Hard Thoughts About Nuclear Weapons And Ukraine

The most important foreign policy initiative President Obama is trying to achieve against great odds is a nuclear agreement with Iran.  Central to this is having credibility that any promises made regarding Iranian security if they do not pursue acquiring nuclear weapons (which I do not think they are currently doing) must be credible.  It may be that he may have to engage in drastic action in the near future in order to maintain that credibility.

The New York Times top story today is that Russian troops are massing on the border of Eastern Ukraine, presumably threatening an invasion, either to carve off heavily ethnic Russian areas or to run all the way to Kyiv to reinstall former President Yanukovich, whom Putin claims was illegally an inappropriately removed from office.  It may be that he is planning a strategy like that he pulled a few years ago in Georgia.  How to get South Ossetia?  Invade Georgia proper and whomp their military, after which everybody is relieved that they retreat while holding on to South Ossetia.  Could be just the trick for pulling off the apparently impending annexation of Crimea after Saturday's referendum.

Now let me be clear.  I think the case for Crimea to be a part of Russia rather than Ukraine is strong.  Quite aside from the fact that probably a majority of the population prefer that outcome for this autonomous republic, it was a part of Russia prior to 60 years ago when Soviet Premier Nikita Khrushchev gave it to Ukraine on the 300th anniversary of the unification of Russia and Ukraine, he of of mixed ancestry, supposedly feeling guilty about his role in what went on in Ukraine in the 30s and egged on by his likely mistress and former Party leader in Crimea, Yekaterina Furtseva, who wanted to keep Tatars and Greeks and others from returning after being deported by Stalin in 1944.  All that was part of an implicit deal:  Ukraine would get Crimea but would remain part of the same nation as Russia, the Soviet Union.  Probably Yeltsin should have insisted on the return of Crimea when the USSR broke up, but he did not do so.  In any case, while it is hypocritically sneaky, one must recognize that Putin is maintaining a legal cover by asserting that all those pro-Russian militias running around in Crimea are really just local Crimeans rather than actual Russian military, even if we all know better.  He is maintaining the facade of not invading Ukraine.

Here is why that is important, and why an outright invasion of the rest of Ukraine would be very bad news.  In 1994, Ukraine had the third largest store of nuclear weapons in the world.  It gave it up in an agreement signed by Russia, Ukraine, the US, and the UK, which I understand France and China also later signed on to, this agreement guaranteeing the territorial integrity of Ukraine in exchange for sending all those nukes to Russia.  Russia is the last nation on the planet that should be violating this agreement, but this apparently what it may be about to do.

I hate to come on like this, I really do, but I am about to come on as more hawkish than John McCain, more so except for that nutcase wanting to put nukes on planes in Poland.  Anyway, I think if Russia openly invades Ukraine proper, the appropriate response is not just economic sanctions, which Putin will simply laugh at.  This is very dangerous, but Putin has clearly gone completely off the deep end of power mad egomania, surrounding himself by an inner circle of sycophants.  For the future of any nuclear peace, he cannot be allowed to get away with violating this agreement.

Workers do not compete for jobs!

Arise, ye prisoners of starvation! Giles Merritt, editor of Europe's World and head of the Brussels-based think tanks "Friends of Europe" and "Security & Defense Agenda" has just announced that the suggestion workers compete for jobs is nonsense. I kid you not. Nor am I exaggerating. Mr. Merritt himself performed the reductio to his own absurdum at the Project Syndicate site:

Politicians and journalists often suggest that people compete for jobs, the implication being that bringing more women into Europe’s workforce would deny jobs to men. That is not true, of course: economists deride the idea that there is a given number of jobs to be divided up as the “lump of labor fallacy.” We need as many people working as possible, generating economic activity and paying taxes.

A careful reading of the above paragraph would show that the error resides in the transition -- or lack of one -- between the suggestion that people compete for jobs and the alleged implication that more women in the workforce denies jobs to men. Mr. Merritt has pulled that implication (along with the projected "idea that there is a given number of jobs to be divided up") out of his... "hat" This is the point about the so-called "lump-of-labor fallacy" that I have been trying to draw attention to for a decade and a half.

What are the implications for standard economic theory of the idea that workers do not compete for jobs?

Tesla v. the New Jersey Motor Vehicle Commission

Tesla is not happy with Governor Christie:

Since 2013, Tesla Motors has been working constructively with the New Jersey Motor Vehicle Commission (NJMVC) and members of Governor Christie’s administration to defend against the New Jersey Coalition of Automotive Retailers’ (NJ CAR) attacks on Tesla’s business model and the rights of New Jersey consumers. Until yesterday, we were under the impression that all parties were working in good faith. Unfortunately, Monday we received news that Governor Christie’s administration has gone back on its word to delay a proposed anti-Tesla regulation so that the matter could be handled through a fair process in the Legislature. The Administration has decided to go outside the legislative process by expediting a rule proposal that would completely change the law in New Jersey. This new rule, if adopted, would curtail Tesla’s sales operations and jeopardize our existing retail licenses in the state ... We strongly believe it is vital to introduce our own vehicles to the market because electric cars are still a relatively new technology. This model is not just a matter of selling more cars and providing optimum consumer choice for Americans, but it is also about educating consumers about the benefits of going electric, which is central to our mission to accelerate the shift to sustainable transportation, a new paradigm in automotive technology.

In fairness, we should note that Arizona and Texas have also decided to side with the established retailers of automobiles in restricting competition. And any economist might note that if a citizen of Ft. Lee, New Jersey wanted to buy a Tesla, he could simply cross the George Washington Bridge and buy one in New York City. Of course, I’m assuming that the Port Authority does not decide to limit access of the bridge again.

Some games ARE zero-sum games

Mark Thoma featured an NYT commentary by Harvard economist, Sendhil Mullainathan, which Mark described as not his favorite article of the day. In the commentary, Mullainathan mused, "we shouldn't let these arguments serve as handmaidens to our emotional outrage — or to a misguided belief that the economy is a zero-sum game."

"The economy" may or may not be a zero-sum game. It really depends on what scale it's being evaluated. Cosmically speaking, the first law of thermodynamics rules out perpetual motion machines. But even if we assume that at a more mundane scale the economy is a non zero-sum game that doesn't mean that none of its component parts may be zero-sum games. That would be a fallacy of division.

"...it is fallacious to conclude (distributively) that each or every member of a class has a property from the premise that the class (collectively) has that property. Thus, the whole class collectively may be [non zero-sum], but a part of that class may not necessarily have that property -- i.e., may not be [non zero- sum]."

Did Khrushchev Cause The New Crimean War To Please A Mistress?

That is what one well-informed source tells me, so I have investigated the matter.  The woman involved was one of the most important and powerful of the Soviet era, Yekaterina Furtseva, the first woman to join the ruling Soviet Politburo in 1956, who was also a powerful Minister of Culture who famously banned certain movies and ruined certain actors.  On the Politburo she was at least at first a strong supporter of Nikita Khrushchev, providing crucial support for him in some of the battles that went on in the Politburo during the late 1950s, most importantly against an effort in 1957 by Stalinists led by Molotov who wanted to overthrow him.  However, in 1960, she turned against him and joined a failed effort to have him removed.

Prior to her elevation to the Politburo, she served as the leader of the Moscow Communist Party, with Khrushchev responsible for putting her into that position after Stalin died in 1953.  It was in 1954 that Khrushchev gave Crimea to Ukraine from Russia as a "gift," with the reasons for doing so still a matter of much debate, although ostensibly at the time it was in celebration of the 300th anniversary of the original union between Russia and Ukraine.  It has also long been argued that Khrushchev had long dreamed of doing this as a way to please the Ukraine and also  to keep the Tatars from returning by offering their land to Ukrainian peasants, and indeed the ethnic Ukrainian population of Crimea did increase after this gift, although they are still only in third place in the autonomous republic behind ethnic Russians and Tatars.

I note that the ethnic composition and history of this in Crimea is far more complicated than most recognize, with Stalin in 1944 removing not only the Tatars who gave it its name, but also Armenians, Bulgarians, and a group that had long predated the Tatars, Greeks, whose presence dated back 2500 years and who called the place "Taurica," or initially "Tauris," after the even earlier Tauri inhabitants, an apparently Indo-European group reputedly descended from the Cimmerians.  While Tatars returned starting in the 1980s, the Greeks have only recently begun to return there.

One can make the argument that Khrushchev was motivated in this also because of his personal connections to Ukraine, and undoubtedly this played a role.  He was born in a Russian village, but one near the Ukrainian border, and while most sources identify his parents as Russian, some say that he had some Ukrainian ancestry as well.  In any case, he was sent by Stalin to  run the Ukrainian Communist Party in the late 1930s, and oversaw purges and much else there.  It is  fully understandable  that he may well have become sympathetic to the republic during this period, thus leading to his actions on Crimea in 1954 shortly after he became Premier and before he had fully consolidated his power, still struggling with Malenkov for control, with the latter initially identified as Stalin's successor upon his death.

However, it may well be that Furtseva contributed to this decision.  While she was an ethnic Russian born north of Tver who initially joined the Communist Party while working in a Moscow textile mill, she would be sent to Crimea in the early 1940s where she was in charge  of an oblast level Communist Party unit there, equivalent to a county in the US.  It is likely she first got to know  Khrushchev at that time.  In any case, he became her patron after the death of Stalin, and she was in Moscow running its party at his behest at the time of the "gift."  However, as a Stalin appointee in Crimea in the early 1940s, she may well have supported the deportations of the Tatars, Greeks, et al, and agreed with or even been the source of the idea by Khrushchev to populate the place with more reliable Ukrainian peasants to keep these banished groups who were scattered across Central Asia from returning.

Now, to get to the juicy part. While it is not known for sure to be true, the rumors that the two of them were having an affair at that time were widespread, being reported by the BBC among other sources.  While this source is tainted in my view for overdoing conspiracy theories, _The Man Who Knew Too Much_ by Dick Russell provides accounts from other sources reporting this rumor on p. 118, including supposed CIA sources and others beyond the BBC report, the latter a matter of public record.  Russell reports on other matters that may or may not be true.  One that appears to be true is that she was apparently the main defender in the Politburo of letting Lee Harvey Oswald stay in the Soviet  Union when he first arrived there, with this being corroborated by other sources as well.  "Oswald's defender" she was called.  However, Russell pursues even murkier suggestions that I have not seen reported elsewhere that include claims that she was actually a CIA agent herself and that Khrushchev knew this and used her as a backdoor link for certain negotiations, particularly during the 1962 missile crisis.  What undermines the credibility of this last claim is that he had apparently turned against her in 1960, but perhaps she had been rehabilitated, and she was still on the Politburo.

However, in 1954, whether or not they were actually having an affair, Khrushchev was clearly very close to this powerful woman whom he would raise into the Politburo and had already raised to the ruling position in the city of Moscow, who had previously served as a Communist Party oblast chief in Crimea.  It is not out of the question that she may have crucially and substantially encouraged and supported this decision of his.

Barkley Rosser

Later Correction:  It appears that Furtseva was sent to Crimea in 1949 after he met her for the first time.  Thus, her experience there would have been more immediately on her mind in 1953-54 when she was closest to Khrushchev and he was making this decision.  She would have been aware of the issue that after the death of Stalin, the deported Tatars and others would want to return to Crimea, and so would certainly have supported a scheme to encourage immigration by "loyal" Ukrainians."  In the early 1940s she was married to a military man who left her in 1942 after she bore him a daughter.  She was later married to a Soviet diplomat, but later in her life he was reportedly cheating on her and she took to the bottle, dying in 1974 at the age of 63.

Fiscal Stimulus Deniers: John Versus John

John Taylor argues:

The very word “stimulus” has become a dirty word because so many Americans view it as a failure ... At best, there is divided opinion among economists about the stimulus. Indeed, there has always been great deal of disagreement among economists on the efficacy of these temporary “Keynesian” stimulus packages. And during the 1980s and 1990s there was a huge amount of skepticism of their usefulness. How do the new pro-stimulus arguments deal with the fact that there is clear disagreement? Some ignore it and simply assert that there is agreement.

John Taylor’s suggestion that he and John Cochrane agree that the 2009 fiscal stimulus package was doomed to fail misses the point that the two Johns presented incredibly different reasons why they argued that the stimulus was doomed to fail. Taylor’s argument is classic Ando-Modigliani life cycle thinking – give people a permanent tax cut and they consume more of it than they would if it were a one-time rebate. Cochrane was pushing the Ricardian Equivalence line that since the government budget must be balanced in the long-run, tax cuts not financed by eventual spending cuts would have to be later reversed by tax increases. For households not borrowing constrained, such temporary cuts are effectively loans they don’t need and as such would not be consumed at all. Advocates of Ricardian Equivalence such as Robert Barro would argue the same effect would exist if policymakers tried to claim their tax cut was permanent. Let’s put an end to this charade by noting two things. Households facing borrowing constraints do consume tax cuts and transitional increases in government spending – such as the public infrastructure proposals from many economists (including Martin Feldstain) – do increase aggregate demand. OK, John Cochrane seems not to understand this point. Whether John Taylor understands it or not – he is staying silent on this important distinction. But to suggest that John Taylor and John Cochrane have the same views on this topic is disingenuous in the extreme.

A Transparency Paradox At The Fed

In musing on the recently released 2008 transcripts from Federal Reserve meetings, Brad De Long ends up suggesting that maybe having a collegial Chair like Ben Bernanke may not be such a good idea.  He notes that while Bernanke was a deep student of what happened in the Great Depression to  the banking and finance systems, he seemed unable to use this knowledge in dealing with that bizarre and silly arguments being made by various people in the FOMC meetings at the time that inflation was a much more serious threat than financial breakdown and deep recession.  Brad ends by invoking the more secretive past when FOMC participants (which includes all the Fed bank presidents, not just those who formally vote) said what they had to say without there being any later reporting, or only minimally such, and the Chair would then go into privacy to decide what to do and did it, with the rest keeping their mouths shut, including publicly (Brad did not add that last, but it is implicit).  He suggests that if this model were used, BB would have been able to use his deep knowledge of the GD to overrule the rantings of the anti-inflation hysterics and done the wise thing.

Aside from whether or not the wise thing was done or not (certainly looks unwise in retrospect), I am not sure that going more secret would help here.  Indeed, it is only because we now have access to these transcripts that we understand fully how silly these folks were.  Some of them are still in place and shooting off their mouths quite prolifically, with Richard Fisher of the Dallas Fed coming particularly to mind, although Plosser has been pretty vocal recently as well.  If they are not duly embarrassed by this revelation of their past wrongheadedness, they certainly should be.  The paradox remains that eventual revelation of stupidity may be necessary to keep people in line.  It is not clear that returning to complete secrecy would overcome stupidity.  It might just protect it and encourage it.

Barkley Rosser

Say's Paradoxe and the Paradox of Jean-Baptiste Say

Ces moyens, en quoi consistent-ils ? En d'autres valeurs, d'autres produits, fruits de leur industrie, de leurs capitaux, de leurs terres: d'où il résulte, quoique au premier aperçu cela semble un paradoxe, que c'est la production qui ouvre des débouchés aux produits.

One cannot escape the impression that the promulgators of what has come to be known as "Say's Law" may not have actually read Say's Treatise. If the translation is any reflection on the original French, Say wrote beautifully. He was also in possession of an intellect generous enough to have not been bothered by the hobgoblin of consistency. At one point in the Introduction, he writes, "In any investigation, to treat dissimilar cases as if they were analogous, is but a dangerous kind of empiricism, leading to conclusions never foreseen." Later on, he protests, as if there was "a perfect analogy between the finances of a nation and those of an individual":

...a statesman who should venture to affirm, that there is a perfect analogy between the finances of a nation and those of an individual, and that the same principles of economy should regulate the management of the affairs of both, would have to encounter the clamours of various classes of society, and to refute ten or a dozen different systems.

In objecting to Ricardo's reasoning "upon abstract principles to which he gives too great a generalization," Say observes:

The science of political economy, to be of practical utility, should not teach, what must necessarily take place, if even deduced by legitimate reasoning, and from undoubted premises; it must show, in what manner that which in reality does take place, is the consequence of other facts equally certain. It must discover the chain which binds them together, and always, from observation, establish the existence of the two links at their point of connexion.

It is fitting, then, that Say introduces the idea that production opens up the opportunity to sell products as un paradoxe rather than une loi générale;

A man who applies his labour to the investing of objects with value by the creation of utility of some sort, cannot expect such a value to be appreciated and paid for, unless where other men have the means of purchasing it. Now, of what do these means consist? Of other values of other products, likewise the fruits of industry, capital, and land. Which leads us to a conclusion that may at first sight appear paradoxical, namely, that it is production which opens a demand for products.

In Chapter Seven, Say rehearses another application of this paradox, pertaining to the effects on employment of the introduction of labor-saving machinery:

The multiplication of a product commonly reduces its price, that reduction extends its consumption; and so its production, though become more rapid, nevertheless gives employment to more hands than before.

As applied to labor, the paradox can be restated as "a cheap market will always be full of customers," as Dorning Rasbotham summed it up 23 years before publication of Say's Treatise. Sixty-two years later, W. S. Jevons was to refer to this argument as "a principle recognized 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.

Jevons. of course, went on to apply Say's (or Rasbotham's) paradoxical principle to fuel: the "Jevons Paradox" (Polimeni, et al. discussed the connection between "Say's Paradox" and Jevons in The Jevons Paradox and the Myth of Resource Efficiency). As I wrote a little over three years ago, "the Jevons Paradox is a special case of Jean-Baptiste Say's Law of Markets..." I should have wrote, Say's alleged law.

Imagine a Möbius strip made from a piece of paper that had "law" written on one side and "fallacy" on the other (or "myth" and "reality"). When joined together, the two sides become one continuous side with a single edge: this is the paradox. Now imagine a second Möbius strip made from a piece of paper with "economy of fuel" written on one side and "economy of labor" on the other.

Say's Bye-Law

Il est bon de remarquer qu’un produit terminé offre, dès cet instant, un débouché à d’autres produits pour tout le montant de sa valeur. En effet, lorsque le dernier producteur a terminé un produit, son plus grand désir est de le vendre, pour que la valeur de ce produit ne chôme pas entre ses mains. Mais il n’est pas moins empressé de se défaire de l’argent que lui procure sa vente, pour que la valeur de l’argent ne chôme pas non plus. Or, on ne peut se défaire de son argent qu’en demandant à acheter un produit quelconque. On voit donc que le fait seul de la formation d’un produit ouvre, dès l’instant même, un débouché à d’autres produits.

Google translates un débouché as "an outlet." In the above paragraph, Jean-Baptiste Say said nothing about any "law." He did, however, use terms such as désir and empressé, which would seem to refer to subjective drives rather than to objective causes.

In his introductory textbook, Principles of Economics (1927), Raymond Bye wrote, "...every product is a demand for, and a means of purchasing, another product.... The total demand for goods is the total goods produced" (emphasis in original).

This is not to unduly credit Bye with originality. The injunction against the possibility of overproduction was already referred to as "Say's Law" by Karl Rodbertus in 1898 (Overproduction and Crises) and by John Badlam Howe in 1878 (The Political Economy of Great Britain, the United States, and France, in the Use of Money). Howe asserted that most writers  in the United States and Britain (presumably on economics) repeated "Say's abstract law." Both Rodbertus and Howe, however, were intent on refuting the alleged law they attributed to Say.

In fact, unoriginality is the mode here. Say didn't invoke a law. Those who subsequently repeated Say's Law don't appear to have given it that name. The appellation comes from critics. Perhaps the allusion to supposed law-like inevitability is meant to be ironic.

Are there economic laws?

Jean-Baptiste Say Did Not Believe In Say's Law

There has been a lot of discussion recently on the econoblogosphere and the History of  Economics list about Say's Law, much of it quite heated.  I just want to add one relatively minor point: Jean-Baptiste Say did not believe in Say's Law.  To be more precise, while he made many statements that look like it, and I would say that he believed in it in the long run and maybe even the medium run, he was fully aware that it may not hold in the short run.  He provided numerous examples of exceptions to it from historical cases, situations where for one reason or another citizens would hoard cash and not spend it.  So, he was very aware that in the short run supply may not lead to an equal demand.  A general glut may be possible, at least for awhile.

BTW, while his law regularly is invoked by those who deny any efficacious role for fiscal policy in macroeconomic stabilization, during the post-Napoleonic War economic slowdown and high unemployment, he in fact sided with Malthus rather than Ricardo and supported public works spending to, yep, you guessed it, help to those who had become unemployed as a result in the reduced military spending with the end of the war.  Say was in fact quite practical about public policy and not just someone constantly reciting his own law to deny reasonable policy.  But one rarely hears of this.

Barkley Rosser

Fred Hiatt Doubles Down On Dissing Obama Over Social Security Indexation

Two days ago I dissed Washington Post's Editorial Page Editor, Fred Hiatt, for attacking President Obama for dropping the proposal to change the COLA index for social security to the chained -C-CPI-U measure, that would reduce future benefits by an estimated 0.3% per years.  I said he had "lost his cookies."  I shall not reiterate the arguments there, but now note that he has doubled down today in a signed column on the matter entitled "Is there Change Obama Can Believe In?"  This column does cover other issues, mostly Syria where Hiatt complains that Obama has not supported "free markets and democracy" there, while not remotely addressing how difficult and complicated that issue is.  He also lists a boilerplate set of issues that he says Obama is supporting, but dismissively notes that these are popular, with some of them even supported by Republicans.

However, he starts with his complaint about Obama dropping the chained index proposal, which clearly has him really upset (those darned cookies).  He quotes Obama from 2009 and also  from 2010 stating that (from 2009), "To preserve our long term fiscal health we must address the growing costs of Medicare and Social Security."  He does briefly admit that "Defenders would say that...he's done his bit for entitlement reform with cost-bending measures in Obamacare."  Hmmm, "bit"?  In fact, the change in the medical care cost curve (which also affects Medicaid) has completely transformed the future deficit outlook, drastically reducing those projections.  The few percents impact the chained index change would make would be utterly trivial by comparison, but this is not good enough for Hiatt.

Two further points.  One is that he is all upset that supposedly in 2011 for political reasons "Obama cold-shouldered the fiscal commission he appointed..."  That would be the Bowles-Simpson one that Hiatt as a deep-dyed Washington VSP just loved to bits.  However, as Dean Baker has repeatedly noted, that commission never issued a formal report.  Why?  Because some of its GOP members, led by Paul Ryan, refused to sign off on it because it (eeeek!) contained tax increases.  There never was a formal report, and what Hiatt is referring to was a statement put out by Bowles and Simpson, but that document never had any official backing from the commission.  Getting worked up about Obama's reaction to it is a joke, and, of course, until  recently, Obama was offering the essence of the deal, this chained index proposal if only Republicans would accept some tax increases.  But, they have said no, so why is Hiatt getting so indignant that Obama has pulled back on his offer?

The other is the idea that somehow Obama got elected to propose this.  In fact, during the primary campaign against Hillary, he shifted his position to one of strictly defending Social Security as it stood and stands.  Thus, for all Hiatt's whining, Obama has returned to his position during his initial run for president: to preserve and protect Social Security as it is.  Hiatt and his fellow VSPs need to drop their silly hysteria over the Social Security issue, the sooner the better.

Barkley Rosser

WaPo's Fred Hiatt Loses His Cookies Over Obama Abandoning Chained CPI For Social Security Indexation

Several commentators have already applauded President Obama for not including a proposal to use the C-CPI-U (aka "chained CPI") price index for COLA adjustments of US Social Security payments, including Bruce Webb, Paul Krugman, and Dean Baker.  Longtime Social Security defender Webb declares "we won," referring to those opposing cuts in future SS benefits.  Krugman calls it "the end of BowlesSimpsonism." Dean focuses on a Washington Post (aka "WaPo") news story on the matter, finding it just falling all over its own face with silly claims and analysis.  I am in complete accord with all of them on this matter, but want to note further the discombobulation and outright visceral anger in an unsigned editorial column today in WaPo that is certainly by Fred Hiatt, WaPo editorial page editor, and one of the most relentless and influential of Washington VSPs pushing for cutting future Social Security benefits in any way possible.  It is because of him that the WaPo editorial page has housed several otherwise nominally liberal columnists who have pounded away over and over on this matter spouting his views, including Robert J. Samuelson and Ruth Marcus, none of these people exhibiting a shred of understanding how distorted and silly their position has been over time.

So, Hiatt's editorial is really seething.  The subtitle, referring to Obama, is "His surrender on entitlements will make a bad situation worse."  After noting his backing off from including the chained CPI proposal (which he still officially supports in principle), Hiatt intones that "This is a huge disappointment,"  this followed shortly by the claim that this will cost "$162.5 billion over the next decade."  Somehow he fails to note that this amounts to about $16 billion per year, on the order of 3-4% of the US current budget deficit, in short, a drop in the bucket.  But who cares, this is a matter of Hiatt not getting his way here, goshdarnit! 

He continues that "Mr. Obama's rationale for taking the idea out of his budget was openly political," which is true, except that the actual economic case that the C-CPI-U is appropriate for being applied to old people has never been made and in fact does not exist, there being an experimental CPI for the elderly, a chained version of which would clearly be superior, but would raise payments rather than cut them, so must be rejected by the "screw the old people" crowd that Hiatt has been leading for so long.  After noting that leftier Dems are pushing for benefit increases and also accepting that Republicans simply are not going to accept the tax increases on the wealthy that Obama had asked for in exchange for his past support of the C-CPI-U, Hiatt complains that facing possible loss of Dem control of the Senate in November, "Mr. Obama has apparently concluded that the expedient course is to bash Republicans rather than to resist bad policy ideas emanating from his own camp," failing to note that Obama is not supporting this benefit increase proposal by lefty Dems and completely ignoring that while Republicans claim never to support tax increases, they did so over a year ago in voting to undo the fica tax cuts that had been part of the stimulus package.

Prior to 2008 there was a case to made for BowlesSimpsonism in broad terms, some sorts of spending cuts to be traded off for some sorts of tax increases in order to reduce the large budget deficits that had emerged during the W. Bush presidency following the surpluses he inherited, thanks to his tax cuts for the wealthy plus wars in Afghanistan and Iraq, etc.  Nothing ever came out of those commissions officially because at least some Republicans simply refused to sign onto any tax increases no matter what, even though later they were eager to make the regressive hike in fica taxes without batting an eyelash over their hypocrisy or being taken to task for this by practically anybody in the media, and certainly not Mr. Hiatt or his WaPo Social Security bashers.

However, even prior to the crash when all this whomping up and down about deficit reduction became ridiculous, these commentators, including Bowles and Simpson themselves, continued to tell horror stories about future growth in entitlements, which were ovewhelmingly due to projected increases in Medicare and Medicaid costs, but then say nothing about doing anything about them and focus in public commentary on Social Security, in effect making a political judgment that Republicans would be more willing to raise the regressive fica tax in exchange for cutting future benefits, despite this not being remotely a serious problem in and of itself, rather than doing anything about reining in future medical care cost increases.

The situation has totally changed on several fronts, but Hiatt and his gang of outraged remain stuck in that now ancient and irrelevant time.  Amazingly enough, despite its flaws, Obama's ACA appears to have bent the curve of medical care cost increases, or at least that curve has bent, even if it is not entirely due to Obamacare, that horror of horrors.  No mention of this in Hiatt's editorial, but this has completely undone the hysterical future stories about deficits, with this being the real reason BowlesSimpsonism is now dead as a doornail, on top of the reality that austerity in Europe has led to renewed recession so that Hiatt's pushes for more austerity are simply silly, despite all his self-righteous huffing and puffing.  

Let me close by simply supporting that the most appropriate index be used for Social Security COLA adjustments, an argument that has simply disappeared in this flurry of political flying back and forth.  Without doubt this would be the chained version of the experimental CPI for the elderly.  Yes, it is true that chained indexes are more accurate than the unchained ones, but the one that should be used is the one that really measures cost-of-living changes for Social Security recipients.  That would be this experimental one for the elderly.  But consideration of it has never even been on the table.

As it is, maybe Hiatt and his pals will stop and look more carefully at their general push for cutting future benefits for Social Security recipients, now that the C-CPI-U verson of the chained index seems to have been removed from the table for now.  If they are really worried about improving future SS budgets, let them call for raising the income cap on fica taxes, which would help alleviate the general income inequality situation we face, although at the moment we do not need any further moves to austerity.  As it is, I have not seen any of them mentioning that idea, although Republicans have been keen on cutting benefits for better-off seniors, understanding that this would undermine political support for the program in the future.  Even if we cannot seriously hope for greater sanity or even reasonableness on the part of these VSPs, at least for now it looks like their threat to damage future Social Security benefits has receded, and for that at least we can be thankful.

Barkley Rosser

Krugman on HearSay Economics

"The fact is that the fallacy Keynes called Say’s Law was and is a powerful force in economic discourse, seriously hampering our ability to respond rationally to economic troubles."

Sandwichman said it first: Yasraeh's Law and Say against Say: lower wages won't clear labor markets (It's the law!)

On Cap & Trade and the Price of Emissions

Mark Thoma featured a very interesting discussion of the lack of political will to impose either Pigou taxes or cap & trade by Jeff Frankel, which led to some commenter who must have it in for Paul Krugman who a few years ago sensibly wrote about James Hansen:

he’s now engaged in a misguided crusade against cap and trade, which is — let’s face it — the only form of action against greenhouse gas emissions we have any chance of taking before catastrophe becomes inevitable. What the basic economic analysis says is that an emissions tax of the form Hansen wants and a system of tradable emission permits, aka cap and trade, are essentially equivalent in their effects ... A tax puts a price on emissions, leading to less pollution. Cap and trade puts a quantitative limit on emissions, but from the point of view of any individual, emitting requires that you buy more permits (or forgo the sale of permits, if you have an excess), so the incentives are the same as if you faced a tax. Contrary to what Hansen seems to believe, the incentives for individual action to reduce emissions are the same under the two systems ... The only difference is the nature of uncertainty over the aggregate outcome. If you use a tax, you know what the price of emissions will be, but you don’t know the quantity of emissions; if you use a cap, you know the quantity but not the price. Yes, this means that if some people do more than expected to reduce emissions, they’ll just free up permits for others — which worries Hansen. But it also means that if some people do less to reduce emissions than expected, someone else will have to make up the shortfall. It’s symmetric; there’s no reason to emphasize only one side of the story. And as far as I can see, the question about uncertainty is secondary; the fact is that cap and trade works. Hansen admits that the sulfur dioxide cap has reduced pollution, but argues that it didn’t do enough; well, it did as much as it was designed to do. If Hansen thinks it should have done more, he should be campaigning for a lower cap, not trashing the whole program.

There is one difference between the two regimes, which we need to mention in light of some nonsense from Stanley Reed and Mark Scott:

Still, Europe’s carbon market, a pioneering effort to use markets to regulate greenhouse gases, is having a hard time staying upright. This year has been stomach-churning for the people who make their living in the arcane world of trading emissions permits. The most recent volatility comes on top of years of uncertainty during which prices have fluctuated from $40 to nearly zero for the right to emit one ton of carbon dioxide. More important, though, than lost jobs and diminished payouts for traders and bankers, the penny ante price of carbon credits means the market is not doing its job: pushing polluters to reduce carbon emissions, which most climate scientists believe contribute to global warming.

In terms of Paul’s demand curve for emissions, Reed and Scott were talking about a drop in this demand curve – likely generated by the Great Recession and reduced economic activity that would lead to pollution. Paul captured this with his:

If you use a tax, you know what the price of emissions will be, but you don’t know the quantity of emissions; if you use a cap, you know the quantity but not the price.

Now had policymakers decided to adopt the suggestion to lower the cap, which Jeff notes isn’t exactly the current thread of Tea Party politics and global warming deniers, the price of emissions would have gone back up. Or we could have had Hansen’s fee and dividend program – which is essentially Greg Mankiw’s Pigou tax – with the same effect. But consider the alternative shock to Paul’s demand for emissions curve, which did occur at least on a global basis when China and India developed so rapidly at the turn of the century. The demand for emissions went up. Under the tax proposal championed by Hansen, we would see a rise in polluting activities as the price remained constant. Had we imposed globally a cap & trade regime – the price of emissions would have risen instead.

Senator Jeff Flake – NPR Free Rider

Paige Lavender provides us with this tidbit:

Despite voting against providing federal funding for National Public Radio while serving in the House of Representatives, Sen. Jeff Flake (R-Ariz.) admitted he's "an NPR listener" during an appearance on “Wait, Wait … Don’t Tell Me” on Feb. 15.

Hey – I also free ride National Public Radio. But then I understand that such free riding is an example of the positive externalities that result from the production of public goods. The private market tends to undersupply such public goods, which is why we want the government to fund them. And yet Senator Flake chooses to vote against such funding even as he enjoys NPR?