Robert Samuelson Credits Reagan for the Volcker Disinflation

Paul Krugman has some fun with the latest from Robert (no relationship to Paul) Samuelson:

My point was that the legend of Reaganomics — that supply-side tax cuts produced a disinflation that confounded Keynesians — is not at all what happened in the 1980s. What happened instead was that harshly restrictive monetary policies created a deep recession, and a period of very high unemployment broke the wage-price spiral.

This narrative went completely unchallenged by Samuelson in his strange attack on Krugman. So what was Samuelson’s beef?

From 1960 to 1980, inflation — the general rise of retail prices — marched relentlessly upward. It went from 1.4 percent in 1960 to 5.9 percent in 1969 to 13.3 percent in 1979.

I guess Samuelson forgot that Nixon listened to Milton Friedman for his first couple of years as well as those Ford WIN buttons. And Volcker’s first monetary restraint occurred during Carter’s years in office. But let’s move on:

What Reagan provided was political protection. The Fed’s previous failures to stifle inflation reflected its unwillingness to maintain tight-money policies long enough to purge inflationary psychology.

Paul questions whether the Reagan Administration was totally behind Volcker’s tight monetary policy:

As it happens, I don’t agree on the political story either; based in part on what I saw during my year in government (1982-3), Reagan’s inner circle didn’t even understand that monetary policy was what was going on.

But we can go back to a 1986 discussion from Tom Redburn:

President Reagan's four appointees as governors of the Federal Reserve Board prodded Fed Chairman Paul A. Volcker toward a less restrictive monetary policy when they outvoted him last month on a cut in a key interest rate charged to financial institutions, sources said Tuesday.

The people that President Reagan was appointing to the Federal Reserve did not agree with the Volcker majority and eventually garnered enough influence to force a less restrictive monetary policy. I offer this not as a criticism of President Reagan as some of us loathed the severity of Volcker’s tight monetary policy. But people like Samuelson heart both Reagan and tight monetary policies. Faced with the inconsistency of these two positions – they decide to rewrite history. Update: Dean Baker has more on this including a nice graph of inflation that undermines this line from Samuelson:

Worse, government seemed powerless to defeat it.

Never mind that Dean’s graph shows inflation fell when the FED did tight money under Nixon and again fell after Gerald Ford started up with those damn WIN buttons.

On The Origin of Ecological Economics

There are two questions here to be answered, one of which has a new answer.  The first is the origin of the concepts that make up modern ecological economics.  The second, which has a new answer, is who first neologized the label:"ecological economics"?

Let me answer the second first.  The term became widely know after the journal of that name, Ecological Economics, was founded in 1989 by the ecologist, Robert Costanza.  Very briefly speaking, it has contrasted itself with "environmental economics," which is viewed as being based on conventional mainstream neoclassical economics, studying how to internalize externalities and also how to properly provide environmental public goods as studied in the "market failure" approach of economics.  The general stance of ecological economics, which has numerous sub-branches that squabble much with each other (and which I am not going to get into here and now) views this as insufficient.  It emphasizes needing to more clearly and explicitly incorporate both insights from and the modeling of ecology in connection with economics to emphasize and focus on the ecological foundations of economies, that real world economies are ultimately embedded within ecosystems, which are duly impacted by feedback from those economies.  The journal has from the beginning claimed to take a "transdisciplinary" approach.

So, initially Costanza and those around him who founded the journal claimed to have coined the term, with it unclear which of that group initially did so, it more or less emerging from ongoing discussions.  Some of those included Ann Marie Jansson (some have pointed to her as the originator), Carl Folke, Cutler Cleveland, and the more senior and well-known Herman Daly, among others.  It supposedly arose around then, in the late 80s.  But, I long knew they were wrong because I had been using the term for years prior to that period of time (the only one of those people I knew prior to then was Daly).  But, I did not coin it and never have claimed to have done so.

Where did I get it?  From the regional scientist, Walter Isard, who had served on the thesis committee at Penn of my major professor, Eugene Smolensky (with whom I studied at University of Wisconsin-Madison).  In 1972, he published a book with four otherwise completely obscure coauthors whom I shall not list entitled _Ecologic-Economic Analysis for Regional Development_, New York: Free Press, which I bought a copy of at the time and read thoroughly.  He proposed using an old standby of the old regional science, input-output analysis, to do this.  The crucial idea was that in the I-O matrix one could essentially break it into four broad sub-matrices: an economy to economy one, an economy to  ecology one (think pollution), an ecology to ecology one (Eugene Odum was already conceptualizing ecosystems as I-O systems, which species consumes which species), and ecology to economy (lots of stuff).  Each sub-part could have lots of detail.  I am not sure the precise phrase "ecological economics" appeared in that book, but it was pretty much there in the title, and from reading that book on, I thought in such terms.

The new news is that the term was used even earlier.  A new paper in Ecological Economics, the December 2014 issue to be precise, by Qi Feng Lin, "Aldo Leopold's unrealized proposals to rethink economics," 108, pp. 104-114, identifies the famous forestry ecologist, professor of game and wildlife management, and father of the "land ethic" from the University of Wisconsin, which he coined in his most famous work (published posthumously in 1949), _A Sand County Almanac_ (for those in Madison, Leopold was also the father of the UW-Arboretum.). It turns out that at the very end of his life, when he was writing A Sand County Almanac, Leopold was indeed doing a broader rethinking of economics from a strongly ecological orientation, including drawing a diagram that looks like Quesnay's Tableau Economique could have done it of "food chains" that go from the natural world to the economic world.  However, the bottom line on the phrase itself is that he wrote a memo to the University of Wisconsin administration in 1947 in which he proposed that there be a position created at the UW in, yes, "Ecological Economics."  Given his untimely death not too long after, there was no action on this, and Leopold's memo remained obscure and unknown as near as I can tell until unearthed now by Lin.

So, what about the origins of the ideas of modern ecological economics?  Well, I think the key here is in fact in what we see in Isard and Leopold, input-output analysis and its relatives.  Indeed, the second paper in the journal, Ecological Economics in 1989, was a paper by Paul Christensen, "Historical roots for ecological economics - biophysical versus allocative approaches," 1(1), pp.17-36.  Rather than going to the usual suspect, Malthus, he went to Quesnay and the physiocrats, with his Tableau Econoimique long being viewed as the fountainhead of input-output analysis, and certainly emphasizing land and nature as the foundation of the economy.  That is probably the fundamental source, although most economists of that era and earlier wrote much about agriculture and its ecological foundations, with an even earlier candidate possibly being William Petty.  As it is, I note that Herman Daly's first important publication was in the JPE  (of all places) in 1973, a year after Isard et al's book, "Economics as a Life Science," essentially followed him by proposing at the aggregate level the quadripartite I-O approach that Isard and crew had already laid out the previous year.  In any case, as sort of the older godfather of the Costanza group, Daly provides the crucial link between these earlier appearances of the concept and its full emergence at the end of the 1980s.

Barkley Rosser

To Kick Off 2015: Hippie Punching

The econ blogosphere has its fleeting obsessions, and the first of the new year seems to be whether heterodox economists have anything meaningful to say about the mainstream.  Simon Wren-Lewis confronted this head on, while Noah Smith broached it as an appeal to symmetry.  (The right tries to hijack economics and so does the left; we steer a middle course, etc.)

Well, there is an element of truth here.  Lots of heterodox criticisms of the mainstream are rooted in ignorance.  An even larger proportion of out-on-the-street leftwing criticism attacks a straw man, not economics as it actually is.  A meme can gain currency and no amount of rebuttal seems to do any good.  Remember “the problem with trade theory is that it is based on Ricardo, who assumed that capital doesn’t flow across borders”?  I still hear this one all the time.  You’d think that people might pick up an international trade textbook at some point just to see if it was true.

And many heteros blithely assume a strict correspondence between how much mainstream economics you accept and where you stand on a left-right spectrum.  There is a lot of ideology packed into econo-thinking, but it’s not as simple as that.  For instance, mainstream econ recognizes lots of market failure (as SW-L points out), and this might be construed as left-friendly.  On the other hand, the benchmark against which we measure solutions is how the economy would have performed if this failure hadn’t existed, and markets had been complete and frictionless.  That leans in the other direction.  If you think rough equality of leaning means objectivity, you are in Noah’s camp.  Me, I think ideological significance has to be tracked down in the particular domains where it appears and considered on its own terms.  (Yeah, that’s extremely abstract, but a lot of my posts over the years have been about those domains, in econometrics as well as pure theory.)

Meanwhile, what about the mainstreamers—how much do they know about the dissidents they criticize?  For instance, it would be hard to find a more sympathetic mainstream economist than Thomas Piketty, but his passages in K21 on the Cambridge controversies are egregiously misinformed.  This is not just about one guy: no doubt Piketty passed around the manuscript to many of his colleagues, high-level economists all, and none of them noticed that something was fundamentally amiss.  Meanwhile, hardly any mainstream economists pay attention to economic sociology, even though good work has been done on that front for decades.

And I shouldn’t leave this topic without saying that the best heterodox economists know their mainstream stuff backward and forwards—they know it better by honing their criticisms.  Consider someone like Lance Taylor, for instance; who is the mainstream LT who gives equivalent attention to the arguments on the other side?

So enough hippie punching already.  There is a lot of half-baked or even salmonella-raw argumentation on all sides.  Nevertheless, with the distribution of resources being what it is, heterodox types usually have to pay more heed to the mainstream than vice versa.  Their arguments may be wrong, but at least they have a clue who they’re arguing with.  The reverse is seldom true.

That follows from a mainstream (incentives) analysis, by the way.

Has The Oil Price Drop Come To An End?

Very likely. Reports from November report that the Saudi government has been preparing its budget for the price of oil to be between $45 and $50 per barrel.  The price rose during the last two days and fell slightly today, with Brent crude currently sitting at $48.21 amid rumors of the Saudis playing games in the forward markets.  They can afford to do so and have the whip hand on what the world price is.

So, folks, this may be it.  The Saudis have let the price fall about as far as they want it to, but no further.  If the price stabilizes for some time about where it is now, you first heard it here.  I am not going to attempt to forecast when it might make another move up from this zone, although the Saudi Minister of Petroleum has been quoted as saying, "Do not expect to see prices above $100 per barrel again," although that cannot be ruled out in the longer run.

Barkley Rosser

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

Introduction to Part III of the panel of consultants' report:

Part III of the consultants' report, "Some principles, and some of their consequences," runs to nearly 10,000 words and, in effect, "buries the lede." Section eleven, the last section, states in its underlined, topic sentence:

"Qualitative factors would become increasingly important in proportion as computations of quantitative secondary benefits might be scaled down in the ways here suggested and might become dominantly important."

Indeed, the gist of the entire report may be summed up as that there is only a limited case for quantitative estimates. I have taken the liberty of editing the following "executive summary" of the panel's main argument:

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.

This being the nature of our judgment, we are hardly in a position to recommend an alternative formula purporting to measure these secondary benefits. The inescapable difficulty, even for the quantitative differences, is that, for the ramifying secondary effects, accurate and definitive answers require omniscience. 

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. 

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.

By contrast, the thrust of Budget Circular A-47 was to mandate a quantitative formula that effectively excluded consideration of those "ramifying, involved and conjectural" secondary benefits "[u]ntil standards and procedures for measuring secondary benefits are approved by the Bureau of the Budget." Until when? Until never! The panel of consultants had concluded that evaluation of secondary benefits could not be "precise enough to justify regarding them as quantitative measurement."

Below is a summary of the eleven principles presented in Part III of the consultants report. The Scribd file that follows contains the full text of Part III:

1. Demand for the product is a prerequisite condition. 

2. Quantitative or tangible benefits constitute total differences in national real income, with and without the project. 

3. Increased national real income however caused, can be embodied in three and only three forms. 

4. For an increase of national real income, both increased supply and increased demand are necessary, and full national computations of the two should not be added.  

5. In a national with-and-without comparison, dollar-costs are important only insofar as they usefully represent the foregoing of primary and saleable products (for which their creator could collect a price) from alternative resource-uses that would otherwise have been made. 

6. The "stemming-from" hypothesis, crediting production of raw products with acting as a "trigger" and causing the chain of subsequent processes, has limited validity which does not warrant carrying the computation through to the ultimate consumer in all cases. 

7. One important effect of a successful project may be to raise the marginal productivity of resources in the economy or avoid a reduction but we know no present means of reducing this to calculation, beyond what is already represented in primary benefits. 

8. Allowance for calling unused resources into use needs different treatment for original investment and for subsequent operation. 

9. Local gains need not all be regarded as mere transfers, cancelling out from the national point of view. 

10. Determination of the proper scope of projects should be governed by the principle of equal productivities of marginal increments. 

11. Qualitative factors would become increasingly important in proportion as computations of quantitative secondary benefits might be scaled down in the ways here suggested and might become dominantly important.

Part III

Below are links to Parts I and II of the report:

Part IA. Instructions of Michael W. Straus, Commissioner, Bureau of Reclamation, to Panel of Consultants on Secondary or Indirect Benefits

Part IB. Summary Response to the Commissioner's Instructions

Part IIA. Conclusions and Recommendations: Introduction

Part IIB Conclusions and Recommendations: Summary of Principal Recommendations

Random Tidbits From The Boston 2015 ASSA Meetings

Yes, random tidbits not following any pattern from the recently completed ASSA meetings in Boston.

In commenting on a paper about endogenous preferences and identities in a session on "balance," George Akerlof had a slide that had only two words on it, "Getting dressed."  This is how people choose identities when they get dressed each morning, "all of us," George said.

Richard Thaler spent nearly 15 minutes introducing Raj Chetty to give the Ely lecture.  Really.  The place was overflowing, leading guards to keeping people out.  It was on a behavioral economics view of public policy, behavioral econ being very hot at this conference.

Annie Cot put into its place as overblown an argument made by several speakers on the history of behavioral economics that its origins were all about controlling people due to attitudes of B.F. Skinner.  After all, behavioral psychology is not the same thing as behavioral economics.

In a session on secular stagnation, Robert Hall said that people in the US have dropped out of the labor force due to food stamps, so obviously cutting them could end secular stagnation, while Larry Summers implicitly criticized Janet Yellen, noting that when the next recession comes within the next three years, if the Fed has not raised interest rates sufficiently, it will not be able to lower them to stimulate demand and thus avoid, you know, secular stagnation.  Gosh, what a mistake we made not making him Fed Chair...

In his AEA presidential lecture, William Nordhaus drew widespread laughter when he noted as a "minor detail" that his proposal for a "climate club" that would consist of a group of nations agreeing to a global climate agreement who would place import tariffs on goods from non-club member nations would violate the existing World Trade Organization treaty.

Daniel Berkowitz pointing out that when Putin ended allowing oblasts to elect their governors in favor of him appointing them in Russia, he cited Ukraine as his model for doing this, which already had that system.

Joe Stiglitz talking about "pseudo wealth," which the classical economists from Adam Smith to Karl Marx called "fictitious capital," a term I much prefer, frankly.

Learning from former AEA Secretary-Treasurer, John Siegfried, that New Orleans is no longer in the rotation for ASSA meetings due to bowl games conflicting, that New York is no longer in it due to being too expensive, and that Washington is not because it does not have enough hotels in a single cluster to accommodate the larger meetings, although it is building some and might yet get back in.

Hearing that while death rates in cities in industrializing Britain rose with pollution levels during industrialization, they are not doing so now in Chinese cities.

Having someone at the ACES reception introduce me to someone else as being a "co-founder" of the organization when I have never even been a member (although my wife, Marina, is), and it was founded decades before I ever had anything to do with it.  Talk about feeling like a dinosaur.

Hearing a member of the audience telling Richard Wagner and Frederic Jennings in an AFEE session how pleased she was that their presentations were "shockingly normative."

I did not see the anti-conventional economics demonstraters, but I did see a poster they stuck on a wall.

Oh, and having dinner with fellow Econospeaker, Peter Dorman, who laughed heartily about people suggesting that the US could imitate the system that Germany has for limiting job losses during recessions.

Barkley Rosser

Update (more just a btw),

On Stiglitz, of course his theory of pseudo wealth (bubbles and derivatives markets, etc.) provides a foundation for increased macro instability, aggregate fluctuations, as did fictitiious capital in both Smith and Marx (less fully worked out in Smith, but more so in John Stuart Mill).  I guess this is why Joe has been dinged for the SEC.... :-(.

Compromises

I am not against compromises.  I am against compromises that don’t know, or have forgotten, that they are compromises.










(This is the first in an occasional series of aphorisms.)

Dynamic Scouring II: Cold War, Hot Planet

NSC-68 proposed a vast rearmament program to be financed through a "dynamic expansion of the economy" such that "the required resources could be obtained by siphoning off a part of the annual increment in the gross national product." This dynamic expansion "might itself be aided by" the military buildup.

As the above letter from President Truman to National Security Council Executive Secretary James Lay indicates, Truman was concerned about the "probable cost of such programs" and consequently"the effect of these Conclusions upon the budgetary and economic situation." He therefore directed that the Director of the Bureau of the Budget, Frederick J. Lawton, the Chairman of the Council of Economic Advisers, Leon Keyserling and the Economic Cooperation Administrator convene to consider those budgetary and economic implications of the report. According to Keyserling, Truman would not have been aware that it was Keyserling himself who had advised the NSC-68 author, Paul Nitze, regarding the notion of "siphoning off" part of the increment in GNP generated by the arms build-up to pay for the arms build-up.

In the wake of NSC-68 (and, incidentally, the Korean War) U.S defense spending increased from $13 billion in 1950 to $50 billion in 1953. Presidential candidate Eisenhower, in a scheduled September 23rd speech he never gave (it was preempted by Nixon's Checkers Speech), condemned both the inflationary and foreign policy implications of the Truman administration's national security strategy:

The inflation we suffer is not an accident; it is a policy. It is not, as the Administration would have us believe some queer and deadly kind of economic bacteria breathed into the atmosphere by Soviet communism... 

Now the weakness of the Democratic Party for 'cheap' or 'soft' money is well known. For the last 20 years, it has practiced this policy faithfully. Of late, it has given it a new twist: it is now called 'controlled inflation.' But this name does not mean what it says. 

It really means inflation plus controls. 

The way this policy has worked out is easy to describe. With one hand the Administration has been turning up the water pressure at the hydrant, while with the other hand it has been trying to check the water's flow. The Administration's controls over prices are nothing but weak stop-gaps... 

There is in certain quarters the view that national prosperity depends on the production of armaments and that any reduction in arms output might bring on another recession. Does this mean, then that the continued failure of our foreign policy is the only way to pay for the failure of our fiscal policy? According to this way of thinking, the success of our foreign policy would mean a depression.

Candidate Ike's proposed alternative to arms spending was... tax reduction. "Tax reduction is a way to boost consumer buying power and to let the people spend their own money instead of the government spending it for them." Soon after Eisenhower's election, President Truman wrote to him:

Washington, November 6, 1952. 

Top Secret 

Dear General: 

Following up my telegram of yesterday afternoon, I had a consultation with State, Treasury, Defense and Budget. 

There are some really fundamental things pending before the United Nations that must be met in a positive manner. I wish you would suggest somebody, in addition to the person who is to talk to the Budget Director, to discuss these matters authoritatively with the Secretary of State, the Secretary of the Treasury, and the Secretary of Defense.... 

... 

There is a National Security Council problem pending regarding the allocation of resources. A preliminary report is due November 15th. 

All these things are vital policy matters which can only be decided by the President of the United States but I would prefer not to make firm decisions on these matters without your concurrence, although the decisions will have to be made. These things affect the whole American policy with regard to the free world. 

If you could designate someone to act authoritatively for you, or come yourself to sit in on these meetings, it would be the proper solution to the problem. 

Sincerely yours, 

Harry Truman

Oh, and, Ike, about that "National Security Council problem pending..." If you liked NSC-68, you'll love NSC-141, the Truman administration's "last will and testament" to its successor. Historian John Lewis Gaddis described NSC-141 as "in one sense an admission of failure… But it was also a staunch reaffirmation of the essential correctness of the Truman administration's strategy."

In other words, the strategy failed so good that much more of it needed to be done: continental defense, civil defense, the development of flexible multi-purpose forces... In short, "these programs for defense of the United States against atomic attack constitute new and distinct requirements and that resources additional to those now programmed should be made available to meet them."

It is in this context that the urgency and stringency of Bureau of the Budget Circular No. A-47 -- issued on New Year's Eve, December 31, 1952 -- becomes comprehensible. Budget Circular A-47 addressed the standards and procedures for developing budget estimates for water resources projects. Item 8, which dealt with "benefits to be included in evaluation" stipulated that "Until standards and procedures for measuring secondary benefits are approved by the Bureau of the Budget, the evaluation shall be based mainly upon primary benefits." Short shrift for the consultant panel's Report on Secondary or Indirect Benefits of Water-Use Projects.

Coincidentally, that report had specifically addressed the crowding-out of public works projects imposed by heavy defense spending:

For an indefinite time ahead, the prospect is one of heavy defense outlays, but with a diminishing strain on the construction industry, and a high average level of employment, with fluctuations ranging from moderate recession to full employment and inflation. With this goes very high taxes, both on personal and business incomes. The impact of the present high business taxes has not so far shown itself in reduced private investment -- the defense-stimulated demand and high profits have seen to that -- but it means that any particular increment of investment has to show a very high marginal return before taxes, in order to show a modest rate after taxes.... If the defense stimulus lessens, while taxes cannot be reduced more than a little, taxes may become a substantial handicap to high-level employment. One remedy is deficit-spending, with inflationary potential. In this setting, inflation and high taxes are alternative evils, which may combine. In the present phase of this situation, public works bear an unusually heavy burden of proof. 

To use the glib expression from NSC-68, the required resources for further expansion of defense outlays called for by NSC-141 could be obtained by "siphoning off" funds that might otherwise have been spent on civilian public works projects. The economic rationale for A-47 was thus not so much fiscal conservatism as it was about offsetting military-industrial profligacy with austerity elsewhere in the federal budget.

Let's return in closing to that earlier formulation of a "dynamic expansion of the economy" such that "the required resources could be obtained by siphoning off a part of the annual increment in the gross national product." The contention was that the massive increase in military spending "could be accomplished without a decrease in the national standard of living." The incoherence of this claim may be concealed by its obtuseness. Paul Samuelson's explanation from a 1950 article on "Evaluation of Real National Income" may help to clarify:

Production possibilities as such have no normative connotations. We are interested in them for the light they throw on utility-possibilities. This is why economists have wanted to include such wasteful output as war goods in their calculations of national product; presumably they serve as some kind of an index of the useful things that might be produced in better times.

That is to say, the "dynamic" increment in GNP resulting from the military buildup could only serve as an index of the extent to which the standard of living would not have been decreased if it weren't for the wasteful spending on war goods. Yes, and if we had some bacon, we could have bacon and eggs -- if we had some eggs. At the conclusion of his article on national income (in which he also criticizes the Kaldor-Hicks-Scitovsky criterion) Samuelson offers "one last warning": "to define what is feasible involves many arbitrary assumptions, some of them of an ethical nature."

So much for the "Cold War" in the title. What about the "Hot Planet" bit? Recall Samuelson's remark about "an index of useful things that might be produced in better times." There's a catch. 

Coop Finance

This is the season for blog posts about What I Learned at the ASSA Meetings.  Maybe the single most important takeaway for me occurred in the URPE panel on worker cooperatives.  Chris Gunn gave a report on Equal Exchange, which is structured as a worker coop, and how it is financing its relatively rapid expansion.  This definitely set my neurons firing, and I’d like to share some thoughts here.

First, however, a word of background.  Coop finance is one of biggest and oldest controversies in the field.  There are two issues actually, startup finance and finance for expansion.  Why it matters: on the one side, the whole point of cooperation is to democratically vest control of the enterprise in the workforce, and ownership is a principal vehicle (though not the only one).  On the other, one of the chronic weaknesses of worker coops is undercapitalization, which has made their share of the overall economy smaller than it would otherwise have been.  Those who emphasize democracy want to rely primarily on member capital contributions and retained earnings; those who want more rapid growth in an increasingly competitive world look to debt.  Each side thinks the other is a threat to the future of the movement.  (Slightly exaggerated.)

Meanwhile, another classic issue is asset diversification.  A longstanding criticism of worker coops is that they force members to hold assets whose value moves in tandem with their earnings as workers.  In particular, if a coop fails, workers lose their wages and their investments in the firm.  The Mondragon coop conglomerate went a long way toward solving that problem by making a diversified portfolio of firms the unit of finance, while each member firm is (mostly) controlled by its own workforce in the conventional coop manner.  But the problem with the Mondragon model is that it is difficult to replicate: it works because the system is actually large and diversified, with many producer coops supported by a bank, a university, a social insurance system, etc.  Can you, the small, struggling isolated coop far from the Basque world, get there from here?

Enter the Equal Exchange solution.  This coop has financed itself by issuing preferred (nonvoting) stock.  It’s different from debt because, as equity, it can be encumbered in ways that debt can’t.  Specifically, investors in this stock can’t redeem within five years without accepting a significant penalty, and the shares can’t be sold to third parties—no secondary market.  They carry a fixed nominal interest rate at a fixed term.  So who buys this stuff?  Equal Exchange markets primarily to its own partners, such as retailers like food coops.  They are successful at this and have financed most of their expansion through this vehicle.

So here are my thoughts:

1. This is an ideal solution to the debt financing conundrum.  Preferred stock approximates debt from a financial perspective, but it yields far less influence.  Maybe both sides in the more democracy versus more capital debate can be happy.

2. Cross-ownership via preferred stock can be a vehicle for dispersed coops to replicate the Mondragon model, at least on a financial level.  You might think it’s a disadvantage to not have the collective goods that Mondragon provides its member firms, and you would be right, but this also means you don’t have to set up the large, costly superstructure to enjoy the advantages of asset diversification.  Meanwhile, it raises new questions about how much of the member’s contribution should be in the form of a voting share in their own firm and how much in the firm’s preferred stock investment fund, balancing incentive against diversification interests.  That’s a great thesis project for someone.  (I’m assuming that some portion of a coop’s preferred stock investments are financed directly by members, some by retained earnings, and some by issuance of their own preferred stock.  A lot of the cross-ownership is simply a swap.)

3. Of course, a portfolio should not consist solely of debt-like, lower-risk, lower-return investments.  From a finance point of view, coop equity should include a component that has higher returns over time but experiences more earnings fluctuation.  The obvious answer is a venture capital fund to which coops could contribute and which would be managed by a Mondragon-like second-level entity.  (There would not need to be much organizational structure for this; a representative supervisory board plus a watchdog unit should be enough.)  Such a fund would address the other finance issue, startups, by supporting new coop formation.  Again, there is a portfolio balance problem to solve: how much for the preferred stock fund and how much for venture capital?

Veterans of debates over labor-managed economies (many with Cornell degrees) will know I have bypassed a number of issues in this post, but my goal is not to devise a complete solution, just to put some general ideas on the table.  And thanks to Chris for telling the Equal Exchange story—and for his decades of service to the cause of worker-managed enterprises.

Dynamic Scouring

Mark Thoma and Edward Kleinbard both have op-eds about Republican proposals for "dynamic scoring" of tax cut legislation. It would be helpful to point out that dynamic scoring is a euphemism for "secondary and indirect benefits" -- particularly those arising from what is known as the Keynesian multiplier.

Sandwichman has been documenting the controversy over secondary and indirect benefits in the early 1950s that eventually resulted in their virtual exclusion from standard cost-benefit analysis, as per Bureau of the Budget Circular A-47. Implementing dynamic scoring for tax cuts would, in effect, declare "multipliers for me but no multiplier for thee."

As the panel of consultant's report from 1952 outlined in excruciating detail, there are limits to the usefulness and transparency of incorporating secondary and indirect benefits in a quantitative cost benefit analysis. There are also huge pitfalls in disregarding these difficult or impossible to quantify outcomes. Familiarity with the panel's discussion could inform deliberation over the dynamic scoring proposal.

I have so far posted Parts I and II of the report. I have scanned in and proof read Part III but its considerable length poses some formatting challenges for posting on the blog.

Part IA. Instructions of Michael W. Straus, Commissioner, Bureau of Reclamation, to Panel of Consultants on Secondary or Indirect Benefits

Part IB. Summary Response to the Commissioner's Instructions

Part IIA. Conclusions and Recommendations: Introduction

Part IIB Conclusions and Recommendations: Summary of Principal Recommendations

Part III. Several Principles, and Some of Their Consequences

About that memo, Professor Summers...

Let this be the year when we put a proper price on carbon is the theme and headline of an op-ed by Lawrence Summers at the Financial Times. There is indeed a compelling case for a carbon tax, as Summers argues. The case could be even more compelling were it not for the persistence of an "impeccable economic logic" that never was.

That  "impeccable logic" made a cameo appearance in an infamous World Bank memo that went out over Summers's signature some 23 years ago: "the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable." Take it as given that Summers did not write the memo, that the infamous passage was taken out of context and that the intention of the author, Lant Pritchett, was ironic and not making a serious proposal.

And yet... Satire has an object. The full memo is a chapter-by-chapter commentary on the outline for the 1992 World Bank publication, "Global Economic Prospects and the Developing Countries." Chapter 3 of the outline was presumably the target of the infamous excerpt. Note that chapter 3 in the final version is titled "Interlinkages, human capital and export competitiveness" and has nothing to say about pollution. In fact, the entire document has nothing to say about pollution.

Where is the rest of the infamous memo? Pages one and five of the original memo are posted on the internet but searching phrases from those pages turns up nothing. Daniel Hausman and Michael McPherson used the provocative toxic waste passage as exhibit "A" in their Economic Analysis, Moral Philosophy and Public Policy. But they are silent on the broader context of the full memo and the Global Economic Prospects outline.

Hausman and McPherson do, however, delve into the matter of cost-benefit analysis, which they conclude "is not a scientifically valid or value-neutral procedure for social decision making." This is sort of the argument I have been making here but not entirely. My argument, though, is that the "economic logic" is extraordinarily "peccable" -- its logical fallacy concealed behind an impenetrable veil of incongruity.

Whether conventional cost-benefit analysis is merely "not scientifically valid or value neutral" or is downright incongruous and "unacceptable nonsense," the Interagency Working Group on Social Cost of Carbon relied on it in 2010 to estimate the social cost of carbon to be $21 per ton of CO2 (in 2007 dollars). If Summers is serious about "letting this be the year when we put a proper price on carbon," perhaps he could nudge things along a bit by showing that the "impeccable economic logic" of not doing so is an abysmal sham and a swindle.

Mario Cuomo

The three time governor of my state and the father of our current governor has passed away. Mario – you will be missed. My tribute is to link to his 1984 speech in San Francisco known as the Tale of Two Cities:

But the hard truth is that not everyone is sharing in this city's splendor and glory. A shining city is perhaps all the President sees from the portico of the White House and the veranda of his ranch, where everyone seems to be doing well. But there's another city; there's another part to the shining the city; the part where some people can't pay their mortgages, and most young people can't afford one; where students can't afford the education they need, and middle-class parents watch the dreams they hold for their children evaporate. In this part of the city there are more poor than ever, more families in trouble, more and more people who need help but can't find it. Even worse: There are elderly people who tremble in the basements of the houses there. And there are people who sleep in the city streets, in the gutter, where the glitter doesn't show. There are ghettos where thousands of young people, without a job or an education, give their lives away to drug dealers every day. There is despair, Mr. President, in the faces that you don't see, in the places that you don't visit in your shining city. In fact, Mr. President, this is a nation -- Mr. President you ought to know that this nation is more a "Tale of Two Cities" than it is just a "Shining City on a Hill."

These words apply even 30 years later. Mario – rest in peace!

Perceptions of incongruity: when is a "dollar" not worth a dollar?

Bruner and Postman (1949):

Generally speaking, there appear to be four kinds of reaction to rapidly presented incongruities. The first of these we have called the dominance reaction. It consists, essentially, of a "perceptual denial" of the incongruous elements m the stimulus pattern. Faced with a red six of spades, for example, a subject may report with considerable assurance, "the six of spades" or the "six of hearts," depending upon whether he is color or form bound. In the one case the form dominates and the color is assimilated to it; in the other the stimulus color dominates and form is assimilated to it. In both instances the perceptual resultant conforms with past expectations about the "normal" nature of playing cards.

The full title of Bruner and Postman's 1949 article is "ON THE PERCEPTION OF INCONGRUITY: A PARADIGM." In The Structure of Scientific Revolutions, Thomas Kuhn referred to the research as "a psychological experiment that deserves to be far better known outside the trade."

The Walrasian numéraire is incongruous. It is not money. It is, as Orléan explained. "a purely technical device, introduced simply for the purpose of making exchange values [in a barter economy] explicit." It is, in other words, a red six of spades. What Bruner and Postman called the dominance reaction leads the subject to perceive the numéraire as good old dollar-in-the-pocket money. But it is not money because in the model real money does not exist. This incongruity produces "a bit of economic sophistry." (Clark) "unacceptable nonsense," (Little) "a still thicker and more terrifying smoke-screen," (Chipman and Moore) and "rubbish that prevents the flowering of new theory," (Minsky).

Isn't it about time to call a red spade a red spade?

Pipe Dreams and Paradigms

On Democracy Now, December 12, 2014, Amy Goodman spoke with Sean Sweeney of the Cornell Global Labor Institute about claims that the Keystone XL pipeline would create 250,000 jobs. The transcript below is from the part of the interview that starts at around time 00:55 on the embedded video.

AMY GOODMAN: ...You have been involved at a high level when it comes to Keystone XL and providing the numbers for President Obama around it, is that right? 

SEAN SWEENEY: That’s correct, yes, the job figures. 

AMY GOODMAN: What have you found?

SEAN SWEENEY: Well, the jobs debate has been severely distorted by TransCanada Corporation and the American Petroleum Institute. They put forward numbers that really cannot stand up to serious scrutiny, based on normal research practices and methodologies. The numbers are far, far higher than it actually—real. The numbers submitted to the State Department were far, far lower. And this is borne out with the State Department’s environmental impact statement. 

AMY GOODMAN: Did you brief President Obama yourselves? 

SEAN SWEENEY: No, but we know that the president read the report — it was called "Pipe Dreams: Jobs Gained, Jobs Lost [by] the Construction of Keystone XL pipeline" — because he made reference to the figures. 

AMY GOODMAN: Because that is the issue that’s raised so often, that environmentalists are killing jobs by killing the Keystone XL. Explain how you arrive at your numbers. And how many jobs would be lost or gained? 

SEAN SWEENEY: Well, in many respects, the numbers were submitted by TransCanada to the State Department, and we simply interrogated the claims of the multiplier effect, which wonky researchers understand is the jobs that—indirect and induced jobs that would be created by a certain amount of dollars spent on a project. The numbers, you’ll notice, Amy, have not gone down with the jobs, even though the project is half-completed. So, the numbers that they originally claimed three years ago have not gone down at all, but at least—or almost half of the pipeline has actually been constructed. [emphasis added]

The point Sandwichman has been trying to make over the last couple of months -- beginning with this post on Public Works, Economic Stabilization and Cost-Benefit Sophistry -- is that secondary or indirect benefits have been excluded from cost-benefit analysis for public works projects. By itself, this exclusion introduces the possibility of undervaluing the benefits of public works projects. However, as the  Report of Panel of Consultants on Secondary or Indirect Benefits of Water-Use Projects makes clear, such indirect benefits are "so ramifying, involved and conjectural that the attempt to compute them... cannot properly be regarded as 'measurement'," (see also part 2).

So what are we left with? Exclusion of indirect benefits from cost benefit analysis of public works projects coupled with systematic exaggeration of indirect benefits from private investment. But wait. There's more. Those private investments have social costs that just happen to be estimated according to a formula that discounts future benefits and costs in addition to excluding secondary benefits from current carbon abatement. From "More than Meets the Eye: The Social Cost of Carbon in U.S. Climate Policy, in Plain English" by Ruth Greenspan Bell and Diane Callan:

In the calculation of costs, benefits, and the social cost of carbon, the choice of discount rate has enormous impact, influencing whether economists recommend to invest today or much later. From the policy perspective of the economists who value this calculation, the higher the discount rate, the less significant future costs become.

In 2010 the U.S government's Interagency Working Group on Social Cost of Carbon (IAWG) presented its estimate of the social cost of carbon "to allow agencies to incorporate the social benefits of reducing carbon dioxide (CO2) emissions into cost-benefit analyses of regulatory actions that have small, or 'marginal,' impacts on cumulative global emissions." The IAWG's central estimate for the social cost per ton of CO2 in 2010 was $21 in 2007 dollars, based on a 3% discount rate.

The D.I.C.E. are loaded. Not once. Not twice. But three times.

The Price Of Oil And The Environment In the Late Twenty-Teens

In my post yesterday on Looking Forward To The Late Twenty-Teens, I said I would not forecast the price of oil.  I shall not do so too precisely, but I think I will comment on likely effects of possible trajectories of it.  Indeed, I think the general trajectory is well known,with only bottoms, tops, and timing unknown.  In short, the price of oil will almost certainly decline some more, hit a bottom, and eventually go back up again, although with the unknowns I just mentioned.  For a highly informed analysis of the supply and demand factors I recommend the recent post on this by the highly knowledgeable Jim Hamilton at Econbrowser, who tells the scenario I just said, but also very carefully eschews making even short-term forecasts or anything about timing.

So, much of what I have to say should be boilerplate, although I have seen many denying parts of it.  The lower the price goes and the longer it stays there, the more this will help global economic growth over the next half decade, even though oil exporters will be hurt.  They are outnumbered by the oil importers, and such a scenario might even alter the prospects for the currently gloomy Euroland and Japan, both major oil importers, even temporarily overcoming their depressing demographics.

OTOH, this will hurt getting us off fossil fuels, which we need to do in the longer run to save the world from global warming. Ironically, however, in the short run, both China and the US economies are mildly aided by continuing warming, as has been projected by most models, with gains for about another degree or so of warming.  Why?  The gains from reducing winter heating costs will outweigh the losses from all the other welI known damages, which will eventually start outweighing those gains after that degree or so.  Of course there are many areas, particularly poor, low-lying nations, who will suffer nothing but damage from near term warming.

I see many saying that a lower price of oil will not slow the shift to alternatives, but, sorry, it will if it goes low and stays there.  Indeed, this is partly why the Saudis are letting it go  down.  They are at the bottom of the world supply curve, and they want to punish and eliminate various high cost competitors, some of whom they do not like (Russia, Iran), and some of whom they are friendlier with (US with all its new shale oil).  But they also  do not mind getting Americans out there buying those gas-hog SUVs again and just generally getting everybody back under their thumbs again.  And, if anybody thinks the Saudi royal family is about to get overthrown soon, well, not in the next five years I predict.  Sa'ud al-Faisal has been foreign minister since the mid-1970s, by far the longest seving such person in the world, and I predict he still will be in 2020.

That said, I do think that King Coal is dead in the US, once and for all, no matter what happens to the price of oil.  Natural gas is just that much cheaper now, and will remain so for a long time.

So, a lower price of oil will  help global economic growth in the next half decade or so,  but threatens to  make the global climate situation worse in the longer run.

Barkley Rosser