A Cheap Market Will Always Be Full of Cheap Hustlers

Case in point: Stephen Gordon writes today, at Maclean's Econowatch:

Another popular misconception is that increased productivity means higher unemployment. If the same amount of output can be produced by fewer people, then what happens to those excess workers? This is the “lump of labour” argument, the notion that the quantity of work to be done is a fixed constant. It is also a well-known fallacy: higher productivity increases the demand for labour, because more productive workers are more valuable to employers. Although higher productivity in a given industry may reduce employment in that sector, the increase in total output and income across the economy will create new, better-paying, employment opportunities elsewhere.

Thus Professor Gordon performs the academically-sanctioned equivalent of the thimblerig or the pigeon drop. He will no doubt pull off his swindle with impunity, as have hundreds of economists and economists-manque before him, however much Jonathan Chait may inveigh in vain against debating straw men: "If you’re arguing against an idea, you need to accurately describe the people who hold them [sic]. 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."

In his 1891 article, "Why Working Men Dislike Piece Work," David F. Schloss, reported a conversation with a laborer making washers on piece work. "I know I am doing wrong," Schloss quotes him. "I am taking away the work of another man. But I have permission from the Society." It was to those italicized passages that Schloss assigned the name, "the Theory of the Lump of Labour."

The remarkable thing about the laborer referred to by Schloss is that he was working in violation of, not in conformity to, the dictates of his supposed theory. Furthermore, he had permission from his union to do so.

This unnamed washer-boring workman has the distinction of being one of the very few individuals whose spoken words (whether authentic or apocryphal) have ever been cited in evidence of a belief in the alleged lump-of-labour theory. By contrast, for example, the prominent agitator for the eight-hour day, Tom Mann, "looked for the absorption of the unemployed by the distribution of work; while disclaiming the fallacy that there is only a fixed amount of work to be done."

In fact, disclaiming the alleged fallacy had been honed to a fine edge decades before Schloss coined the quaint 'lump-of-labour' sobriquet. The transactions of a miners' conference held at Leeds in 1863 contained an introductory report that astutely mocked the hypocrisy of political economists and employers who, on the one hand, decried the "ignorance and folly" of those who would attempt to regulate grievously long hours, which were supposedly the "infallible and inevitable result of demand and supply" while "constantly telling the men that wages must be reduced in consequence of over-supply [of labor]." Meanwhile, the coal-owners themselves maintained restrictions on the production of coal -- known as "the limitation of the vend" -- from 1771 to 1845.

"Unvarying" is the supposed quantity of labor to be performed, allegedly assumed by the typically anonymous offender against the fallacy taboo.

At the bottom of these contrivances for artificially increasing the amount of employment, there seems to lurk the fallacy of supposing that the labour required to be done in any department of trade, or in the country generally, is a fixed quantity; therefore, in order to secure an aliquot portion of it to the greatest number, the labour must be spread out thin. The teaching of sound Political Economy is directly the reverse of this.

wrote the author of an article on Trades Unions in the Edinburgh Review of 1867.

The League is only an offshoot of the Unions... Their theory is that the amount of work to be done is a fixed quantity, and that in the interest of the operatives, it is necessary to spread it thin in order to make it go far.

wrote the London correspondent to the New York Times in 1871.

The root of the mania which has had such a disastrous effect on the material prosperity of the country, and, above all, of the working classes, is the idea that the amount of work to be done is a fixed quantity, quite independent of any efforts which may be made to encourage and stimulate demand, and that, therefore, the best course is to spread it thin in order to make it go as far as possible.

is how the author of an article in The Saturday Review of Politics, Literature, Science and Art put it in 1876.

I have a database of over 540 entries, from 1871 to 2011, most of which invoke some variation on the lump-of-labour fallacy claim. A precious few refute the fallacy claim and there are perhaps a dozen or so duplications. With very few exceptions, these parroters of the claim do not cite any actual person who holds the fallacious idea.

"These people think that the amount of work to be done is a fixed quantity."

"If we are to proceed on the assumption that the amount of work to be done is a fixed quantity..."

"The theory of the Lump of Labour will be seen to rest upon the utterly untenable supposition that a fixed amount of work exists."

"But there is not, as this argument assumes, a fixed Work-Fund, a certain amount of work which has to be done, whatever the price of labour."

"The Leaders of the Federation said that there was a certain amount of work to be done in Atlantis..."

"The notion is that there is exactly so much labor predetermined to be done; therefore, if machines are introduced, there is that much less for men to do..."

"This means, roughly speaking, that there is a certain total number of hours of work to be done each week."

"This view -- that the amount of work to be done is fixed -- is called the lump-of-labor fallacy."

"Very similar to the general overproduction fallacy is the erroneous belief that there is only a certain amount of work in the community to be done..."

"At the bottom of these contrivances..."

"We have touched the fallacy which lies at the bottom of this whole system..."

"The real question which lies at the bottom of the dispute..."

"The root of the mania..."

And on... and on... and on... and on...

Getting to the bottom of the fallacy claim took 15 years of patient, persistent inquiry. The economists who pedantically recite the fallacy claim and insist upon its authority know nothing of its origins (or, for that matter, its subsequent career)! The lump-of-labour label was a late Victorian addendum that alluded impishly to the colloquial term for a kind of labor sub-contracting, "lump work," which explicitly specified the amount of work to be done as a fixed quantity. Henry Mayhew chronicled the practice in his mid-century reportage on "London Labour and the London Poor":

It is this contract or lump work which constitutes the great evil of the carpenter's, as well as of many other trades; and as in those crafts, so in this, we find that the lower the wages are reduced the greater becomes the number of trading operatives or middlemen...

"Lump" work, "piece" work, work by "the job," are all portions of the contract system. The principle is the same. "Here is this work to be done, what will you undertake to do it for?"

So, if lump work was by definition "a fixed amount of work to be done" from whence does the "fallacy" arise? The lump-of-labour and its antecedent, lump work, turn out to be blind alleys. The origin of the fallacy claim had to do with the introduction of machinery rather than with piece-work or working time (not to mention immigration or early retirement). Dorning Rasbotham, a magistrate in the county of Lancashire, England, published a pamphlet, "Thoughts on the Use of Machines in the Cotton Manufacture," in 1780 in response to rioting that had occurred the previous year near Blackburn. In it, on page 18, occurs what appears to be the seminal instance of the fallacy claim, expressed in words unmistakably paraphrased by the now standard "fixed amount of work to be done":

Dorning Rasbotham, Esq.

"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. Trade is not hemmed in by great walls, beyond which it cannot go. By bringing our goods cheaper and better to market, we open new markets, we get new customers, we encrease the quantity of labour necessary to supply these, and thus we are encouraged to push on, in hope of still new advantages. A cheap market will always be full of customers. Men will cross land and sea to go thither."

Although virtually forgotten today, Rasbotham's pamphlet was well-enough known in the early 19th century for his views to have been cited with admiration by John R. M'Culloch in an 1827 Edinburgh Review article on the cotton industry:

Dorning Rasbotham, Esq., a magistrate near Bolton, printed some time about the period referred to, a sensible address to the weavers and spinners, in which he endeavoured to convince them that it was for their interest to encourage inventions for abridging labour. The result has shown the soundness of Mr Rasbotham's opinion.... There is, in fact, no idea so groundless and absurd, as that which supposes that an increased facility of production can under any circumstances be injurious to the labourers.

Unlike David Schloss's account, more than a century later, of a conversation with a workman who subscribed to the Theory of the Lump of Labour, Rasbotham's pamphlet presented no indication of who "they" were who allegedly said there was "a certain quantity of labour to be performed." But it would be rash to judge his argument solely on this singular lack of evidence. Indeed, a careful reading of the pamphlet reveals this supposedly "sensible address to the weavers and spinners" to be a smug, patronizing exercise in diminishing the actual grievances of the working population while extolling the abstract virtues of trade and technology detached from the circumstances of their employment by the rich. The author who on the first page styles himself "from the bottom of my heart, a Friend to the Poor," concludes his peroration berating his erstwhile "friends" for their improvidence and their propensity to "carry their money to the Alehouse" rather than seize the burgeoning opportunities for self improvement. The real core of Squire Rasbotham's argument, though, occurs in the fourth of seven enumerated principles:

It is the use of Machines, which chiefly distinguishes men in society from men in a savage state. Some have thought it no bad description of a human being, that he is a tool-making, or a machine-making animal. What are the most common instruments or furniture of our houses, but machines to shorten labour? What is an ax, a hammer, a saw, a pair of bellows, but machines for this end? [...] If we must go upon the principle of having no machines, we must pull them all down, and bruise our corn in Mortars. -- What do I say? The Mortar and Pestle are machines for shortening labour. We mull crush our corn between two stones, or beat out the flour with sticks.

It is just such a disquisition as this Marx had in mind in the section in volume one of Capital titled, "The Theory of Compensation as Regards the Workpeople Displaced by Machinery," where he presented his parody of Bill Sikes, the villain from Oliver Twist, addressing the jury:

Gentlemen of the jury, no doubt the throat of this commercial traveler has been cut. But that is not my fault; it is the fault of the knife! Must we, for such a temporary inconvenience, abolish the use of the knife? Only consider! Where would agriculture and trade be without the knife? Is it not as beneficial in surgery as it is in anatomy? And in addition a willing help at the festive table? If you abolish the knife — you hurl us back into the depths of barbarism.

Marx's point, of course, was that it was not the machines that threw people out of work, any more than it was the knife that cut the throat of the traveling salesman. It was how the machines were used by those who owned them that threw people out of work. Similarly, the argument advanced by M'Culloch, James Mill, Robert Torrens, Nassau Senior and John Stuart Mill -- that "all machinery that displaces workmen, simultaneously and necessarily sets free an amount of capital adequate to employ the same identical workmen" -- was groundless. Instead,

The labourers that are thrown out of work in any branch of industry, can no doubt seek for employment in some other branch. If they find it, and thus renew the bond between them and the means of subsistence, this takes place only by the intermediary of a new and additional capital that is seeking investment; not at all by the intermediary of the capital that formerly employed them and was afterwards converted into machinery.

Note that Marx's specification of the necessity of "new and additional capital" is not at all the same thing as assuming that there is a fixed amount of work to be done. There is more work to be done; but whether or not it is done depends on additional investment. As Keynes phrased it some 60 years later, the economic system is not "self-adjusting" as assumed by "almost the whole body of organized economic thinking and doctrine of the last hundred years."

This self-adjusting, automatically-compensating for displacement doctrine made a notable appearance in William Stanley Jevons's speculations regarding The Coal Question and thus has implications for contemporary debates about energy consumption, conservation and climate change. Jevons maintained that, "It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth [emphasis in original]." He went on to explain:

William Stanley Jevons

As a rule, new modes of economy will lead to an increase of consumption according to a principle recognised in many parallel instances. The economy of labour effected by the introduction of new machinery throws labourers out of employment for the moment. But such is the increased demand for the cheapened products, that eventually the sphere of employment is greatly widened. Often the very labourers whose labour is saved find their more efficient labour more demanded than before.

If we subscribe to Marx's and Keynes's refutation of the self-adjusting, compensation principle, the 'good news' is that increasing energy efficiency doesn't necessarily lead to increased consumption, as the Jevons Paradox or 'rebound effect' implies.

The bad news, though, is that to whatever extent the self-adjusting principle doesn't apply to fuel, it also doesn't apply to employment. Meanwhile employment, as conventionally defined, is deeply entangled with energy consumption. Whatever we might do to expand aggregate employment will likely increase the consumption of energy if past performance is any indicator.

But of one thing we can be certain: a cheap market will always be full of cheap hustlers.

IRS To No Longer “Waste” Money on Training

There is an aspect of the latest IRS scandal that I find absurd:

IRS spokeswoman Michelle Eldridge said Sunday that spending on large agency conferences with 50 or more participants fell from $37.6 million in the 2010 budget year to $4.9 million in 2012.

I have no idea whether 220 conferences costing $50 million over 3 years is too much or too little as far as a budget to reasonably train the IRS staff to enforce a very complicated tax code. OK, there may have been a few excesses here and there but most tax directors will tell you that the IRS desperately needs to increase the abilities of their staff. And yet the politicians and even Ms. Eldridge are arguing that slashing the training budget is a sign of good management. Penny wise – pound foolish.

A Berlin Chronicle

Under the S-Bahn arch on Knesebeckstraße, across the street from the Joan-Miró-Grundschule, which a century ago had been the Kaiser-Friedrich-Gymnasium that Walter Benjamin attended as a child, the Sandwichman was accosted by a Franz Biberkopf look-alike who pretended to have just found a gold ring on the sidewalk. Complete with illegible hallmark inside! Had I dropped it?

The gold ring drop -- akin to the pigeon drop and the Guinea drop -- is a venerable scam, the latter version of which was mentioned by John Gay in his 1716 poem, "Trivia -- Or, the Art of Walking the Streets of London,":

Who can the various city frauds recite,
With all the petty rapines of the night?
Who now the guinea-dropper's bait regards,
Trick'd by the sharper's dice, or juggler's cards?
Why should I warn thee ne'er to join the fray,
Where the sham quarrel interrupts the way?
Lives there in these our days so soft a clown,
Brav'd by the bully's oaths, or threatening frown?
I need not strict enjoin the pocket's care,
When from the crowded play thou lead'st the fair;
Who has not here or watch or snuff-box lost,
Or handkerchiefs that India's shuttle boast?

Charmed by my ersatz Biberkopf's supplications for "ein Bier!" I offered him two Euro for his performance but balked at his demand for "funf!" Having puzzled now for a week about the persistence of this archaic hustle, I am beginning to wonder if perhaps it doesn't embody the transition from gift to market exchange. The operator doesn't attempt to sell the counterfeit item to the mark but presents it as a gift -- or under the pretence of a gift. If it was the item it purports to be, such a valuable gift would impose an obligation on the receiver to reciprocate.

Utilitarian analysis operates on the unspoken assumption that fraud, misrepresentation and adulteration are the anomalies and that the normal course of business entails the exchange of items that are what their purveyors claim them to be. This is not the case with advertising, which incessantly alludes to social joys the products themselves are incapable of delivering. So although the value of a utility may be subjective, any correspondence between expected utility and objective fulfilment is strictly coincidental. "Value" is the hallmark of the discrepancy. Perhaps the bourgeois lifestyle, broadly speaking -- career, private life, mortgaged abode, social relationships mediated by possessions -- can be better appreciated as a macrocosm of the counterfeit gold ring drop scam. And then there are the various Ponzi schemes of the macroeconomy. "Lives there in these our days so soft a clown..."

AS-AD: Counting the Ballots

Ah, the blogosphere is a wonderful thing.  I asked for thoughts about the status of AS-AD in the intro macro textbook, and I got a whole bunch.  I really appreciate the response!  Here is my takeaway:

1. There is a lot of love out there for AS-AD.  I didn’t want to get into a debate over its merits (and yes I know Romer’s version, the claim that AS is a kind of Phillips Curve, and so on), but I was curious about whether economists feel positively enough about the model to actually use it in real life (as opposed to the classroom).  The answer is that some do.  That said, I think one could follow policy debates in economics without any exposure to AS-AD: all the main arguments on every side—Keynesian, classical, Post Keynesian, Austrian—can be presented and normally are presented without recourse to the AS-AD format.  There is a bit of AS-ADing on the web; there is little to none, as far as I know, in the corridors of policy.

2. AS-AD’s greatest claim to relevance may be its role in allowing the 1970s experience in the US to be placed in a different box than previous and subsequent episodes of macro distress.  (This is Paul Krugman’s core point.)  I can see the logic of this.  The 1970s was a crucial decade for macrotheory, and if all recessions were like the OPEC-induced variety the real business cycle model would be the only way to go.  By differentiating between “demand-side” and “supply-side” crunches, we can ringfence the 70s.  AS-AD is the easiest way to do this.

3. And what is the alternative?  Surely we don’t want to suggest that a model without prices (like the venerable Keynesian Cross) can fill the bill?  Whatever the detailed merits of AS-AD, at least it allows you to talk about output and prices at the same time.

So have I budged?  Maybe, somewhat.

1. I still think AS-AD is logically flawed.  That’s a different debate, but I think the flaws show up in a widespread perception that the framework isn’t very useful for policy purposes.  Here are two examples: (a) A recurring question is “what should the central bank do?”  Assuming that the CB engages robotically in inflation targeting (the Romer version of the model) isn’t exactly the best starting point for trying to answer it.  (b) The standard model of a shifting short run Phillips Curve (when unemployment is above or below NAIRU) provides a more empirically relevant basis for understanding the relationship between output and inflation than an AS curve.  You can actually measure NAIRU, debate its stability, etc.  That will give you an AS curve too.  But what is the empirical basis for a shift in the AS curve?  That’s about a shift in NAIRU, right?  Am I the only one who notices that the literature that would justify and calibrate such shifts is thin and inconclusive?  (I say this even though I think I have a rough understanding of the factors that might push NAIRU one way or the other.)  A lot has been written on the impact of Obama’s initial stimulus on output and employment, for instance; how much has been written on its impact on NAIRU?

2. It’s true that without AS-AD it’s hard to put the 1970s in a separate box.  How much that matters depends on how you want to respond to the new classical critique that emerged at the same time.  One response is, OK you guys were right, but mostly about this one period, which really was a real business cycle.  That’s not the only option.

3. What the alternative is depends on whether you think you always need a single model to tie everything together.  That function is served by DSGE at the upper reaches of macrotheory.  (Again, the merits of DSGE are not at issue at the moment.)  But DSGE can’t do this job at the intro level.  So do you tell a number of stories that bear on DSGE-ish issues, or do you opt for a simple model whose value is mainly to provide a thread that runs through the intro textbook?  The mantra for textbooks today is simple stories with lots of repetition.  Whether you can get introductory students to wrap their minds around multiple stories that stand in some tension with one another is a practical question.  We’ll see.

Why You Don’t See the Aggregate Supply—Aggregate Demand Model in the Econ Blogosphere

Introductory textbooks are supposed to give you simplified versions of the models that professionals use in their own work.  The blogosphere is a realm where people from a range of backgrounds discuss current issues often using simplified concepts so everyone can be on the same page.

But while the dominant framework used in introductory macro textbooks is aggregate supply—aggregate demand (AS-AD), it is almost never mentioned in the econ blogs.  My guess is that anyone who tried to make an argument about current macropolicy using an AS-AD diagram would just invite snickers.  This is not true on the micro side, where it’s perfectly normal to make an argument with a standard issue, partial equilibrium supply and demand diagram.  What’s going on here?

I’ve been writing the part of my textbook where I describe what happened in macro during the period from the mid 70s to the mid 00s, and part of the story is the rise of textbook AS-AD.  Here’s the line I take:

The dominant macro model, now crystallized in DSGE, is much too complex for intro students.  It is based on intertemporal optimization and general equilibrium theory.  There is no possible way to explain it to students in their first exposure to economics.  But the mainstream has rejected the old income-expenditure models that graced intro texts in the 1970s and were, in skeleton form, the basis for the forecasting models used back in those days.  So what to do?

The solution has been to use AS-AD as a placeholder.  It allows instructors to talk about both prices and quantities in a rough market context.  By putting Y on one axis and P on another, you can locate any macroeconomic outcome in the upper-right quadrant.  It gets students “thinking like economists”.

Unfortunately the model is unsound.  If you dig into it you find contradictions that can’t be papered over.  One example is that the AS curve depends on the idea that input prices for firms systematically lag output prices, but do you really want to argue the theoretical and empirical case for this?  Or try the AD assumption that, even as the price level and real output in the economy go up or down, the money supply remains fixed.

That’s why AS-AD is simply a placeholder.  It has no intrinsic value as an economic model.  No one uses it for policy purposes.  It can’t be found in the econ blogs.  It’s not a stripped down version of DSGE.  Its only role is to occupy student brain cells until the real work of macroeconomic instruction can begin in a more advanced course.

If I’m wrong I’d like to know before I cut off all lines of retreat.

The Return of MaxSpeak

Hi folks. After the long hiatus, the urge to return to blogging is overwhelming. The revival will be constrained in a number of ways, given my place of employment. I can't be sure how much I will get done, since writing will be limited to weekends and evenings. This site -- EconoSpeak -- will go on with its bad self. The reason for posting here is I need a MaxSpeak fan who is also an HTML whiz to help me get the old site back up and running. Ideally this would include resurrecting the fabulous archives and comments. There may be some compensation possible, in addition to the eternal glory. (Definitely free advertising if you code for a living.) To get responses I've set up a hotmail account that will live and die just for this purpose. Use my name with middle initial b, no periods. Hotmail.com has turned into outlook.com.

The Flight of Sergei Guriev

"Better Paris than Krasnokamensk," Sergei Guriev tweeted shortly before departing from Moscow for Paris, where his wife Ekaterina Zhuravskaya, is a professor at the Paris School of Economics, Krasnokamensk being a notorious prison camp.  He is officially visiting at Sciences Po temporarily, but most think he has left Moscow for good, resigning from his position as Rector of the New Economic School (NES, although "Russki Ekonomicheski Shkola" in Russian ("Russian Economic School"), and known there as "RESH" rather than "NES," sort of like how Russian food stores in the US have titles in English such as "International Food Market," while the sign in Russian says, "Russki Magazin," ("Russian store")), even though officials at NES (RESH) say that he is only on leave or on vacation, or whatever.  He has also reportedly resigned from a board overseeing Russia's largest bank, the still partly state-owned and trusted by the grandmothers to hold their money, Sberbank.

This sudden departure must be viewed as very significant.  The 41-year old Guriev, a Chechen who made it to and in Moscow from the sticks, has played a unique role in Moscow in recent years, both advising former President and now Prime Minister Medvedev, while also maintaining links with dissidents such as Andrei Navalny and coauthoring a report criticizing the second round of jailing of oil baron, Mikhail Khodorkovsky, and also serving as the leading link between western economists such as Andrei Shleifer and the rising economists in Moscow, such as those at NES (RESH) and its rival, the Higher Economic School (VWISH), both of them started since the end of the Soviet Union.  The simplest explanation is that he may simply have been trying to be too many things to too many people and sides, but one of them would not put up with it any longer.

That side would be President Putin and those around him.  He was known to be unhappy about Guriev's support of Khodordovsky.  However, the reported investigation that was closing in on Guriev and was most likely to result in his arrest involved his relationship with Navalny, now imprisoned, who has been viewed as the main leader of the anti-Putin demonstrations of recent years that have combined aspects of the Occupy movements of the West with more traditional Russian dissident movements, such as gathering at the statue of Pushkin at the intersection of the Garden Ring road and Tverskaya street (formerly Gorky street) before setting off for wherever they would eventually end up to occupy before enduring breaking up and arrests by the police.  Navalny is in jail because of what his supporters say are trumped up charges involving advice he gave a regional leader about certain economic deals.  Supposedly Guriev sent money to Navalny, although that would not seem in and of itself to be a criminal offense, but perhaps the authorities will try to link Guriev to whatever it is that Navalny has been jailed for.  As it is, Russian blogs supporting Putin have been denouncing Guriev and claiming that he is corrupt and involved with many businesses (the latter is true, but essentially no evidence of the former has been put forward). 

However, it may well be that his worst crime has been serving as a top adviser to Medvedev, whom Putin used to need but apparently now views as a rival and a nuisance to be put in his place.  No better way to do that than to bust his top advisers.

It is far from clear what will follow from this.  Certainly a message has been sent.  If you want to advise the government or be involved in local politics, then just as with NGOs you had better not be involved with the political opposition to Putin and you had better not have too many foreign links.  Liberalizing think tanks and academic outfits like NES(RESH) and VWISH may be allowed to more or less do their things, mostly research and training people for Master's degrees in economics to go to the West to earn PhDs who have strong undergraduate credentials in math or physics, much like Guriev himself, who came out of such institutes in Vladikavkaz and Kiev to eventually get a PhD in applied math before getting an econ PhD at MIT prior to becoming Rector of NES in 2004.  People at these places will have to keep their heads down if they want to stay in business.

One can argue about whether the kind of economics that is being taught at NES and VWISH is what Russia really needs or not.  However, the existing institutions left over from the Soviet era such as Moscow State University or the Central Institute of Mathematical Economics (TsEMI) are either stuck in a leftover swamp of the Soviet era with little of use to say or are highly mathematical and theoretical, if at a high level, such as TsEMI, out of which the NES was formed with the two sharing the same building on Nakhimovsky street in southern Moscow.  TsEMI has such acclaimed figures as Econometric Society Fellow Victor Polterovich, but he and his colleagues tend to be far removed from policy discussions.  Thus it is not surprising that they would support the founding of NES, even if the latter may have gotten into hot water for it, or at least particularly its very active Rector.

In any case, whatever one thinks of Guriev's views on economics, he has been a critic of arbitrary power and corruption and a supporter of democratic opposition to this entrenchment and re-entrenchment of such power.  His sudden departure cannot be viewed as anything other than a very unfortunate sign of what is going on in Russia both politically and intellectually.

Barkley Rosser

Why has austerity led to disaster in Greece?

Greece is in sharp economic free-fall. “20% real decline since 2008” (as reported on 30th April 2013). In 2012 the real value of government revenues and spending reached a ten-year low.  However, because of the sharp economic contractions, government revenues and spending as a share of GDP reached an all-time high (44.7% of GDP and 54.8% of GDP respectively)....

Link:  Globe-Alive

Money or Power, or cheap Energy?

"…The international monetary system also now faces a clear and present danger: currency wars. Virtually every major country is seeking depreciation, or at least non-appreciation, of its currency to strengthen its economy and create jobs....The “target list” of manipulators for priority policy response identified... includes China, Denmark, Hong Kong, Korea, Malaysia, Singapore, Switzerland and Taiwan, which accounted for half the estimated amount of unjustified intervention in 2011 ....Japan should be put on a “watch list,” ... Most of the remaining intervention is by major oil exporters, both members of OPEC led by Saudi Arabia and non-members such as Norway and Russia. ...

....John Connally [four days after the Nixon shocks of August 1971 when a global currency war led the US to abandon the gold standard]:

“I appre­ciate the advice from you gen­tlemen and want to share my own phi­los­ophy with you before we break up: the for­eigners are out to screw us and our job is to screw them first. Thank you and goodbye.”

From C Fred Bergsten's 'Currency Wars, the Economy of the United States and Reform of the International Monetary System'

[Common denominator 1971, 2013:  Peaks in oil production.]

More Laffer Lies from the Jersey Shore

A follow to this post with a hat tip to Mark Thoma. Mark graphs the changes in real education student per student. While not as bad as what is happening in Mark’s state (Oregon), New Jersey has seen a 27% decline since 2008. Yet Governor Christie is claiming New Jersey has seen record education spending as it balances the budget with tax cuts for everyone. Does the New Jersey governor lie about everything?

Explaining the Prejudice that Keynesian Economics Is Obsessed with the Short Run

Follow them to their source and you’ll usually find that big rivers have many feeder streams.  The myth that Keynes was fixated on the short run has at least two, I think.

The first was the perception that Keynes wanted to shift resources from investment into consumption.  You can see this already in 1931 in the famous story about Hayek’s foray behind enemy lines at Cambridge (here quoting Joan Robinson as cited by Brad DeLong):

While the controversy about public works was developing, Professor Robbins sent to Vienna for a member of the Austrian school to provide a counter attraction to Keynes. I very well remember Hayek's visit to Cambridge on his way to the London School. He expounded his theory and covered a black board with his triangles. The whole argument, as we could see later, consisted in confusing the current rate of investment with the total stock of capital goods, but we could not make it out at the time. The general tendency seemed to be to show that the slump was caused by [excessive] consumption. R. F. Kahn, who was at that time involved in explaining that the multiplier guaranteed that saving equals investment, asked in a puzzled tone, "Is it your view that if I went out tomorrow and bought a new overcoat, that would increase unemployment?"' "Yes," said Hayek, "but," pointing to his triangles on the board, "it would take a very long mathematical argument to explain why."

The notion is that too much consumption sets in motion a process that results in too little investment and therefore (in Hayek’s formulation) too little employment in the long run.  Aside from the logical fallacies it entails, it has an intuitive basis in a Puritan view of how capitalism works.  (Smart people would not think themselves into fallacies like Hayek’s unless they were predisposed to believe them on some deeper level.)  The irreplaceable virtue of the capitalist is that he (and it was a he) restrains himself from consumption, and that this heroic abstention is the foundation for the growth in prosperity.  Keynesian policies are condemned for their refusal to abstain—indeed for their devotion to consumption in the here and now.  Surely this failure to take the long view will be punished somehow.

The second source of the myth of the eternal Keynesian short run comes from the debate between Samuelsonian Keynesians and new classical economists in the 1970s.  The classicals argued that in a properly specified general equilibrium model there could not be persistent shortfalls of effective demand, nor government policies that could “outsmart” economic agents and bring them to a collective outcome better than they could obtain themselves by their own wits in the marketplace.  Over the course of a decade or so a sort of Yalta emerged: Neo-Keynesians argued that frictions (especially sticky prices) could produce Keynes-type effects in the short run, but they ceded the long run to the new classicals, while the classicals (most of them) handed over the short run to the Neo-Keynesians.  Now almost every macroeconomics textbook gives you short run models that look sort of Keynesian and long run models that look sort of classical.

When these two streams come together they produce a mighty roar.  Yet it has to be said that (1) neither Keynes nor the tribe of Keynesians is emotionally or philosophically predisposed to favor the present over the future, and (2) there is no general distinction between the short and long runs in “real” Keynesian theory.  An economy can remain stuck in an underemployment equilibrium for years and years, as it did during the Great Depression and as it is in the process of doing today.  This comes at the cost of not only today’s living standards but foregone investments we should be making for the future.  When you put it this way it’s obvious.  It takes a combination of emotional investment in the concept of self-denial-and-reward and a peculiar truce among late 20th century macroeconomic modelers to render it invisible.

"What this country needs is another financial crisis"

That is just the headline in today's Washington Post for a column by semi-retired Allan Sloan, who says in the text, "What this country needs to get its act together is a good five-alarm financial crisis."  Really.  He does not mean it, as he gets worked up about Republicans possibly damaging US credit with another debt ceiling crisis later this year, but he certainly said it, and this is clearly a very strongly felt sentiment among Washington VSPs, even though we have still not come out of the high unemployment from the last financial crisis.  This is not what bothers him.  He seems upset that the stock market is doing well, housing prices are up, as are corporate profits, although he fails to mention that these have happened with inflation still below the Fed's target rate.  So what does he want out of this supposedly needed new financial crisis?

One is that we should have done something about banks being too big to fail.  I actually agree with him on this one.  However, he fails to note that part of how we got out of the last financial crisis without more bank failures than we had was by letting our very biggest banks buy up several of the smaller ones that were on the verge of failing.  What was his alternative?  I do not remember what he recommended at the time, but the main alternatives were either letting those banks go bust and paying off the depositers (which quite likely would have bankrupted the FDIC and thrown the expense on the taxpayers) or some sort of temporary nationalization such as the Swedes did in the 1990s.  Maybe one of those would have been better, and maybe we should have put in place some mechanism to break up the biggest banks so that some of their gobbled up subsidiaries can go back to failing, but it is not at all obvious to me that having another financial crisis is worth achieving any of these.

Oh, and he is all upset that the budget deficit is going down and so fast! He warns that some of the revenue boosts are temporary, and of course down the road we shall face those inevitably higher interest rates on the national debt, the usual boogey-man.  But then, of course, he gets to the standard whine of the VSPs, we did not cut Social Security, Medicare, or Medicaid!  What a waste of a financial crisis!  Tank the markets and send the unemployment rate back above 10% so that we learn the error of our ways and definitely cut those future benefits now so that we won't have to worry in the future about how they might be cut in the future!  Ultra gag.

OK, OK.  I must admit that in the end he really does not mean it.  In his final paragraph he tells us, "I don't want to see a crisis, and I hope our alleged leaders, who aren't stupid, bestir themselves before one strikes.  But I sure wouldn't count on it. Too bad for them.  Too bad for us."  However, if what he thinks they need to do is to cut the social safety net to shreds, then let us just sit quivering in fear of the crisis that he forecasts we face if we fail to follow his humble advice.

Barkley Rosser

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?