Those of us of a certain vintage may recall the old Art Linklater radio/television program, “House Party,” which had a recurring, humorous feature known as Kids Say the Darndest Things in which Art posed various questions to young children. (The series, which ran from 1945 to 1969, was also resurrected and reprised by Bill Cosby in the late 1990s.) The answers were hilarious as the kids often didn’t understand the question asked, misinterpreted the question or just flat out engaged their wonderful imaginations. The incongruity between the questions and answers gave rise to many smiles and chuckles. The authors recently were reminded of this show while reading the comments made by Bill Morgan, the Senior Economic Adviser to the APMA Program, at a Bloomberg BNA function in July 2013. In particular, we read with interest Morgan’s lament over the Tax Court’s opinion in VERITAS Software Corp. v. Commissioner.Feel free to read their little opinion letter and judge for yourself the merits of the particular case. But I guess economists who actually try to tell the truth are subject to scorn from the legal profession when that truth challenges their client’s tax avoidance. But as Barry Ritholtz notes there appears to be no penalty for economists championing the rich via dubious if not deceptive claims.
Thursday, June 12, 2014
Migrating Intangible Assets for Pennies on the Dollar – Lawyers Say the Darndest Things
I likely would not get much of an argument from most sensible people if I suggested that U.S. based multinationals have shifted a lot of profits to offshore tax havens by selling their intangible assets for pennies on the dollar. Of course, some lawyers make their livings defending these transfer pricing schemes and some economist (such as Bill Morgan) might dare to object. It seems a couple of these lawyers believe it is their professional duty to ridicule any economist who might so object:
Wednesday, June 11, 2014
The Peculiar Political Economy of David Alan Brat
As probably just about everybody reading this by now knows, the Republican Majority Leader of the US House of Representatives, Eric Cantor, was defeated in a primary by David Alan Brat, Professor of Economics at Randolph Macon College in Ashland, Virginia. Brat has served as Department Chair since 2005, directs a BB&T funded Center on Morality Foundations of Capitalism, and who has served on a Virginia state economic development council. Brat ran on a platform that emphasized his strongly anti-immigrant position as well as his strict position on balanced budgets, denouncing Cantor for supporting an increase in the federal debt ceiling. Some reports had him being an admirer of Austrian economics, but it turns out that the political economy of David Alan Brat is far more complicated and not at all clearly Austrian.
What appears to be the deepest key and theme of his views involves religion. He received a Masters degree in theology from the Princeton Theological Seminary in 1990, where he apparently entertained critical views of Milton Friedman's approach to theoretical econimics, which he considered to be sorely lacking in ethics. Following up on this he pursued a PhD in economics at American University, a department widely considered to be of a somewhat leftish and heterodox orientation. His dissertation was entitled "Human Capital, Religion, and Economic Growth," with Walter Park and Jim Weaver as co-chairs, and John Willouhby and John Wisman as committee members. It was completed in 1996, and he published two papers from it, coauthored with Walter Park.
The first in 1995 was "A Global Kuznets Curve," in Kyklos, which has been cited 44 times. Arguing for directly global measures of inequality along the lines pursued by Branko Milanovic at the World Bank, where Brat spent some time then, it could have been written by Thomas Piketty. In 1996 he published with Park, "Cross-country R&D and Growth: Variations on Theme of Mankiw-Romer-Weil" in the Eastern Economic Journal, cited 8 times. A theme of his work was how R&D affects global income distribution. The third part of his dissertation was about religion in Britain, France, and Germany a century ago and economic growth, with arguments resembling those of Max Weber. Papers drawn from it would be published later in the Virginia Economic Journal.
I can attest that members of his department say that he was a quiet and good student in the early 90s who did not exhibit any particular political views. He has recently declared that he stood against the "power elites" at AU back then, but, needless to say, these largely leftish heterodox profs find this characterization of them highly amusing.
He obtained his job at Randolph Macon in 1996, where he has been ever since, despite some visits to other places. During the late 90s he moved from his interest in human capital to studying labor markets and education, initially focusing on local governments and education and Tiebout effects. He has continued to study education issues, but after 2000 he increasingly moved back towards his concerns with religion and economics. Increasingly this involved a more strongly pro-laissez faire attitude, with the work of Deirdre McCloskey on the morality of capitalism an influence, particularly in an unpublished book he has written. Nearly all his papers since then have appeared in two outlets: the Virginia Economic Journal, which is the journal of the small Virginia Economic Association, and whose long time editor, Barry Pfitzner, has been a member of his department for 31 years. The other outlet is something that does not appear to be a refereed journal and which I have never heard of, Proceedings of the Southeast Decision Sciences, and one paper in another journal I know nothing of, Intepretation.
Here are recent publications of his:
"Adam Smith's God and the End of Economics," Virginia Economic Journal, 2005
"Human Capital in Eastern Europe: Revised Determinants of Student Test Scores," Proceedings of the Southeast Decision Sciences, 2010.
"God and Advanced Mammon - Can Theological Types Handle Usury and Capitalism," Intepretation, 2011.
He also has a recent unpublished paper entitled, "An Analysis of the Moral Foundations in Ayn Rand." I note that BB&T former CEO and current Director of the Cato Institute, where Brat has spoken, is very much a fan of Ayn Rand. Needless to say, there are some ironies here, given that Rand was both an atheist and an immigrant.
I would conclude by noting that he has no clear links with Austrian economists or economics, with many more Hayekian oriented types upset by his anti-immigrant views, even though these would be consistent with what one finds held by some at the Ludwig von Mises Institute in Auburn, founded by the late Murray Rothbard. However, as near as I can tell, Brat has never had anything to do with the LvMI.
So, while he has to overcome a sociology prof from RMC, Jack Trammell, the Democratic nominee, it is likely that Brat will be the next Congressman from the Seventh District of Virginia, one of the most Republican districts in the state. What he will do or where his views will evolve remains to be seen. But one should at a minimum expect to hear more from him about religion and economics.
BTW, as near as I can tell he has never written anything professional on the matters that he has ridden as hobby horses to his political win: immigration and balanced budgets.
Barkley Rosser
What appears to be the deepest key and theme of his views involves religion. He received a Masters degree in theology from the Princeton Theological Seminary in 1990, where he apparently entertained critical views of Milton Friedman's approach to theoretical econimics, which he considered to be sorely lacking in ethics. Following up on this he pursued a PhD in economics at American University, a department widely considered to be of a somewhat leftish and heterodox orientation. His dissertation was entitled "Human Capital, Religion, and Economic Growth," with Walter Park and Jim Weaver as co-chairs, and John Willouhby and John Wisman as committee members. It was completed in 1996, and he published two papers from it, coauthored with Walter Park.
The first in 1995 was "A Global Kuznets Curve," in Kyklos, which has been cited 44 times. Arguing for directly global measures of inequality along the lines pursued by Branko Milanovic at the World Bank, where Brat spent some time then, it could have been written by Thomas Piketty. In 1996 he published with Park, "Cross-country R&D and Growth: Variations on Theme of Mankiw-Romer-Weil" in the Eastern Economic Journal, cited 8 times. A theme of his work was how R&D affects global income distribution. The third part of his dissertation was about religion in Britain, France, and Germany a century ago and economic growth, with arguments resembling those of Max Weber. Papers drawn from it would be published later in the Virginia Economic Journal.
I can attest that members of his department say that he was a quiet and good student in the early 90s who did not exhibit any particular political views. He has recently declared that he stood against the "power elites" at AU back then, but, needless to say, these largely leftish heterodox profs find this characterization of them highly amusing.
He obtained his job at Randolph Macon in 1996, where he has been ever since, despite some visits to other places. During the late 90s he moved from his interest in human capital to studying labor markets and education, initially focusing on local governments and education and Tiebout effects. He has continued to study education issues, but after 2000 he increasingly moved back towards his concerns with religion and economics. Increasingly this involved a more strongly pro-laissez faire attitude, with the work of Deirdre McCloskey on the morality of capitalism an influence, particularly in an unpublished book he has written. Nearly all his papers since then have appeared in two outlets: the Virginia Economic Journal, which is the journal of the small Virginia Economic Association, and whose long time editor, Barry Pfitzner, has been a member of his department for 31 years. The other outlet is something that does not appear to be a refereed journal and which I have never heard of, Proceedings of the Southeast Decision Sciences, and one paper in another journal I know nothing of, Intepretation.
Here are recent publications of his:
"Adam Smith's God and the End of Economics," Virginia Economic Journal, 2005
"Human Capital in Eastern Europe: Revised Determinants of Student Test Scores," Proceedings of the Southeast Decision Sciences, 2010.
"God and Advanced Mammon - Can Theological Types Handle Usury and Capitalism," Intepretation, 2011.
He also has a recent unpublished paper entitled, "An Analysis of the Moral Foundations in Ayn Rand." I note that BB&T former CEO and current Director of the Cato Institute, where Brat has spoken, is very much a fan of Ayn Rand. Needless to say, there are some ironies here, given that Rand was both an atheist and an immigrant.
I would conclude by noting that he has no clear links with Austrian economists or economics, with many more Hayekian oriented types upset by his anti-immigrant views, even though these would be consistent with what one finds held by some at the Ludwig von Mises Institute in Auburn, founded by the late Murray Rothbard. However, as near as I can tell, Brat has never had anything to do with the LvMI.
So, while he has to overcome a sociology prof from RMC, Jack Trammell, the Democratic nominee, it is likely that Brat will be the next Congressman from the Seventh District of Virginia, one of the most Republican districts in the state. What he will do or where his views will evolve remains to be seen. But one should at a minimum expect to hear more from him about religion and economics.
BTW, as near as I can tell he has never written anything professional on the matters that he has ridden as hobby horses to his political win: immigration and balanced budgets.
Barkley Rosser
Paul Davidson To Step Down As JPKE Editor
In 1978 Paul Davidson and the late Sidney Weintraub co-founded the Journal of Post Keynesian Economics. It has been announced that Davidson is about to step down from his editorial position. Some years ago, his former student, Jan Kregel became a coeditor with Paul. Randall Wray, former student of Hyman Minsky, will replace Davidson as coeditor.
Paul Davidson has long been known as a man of very strong and distinctive views, the acknowledged leader of the so-called "fundamentalist Keynes-Post Keynesian" school of thought, known for emphasizing the role of fundamental uncertainty and Keynesian monetary theory in economic analysis. While he has forcefully advocated these views over the decades, it must be noted that he has always treated other views fairly in terms of publishing in the JPKE.
Whatever one thinks of either Post Keynesian (or post-Keynesian, or whichever spelling) economics, or the journal that Paul Davidson has edited for so long, he will be missed.
Barkley Rosser
Addendum: I have just learned that Paul Davidson has not agreed to this. There is an effort by Sharpe to push him out against his will. There was an effort to do this three years ago, which failed. This is now up in the air, and I apologize to one and all for posting something I should have waited longer to see if it was for real or not.
Paul Davidson has long been known as a man of very strong and distinctive views, the acknowledged leader of the so-called "fundamentalist Keynes-Post Keynesian" school of thought, known for emphasizing the role of fundamental uncertainty and Keynesian monetary theory in economic analysis. While he has forcefully advocated these views over the decades, it must be noted that he has always treated other views fairly in terms of publishing in the JPKE.
Whatever one thinks of either Post Keynesian (or post-Keynesian, or whichever spelling) economics, or the journal that Paul Davidson has edited for so long, he will be missed.
Barkley Rosser
Addendum: I have just learned that Paul Davidson has not agreed to this. There is an effort by Sharpe to push him out against his will. There was an effort to do this three years ago, which failed. This is now up in the air, and I apologize to one and all for posting something I should have waited longer to see if it was for real or not.
"Luddite" Larry and the Downward Ramp of Opportunity
"...unless one regards envy as a virtue," writes Lawrence H. Summers in a column at the Financial Times, "the primary reason for concern about inequality is that lower- and middle-income workers have too little – not that the rich have too much."
Back in the days of Pope Gregory and Dante Alighieri, there were seven deadly sins, not one. Avarice, gluttony and pride were among them. Might we not have as much condescending solicitude for the souls of the rich as for those of the poor and middle class?
Summers argues that the policy impacts which matter most have more to do with health and opportunity for children than with income or wealth inequality. The subheading of his column is "The differences between the rich and everyone else are about health and opportunity." Along the way, though, he quietly substitutes educational achievement for opportunity and concludes:
Than depends. Is educational achievement really the same as opportunity for children? Not according to research highlighted by Thomas Edsall in an Op-Ed, The Downward Ramp, at the NYT:
In his reflections on his undergraduate education, Summers didn't connect the dots between the Luddite mythology and what Keynes supposedly "got wrong" in his "Economic Possibilities for our Grandchildren." Instead he offered the following anachronism:
*Marty FeldSTEIN -- not to be confused with Marty FeldMAN as Igor ("it's pronounced eye-gore") in "Young FrankenSTEIN" -- was Larry Summers's mentor.
Back in the days of Pope Gregory and Dante Alighieri, there were seven deadly sins, not one. Avarice, gluttony and pride were among them. Might we not have as much condescending solicitude for the souls of the rich as for those of the poor and middle class?
Summers argues that the policy impacts which matter most have more to do with health and opportunity for children than with income or wealth inequality. The subheading of his column is "The differences between the rich and everyone else are about health and opportunity." Along the way, though, he quietly substitutes educational achievement for opportunity and concludes:
It would be a tragedy if this new focus on inequality and on great fortunes diverted attention from the most fundamental tasks of any democratic society – supporting the health and education of all its citizens.Who could be against health or education?
Than depends. Is educational achievement really the same as opportunity for children? Not according to research highlighted by Thomas Edsall in an Op-Ed, The Downward Ramp, at the NYT:
...evidence produced by Paul Beaudry and David A. Green of the University of British Columbia, and Ben Sand of York University, demonstrates that the collapse, between 1980 and 2000, of mid-level, mid-pay jobs — gutted by automation or foreign competition (and often both) — has now spread to the high-skill labor market.
The U-shaped pattern of job growth characteristic of recent decades – strong at the top and bottom, but weak throughout the middle — has now become “a bit more like a downward ramp,” according to David Autor, an economist at M.I.T. who documented the decline in mid-level jobs in the 1980s and 1990s.
...
"Many higher skilled workers have moved down the occupation ladder and accepted less challenging employment," Beaudry wrote in an emailed response to my inquiry about this development. "This movement down has been very detrimental to the low skilled, as higher skilled workers have taken many of 'their' jobs."Not to worry, though. Allister Heath cheerily reassures us in a column at The Telegraph, "Capitalism is a process of creative destruction... It's scary but it works."
The faster the mechanisation process, the more likely we are to see productivity – the amount of output each worker generates – starting to grow again and, with it, wages. A greater use of artificial intelligence throughout the economy will benefit, not hurt, the overall workforce. ...it will be vital to help individuals displaced by the new technologies to find work in new areas. Better education and training will become even more vital.
The lump of labour fallacy is the oldest myth in economics. There is no fixed stock of jobs; in a dynamic economy, millions of new ones are created every year to replace the equally large numbers that are lost. The luddites are as wrong today as they were two centuries ago.One reader asks, though:
Given that technology has replaced so many jobs the obvious question is why we are still working such long hours? We don't seem to have taken advantage of technology in the ways predicted by nineteenth century thinkers.As fate will have, Summers addressed both Luddites and long hours last July in his 2013 Martin Feldstein* Lecture, "Economic Possibilities for Our Children."
When I was an MIT undergraduate in the early 1970s, a young economics student was exposed to the debate about automation. There were two factions in those debates. There were the stupid Luddite people, who mostly were outside of economics departments, and there were the smart progressive people, who at that time were personified by Bob Solow. The stupid people thought that automation was going to make all the jobs go away and there wasn't going to be any work to do. And the smart people understood that when more was produced, there would be more income and therefore there would be more demand. It wasn't possible that all the jobs would go away, so automation was a blessing. I was taught that the smart people were right. Until a few years ago, I didn't think this was a very complicated subject; the Luddites were wrong and the believers in technology and technological progress were right. I'm not so completely certain now.One might quibble that it's more than a matter of "changing sides" in the debate about automation as framed by the economics departments. This was no debate but a set piece demolition by the "smart people" of straw man arguments that had little to do with the real issues. Incidentally, the smart people at MIT -- presumably Keynesian Synthesists like "Uncle Paul" Samuelson -- appear to have been teaching the vulgar version of Say's Law, "supply creates its own demand," that Keynes repudiated.
In his reflections on his undergraduate education, Summers didn't connect the dots between the Luddite mythology and what Keynes supposedly "got wrong" in his "Economic Possibilities for our Grandchildren." Instead he offered the following anachronism:
But Keynes also got some things wrong. He predicted that as incomes rose eightfold, the workweek would fall to 15 or 20 hours. The reason he got that wrong is something that I hadn’t previously reflected on.
When I took introductory economics, a big feature of the textbook was the backward bending labor supply curve, where it was explained that past a certain point, the income effect took over from the substitution effect and so the labor supply curve bent backwards. This does not get much attention in textbooks today. The reason is that people with higher wages now work more hours than people with lower wages. The time series tracks the cross section. Over time, as we have all gotten richer, the number of hours worked for many people has risen.
That backward-bending labor supply curve was indeed a big feature of the textbook when Summers took introductory economics. It wasn't in 1930, when the essay was first published, nor in 1928 when it was delivered as a talk to the Political Economy Club at Cambridge.
The confluence of mythology and anachronism in Larry Summers's education has more than pedantic relevance. As his casual reference to the platitude that Summers may not have even recognized as Say's Law suggests, his miseducation (or myth-education) on history of economic thought has theoretical consequences. And of course, Summers is not alone in his "delightful abundance of aberrations."
The creature that emerges from this anachronistic, mythological bend-over-backward Luddite lump-of-labor supply swamp is not "modern economics" any more than George Washington cutting down a cherry tree with a laser beam is "American history" It is that hoary old "magazine of untruth" masquerading as economics.
*Marty FeldSTEIN -- not to be confused with Marty FeldMAN as Igor ("it's pronounced eye-gore") in "Young FrankenSTEIN" -- was Larry Summers's mentor.
Tuesday, June 10, 2014
Thomas Hobbes, Call Your Office!
I just happened to notice a car with an Arkansas license plate, upon which we find Arkansas touted as "THE NATURAL STATE." Not quite STATE OF NATURE, granted, but close enough, as we say, for folk music. Readers, Is life in Arkansas nasty? brutish? short? And where is the state bold enough to take a stand with Burke, with Mill, and of course with Hobbes himself, and proclaim proudly on its plate:
YOUR STATE NAME HERE
"STATE OF ARTIFICE"
YOUR STATE NAME HERE
"STATE OF ARTIFICE"
Saturday, June 7, 2014
From Luhansk To Lugansk To Novorossiya
Today Petro Poroshenko was sworn in as the new president of Ukraine. He is promising to retake military control of the two breakaway regions in eastern Ukraine, now calling themselves the Donetsk Peoples' Republic and the Lugansk ("Luhansk" in Ukrainian as the western media still calls it, but not as it is called within it) Peoples' Republic. There will probably be a renewed effort by him to make the military effort, but there is good reason to expect that it will fail.
The fatal weakness of the Ukrainian military in the region is that it may have suffered a fatal blow in the last two days, the loss of the main border post between Russia and Luhansk/Lugansk, which will now allow an uninterrupted flow of men and material into the breakaway republics. It is now known that major leaders of those self-proclaimed rebel regimes are in fact Russian nationals, some claiming to be "volunteers" to prevent any linking with Putin, and he has withdrawn most of his troops from the border, so nobody can accuse him of directly invading. This is very much an imitation of what he did in Crimea, and with the border post now in control of his people, it will be like in Crimea where the Russian military could easily supply and support from its bases the unofficial Russian military who gained control.
So, the next question will be whether or not these two self-proclaimed republics will remain two or eventually unite into one, presumably dominated by more populous Donetsk, which would probably call itself "Novorossiya" or "New Russia," as various propagandists are calling for, in honor of what all of southern Ukraine extending as far west as Odessa was called in the late1700s when Catherine the Great gained control of that area from the Ottoman Turks. This is the likely outcome, hence, from Luhansk to Lugansk to Novorossiya.
If that is the case, expect them unlike Crimea not to be annexed by Russia, but to join Transdniestria, South Ossetia, Nagorno-Karabakh, and Abkhazia as self-ruling de facto independent states supported by Russia, while unrecognized by pretty much all, or nearly all, the world. I would note that this is not necessarily a bad outcome for them as these states have generally performed about as well economically as their neighbors, and it really is the case that the main export from the area is steel and coal to Russia.
Even though the current rebel leaders are self-appointed, supposedly there will be elections in September. We shall see. As it was, people were not allowed to vote in the Ukrainian presidential election in either of them.
Barkley Rosser
The fatal weakness of the Ukrainian military in the region is that it may have suffered a fatal blow in the last two days, the loss of the main border post between Russia and Luhansk/Lugansk, which will now allow an uninterrupted flow of men and material into the breakaway republics. It is now known that major leaders of those self-proclaimed rebel regimes are in fact Russian nationals, some claiming to be "volunteers" to prevent any linking with Putin, and he has withdrawn most of his troops from the border, so nobody can accuse him of directly invading. This is very much an imitation of what he did in Crimea, and with the border post now in control of his people, it will be like in Crimea where the Russian military could easily supply and support from its bases the unofficial Russian military who gained control.
So, the next question will be whether or not these two self-proclaimed republics will remain two or eventually unite into one, presumably dominated by more populous Donetsk, which would probably call itself "Novorossiya" or "New Russia," as various propagandists are calling for, in honor of what all of southern Ukraine extending as far west as Odessa was called in the late1700s when Catherine the Great gained control of that area from the Ottoman Turks. This is the likely outcome, hence, from Luhansk to Lugansk to Novorossiya.
If that is the case, expect them unlike Crimea not to be annexed by Russia, but to join Transdniestria, South Ossetia, Nagorno-Karabakh, and Abkhazia as self-ruling de facto independent states supported by Russia, while unrecognized by pretty much all, or nearly all, the world. I would note that this is not necessarily a bad outcome for them as these states have generally performed about as well economically as their neighbors, and it really is the case that the main export from the area is steel and coal to Russia.
Even though the current rebel leaders are self-appointed, supposedly there will be elections in September. We shall see. As it was, people were not allowed to vote in the Ukrainian presidential election in either of them.
Barkley Rosser
Thursday, June 5, 2014
Learning about Learning about "New Keynesianism"
Mark Thoma links to Joseph Stiglitz's TIGER Forum 2014 lecture on "Creating a Learning Society":
Is our society learning if what we are taught is "false and misleading"?
May 30, 2014
Dear Professor Stiglitz,
I am conducting historical research on Alfred Marshall's conception of the efficiency wage and how it relates to the contemporary sense of the term. In the course of my research, I have come across a claim that you made in 1984 that I wonder if you could clarify. You wrote, in "Theories of Wage Rigidity" (1984): "It is widely recognized that the assumption that wages are rigid is central to Keynes' explanation of the persistence of unemployment." In contrast, in chapter 19 of the General Theory, Keynes wrote, "[T]he Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on an assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment…. In its crudest form, this is tantamount to assuming that the reduction in money-wages will leave demand unaffected.… It is from this type of analysis that I fundamentally differ…"
It seems clear from the discussion in chapter 19 as a whole that Keynes rejected the hypothesis that rigid money wages were to blame for persistent unemployment. It would be possible to parse your sentence as ambiguous on the question of whether it was the assumption or the rejection of the assumption that "is central to Keynes' explanation." But of course the context of your article and of contemporary efficiency wage theory in general would seem to resolve any ambiguity. Was it your position, in 1984, that Keynes's explanation relied on the assumption that wage rigidity was to blame for the persistence of unemployment? If it was, is that still your position? If it wasn't your position -- or if your position has changed since then -- have you clarified that in any subsequent article? I thank you for any information you can provide on this matter.
Cheers,
Tom Walker
I am conducting historical research on Alfred Marshall's conception of the efficiency wage and how it relates to the contemporary sense of the term. In the course of my research, I have come across a claim that you made in 1984 that I wonder if you could clarify. You wrote, in "Theories of Wage Rigidity" (1984): "It is widely recognized that the assumption that wages are rigid is central to Keynes' explanation of the persistence of unemployment." In contrast, in chapter 19 of the General Theory, Keynes wrote, "[T]he Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on an assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment…. In its crudest form, this is tantamount to assuming that the reduction in money-wages will leave demand unaffected.… It is from this type of analysis that I fundamentally differ…"
It seems clear from the discussion in chapter 19 as a whole that Keynes rejected the hypothesis that rigid money wages were to blame for persistent unemployment. It would be possible to parse your sentence as ambiguous on the question of whether it was the assumption or the rejection of the assumption that "is central to Keynes' explanation." But of course the context of your article and of contemporary efficiency wage theory in general would seem to resolve any ambiguity. Was it your position, in 1984, that Keynes's explanation relied on the assumption that wage rigidity was to blame for the persistence of unemployment? If it was, is that still your position? If it wasn't your position -- or if your position has changed since then -- have you clarified that in any subsequent article? I thank you for any information you can provide on this matter.
Cheers,
Tom Walker
"It is widely recognized that the assumption that wages are rigid is central to Keynes' explanation of the persistence of unemployment." Joseph E. Stiglitz 1984.O. F. Hamouda writes:
"[T]he Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on an assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment…. In its crudest form, this is tantamount to assuming that the reduction in money-wages will leave demand unaffected.… It is from this type of analysis that I fundamentally differ…" John Maynard Keynes 1936.
"Given the enormous literature on Keynes and Keynesianism and the flippant way in economics in which consensuses are formed to become the truth, there is need for a concordance to be undertaken to compare, in the light of this book, what was said at the source, what was ascribed first-hand as having been said, and then what was made second-hand of those accounts, multiplied over and over. There is a delightful abundance of aberrations… …it is not claimed that everyone, everytime, everywhere should always run back to the sources nor, as Hicks once said, that the source should be taken as divine, but when a claim is made, it must be able to stand, as few presently do."One of the aberrations Hamouda cites is:
"It is widely recognized that the assumption that wages are rigid is central to Keynes' explanation of the persistence of unemployment." Joseph E. Stiglitz 1984.Paul Davidson also pointed out the New Keynesian reversal of Keynes's position in "Would Keynes be a New Keynesian?" Eastern Economic Journal, Vol. 18, No. 4 (Fall, 1992), pp. 449-463.
"The principle of a truth in labeling law that protects consumers from false and misleading claims is often violated by economics textbooks. Under the truth in labeling law, a minimum quantity of beef is required in a patty before society permits anyone to sell it as a hamburger. Similarly some minimum quantity of Keynes's logical analysis should be an essential ingredient in any theory sold as Keynesian, especially in textbooks to yet uneducated consumers.---
"Paraphrasing a famous slogan of the 1988 Democratic presidential primary, 'Where's the Keynesian beef in New Keynesian economics"? This paper demonstrates that (1) New Keynesian Economics (hereafter NKE) does not contain any of Keynes's logical building blocks, and (2) NKE leads to policies that are the opposite of what Keynes advocated as solutions to the major problems facing real world economies."
"...Keynes specifically denied that fixed nominal wages and prices were a necessary condition for underemployment equilibrium. One complete chapter of The General Theory demonstrates why the existence of instantaneously flexible money wages can not assure full employment - even if no coordination failures exist. 'For the Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on the assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment ...My difference from this theory is primarily a difference of analysis'. In the fourth section, it will be shown that Keynes's use of wage units to measure his aggregate functions brings to the foreground this "difference of analysis" by requiring the feedback effects of flexible wages be traced on components of aggregate demand. These feedback effects had nothing to do with coordination failures!
"Keynes's chapter 19 analysis demonstrates that complete wage (or price) flexibility was neither a necessary nor a sufficient condition for full-employment equilibrium. Keynes's two major conclusions regarding the effect of instantaneously flexible money wages - even in condition of purely competitive supply - are that "there is, therefore, no ground for the belief that a flexible wage policy is capable of maintaining a state of continuous full employment" and that "to suppose that a flexible wage policy is a right and proper adjunct of a system which on the whole is one of laissez-faire, is the opposite of the truth".
"Consequently, anyone selling New Keynesian theoretical patties, in which the fixity of nominal wages or prices is the main ingredient, to students (or uneducated policy makers) would not get a franchise to use his name from the originator of Keynesian economics."
Wednesday, June 4, 2014
Explaining Pikettymania
It isn't every day a name economist publishes a long, heavily footnoted book and storms the bestseller list. How to explain this?
I will reject two partisan explanations. The first is that “inequality is an idea whose time has come”. Well, yes and no. Actually, it came a couple of decades ago, and quite a few important books have been written on the topic since then, none of them reaching even a sliver of Piketty's audience. But no doubt it helps that the topic is about inequality and not, say, auction theory.
The other partisan meme is that it’s just the Marxist liberals (I love writing this) who are in a frenzy, and once they get bored they’ll move on to their next obsession, like how wonderful it is to raise your taxes. If so, there are a lot of these Lenin-lovers out there, more than we thought. But still, why Piketty?
I have some hypotheses of my own:
1. Readers in this country, maybe elsewhere, really like history books and other books with lots of history in them. They like the long view, the big picture. Piketty’s vision of capitalism spans centuries, and this fits right in. I remember the mini-craze a few years back for This Time it’s Different. It had the topic du jour (financial chaos), but I think readers appreciated all the history packed into it. If it had told more stories it would have made an even bigger splash.
2. Which brings me to the second thought: Piketty drops juicy factoids on almost every page. He goes out of his way to do this. That’s a formula for mass market success, or at least it gives an author a fighting chance. Some of this material is central to his argument, like the tables with wealth, growth rates, etc. A lot of it falls under the heading of what reviewers have called digressions, which is mostly context-setting. This much I'll wager: the vast majority of his readers are more interested in the data and stories than the algebra.
3. And the data are really wonderful. Admit it. The book is crammed with interesting and important evidence about the evolution of capitalism through the ups and downs of history. This part of his popularity is fully deserved: the book is the culmination of a research project that he has pursued doggedly for two decades, which is where all the cool numbers come from.
4. Finally, he has found a voice and style that lots of readers are comfortable with. He is morally serious, talking about grand issues of democracy, social justice, the viability of the social order, and all that, but he also has a sense of humor and, more important, a disarming honesty about his own limitations. He admits it when, despite his best efforts, the evidence is simply weak. Predictions are provisional and may flip if new data point in another direction. There is an aw-shucks tone to the whole enterprise—no bluster at all. Need I mention that this is unusual for an economist?
So there are some explanations. But maybe it’s not about him. Perhaps the competition is simply weak right now—no killer historical novels or Gladwellesque pastiches about the psychological quirks that explain what running a Fortune 500 company and dog training have in common. We're having an early summer and people have to read something.
I will reject two partisan explanations. The first is that “inequality is an idea whose time has come”. Well, yes and no. Actually, it came a couple of decades ago, and quite a few important books have been written on the topic since then, none of them reaching even a sliver of Piketty's audience. But no doubt it helps that the topic is about inequality and not, say, auction theory.
The other partisan meme is that it’s just the Marxist liberals (I love writing this) who are in a frenzy, and once they get bored they’ll move on to their next obsession, like how wonderful it is to raise your taxes. If so, there are a lot of these Lenin-lovers out there, more than we thought. But still, why Piketty?
I have some hypotheses of my own:
1. Readers in this country, maybe elsewhere, really like history books and other books with lots of history in them. They like the long view, the big picture. Piketty’s vision of capitalism spans centuries, and this fits right in. I remember the mini-craze a few years back for This Time it’s Different. It had the topic du jour (financial chaos), but I think readers appreciated all the history packed into it. If it had told more stories it would have made an even bigger splash.
2. Which brings me to the second thought: Piketty drops juicy factoids on almost every page. He goes out of his way to do this. That’s a formula for mass market success, or at least it gives an author a fighting chance. Some of this material is central to his argument, like the tables with wealth, growth rates, etc. A lot of it falls under the heading of what reviewers have called digressions, which is mostly context-setting. This much I'll wager: the vast majority of his readers are more interested in the data and stories than the algebra.
3. And the data are really wonderful. Admit it. The book is crammed with interesting and important evidence about the evolution of capitalism through the ups and downs of history. This part of his popularity is fully deserved: the book is the culmination of a research project that he has pursued doggedly for two decades, which is where all the cool numbers come from.
4. Finally, he has found a voice and style that lots of readers are comfortable with. He is morally serious, talking about grand issues of democracy, social justice, the viability of the social order, and all that, but he also has a sense of humor and, more important, a disarming honesty about his own limitations. He admits it when, despite his best efforts, the evidence is simply weak. Predictions are provisional and may flip if new data point in another direction. There is an aw-shucks tone to the whole enterprise—no bluster at all. Need I mention that this is unusual for an economist?
So there are some explanations. But maybe it’s not about him. Perhaps the competition is simply weak right now—no killer historical novels or Gladwellesque pastiches about the psychological quirks that explain what running a Fortune 500 company and dog training have in common. We're having an early summer and people have to read something.
Working less: "Is there a history of this idea?"
Thomas Frank interviews David Graeber at Salon:
Let’s start at the beginning: Keynes’ prediction, back in the 1930s, that before too long workers would have all sorts of leisure time because of improving productivity. Is there a history of this idea? I mean, others have argued this as well, correct?
Well, radical elements in the labor movement began embracing such visions from quite early on. After the successful campaigns for the eight-hour day in the 1880s, people immediately started thinking, can we move this to seven, six, or less. Paul Lafargue, Marx’s son-in-law, and author of “The Right to Be Lazy,” was already calling for something along those lines in 1883. I have a Wobbly T-shirt with a turn-of-the-century style design that says “join the IWW for a new dawn,” it has a sun rising over the rooftops, and on the sun is written, “four-day week, four-hour day.” I don’t know how old the image really is but I’m guessing it’s from the Teens or the ’20s. In the 1930s, a lot of labor unions did move their industries to a 35-hour week. My mom was a garment worker at the time and that’s how she ended up getting involved in the ILGWU musical review “Pins and Needles,” because everyone had moved to a shorter week and the union started providing leisure activities.
And when did this expectation finally start dying out?
Monday, June 2, 2014
Artificial Scarcity and the Lopsided Economist
Jared Bernstein has launched a vital conversation around the question, "why is capital so much stronger than labor?" In his first post, Jared reflects,
Sandwichman comments on c > l as follows:
I'd like to propose substituting for the word "inequality," the word "lopsided." Inequality is their word and it carries with it a customary whiff of distinction, justified by merit. The connotation is undeserved but has been instituted through sheer repetition and amplification. Wealth and income are not merely unequal, they are literally lopsided: one side has been lopped off.
One side of economic analysis has been lopped off, too. It is the side that deals with the inherent imbalance, the lopsidedness. A lopsided economics makes a lopsided economy even more so.
But let me be more specific. As John R. Commons, pointed out, efficiency and scarcity are complements as well as substitutes. Lionel Robbins's famous definition of economics as "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses" implicitly (albeit ambiguously) posits the scarcity of the means as given and thus evades the crucial complication of artificial scarcity.
There has been in economics a long-lasting and lopsided preoccupation with one kind of artificial scarcity: the restriction of output by workers. Every once in a while a renegade economist such as Veblen looks directly into this lopsidedness and debunks it but the prejudice trundles on as if nothing had happened. As Warren Samuels noted 20 years ago, the contemporary "efficiency wage" literature is rife with pejorative anti-worker bias. Google scholar shows 10 results for Samuels's critique (four of them in articles by David Spencer) compared to 4589 results for Shapiro and Stiglitz's article on "shirking" and efficiency wages.
And just what IS a wage anyway? It is a ratio. It is a rate of remuneration PER period of time or unit of output. By far the most common form of wages today are time wages.What would one think of an analysis of capital that analyzed the return without reference to the principal? Yet contemporary economics treats the supply of hours of labor as unproblematically generated by workers' preferences for leisure or income. There is NO theoretical foundation for this treatment. There is NO empirical foundation for it. The "leisure device" has been shown to be utterly unfounded and yet it forms the basis of the systematic exclusion from contemporary economic theorizing of the question of the efficiency of the given hours of work.
Again, the "New Keynesian" efficiency wage hypothesis literature provides a stark illustration of this lopsided exclusion. Bob LaJeunesse's 1999 Challenge article on the efficiency week garnered ONE citation and even that by an author who declined to pursue the analysis.
Concern with the efficiency of the hours of labor, as well as the rate of pay for those hours is not just some quaint institutionalist (or Marxist) hobby horse. Marshall's neoclassical analysis of an "efficiency wage" and that of his star pupils, Pigou and Chapman, was influenced both directly and indirectly by Thomas Brassey's Work and Wages, which focused explicitly on the productivity effects of variations in the hours of labor. The neo-Walrasian, mathematical modelers have opted for a pre-marginalist doctrine, in effect resurrecting on the "revealed preference" supply side the defunct wages-fund doctrine that was long ago discredited and disavowed as an explanation of the demand for labor.
In conclusion, lopsided outcomes in income and wealth are hardly a surprise in an economic system in which the power to restrict output and thus to maintain a profitable advantage through artificial scarcity is itself lopsided. A lopsided economics that treats the entrepreneur as the epitome of efficiency and workers as shirkers is unlikely to disclose the sources of income and wealth lopsidedness. The lopsided treatment of the wage as somehow immune to operations on the divisor side of the ratio is equally unlikely to consider the full range of appropriate remedies for the lopsidedness of income and wealth.
...my experience as a policy wonk and economist in government has led me to believe that economics, as currently practiced, is part of the problem. Not the discipline itself, which historically has been flexible enough to offer wide ranging and useful tools for analyzing and solving economic problems. I’m talking instead about the way it interacts with wealth and power today to support capital and hamstring labor.Part 2 of "why is capital so much stronger than labor?" is titled r > g meets c > l
Sandwichman comments on c > l as follows:
I'd like to propose substituting for the word "inequality," the word "lopsided." Inequality is their word and it carries with it a customary whiff of distinction, justified by merit. The connotation is undeserved but has been instituted through sheer repetition and amplification. Wealth and income are not merely unequal, they are literally lopsided: one side has been lopped off.
One side of economic analysis has been lopped off, too. It is the side that deals with the inherent imbalance, the lopsidedness. A lopsided economics makes a lopsided economy even more so.
But let me be more specific. As John R. Commons, pointed out, efficiency and scarcity are complements as well as substitutes. Lionel Robbins's famous definition of economics as "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses" implicitly (albeit ambiguously) posits the scarcity of the means as given and thus evades the crucial complication of artificial scarcity.
There has been in economics a long-lasting and lopsided preoccupation with one kind of artificial scarcity: the restriction of output by workers. Every once in a while a renegade economist such as Veblen looks directly into this lopsidedness and debunks it but the prejudice trundles on as if nothing had happened. As Warren Samuels noted 20 years ago, the contemporary "efficiency wage" literature is rife with pejorative anti-worker bias. Google scholar shows 10 results for Samuels's critique (four of them in articles by David Spencer) compared to 4589 results for Shapiro and Stiglitz's article on "shirking" and efficiency wages.
And just what IS a wage anyway? It is a ratio. It is a rate of remuneration PER period of time or unit of output. By far the most common form of wages today are time wages.What would one think of an analysis of capital that analyzed the return without reference to the principal? Yet contemporary economics treats the supply of hours of labor as unproblematically generated by workers' preferences for leisure or income. There is NO theoretical foundation for this treatment. There is NO empirical foundation for it. The "leisure device" has been shown to be utterly unfounded and yet it forms the basis of the systematic exclusion from contemporary economic theorizing of the question of the efficiency of the given hours of work.
Again, the "New Keynesian" efficiency wage hypothesis literature provides a stark illustration of this lopsided exclusion. Bob LaJeunesse's 1999 Challenge article on the efficiency week garnered ONE citation and even that by an author who declined to pursue the analysis.
Concern with the efficiency of the hours of labor, as well as the rate of pay for those hours is not just some quaint institutionalist (or Marxist) hobby horse. Marshall's neoclassical analysis of an "efficiency wage" and that of his star pupils, Pigou and Chapman, was influenced both directly and indirectly by Thomas Brassey's Work and Wages, which focused explicitly on the productivity effects of variations in the hours of labor. The neo-Walrasian, mathematical modelers have opted for a pre-marginalist doctrine, in effect resurrecting on the "revealed preference" supply side the defunct wages-fund doctrine that was long ago discredited and disavowed as an explanation of the demand for labor.
In conclusion, lopsided outcomes in income and wealth are hardly a surprise in an economic system in which the power to restrict output and thus to maintain a profitable advantage through artificial scarcity is itself lopsided. A lopsided economics that treats the entrepreneur as the epitome of efficiency and workers as shirkers is unlikely to disclose the sources of income and wealth lopsidedness. The lopsided treatment of the wage as somehow immune to operations on the divisor side of the ratio is equally unlikely to consider the full range of appropriate remedies for the lopsidedness of income and wealth.
The Crisis at the Veterans Health Administration and a Shortage of Doctors
In response to a call for privatization from Greg Mankiw, I noted this excellent discussion:
The Department of Veterans Affairs spends more today in inflation adjusted dollars than it did after World War II and the Vietnam War, when millions of troops returned from the battlefield, according to federal budget figures … Two factors more than any others have driven health care costs higher at the Dayton VA Medical Center, officials said. Aging Vietnam veterans who have more health needs as they grow older, and the return home of thousands of veterans from the battlegrounds of Iraq and Afghanistan. "It's the number of veterans returning from the war, but it's also the conditions they are returning with," said Dr. William J. Germann, Dayton VA chief of primary care service and a retired Air Force brigadier general. "There are a number of veterans coming back dysfunctional and as a result may not be able to hold a job."Richard Oppel and Abby Goodnough discuss what they call a doctor’s shortage:
At the heart of the falsified data in Phoenix, and possibly many other veterans hospitals, is an acute shortage of doctors, particularly primary care ones, to handle a patient population swelled both by aging veterans from the Vietnam War and younger ones who served in Iraq and Afghanistan, according to congressional officials, Veterans Affairs doctors and medical industry experts. The department says it is trying to fill 400 vacancies to add to its roster of primary care doctors, which last year numbered 5,100. “The doctors are good but they are overworked, and they feel inadequate in the face of the inordinate demands made on them,” said Senator Richard Blumenthal, Democrat of Connecticut and a member of the Senate Veterans Affairs Committee. “The exploding workload is suffocating them.” ... Most experts agree that soaring demand for veterans’ care has outpaced the availability of doctors in many locations, and that high turnover is a major problem. In the past three years, primary-care appointments have leapt 50 percent while the department’s staff of primary care doctors has grown by only 9 percent, according to department statistics. Those primary care doctors are supposed to be responsible for about 1,200 patients each, but many now treat upward of 2,000, said J. David Cox Sr., national president of the American Federation of Government EmployeesWould outsourcing some of the responsibility to the private sector alleviate the problem and if so how? The price system could attract more doctor supply but only at additional cost with the key question whether this cost would be borne by taxpayers or by patients. If we are to avoid asking our veterans to pay the additional cost, Congress must be willing to pony up the additional funds. Oppel and Goodnough continue:
Supporters of the department also note that hospitals everywhere are struggling to find primary care doctors. But some experts say the department has additional hurdles, including lower pay scales. Primary care doctors and internists at veterans centers generally earn from about $98,000 to $195,000, compared with private-sector primary care physicians whose total median compensation was $221,000 in 2012, according to the Medical Group Management Association, a trade group.So are we doomed to paying the doctors gild higher compensation? Dean Baker apparently does not think so:
Doctors in the United States make on average more than twice what their counterparts in other wealthy countries earn, which means that many would likely be willing to work in the United States for a period of time, given the opportunity ... given the evidence of a shortage of doctors in the United States, and the huge gap in pay between the U.S. and other countries, this would seem an obvious case for benefits from increased immigration. It is remarkable that this is not front and center on the national agenda.To be fair to Greg Mankiw, he has always made the same argument.
Friday, May 30, 2014
r and g redux
Many people are jumping all over Piketty's claim that r>g implies growing inequality. I'm going to leave that alone, but I do want to make some points that may or may not be relevant.
Many years ago, Joan Robinson suggested that workers are exploited to the extent that capitalists consume more than zero! Here's why: she 's assuming workers save nothing, so the savings rate will be arK/Y. where a is the rate at which capitalists save. Since the long-run value for K/Y is the net savings rate divided by g, the growth rate -this is one of Piketty's fundamental laws and is trivial to establish- we then have, in the long run K/Y =(arK/Y)/g, or r =g/a. So when capitalists live on air, a=1 and r=g. If capitalists consume anything, a falls short of 1 and r>g.
And here's the key: r=g is needed to satisfy the Golden Rule: steady-state consumption is maximized for the representative generation only when r=g.
If you are familiar with the overlapping generations model - the canonical articles, especially Gale (1973)- you know that this is right. Many people note that r less thang is inefficient. But most characterize r greater than or equal to g as efficient. And it's true, if r strictly exceeds g, we have efficiency. But the reason for the efficiency is that moving towards the golden rule would require harming the initial old generation. Every other generation, however, will be better off both transitionally and in the golden rule steady state. And what's more - see Gale and also Diamond (1965) - the harm to the initial old can be made arbitrarily small.
I think people don't make this point because they've bought the infinitely-lived agent nonsense, or the Barrovian dynastic equivalent, where the optimal r is the rate of time preference. But as Gale made a point of noting, in an over-lapping generations frame-work, time preference is irrelevant! We need r=g for optimality. Robinson, as usual, was right!
By the way, if you haven't read Fredric deBoer's review of Megan McCardle's review of Piketty - the one which opens with McCardle admitting she hasn't read Piketty- here is a taste which bears on (sort of!) r and g :
"Finally, there is McArdle’s dubious takedown of Snicket’s statistics. By now, Snicket’s controversial equation “r>g,” where r = points per game from center Nicklas Backstrom and g = penalty minutes/100 for winger Tom Wilson, has become something of a mantra in left-wing circles. McArdle responds with her own equation, which seems much less convincing– s = (bs – epst)*hyk, where s stands for success, bs for number of bootstraps, epst exposure to public school teachers, and hyk the Coefficient of Hayek. While I appreciate McArdle’s focus on hard work, this seems to do little to address the book’s real thesis."
I'm damned if can put the link in, but look around and you'll find the whole thing!
Many years ago, Joan Robinson suggested that workers are exploited to the extent that capitalists consume more than zero! Here's why: she 's assuming workers save nothing, so the savings rate will be arK/Y. where a is the rate at which capitalists save. Since the long-run value for K/Y is the net savings rate divided by g, the growth rate -this is one of Piketty's fundamental laws and is trivial to establish- we then have, in the long run K/Y =(arK/Y)/g, or r =g/a. So when capitalists live on air, a=1 and r=g. If capitalists consume anything, a falls short of 1 and r>g.
And here's the key: r=g is needed to satisfy the Golden Rule: steady-state consumption is maximized for the representative generation only when r=g.
If you are familiar with the overlapping generations model - the canonical articles, especially Gale (1973)- you know that this is right. Many people note that r less than
I think people don't make this point because they've bought the infinitely-lived agent nonsense, or the Barrovian dynastic equivalent, where the optimal r is the rate of time preference. But as Gale made a point of noting, in an over-lapping generations frame-work, time preference is irrelevant! We need r=g for optimality. Robinson, as usual, was right!
By the way, if you haven't read Fredric deBoer's review of Megan McCardle's review of Piketty - the one which opens with McCardle admitting she hasn't read Piketty- here is a taste which bears on (sort of!) r and g :
"Finally, there is McArdle’s dubious takedown of Snicket’s statistics. By now, Snicket’s controversial equation “r>g,” where r = points per game from center Nicklas Backstrom and g = penalty minutes/100 for winger Tom Wilson, has become something of a mantra in left-wing circles. McArdle responds with her own equation, which seems much less convincing– s = (bs – epst)*hyk, where s stands for success, bs for number of bootstraps, epst exposure to public school teachers, and hyk the Coefficient of Hayek. While I appreciate McArdle’s focus on hard work, this seems to do little to address the book’s real thesis."
I'm damned if can put the link in, but look around and you'll find the whole thing!
On the Eurasian Customs Union Agreement
Russia, Belarus, and Kazakhstan have just signed an agreement to have a Eurasian customs union come into place this coming January, with trade barriers set to fall, "cooperation" claimed to move forward for leading sectors, and for workers to be able to freely move about from one nation to the other without work permits or visas for purposes of employment. This resembles agreements made in the past within what used to be known as the European Economic Community, now developed into the European Union. Ukraine was supposed to be part of this deal, but the overthrow of former President Yanukovich by Maidan Square demonstraters made that not happen, and newly elected President Poroshenko is unlikely to join, although he has expressed willingness to negotiate wiht Russian President Putin on various matters.
I note that this moves forward Putin's effort to reconstitute at least a portion of the former Soviet Union in an economic and political group led by Russia. Led by Europe's most dictatorial leader, Alexander Lukashenka (or Lukashenko), Belarus has long been the most closely allied with Russia of any of the former other 14 republics, now nations. It is fourth in population of the former republics and I think also fourth in land area, although not quite sure about that last figure. Its economic system is probably the closest to that of the old Soviet Unon of any of the former republics, although it has a few rivals in Central Asia not part of this agreement. It has been quite economically stagnant since the end of the USSR, although higher in income than many of the former republics.
Kazakhstan is second in land area and contains substantial energy resources. Like in non-member Uzbekistan, its leader, Nursultan Nazarbayev, is a full holdover from the Soviet era, a former member Communist Party chief of the republic at the time. All both of these leaders did was to change the name plates on their doors and replace their old party affiliations with newly created ones. Kazakhstan has had more success than Belarus in making successful changes in its economy and has substantially improved its economic standing, one of the better performers among the former republics, although its political system remains highly authoritarian, very much along the lines of what one finds in the other two nations in the new union.
Where does all of this fit in to other groups and what are its prospects?
One place it fits is with the larger Shanghai group that includes other former republics as well as China and Iran and a few other nations. This latter group is more of a political and military grouping, although as of now still very loose and more of a talking shop and designed to signal a degree of friendliness and lack thereof with respect to the US. I doubt there will be too much interaction between these two groups.
More interesting will be to see which of the former Soviet republics might join, at least in the near future. The most immediate candidate appears to be Armenia, which has also long had relatively friendly relations with Russia, whom its leaders view as a protective big brother against such hostile neighbors as Azerbaijan, Georgia, and Turkey, all of which are not particularly friendly with Russia.
Another possible near term candidate whose leader attended the signing ceremony, although he has not said anything about specifically about joining so far, is Kyrgyzstan in Central Asia. Much smaller than either Kazakhstan or Uzbekistan, Kyrgyzstan has had a complicated post-Soviet history. It is on the Chinese border and reportedly Chinese economic influence has become very large there. At one point it was viewed as the most reformist and pro-US of the Central Asian nations, providing airfield support for the US military effort in Afghanistan. However, it has moved to becoming much more pro-Russian in recent years. It could easily join, but is a small and not very well-off nation.
Among other former republics there is a range of attitudes towards Russia, with this likely being the main variable determining the interest or lack thereof in joining this new group, which will probably enjoy some increase in mutual trade and investment as a result of this agreement. Many of these attitudes are deeply entrenched and date back to the Soviet era.
So, none of the Baltic nations are likely candidates, now all members of the EU, with two of them now also both using the euro and in NATO, namely Estonia and Latvia, although arguably Lithuania may be the most nationalist and anti-Russian of the three. Others that have been and are strongly anti-Russian and not likely to join are Georgia, which was invaded by Russia in 2008, and Azerbiajan, among the trans-Caucasian nations. Moldova, the lowest income nation in Europe, is also unlikely to join, given Russian support for the trans-Dniestrian republic that supports Russia and is carved out of Moldovan territory, with this autonomous republic probably the model for the still-asserting itself Donetsk Peoples' Republic in eastern Ukraine, with Ukraine not likely to join either, as already noted.
The situation in Central Asia is somewhat more complicated. Kazakhstan is joining, while the third largest in population of the former republics (after Russia and Ukraine), Uzbekistan appears unlikely to do so. With its former Soviet official, Islam Karimov, in charge, he has gone back and forth in regard to his relations with Russia, currently on the not-so-friendly side, although that nation is part of the Shanghai group. Ironically, Uzbekistan is one of those most closely competing with Belarus for having an economic system that most closely resembles that of the former Soviety Union's, but it has always been run by local elites and been a source of major corruption, with the famous case of the nonexistent cotton mill under the USSR not existing in Uzebekistan.
Finally, there are Tajikistan and Turkmenistan. The former has long been the poorest of the former republics, dating from Soviet times, the extreme opposite of well-off and semi-Nordic Estonia. It could conceivably be a candidate to join this new grouping, but has so far made no moves to do so. As for Turkmenistan, it contains substantial natural gas reserves and has chosen a path almost like North Korea's in being extremely isolationist on almost all fronts and issues, using its gas to cut bilateral deals and otherwise keeps to itself in a highly authoritarian state. It also competes to be like the former USSR in its economic system, althoiugh more idiosyncratic, but with its current highly nationalist and isolationist approach, it is highly unlikely to join this new grouping.
Barkley Rosser
I note that this moves forward Putin's effort to reconstitute at least a portion of the former Soviet Union in an economic and political group led by Russia. Led by Europe's most dictatorial leader, Alexander Lukashenka (or Lukashenko), Belarus has long been the most closely allied with Russia of any of the former other 14 republics, now nations. It is fourth in population of the former republics and I think also fourth in land area, although not quite sure about that last figure. Its economic system is probably the closest to that of the old Soviet Unon of any of the former republics, although it has a few rivals in Central Asia not part of this agreement. It has been quite economically stagnant since the end of the USSR, although higher in income than many of the former republics.
Kazakhstan is second in land area and contains substantial energy resources. Like in non-member Uzbekistan, its leader, Nursultan Nazarbayev, is a full holdover from the Soviet era, a former member Communist Party chief of the republic at the time. All both of these leaders did was to change the name plates on their doors and replace their old party affiliations with newly created ones. Kazakhstan has had more success than Belarus in making successful changes in its economy and has substantially improved its economic standing, one of the better performers among the former republics, although its political system remains highly authoritarian, very much along the lines of what one finds in the other two nations in the new union.
Where does all of this fit in to other groups and what are its prospects?
One place it fits is with the larger Shanghai group that includes other former republics as well as China and Iran and a few other nations. This latter group is more of a political and military grouping, although as of now still very loose and more of a talking shop and designed to signal a degree of friendliness and lack thereof with respect to the US. I doubt there will be too much interaction between these two groups.
More interesting will be to see which of the former Soviet republics might join, at least in the near future. The most immediate candidate appears to be Armenia, which has also long had relatively friendly relations with Russia, whom its leaders view as a protective big brother against such hostile neighbors as Azerbaijan, Georgia, and Turkey, all of which are not particularly friendly with Russia.
Another possible near term candidate whose leader attended the signing ceremony, although he has not said anything about specifically about joining so far, is Kyrgyzstan in Central Asia. Much smaller than either Kazakhstan or Uzbekistan, Kyrgyzstan has had a complicated post-Soviet history. It is on the Chinese border and reportedly Chinese economic influence has become very large there. At one point it was viewed as the most reformist and pro-US of the Central Asian nations, providing airfield support for the US military effort in Afghanistan. However, it has moved to becoming much more pro-Russian in recent years. It could easily join, but is a small and not very well-off nation.
Among other former republics there is a range of attitudes towards Russia, with this likely being the main variable determining the interest or lack thereof in joining this new group, which will probably enjoy some increase in mutual trade and investment as a result of this agreement. Many of these attitudes are deeply entrenched and date back to the Soviet era.
So, none of the Baltic nations are likely candidates, now all members of the EU, with two of them now also both using the euro and in NATO, namely Estonia and Latvia, although arguably Lithuania may be the most nationalist and anti-Russian of the three. Others that have been and are strongly anti-Russian and not likely to join are Georgia, which was invaded by Russia in 2008, and Azerbiajan, among the trans-Caucasian nations. Moldova, the lowest income nation in Europe, is also unlikely to join, given Russian support for the trans-Dniestrian republic that supports Russia and is carved out of Moldovan territory, with this autonomous republic probably the model for the still-asserting itself Donetsk Peoples' Republic in eastern Ukraine, with Ukraine not likely to join either, as already noted.
The situation in Central Asia is somewhat more complicated. Kazakhstan is joining, while the third largest in population of the former republics (after Russia and Ukraine), Uzbekistan appears unlikely to do so. With its former Soviet official, Islam Karimov, in charge, he has gone back and forth in regard to his relations with Russia, currently on the not-so-friendly side, although that nation is part of the Shanghai group. Ironically, Uzbekistan is one of those most closely competing with Belarus for having an economic system that most closely resembles that of the former Soviety Union's, but it has always been run by local elites and been a source of major corruption, with the famous case of the nonexistent cotton mill under the USSR not existing in Uzebekistan.
Finally, there are Tajikistan and Turkmenistan. The former has long been the poorest of the former republics, dating from Soviet times, the extreme opposite of well-off and semi-Nordic Estonia. It could conceivably be a candidate to join this new grouping, but has so far made no moves to do so. As for Turkmenistan, it contains substantial natural gas reserves and has chosen a path almost like North Korea's in being extremely isolationist on almost all fronts and issues, using its gas to cut bilateral deals and otherwise keeps to itself in a highly authoritarian state. It also competes to be like the former USSR in its economic system, althoiugh more idiosyncratic, but with its current highly nationalist and isolationist approach, it is highly unlikely to join this new grouping.
Barkley Rosser
Whack-a-Mole Tim and the Fixed Amount of Cheese-Eating Work Fallacio
Tim Taylor writes:
Why economists dislike a lump of labor, Tom Walker, Review of Social Economy, 2007, vol. 65, issue 3, pages 279-291
Here's one snapshot of how the U.S. economy evolved in the last 15 years: an identical number of total hours worked in 1998 and 2013, even though the population rose by over 40 million people, but a 42% gain in output.What is the difference between"an identical number of total hours worked" and "a fixed amount of work"? The former is an empirical fact. The latter is an alleged fallacy. Here is what Mr. Taylor wrote ten years ago:
If the quantity of work were fixed, as the lump-of-labor fallacy holds, one way to reduce unemployment would be to limit the hours individuals can work, or to encourage early retirement. But fighting unemployment with these policies have [sic] not succeeded.
France passed laws in the last decade requiring a 35-hour workweek. Much of the impetus was that the unemployment rate in France had exceeded 11 percent for most of the 1990s. But international comparisons yield no evidence of a statistical link between lower average hours worked and the unemployment rate. Back in 1998, workers in France already averaged a relatively low 1,600 hours of work a year, compared with roughly 1,850 hours per worker in the United States and Japan – countries with much lower rates of unemployment.
France and other European countries have also encouraged early retirement, partly on the grounds that it “creates jobs” for other workers. (Among the promises of early retirement for some and more jobs for others, the question of who will pay for early retirees to enjoy the living standard they’ve come to expect was rarely discussed.) Today roughly 37 percent of French and Germans 55-64 years of age hold jobs, compared to 58 percent of the same age group in the United States and 52 percent in Britain. Despite the success of France and Germany in encouraging early retirement, they face chronic unemployment far in excess of the rates in America and Britain. Attempts to honor the lump-of-labor fallacy by spreading out a supposedly fixed quantity of work over more workers have thus proven unsuccessful.And here is what Paul Krugman wrote about a week and a half ago:
Well, I hadn't looked at this data for a while; and where we are now is quite stunning:
"Since the late 1990s we have completely traded places: prime-age French adults are now much more likely than their US counterparts to have jobs.
"Strange how amid the incessant bad-mouthing of French performance this fact never gets mentioned."Yes, strange, isn't it?
Why economists dislike a lump of labor, Tom Walker, Review of Social Economy, 2007, vol. 65, issue 3, pages 279-291
Abstract: 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.
The New York Times on Carbon Cap-and-Trade: How Many Errors Can You Fit into a Single News Article?
As I sit down to write this, I am daunted by the prospect of identifying and explaining every misconception, omission and distortion in this morning’s background piece, “A Price Tag on Carbon as a Climate Rescue Plan”. The sad, but liberating, truth is that I can’t take on most of them. Too much work, too little time. So let me pull out a few choice morsels.
First a quick summary of the article itself. According to the Times, California has created the world’s best system for halting the steady increase in greenhouse gases in the atmosphere. They are giving away carbon permits to firms that produce carbon emissions, and firms can either use them, trade them to other firms, or emit without a permit if they pay for an approved project somewhere else (“offsets”). The long term plan is to switch to a system under which the permits would be sold, and controls are in place to ensure that carbon prices do not fluctuate too much. They currently go for $11 per ton of carbon equivalent, higher than the price of permits issued in Europe. Revenue from permit sales will go into alternative energy projects. The article quotes several economists extolling the California model, along with several natural scientists and environmental activists who think it is flawed but do not give any specific reasons.
Here are just a few problems with the article out of many I could jump on.
1. $11 per ton is truly paltry. The implications should be spelled out. For instance, for simplicity let’s take the price of a gallon of gas in the US to be $4. According to the Congressional Budget Office, a carbon tax of $11/ton would translate to an 11 cent increase in gas prices, about 2.8%, and this is somewhat higher than the corresponding increase in other energy costs. A reasonable estimate of the long run price elasticity of demand for fossil fuels across the US economy is .5. So, being generous, we would get a decline in energy demand of a bit under 1.5% if the whole country were on the California plan. And this would be a one-time decline to a new, slightly lower level. (And one that doesn’t take into account population growth, economic growth or any other factor working in the opposite direction.) If you want to go lower you have to raise the tax. If by chance the US wanted to do its part to reach the IPCC’s carbon budget target, on the other hand, our demand would need to fall by about 5% per year, every year. In other words, there’s a gaping scale mismatch that a conscientious reporter would want to point out.
2. Handing out free permits is giving away money. Permits are valuable. If you give them to a firm and the firm sells them, that is a pure transfer. And who pays for it? Everyone who has to pay higher prices because they have permit costs built into them. OK, it’s not very much money because the system is so timid, but it’s the principle of the thing.
3. In fact, even if the permits are sold, the ultimate cost is paid by consumers. A carbon tax is simply a kind of value added tax (VAT). In itself it is highly regressive. If you used ordinary tax dollars from a neutral or slightly progressive tax system to pay for renewable energy, energy efficiency and other nice stuff, you would do much better. It is well known, on the other hand, that rebating carbon revenues on a per capita basis is highly progressive.
4. The biggest problem with the article is its celebration of offsets. It begins with a heart-warming story about a dairy farmer in Wisconsin who installed a methane digester with subsidies from California. Extra carbon, over and above the “cap” was allowed to be emitted because money was funneled to this biogas operation. The article was entirely credulous about all aspects of this transaction, but the story actually illustrates two of the key problems with carbon offsets.
First, the offsets are supposed to adhere to the criterion of additionality, meaning that the project would not have occurred without the funding from the offset program. The article does in fact quote the farmer as saying he has long wanted to install a digester but the net cost was too high. However, without impugning anyone’s honesty, as a reporter I would have wanted to take a look at the economics myself—after all, many farmers have installed these systems without added subsidies. To be blunt, it is in the interest of the farmer to say that the offset money is needed in order to buy the digester; that’s how you get the money. More than that, even if subsidies are needed to jumpstart biogas operations, surely a lot of this has to do with the fact that natural gas prices are unnaturally low because they do not incorporate the externalities associated with fracking. (Or with climate change, for that matter.) Thus the subsidies achieve additionality only if other responsible environmental policies are not implemented. Go figure.
Second, the offset racket is based everywhere on dubious carbon accounting. Think of it this way: the point of climate change mitigation is to reduce the concentration of greenhouse gases. The vast majority of the increase in these gases is due to the extraction and burning of fossil fuels—the portion of the carbon that was in the earth’s atmosphere (or soils or other sinks) in long ago times and was gradually sequestered and buried beneath the earth. Since the dawn of the industrial revolution we have been on a crash program to undo hundreds of millions of years of earth history, and we have to stop. This is the yardstick by which all “mitigation” programs have to be measured.
Does a methane digester, in itself, reduce fossil fuel extraction? No. It offers a renewable energy resource, but there is no reason to expect that the extra energy from cow poop will offset fossil fuels joule for joule. The most likely scenario is that this type of energy subsidy will increase total energy use, from fossil and renewable sources combined. Partial fuel substitution may be better than none, but the carbon accounting of the offset system assumes it’s complete.
It gets more complicated, however. The cow poop that goes into the digester is derived, like all organic matter, indirectly from the photosynthesis of primary producers. By turning it into methane, we are shifting it from one pathway along the carbon cycle into another. That has ramifications for the whole cycle, however. If grain is grown for cows to eat, and the cows don’t return their droppings to the soil, some other source of fertilization will be required. A dairy operation that takes in feed on one end and turns out biogas on the other is just one piece of the larger cycle; applications needed to keep the soils devoted to grain productive is another linked piece. And the use of land to grow the grain that feeds the cows rather than growing some other crop that might have different carbon cycling implications (including other biogas feedstocks) is still another. Without turning this already too long blog post into an agroecology textbook, I can’t possibly disentangle all the carbon consequences of a feedlot-dairy-biogas operation. The one point that should be clear, however, is that the bottom line, whatever it is, has almost nothing to do with the carbon accounting framework of the offset administrators—it would be as murky to them as it is to me if they actually cared about it.
Offsets are not about efficiency in climate change mitigation; they are a side payment to influential economic interests in order to buy their support for a cap-and-trade system. As such, they are more loophole than not.
This is enough for one morning. There’s so much more, but it will have to wait.
First a quick summary of the article itself. According to the Times, California has created the world’s best system for halting the steady increase in greenhouse gases in the atmosphere. They are giving away carbon permits to firms that produce carbon emissions, and firms can either use them, trade them to other firms, or emit without a permit if they pay for an approved project somewhere else (“offsets”). The long term plan is to switch to a system under which the permits would be sold, and controls are in place to ensure that carbon prices do not fluctuate too much. They currently go for $11 per ton of carbon equivalent, higher than the price of permits issued in Europe. Revenue from permit sales will go into alternative energy projects. The article quotes several economists extolling the California model, along with several natural scientists and environmental activists who think it is flawed but do not give any specific reasons.
Here are just a few problems with the article out of many I could jump on.
1. $11 per ton is truly paltry. The implications should be spelled out. For instance, for simplicity let’s take the price of a gallon of gas in the US to be $4. According to the Congressional Budget Office, a carbon tax of $11/ton would translate to an 11 cent increase in gas prices, about 2.8%, and this is somewhat higher than the corresponding increase in other energy costs. A reasonable estimate of the long run price elasticity of demand for fossil fuels across the US economy is .5. So, being generous, we would get a decline in energy demand of a bit under 1.5% if the whole country were on the California plan. And this would be a one-time decline to a new, slightly lower level. (And one that doesn’t take into account population growth, economic growth or any other factor working in the opposite direction.) If you want to go lower you have to raise the tax. If by chance the US wanted to do its part to reach the IPCC’s carbon budget target, on the other hand, our demand would need to fall by about 5% per year, every year. In other words, there’s a gaping scale mismatch that a conscientious reporter would want to point out.
2. Handing out free permits is giving away money. Permits are valuable. If you give them to a firm and the firm sells them, that is a pure transfer. And who pays for it? Everyone who has to pay higher prices because they have permit costs built into them. OK, it’s not very much money because the system is so timid, but it’s the principle of the thing.
3. In fact, even if the permits are sold, the ultimate cost is paid by consumers. A carbon tax is simply a kind of value added tax (VAT). In itself it is highly regressive. If you used ordinary tax dollars from a neutral or slightly progressive tax system to pay for renewable energy, energy efficiency and other nice stuff, you would do much better. It is well known, on the other hand, that rebating carbon revenues on a per capita basis is highly progressive.
4. The biggest problem with the article is its celebration of offsets. It begins with a heart-warming story about a dairy farmer in Wisconsin who installed a methane digester with subsidies from California. Extra carbon, over and above the “cap” was allowed to be emitted because money was funneled to this biogas operation. The article was entirely credulous about all aspects of this transaction, but the story actually illustrates two of the key problems with carbon offsets.
First, the offsets are supposed to adhere to the criterion of additionality, meaning that the project would not have occurred without the funding from the offset program. The article does in fact quote the farmer as saying he has long wanted to install a digester but the net cost was too high. However, without impugning anyone’s honesty, as a reporter I would have wanted to take a look at the economics myself—after all, many farmers have installed these systems without added subsidies. To be blunt, it is in the interest of the farmer to say that the offset money is needed in order to buy the digester; that’s how you get the money. More than that, even if subsidies are needed to jumpstart biogas operations, surely a lot of this has to do with the fact that natural gas prices are unnaturally low because they do not incorporate the externalities associated with fracking. (Or with climate change, for that matter.) Thus the subsidies achieve additionality only if other responsible environmental policies are not implemented. Go figure.
Second, the offset racket is based everywhere on dubious carbon accounting. Think of it this way: the point of climate change mitigation is to reduce the concentration of greenhouse gases. The vast majority of the increase in these gases is due to the extraction and burning of fossil fuels—the portion of the carbon that was in the earth’s atmosphere (or soils or other sinks) in long ago times and was gradually sequestered and buried beneath the earth. Since the dawn of the industrial revolution we have been on a crash program to undo hundreds of millions of years of earth history, and we have to stop. This is the yardstick by which all “mitigation” programs have to be measured.
Does a methane digester, in itself, reduce fossil fuel extraction? No. It offers a renewable energy resource, but there is no reason to expect that the extra energy from cow poop will offset fossil fuels joule for joule. The most likely scenario is that this type of energy subsidy will increase total energy use, from fossil and renewable sources combined. Partial fuel substitution may be better than none, but the carbon accounting of the offset system assumes it’s complete.
It gets more complicated, however. The cow poop that goes into the digester is derived, like all organic matter, indirectly from the photosynthesis of primary producers. By turning it into methane, we are shifting it from one pathway along the carbon cycle into another. That has ramifications for the whole cycle, however. If grain is grown for cows to eat, and the cows don’t return their droppings to the soil, some other source of fertilization will be required. A dairy operation that takes in feed on one end and turns out biogas on the other is just one piece of the larger cycle; applications needed to keep the soils devoted to grain productive is another linked piece. And the use of land to grow the grain that feeds the cows rather than growing some other crop that might have different carbon cycling implications (including other biogas feedstocks) is still another. Without turning this already too long blog post into an agroecology textbook, I can’t possibly disentangle all the carbon consequences of a feedlot-dairy-biogas operation. The one point that should be clear, however, is that the bottom line, whatever it is, has almost nothing to do with the carbon accounting framework of the offset administrators—it would be as murky to them as it is to me if they actually cared about it.
Offsets are not about efficiency in climate change mitigation; they are a side payment to influential economic interests in order to buy their support for a cap-and-trade system. As such, they are more loophole than not.
This is enough for one morning. There’s so much more, but it will have to wait.
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