Stephanie Kelton Goes To Washington

Leading Post Keynesian Modern Monetary Theorist (MMT) and Chair of the Economics Department at the University of Missouri-Kansas City (UMKC) is leaving there to become the Chief Economist of the Minority at the US Senate Budget Committee.  She is reported to have been hired by Bernie Sanders, who  will be ranking member of that committee after the Dems lose control of the Senate in January.  

While I am pleased to see her having influence in Washington, I am concerned about what will be happening will be happening in the UMKC econ department, which has been arguably the leading graduate program in the US strongly emphaszing a Post Keynesian approach.  With the death of Fred Lee in October and the retirement of John Henry last year, along with the previous departure of Randall Wray for the Levy Institute, there is not much left in that department of Post Keynesian economists, with Matt Forstater probably the last one holding down the fort there, with apparently the dean there blocking them from hiring people that Stephanie wanted.

What is Washington's gain, is UMKC's (and maybe academic Post Keynesianism's) loss.

Barkley Rosser

Update:  I put this in a comment, but it should probably be in the body of the post.  I have learned that Stephanie Kelton will be returning to UMKC after a two year leave in Washington.

Yet another update: I further note that Stephanie coined the term "deficit owl" to be distinguished from hawks and doves.  The former are austerians who wish to have deficits reduced, period. The latter worry about long term deficits, but are fine with them in the shorter run when the economy is down, such as Paul Krugman.  Deficit owls see them as useful in the longer run for maintaining the money supply and economic growth, with this MMT view associated with chartalism and functional  finance, first proposed by the late Abba Lerner.

A Great Book on the Great Depression

It hasn't been written yet, but in this post I'll tell you how to do it.  The title is Fire Sale: How the Asset Buying Binge of the Great Depression Changed America.  Here are the chapters:

1. The Great Depression: A Good Time to Have Money.  How did the rich (some of them) shelter their wealth during the Depression?  How deflation in goods increased the real return to holding liquid assets, and how asset price deflation offered opportunities to make lucrative long-term investments.  (Some Irving Fisher here on the mechanism of debt deflation and its logic for counterparties.)  Perhaps some cultural aspects: the portrayal of high-end consumption in books and movies, the golden age of tourism, etc.

2. Stocking up.  This chapter begins with the stock market crash of 1929 but then continues the story.  How did stocks fare over the '30s?  How did depressed stock prices allow for the consolidation of new financial empires?  Who were the big winners from the stock swoon, and how did the financial and industrial landscape of the post-WWII era reflect their gains?

3. This Land Is Your Land.  What happened to urban and rural land values during the Depression?  How did low prices make it possible for new land barons to emerge?  But a big part of the story is the purchase of large tracts of land for parks and public infrastructure, for instance as reservoirs (e.g. the Quabbin Reservoir in central Massachusetts).

4. Riding out the Slump.  A whole chapter should be devoted to the purchase of trolley lines at bargain prices by auto and tire producers.  What happened to public transit financially during the Depression, and how did this lead to a collapse in the value of trolley lines?  Who was building new housing during the '30s, where was it being built, and how did this affect the demand for transit vs cars?  And how did the scrapping of urban rail systems change the design of cities and suburbs?

5. After the Great Sale.  What were the long run impacts of the asset reshuffling of the the '30s?  How did it change the level of market concentration?  The role of family versus industrial farming in agriculture?  The face of urban America?  The political economy of the postwar era of renewed economic growth?

There are a lot of question marks in this outline, since many of these topics haven't been researched, at least not synoptically.  You have some work cut out for you, but you'll be fascinated by what you find, and your readers will be enthusiastic.  Do it.

Monetary Policy During the 1921 Recovery

Robert Murphy went after Barkley arguing in part:

The economy had clearly bottomed out and was recovering before the Fed loosened up the monetary spigots, looking at various criteria. (I should admit that the argument for monetary stimulus does have some support if we look at interest rates, rather than monetary growth. I will elaborate on this in a future blog post.)

Barkley had to respond to a barrage of other attacks but let’s focus on his main point:

My post argued that there was monetary stimulus in 1921 and noted that even though there was downward stickiness of wages in 1945-46 and also in 1982, there were rapid bouncebacks with monetary policy in particular being stimulative during those episodes (and fiscal policy also being so in the 1982 one under Reagan).

The alleged evidence Murphy refers to was a drop in the nominal level of the M2 money supply from mid-1920 to mid-1921 as if the nominal money supply was the right criteria even during a period when the consumer price index (1982 = 100) dropped from 20.9 (June 1920) to 17.6 (June 1921). A balanced discussion of monetary policy during this period can be found here:

To return to monetary policy, while the broad US monetary aggregates M1 and M2 did fall in late 1920 and 1921, they clearly did not suffer a disastrous collapse to the same extent as money supply from 1929 to 1933. For example, the broad money supply as measured by M2 fell by about 6.37% from Q3 1920 to Q2 1921, but began growing again in Q3 1921

Can we do a little simple arithmetic? If the nominal money supply drops from say $47 billion to say $44 billion during a 12-month period when the price deflator dropped from 0.209 to 0.176, does that not mean that the real money supply rose from about $225 billion (in 1982$) to $250 billion? Can I simply ask what part of the real money supply do these Austrians not understand?

Singapore Noodles

EconoSpeak goes gastro!  Here's a scrumptious dish that fights back against holiday bloat.  The traditional recipe calls for shrimp instead of tofu.  I started making it with tofu since my partner is vegetarian, but then I realized I preferred it that way.  And subbing tofu for shrimp makes the dish just a little bit lighter, which adds to the appeal.

Rumor has it that this has nothing to do with Singapore.  It originated in Hong Kong and was given a name that sounded exotic and might increase sales.  But no matter.  I make it 1-2 times a month.  Leftovers are just as good as the first day, maybe better.

Singapore Noodles

1 lb. very thin rice noodles
2 tbs peanut oil plus more for frying the tofu
2 cloves garlic, finely chopped
2 tbs peeled, chopped ginger root
2 carrots, shredded
2 stalks celery, very thinly sliced
2 cups thinly sliced Napa cabbage
1 cup bean sprouts (or throw in a whole package, it's OK)
1 lb firm tofu, cut into slices about 1"x1"x1/3"
1½  tsp curry powder
1/4 tsp cayenne pepper
1 tsp sugar
salt and pepper to taste
1/4 cup soy sauce or more to taste
1 tbs toasted sesame oil

1. Prepare the tofu: press the slices between cloth or paper towels to remove most of the liquid, then fry them at medium-high heat in a nonstick pan with enough neutral oil to film the bottom of the pan.  When they are golden brown, flip them and fry the other side.  Drain on paper towels and set aside.  This will have to be done in multiple batches depending on the size of your pan.  It's a standard technique that can be used for preparing tofu for a variety of recipes.  You can buy pre-fried tofu at Asian markets, but it’s not as good.

2. Prepare the noodles: follow the directions on the package, taking into consideration they will be briefly stir-fried at the end.  Different products have very different cooking instructions.  The main thing is not to overcook, as the noodles will congeal into a thick, unappetizing mass.  You want a touch of al dente.

3. Prepare the sauce: combine the curry, cayenne, sugar, salt, pepper, and soy sauce.  There is considerable variety among soy sauces (and tamari), so experience and judgment are useful.  Don’t add less than 1/4 cup, but you might add a bit more if the soy sauce is on the light side.  Don’t go overboard, however, since you can always add more soy at the table.

4. Heat a wok and add the remaining oil.  When it is hot, add the garlic, ginger, carrots, celery, cabbage, and bean sprouts.  Stir-fry for 3 minutes.  Add the soy and spice mixture.  Toss for a moment to mix, and then add the tofu, tossing for at most a minute.  Now add the noodles and continue tossing until they are heated and combined with the sauce and vegetables.  This is the most difficult step, since the noodles must be separated to coat them more or less evenly, but you don’t want to make a complete mess.  Two implements, like a pair of wooden spoons, are necessary to do this.  Don’t spend more than 1-2 minutes on this last step.  When you are done, remove from the heat and stir in the sesame oil.

5. Serve immediately, and provide extra soy sauce, sesame oil and chili oil as condiments.

This makes 4-5 substantial servings.  Serve with beer or a not-too-dry white wine with a mineral finish.  Riesling is great.

Are Keynesians "Desperate" About the 1921 Recession?

So, Robert P. Murphy would have one and all believe, based on a post by him out of the Mises Institute of Canada on Dec. 22.  His post seems to be triggered by a mistaken comment I made to my own post here on the 1921 recession, although it did not appear in the main post itself and was not part of the main argument.  Murphy has long been one of those arguing that 1921 is indeed a role model for studying later downturns, with the supposed bottom line being that economies will bounce back on their own from sharp downturns if prices and wages are flexible and there are no efforts at monetary or fiscal stimulus.

 My post argued that there was monetary stimulus in 1921 and noted that even though there was downward stickiness of wages in 1945-46 and also in 1982, there were rapid bouncebacks with monetary policy in particular being stimulative during those episodes (and fiscal policy also being so in the 1982 one under Reagan).  Murphy's post has nothing to say about those episodes, meaning, I guess, that he is desperate with this post to distract from the complete failure on his and his allies parts to address these points.

So, let me confess and apologize for the mistake I made in one of the comments to my own post.  I falsely claimed that Commerce Secretary Hoover (under Harding) had initiated stimulative public spending in 1921, which, while it did not kick in until after the bounce happened, aided the move out of the recession.  This was inaccurate.  Hoover proposed such spending, but his proposals were not accepted.  He did increase public spending after 1929, as I also noted, and which Murphy does not dispute, indeed revisits and reiterates.

So, does this mistake on my part in this comment indicate "desperation," or is it those failing to reply to the arguments in the main part of my post (still waiting to see those) who are desperately floundering around for an appropriate response?  Murphy usefully provides data on federal spending during the period, and indeed it fell.  However, by far the largest decline he shows in his post was between 1919 and 1920, when federal spending fell from about $18 billion to merely $6 billion in 1920.  Murphy does not think that this sharp fiscal contraction had something to do with the collapse of the economy in 1920?  It is true that federal spending continued to decline, but it did so at a very slow rate.  So, it was $5 billion in 1921 and down to $3 billion in 1922, after which it stabilized.  So, yes, the pressure of fiscal policy was downwards, but nothing like 1919-20.  Murphy disagrees about monetary policy, but I shall not repeat the arguments here, and he does not present them again.

He also shows spending during the Hoover presidency.  Again, I agreed with him that those criticizing Hoover for running balanced budgets were off.  FDR ran on a balanced budget platform against his deficit spending.  However, while indeed Hoover did engage in public works spending, as I noted in my comment, building the Hoover Dam and a lot of airports, the increase in spending was relatively modest, although notable in percentage terms.  So, it was $3 billion in 1928 and 29, but had only risen to $4.5 billion by 1932 and 1933, to be compared with the $18 billion in 1919 and the $6 billion in 1920, much more stimulative than what Hoover had going after 1929, even if he had a rising trend.

Again, my story was more about monetary policy, and I repeat that neither Murphy nor any of his allies has even remotely responded to my points about what went on in 1945-46 or 1982.  There was a -12.7% change in GDP in 1945 with the fiscal spending decline, but also a quick bounceback the following year, like after WW I, but with downward wage stickiness and an expansionary monetary policy.  1982 also saw a rapid bounceback, but I leave it to anybody interested to go back and look at my original post that lays out further details, including commentary on our more recent case, which does not remotely resemble 1921.  The point that one might not be able to infer anything at all today about what policy today should be based on what went on in 1921 remains I believe both valid and pretty straightforward.   Looks to me like those disagreeing with this are the desperate ones.

Barkley Rosser

Forest Grump

I can’t let this go by without comment.  Today’s New York Times has a big front page story on the prospects for mitigating climate change through forest growth and protection.  It has stories about successes in Costa Rica and Brazil, with feel-good mentions of the butterflies, monkeys and other creatures whose habitats can be saved.  Only the most churlish reader would fail to jump on the bandwagon.

Churlish like me.  Actually, I’m completely on the bandwagon for protecting forest biodiversity, ecosystem services, habitat for the millions of human forest-dwellers, especially from traditional cultures, and the recreation and scientific values that natural forests can provide.  And I think there are modest gains to be made in climate protection, mainly having to do with the timing of atmospheric carbon loading.  But the story is profoundly misleading on its most important claim, that a ton of carbon withdrawals due to planting trees or not cutting down trees that were expected to be cut exactly offsets a ton of carbon released by extracting and burning fossil fuels.  Its casual use of “emissions” numbers assumes that this equivalence holds, and it’s wrong.

Specifically, the article claims that by massively increasing forest cover we can “pull a sizable fraction of human-released carbon dioxide out of the air and lock it into long-term storage.”  This is carbon we can then allow ourselves to release through the use of fossil energy, knowing we can make it go away.  It’s convenient to believe this, of course, since the resistance to cutting back on coal, gas and oil is intense, but what if it’s not true?  If we struggle to reach any fossil fuel carbon target, what’s the cost of setting the target too low?

The issue of forest sequestration and atmospheric carbon is far too complex to delve into here.  I can make only a few simple points.

1. The impact of forests on carbon cycling is complex and depends on a number of specifics, like the latitude of the forest, specific tree species and soil types.  Any simple statement about the effect of “forests” on global climate change is misleading.  It may well be the case that some forests (mainly boreal) are net contributors to climate forcing.

2. Carbon is withdrawn from the atmosphere when it is fixed in plant growth.  It returns to the atmosphere when plants decompose, as they will.  The net effect depends on the change in forest cover, not its amount.  To alter climate forcing over a given time period, say a century, this change has to be permanent over that same time period.  Now, why might a change in forest cover not be permanent?  Two good reasons: future land use or resource decisions by people and the effects of climate change itself.  If people 50 years from now cut down a forest we plant today, the effect is simply to reduce carbon loading in the present in order to speed it up in the future.  But climate change makes the problem even worse.  First, changes in temperature and precipitation patterns that are already baked in are likely to cause significant forest die-backs.  A portion of the trees we plant today are essentially doomed, although we don’t know which ones or how many.  Second, it is likely there will be severe impacts on agricultural productivity, especially toward the later years of this century, and that may lead to renewed forest-clearing to meet food needs.  The bottom line is that a ton of carbon released by burning fossil fuels is a definite ton, but a ton sequestered through forestation is a maybe ton, depending on future events we can’t control or predict.

3. The Times article played up natural forests, like Cuatro Rios, a recovered rainforest in Costa Rica.  Many of the projects financed by Reducing Emissions from Deforestation and Forest Degradation (REDD), a UN-based scheme for funneling carbon offsets into forestation, however, support monoculture plantations of fast-growing trees like eucalyptus, since this bulks up the short run sequestration numbers.  Such forests are of dubious value as habitat, and people from traditional forest communities are at risk of being expelled from their homes to make way for industrial tree operations.  Managing forests for carbon is not the same as managing them for cultural and ecological values.

So why, if a non-specialist like me can make these arguments, are the majority of climate scientists and environmental NGO’s so enthusiastic about the use for forestry for carbon mitigation?  I think there are a number of answers, with different people moved by different considerations.

1. From a scientific point of view, the problem of time frames simply doesn't come up in climate models, since the models are intractable over the longer time horizons that are relevant for policy purposes.  We know there is a short run sequestration benefit, and how much of that benefit will be reversed (as some of it almost certainly will be) in decades to come is not something the models can tell us.  Of course, such models also don’t include future human actions that can undo forest gains, nor can they.  The scientific credo is to say what you know and remain silent about what you don’t—minimization of Type I error.  It’s great for the progress of knowledge but often disastrous for pubic policy.

2. For those who care about natural forests, as most environmental groups do, the linkage between forestry and climate is immensely convenient.  National governments and international organizations have lined up behind REDD and similar programs, and it would seem to be insane not to encourage and benefit from this.  If the green groups can ensure that the definition of what constitutes a “forest” excludes mono-plantations and land grabs that expropriate indigenous people, their goals may be realized.  (It could happen, but I wouldn't bet on it.)  But signing on to a myth about climate in order to advance a forest agenda has costs for the climate.

3. The global forestry programs target tropical forests in developing countries.  They have the potential to transfer income from the rich to the poor—if the money isn't funneled into the pockets of politically-connected business interests that have seized forest lands and now demand to be paid in order not to clear them.  This is another potential convenience.  It’s so difficult to squeeze genuine development aid out of the wealthy countries, and if forest carbon can be a conduit, why not support it?  But this too ends up sacrificing carbon goals because the political will doesn't permit a direct, honest solution.

Am I missing something?  I wouldn't be surprised, and I’d be happy to be set straight.  I would especially encourage readers conversant with the science aspects of forestry and carbon cycling to respond.

The Productivity of Working Hours

John Pencavel, "The Productivity of Working Hours" forthcoming in The Economic Journal. (Online version, before publication in an issue, is now available for those with subscription or library access)

ABSTRACT: Observations on munition workers, most of them women, are organised to examine the relationship between their output and their working hours. The relationship is non-linear: below an hour’s threshold, output is proportional to hours; above a threshold, output rises at a decreasing rate as hours increase. Implications of this finding for the estimation of labour supply functions are considered. The findings also link up with the current research on the effects of long working hours on accidents and injuries.

An earlier version is also available as Institute for the Study of Labor (IZA) discussion paper.

UPDATE: Also featured on The Economist's Free Exchange blog on December 9th: "Proof that you should get a life."

More Piling On Cochrane: Why He Cannot Go Back To Being Taken Seriously Even About Asset Pricing

Oh, I cannot resist.  Since his effort to  dump on Keynesians in the WSJ, lots of people have been piling on John Cochrane, showing that nearly all his claims are not only laughingly bogus, but seriously unsupported even in his own column, such as failing even to mention a single supposedly Keynesian economist who forecast a return to recession as a result of budget sequestration, a centerpiece of his embarrassing column.  A sampling can be found Mark Thoma's links for today at economistsview, sort of a Christmas Eve special.

In any case, what caught my attention and is pushing me into  the piling on as well is a remark Brad DeLong made in his post at the link entitled "Cochrane ought to simply say..."  He suggests that Cochrane has made such a big fool of himself out of all this that he should just go back to working on asset pricing.  I am going to argue that even in that arena, he has made a bit of a fool of himself and should also be ignored to some extent, even though he has a long and respectable publication record in the area.

So, what is his problem?  He is one of the leading figures in finance who has simply ignored dealing seriously with the phenomenon of "fat tails," more properly known as kurtosis (or even as leptokurtosis), which are widely known to be ubiquitous in many financial time series.  This is  more a subject for Nassim Taleb, although he pushes things further to talk about full-blown Keynesian-Knightian uncertainty that he calls "black swans," arguing that modeling fat tails is a matter of "grey swans" because we can estimate various probability distributions that show them, and that the crash of 2008 was obviously coming, whereas true black swan uncertainty involves there being no probability distribution at all.

Where does Cochrane fail to do this?  In his widely used and admired grad textbook, _Asset Pricing_.  Let me say that indeed this is a well written book that does a good job of covering most of the material in standard financial  economics related to asset pricing.  However, it has one very unfortunate and peculiar lacuna, not corrected as of the last time I checked.  He simply does not discuss the existence of kurtosis or fat tails in most  financial time series.  The words "fat tails" "kurtosis" and "leptokurtosis" simply do not appear in his famous book. Nowhere, nada, not at all.

Now I have encountered admirers of his who argue that he does address the issue.  The defense in this case rests on noting that when he presents the theory of stochastic discount factors, he does note specifically which of the theorems hold when returns are non-Gaussian (allowing kurtosis) and which only hold when returns are Gaussian, that is normal, without any fat tails.  However, he fails to go on anywhere else in the book to discuss how to deal with the cases where they are not normal. I  note that some of the competitors to his book, such as that by Cambell, Lo, and MacKinlay, do at least talk about this issue and the fact that most returns are kurtotic, even if they do not say a whole lot about it. (It must be recognized that dealing with fat tails formally is hard, with copulas being one way that practitioners have attempted to do so, with the use of one of those, the bivariate normal Gaussian one developed by David Li becoming implicated in the blowing up of AIG in 2008, leading Li to escape to China.)

What is really curious here is that at the time of the crash in 2008, when he was criticized for not talking about fat tails, Cochrane defended himself by noting that Eugene Fama, also at Chicago Booth and his father-in-law to boot, knew all about fat tails because he had worked with Benoit Mandelbrot at one point, one of the earliest people to point out that asset returns have fat tails and proposed using fractals to study the phenomenon.  Indeed, Fama initially supported Mandelbrot's argument that variances are asymptotically infinite, but then turned against him on this matter (they do not appear to be so empirically), although ignoring evidence that fourth moments (kurtosis) may actually be so.  In any case, Cochrane claimed that even though Fama abandoned Mandelbrot on this issue, he knew about asset returns having fat tails and that anybody who studied with him knew this.  Maybe this is so, but there seems to be might little evidence that Cochrane has been passing this on to  his students, even though he is reputedly a good teacher.

BTW, I posted once on this specific matter previously at the time of the death of Benoit Mandelbrot.  One commenter argued then that what financial economists did instead of looking at kurtosis of the overall distributions was instead to focus on volatility clustering by using ARCH/GARCH models, and so on, which is true.  I noted then that these suffer from the problem that they do not model the exogenous shocks that set off the clusters, although such clusters clearly exist.  In any case, it remains true that Cochrane and his closest allies have continued to largely ignore the fat tails phenomenon, and this makes him look pretty pathetic in terms of why anybody should take him really seriously even in his area of most basic research.

Barkley Rosser

PS:  And Merry Christmas to all who celebrate it!

Wither the Ruble?

Did I mean to say "Whither the Ruble?"  No.  I am commenting on last week's jumping up and down over the 17% decline of the Russian ruble last Tuesday, led most loudly by Paul Krugman on how Putin's "bubble burst."  By the end of the week the ruble was only down  by 2% and rose again today, although this did not make the news that the commentary on how the ruble was done for and Putin was clearly paying the price for his sins (although, of course, it is the Russian people who are going to pay the price next year and possibly longer of the upcoming recession).

Quite aside from the obvious lack of further withering after last Tuesday's apparent meltdown, there are reasons to be somewhat cautious about predicting further major collapsing, although it certainly cannot be ruled out.  One ironically is a side effect of the economic sanctions and the Russian reaction to them, with the sanctions certainly having contributed substantially to last week's decline.  Imports into Russia have been sharply reduced, so that despite a major decline in oil export revenues as oil prices decline, the current account of Russia is in surplus and likely to remain so for the near future.

Another is that Putin went out of his way to largely eliminate Russian sovereign foreign debt, with the central bank still holding about $370 billion in foreign exchange reserves, although maybe as much as $100 billion of that is tied up in various ways making it all but unusable.  Where there is a Russian foreign debt problem is in the Russian private sector, with many Russian companies having run up foreign debt that must be refinanced next year.  This could be a big problem, if sanctions remain in place.  This is where the sanctions bite, and if the ruble were to resume falling seriously, would aggravate their refi problem.  Indeed, contemplation of this was a major part of Krugman's discussion, particularly another post on Russian foreign debt, which has been holding steady at about 35% of GDP, most of this private debt. 

Obviously, the main fundamental driving down the ruble has been the falling price of oil.  This could easily go lower and probably will, with the Saudis holding production steady and even stating that they could handle a $20 per barrel price.  They probably could, as the world's lowest cost producer.  But if oil hits such a price, it will not stay there long, and indeed bottomed out in the low 30s near the end of 2008 after the collapse of the then oil price bubble.  This one does not look so much like the collapse of a bubble as a basic supply and demand adjustment: demand has been weak and supply has increased from various sources.  The Saudis have decided to let the price fall enough to drive out the high cost producers, some of them in the US, and then the price will go back up, if not necessarily to where it used to be.  Indeed, some observers argue that oil is already oversold and could go back up to around $70 per barrel fairly soon, as part of the decline was due to technical trading, basically a downward bubble that may have finished. If this bounce happens, there will not be all that much more withering of the ruble.

Let me be clear that I am not at all applauding Putin, whom I despise, and obviously he could substantially improve the situation there if he stopped messing in eastern Ukraine and got the economic sanctions removed.  However, he seems to have sold the Russian people on suffering economic privation for these foreign escapades, at least for now, invoking WW II with charges of "fascism" in the Ukrainian government and "aggression"by NATO, these given some support by there actually being loudmouthed extreme nationalists in the Ukrainian government and the Kerry State Department having stupidly put the loudmouthed neocon, Victoria Nuland, into a senior position.  I know very knowledgeable and intelligent people in Moscow who are buying Putin's tripe.

As it is, I agree with Krugman that Putin's activities are indeed showing that "conquest is for losers," even if Putin can continue to con his own people on this for awhile longer.  In the immediate moment my biggest sympathy goes to Russia's central bank governor, Elvira Niubilla, who was pressued into helping finance a shady Rosneft deal, probably the immediate trigger of last Tuesday's collapse, and whom Putin has denounced for not stopping the decline.  Former central banker Victor Gerashenko has said that if he were in her position, he would "get a gun and shoot myself."  Sigh.

Barkley Rosser

World is Going to Hell -- Send Money!

"Today, we're preparing for one of the toughest fights of our lives... but we can't do it without you."

Most of these incessant solicitations from "progressive organizations" skip the inbox and go directly to the trash folder. Enough of them slip through to leave a vague ambience of doom and desperation.

It all started with those Reader's Digest "sweepstakes" didn't it? Then came Richard Viguerie and the reign of Robotype machine mail order conservatism.

Now everyone's doing it... doing it... doing it.

Sandwichman will MAKE THEM STOP! 

But I need your help...

Report of Panel of Consultants on Secondary or Indirect Benefits of Water-Use Projects, Part IIB

Conclusions and Recommendations

B. Summary of Principal Recommendations

This summary does not include all the minor and detailed recommendations and suggestions which appear in Parts III - VI of our report, but concentrates on those of major importance.

1. Secondary benefits are much less certain and calculable than primary, and more dependent on far-reaching hypotheses. moreover, it appears that usable formulas cannot be based on data that are capable of furnishing complete and accurate comparisons of effects "with and without" a given project. In recognition of this, we recommend that, in benefit-cost ratios, primary and secondary benefits be separately shown; e.g., if the total ratio is 1.8:1, but the primary-benefit ratio is 1.15:1, the result be expressed as (1.15 + .65):1.

2. It appears that Manual procedure for determining the scope of projects could result in carrying one project out on a scale such that the last separable increment would have a separate benefit-cost ratio barely more than one whereas early separable increments of some other projects, whose total benefit-cost ratio was lower than the total benefit-cost ratio of the first, might show a higher ratio than that of the final increment of the first project. We therefore recommend that benefit-cost ratios for separable increments be separately stated, in order that appropriations may be so allocated as to produce the combination of increments yielding the greatest total benefits.

3. We find that benefits "induced" by increased demand and benefits "stemming" from increased supply are of such character that, with minor exceptions, it is not proper to add them in figuring total secondary benefits from a given project at a given time, During construction, secondary benefits are all "induced", while during subsequent operation induced benefits (so far as not covered by "stemming" benefits) appear to be limited to identifiable particular cases of minor magnitude, and the main secondary benefits are of sorts for which the "stemming" procedure (with modifications which we will suggest) affords an appropriate rule-of-thumb approach. We therefore recommend that the calculation of benefits be separated between periods of construction and operation of a project, as, explained further in recommendations 4 and 5.

4. As to induced benefits taking the form of employing otherwise-unemployed resources during construction, we recommend that the Bureau explore with other appropriate agencies, such as the President's Council of Economic Advisors or the Bureau of the Budget, the possibility of setting up a sliding scale of such benefits, varying with the probable state of activity in the economy (the construction industry deserving special weight). Such a sliding scale might be made available as a standing formula for guidance in estimating such benefits. The appropriate time to apply the formula would be the last possible moment before decision on the undertaking of a project, when some reasonable forecast of the probable state of economic activity may be feasible. Any such overall national formula should be supplemented by local or area information which may indicate possibilities of mopping up local pools of unemployment or utilizing unused facilities. For the construction period, estimates varying with the probable state of economic activity, to the extent that forecasting is feasible, appear superior to blanket allowances, e.g., of 5% or 6%.

The result might be treated as an "offset to cost" of construction or as a public benefit. We see advantages and disadvantages for each method, and have no firm preference between them.

5. As to benefits "stemming from" increased supply of project products, we consider benefits of this sort exist, to an extent impossible to measure, but far less than the full amounts computed by the Manual procedures, We would accept a more limited form of this procedure as a rough approximate representative, not only of literal "stemming" effects, but also of more general effects, diffused through the economy and not at present measurable. We have in mind gains from lessening pressure of mobile resources on land areas other than project lands, and otherwise in-creasing productivity or lessening its decline. We propose four limitations on existing "stemming" procedure:

(a) Subtraction of full economic costs of "stemming" activities, or some agreed estimate of them, instead of the costs now subtracted.

(b) Reduction of disparities between commodities by exclusion of major processing operations.

(c) Allowance on the "without" side of the "with and without" comparison for benefits "stemming" from alternative uses of resources represented by project costs.

(d) As indicated in recommendation 3, above, induced benefits during operation be not included except in particular cases where a definite showing is made that their inclusion is justified.

6. Inclusion of "public" benefits is justified. We judge that, in the case of municipal water supply in instances where no alternative source is available, public benefits beyond rates charged for water are warranted and recommend further study of this question. In the case of irrigation, we take. exception to the allowance for "settlement opportunity", and recommend that this be treated as a qualitative, "intangibles" factor.

7. As to power, we find that it is proper to assume that, in the absence of a project, power will be supplied from an alternative source, and therefore propose that the total benefit imputed to project power be the cost of power from the next cheapest alternative source. This excludes all benefits of the "stemming" type, specifically those designated in the Manual as B-2, B-3, and C-3. If the B-2 type of benefits (benefits of private distributors of power purchased from a public project) are nevertheless employed, we find them computed on an exaggerated basis and recommend that they be reduced by deducting full allowance for economic return on all capital in accordance with recommendation 5 (a), above.

8. As to qualitative and intangible benefits and costs our study has led us to look toward diminished reliance on quantitative computation and toward attaching greater relative importance to qualitative effects of the alterations in distribution of population, types of community, etc. We therefore suggest that these matters are worth increased attention and study, including sociological aspects. These are, of course, matters that can be described and appraised only by judgment.

Report of Panel of Consultants on Secondary or Indirect Benefits of Water-Use Projects, Part IIA

Conclusions and Recommendations

A. Introduction

The present panel has been engaged as a group of disinterested students to make an objective appraisal of the disputed procedures for evaluating secondary benefits and costs of Federal water-use projects, on which the Bureau of Reclamation has failed to reach agreement with the other five agencies represented in the Subcommittee on Benefits and Costs. We have been engaged by the Bureau of Reclamation, with the knowledge and approval of the other interested agencies. The personnel of the Bureau have given us the fullest assistance and cooperation, in making available to us the pertinent documents in the case, in presenting to us the wide variety of views, to be found among their members, and in answering questions which have arisen from time to time in the course of our study. The members of the panel are impressed with a deep sense of their responsibility in this difficult question. Able minds, more conversant with specific problems than the members of the panel could hope to become in their necessarily limited study, and exhibiting familiarity with the relevant concepts of economic theory, have with time and effort hammered out a considerable amount of agreement on principles and at least, a compromise on general outlines of procedures; and we should feel presumptuous if we undertook, on much briefer study, to propose disturbing any material part of whatever consensus may have been reached, without imperatively strong reasons. In fact, it appears that, in the various documents that form the record of this case, most if not all of the pertinent theoretical concepts are embodied, in one way or another, but they appear with twists and one-sided applications, which alter the meaning of concepts in ways not unrelated to their pragmatic effects. The positions of majority and minority cannot both be right: real agreement necessitates change of one or the other.

Our conclusions are of two sorts. A few are specific and not far reaching, and could, if approved, be put into effect fairly readily. Other's are based on more fundamental questions as to the economics involved in the procedures, and are so far-reaching as to call for further study, and presumably consultation between the interested agencies, before they could be embodied in working procedures. On certain points, we agree with majority positions, on others with the minority; but on some rather fundamental matters we dissent from both. We take the principle of the "with and without" comparison as controlling, but find that certain limitations on its application have prevented the procedures used from truly reporting the results of such a comparison, which they are supposed to report, or to be attempting to approximate.

We seek a method of determining what projects promises net surplus of national benefits over conditions as they would be without these projects; also of ranking different projects, and different increments of project scope, in order of relative economic justifiability. All parties appear to agree that the basic answer sought is the aggregate of quantitative differences in the national real income, with and without a given project, wherever such differences may occur and whether they are plus or minus; to which should be added consideration of qualitative differences and evaluation of them wherever possible. The inescapable difficulty, even for the quantitative differences, is that, for the ramifying secondary effects, accurate and definitive answers require omniscience. Lacking this, some things can still be measured, but not all the hypothetical effects of the presence or absence of a given project. Something short of measurement is inevitable. Methods of meeting this difficulty are subject to several criteria.

First, similar standards should be applied to different projects, and to both sides of the "with and without" comparison.

Second, these standards should be framed in the light of objectively valid conceptions of the essential cause-and-effect relationships and these conceptions should be kept clear and distinct from compromises of procedure that may be necessitated by limitations of evidence or otherwise. If this is done, a range will appear – in some cases quite a wide range – within which the answer may depend on judgment, without possibility of even relatively precise measurement.

Third, in this situation, without pretending an unreal precision, a different kind of end may be served if formulas can be devised calculated to yield results within the general order of magnitude which judgment suggests. Such formulas would at least make for uniformity and comparability, reducing the scope for the vagaries of personal equation or agency bias. This is in itself a weighty consideration.

Lastly, if at all possible, procedures should be simplified. One of the apparent vices of the present situation is the fact that some of the procedures are so complex and involved that the meaning of what lies behind a benefit-cost ratio is accessible only to a select few, even among. the initiated. This hampers what needs facilitating; namely, proper democratic scrutiny of the proposal of executive agencies. The material involves inescapable complexities and uniformity in handling it requires formulas of some sort, at some stage or stages. Democracy has to rely on technicians in matters inscrutable to the non-specialist, but preferably where the specialist is following a well-authenticated technique. In this case, the disagreements among the specialists are evidence that they do not possess such an authenticated technique, for the results of which a representative government can safely take their word. It needs to be able to tell what they are doing, and what their procedures mean.

All this creates a dilemma difficult to resolve, In this dilemma there appear to be two tenable alternatives, The more drastic method would be to abandon the attempt to measure secondary benefits. Computation would then be reduced to the furnishing of evidence on the basis of which secondary benefits may be appraised by a frank exercise of judgment. The less drastic method is to use formulas calculated to give results that fall within the range of reasonable judgment-estimates, but which are with equal frankness treated as rule of thumb, not as definitive measures.

In the first case, regional offices should furnish statistical evidence prepared under rules that are uniform within a given agency and at least comparable as between agencies. The first judgment-estimates would presumably be made in the central office of each agency, as a means to intra-agency uniformity; but inter-agency comparability and equity would be in the hands of higher authorities, who would need to have the evidence passed up to them in usable form. If this seems too indefinite – and the President's Water Resources Policy Commission has asked for greater definiteness and inter-agency uniformity – there is an arguable case for the view that it is better than spurious definiteness, that final decisions actually use judgment rather than implicitly following benefit-cost ratios calculated by different agencies in different ways, and that the suggested method would tend to implement the ultimate decision with better-prepared evidence than it now has. We see force in this view but we recognise also that the pressure for rules of thumb is strong, and the advantages of more definite uniformity great. We therefore propose continued use of formulae, regarded as rules of thumb, and altered from present Bureau practices, for "stemming" and "induced" benefits; but for some elements we propose that they be left to the exercise of judgment, without attempting quantitative measurement.

Accidentally Revealed: The New York Times Is Still Suppressing News “Every Month”

Today’s New York Times has a self-celebratory story by Margaret Sullivan, its usually perceptive public editor, that tells us how independent its news operation is today compared to a decade ago.  Today, we are told, repeated government requests to withhold stories are routinely turned down.

Wait: did she just say that the government continues to ask The Times to suppress news stories?  Yes, and referring to Dean Baquet, the paper’s executive editor, Sullivan writes

Mr. Baquet told me that, even now, “certainly a month doesn't go by” that there isn't some government effort to persuade The Times not to publish something. How often are they successful? “Very rarely.”

What jumps out from this is not the fact that stories are occasionally withheld, which may well be justified, but that we aren't being told about government pressure to suppress the news when it isn't.

From the reader’s standpoint, the government’s attempt to stifle the news is news, and we’re not getting it.  From the government’s standpoint, The Times' policy means that pressuring to keep information under wraps is a one-way bet.  If they win, the public is kept in the dark.  If they lose, there is no cost to trying because the public never finds out about that either.

Hint to The Times: if they want less pressure from Washington they should report on it.

Quote of the Day: That Sound You Hear Is the Snorting of Old Socialists

From Robert Paul Wolff, describing the anticipation of aging socialists like himself that another Great Depression would fulfill the prophecies of Marx:

The pulse still quickens in the circles I frequent when the tech stock market bubble bursts or Paul Krugman forecasts a calamitous reversal in housing prices, the way old war horses flare their nostrils and stamp their hooves at the sound of distant trumpets. But the truth is that our corporate masters will never again allow a serious threat to the foundations of the economic house they have built.

Report of Panel of Consultants on Secondary or Indirect Benefits of Water-Use Projects, Part IB

B. Summary Response to the Commissioner's Instructions

The Commissioner's instructions to the panel open with a general paragraph calling for an appraisal of Bureau of Reclamation procedures, and for our own recommended basis for procedure. The main subject with which these procedures deal – secondary benefits and costs arising from water-use projects – has been defined to us as consisting of differences, not covered by primary benefits and costs, in the total national output of goods and services with the project as compared to similar output as it would be without the project. We understand that it is as measures of these differences that we are asked to appraise existing or proposed procedures.

Instruction (1) concerns Bureau of Reclamation procedures. After careful consideration, it is our conclusion that these procedures for evaluating secondary or indirect benefits and costs include some elements for which quantitative estimates are warranted, and further elements for which an arguable (but not conclusive) case could be made for limited application of quantitative estimates; but that the applications actually made by the Bureau go far beyond what can be soundly identified as quantitatively measurable secondary benefits (in the above sense) attributable to public water-use projects. More broadly, we believe in the importance of secondary benefits, but find them so ramifying, involved and conjectural that the attempt to compute them as a national total, in dollar terms, by the methods of the Manual or any other methods that appear at present available, cannot properly be regarded as "measurement," though computations of pertinent items may be useful as guides to judgment in rating the importance of these benefits.

Accordingly, we are able to "set forth a recommended basis for the evaluation of secondary benefits and costs" as directed in instruction (2) only on the assumption that "evaluation" can include, for important parts of these benefits and costs, ratings by the exercise of judgment which are not precise enough to justify regarding them as quantitative measurement. As to what secondary benefits and costs should be taken into monetary account, these appear to include the following.

(i) Increased employment during construction, as a non-recurring benefit or offset to cost of construction, dependent on expected economic conditions during the construction period, and subject to offset, in conditions of high-level employment, for the non-measurable impacts of probable inflationary pressures and/or seriously high taxes, including business taxes.

(ii) Locally-accruing gains as a basis for securing reimbursement. The propriety of including these in an appraisal of aggregate national benefits appears to be an arguable question, difficult to settle in favor of either affirmative or negative.

(iii) Local "public" benefits.

(iv) Increased (or decreased) utilization of identifiable existing facilities.

As to the more general question of an aggregate increase in the national product attributable to a project (excess of product with the project over product without it) during the period of operation, as distinct from that of construction, we believe there may be such effects of three general sorts: (a) in the case of irrigation, increase (in the above sense) in productivity of mobile factors of agricultural production resulting from increase in the available supply of arable land, (b) expansion of the field of employment of non-agricultural sorts from a net increase (in the above sense) in the amount of primary agricultural products flowing into the economy, and (c) the furnishing of other basic facilities for production or community life by more economical methods than the cheapest available alternative, the saving representing an amount of productive factors freed for other uses in the general economy. As to (a) above, we think it possible (though far from certain) that current investigations may in future yield results by which the magnitude of the increased marginal productivity might be approximately indicated, but we know of no methods now available which we could conscientiously recommend as accomplishing this. As to secondary increases of product in general, the main methods used by the Bureau are estimates of benefits "stemming from" the disposal and processing of the products grown on a project, and benefits "induced by" by the spending of the primary income received from the sale of the project's raw products. Both of these methods appear to contain some probable validity; but as to how much (i.e., how large an estimate on these scores is warranted) we think that is a matter of judgment and the best check on arbitrary estimate is a survey of the forms in which such an increase in the national product must be embodied (as developed in Part III, Section 3, below).

This being the nature of our judgment, we are hardly in a position to recommend an alternative formula purporting to measure these secondary benefits. We recognize that both the majority and the minority of the Subcommittee on Benefits and Costs have accepted the "stemming" and "induced" formulas as parts of their (conflicting) procedures; and accordingly our specific comments include, in addition to critical examination of these formulas, conditional suggestions that if formulas of these general sorts are to continue in use, certain kinds of limitations should be imposed on them, tending to prevent them from being built up to totals that appear clearly unwarranted. Since the Commissioner's eight particular questions presuppose the use of procedures of these general sorts, and get their operative meaning from this setting, our answers should be understood in the same sense, as what would be applicable if and to the extent that such procedures are to continue to be used, but not as implied by accepting the idea that these procedures constitute quantitative measurement of the aggregate difference between national product with a project and national product without it.

Some of our specific recommendations bear on matters that do not stand or fall with this major question of basic procedure, and the significance that should be attached to it.

With this explanatory comment, we present our answers to the eight questions put by the Commissioner.

1. Basic assumptions and procedures in the Bureau of Reclamation Manual.

These assumptions and procedures appear sound to the extent that they follow what we conceive to be the controlling principle: that of the "with and without" comparison. They appear sound, as against the majority report, in rejecting double deduction of costs of secondary activities, which an unsigned memorandum describes as "netting benefits already net." However, they do not appear sound in adding benefits "stemming from" and benefits "induced by" a project nor in carrying the computation of "stemming" benefits through to the final consumer and giving the project credit for the whole. Our report will weigh alternative proposals for dealing with this difficulty and will make recommendations, the reasoning on which they rest being developed in the appropriate sections.

2. (a) Should it be assumed that needs met by a project would be met if the project were not constructed?

The answer appears to be: "yes, if it appears reasonably clear that this is what will happen – for example, where power will be produced by a steam plant if not by a hydroelectric project." There it is merely a question of what uses private enterprise will make of resources as a result of a project not being undertaken, the probable similarity of the needs met should be examined. In that case it is our judgment, that any assumption of difference in needs met which would carry an assumption of smaller secondary benefits without the project than with it, should bear a definite burden of proof, which burden will not be easy to sustain.

2. (b) "By what procedure should the analysis account for stimulating expansion of the nation's productive capacity?"

We believe this factor to be highly important, but have found no procedure that can properly claim to measure it quantitatively. The choice appears to lie between two courses: (1) treating this as one of the factors which can be described and given weight by judgment; and (2) using procedural rules of thumb, presented as such, without claim that they can truly "measure" this quantity.

3. "Can the procedures for primary benefits and the general principles of the Subcommittee's May 1950 report be logically expanded to provide adequate evaluation of secondary benefits?"

The report of May 1950 commands high respect for its understanding and general soundness, and is an excellent but incomplete guide. For purposes of expansion of primary-benefit procedures to secondary benefits, its statement on page 9 needs clarification on one key point as to the use of costs to represent benefits foregone. This lack of clarity permits a major disagreement as to whether secondary benefits should be counted on both sides of the "with and without" comparison. The same passage in the May 1950 report needs to be qualified or clarified by the proviso that the significant alternatives are not limited to uses of the identical resources, but include any uses of resources that will be made in the economy in the absence of the project. This qualification figures in one of our suggestions on procedure. As to procedure for determining the scope of a proposed project, the report appears to fall into an error, not of basic importance, which can be rectified without difficulty of principle.

As to the question asked about expanding primary-benefit procedures to cover secondary benefits, it appears that a simple "yes" or a simple "no" answer would be about equally misleading. There are common elements, but the more complex features of ramifying and non-marketable secondary impacts require additional analysis. It is notable that "induced" and "stemming" benefits are barely mentioned in the May 1950 report, and are not analyzed, thus avoiding the most thorny differences between primary and secondary procedures.

4. (a). "Should project costs, associated costs, and secondary costs, in terms of market value, be considered an adequate measure of benefits foregone from alternative uses?"

This is a far-reaching question of central importance. Briefly, ordinary accounting costs should not be so considered; full economic costs, including market rates of return on investment and compensation for entrepreneurial services, may be taken as adequately representing the direct and marketable benefits foregone from alternative uses, but not secondary for which private producers cannot collect market compensation. If these secondary benefits are reckoned on one side of the "with and without" comparison, they should properly be reckoned or reflected on the other side also, in one way or another.

4. (b). "Should the effects of alternative uses be compared with or deducted from the benefits of project uses?"

Unless one notes the context out of which this question arises, one is tempted to reply: "What difference does it make?" The question appears to arise, in connection with the dispute over double deduction of costs in reckoning secondary benefits. And the answer appears to be that a single deduction of this sort is warranted, but not a double deduction. The insistence on comparing rather than deducting seems to be intended as a way of avoiding the second deduction made in the example given in the majority report, top of page 9.

5. "Should the same basic assumptions govern the analysis of primary and secondary benefits?"

This appears to have been dealt with in the answers to Questions 3 and 4(a) above.

6. (a). How can measurements of benefits from a local viewpoint be converted to represent the national public viewpoint?"

In principle, the answer appears to be: by making them one side only of a comprehensive national "with and without" comparison, and deducting corresponding benefits that would accrue elsewhere without the project. However, in practice, local benefits are identifiable, and less uncertain than unidentified nation-wide alternative benefits. Where it seems warrantable to assume that there will be a net national balance of benefits larger than the sum of benefits accruing within the locality, it may be warrantable to count the locally-accruing benefits as part of the national sum, provided the rest of the national sum computed is sufficiently limited to safeguard against exceeding the probable national total.

6. (b). "If direct irrigation benefits (increases in net farm income) represent a national as well as a local viewpoint, should increases in net income in secondary activities represent both viewpoints?"

This question appears to be controlled by the answer just given, and also by the answer to Question 4(a) above, in which the economic meaning of "net income" hinges on the kind of costs that are deducted in arriving at it. One answer would be: Neither primary nor secondary net income should be accepted as representing national benefits unless the costs used are such as represent national benefits foregone, and secondary benefits foregone are taken into the reckoning.

7. "Do secondary benefits vary substantially for different types of commodities and different projects?'

There is a strong presumption that national benefits "induced by" spending bear a substantially equal ratio to the spending, or to the income from which the spending is derived, not differing in measurable ways between different commodities or projects. This kind of benefit is generated only by a net increase of spending, and is most clearly applicable to cost of construction during the construction period. Where locally-accruing benefits, "induced" or "stemming", 'are computed during the period of operation, they might be expected to differ between products and projects; but these differences should not affect the factors used to set limits on any national total which may be used as representative of secondary benefits.

National totals of benefits "stemming from" a project may differ slightly for different kinds of products and projects; but we do not believe they differ to anything like the extent, or in the way or for the reasons that appear in the method now accepted. We believe this method seriously distorts the relative benefit-standing of different kinds of products. We believe it is more faithful to the probable facts to adopt the prima facie assumption that these benefits follow the same proportions for different products in the same general class of project, and the, same for products with a project as without it, putting the burden of proof on any claim of quantitative difference. As to differences of view between the water-use agencies, the most controversial bearing of this question is on the disputed method of computation culminating at page 9 of the majority report. The method of the Manual has an effect equivalent to assuming that secondary benefits with the project exceed those without it in the ratio which of "value added" bears to costs in the "stemming" processes. In our judgment, this is too large a difference for the purpose in hand, exaggerating the net total of "stemming' benefits. The costs used in this analysis appear not to afford valid evidence for an answer to this difficult and far-reaching question.

8. (a) "Can an identical procedure be used to evaluate secondary benefits from irrigation, power, municipal and industrial water supply, and other purposes?"

The problems appear sufficiently different to call for variants of specific procedure. It should be possible to place these on a common basis of principle.

8. (b). "Should savings to power consumers from lower power rates be considered a primary or secondary benefit?"

The economic analysis of proposed hydroelectric power developments should be viewed primarily as a comparison of the relative economy of power generation from different possible sources. It is reasonable to assume that power demand in the United States will continue to grow and that if a proposed hydroelectric plant is not built, the demand will be met by power from the most economical alternate source, usually steam. Hence the total benefit figure for comparison with the project costs added by the inclusion of power features in a river basin development should be the cost of equivalent power from the most economical alternate source. The use of such a benefit figure will fully reflect savings to the public resulting from the decision to choose hydro power rather than steam power for generating purposes. This topic is discussed at greater length in Part V of our report. In Part V, we recommend that the total power benefit, namely, the cost of power from the most economical alternate source, be viewed entirely as a primary benefit.