, an economist whose every pronouncement is accorded scriptural authority, spits out the epithet “printing press” six times in a recent op-ed demanding that the ECB remain neutered.

In a nutshell, the German position is that any risk of inflation, no matter how small the inflation or the risk, outweighs the possibility of a financial meltdown resulting from a shortfall of euro liquidity.  If a country undergoes a run on its banking system or sovereign debt (typically connected), it is a sign of profligate living, and the specter of default is needed as an incentive for “reform”.  This attitude—and it is simply an attitude, not a rational economic argument—is the proximate reason why the global economy is on the brink.

So Germany, the biggest, strongest, richest country in the Eurozone is the rogue state, exercising its veto in increasing defiance of world opinion.  Forget the True Finns; the parties whose absurd demands are threatening to plunge Europe, and the rest of us, into crisis have names like the Christian Democrats, the Free Democrats, the Social Democrats and the Greens.  Will any of them start to crack before it's too late?

Strike at California State University

Two of the campuses of California State University are striking today. The timing of the strike is unfortunate, coming at the same time as fees are raised once again almost 10%. The union realizes that pay raises are a small part of the overall abuse of higher education in California, but strikes are only permitted in opposition to the contract with University system. Chronic underfunding began during the first term of Jerry Brown, when the passage of proposition 13, frightened him. Not only is the administration grossly overpaid, its management style is arrogant and heavy-handed. Finally, the gutting of public education at all levels means that students come to the University underprepared and, more often than not, lacking the funds to pay for their education. Not only do they fall under a heavy debt burden, they work too many hours after school in order to focus on their education. To add insult to injury, all of us have to listen to public figures telling us how our economic future depends upon educating young people, presumably without any tax burden unless such funds are directed to hedge funds engaging in charter school scams.

Väsen

I’m slow to get up this morning after a concert last night by this great Swedish folk group.  They played in an ancient church—great acoustics—in the tiny village of Freepsum in northwestern Germany.  Although they’ve been together for 22 years, this was the beginning of their first German tour.  (“We’ve had a lot of time to practice”, said Roger Tallroth, the guitarist.)

On stage, the core of Väsen is Olov Johansson, who plays the nyckelharpa–like its name says (in Swedish), a stringed instrument with keys.  He flies through complex runs in the dance tunes and produces a resonant tone for the slow airs.  While a few of the pieces they played were traditional, most were composed by one of them, especially the fiddle player, Mikael Marin.

Väsen’s virtuosity is exceptional.  Their sound is rich with harmony (think Ravel), even when they are blasting away at high-tempo polkas.  Toward the end of the night they started to fool around, and this was good too.  Lucy in the Sky with Diamonds mixed in with 18th century Swedish fiddle standards—why not?

They will be returning to the US in a few months, playing the Wintergrass festival in Bellevue in February and other events.  Not to miss.

Paperback version of The Confiscation of American Prosperity

I am writing a first draft of my introduction to the paperback edition of my book. Any feedback would be very much appreciated.

The Confiscation of American Prosperity: From Right-Wing Extremism and Economic Ideology to the Next Great Depression first appeared in October 2007, just as the stock market was peaking. Judging by the public pronouncements by economists and the business press, the economy appeared modestly healthy before the breakdown of the subprime mortgage market. In fact, the weakness of subprime mortgage market was a symptom of deeper problems that had been eating away at the economic core.

In addition to a diagnosis of these deeper problems, such as growing inequality and an emphasis on financial activities, rather than more productive economic endeavors, the book offered a historical analysis of the willful gutting of the economy that occurred over the last four decades. The Confiscation of American Prosperity presents this history in the form of a crime story, beginning with an accounting of the economic plunder engineered by a small part of society, with the complicity of both political actors and many, if not most, economists. The second part of the book describes the way that this group was able to carry out the theft of enormous wealth. In the tradition of crime stories, the third part of the book examines the expected retribution. The final section addresses the incompetence of the economists, who should have acted as policeman while the plot was unfolding.

The recent protests of the Occupy Movements indicate a deeper understanding of the crime than either the business press or the economic analysis following the meltdown of the financial system. The protesters correctly realize that many of the most serious perpetrators have escaped from the crisis without retribution. Their outrage might contribute to some modest retribution, but the expected retribution discussed in the book will come from more serious economic disruptions that are all but certain, without addressing some of the economic imbalances created by the crime. Of course, the economy can begin showing signs of health once again, but sooner or later the imbalances will take a serious toll on the economy.

Historically, economic crises do tend redress some imbalances, but political mobilization is also an important element in returning to a more healthy balance. One can only hope that such mobilization will be effective enough to prevent another Great Depression.

The Moral Philosophers' Stone: A Compleat History of 'A Certain Quantity of Labour to be Performed.'

In the past couple of weeks, the Sandwichman has uncovered not one but TWO previously unheralded milestones in the history of "best-known fallacy in economics". The first is a erudite defense by an accomplished first-generation political economist, Rev. Thomas Chalmers (1820), of the proposition that "there is a certain quantity of work to be done; and this quantity, generally speaking, does not admit of being much extended, merely on the temptation of labour being offered at a cheaper rate..." The second is a spirited plea by Dorning Rasbotham, Esq.(1780) for the use and encouragement of machines that attributes to "some persons staggered by this argument" the false view that there is only "a certain quantity of labour to be performed."

Ecological Headstand has commenced a series on "The Moral Philosophers' Stone: A Compleat History of 'A Certain Quantity of Labour to be Performed.'" The antiquity of Rasbotham's fallacy claim and the cogency of the Chalmers proposition suggest the persistence of the former as a pre-analytical, essentially pre-industrial fossil, petrified by ad hoc explanations.