Lafferism as Part of the New Jersey Gubernatorial Race

New Yorkers may be looking forward to spending this holiday weekend at the reopened Jersey shore and Governor Christie is certainly patting himself on the back for this. There is also a battle of whether his tenure as governor has led to some magical supply side miracle. His own ads paint a picture of how a reversal of Corzine’s alleged tax& tax and spend&spend has led to a New Jersey miracle. His ads makes four claims: (1) employment has soared: (2) everyone got tax cuts; (3) spending may have been cut and still is at record levels (for at least education spending) at the same time: and (4) he has balanced the budget. Of course, this is a replay of Reagan’s 1984 campaign known as “Morning in America”. That one can claim spending is both up and down at the same time is something one would only imagine that Lawrence Kudlow might do. But let’s start with his claim that he has balanced the budget. Mark Magyar challenges Christie’s budget games thusly:

Governor banks on one-shots, property-tax rebate delay, Medicaid savings, and Internet gaming to bridge budget gap

Barbara Buono has also fired back noting that some New Jersey residents are paying more in taxes because of this property tax rebate delay. Bloomberg adds:

New Jersey’s public pension deficit swelled 13 percent to $47.2 billion in fiscal 2012 as the state continued to make partial contributions to its retirement plans. The system had about 64.5 percent of assets needed to cover promises to current and future retirees as of July 1, 2012, compared with 67.5 percent a year earlier, when the gap stood at $41.7 billion, according to data posted on the state Treasury Department’s website.

In other words, the state government is supposed to be making larger contributions to the public pension funds than Christie in counting in his allegedly balanced budgets. To claim that he has balanced the budget is simply put – accounting fraud. Buono is also challenging Christie’s claim as to some alleged employment miracle but noting that the state’s unemployment rate remains very high. If one looks at the Bureau of Labor Statistics reporting for New Jersey’s employment situation, this matter becomes much clearer. New Jersey’s employment situation over the past 20 years has basically mirrored the nation’s. During Clinton’s 8 years, state employment rose by 437,658 and its unemployment rate was quite modest at the end of this period. Since January 2001, the net increase in employment has been a mere 78,600. Our graph shows both employment and labor force since January 2001. Employment basically flat lined during Bush43’s first term but rose to almost 4.3 million by the end of 2007. Then the Great Recession hit and New Jersey’s employment plummeted to around 4.1 million by the end of 2009. Now it is true that employment has partially recovered since then but also note that the labor force has also been growing over the same period. New Jersey’s employment situation is still dismal even if the current governor wants to claim he has been some alleged Laffer style miracle.

How The National Security State Bites Itself In The Behind

I am not a fan of the Patriot Act or the aggressive actions by President Obama to bust leakers and spy on the US population, and so forth.  This extends to the recent "scandal" over the Department of Justice seizure of phone records of Associated Press reporters, the only one of the current three scandals that I think may merit this label.  Nevertheless, a pushback is coming from certain parties that while the DOJ's move appears to have been for political revenge that the AP released its story prior to the administration publicly releasing it, even if the release came after national security issues were resolved, that in fact the underlying situation that the story dealt with was indeed a very serious national security matter that ended up getting botched by the release of the story.

Probably the most serious presentation of how this particular situation turned into a totally screwed up mess is by Walter Pincus in today's Washington Post, Pincus being arguably the dean of military-intelligence reporters in Washington, whose credibility was reinforced by his standing against the MSM's rush to support the Bush rush to war before the US went into Iraq.  In any case, I have little doubt that his presentation is accurate, and way too complicated and subtle for any of the main parties currently shouting about "scandal" right now to be able to process or figure out substantially, although to me, and probably against Pincus, who seems to be sympathetic to the government trying to crack down on leaks in at least this case, these kinds of messes are what one gets in an overly vigorous National Security State such as the US seems to have become.

The underlying situation does appear to be something much more serious than the usual tripe, and one upshot of the mess has been to damage cooperation between US, British, and Saudi intelligence regarding fighting against genuine terrorist plotting.  So, al-Qaeda in the Arabian Peninsula (AQAP) has long plotted to make bomb attacks against the US, including against airplanes and in the US itself.  Saudi intelligence managed to get a double agent into the AQAP in Yemen who volunteered to be a suicide bomber on a plane and obtained a bomb to take out a commercial plane.  He then managed to get this to US intel, with it ending up in a US lab for inspection.  The AP story that came out was that US intel had foiled a plot to bomb an airplane, including that the bomb was in US hands, although leaving out all the details about the Saudi double agent, with AP holding off on the story until various immediate national security concerns were supposedly taken care of. 

There were two problemswith this, however.  One was that this was during the presidential campaign, and also that the CIA had planted a story that was publicized by White House Press Chief, Jay Carney, a week before the AP story to the effect that al Qaeda was under control and not a threat to Americans.  This was actually to fool the AQAP, although it was generally intepreted as being a campaign claim regarding Obama's foreign policy prowess in dealing with terrorists. 

So, when the AP story came out it appeared that rather than being a triumph of US anti-terrorism policy, it was interpreted as undercutting this political claim by Obama, and showed that Obama was lying about what was going on for political gain, a mini-scandal of the campaign.  In order to minimize this political damage, the administration then proceeded to let out further information regarding the whole situation, particularly some of the details regarding the Saudi double agent and the cooperation with the British and the Saudis.  The upshot of this was to shut down that whole operation and reportedly to damage this cooperation.

So it goes, as the old saying says, what a tangled web we weave, when first we seek to deceive.

Barkley Rosser

Oklahoma Relief Funding: Would Robert Barro Agree with Senator Coburn?

TalkingPointsMemo notes that while Oklahoma Senator Tom Coburn welcomes FEMA relief for the destruction caused by yesterday’s tornado:

Oklahoma Republican Sen. Tom Coburn will seek to offset federal aid to victims of a massive tornado that blasted through Oklahoma City suburbs on Monday with cuts elsewhere in the budget. "That's always been his position [to offset disaster aid]," a spokesman told the Huffington Post Monday night. "He supported offsets to the bill funding the OKC bombing recovery effort."

Two questions: (1) has Coburn always been so consistent on the issue of offsetting surges in government spending; and (2) is this form of consistency really optimal fiscal policy? On the first – I would submit the answer is no unless Coburn demanded that the cost of the disaster known as the 2003 Iraq War be offset. On the latter – let me turn to a 1989 paper by conservative economist Robert Barro, which was published in the Journal of Economic Perspectives. The paper was entitled The Ricardian Approach to Budget Deficits and is often cited as Barro’s case for optimal tax smoothing. Barro noted that transitional increases in government spending were best handled by temporary deficits with taxes set to cover the present value of government spending over the long-run. In short, temporary increases in government spending should not be currently offset as Senator Coburn suggests. Barro often cites wars as an example of transitional increases in spending albeit wars represents very sizeable changes as compared with the more modest FEMA expenditures for any particular natural disaster. I have to admit, however, that ten years ago a few of us worried that the neocon zest for invading other nations might represent a permanent increase in government spending. And yet Republicans back then did not want to finance their zest for war with tax increases. Go figure! But back to natural disasters such as the Oklahoma tornado or Hurricane Sandy. If these were truly unusual events only temporarily raising government relief spending, I suspect Dr. Barro would disagree with Senator Coburn’s call for offsets. Then again – some have worried that we are in for a new era of more natural disasters. If the expected cost of disaster relief has risen, then the Senator may have a point. But shouldn’t the offset be in the form of higher taxes and not a cut in things like Social Security spending?

Financialization and the Incredible Shrinking Time Horizon

Reading this excerpt from an interview with UNCTAD economist Heiner Flassbeck posted at Naked Capitalism prompts these thoughts on how financialization has altered the way capitalism functions.

Consider two ways an enterprise can be privately owned and managed.  (For simplicity I will talk about two discrete models, but of course there is a continuum between them.)  In the first way, which I’ll call institutional, a set of residual claimants are tied to the enterprise: there are substantial exit costs to their ownership, and thus they are forced to accept less diversification of their wealth portfolio than would otherwise be optimal—for them.  They could be family members with longstanding ties to the enterprise, perhaps dating from some ancestral founding, top executives whose career paths do not easily extend horizontally to other enterprises, perhaps because of a perception that firm-specific knowledge is critical in executive competence, or investment banks or other intermediaries who hold long-term equity positions.  It has to be emphasized that, from a purely risk-weighted wealth maximization point of view, such tied asset positions are unfavorable.

The second way, which can be called financial, takes the form of possession of paper claims on the enterprise tradeable in liquid markets or executive positions also tradeable for comparable positions in other enterprises.  Exit costs, in other words, are much lower.  This greatly reduces the risk of those in positions of transitory ownership and control: the owners can maintain a diversified and shifting portfolio of equity positions, while the executives can preserve outside employment options that substantially reduce the variability of expected permanent income.

In a world of perfect foresight or unitary ("rational") expectations it could be shown that these two models converge.  In the real world of fundamental uncertainty, asymmetric information and conflicting expectations they don’t.  Rather, the institutional approach compels owners and managers to extend their time horizons and lower their discount rates when forecasting future performance of the enterprise to which they are tied.  The availability of low-cost exit reduces this incentive for comparable parties under the financial approach.

One consequence of a longer-term orientation is an incentive for greater investment, and an important venue for this investment is the enterprise’s workforce.  A high-investment personnel strategy is one in which more resources are devoted to cultivating human capital and worker attachment to the firm.  The latter is fostered through internal labor markets, rent-sharing and a more favorable, or at least less resistant, attitude toward worker voice.  (This also depends, of course, on the production regime; under a technologically regimented regime such as one finds in commodity mass production like apparel, the drive system can coexist with a long-term orientation.)  Financialization is linked to inequality and greater precariousness of work because there is little incentive to expend resources in the present to capture the return to investments in the workforce that materialize (uncertainly) well into the future.

There is also a political economic dimension to financialization.  Those who are wealthy or hold positions at the top of organizational pyramids have disproportionate influence over public policy everywhere.  If personal interests play a central role, directly or indirectly via ideology, in the kinds of policies economic elites favor, one would expect systematic differences between these two varieties of capitalism.  Perhaps the most important is that the sort of sectoral jockeying one associates with institutionalized capitalism will give way to policies that are favorable to wealth-holders in general.  Such policies will be those that promote capital mobility, reduce effective taxes on financial income, limit inflation or intensify disinflation, and backstop credit market positions.  Again, I am not claiming that economic elites necessarily operate from a stance of naked self-interest; in fact, it is more likely that they will base their claims on sophisticated arguments that these things are in the public interest, as developed, for example, by like-minded economists.

So why the wave of financialization?  The key, in my opinion, is to recognize that tying one’s fortune to any particular enterprise is always costly.  Active entrepreneurs do this because their commitment to the enterprise, during this stage, is irreplaceable: there is simply no option for them to diversify their investments.  Beyond this, elites seek diversification if they can get it.  One reason institutional capitalism has prevailed in certain times and places is that rules were put in place to require it; labor laws, for instance, have served this function in many countries.  Capital market regulations have also sheltered tied investors, in effect subsidizing their commitment to particular enterprises.  This suggests that one reason we have seen the shift toward financialization is the dismantling, in most countries, of such rules.  (The European Union has been explicit in opposing any national regulation that sheltered tied investors in the name of the single capital market.)  Another factor is globalization, which is both a consequence of capital liberalization but also an inducement to it: as geographically dispersed markets with radically different economic opportunities and price structures are integrated, the costs of inhibiting capital mobility go up.  At the same time, cultural shifts have taken place which devalue the kinds of commitment on which institutional capitalism depends and even celebrate the wealth of those who time their ship-jumping with exquisite accuracy.  In the world we live in today, a radical lack of commitment to any specific enterprise is the default position, at least among those at the top of the hierarchy, and conscious social intervention is required to create countervailing pressures.

Two political observations to conclude:

1. Elites recognize as a fundamental conceptual point that a short-term orientation is dangerous.  Of course, the point of financialization is that they dare not point this gun at themselves.  Thus they project their concerns onto the public sector: it is government’s short-sightedness in fiscal matters alone that causes financial instability.  This is a nice option, enabling them to adopt the posture of one who is wise and thinks in the long run while resisting any proposal that would cause them to forego their own private short-run orientation.

2. It is truly unfortunate that the rise of financialization and its political economic fallout has coincided with the emergence of a drastic problem whose solution depends on governments’ adopting much longer time frames than ever before, climate change.

Is The Decline In US Budget Deficits Merely "Interesting"?

In yesterday's Washington Post, the execrable Robert J. Samuelson declared, "So the latest deficit numbers, although interesting, settle nothing.  They don't provide a road map for long-term budget discipline or resolve the debate over the short-term effects of deficits. They do not provide an excuse for both Congress and the White House to postpone genuine discussion an decisions."  And what, pray tell, should those "genuine" discussions and decisions deal with?  Well, of course, the fave topics of the Washington Very Serious People (VSPs), cutting Social Security and Medicare for those naughty and undeserving baby boomers.

He makes his disdain for the recent austerian moves by the US government clear in an earlier passage of this pathetically silly column: "Nothing of consequence has changed.  A few numbers have shifted slightly. That's all."  Really?  So, shall we play (Bill) Clintonian games over the defintions of "consequence" and "slightly"?  I mean we are talking about a budget deficit that is now more than a quarter less than it appeared to be just a few months ago. "Slightly," of no "consequence."  Really?

Not that good old RJS is completely out of it.  He recognizes that major austerian moves have been made recently in the US on both the spending and taxation side, however stupid and ignorantly put in place.  So, the major spending cut has been the Sequestration, something that was never supposed to happen, a cooked-up nightmare that was supposed to scare the two US parties into negotiating the "Grand Bargain," much loved by DC VSPs, that would really take an ax to those "entitlements" for some sort of figleaf tax increase, but in the end failed to overcome the deep partisan divides in the nation, with, in the end, the GOP embracing this massive stupidity as their own.

As it has been, the GB has happened, if not in the way the VSPs would approve, a New Year's tax increase in the form of letting the Bush tax cuts for high income people expire, along with letting those for middle and lower income fica tax payers also expire, along with the blunt and stupid Sequestration. Curiously, while these appear to have reduced US GDP growth by at least as much as 1/2%, all the media noise has been about the increase in taxes for the rich, even as most economists observe that the bigger hit to GDP growth is coming from the fica increase.  In any case, the combo of these spending cuts, however mindless, and tax increases, have, along with continued US GDP growth led to these "interesting" budget deficit decreases.

Anyway, RJS and his VSP pals are really annoyed by all this.  RJS sneers at economists who supposedly are upset about this deficit reduction.  But in fact nearly none of them are bothered at all by the deficit reduction; they are upset at the growth-slowing policies that led to it, which RJS actually recognizes without realizing how this fine point distinction undermines his position, and, of course, he has been loudly calling for such austerian policies repeatedly, particularly if they include cuts in Social Security and Medicare in line with the VSP consensus.

Needless to say, as usual, RJS fails to mention the reduced rate of increase in medical care costs, the main source of the scary scenarios that keep the VSPs up at night.  As it is, he views the slight improvements this year as part of some sort of random walk process ready to be offset next year: "They moved in a favorable direction.  Next time, they might go the other way."  Sure, Robert.  Bet on it.

Barkley Rosser

The Odd Coupling: Asking the Wrong Questions about "Decoupling" Environmental Impacts from Economic Growth

(Cross posted from the Economics and the Common Conference communication platform.)

The great green panacea for salvaging the market/state economic growth model from its own environmental consequences is that it may somehow be possible to "decouple" GDP growth from resource consumption. The rationale for decoupling GDP is summarized in the 2011 United Nations Environmental Programme report, Decoupling Natural Resource Use and Environmental Impacts from Economic Growth:

Decoupling at its simplest is reducing the amount of resources such as water or fossil fuels used to produce economic growth and delinking economic development from environmental deterioration. For it is clear in a world of nearly seven billion people, climbing to around nine billion in 40 years' time that growth is needed to lift people out of poverty and to generate employment for the soon to be two billion people either unemployed or underemployed.

Critics of economic growth have pointed out that even though relative decoupling of resource use from GDP has always been characteristic of industrial society, absolute decoupling – in which the amount of resource consumed actually decreases, even as the market economy continues to grow – has never happened. The Sustainable Development Commission's report, Prosperity Without Growth, for example, explained that greater efficiency in resource use also saves money and that money gets spent on even more goods and services resulting in a rebound effect, also known as the Jevons Paradox. "In short, relative decoupling sometimes has the perverse potential to decrease the chances of absolute decoupling."

But asking whether relative decoupling of GDP from resource consumption can eventually result in absolute decoupling is asking the wrong question. As the decoupling.report clearly indicated, GDP growth is not advocated as an end per se but as a means of generating employment.

Although GDP growth and employment are indeed highly correlated, the growth rate of GDP among the industrially developed countries (OECD) between 1991 and 2009 was about three times as fast as the growth rate of employment. To put this in perspective, energy consumption in the OECD countries increased over the last two decades at roughly the same pace as employment. In other words there has been virtually no relative decoupling of energy consumption and employment in the wealthier countries.

Globally the situation is even worse. From 1991 to 2009 world GDP increased by 93 percent. Employment increased by 33 percent and energy consumption increased by 36 percent. So even though energy consumption per dollar of GDP fell by nearly 30 percent over that period, energy consumption per employed person increased by two and a half percent. If the purpose of GDP growth is job creation, it makes absolutely no sense to talk about the energy intensity of GDP while ignoring the energy intensity of jobs.

As Thomas Pynchon wrote in Gravity's Rainbow, "If they can get you asking the wrong questions, they don't have to worry about answers." What happens when we start asking the right questions? "When we try to pick out anything by itself," John Muir wrote in My First Summer in the Sierra, "we find it hitched to everything else in the Universe." Industrial jobs are hitched to energy consumption which is hitched to GHG emissions. The right question, then, is how can we unhitch human flourishing from natural resource consumption and environmental impacts? 

Giacomo D'Alisa and Claudio Cattaneo ask the right questions in their research on "Household work and energy consumption: a degrowth perspective." Their research reveals the dangers, in terms of energy consumption, of promoting so-called "economic growth" through the substitution of commodity-based economic activity for household-based production.

The Buen Vivir movement that originated with the indigenous people of the Andes asks the right questions. Barbara Unmüßig, Wolfgang Sachs and Thomas Fatheuer summarize that movement's core principles in their Critique of the Green Economy:

Firstly, the good life is contrasted with development, which is seen as unilinear and imposed from above. According to this view, development is a mental process as well as a socioeconomic one. The aim is nothing less than a decolonization of the imagination.

Secondly, there are different narratives of Buen Vivir in different cultural traditions. Indeed, there are different nations – the Bolivian constitution describes the country as plurinational – each with their own language, history, social forms and ways of adapting to natural conditions. Biological diversity begets cultural diversity and vice versa.   

Thirdly, it is a community-based narrative that emphasizes relationships with one’s fellow humans, the plant and animal world and the cosmos instead of starting with the individual as the Western tradition does. Buen Vivir means living well with the surrounding world, which includes both the natural environment and other people. 

Fourthly, the forests, land and seed are to be tended jointly; collective work and machines are also common property. Social rules and methods can change, but in ways that the community decides. 

Fifthly and finally, nature is the basis of humans’ existence and they are part of the community of all living beings. Mountains and rivers, plants and animals are included in the common narrative as living subjects with whom one can converse.

The Texas Environmental Law Center and Our Children’s Trust asked the right question when they brought suit to have the atmosphere declared a public trust. As David Morris reported in On the Commons, Peter Barnes proposed treating the sky as a public trust in his 2001 book, Who Owns the Sky. Barnes's idea was the basis for a "cap-and-dividend" bill proposed in the U.S. House of Representatives in 2009. In July 2012, Judge Gisela Triana, of the Travis County, Texas, District Court ruled in favor of the plaintiffs.

In The Moon Belongs to Everyone, I traced the way that "everything is hitched to everything else" back from greenhouse gas emission to hours of industrial employment and proposed that the most direct way to cap emissions would be to cap hours of paid work. My policy proposal may not be the final answer but I think I'm asking the right questions.

Is the Stock Market Undervalued?

Gillian Tett sees a soaring stock market and frets that we are experienced a bubble. Antonio Fatas and Paul Krugman calmly remind us of the fundamentals. Paul notes that the stock price rally tracks earnings growth which implies we have not seen much in the way of an increase in the price to earnings ratio whereas Antonio notes:

interest rates are low because of a trend that started in the mid 2000s of increased saving in some emerging markets and the effects of the great recession that increased saving in advanced economies and made investment collapse. When no one wants to invest or consume, interest rates are low. And they are unusually low this time because the patterns of investment and saving are driven by a crisis that is very large compared to historical patterns. As a reminder, interest rates are low everywhere not just in countries where quantitative easing is taking place

Wait – with lower interest rates, the question should be why hasn’t the price to earnings ratio increased? In other words, with higher earnings and lower interest rates, shouldn’t stock prices be even higher?

Wild Things: Question Mark and the Austerians

At his blog today, Paul Krugman cited Michael Kalecki's 1943 essay, "Political Aspects of Full Employment":

Two and a half years ago Mike Konczal reminded us of a classic 1943 (!) essay by Michal Kalecki, who suggested that business interests hate Keynesian economics because they fear that it might work — and in so doing mean that politicians would no longer have to abase themselves before businessmen in the name of preserving confidence.

Sandwichman serialized Kalecki's essay on EconoSpeak in 14 installments four years ago. Strategically, it makes a difference whether your analysis comes before or after the damage has been done. Hindsight is no substitute for foresight.

There's something Krugman didn't mention today about Kalecki's essay. In it, Kalecki also singled out an important exception to the businessmen's fear of full employment: spending on armaments. See also: Krugman of Mass Destruction, October 30, 2011 and Krugman, Ike, Keyserling, Keynes and Kalecki: "Siphoning Off a Part of the Annual Increment of GNP," October 31, 2011.

I wonder, though, whether Kalecki went too far or spoke too subtly when he observed that "obstinate ignorance is usually a manifestation of underlying political motives." That might indeed be true when we include as "political" the rather mundane motivation of fitting in with one's colleagues. But I suspect it is misleading if we take "political motives" to refer to some larger purpose. Thus the controversy between the self-proclaimed Keynesians, like Krugman, and the austerians may be a bit of a phony war.

The choice is not between politically-motivated "bad" economics and technocratic "good" economics. The latter is a posture that only leads to what C. Wright Mills called "crackpot realism" -- a sort of Faustian bargain that settles for half the treasure in return for the whole soul on the assumption Old Scatch will be so pleased he gets to keep half the treasure he'll forget about collecting. The Sandwichman has a namesake's affinity for the story of the Faustian bargain.

Working Conditions in Bangladesh

AP reports on some limited good news:

Bangladesh’s government agreed Monday to allow the country’s garment workers to form trade unions without prior permission from factory owners, the latest response to a building collapse that killed more than 1,100 people and focused global attention on the industry’s hazardous conditions. The Cabinet decision came a day after the government announced a plan to raise the minimum wage for garment workers, who are paid some of the lowest wages in the world to sew clothing bound for global retailers.

It is a shame that almost 1000 workers had to die from unsafe working conditions before the government decided to cease its anti-union efforts. The reason this is only limited good news is explained later:

Bangladesh is the third-biggest exporter of clothes in the world, after China and Italy. There are 5,000 factories in the country and 3.6 million garment workers. But working conditions in the $20 billion industry are grim, a result of government corruption, desperation for jobs, and industry indifference. Minimum wages for garment workers were last raised by 80 percent to 3,000 takas ($38) a month in 2010 following protests by workers. Since 2005, at least 1,800 garment workers have been killed in factory fires and building collapses in Bangladesh, according to research by the advocacy group International Labor Rights Forum.

Free trade certainly brought benefits to U.S. consumers of apparel in the form of lower prices. We had heard from proponents of free trade that it also brought benefits to Chinese workers in the form of higher wages. But the apparel multinationals saw places like Bangladesh as an opportunity to keep its profits high even as consumers enjoyed lower prices. Cost minimization is not always welfare increasing.

More Benghazi Myths

I have previously posted on this topic, http://econospeak.blogspot.com/2013/01/benghazi-myths.html , which drew heavily on posts from Juan Cole, noting that many things widely believed by the public and incessantly repeated by much of the media, not just Fox News, is wrong.  The new hearings on this matter have continued to reinforce publicity about these myths, along with introducing some new elements from testimony, with much of the media taking these items seriously, particularly the testimony by late Ambassador Stevens's right hand man in Tripoli, Gregory Hicks.  One would expect him to be serious, and his testimony had drama, particularly about his final phone conversation with Stevens, but unfortunately it also contained some seriously questionable claims, which may have been responsible for him not being treated well by his superiors, but which may yet get him a hefty book contract or a regular and paid speaking gig on Fox News.

Let me begin by cutting to the chase of the hearings and reiterating the main point from my last post: What is claimed to be lies are not.  So, much of this new hearing focuses on the ongoing changes of wording in talking points last fall that went on, apparently due to arguments between the State Department and CIA.  The hearings push the view that all this was part of an attempted coverup of the fact that those attacking the facilities in Benghazi were terrorists, rather than extremists, and in particular that their attack was not motivated by the anti-Muhammed video.  Supposedly key to this is that they did not come out of the ongoing street demonstrations in Benghazi against the video that were being kept back from the consulate by local authorities, this latter apparently correct.

However, CIA has indicated the leaders of Ansar-el-Islam (or el-Sharia) had watched the demonstrations in Cairo against the video at the US Embassy on TV prior to the attack.  No one will ever know whether or not the attack had been long planned, but the video does seem to have provided at least some motivation.  There is and was no contradiction between it being a terrorist attack and being motivated by the video.  It was a terrorist attack motivated by the video.  For support of this position, see http://articles.washingtonpost.com/2012-10-19/opinions/35501083_1_cairo_benghazi_safe_room , keeping in mind that David Ignatius is a reporter/columnist with some of the best CIA connections in the business.  It remains an uncriticized assumption by nearly all in the hearing and the media that being a terrorist attack and being motivated by the video cannot possibly coexist.

So we come to the ultimately pathetic testimony by Hicks.  His strongest and most egregious claims involve his own half-baked efforts to get military help to those in Benghazi.  Let me say that I fully sympathize that he was upset after hearing his friend and superior on the phone under attack.  He wanted to help and called for the scrambling of jets and for a group of 4 Special Forces personnel to be sent to Benghazi to help.  We have repeatedly heard how one military guy praised him for his "balls" on this latter plea.  However, this all turns out to be a bunch of baloney.  The jets could not have gotten there in time to do anything useful, and the 4 Special Forces people in Tripoli were there on a fact finding mission and were armed with only handguns.  They could have done nothing, and that was why they were not sent.  While Hicks is not outright lying, he is engaging in some sort of shameless and ultimately nauseating self-aggrandizing grandstanding.  For more on this see, http://littlegreenfootballs.com/article/41968_Why_Did_the_Military_Tell_special_ForcesTeam_Not_to_Fly_to_Benghazi_(For_Good_Reasons) .

Which brings us to a greater hypocrisy and bottom line on these hearings, that due to its classified nature, nobody is going to say boo about what the CIA was doing there or what Ambassador Stevens was doing in Benghazi at that time, given how it was well known that the place was not well secured with these various terrorist groups lurking about and making random attacks.  Hicks made much of how requests for more security were turned down, but those requests were for more security at the embassy in Tripoli, not in Benghazi.  The "consulate" in Benghazi was a front for the real operation there, which was the supposedly hidden CIA Annex, which had been established prior to the main building and always had more people in it.  Very likely Stevens was there to deal with problems in the CIA operations, given that basically nothing was going on in the consulate.  What is unclear is if the Ansar people knew he was there or not.  In any case, it remains officially unknown what was going on there, although a few reports claim (with some denials of this from some quarters) that the Annex had been trying to run guns to Syrian rebels, but that a major snafu had happened involving the Turks over which faction in Syria to give them to, and that was what had brought Stevens to Benghazi after a short visit to Turkey just before then.  Needless to say, the current hearings are not going to come close to even mentioning any of this.  See http://www.globalresearch.ca/the-benghazi-affair-uncovering-the-mystery-of-the-benghazi-cia-annex/5320872 .

Barkley Rosser

What the “Low Hispanic IQ” Dissertation Tells Us About Dissertations in General

Dissertation scandal!  Jason Richwine was disowned by the Heritage Foundation when it was revealed that his PhD dissertation at the Kennedy School of Government (Harvard), entitled “IQ and Immigration Policy”, argued for the superior intelligence of some immigrant “races” and the inferiority of others.  At the bottom of the heap were Hispanics, about whom Richwine concluded, “No one knows whether Hispanics will ever reach IQ parity with whites, but the prediction that new Hispanic immigrants will have low-IQ children and grandchildren is difficult to argue against.”

Of course, the interesting question is not, why did Heritage pick this guy in the first place, but, what was his dissertation committee thinking?  According to Jon Wiener over at The Nation, his chair was George Borjas, and the other readers were Richard Zeckhauser and Christopher Jencks.  Borjas is politically conservative, but he has done as much as anyone to set the agenda of immigration studies in the US during recent decades.  Zeckhauser is perhaps the foremost name in pubic finance.  Jencks is a specialist in inequality, generally associated with the center-left.

The one who is primarily responsible for approving Richwine is Borjas.  Nothing in Borjas’ past work suggests that he has a penchant for theories about racial inferiority.  In fact, most dissertation chairs in economics buzz through the window dressing in the drafts that get sent to them and zero in on the methodology.  Did the candidate select and implement the right estimators, properly observe sampling issues, cite the appropriate papers?  You can’t let someone get through if there are observable errors.  The rest you skim.

With other readers it is rather hit or miss.  Senior faculty at large research universities may end up on many such committees.  They meet with the candidate once or twice and have little personal investment.  No one would blame them if they did the bare minimum, or less.  My guess is that both Zeckhauser and Jencks are rather embarrassed at the moment, but it will pass because everyone know’s it’s not really their fault.  More to the point, will Borjas suffer any consequences?  This is entirely speculative, but I would wager that he will cruise past this too.  Everyone knows a dissertation chair can’t vet the whole thing.

I’d be interested in hearing from readers if this matches their own observations about the dissertation process.

Peer Review: Economists and the Rhetoric of Groveling

"As a general rule economists are not very good at economics." -- Dean Baker

As a general rule economists are not very good at accountability. The rules of evidence in Anglo-American common law disallow the raising of allegations without a basis in provable fact. The rules of evidence in Anglo-American economics... well, there are no rules of evidence.

It's hard to think of another field (besides advertising) where assertion trumps analysis with such impunity. Perhaps "impunity" is too mild a word, though. Come to think of it, there seems to be a smug self-satisfaction in economists' lack of accountability -- as if being "above" accountability was itself a badge of distinction. Let's follow that intuition...

The expression "peer review" in the title doesn't refer to the niceties of academic publishing. The peers I have in mind are the nobility of 18th century England who, according to Fitzmaurice, seldom had the kind of formal, grammar school education that the sons of clergymen and gentry whom they might patronize did.

So what, pray tell, might these 18th century noble peers and their clients have to do with either the competence or accountability of 21st century economists? In a word, "mannerisms."

To elaborate my hypothesis, I would first like to return to Fitzmaurice and her observations on the rhetoric of late modern English letters (1654-1762):

...the Montagu manuscript collection reflects two fairly distinct groups of letter-writers — namely Montagu’s clients on the one hand and his peers on the other. … [Members of the former group] exhibit acute awareness of and adherence to conventional strategies of linguistic politeness that index the superior rank and greater power of their addressee. So in addition to formal physical indicators of respect such as opening and closing formulae, the rhetorical structures adopted by the men seeking patronage indicate the extent to which epistolary mendicity is conventionalized in humiliative discourse at the time.

Personally, for quite some time I have taken a kind of perverse delight in the subtle, stilted ambivalence of the closing salutation, "I beg to remain, Sir, your most humble and most obedient servant." George Bernard Shaw captured something of this potential for duplicity in his critique of the dramatist, Dion Boucicault's "Stage Irishman":

His vices are the arts by which he accommodates himself to his slavery – the flattery on his lips which hides the curse in his heart; his pleasant readiness to settle disputes by "leaving it all to your honor," in order to make something out of your generosity in addition to exacting the utmost of his legal due from you; his instinctive perception that by pleasing you he can make you serve him; his mendacity and mendicity; his love of a stolen advantage; the superstitious fear of his priest and his Church which does not prevent him from trying to cheat both in the temporal transactions between them; and the parasitism which makes him, in domestic service, that occasionally convenient but on the whole demoralizing human barnacle, the irremovable old retainer of the family.

Dear Officer Krupke! "I'm depraved because I'm deprived!" Or, I'm mendacious because I'm mendicious! In addition to the potential insincerity of the formulaic hyper-humility is what I will call the equilibrium of deference and disdain. That is to say that the necessity of groveling to a social superior might well evoke in the groveler a compulsion to snarl at a social subordinate.

What I'm suggesting, then, is that mannerisms of genuflection and contempt are embedded in post-enlightenment academic discourse -- and particularly in economics -- to a degree that trumps analysis. Perhaps it is not so much that, as a general rule, economists are not good at economics as that the economists who generally rule do so not because they are good at economics but because they have perfected the ritual elements of deference toward those above them and disdain toward those below.

Need I point out that this is worse than feudalism? It is a subaltern feudalism that replaces noblesse oblige with faux aristocratic disdain affected by a self-appointed mendicantocracy.

If we be serfs, let us at least be serfs to Lords and not serfs to the supplicants of Lords!

I beg to remain, Sir or Madam, your most humble and most obedient and most servile servant,

Sandwichman

Bank Capital Regulation, the Modigliani-Miller Theorem, and the Winstar Litigations

Olivier Blanchard’s Rethinking Macroeconomic Policy notes the following under Finanical Regulation:

I am struck by the level of uncertainty and disagreement about the effects of capital ratios on funding costs, and thus on lending. Reasonable people, such as Martin Hellwig and Anat Admati, argue that we are not so far from the Modigliani-Miller world, and banks can afford substantially higher capital ratios. Others, and not only bankers, argue that such ratios would instead destroy the banking industry.

This reference to Modigliani-Miller intrigued me because of certain discussions of the Winstar litigations, which we’ll note below. Martin Hellwig and Anat Admati co-authored with Peter M. DeMarzo and Paul Pfleiderer Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive. While I highly recommend that you should read the entire paper, let me provide the references to the Modigliani-Miller theorem:

One of the fundamental results of corporate finance (Modigliani and Miller, 1958) states that, absent additional considerations such as those involving tax advantages or public subsidies to debt, increases in amount of financing done through equity simply re-distributes the total risk that must be borne by investors in the bank, i.e., the holders of debt and equity and any other securities that the bank may issue. The total risk itself is given by the risks that are inherent in the bank’s asset returns. In a market in which risk is priced correctly, an increase in the amount of equity financing lowers the required return on equity in a way that, absent subsidies to bank debt and other frictions, would leave the total funding costs of the bank the same. The Modigliani-Miller analysis is often dismissed on the grounds that the underlying assumptions are highly restrictive and, moreover, that it does not apply to banks, which get much of their funding in the form of deposits. The essence of this result, however, is that in the absence of frictions and distortions, changes in the way in which any firm funds itself does not change either the investment opportunities or the overall funding costs determined in the market by final investors. The one essential assumption is that investors are able to price securities in accordance with their contribution to portfolio risk, understanding that equity is less risky when a firm has less leverage i.e., funds itself with less debt.

The authors use this result to discredit one of the common arguments made against significantly increasing equity requirements:

Increased equity requirements would increase banks’ funding costs because equity requires a higher return than debt. This argument is fallacious, because the required return on equity, which includes a risk premium, must decline when more equity is used. Any argument or analysis that holds fixed the required return on equity when evaluating changes in equity capital requirements is fundamentally flawed.

So what were the Winstar litigations? United States v. Winstar Corp. was a Supreme Court decision that the Federal government breached certain contractual obligations when the Bush41 administration chose to restore capital adequacy requirements in the aftermath of the savings-and-loan crisis. Winstar cases are still in litigation with enormous purported damages being suggested by the attorneys for the financial institutions such as Winstar. Some of the arguments put forth by these attorneys are akin to what Blanchard dubbed the bankers argument that capital adequacy rules “would instead destroy the banking industry”. The Federal government as defendant in the Winstar litigations hired expert witnesses to argue for lower damages, which seems to be a reasonable proposition given the above discussion of how the Modigliani-Miller Theorem applies to the financial sector. But leave it to the bankers and their attorneys to find any means possible for extracting the rents from either the public and taxpayers – even if they have to hire prostitutes dressed up as expert witnesses.

Lumps of Mulligan and the Specter of the Disembodied "Idea Behind"

It's nice to see that Casey Mulligan and Paul Krugman agree on something, even if it's only their shared unquestioning credulity toward a 233-year old zombie mind-reading hoax.

Dean Baker calls attention to an Economix blog post at the New York Times in which Mulligan discussed "What Job-Sharing Brings." Mulligan opens his remarks with a classic paraphrase of the lump-of-labor fallacy canard, omitting only the "lump-of-labor fallacy" brand name:

The idea behind work-sharing is that employers have a certain amount of work that needs to be done, and that the work can be divided by many employees working a few hours each or a few employees working many hours each. If hours per employee could be limited, by this logic employers would have to hire more employees to get the same amount of work done.

Let's make this as simple as possible. Professor Mulligan doesn't know what "the idea behind work-sharing is." He has no way of knowing. He presents no evidence of any advocate of work-sharing saying that is the idea behind it. This is a bogus assertion and everything that follows is null and void because when you make up things about what other people supposedly think, it doesn't much matter what reasons you give for showing that they are wrong. If people didn't say those things, you have no reason for supposing they thought them.

Let's make this just a bit a simpler. It's not just that Mulligan is reading minds, he doesn't even specify who's mind he's reading. The argument is that mind reading is hard enough to do when you know what mind you're reading. It's darn near preposterous when you can't even specify the mind. Is that clear?

Jonathan Chait said something in discussing opinion journalism a couple of weeks ago that bears repeating (over and over again):

If you’re arguing against an idea, you need to accurately describe the people who hold them. If at all possible, link to them and quote their argument. This is a discipline that forces opinion writers to prove that they’re debating an idea somebody actually holds.

Fancy that! An idea somebody actually holds! Does anyone actually hold Mulligan's "idea behind" work sharing? Not that Mulligan knows of. But let's not single out poor Mulligan for mindless mind-reading. Here's what his comrade in mind-reading arms, Paul Krugman wrote almost ten years ago:

Economists call it the "lump of labor fallacy." It's the idea that there is a fixed amount of work to be done in the world, so any increase in the amount each worker can produce reduces the number of available jobs. (A famous example: those dire warnings in the 1950's that automation would lead to mass unemployment.) As the derisive name suggests, it's an idea economists view with contempt, yet the fallacy makes a comeback whenever the economy is sluggish.

Notice "the idea"? Now see who had that idea? I didn't think so. This is scarier than zombies, folks! No telling what those disembodied ideas might do when they get a mind to it!

Look, I've refuted this foul piece of dog crap that passes for economic conventional wisdom over and over and I'm sick and tired of repeating myself. The prototype of the disembodied idea is Dorning Rasbotham's unattributed "say they" from his 1780 pamphlet, "Thoughts on the Use of Machines in the Cotton Manufacture":

There is, say they, a certain quantity of labour to be performed. This used to be performed by hands, without machines, or with very little help from them. But if now machines perform a larger share than before, suppose one fourth part, so many hands as are necessary to work that fourth part, will be thrown out of work, or suffer in their wages.The principle itself is false. There is not a precise limited quantity of labour, beyond which there is no demand.

Can you identify who "they" are? No, not even if you go back and read the whole fucking pamphlet. "They" is a figment of Rasbotham's rhetoric. A straw man. Got it? Every word after the word "they" is a lie because there is no "they" there.

But it gets worse, people. I've got a database of around 577 recitations of the lump of labor fallacy claim going back to the 1870s. How many of them do you think cite a particular individual or organization that actually holds "the idea behind work-sharing"? Want to take a guess?

Here are the names of some respected economists who have either refuted the fallacy claim or have presented cogent arguments for the ameliorative potential of work-time reduction on unemployment (or both): John R. Commons, Dorothy W. Douglas, John Maurice Clark, Sir Sydney J. Chapman, A. C. Pigou, Maurice Dobb, John Maynard Keynes, Luigi Pasinetti. How many of those names do you suppose have been cited by the Mulligans and Krugmans when they disparage "the idea behind" work sharing?

Abenomics and Mortgage Rates

Are the folks at Bloomberg serious:

Bank of Japan Governor Haruhiko Kuroda’s stimulus policies are backfiring in the housing market, where mortgage rates are rising even as the central bank floods the financial system with cash. While 35-year home-loan costs rose one basis point to 1.81 percent this month from an all-time low of 1.8 percent in April, any increase will be undesirable for the BOJ ... The BOJ’s April 4 announcement that it would double bond buying to generate 2 percent inflation unleashed the highest government-debt volatility in a decade and pushed 10-year yields up by 4 1/2 basis points. The benchmark lending rate for large corporations, known as the prime rate, increased five basis points from its record low to 1.2 percent on April 10, despite the BOJ’s aim of stoking the economy through cheaper funding.

Tim Duy has some fun with the fact that Bloomberg makes a big deal out of a one basis point increase in nominal interest rates. Seriously guys. You know – temperatures fell in New York City this week so by your logic – the era of global warming is over. The whole point of Abenomics wasn’t necessarily to lower nominal interest rates but to lower real rates by increasing inflationary expectations. If nominal rates on mortgages are only 1.8% and if inflationary expectations are 2%, then real mortgage rates are negative. Contrast this Japanese rate to the 3.35% rate on U.S. conventional mortgages (as of May 2, 2013) as reported by the Federal Reserve. The fact that nominal rates may have bumped up by a few basis points is not proof that monetary policy is backfiring. Note also that this story admits later that the yen has devalued, which one would think might raise net export demand.