Forest Conservation and the Rise of the 1%

Over here we have debate on the decades-long upsurge in inequality, fueled by the increasing share of income going to the top 1%.  Over there we have the politics of forest prevention, specifically the push by the state of Colorado to weaken roadless protection in order, among other things, to try to suppress forest fires.  What’s the connection?

The main purpose of the roadless areas directive is to keep land available for wilderness designation.  The guiding philosophy of wilderness is that large swaths of forest, desert and other ecosystems need to be left alone to provide the sort of habitat, recreation and research that can exist only in the absence of large-scale human interference.  Keeping out roads is a way of putting a ceiling on that interference.

One aspect of wilderness is permitting a natural fire ecology.  Periodic fires are part of the system, so they should be allowed to burn off excess fuel and permit the rotation of tree species.  (Fire-resistant species thrive in the wake of a fire but are eventually displaced by more susceptible competitors, until another fire begins the cycle again.)  The expectation has been that more of these smaller fires will reduce the number of monster burns.

It hasn’t worked out quite that way.  One reason is climate change, which is slowly redrawing the ecological map of North America.  Some land that used to be forest is destined to be savannah or even drier, and fire, abetted by disease, is often the agent of change.

But something else has happened, much more rapidly: large numbers of the newly rich have chosen to build their second (or nth) homes in remote areas of Colorado, Wyoming, Montana and other mountain states.  They like the magnificent vistas and opportunities for recreation provided by public lands, as long as they can own their own private chunk next door.  Naturally, they have the means to fly back and forth, so distance is not a problem .

What is a problem is fire.  Even the small fires envisioned in wilderness philosophy threaten their lovely dachas.  In remarkably bloodless language, the Times summed up this dynamic:

But he [Glenn Casamassa, a US Forest Service supervisor] said the West, and maybe Colorado in particular, has also changed significantly in the intervening years. More people are living near national forests. An outbreak of pine-killing bark beetles that has its epicenter in Colorado and several major fires over those years that roared out to touch the edge of urban life have also changed thinking about intervention in the wild.

And that’s how it is.  If a proposed financial regulation runs afoul of the 1%, out it goes.  If closing a tax loophole brings their rate up to everyone else’s, no go.  And if wilderness gets in the way of their weekend getaways, then this requires “changed thinking” among forest managers.

Plutocracy does have consequences.

Would President Gingrich Hire Christina Romer as Economic Advisor?

Christina Romer presented an excellent discussion on the effects of fiscal policy with this closing line:

The one thing that has disillusioned me is the discussion of fiscal policy. Policymakers and far too many economists seem to be arguing from ideology rather than evidence. As I have described this evening, the evidence is stronger than it has ever been that fiscal policy matters—that fiscal stimulus helps the economy add jobs, and that reducing the budget deficit lowers growth at least in the near term. And yet, this evidence does not seem to be getting through to the legislative process. That is unacceptable. We are never going to solve our problems if we can’t agree at least on the facts. Evidence-based policymaking is essential if we are ever going to triumph over this recession and deal with our long-run budget problems.

Gingrich isn’t exactly known for seeking reality based advice, which is why this stunned me:

Newt Gingrich said Sunday that an “age of austerity” is the wrong solution for the economy and would “punish” the American people. He said he prefers “pro-growth” policies instead. The comments appear to pour cold water on the modern Republican belief that austerity and growth go hand in hand.

I just wish we could take the latest from Newt seriously!

The Chinese Question: Liquidity or Solvency?

Once again the EU is trying to get China to commit a few hundred billion of its foreign exchange reserves to shoring up Eurozone sovereign debt.  The European “stability” mechanisms (EFSM and ESM) need more money, and no one in Europe is willing to lay that much on the line.  China says it would be willing to step in, but under one condition: that its investments are guaranteed.

This is perfectly reasonable.  China is still a largely poor country, and there is no reason why its people should risk losing their savings in order to help manage the affairs of much wealthier Europe.  At the same time, however, their demand exposes the fundamental dishonesty of Eurozone policy.

Except for Greece, the official line is that all sovereign debts will be honored and all fiscal targets met.  The rescue facilities exist only to provide bridge loans that markets are unwilling to extend at a reasonable cost.  With enough liquidity, austerity and reform, financial sustainability is assured.

If this were really the case, however, there would be little risk in giving the Chinese the guarantee they demand.  And no one seriously expects such a guarantee to be offered.

The reason is that the true situation in the Eurozone bears little relation to the optimistic talk still issuing from summits like the one just concluded in Brussels.  Greece is only the first in line; Portugal too will need debt relief and perhaps also Ireland.  Spain faces an entire banking system that may well be technically insolvent, and it can neither survive a banking collapse nor come up with the funds to forestall one.  All the severely indebted countries are at risk from the gathering recession, and the need for further recapitalization of the banks across the continent is a further risk.

In the face of this frightening public and private debt overhang, the official policy has been to lend, lend and lend some more.  The ECB has turned back the doomsday clock by lending half a trillion or so euros at close to zero interest to private banks in return for their own lending to overstretched sovereigns.  So-called bailouts, like the next tranche at issue in Greece, are also loans.  Politicians give stern speeches about how debt cannot be the solution to debt, and then they find more spigots for lending: beef up the European Financial Stability Mechanism, bring on a permanent mechanism, go door to door in China.

But if the problem is not liquidity but solvency, this avalanche of credit is profoundly wrongheaded.  The solution for insolvency is always the same: write down existing unpayable debts and generate income—transfers if necessary—to forestall new debts.  In the current environment each is associated with an immense political-economic challenge, since the first requires confronting the European financial oligarchy and the second creating a true, zone-wide fiscal entity (the feared transfer union).  Achieving either alone would be a miracle; accomplishing both is almost beyond utopia.

At least we can thank the Chinese for clarifying the contradiction at the heart of the current policy charade.

What happens when monetary values replace notions of real wealth? Quotes from 2011

“The Fed can’t print oil.” [1]

"What’s most terrifying, we are having this discussion about the risk of recession at a time when unemployment is already too high, at a time when a quarter of homeowners are underwater on their mortgages, at a time then the fiscal deficit is at 9 percent and at a time when interest rates are at zero." [2]

“We’re on the verge of a great, great depression. The [Federal Reserve] knows it” [3]

Since China entered the WTO in 2001, the U.S. trade deficit with China has grown by an average of 18% per year. The U.S. trade deficit with China in 2010 was 27 times larger than it was back in 1990. The United States has lost an average of 50,000 manufacturing jobs per month since China joined the World Trade Organization in 2001. [4]

244 Members of Congress Flunked Arithmetic

TPMLivewire reports:

Every House Republican voted Thursday to reject the proposition that the Bush tax cuts added to the deficit. Joined by just a handful of Democrats, the full Republican conference rejected a measure that would have affirmed what nearly all budget experts and economists recognized: President George W. Bush's debt-financed tax cuts blew up the budget in the last decade, leaving the country in a hole that sank into a chasm after the 2008 financial crisis. The final tally was 174-244.

I guess their next vote will declare that the Earth is flat.

A Curious Case of Plagiarism... and of Contradiction

Back in April 2008, the Sandwichman reviewed an IMF Working Paper on "The Effects of Early Retirement on Youth Unemployment." The concluding paragraph began as follows:

BUT the positive side to this dumb paper is the sentence, "Those who make the fallacy claim fail to offer specific evidence of the supposed belief in a fixed amount of work." That's a paraphrase of what the Sandwichman has been saying for 10 years!

Well the Sandwichman was wrong.

How Would Romney Pay for the Repairs in the Safety Net?

This morning on CNN, Mitt Romney said:

“I’m not concerned about the very poor, we have a safety net there,” Romney said. “If it needs repair, I’ll fix it. I’m not concerned about the very rich, they’re doing just fine. I’m concerned about the very heart of America, the 90, 95 percent of Americans who, right now, are struggling, and I’ll continue to take that message across the nation.”

I guess some Democratic hacks could take the very first part of this statement out of context (Romney is not concerned about the very poor) but let’s do as he lectured Soledad O’Brien and finish the sentence. The safety net does need repair and that would involve an increase in government spending. Now if Mr. Romney has decided to agree with President Obama about the very rich doing fine, then have him say we will pay for this increase in government spending by raising taxes on the very rich. But wait – his tax proposal would dramatically reduce Federal revenues by giving the very rich even more tax breaks. So the arithmetic just does not add up unless Mr. Romney is proposing even bigger deficits. Of course, this kind of doubletalk is where Mitt Romney excels.

≡

It’s amazing, isn’t it, that professional economists could argue about the relationship of identity and equilibrium and fail to come to a quick agreement?  I see that David Glasner and Scott Sumner are still having at each other over at Uneasy Money.  And I am truly baffled by Glasner’s claim “that it is incoherent to state that the income-expenditure model of national income requires savings to equal investment whether or not equilibrium obtains...”

It’s all rather easy: an accounting identity imposes a necessary relationship between a set a variables on the basis of their definition, but it doesn’t say what the value of any particular variable will be.  Behavioral arguments, which may employ the concept of equilibrium (but don’t have to), attempt to explain or predict these values.  A behavioral argument may be right or wrong—people may behave the way you say they do, nor not—but an identity is an identity is an identity.

I disagree strongly with Noah Smith and Paul Krugman, however on the question of whether one can learn anything substantive from identities; clearly the answer is yes.  Rather than make a theoretical argument, I will link to a chapter from my introductory macroeconomics text.  It is all about identity---there is no discussion at all about equilibrium—but I think students would learn a number of useful things about national and global economic patterns from reading it.  See if you agree.

And the next time you accuse someone of not fully comprehending an identity, look in the mirror.

Tokyo Request

I will be visiting Tokyo in the middle of next month. Any contacts or advice would be very much appreciated. Contacting me directly would be best.

Real Interest Rate in the Early 1980’s and the Last Few Years

Brad DeLong constructs a real interest rate series for the past 50 years using the nominal rate on 10-year government bonds minus inflation. Our graph is based on TIPS which limits us to the past few years. Brad notes:

If You Think That the Equilibrium Real Ten-Year Treasury Rate Is 2.5%/Year...as you might conclude from the historical track of the past fifty years: then the current 10-year Treasury rate of 1.87%/year is consistent with market expectations of deflation at an average rate of 0.63%/year over the next decade. If you think that the market's forecast of the equilibrium Treasury real rate over the next decade will be much less than 2.5%/year--as the real TIPS rate of -0.185/year suggests--then it seems likely that it is because the market expects a high unemployment rate for the next decade. Neither possibility seems consistent with market expectations of a Federal Reserve that understands its mission

.

I’m puzzled by the behavior of the real rate during the most recent recession period. At first, this real rate dropped from nearly 2.5% (August 2007) observed before the recession to around 1% (March 2010) as one would have hoped from Federal Reserve policies designed to offset the recession. But by October 2010, the real rate increased to 3%. I realize that this was the period when fiscal policy was trying to revive the weak economy but given the depth of the Great Recession, but most of us thought the fiscal stimulus was too weak to get us even remotely close to full employment.

But let’s also look at the early 1980’s, which was a period when fiscal policy turned stimulative for whatever reason. Some defenders of the Reagan tax cut might have argued we were in a deep recession then as well, while others justified that tax cut on supply-side silliness. Of course, macroeconomic history tells us that the Volcker Federal Reserve was hell bent on combating inflation and decided to offset the Reagan tax cuts with a period of tight monetary policy, which led to much higher real interest rates crowding-out investment. Not exactly the parable that the supply-side crowd likes to tell. But then there has always been a third school of economists who preach Barro-Ricardian equivalence. Their message – as best exemplified by “Do Higher Deficits Produce Higher Interest Rates” by Paul Evans (AER, 1985) – was that households would save all of the tax cuts so that there would be no impact on national savings and hence no effect on interest rates. That prediction was clearly not borne out by the evidence as Brad’s graph clearly shows. The good news is that we finally recovered from the 1982 recession as Federal Reserve policy eventually reversed its draconian contraction and allowed real rates to fall from their peak.

Ratings Agencies Demonstrate Power Over Markets Again (Not)!

So, Fitch has downgraded Spain, Italy, Belgium, Cyprus, and Slovenia. The market response? Yields on Spanish and Italian bonds fall, and the euro rises. Yet more reason to fear the mighty power of the ratings agencies!

Perverse Fiscal Policy

Assuming a picture is worth a thousand words, our graph is offered as an illustration of some wise words from Mark Thoma:

We need a temporary increase in government spending to increase demand and employment through, for example, building infrastructure. That would help to get us out of the deep hole we are in. Instead, the government seems to be trying to make it harder to escape. We do need to address our long-run budget problems once the economy is healthy enough to withstand the tax increases and program cuts that will be required. But the idea of "expansionary" austerity has failed.

Real government purchases fell by almost $30 billion (annualized) last year with $20 billion of this decline shockingly coming from Federal purchases. While it is true that state & local purchases have been declining since late 2007 with the cumulative decline exceeding $90 billion per year, we have also seen a significant decline in Federal purchases over the past year. We should add that Keynesian macroeconomists have always worried about the implications those state & local balanced budget requirements, which force this kind of perverse fiscal reaction to recessions. But as Barkley Rosser noted over at Mark’s blog:

Is it not the case that the main source of this outright decline in G is coming from the state and local levels with their balanced current budget rules, along with the ending of fed stim support for them? Of course, this suggests that the easiest way to offset this would be renewed support by the feds for the states and locals, but obviously this is unlikely to happen in the near future.

Federal revenue sharing should be increased but then the leaders of the Republican Party seem hell bent on balancing even the Federal budget during this Great Recession.

For Once The Military Is Right

Despite the title here I absolutely support civilian control of the military in democratically ruled countries. However, in both the US and Israel we have a weird situation where the military and the intel establishments are not only better informed and more aware of the implications of current serious policy issues than their civilian political superiors, along with their media abettors, but they are right. The issue is the Iranian nuclear program where the disconnect between not only what military intelligence knows (yes, I know, hahahaha, milintel is an oxymoron (decrepitly old joke), hahahaha), and what the public discourse in the media and the political debates and what the official policymakers are saying (including amazingly enough US Nat Sec Advisor Thomas Donilon earlier this evening on Charlie Rose) are totally out disconnected.

The media reports on this recently have become blatant, and I apologize for not providing relevant links. But, last week WaPo and NYTimes reported on how Israeli milintel were saying Iran was not pursuing a nuclear weapons program currently. Then today the NYT was a mass of conflicting stories with the ones from top Israeli governmental leadership (somewhat backed up by NSC director Donilon on Charlie Rose) arguing that Iran is indeed pursuing nukes and when or how will either Israel or the US just bomb the heck out of them blah blah blah to stop it, despite the contrary claims of their respective military intel establishments.

Sorry folks, but the people who will have to do this, either the Israeli or US military, are not all that excited about this (much less convinced by the official reports that go against their offical intel assessments, see US NIE reports). Their leaders know what is not acknowledged by President Obama in his SOTU, or Natenyahu in his public statements, or certainly not by the GOP prez candidates (with the exception of Ron Paul), that in fact Iran is not actively or currently pursuing obtaining nuclear weapons. All the war whooping and hawkishness by the political leaders and their pathetic rivals and related media and much of the public is ignorant and stupid and worthless. But, they cannot speak up publically on this matter. Let us hope that we shall muddle through this without yet another worthless new war.

It’s a Bruegal World

I just returned from seeing “The Mill and the Cross”, the remarkable remake of The Way to Calvary by Pieter Bruegal the Elder.  Some quick reactions:

1. If you were an art history major you will have multiple orgasms.  Guaranteed.

2. Even if you weren’t, if your eyes are open you will be enchanted by images that occupy a gray zone between painting and live-action film.

3. The pace is extremely slow, which works if you allow yourself to be hypnotized.  Don’t go to see it on an empty stomach.

4. The crucifixion thing is overdone, even after allowing for the fact that Bruegel overdoes it too.

5. The scene with the crows eating a dead guy’s eyeballs is really gross.

6. The people in this window on 16th century Flanders are much too clean and healthy.  This is not only a distracting anachronism, it also distances us from the world we see in Bruegal’s paintings.

7. You can see why the Dutch fought so intensely to free themselves of Spanish rule.

8. If the movie doesn’t grab you, you will find it to be a mashup of Masterpiece Theater and Bread and Puppet, except that a rich banker would never be a good guy in a Bread and Puppet production.

9. This film is auteur theory on steroids: Lech Majewski not only directed it, he did camera work, art design and the musical score.  If you don’t like it, you know who to blame.

10. How do people do those slow, gently hopping dances that Bruegal paints so well?  Can we start a new craze?

The Blade’s Response to the State of the Union Address

The transcript of what Indiana Governor Mitch Daniels said can be found here. When the Blade claims Obama’s policies were pro-poverty, what he seems to be saying that in the face of insufficient aggregate demand, the right policy should have been austerity - cutting government spending. Talk about Herbert Hoover economics!

Governor Daniels also expressed concerns about the size of the Federal deficit. Folks give this governor too much credit for the fiscal shape of Indiana, which they assert has been dramatically improved by his policies. Lest we forget, however, that a source of revenues for Indiana was the one time sale of toll rights to the private sector. Sacrificing future toll revenues to collect cash that has a lower present value is not a long-term solution to a government’s fiscal follies.

Of course, we get this rhetoric:

There is a second item on our national must-do list: we must unite to save the safety net. Medicare and Social Security have served us well, and that must continue. But after half and three quarters of a century respectively, it’s not surprising that they need some repairs.

By repairs – does he mean the Paul Ryan plan to effectively eliminate Medicare?

Finally, we get this canard:

Contrary to the President’s constant disparagement of people in business, it’s one of the noblest of human pursuits. The late Steve Jobs - what a fitting name he had - created more of them than all those stimulus dollars the President borrowed and blew.

Rebuttal outsourced to Paul Krugman.