Leahy said a proposal drafted by Sens. Bob Corker (R-Tenn.) and John Hoeven (R-N.D.) “reads like a Christmas wish list for Halliburton.” The amendment requires implementation and activation of $4.5 billion in technology and equipment to achieve full surveillance of the U.S.-Mexico border. “I am sure there are federal contracting firms high-fiving at the prospect of all of the spending demanded by some of our friends on the other side in this amendment,” Leahy said on the Senate floor. Leahy criticized the GOP-sponsored language for waiving standard federal contracting rules. “That is a potential we must watch out for — for waste and fraud,” he said.Normally – this kind of largesse for military contractors should be roundly condemned by those who care about fiscal responsibility and/or efficient allocation of resources. But we are far below full employment and this seems to be the only form of stimulus we can expect from the modern Republican Party.
Sunday, June 23, 2013
Border Security as Militarized Keynesianism – Outsourced
I think we have found a proposal to increase government purchases that Republicans like:
Thursday, June 20, 2013
Robert Reich and Life of "Pie"
AFL-CIO: "The rich keep getting a bigger share of the economic pie while everyone else’s share keeps shrinking. What should be done to reverse this trend?"
Sandwichman: "Stop growing "the pie." Restore the commons instead."
Bob Reich: "They go together. Economic growth doesn't have to result in more consumption of material goods. It can also result in a better environment, better public health, better education. All growth does is create the economic capacity to do these things. How we use growth -- either for more consumer goods of for more public goods (the commons) is a political choice."
Sandwichman: "There is a very large literature that disagrees with that assumption, Bob. A good place to start would be with Jonathan Rowe's "Our Common Wealth" or the 1995 Atlantic Magazine article on the GDP Jonathan co-authored. Also the commons is not just another term for public goods. See Elinor Ostrom's Nobel Prize winning work on the commons."
Sandwichman: "Stop growing "the pie." Restore the commons instead."
Bob Reich: "They go together. Economic growth doesn't have to result in more consumption of material goods. It can also result in a better environment, better public health, better education. All growth does is create the economic capacity to do these things. How we use growth -- either for more consumer goods of for more public goods (the commons) is a political choice."
Sandwichman: "There is a very large literature that disagrees with that assumption, Bob. A good place to start would be with Jonathan Rowe's "Our Common Wealth" or the 1995 Atlantic Magazine article on the GDP Jonathan co-authored. Also the commons is not just another term for public goods. See Elinor Ostrom's Nobel Prize winning work on the commons."
Tuesday, June 18, 2013
Megan McArdle: As the Lump Crumbles...
At the Daily Beast, Megan McArdle tries to defend herself from charges that she has committed the dread Lump of Labor Fallacy (Why Aren't We Creating Enough New Jobs?) -- but wants to have it both ways.
McArdle then answers her own question: "No, not at all. Nonetheless, I am worried about unemployment at the bottom of the economy..."
It doesn't dawn on McArdle that she is no exception. If she is not guilty of the alleged Lump of Labor Fallacy (and I agree with her that she isn't), then on what basis does she assume that the fallacy claim is valid for other people? Maybe if instead of relying on The Economist's Lump of Labour hackery, Ms. McArdle would consult a peer-reviewed economic journal article...
"Why Economists Dislike a Lump of Labor"
Last Friday, I wrote a piece about When Work Disappears. On twitter, by email, and in the comments, I got pushback. Wasn't I committing the Lump of Labor Fallacy, assuming that the jobs that were disappearing meant permanent unemployment?
No, but I can see why people were worried. Let me explain.
For starters, let me define the Lump of Labor Fallacy for those who don't fill their spare hours by reading classical economics texts. Or rather, let me let The Economist define it for you.After citing the "one of the best known fallacies" BS from The Economist's Economics A to Z, Ms. McArdle asks: "Is that what I am worrying about? Am I under the delusion that when we lose 10,000 steelworker jobs, that necessarily means 10,000 fewer people working?"
McArdle then answers her own question: "No, not at all. Nonetheless, I am worried about unemployment at the bottom of the economy..."
It doesn't dawn on McArdle that she is no exception. If she is not guilty of the alleged Lump of Labor Fallacy (and I agree with her that she isn't), then on what basis does she assume that the fallacy claim is valid for other people? Maybe if instead of relying on The Economist's Lump of Labour hackery, Ms. McArdle would consult a peer-reviewed economic journal article...
"Why Economists Dislike a Lump of Labor"
"The lump-of-labor fallacy has been called one of the “best known fallacies in economics.” It is widely cited in disparagement of policies for reducing the standard hours of work, yet the authenticity of the fallacy claim is questionable, and explanations of it are inconsistent and contradictory. This article discusses recent occurrences of the fallacy claim and investigates anomalies in the claim and its history. S.J. Chapman's coherent and formerly highly regarded theory of the hours of labor is reviewed, and it is shown how that theory could lend credence to the job-creating potentiality of shorter working time policies. It concludes that substituting a dubious fallacy claim for an authentic economic theory may have obstructed fruitful dialogue about working time and the appropriate policies for regulating it."
Fred Hiatt Outs Self As Total Social Safety Net Hysterian
In (now yesterday's) Washington Post, editorial page editor Fred Hiatt makes it clear that he is one of the most out there of Washington "liberal" social safety net hysterians, totally obsessed with cutting benefits for Social Security and Medicare, no matter what. Dean Baker duly takes him to task on various fronts, including that taxes could be raised (and even Republicans are willing to do so to avoid cuts in those programs), defense could be cut more, and there is no guarantee that if liberals go along with cutting those benefits, the money will go to discretionary non-defense spending as Hiatt wants rather than yet another round of tax cuts for the rich See http://www.cepr.net/index.php/blogs/beat-the-press/fred-hiatt-is-holding-head-start-hostage-until-liberals-support-cuts-to-social-security-and-medicare . I have a few additions to Dean's worthy screed on this.
One is the matter that Hiatt seems particularly incensed that Congressional liberals have not jumped on Obama's proposal for a chained CPI for COLA adjustments to Social Security. Hiatt completely ignores that there is an alternative CPI for the elderly that shows substantially higher rates of price increases for goods purchased by the elderly than the non-elderly, with the still rapidly rising medical care costs a main reason for this, even if that rate of increase is decelerating. A chained version of that is probably conceptually the best one to use. As it is, Hiatt simply does not care what is fair or reasonable. He just wants to have those future benefits cut now, blankety blank, no matter what the rationale. After all, if we do not cut the future benefits now, we might have to cut them in the future!!!
Like many other VSPs who regularly pat each other on the back, such as Bowles and Simpson, he is clearly upset that the recent declines in the budget deficit have taken the pressure off for a grand bargain of tax increases and spending cuts, with social safety net cuts the centerpiece of this. What is funny is that he fails to notice that this recent decline in the deficit is in fact partly the result of what is effectively a grand bargain that has now been struck, although admittedly a pathetic and stupid one and not done so in any coordinated way: the ending of the Bush tax cut for the rich and the ending of the Obama fica tax cut for the middle class and poor along with the spending cuts mandated by the inane sequestration. Sure, this is not what these good government goo goo VSPs think should be done, but they are living in la la land if they think this totally dysfunctional Congress is at all remotely able to have any sort of sensible negotiation on this matter, if indeed such were really needed, which is highly questionable in the current situation. They would rather blame Obama anyway, even though he caved to the VSPs and offered the chained CPI for SS, only to have everybody in both parties in Congress shoot it down, well aware that the public does not like it at all.
Something that is important is that Fred Hiatt is an especially influential VSP, much more so than most, who only rarely surfaces in such a public way as he does here and whose role is probably not that well known by the broader public. His influence on the editorial WaPo page is certainly why few columnists there go against his arguments, with Harold Meyerson being about the only one I can think of who does so on any regular basis. While some simply ignore the topic, several other supposedly nominally liberal columnists there parrot the line of Hiatt, including Robert J. Samuelson and Ruth Marcus. And, of course, all their conservative columnists also agree that Social Security and Medicare should be cut, period, the sooner and greater, the better.
What remains to me a bit mystifying is how he and some of these others managed to get themselves so obsessed and in such conniption fits over this. I suspect that it dates back to the 90s when Clinton was pushing the issue, with much talk of setting up private accounts then and of course under Bush as well. I attribute much of the original push to pressure coming from Wall Streeters like Robert Rubin who saw lots of money for their companies if such accounts were set up. That has largely fallen out of the discussion, but this consensus among Washington insiders that formed then, has simply remained ("Everybody knows Social Security is in crisis," said Robert Schieffer to John Kerry and George W. Bush during their third presidential debate back in 2004), even though it is clear that this view is highly unpopular with the public, and many of the arguments that these people make have been repeatedly discredited over a long period of time. This is clearly the general phenomenon, but why somebody like Hiatt is so particularly obsessed himself to the point of writing such a silly column as this one, which is simply crawling with false or distorted "facts," more documented by Dean Baker and his commenters, is something of a mystery to me in the end.
One is the matter that Hiatt seems particularly incensed that Congressional liberals have not jumped on Obama's proposal for a chained CPI for COLA adjustments to Social Security. Hiatt completely ignores that there is an alternative CPI for the elderly that shows substantially higher rates of price increases for goods purchased by the elderly than the non-elderly, with the still rapidly rising medical care costs a main reason for this, even if that rate of increase is decelerating. A chained version of that is probably conceptually the best one to use. As it is, Hiatt simply does not care what is fair or reasonable. He just wants to have those future benefits cut now, blankety blank, no matter what the rationale. After all, if we do not cut the future benefits now, we might have to cut them in the future!!!
Like many other VSPs who regularly pat each other on the back, such as Bowles and Simpson, he is clearly upset that the recent declines in the budget deficit have taken the pressure off for a grand bargain of tax increases and spending cuts, with social safety net cuts the centerpiece of this. What is funny is that he fails to notice that this recent decline in the deficit is in fact partly the result of what is effectively a grand bargain that has now been struck, although admittedly a pathetic and stupid one and not done so in any coordinated way: the ending of the Bush tax cut for the rich and the ending of the Obama fica tax cut for the middle class and poor along with the spending cuts mandated by the inane sequestration. Sure, this is not what these good government goo goo VSPs think should be done, but they are living in la la land if they think this totally dysfunctional Congress is at all remotely able to have any sort of sensible negotiation on this matter, if indeed such were really needed, which is highly questionable in the current situation. They would rather blame Obama anyway, even though he caved to the VSPs and offered the chained CPI for SS, only to have everybody in both parties in Congress shoot it down, well aware that the public does not like it at all.
Something that is important is that Fred Hiatt is an especially influential VSP, much more so than most, who only rarely surfaces in such a public way as he does here and whose role is probably not that well known by the broader public. His influence on the editorial WaPo page is certainly why few columnists there go against his arguments, with Harold Meyerson being about the only one I can think of who does so on any regular basis. While some simply ignore the topic, several other supposedly nominally liberal columnists there parrot the line of Hiatt, including Robert J. Samuelson and Ruth Marcus. And, of course, all their conservative columnists also agree that Social Security and Medicare should be cut, period, the sooner and greater, the better.
What remains to me a bit mystifying is how he and some of these others managed to get themselves so obsessed and in such conniption fits over this. I suspect that it dates back to the 90s when Clinton was pushing the issue, with much talk of setting up private accounts then and of course under Bush as well. I attribute much of the original push to pressure coming from Wall Streeters like Robert Rubin who saw lots of money for their companies if such accounts were set up. That has largely fallen out of the discussion, but this consensus among Washington insiders that formed then, has simply remained ("Everybody knows Social Security is in crisis," said Robert Schieffer to John Kerry and George W. Bush during their third presidential debate back in 2004), even though it is clear that this view is highly unpopular with the public, and many of the arguments that these people make have been repeatedly discredited over a long period of time. This is clearly the general phenomenon, but why somebody like Hiatt is so particularly obsessed himself to the point of writing such a silly column as this one, which is simply crawling with false or distorted "facts," more documented by Dean Baker and his commenters, is something of a mystery to me in the end.
Sunday, June 16, 2013
John Taylor’s Flip-Flop on Federal Revenue Sharing
Paul Krugman compared John Taylor’s testimony in 2009 that Federal revenue sharing was only committed to reducing state government debt versus Taylor’s latest:
Janet Yellen blamed the slow recovery in part on the fact that “State and local governments were cutting spending…” As a matter of national income and product accounting, it is true that cuts in state and local government purchases subtract from GDP, but these cuts are mainly an endogenous consequence not an exogenous cause of the weak recovery.His latest is the claim that state governments with balanced budget constraints are forced to adopt austerity during recessions. But isn’t this the reason we adopted Federal revenue sharing in the first place. OK, Taylor has resigned from the community of honest economists to join Team Republican but can we point out one consistency in his 2009 testimony and his latest:
Consider the following two charts. The first shows how state and local government purchases have been essentially flat in nominal terms in the past few years.He also graph nominal purchases back in his 2009 testimony. Odd – don’t macroeconomists normally talk about real purchases, which is how our graph is drawn? In real terms, state and local government purchases have fallen after 2009. They were also showing stagnation in 2008 as the recession got started but they showed a bump in 2009 when ARRA implemented its temporary Federal revenue sharing. Oops – doing this in real terms sort of undermines what Taylor was trying to claim.
Friday, June 14, 2013
Thomas Schelling Gives The Bottom Line On Why We Did Not Blow Ourselves Up So Far In A Nuclear War
For as good account as will probably ever be given on how we are still alive and not having had a nuclear war since 1945, from the man as responsible for this good outcome as any on the planet, see
http://www.youtube.com/watch?v=BFE7gw7bEdQ .
I have no further comment on this, which speaks for itself totally.
http://www.youtube.com/watch?v=BFE7gw7bEdQ .
I have no further comment on this, which speaks for itself totally.
Paul Krugman's Sympathy for the Luddites
Paul Krugman finally catches up with the Sandwichman:
Mechanization eventually — that is, after a couple of generations — led to a broad rise in British living standards.As the Sandwichman wrote a little over two years ago (May 7, 2011) in an Open Letter to Paul Krugman:
But it’s far from clear whether typical workers reaped any benefits during the early stages of the Industrial Revolution; many workers were clearly hurt. And often the workers hurt most were those who had, with effort, acquired valuable skills — only to find those skills suddenly devalued.
One of the favorite unintended-consequences stories in economics is the idea that 'technology creates more jobs than it destroys.' This was a standard rebuke to Luddites in the early 19th century, who were portrayed as fearing that machines would create chronic unemployment. It closely resembles the case argued against the mercantilism of the early 18th century by Henri Martyn in Considerations on the East India Trade. The lump-of-labor fallacy appears as the negative version of this story. In fact, the fallacy is sometimes called the Mercantalist or Luddite fallacy.
There is a crucial difference between the two sides of the story, though. The technology creates jobs story is openly embraced by economists and triumphantly played as the trump card in debates over employment policy. The fixed-amount-of-work story, though, is only attributed by economists to Luddites, shorter work time advocates and other 'naive populists' they wish to discredit. In both cases it is the economist (not infrequently, The Economist) speaking, telling the uninitiated to sit down and shut up.
Tuesday, June 11, 2013
From The Big Ear To The Universal Ear
In 1958 a radio silence zone was created in eastern West Virginia around the Green Bank radio telescope. During the next few years it was thought there might be a way of monitoring of Soviet military/intel communications by catching them bouncing off the moon. A project was initiated to do just that, the "Big Ear," with a site selected at Sugar Grove, West VA, about 30 miles from Green Bank and within its radio silence zone, which would make it easier to pick up the signals. For a variety of reasons this project was discontinued in 1962, but the materials and equipment were in place at Sugar Grove, just over the Shenandoah Mountain range from the central Shenandoah Valley, and became attractive to other customers for other communications purposes.
So it was that the Sugar Grove Naval Station opened in 1969, although with minimal publicity, under the oversight of the Naval Informations Operations Command (NAVIOCOM). To the few who became aware of this station in the area it was let out that it was involved in long wave communications with submarines, which apparently was a function that it did. Over time, a variety of obvious pieces of equipment appeared there that could carry out such activities, eventually three large dishes (each much smaller than the originally planned Big Ear), as well as some large circular arrays, all of this readily visible from nearby mountaintops, particularly Reddish Knob on the Shenandoah range, a high point where a James Madison University, Norlyn Bodkin, would find a previously unknown species of plant left over from the ice age, along with a parking lot, where students and many locals would regularly repair for picnics and wild parties, with all those very visible communications devices down below providing fodder for all kinds of amusing speculations.
And then in 1982 James Bamford published a book about an agency whose existence had previously been officially classified, although its existence had surfaced briefly during the 1975 Church committee on abuses by US intelligence agencies. One upshot of those hearings related to this agency whose existence was still classified was a 1978 act establishing a secret court to determine when this agency (and any others) could listen to telephone calls by US citizens. The agency was the National Security Agency (NSA), whose initials had long been claimed jokingly to stand for "Never Say Anything,"
Among the more important secrets revealed about the NSA in Bamford's book was about the Sugar Grove Naval Station. Not only did it communicate with submarines, it also was the top listening post for the NSA on the US East Coast, able to listen to all long distance telephone calls, the technology of that time being that such calls were transmitted by shortwaves, with local calls sticking to cables. While all such calls could be listened to, at that time only ones using key words and with foreigners were supposedly listened to, but the potential was clear for what could be done, particularly in connection with the NSA being the regular first customer for whatever was the latest Cray supercomputer to roll out of the barns in Chippewa Falls, Wisconsin, which could be programmed to direct such mass targeting of long distance telephone calls.
Well, time and technology have moved on. The importance of Sugar Grove began to decline in the 1990s as long distance calls increasingly were transmitted via fiber optic cables rather than shortwave transmissions, hence not readily picked up by the ears at Sugar Grove (not to mention that some attention got focused on the even more secret spy satellite operater NRO, whose existence had continued to be classified until then: how widely are they watching people?), although reportedly there was quite a bit of construction there during 2000-04. I do not know how NSA sweeps up those calls now, but obviously they have the tech, and the computer tech has only massively increased.
Last year in Wired magazine, Bamford reported that NSA was building a massive new data center in Utah, able to "intercept, decipher, analyze, and store vast swaths of the world's communications as they zap down from satellites and zip through the underground and undersea cables of international, foreign, and domestic networks," as quoted in an article by the superknowledgeable Walter Pincus in today's Washington Post. Not many paid much attention, any more than many had paid attention in 2006 when USA Today, of all sources, according to Pincus, had reported that NSA "has been secretly collecting the phone records of tens of millions of Americans, using data provided by AT&T, Verizon, and BellSouth." However, this did trigger some reaction with President Bush defending the program in terms reminiscent of those now defending PRISM, with NSA's ability to do this expanded with the 2008 FISA.
As for Sugar Grove, ironically the announcement of the end came just before Edward Snowden publicly revealed PRISM and related activities by the NSA, amounting to a Universal Ear picking up all telephone calls, not to mention a whole lot emails and other communications. On April 23 of this year, NAVIOCOM sent an order moving the naval command at Sugar Grove to NSA headquarters at Fort Meade, Maryland. I have no idea what, if anything, will still happen at Sugar Grove, but I suspect that those dishes and circular arrays will still be around for some time for the picnickers and partiers from around where I live in the central Shenandoah Valley to look at and speculate about while they do their things on top of Reddish Knob.
Barkley Rosser
So it was that the Sugar Grove Naval Station opened in 1969, although with minimal publicity, under the oversight of the Naval Informations Operations Command (NAVIOCOM). To the few who became aware of this station in the area it was let out that it was involved in long wave communications with submarines, which apparently was a function that it did. Over time, a variety of obvious pieces of equipment appeared there that could carry out such activities, eventually three large dishes (each much smaller than the originally planned Big Ear), as well as some large circular arrays, all of this readily visible from nearby mountaintops, particularly Reddish Knob on the Shenandoah range, a high point where a James Madison University, Norlyn Bodkin, would find a previously unknown species of plant left over from the ice age, along with a parking lot, where students and many locals would regularly repair for picnics and wild parties, with all those very visible communications devices down below providing fodder for all kinds of amusing speculations.
And then in 1982 James Bamford published a book about an agency whose existence had previously been officially classified, although its existence had surfaced briefly during the 1975 Church committee on abuses by US intelligence agencies. One upshot of those hearings related to this agency whose existence was still classified was a 1978 act establishing a secret court to determine when this agency (and any others) could listen to telephone calls by US citizens. The agency was the National Security Agency (NSA), whose initials had long been claimed jokingly to stand for "Never Say Anything,"
Among the more important secrets revealed about the NSA in Bamford's book was about the Sugar Grove Naval Station. Not only did it communicate with submarines, it also was the top listening post for the NSA on the US East Coast, able to listen to all long distance telephone calls, the technology of that time being that such calls were transmitted by shortwaves, with local calls sticking to cables. While all such calls could be listened to, at that time only ones using key words and with foreigners were supposedly listened to, but the potential was clear for what could be done, particularly in connection with the NSA being the regular first customer for whatever was the latest Cray supercomputer to roll out of the barns in Chippewa Falls, Wisconsin, which could be programmed to direct such mass targeting of long distance telephone calls.
Well, time and technology have moved on. The importance of Sugar Grove began to decline in the 1990s as long distance calls increasingly were transmitted via fiber optic cables rather than shortwave transmissions, hence not readily picked up by the ears at Sugar Grove (not to mention that some attention got focused on the even more secret spy satellite operater NRO, whose existence had continued to be classified until then: how widely are they watching people?), although reportedly there was quite a bit of construction there during 2000-04. I do not know how NSA sweeps up those calls now, but obviously they have the tech, and the computer tech has only massively increased.
Last year in Wired magazine, Bamford reported that NSA was building a massive new data center in Utah, able to "intercept, decipher, analyze, and store vast swaths of the world's communications as they zap down from satellites and zip through the underground and undersea cables of international, foreign, and domestic networks," as quoted in an article by the superknowledgeable Walter Pincus in today's Washington Post. Not many paid much attention, any more than many had paid attention in 2006 when USA Today, of all sources, according to Pincus, had reported that NSA "has been secretly collecting the phone records of tens of millions of Americans, using data provided by AT&T, Verizon, and BellSouth." However, this did trigger some reaction with President Bush defending the program in terms reminiscent of those now defending PRISM, with NSA's ability to do this expanded with the 2008 FISA.
As for Sugar Grove, ironically the announcement of the end came just before Edward Snowden publicly revealed PRISM and related activities by the NSA, amounting to a Universal Ear picking up all telephone calls, not to mention a whole lot emails and other communications. On April 23 of this year, NAVIOCOM sent an order moving the naval command at Sugar Grove to NSA headquarters at Fort Meade, Maryland. I have no idea what, if anything, will still happen at Sugar Grove, but I suspect that those dishes and circular arrays will still be around for some time for the picnickers and partiers from around where I live in the central Shenandoah Valley to look at and speculate about while they do their things on top of Reddish Knob.
Barkley Rosser
NSA Leak – Privatization Run Amok
Is Edward Snowden a hero for protecting our liberties or a traitor for undermining our national security? This is indeed a difficult issue for most Americans but as I watched Snowden describe his actions, it struck me that the privatization of our national security may have undermined both noble goals. Some excellent reporting from the Washington Post shocked me as to how far this privatization has gone:
Never before have so many U.S. intelligence workers been hired so quickly, or been given access to secret government information through networked computers. In recent years, about one in four intelligence workers has been a contractor, and 70 percent or more of the intelligence community’s secret budget has gone to private firms ... But in the rush to fill jobs, the government has relied on faulty procedures to vet intelligence workers, documents and interviews show. At the same time, intelligence agencies have not hired enough in-house government workers to manage and oversee the contractors, contracting specialists said.If the national security buffs in our Federal government were serious about keeping such programs classified, why allow private contractors to be so heavily involved? And when private companies have such access to our private information, where are the protections to our liberties? And with the secrecy involved with these programs, private fraud is made that much easier. The situation created by this privatization run amok is something only Dick Cheney could love.
Monday, June 10, 2013
Debt Alarmism in California
Not all the paranoia about fiscal deficits has been exorcized. Jim Hamilton tells us that, if interest rates rise, the interest burden on the federal debt will swallow us whole, or nearly. Where will we get the cash to service this monster?
The short answer is: from the same folks who are collecting all this interest. Lord knows, there’s plenty of room for tax increases on the wealth-holding class, and there’s no reason why we can’t have a private-to-public flow of tax transfers to offset any increase in public-to-private interest transfers. More even. If our economy ever gets back on its feet and away from the ZLB, fiscal multipliers will be small again, and smaller still at the highest income brackets.
The key is to remember that, if the increased government debt is held domestically, we are simply seeing a shifting of net credit positions between the private and public sectors. If the balance shifts too much toward private net wealth and public net obligation, we have ways to rebalance again. If interest rates rise, lean on the tax lever; if not, go a little easier.
I hear you ask, what if a significant portion of new public debt ends up in the hands of foreigners? If they are simply substituting public credit assets for private, our domestic wealth-holders have increased their portfolios of something else, and we can tax them just the same. If there is a sizeable net increase in foreign holdings of US assets, public and private, then we have a widening payments imbalance to deal with—and that’s the problem, not the fiscal deficits. (Yes, I hear some say, and fiscal deficits cause current account deficits, which sounds fine as long as you don’t look at the evidence.)
However, we are saddling future generations with difficult problems because of our political shortsightedness today. They will have more poverty and broken lives to repair because of this endless slump, a less educated society and an infrastructure shortfall because of funding cuts, and above all a climate change problem that may well be intractable. If we care about future generations, this is what we will deal with today. Deficit paranoia is not a harmless quirk if it prevents us from spending the money to do what needs to be done.
The short answer is: from the same folks who are collecting all this interest. Lord knows, there’s plenty of room for tax increases on the wealth-holding class, and there’s no reason why we can’t have a private-to-public flow of tax transfers to offset any increase in public-to-private interest transfers. More even. If our economy ever gets back on its feet and away from the ZLB, fiscal multipliers will be small again, and smaller still at the highest income brackets.
The key is to remember that, if the increased government debt is held domestically, we are simply seeing a shifting of net credit positions between the private and public sectors. If the balance shifts too much toward private net wealth and public net obligation, we have ways to rebalance again. If interest rates rise, lean on the tax lever; if not, go a little easier.
I hear you ask, what if a significant portion of new public debt ends up in the hands of foreigners? If they are simply substituting public credit assets for private, our domestic wealth-holders have increased their portfolios of something else, and we can tax them just the same. If there is a sizeable net increase in foreign holdings of US assets, public and private, then we have a widening payments imbalance to deal with—and that’s the problem, not the fiscal deficits. (Yes, I hear some say, and fiscal deficits cause current account deficits, which sounds fine as long as you don’t look at the evidence.)
However, we are saddling future generations with difficult problems because of our political shortsightedness today. They will have more poverty and broken lives to repair because of this endless slump, a less educated society and an infrastructure shortfall because of funding cuts, and above all a climate change problem that may well be intractable. If we care about future generations, this is what we will deal with today. Deficit paranoia is not a harmless quirk if it prevents us from spending the money to do what needs to be done.
Sunday, June 9, 2013
From Big Brother to Big Data
Today’s events can spread ripples that influence the far future, but the future can also cast a shadow on the present. The full meaning of today’s news may be revealed only in retrospect, as foreshadowings of a future we can barely imagine in advance.
I’m thinking of the revelations of the past week concerning the collection and analysis of massive amounts of digital data, the records of our communications, transactions and travels, by the National Security Administration. They have been parsing all our phone calls (although not the content), as well as every available database maintained by social media, financial institutions and other businesses with electronic data storage. They were attempting to gain access to Dropbox and may well have accessed other cloud backup services.
There are two interesting questions that, as far as I know, haven’t been asked yet. The first is obvious: what are they looking for, exactly? We see vague references to “terrorists”, but that is a slippery term. First, there are many potentially violent people out there. Some have connections to radical Islamist groups. Some adhere to other apocalyptic religions or ideologies. Some are just crazy. Are all such threats targeted in this dragnet or only some? Which? And what constitutes a threat? What about radical environmentalists who want to physically obstruct a project they oppose? Organizers of some future Occupy-type movement? Hackers who try to breach security walls? Whistleblowers like the ones the Obama administration is so determined to identify and punish? Who are they trying to find?
The second is deeper and, well, more paranoid. Some time ago I mentioned in this blog that, by all appearance, killing by profile was becoming an established military tactic. Targets for bomb attacks, including but not limited to armed drones, were being selected on the basis of statistical profiles. Given the number of individuals at a particular location, their age and gender, the time of day, whether there was a pattern to their meeting and so on, a decision would be made to blow them up. It was not necessary to have information on their precise identities or human confirmation of their military activities. A simple statistical likelihood was sufficient cause. In the years that have passed the suspicion that profiling was being employed for target selection has become a near certainty.
Indeed, profiling is apparently being used by the security apparatus in other contexts. It is likely that individuals are being placed on lists that trigger heightened scrutiny at airports or prevent them from flying altogether on the basis of profiling. Visa applications may receive differential treatment on the basis of statistical models. For a long time it has been known that the IRS uses profiling to identify which tax returns it wants to audit, although there is supposed to be a wall between their data resources and those of other government agencies. (How much do you want to bet that there aren’t big holes in this wall?)
So the second question is, to what extent do the profiling activities of NSA and other agencies interface with the profiling models employed to take action against individuals—to restrict, punish or kill them? The current discussion seems to be based on the assumption that the profiles constructed by intelligence agencies will be used only as an aid to traditional surveillance and investigation. NSA tells the FBI, watch these guys: they may be dangerous. Or they tell them, here are several suspects for this crime you should follow up on. That sounds only a tiny bit Orwellian, nothing to be too concerned about. But what if that traditional human layer is bypassed, and the profiled data go directly into a profiled action? Someone is detained at an airport for 18 hours or is subjected to a cyberattack or is assassinated in a country accused of harboring potential terrorists because their factors loaded too strongly?
And this is the shadow of the future falling on us today. The technology for taking action against individuals automatically via statistical modeling will only become less expensive and more effective over time. The case for implementing these technologies will be overwhelming, since they will work. The rest of us will adapt: we will be careful who we communicate with, where and when we travel, what we buy. We will make sure our factor score remains well below the critical threshold. Indeed, most people in Europe and North America will not have to worry; their risk of being positively identified will be negligible. The result will be a modern, clean totalitarianism, with no visible enforcers and lots of space for daily life to go on as usual.
I’m thinking of the revelations of the past week concerning the collection and analysis of massive amounts of digital data, the records of our communications, transactions and travels, by the National Security Administration. They have been parsing all our phone calls (although not the content), as well as every available database maintained by social media, financial institutions and other businesses with electronic data storage. They were attempting to gain access to Dropbox and may well have accessed other cloud backup services.
There are two interesting questions that, as far as I know, haven’t been asked yet. The first is obvious: what are they looking for, exactly? We see vague references to “terrorists”, but that is a slippery term. First, there are many potentially violent people out there. Some have connections to radical Islamist groups. Some adhere to other apocalyptic religions or ideologies. Some are just crazy. Are all such threats targeted in this dragnet or only some? Which? And what constitutes a threat? What about radical environmentalists who want to physically obstruct a project they oppose? Organizers of some future Occupy-type movement? Hackers who try to breach security walls? Whistleblowers like the ones the Obama administration is so determined to identify and punish? Who are they trying to find?
The second is deeper and, well, more paranoid. Some time ago I mentioned in this blog that, by all appearance, killing by profile was becoming an established military tactic. Targets for bomb attacks, including but not limited to armed drones, were being selected on the basis of statistical profiles. Given the number of individuals at a particular location, their age and gender, the time of day, whether there was a pattern to their meeting and so on, a decision would be made to blow them up. It was not necessary to have information on their precise identities or human confirmation of their military activities. A simple statistical likelihood was sufficient cause. In the years that have passed the suspicion that profiling was being employed for target selection has become a near certainty.
Indeed, profiling is apparently being used by the security apparatus in other contexts. It is likely that individuals are being placed on lists that trigger heightened scrutiny at airports or prevent them from flying altogether on the basis of profiling. Visa applications may receive differential treatment on the basis of statistical models. For a long time it has been known that the IRS uses profiling to identify which tax returns it wants to audit, although there is supposed to be a wall between their data resources and those of other government agencies. (How much do you want to bet that there aren’t big holes in this wall?)
So the second question is, to what extent do the profiling activities of NSA and other agencies interface with the profiling models employed to take action against individuals—to restrict, punish or kill them? The current discussion seems to be based on the assumption that the profiles constructed by intelligence agencies will be used only as an aid to traditional surveillance and investigation. NSA tells the FBI, watch these guys: they may be dangerous. Or they tell them, here are several suspects for this crime you should follow up on. That sounds only a tiny bit Orwellian, nothing to be too concerned about. But what if that traditional human layer is bypassed, and the profiled data go directly into a profiled action? Someone is detained at an airport for 18 hours or is subjected to a cyberattack or is assassinated in a country accused of harboring potential terrorists because their factors loaded too strongly?
And this is the shadow of the future falling on us today. The technology for taking action against individuals automatically via statistical modeling will only become less expensive and more effective over time. The case for implementing these technologies will be overwhelming, since they will work. The rest of us will adapt: we will be careful who we communicate with, where and when we travel, what we buy. We will make sure our factor score remains well below the critical threshold. Indeed, most people in Europe and North America will not have to worry; their risk of being positively identified will be negligible. The result will be a modern, clean totalitarianism, with no visible enforcers and lots of space for daily life to go on as usual.
Friday, June 7, 2013
ObamaCare in California – Reuters Rehashes Avik Roy’s Lie
It saddens me that Reuters wrote this:
Healthcare policy expert and Forbes commentator Avik Roy said that prices were in fact going up as much as 146 percent for some people compared with those for individual plans for sale now in California.There was absolutely no qualification to this claim given and one can see lots of comments to this online post where the readers accepted what Roy claimed as if it were gospel. Yet, days earlier this claim was exposed to be a fraud by several writers including Rick Ungar who also write for Forbes as well as Ezra Klein and Jonathan Cohn. The coverage of how Roy misrepresented this issue was so thorough, it is hard to imagine how these two Reuters reporters missed it. And yet they repeat the claim as if it were the truth. And we wonder why the rightwing spin machine continues to succeed.
Thursday, June 6, 2013
Who Predicted The Crisis-Redux
I probably should not dredge around in this further, but there has been in the last week or so a major outpouring of dicussion about "who predicted the crisis," with a lot of wrangling and some less than pleasant comments being strewn about. I got dragged into it and should probably leave it alone, but more keeps coming, and I also think there might be a link to developments here at this blog.
Anyway, the main volley and still the main center of this discussion was set off by Noah Smith, http://noahpinionblog.blogspot.com/2013/05/what-does-it-mean-to-have-predicted.html . (I have just tried this link, which is accurate, but it failed. He laid out three conditions for having really predicted it fully, actually four. The main three were to have called the housing bubble, then called the broader financial market collapse deriving from the collapse of the housing bubble, and then to have called that there would be deep recession with a long stagnation afterwards. Oh, and to really qualify for him, one needed to do this with a fully specified model based on data. He basically argued that nobody fully satisfied all these criteria, although he makes lots of favorable remarks about Dean Baker, accurately crediting him, I think, with having first called the housing bubble back in 2002, and also arguing that its collapse would lead to a recession, although not necessarily a broader financial collapse nor how deep the recession would be, and also he did not have a fully specified data-based model for his forecasts, although he did use data. I basically agree with this.
Now most of the rest of the post, after throwing out a few other names (not including me), focused on Steve Keen, who has quite prominently claimed to have called the crisis. Noah basically jumped all over Steve, even confessing to not liking him personally based on his tweets. He admits that Steve had an interesting Minsky- based model in 1995, which I happen to be a fan of, but argued that it was not based on data and had various characteristics (such as lots of cyclicity) that made it not all that good for actually forecasting the crisis in the way he prescribed. At least some of this is true, although I commented on the thread that I thought he was overdoing the harshness of his criticisms of Steve, particularly the personal ones. I have always found Steve to be personable and lots of fun in person, even though he definitely argues hard, thereby annoying many. I also noted that Steve has been the victim of a purge at the University of Western Sydney, although I did not fully spell it out there. But he has. His department was eliminated as of the end of March. One can dump on Steve Keen all one wants, but he is currently unemployed as a result of a vendetta by orthodox types in the Australian establishment that has taken down his department, although this is part of a broader bad policy in the educational establishment of Australia.. Anyway, this is a scandal as far as I am concerned.
Anyway, this post set off a massive debate in 179 comments so far that has ranged all over the place, with many vigorously defending Steve, and others attacking him, in some cases more aggressively than did Noah. As this wore on various other links were made and other people were brought in as suspects or possible predictors.
One link that did this was in the original post by Noah, to a paper from June 16, 2009, by Dirk Bezemer, who himself claimed to have "called it." He listed 12 others with how and what they said. Some of them I know nothing about, although none of them clearly fulfilled all the criteria of Noah. Those I know of included Dean Baker (first on the list), the late Wynne Godley, Steve Keen, Nouriel Roubini (Baker, Roubini, and Keen received an award at some point for their efforts), Peter Schiff (who also predicted massive hyperinflation and is still doing so), and Robert Shiller. Roubini stands out from this group in like Dean Baker also calling ahead of time for the housing crash to trigger a recession, although both of them had some details of timing and how it would play out a bit off. The Bezemer link is http://mpra.ub.uni-muenchen.de/15892 . (Hope these links work.)
Then deep in the debate, Robert Viennau linked to a paper from a couple of years ago by Jamie Galbraith entitled, "Who Are These Economists Anyway?' I do not have a solid link to it, but it is linked to in another blogpost out yesterday by Lars Syll, http://rwer.wordpress.com/2013/06/04/bashing-crises-predictions . Jamie's piece mentions another set of candidates for "who predicted it," including Marxists Patrick Bond and Robert Brennan, Keynesians such as Wynne Godly and people at the Levy Institute, Minsky non-linearians, including the late Peter Albin, me, and Ping Chen, and then "the new criminologists" who focus on insitutions and fraud, Gary Dymski and Bill Black, whom he saw as following his late father's ideas. (I don't think he mentioned Steve, but maybe I just did not read closely enough.)
This led me to enter the fray, talking about how I had made predictions on the old Maxspeak about the housing bubble, but that these were not available due to the archives being sealed. Although these were initially inspired by Dean Baker and later supported by data from Shiller in his Irrational Exuberance, 2nd edition, Chap. 2 (did not mention that, but is true). I also noted that though I did not blog on it early, I gave talks about the link between the housing bubble and global financial markets, forecasting a major crash in March and December, 2007 (dates of speeches, I did not pick a time for the crash), with this insight coming from a Sept. 2006 speech by Timothy Geithner in Hong Kong, of all people. I then called that the crash was coming soon in a post here that was picked up by Mark Thoma at Economistsview, http://economistsview.typepad,com/economistsview/2008/07/gradual-decline.html , which led Mark to express a hope that the crash would not happen. (Although also accurate, this one did not work for me, so here is the original post from here, http://econospeak.blogspot.com/2008/07/falling-from-period-of-financial.html .) That was based on a model of mine with Antonio Palestrini and Mauro Gallegati, published in Macroeconomic Dynamics in 2011, although the first draft was out in 2005. Nobody was interested in publishing an ABM of Minsky dynamics somehow prior to the crash. It was this model that Jamie cited when he mentioned me.
That model was more specifically of the three different kinds of crashes that can come out of a bubble according to Minsky initially and picked up by Charles Kindleberger, in his classic _Manias, Panics, and Crashes_: a sudden fall from the peak, a gradual decline from the peak with no hard crash, and then one with a "period of financial distress" wherein there is a gradual decline for awhile after the peak, followed by a hard crash, which is by far the most common historical pattern according to Kindleberger. I said in July, 2008 that the global financial markets were in such a period of distress, which had started in Summer 2007, varying slightly depending on the market, and that it looked like a hard crash was coming probably pretty soon, the Minsky Moment, which indeed happend in mid-September after the failure of Lehman Brothers.
I have since with Gallegati and Marina Rosser published a paper in 2012 in the Journal of Economic Issues noting how other bubbles of the period fit into this. Housing looked like the gradual decline, roughly paralleling its rise, something one would expect more from real estate, particularly residential real estate, where people resist selling their homes when the price is falling, and oil, which in 2008 followed the sudden crash scenario from $147 per barrel in July to around $30 in November, with commodities often more likely to follow this scenario than the other two. I admitted in my comment at Noah's that I did not anywhere forecast the depth of the recession or the length of the recovery.
An odd spinoff of this is that it is not out of the question that this triggered Max Sawicky to announce that he will open the old Maxspeak archives. I suspect that he has been planning to start Maxspeak again for some time, but I have also noticed that a "Max" has commented on Noah's blog. Maybe Max saw my whine about the archives and decided to open them up. I confess that I was never happy about his sealing them off, but never until that comment on Noah's blog did I ever complain about it as I knew that when he stopped Maxspeak, Max was dealing with a tragic family health problem, and there was no way I was going to give him a hard time about anything then.
This has become ridiculously long and looks like what Noah disapproves of, people "thumping their chests about having predicted it," although he says that Dean Baker should be praised for not having done so, and clearly one of the things he is annoyed with Steve Keen about is that he does it a lot, with Noah not thinking he deserves to get that much credit for it. But I need to comment on one more item.
This would be the most recent post by Lars Syll, which on the one hand I appreciate, but on the other I think he does not quite have things right. He bashes Noah for "bashing the predictors," and then names five people: Dean Baker, Dirk Bezemer, Nouriel Roubini, me, and Steve Keen. Now, he certainly did bash Steve, but I do not think this characterizes what he said about the rest of us. He simply linked to Bezemer's paper, but really did not comment on it at length other than to argue that none of those listed by Bezemer fulfilled his own criteria, even if all of them got at least parts of it right. He is not all that unfavorable to Roubini, although thinking that his mechanism for the recession was off, involving a crash of the dollar, when just the opposite happened at the Minsky Moment, with Bernanke doing a Fed save by buying up $600 billion of eurotrash to prop up the collapsing euro, which was quietly rolled over during the next six months into MBSs (Noah did not spell out all those last details; I did). Dean Baker he actually said good things about, mostly, even if Dean did not have a full model. And he really did not comment on my post other than to say that Dean was one of those who did not constantly beat his own drum. I am doing so here, although I have not done so super-duper often in the past. As it is, I have to say that Lars overdid how hard Noah came down on all of us, although he definitely came down hard on Steve Keen big time, and promised in some comments to come down hard on Peter Schiff some other time.
I shall close this by noting some quotes that Lars pulled from the end of Jamie's paper, that he had written in 2000, doing his own "claiming," I suppose, :-). Just a few, and I think he is right on this. He speaks of "a kind of Politburo of correct economic thinking" that rules the profession. "They predict disaster where none occurs. They deny the possibility of events that then happen." But, "No one of them loses face, in the club, for having been wrong. No one is disinvited from presenting papers at later annual meetings. And still less is anyone from the outside invited in." And this remains pretty much true to this day.
Barkley Rosser
Anyway, the main volley and still the main center of this discussion was set off by Noah Smith, http://noahpinionblog.blogspot.com/2013/05/what-does-it-mean-to-have-predicted.html . (I have just tried this link, which is accurate, but it failed. He laid out three conditions for having really predicted it fully, actually four. The main three were to have called the housing bubble, then called the broader financial market collapse deriving from the collapse of the housing bubble, and then to have called that there would be deep recession with a long stagnation afterwards. Oh, and to really qualify for him, one needed to do this with a fully specified model based on data. He basically argued that nobody fully satisfied all these criteria, although he makes lots of favorable remarks about Dean Baker, accurately crediting him, I think, with having first called the housing bubble back in 2002, and also arguing that its collapse would lead to a recession, although not necessarily a broader financial collapse nor how deep the recession would be, and also he did not have a fully specified data-based model for his forecasts, although he did use data. I basically agree with this.
Now most of the rest of the post, after throwing out a few other names (not including me), focused on Steve Keen, who has quite prominently claimed to have called the crisis. Noah basically jumped all over Steve, even confessing to not liking him personally based on his tweets. He admits that Steve had an interesting Minsky- based model in 1995, which I happen to be a fan of, but argued that it was not based on data and had various characteristics (such as lots of cyclicity) that made it not all that good for actually forecasting the crisis in the way he prescribed. At least some of this is true, although I commented on the thread that I thought he was overdoing the harshness of his criticisms of Steve, particularly the personal ones. I have always found Steve to be personable and lots of fun in person, even though he definitely argues hard, thereby annoying many. I also noted that Steve has been the victim of a purge at the University of Western Sydney, although I did not fully spell it out there. But he has. His department was eliminated as of the end of March. One can dump on Steve Keen all one wants, but he is currently unemployed as a result of a vendetta by orthodox types in the Australian establishment that has taken down his department, although this is part of a broader bad policy in the educational establishment of Australia.. Anyway, this is a scandal as far as I am concerned.
Anyway, this post set off a massive debate in 179 comments so far that has ranged all over the place, with many vigorously defending Steve, and others attacking him, in some cases more aggressively than did Noah. As this wore on various other links were made and other people were brought in as suspects or possible predictors.
One link that did this was in the original post by Noah, to a paper from June 16, 2009, by Dirk Bezemer, who himself claimed to have "called it." He listed 12 others with how and what they said. Some of them I know nothing about, although none of them clearly fulfilled all the criteria of Noah. Those I know of included Dean Baker (first on the list), the late Wynne Godley, Steve Keen, Nouriel Roubini (Baker, Roubini, and Keen received an award at some point for their efforts), Peter Schiff (who also predicted massive hyperinflation and is still doing so), and Robert Shiller. Roubini stands out from this group in like Dean Baker also calling ahead of time for the housing crash to trigger a recession, although both of them had some details of timing and how it would play out a bit off. The Bezemer link is http://mpra.ub.uni-muenchen.de/15892 . (Hope these links work.)
Then deep in the debate, Robert Viennau linked to a paper from a couple of years ago by Jamie Galbraith entitled, "Who Are These Economists Anyway?' I do not have a solid link to it, but it is linked to in another blogpost out yesterday by Lars Syll, http://rwer.wordpress.com/2013/06/04/bashing-crises-predictions . Jamie's piece mentions another set of candidates for "who predicted it," including Marxists Patrick Bond and Robert Brennan, Keynesians such as Wynne Godly and people at the Levy Institute, Minsky non-linearians, including the late Peter Albin, me, and Ping Chen, and then "the new criminologists" who focus on insitutions and fraud, Gary Dymski and Bill Black, whom he saw as following his late father's ideas. (I don't think he mentioned Steve, but maybe I just did not read closely enough.)
This led me to enter the fray, talking about how I had made predictions on the old Maxspeak about the housing bubble, but that these were not available due to the archives being sealed. Although these were initially inspired by Dean Baker and later supported by data from Shiller in his Irrational Exuberance, 2nd edition, Chap. 2 (did not mention that, but is true). I also noted that though I did not blog on it early, I gave talks about the link between the housing bubble and global financial markets, forecasting a major crash in March and December, 2007 (dates of speeches, I did not pick a time for the crash), with this insight coming from a Sept. 2006 speech by Timothy Geithner in Hong Kong, of all people. I then called that the crash was coming soon in a post here that was picked up by Mark Thoma at Economistsview, http://economistsview.typepad,com/economistsview/2008/07/gradual-decline.html , which led Mark to express a hope that the crash would not happen. (Although also accurate, this one did not work for me, so here is the original post from here, http://econospeak.blogspot.com/2008/07/falling-from-period-of-financial.html .) That was based on a model of mine with Antonio Palestrini and Mauro Gallegati, published in Macroeconomic Dynamics in 2011, although the first draft was out in 2005. Nobody was interested in publishing an ABM of Minsky dynamics somehow prior to the crash. It was this model that Jamie cited when he mentioned me.
That model was more specifically of the three different kinds of crashes that can come out of a bubble according to Minsky initially and picked up by Charles Kindleberger, in his classic _Manias, Panics, and Crashes_: a sudden fall from the peak, a gradual decline from the peak with no hard crash, and then one with a "period of financial distress" wherein there is a gradual decline for awhile after the peak, followed by a hard crash, which is by far the most common historical pattern according to Kindleberger. I said in July, 2008 that the global financial markets were in such a period of distress, which had started in Summer 2007, varying slightly depending on the market, and that it looked like a hard crash was coming probably pretty soon, the Minsky Moment, which indeed happend in mid-September after the failure of Lehman Brothers.
I have since with Gallegati and Marina Rosser published a paper in 2012 in the Journal of Economic Issues noting how other bubbles of the period fit into this. Housing looked like the gradual decline, roughly paralleling its rise, something one would expect more from real estate, particularly residential real estate, where people resist selling their homes when the price is falling, and oil, which in 2008 followed the sudden crash scenario from $147 per barrel in July to around $30 in November, with commodities often more likely to follow this scenario than the other two. I admitted in my comment at Noah's that I did not anywhere forecast the depth of the recession or the length of the recovery.
An odd spinoff of this is that it is not out of the question that this triggered Max Sawicky to announce that he will open the old Maxspeak archives. I suspect that he has been planning to start Maxspeak again for some time, but I have also noticed that a "Max" has commented on Noah's blog. Maybe Max saw my whine about the archives and decided to open them up. I confess that I was never happy about his sealing them off, but never until that comment on Noah's blog did I ever complain about it as I knew that when he stopped Maxspeak, Max was dealing with a tragic family health problem, and there was no way I was going to give him a hard time about anything then.
This has become ridiculously long and looks like what Noah disapproves of, people "thumping their chests about having predicted it," although he says that Dean Baker should be praised for not having done so, and clearly one of the things he is annoyed with Steve Keen about is that he does it a lot, with Noah not thinking he deserves to get that much credit for it. But I need to comment on one more item.
This would be the most recent post by Lars Syll, which on the one hand I appreciate, but on the other I think he does not quite have things right. He bashes Noah for "bashing the predictors," and then names five people: Dean Baker, Dirk Bezemer, Nouriel Roubini, me, and Steve Keen. Now, he certainly did bash Steve, but I do not think this characterizes what he said about the rest of us. He simply linked to Bezemer's paper, but really did not comment on it at length other than to argue that none of those listed by Bezemer fulfilled his own criteria, even if all of them got at least parts of it right. He is not all that unfavorable to Roubini, although thinking that his mechanism for the recession was off, involving a crash of the dollar, when just the opposite happened at the Minsky Moment, with Bernanke doing a Fed save by buying up $600 billion of eurotrash to prop up the collapsing euro, which was quietly rolled over during the next six months into MBSs (Noah did not spell out all those last details; I did). Dean Baker he actually said good things about, mostly, even if Dean did not have a full model. And he really did not comment on my post other than to say that Dean was one of those who did not constantly beat his own drum. I am doing so here, although I have not done so super-duper often in the past. As it is, I have to say that Lars overdid how hard Noah came down on all of us, although he definitely came down hard on Steve Keen big time, and promised in some comments to come down hard on Peter Schiff some other time.
I shall close this by noting some quotes that Lars pulled from the end of Jamie's paper, that he had written in 2000, doing his own "claiming," I suppose, :-). Just a few, and I think he is right on this. He speaks of "a kind of Politburo of correct economic thinking" that rules the profession. "They predict disaster where none occurs. They deny the possibility of events that then happen." But, "No one of them loses face, in the club, for having been wrong. No one is disinvited from presenting papers at later annual meetings. And still less is anyone from the outside invited in." And this remains pretty much true to this day.
Barkley Rosser
Wednesday, June 5, 2013
Guest Post: The Logical Inconsistencies of AS-AD
Although I stirred up the dust a bit with my previous posts on AS-AD, I tried to avoid debating the overall merits of the model(s). I was interested in why AS-AD is more prominent in the textbooks than in other venues, like the blogosphere and policy analysis. But the desire for a red-blooded debate is out there! Here is a guest post from Fred Moseley of Mt. Holyoke College that lays out his view that AS-AD should be chucked altogether.
I think that AS-AD is a very bad model, that we should not be teaching to our students, for the following reasons:
1. It is logically inconsistent outside of equilibrium. The AS and AD curves do not refer to separate economic agents making separate decisions about S and D (as consumers and firms in microeconomics), but instead refers to different theories of the relation between output and the price level in the same economy. Outside of equilibrium, these two different theories predict two different levels of output for the same price level; but the same economy cannot produce two different levels of output at the same time.
There are different theories of AS, but all of them are logically inconsistent with the AD curve outside of equilibrium. The original AS curve in the 1970s was derived from the classical labor market. The AD curve, on the other hand, was (and is) derived from the Keynesian IS-LM theory. Thus, the AS-AD model attempts to reconcile Keynes’ theory (in which employment is determined in the output market) and the classical theory (in which employment is determined in the labor market). Keynes must be shouting out from his grave: “No, don’t do it! This is absurd!”
More recent AS curves (e.g. Mankiw’s “sticky price” model) turn AS into a price, which is a function of output, and which thus contradicts AD which is a quantity of output as a function of P.
2. Because of the logical inconsistency between AS and AD, the model cannot explain the adjustment process to equilibrium. For example, in the case of excess supply, the AD curves implies that output should increase in order to restore equilibrium and the neo-classical AS curve implies that output should decrease in order to restore equilibrium. But the output of the same economy cannot both increase and decrease at the same time. In the “sticky price” model, AS > AD has no meaning, because AD is a quantity and AS is a price.
3. The AS-AD model is empirically unrealistic. The model predicts that AS > AD causes prices to fall, but prices have not fallen since the 1930s (more than a percent or two once or twice). And it is a very good thing that prices no longer fall! Because significant deflation would be a disaster for such a heavily indebted economy as the US. And yet the AS-AD models in the textbooks still present deflation as an unproblematic solution to excess supply. Ben Bernanke, in his real-world job as Chairman of the Fed, is doing everything he can possibly think of in order to avoid deflation. And yet his intermediate macro textbook (co-authored) still presents the AS-AD model and deflation as a solution to excess supply.
David Colander was one of the first to call attention to these deficiencies of the AS-AD model in a very interesting and important 1995 JEP article entitled “The Stories We Tell: A Reconsideration of ASAD Analysis” (9, 3: 169–188.)
We should not be teaching such a logically contradictory and empirically unrealistic to our students. It encourages sloppy thinking and memorization, rather than rigorous and critical and creative thinking.
Mankiw concludes Part 4 of his textbook (on short run fluctuations) as follows:
The fact that students “find it difficult” is a good sign, not a bad sign. It is not a sign that students are not smart enough for the theory, but rather that the theory has serious logical problems, and that students are smart enough to have an intuition about these problems, even though they usually cannot fully identify and articulate them.
One is reminded of Colander’s “precocious student”, who asks probing questions about the inconsistencies between the ISLM model and the ADAS model, and does not receive satisfactory answers from a back-peddling professor, and she decides to switch to another major.
For further discussion of these issues, see my critique of Mankiw’s presentation of the AS-AD model in “Critique of Aggregate Demand – Aggregate Supply: Mankiw’s Presentation”, Review of Radical Political Economics, 2010; vol. 42, 3, pp. 308-314.
Get Rid of AS-AD, by Fred Moseley
1. It is logically inconsistent outside of equilibrium. The AS and AD curves do not refer to separate economic agents making separate decisions about S and D (as consumers and firms in microeconomics), but instead refers to different theories of the relation between output and the price level in the same economy. Outside of equilibrium, these two different theories predict two different levels of output for the same price level; but the same economy cannot produce two different levels of output at the same time.
There are different theories of AS, but all of them are logically inconsistent with the AD curve outside of equilibrium. The original AS curve in the 1970s was derived from the classical labor market. The AD curve, on the other hand, was (and is) derived from the Keynesian IS-LM theory. Thus, the AS-AD model attempts to reconcile Keynes’ theory (in which employment is determined in the output market) and the classical theory (in which employment is determined in the labor market). Keynes must be shouting out from his grave: “No, don’t do it! This is absurd!”
More recent AS curves (e.g. Mankiw’s “sticky price” model) turn AS into a price, which is a function of output, and which thus contradicts AD which is a quantity of output as a function of P.
2. Because of the logical inconsistency between AS and AD, the model cannot explain the adjustment process to equilibrium. For example, in the case of excess supply, the AD curves implies that output should increase in order to restore equilibrium and the neo-classical AS curve implies that output should decrease in order to restore equilibrium. But the output of the same economy cannot both increase and decrease at the same time. In the “sticky price” model, AS > AD has no meaning, because AD is a quantity and AS is a price.
3. The AS-AD model is empirically unrealistic. The model predicts that AS > AD causes prices to fall, but prices have not fallen since the 1930s (more than a percent or two once or twice). And it is a very good thing that prices no longer fall! Because significant deflation would be a disaster for such a heavily indebted economy as the US. And yet the AS-AD models in the textbooks still present deflation as an unproblematic solution to excess supply. Ben Bernanke, in his real-world job as Chairman of the Fed, is doing everything he can possibly think of in order to avoid deflation. And yet his intermediate macro textbook (co-authored) still presents the AS-AD model and deflation as a solution to excess supply.
David Colander was one of the first to call attention to these deficiencies of the AS-AD model in a very interesting and important 1995 JEP article entitled “The Stories We Tell: A Reconsideration of ASAD Analysis” (9, 3: 169–188.)
We should not be teaching such a logically contradictory and empirically unrealistic to our students. It encourages sloppy thinking and memorization, rather than rigorous and critical and creative thinking.
Mankiw concludes Part 4 of his textbook (on short run fluctuations) as follows:
If you find it difficult to fit all the pieces together, you are not alone. The study of aggregate supply remains one of the most unsettled – and therefore the most exciting – research areas in macroeconomics. (emphasis added)I argue that the reason why so many students (and professors as well) “find it difficult to fit all the pieces together” is that the pieces do not fit together logically! The pieces – the AD and AS curves – are mutually contradictory. It is not only that the theory of AS is unsettled, but more fundamentally that all the theories of AS are logically inconsistent with the Keynesian ISLM theory of AD with which it is combined.
The fact that students “find it difficult” is a good sign, not a bad sign. It is not a sign that students are not smart enough for the theory, but rather that the theory has serious logical problems, and that students are smart enough to have an intuition about these problems, even though they usually cannot fully identify and articulate them.
One is reminded of Colander’s “precocious student”, who asks probing questions about the inconsistencies between the ISLM model and the ADAS model, and does not receive satisfactory answers from a back-peddling professor, and she decides to switch to another major.
For further discussion of these issues, see my critique of Mankiw’s presentation of the AS-AD model in “Critique of Aggregate Demand – Aggregate Supply: Mankiw’s Presentation”, Review of Radical Political Economics, 2010; vol. 42, 3, pp. 308-314.
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