Kudlow’s Deficit Dance

I was not invited to the private dinner with Scott Walker but Paul Krugman notes who was on the guest list:

Scott Walker, the governor of Wisconsin, is said to be a rising contender for the Republican presidential nomination. So, on Wednesday, he did what, these days, any ambitious Republican must, and pledged allegiance to charlatans and cranks … the three most prominent supply-siders: Art Laffer (he of the curve); Larry Kudlow of CNBC; and Stephen Moore, chief economist of the Heritage Foundation.

Paul notes some of the recent ramblings from this trio including their predictions that the use of expansionary monetary policy to combat the Great Recession would lead to runaway inflation and high interest rates. But let’s turn back the clock to the first term of the Bush43 Administration when Kudlow writing for the National Review was all in defending Bush’s fiscal stimulus and arguing at several points how the labor market was booming even when it was not. Kudlow was infamous for claiming the household survey was a better measure of employment when it showed that employment was rising while the payroll survey said the opposite. Of course there were months when the payroll survey showed better job growth than the household survey showed – to which Kudlow declared the payroll survey was more reliable. And during those months when the unemployment rate fell even though the employment-population ratio fell, Kudlow was all aglow that labor force participation rates were falling. After all, spinning for the Bush-Cheney 2004 campaign was more important than actual improvement in the labor market: My favorite Kudlow spin had to be what he wrote on November 22, 2002:

The federal budget deficit was $158 billion for fiscal year 2002. Democratic politicians blame this shortfall on the Bush tax cut of 2001. But how can they? The bulk of the reduction in personal tax rates designated in that cut do not occur until the 2004 to 2006 period. Thus far, only about 10% of the tax cut has even taken place. The real blame for the deficit can be placed on sub-par economic growth over the past two years .. As a result, actual economic performance has fallen below the long-term 3.5% historical trend line, which reflects the economy’s indisputable potential to grow. If that trend line were extended through 2002, as though no slowdown had occurred, then the potential third-quarter gross domestic product would have been $9.829 trillion. Instead, actual GDP fell $364 billion short of the mark. Cumulatively, over the past two years, the loss of potential GDP comes to $1.95 trillion — a considerable amount. If you apply the 18% economy-wide tax rate of recent years to the nearly $2 trillion loss of potential output, you get a $351 billion shortfall in tax revenues — which we’d be counting now if the economy had been running at full steam.

I used to watch The Capital Gang until I could not take Robert “That’s Class Warfare” Novak lecturing to everybody that only he knew anything about economics, which he tended to get by reading Kudlow. One Saturday night in November of 2002, he claimed that if the economy were only at full employment – we would have a $190 billion surplus. OK, I knew that despite all the Bush cheerleader from the National Review, we did have a considerable GDP gap. But this claim sounded extreme so I found Kudlow’s Deficit Dance which is where Novak got this bizarre claim. Where to begin with this? One could point out that Kudlow is using the unified budget deficit as the starting point which pulls the Social Security Trust Fund into the discussion as an offset to the larger General Fund deficit. Our first graph shows, however, that not only did total debt (TD) grow relative to GDP after both the 1981 tax cut and the 2001 tax cut but debt held by the public (DHP) also grew relative to GDP. One could also point out that potential GDP does not always grow at 3.5% per year especially when fiscal stimulus reduces national savings and investment (a topic for another post). But the real problem is that this implicit assertion that the GDP gap was $2 trillion per year is based on summing 8 observations when one should be taking the average. OK Kudlow said this $2 trillion was a gap over 2 years so we can blame Novak by not dividing these figures by two. But Kudlow was also using annual flow information as if it were quarterly flow information. So to correct even what he wrote – we needed to further divide his figures by four. Our second graph shows the GDP gap on an annual basis using the CBO estimate of potential GDP and they were nowhere near $1 trillion per year. Could Kudlow really be this incredibly stupid or did he know he was trying to deceive stupid readers? I guess he did because Robert Novak certainly fell for this incredibly misleading and incorrect assertion.

Economic Wisdom in Germany

The negotiations between Greece and the rest of the Eurogroup were largely about how far, if at all, Germany could be pulled toward compromise.  German thinking about the economics of the currency zone is decisive: they set the boundaries and, to a large extent, the discourse.  The most prestigious group of economists in Germany is the Sachverständigenrat, the Council of Experts commonly referred to as the Five Wise Men.  (They currently have a single female member.)

This body released a statement about the Greek negotiations which you can read here.  Simon Wren-Lewis went after it here, but I want to say a bit more.  First, read the words of the Wise.

Now that you’re done, consider this.  Only once in this document is there even a passing reference to unemployment.  There is no mention of output gaps, nor of living standards.  Governments are seen strictly as borrowing and lending entities with no particular obligation other than paying their bills.  In other words, macroeconomics as the rest of the world understands it is essentially absent from beginning to end.  The message is: your government borrowed too much, we gave you some relief, and now you have to pay the rest.  There is nothing more to discuss.

The topic of reforms appears on occasion.  There isn't much discussion of their content other than that they are to be “market-oriented”.  Ireland, Portugal, Spain and Italy are held up as examples of the success of such reforms, although what success means in this context isn't specified.  (I think it means, the governments are continuing to pay on their debts.  Spain and Portugal in particular are no one’s idea of successful economies.)

Meanwhile, the document is studded with truly outlandish statements.  Try this one: “For an economy in the dismal Greek situation, it essentially made no difference that it remained a member of the Eurozone – in any case, adjustment was unavoidable, and it would be painful and accompanied by strong social tensions. The adjustment process of countries that experienced debt and currency crises follows a very similar pattern. This is irrespective of whether they successfully defended a fixed exchange rate or allowed their exchange rate to devalue in order to support external economic adjustment.”  This is followed by a pair of charts, the second of which compares Greece’s GDP growth (decline) to that of the Baltics, along with Korea and Thailand in the late 90s.  But: (1) The Baltics were defending a fixed exchange rate and they did, and are doing, terrible.  (2) The East Asian countries, which had scope for devaluation, were back in growth territory within two years, unlike Greece.  (3) It’s a selective list!  Where’s Argentina, for instance?  Or Iceland.  Oh, but right: “success” means paying your bills, and Argentina and Iceland didn't do this.

About debt relief: “A debt relief of public creditors could not substantially improve the comfortable state of the Greek government, let alone be justified easily vis-à-vis its lenders.”  Read that one over a few times to let it sink in.

The wrap-up: “Greece is suffering very hard times. But the real tragedy is that it elected a government that threatens to exacerbate the situation and spoil the looming economic recovery, on the basis of a thoroughly wrong assessment of its current bargaining situation and the policy alternatives available for achieving sustainable growth in Greece and the Eurozone.”  In short: we will be happy to see you leave the Eurozone, so we don’t have to give an inch.  And there is no alternative to the current policies which, as anyone can see, have been blazingly successful at restoring growth.

And these are the supreme experts.  Imagine what the reasoning must look like down in the second and third tiers.

Bizarre Russian Propaganda

Yesterday I learned that blogs in Moscow, at least one called Energy-Life, are posting a supposed report put out by the RAND Corporation on July 3, 2014 that contains a supposed plan for the Ukrainian government to reconquer eastern Ukraine by Sept. 1, impose martial law, set up internment camps, and then lift it by January 1.  I shall quote from it below, detailing some horrific things  that were supposed to be done according to this plan.  I found it by googling "RAND report Ukraine Novorossiya, and there was a link at the second hit, a site called oped news and a post by David William Pear, who provided a link to the actual report (the link here only goes to the general site but not his report; you will have to google it as I described above to see it, sorry).  His post went up on Feb. 4, 2015, and he posted another round the next day without the link, but referring to it and taking strongly pro-Russian positions.  It would seem that this posting by him has received no attention here, but it is now hot stuff in Russia, and from what I hear, lots of people believe its contents.  I note that while Pear mostly praised the releasing of this report, he did say, "The authenticity of this report is yet to be verified."

So, I am 99.9% certain that this is something cooked up by somebody in Russia.  The actual Memorandum is two pages long and addressed to nobody in particular, nor does it have a date or any names on it, although the link claimed it was issued on July 13 last year.  It has an opening section and then three sections, one on "Isolation," then one on "Mop-up," then one on "Return to Normal."  The flavor of it is best given by simply providing a few quotes.  Its two pages do have a RAND logo on their lower right corners, although I must say that I have never seen official paper of any entity, government, corporate, academic, non-profit, whatever, that had its logo in that location on its official paper, although who knows, maybe that is how they do it at RAND.

From the opening section, which describes the supposed advantages of this plan: "Activists of a pro-Russian political movement get decimated, pro-Russian voters get disorganized."

This is followed by a plan to shut down both the "coal industries" and also "the Donbass industries," with this being praised as a good idea  because it  will  reduce eastern Ukraine's dependence on natural gas (they use gas in the coal mines?).

In the "Isolation" section imposing martial law is proposed and detailed.  Near the end of this section it states that "use of non-conventional weapons shall not be ruled out."

In the second section, description of the takeovers of individual towns contains the following tidbit: "Infantry shall move in next to relocate male adults [ages 13-60] into internment camps."  Apparently all of them, no testing them for ideology or views before doing so.

In the third section it says that these camps will be guarded by people with approved ideology, and then in discussing refugees returning to the area it says, "However, men aged 18-60 shall be checked for possible support of separatists in internment camps."  Yes, that is sic.  Why for this bunch the 13-17 year olds get off is unclear.  In any case, all of these people are supposed to be released from the camps after two months.Or maybe those returnees are not to be tested in the camps but to be tested for whether or not they support those in the camps ("Hey, do you support these people in these camps, with it clear that if you say so we shall put you there?")

There is more, but you get the idea and the tone, including the rather clunky English (nothing in the future is ever "will" but "shall").

Probably the most telling detail of all that convinces me that this was indeed written by somebody in Russia (or somebody very pro-Russian, not pro-Ukrainian) is that twice it refers to "the Lugansk region."  Now quite some time ago, I posted here about whether that city and its region should be spelled as "Luhansk" or "Lugansk."  The former is the Ukrainian spelling, while the latter is the Russian spelling.  I noted on May 1 here that the Washington Post had for a short time switched from calling it "Luhansk" in the Ukrainian way to calling it "Lugansk"in the Russian way, but only for a short while and just before May 1 it switched back to using the Ukrainian spelling of "Luhansk," which it has used ever since as has virtually every media source I have seen in the US.  I seriously doubt that a report written by the RAND Corporation in early July that was supposed to be sent to the Ukrainian president would have used the Russian spelling as this one does. 

I think this pretty much settles it, but I shall simply add that back in July there was in fact a fairly successful campaign by the Ukrainian government to reconquer territory held by the separatists. The cities of Slovyansk and Mariupol were reconquered, the latter a port.  In August, some of this territory was reconquered by the separatists, who have more recently gained more territory, and are near the port of Mariupul, which many fear they may retake.  In any case, if there was anything to this plan we might have seen some of these proposals put into action.  But, I am unaware of any "decimation" of activists,any use of "non-conventional weapons," any setting up of internment camps with the male adults of Slovyansk and Mariupol being put into them, and certainly no shutting down of coal mines or any other "Donbass industries."  Maybe it has been going on, but nothing of the sort has been reported that I have seen, and amusingly enough even the Russian propagandists are not claiming that any of this has occurred in those areas, even as they are now touting to their population this purported plan that was to be activated last summer that urges all this awful stuff to be done.

About all I can say is that it is a sign of how brainwashed current Russians are that so many apparently are believing this tripe.  This is not a good sign.

Barkley Rosser

Homage to Max

I have not asked the permission of Max of Maxspeak to post this, but I think there is a matter of public record that needs to be stated officially.  So, the issue is that from time to time, here and there (sorry, no links), I have complained in the econoblogosphere about how one cannot access the old files of the old MaxSpeak. In its heyday the old MaxSpeak was a borderline top ten econoblog, mostly due to Max's regular, witty, and insightful posts.  I was kind of the second player, with Sandwichman of this blog and others from time to time on board, including Gar Lipow, and even briefly Jason Furman, currently the Chair of the CEA, our brief nod to establishmentarianism, not to mention that even good old Dean Baker was on board for awhile before he started Beat the Press.

Those were the good old days, but Max shut the show down and this blog, Econospeak, became its successor, which was 40-70 on the old Gongol rankings, which I miss, and I do not know what has replaced that. Anyway, after Max shut down the shop I complained from time to time that one could not access the old MaxSpeak files.  There were a few posts of mine, with followups, that I particularly was unhappy about not being able to access or link to, and I kvetched here and there. The one that I most regretted the loss of was my post about the problems of some Kurds in Harrisonburg, VA where I live, who were being persecuted by the FBI, and due to my post on MaxSpeak, at least partly, we (a lot of other people besides me were involved with this), we managed to help save some of these guys from jail.  I shoot off my mouth a lot, but saving somebody from jail is one of those few things that I can say that I am unequivocally proud of.  Given the disappearance of the original posts, the only public record of any of this is at Juan Cole's site, where I provided a guest post discussing the matter (I just tried to link to the post at Informed Comment, but it did not work, but if you google, "Juan Cole Rosser Kurds," you will get it as the top hit).  It is there, really.

So, what happened? Max's wife had cancer, suffered, and died.  This prettty much explains it.  Her illness was why he shut down the old MaxSpeak. Recently he sent me an email explaining what happened to the old files of the old MaxSpeak.  They existed ultimately as physical discs, and he finally told me that what happened is that he has simply lost them in all the confusion of his life assoicated with what I mentioned above. I hope that he finds them, but in the meantime, I can only say that I am sorry and sympathize.

So, MaxSpeak was great, and Max is a great guy.  I must say that I underatand and appreciate what has happened.  I wish him the best.  This is life.


Barkley Rosser

Break Their Haughty Frames

They have taken untold millions that they never toiled to earn,
But without our brain and muscle not a single wheel can turn.
We can break their haughty power, gain our freedom when we learn
That the union makes us strong.

The Hamilton Project bills its "The Future of Work in the Age of the Machine" as a "framing paper." The "frame" (or frame-up) appears on page two of the paper:

The Luddites, as they were called, were revolting against a phenomenon that would fundamentally alter the economies of the world. Technological change would dramatically increase the productivity of labor, creating new possibilities in manufacturing, agriculture, mining, and transportation. While these changes ultimately raised the standard of living in industrialized countries, the Luddites, and many others, saw their jobs disappear (Easterly 2001).

Those "Luddites" (as they were called) were notorious for breaking frames. They were also framed.

From the report of the proceedings of the trial of George Melior (or Mellor), William Thorpe and Thomas Smith for the murder of William Horsfall of Huddersfield, Yorkshire, it would appear (to this reader at least) as though the defendants were indeed guilty as charged. So in what sense am I claiming they were "framed"? The prosecutor, Mr. Richardson saw fit to present his "general observations on the case" -- unsupported by the testimony of witness -- regarding a certain "delusion that has prevailed... amongst the lower orders."

Mr. Horsfall is represented to me to have been a man, who had upwards of four hundred persons at work under him, extremely beloved by his men, and they greatly attached to him. He had very large manufactories, of course, from the employment of so many men; and he employed the machinery which was the object of the abuse of these misguided people. I have not the means of making such observations as I have frequently and lately heard made, upon the delusion which has prevailed upon that subject, amongst the lower orders. It has been supposed that the increase of the machinery by which manufactures are rendered more easy, abridges the quantity of labour wanted in the country. It is a fallacious argument: it is an argument, that no man, who understands the subject at all, will seriously maintain. I mention this, not so much for the sake of you, or of these unfortunate prisoners, as for the sake of the vast number of persons who are assembled in this place. 

I hope that my learned Friend on the other side, will give me credit, that I mean to state no facts as bearing upon the prisoners at the bar, that I shall not, as I conceive, bring home to them. But I cannot help making general observations upon the subject, to draw their Lordships' attention, and yours, to the case itself. I would rather, for perspicuity's sake, go to the facts which constitute the crime, and then apply it to the prisoners. Mr. Horsfall was a man, I understand, of warm feelings*, of great and good understanding, and who saw the fallacy of these arguments; and he, perhaps imprudently (though I do not think so, for I do not think any man acts imprudently in stating his sentiments on a subject which has been under his full consideration) he, I say, stated he would support this species of machinery, because he was sure it was advantageous to the country. He was perfectly well known, in consequence of the part he has taken in reference to these disturbances; and it was proposed by some persons, that he should be taken off.

* What Mr. Richardson meant by "warm feelings" is not what one might suppose. The "warmth" doesn't refer to compassion or tenderness. It alludes instead to Mr. Horsfall's taunt that he wished to "ride up to my saddle girths in Luddite blood."

Catch that? "I have not the means of making such observations..." "I mean to state no facts as bearing upon the prisoners at the bar, that I shall not, as I conceive, bring home to them." In short, this peroration was a digression. It was admittedly incidental to the matter at trial. But it was politically crucial. Not only was Mr. Richardson concerned with securing a conviction for murder but, perhaps even more urgently, with establishing, for the record, the collective guilt of those "lower orders" for "outrages" arising from their delusion and their fallacious argument. Those lower orders had no grounds for complaint.

The authors of the Hamilton Project framing paper cited William Easterly as the source for their digression on the Luddites (as they were called). Easterly called his passage on the Luddites "an aside about the Luddite fallacy." Apparently not having consulted Mr. Richardson's Indictment, Easterly claimed that "the intellectual silliness came later":

Some people believe labor-saving technological change is bad for the  workers because it throws them out of work. This is the Luddite fallacy, one of the silliest ideas to ever come along in the long tradition  of silly ideas in economics. …  

The original Luddites were hosiery and lace workers in Notting  ham, England, in 181 1. They smashed knitting machines that embodied new labor-saving technology as a protest against unemployment (theirs), publicizing their actions in circulars mysteriously  signed “King Ludd.” … The intellectual silliness came later, when some thinkers generalized the Luddites’ plight into the Luddite fallacy: that an economy-wide technical breakthrough enabling production of the same amount  of goods with fewer workers will result in an economy with—fewer  workers. Somehow it never occurs to believers in Luddism that there’s another alternative: produce more goods with the same number of workers.

Actually the allegation of intellectual silliness came three decades earlier -- in the form of a pamphlet by the Lancashire magistrate, Dorning Rasbotham, Thoughts on the Use of Machines in the Cotton Manufacture. Accusing frame breakers of irrational techno-phobia became a commonplace in industrializing Britain. That way you don't have to acknowledge or deal with their grievances.The Luddite fable serves the same purpose today  Opponents of austerity, pension cutbacks, neo-liberal trade policies and labor-market deregulation, along with proponents of work-time reduction can be glibly dismissed without having to acknowledge their arguments. Those lower orders are all deluded. They assume that their is only a fixed amount of work to be done. There's no point listening to their silly ideas or reasoning with them.

Above all, forget about the masterful lampoon and exposé of this dodgy frame by Marx in section 6, chapter 15. volume I of Capital, "The theory of compensation as regards the workpeople displaced by machinery":

It is an undoubted fact that machinery, as such, is not responsible for "setting free" the workman from the means of subsistence. It cheapens and increases production in that branch which it seizes on, and at first makes no change in the mass of the means of subsistence produced in other branches. Hence, after its introduction, the society possesses as much, if not more, of the necessaries of life than before, for the labourers thrown out of work; and that quite apart from the enormous share of the annual produce wasted by the non-workers. And this is the point relied on by our apologists! The contradictions and antagonisms inseparable from the capitalist employment of machinery, do not exist, they say, since they do not arise out of machinery, as such, but out of its capitalist employment! Since therefore machinery, considered alone, shortens the hours of labour, but, when in the service of capital, lengthens them; since in itself it lightens labour, but when employed by capital, heightens the intensity of labour; since in itself it is a victory of man over the forces of Nature, but in the hands of capital, makes man the slave of those forces; since in itself it increases the wealth of the producers, but in the hands of capital, makes them paupers-for all these reasons and others besides, says the bourgeois economist without more ado, it is clear as noon-day that all these contradictions are a mere semblance of the reality, and that, as a matter of fact, they have neither an actual nor a theoretical existence. Thus he saves himself from all further puzzling of the brain, and what is more, implicitly declares his opponent to be stupid enough to contend against, not the capitalistic employment of machinery, but machinery itself. 

No doubt he is far from denying that temporary inconvenience may result from the capitalist use of machinery. But where is the medal without its reverse! Any employment of machinery, except by capital, is to him an impossibility. Exploitation of the workman by the machine is therefore, with him, identical with exploitation of the machine by the workman. Whoever, therefore, exposes the real state of things in the capitalistic employment of machinery, is against its employment in any way, and is an enemy of social progress! Exactly the reasoning of the celebrated Bill Sykes [the villain from Dickens's Oliver Twist]. "Gentlemen of the jury, no doubt the throat of this commercial traveller has been cut. But that is not my fault, it is the fault of the knife. Must we, for such a temporary inconvenience, abolish the use of the knife? Only consider! where would agriculture and trade be without the knife? Is it not as salutary in surgery, as it is knowing in anatomy? And in addition a willing help at the festive board? If you abolish the knife — you hurl us back into the depths of barbarism."

***

Is there aught we hold in common with the greedy parasite,
Who would lash us into serfdom and would crush us with his might?
Is there anything left to us but to organize and fight?

For the union makes us strong.

Bad Faith Economics: A Cheap Market Will (almost) Always (tend to) Be Full of Customers (except when it isn't)

As a rule, new modes of economy will lead to an increase of consumption according to a principle recognised in many parallel instances. The economy of labour effected by the introduction of new machinery throws labourers out of employment for the moment. But such is the increased demand for the cheapened products, that eventually the sphere of employment is greatly widened. Often the very labourers whose labour is saved find their more efficient labour more demanded than before. -- William Stanley Jevons, The Coal Question, 1865.

In other words, technology creates more jobs than it destroys. Or, to be precise: as a rule, technology often, eventually creates more jobs than it destroys. What's the difference between those two statements?

This old saw appears to form the theoretical core of neo-liberal industrial policy. Witness the Hamilton Project's February 2015 "framing paper" The Future of Work in the Age of the Machine. After the obligatory swipe at Luddites -- "The Luddites, as they were called, were revolting against a phenomenon that would fundamentally alter the economies of the world" -- the Wall Street Democrats' think-tank presents a qualified version of the platitude:

There is a consensus that, historically, technological progress has created winners and losers, but over the long run, new technology has tended to create more jobs than it has destroyed, while increasing society’s productivity and wealth.

What is the counter-statement to the principle that technology creates more jobs than it destroys? Is it "technology destroys more jobs than it creates"? "Technology doesn't necessarily create more jobs than it destroys"? "There is a fixed amount of work to be done"?

Surely it can't be the third statement because there could be a situation where the amount of work to be done increased but the number of jobs still decreased. A fixed amount of work is overkill. The first counter-statement is the mirror image of the dogmatic assertion of the principle. The second is actually consistent with the more contingent, provisional version of the principle.

There is no way to predict whether people disputing the dogmatic claim that technology creates more jobs than it destroys do so on the basis of belief in counter-statement one, two or three. As a rule, however, it is discourteous to attribute to an opponent the least plausible motivation for their beliefs. It would be more respectful -- and more prudent -- to attribute the most plausible and defensible motivation.

There is no evidence for the claim that union arguments for shorter hours assume a fixed amount of work and thus commit a lump-of-labor fallacy. There is, however, proof that those who make the accusation actually do commit the fallacy.

The first proof was by Charles Beardsley in 1895. I discussed it in my "Why economists dislike a lump of labor." Pigou in 1913 and Dobb in 1928 demonstrated other fallacies committed by the "fixed Work-Fund" plaintiffs. In Some Leading Principles of Political Economy, published in the 1870s, John Elliott Cairnes bitterly denounced on page 251 the "profound, pernicious fallacy," which is a restatement of the wages-fund doctrine he had obstinately defended back on page 174.

Below is a typical example of the case against the "more refined" 1960s union arguments for shorter hours, which suggested that labor cost increases could be mitigated by the productivity gains resulting from the reduction in fatigue, etc. It is from Collective Bargaining by H. D. Marshall and N. J. Marshall (1971):

Two points need to be made with respect to future gains in productivity resulting from a shortening of hours. First the truer the statement is, the less valid is the union argument that a reduction in hours serves as a solution to the problem of unemployment. The original "lump of work" argument was that if each worker did less work, there would be more work available for others. However, if the reduction in hours induces the worker to produce nearly as much (or even possibly more) than he did on a longer time schedule, the increased availability of work for others will be at least partially lost. Union leaders have often presented these arguments side by side without realizing that they are inherently contradictory.

Subtle. The truer the statement about productivity is, the less valid is the supposed lump of work argument as a solution to unemployment. What the authors overlook, though, is that "future gains in productivity" are -- no less than the introduction of new machinery -- "new modes of economy" and thus may be expected as a rule to eventually widen the sphere of employment. (Unless, of course, the amount of work to be done is fixed.)

The Marshalls' second point was that "it is at least possible that further reductions in the work week below forty hours may not have as stimulating an effect on productivity as previous reductions seem to have had." O.K. Outcomes in the future may be different from those in the past. That sounds reasonable. But shouldn't the same reservation apply then to other new modes of economy -- such as the introduction of new machinery?

The principle of economy has to apply in the same way and to the same extent whether productivity gains result from new machinery or shorter hours. If productivity gains from new machinery create more demand for labor, then productivity gains from shorter hours create more demand for labor. If future results for shorter hours may be different from past results, then future results for new machinery may be different from past results. Applying different standards to the two modes of economy is "bargaining in bad faith."

How many times would you suppose fallacy claimants have responded to the rebuttals from Beardsley, Pigou or Dobb? Did you guess a total of zero? Well, here is yet another unanswered rebuttal to the bad faith lump-of-labor fallacy claim: Howard G. Foster, "Unemployment and Shorter Hours." Labor Law Journal, April 1966, pp. 211-225. Foster presented a simple, non-lump model of shorter hours with improved productivity creating more employment. In each of his examples, "the standard workweek was reduced without a rise in unit labor costs." As Foster observed, "This should at least suggest that in principle hours reduction might indeed be an instrument by which to alleviate the unemployment problem and is worth further study." In a future post, I will explicate Foster's model.

The Utility of Utility (about the methodology of economics)

For those who think that economics is, above all, a method and not a subject matter, the centerpiece of the whole enterprise is utility.  In the canonical set of models, individuals act to maximize their utility, and the purpose of economics is to identify the two-way relationship between factors that impinge on this choice procedure and the choices themselves.  The external environment (institutions, policies, claims on resources, technology, preferences of other agents), combine with the decision-maker’s own preferences to generate a choice, and the choices of all the relevant agents cumulatively alter their shared environment.  This is the program for all standard microeconomics and for microfounded macro.  One convenient feature is that, if you use this approach, the same analysis that provides your positive explanations and predictions does double duty as a normative tool: maximizing utility is why people do things and also the goal to be sought after.

A variant has appeared in the form of behavioral economics.  In this approach, people are ascribed decision rules that vary from utility maximization—some form of “irrationality” due to limited cognitive resources, convenient heuristics, etc.  The predictions cranked out by such models differ from those you get from utility maximization, and the normative task becomes that of devising clever tweaks so that predictably irrational behavior will nevertheless approximate a Pareto superior outcome.

Behavioral economics takes one step away from the utility framework, but remains connected to it.  Utility and its maximization remain the benchmark, and behavioral departures are defined in terms of the U-max requirements that are dropped or altered.  If you step back, however, this continued fealty to utility is rather strange, since utility does not play either a positive or normative role in any school of thought within psychology, which is presumably the academic discipline that tells us most of what we know about human behavior.

In formal terms, this is a problem of external consistency.  Internal consistency is about whether the elements in a model are consistent with one another; you can test this with algebra.  External consistency is about whether these elements are consistent with what is already known by those who work in other domains with other models.  If you devise a heat pump based on a set of assumptions about how its components work, and one of these assumptions violates the Second Law of Thermodynamics, your design might be internally consistent but fail the external consistency test.  That’s the state of economics today: it uses models which, if you accept their maintained assumptions, are internally consistent, but the assumptions are inconsistent with what research outside the discipline has demonstrated.  Or to put it more crudely, if economics is right, psychology is wrong.  Who are you going to believe if the question is about human behavior?

I know what some of you are thinking: this is absurd because economists have accumulated mountains of evidence consistent with utility and utility maximization.  And it’s true.  The problem here is “is consistent with”: the evidence we have for economic behavior is generally consistent with a wide range of assumptions, one of which is utility maximization.  If the price of something goes up people buy less of it.  You could get that outcome from U-max but also from a number of other psychological mechanisms.  When the predictions of U-max come into conflict with what other, more plausible mechanisms tell us, U-max generally performs worse.  That’s why psychologists don’t push U-max as a preferred theory of how people think and act.

That said, there is a valid use for utility, as a heuristic element in thought experiments.  Take game theory, for instance.  The analysis of strategic choice can get very complicated, and it’s helpful to construct models in which players attempt to maximize something we call utility; this helps us figure out the logical processes at work.  That does not mean, however, that we should assume that real human beings in the real world are crunching out expected utility values of their choices, much less that the normative value of a game’s outcome can be assessed on the basis of how much utility participants are getting.  A heuristic device is not a theoretical proposition; it’s just an aid to thought.

The confusion between heuristics and theory runs deep in economics, I’m afraid.  It’s difficult to find an article with even a smidgen of theoretical content that doesn't treat utility as if it were an actual psychic quantity whose pursuit motivates actual human decision-making.  This is as much a problem on the micro side as the macro, and it’s hard to imagine how this can change any time soon.  My only piece of advice is to stop thinking of economics as a normative enterprise at all, since nothing in their training prepares economists to have a special insight into what makes people better or worse off.  Wealthier, yes; better off, no.  If you can do that, you will at least abandon one of the main purposes behind unreflected utility-speak.

Who knew? People oppose austerity -- because the lump of labour fallacy!

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"The basic story put forward to justify austerity is that a reduction in debt will generate an economic turnaround, but why have people rejected this narrative? Some economists would say that people have rejected it simply because it is wrong, but the problem is more protracted than this." -- Achim Kemmerling

Note: This article gives the views of the author, and not the position of EUROPP – European Politics and Policy, nor of the London School of Economics.

Yes, a disclaimer is probably a good idea. Especially when you are publishing nonsense that has been thoroughly discredited. In short, the lump of labour is NOT an idea that some people have; it is an idea that some people ATTRIBUTE to other people. It is a projection. The fallacy is in the head of the beholder.

Why economists dislike a lump of labor

Tom Walker
Review of Social Economy, 2007, vol. 65, issue 3, pages 279-291

Abstract: The lump-of-labor fallacy has been called one of the “best known fallacies in economics.” It is widely cited in disparagement of policies for reducing the standard hours of work, yet the authenticity of the fallacy claim is questionable, and explanations of it are inconsistent and contradictory. This article discusses recent occurrences of the fallacy claim and investigates anomalies in the claim and its history. S.J. Chapman's coherent and formerly highly regarded theory of the hours of labor is reviewed, and it is shown how that theory could lend credence to the job-creating potentiality of shorter working time policies. It concludes that substituting a dubious fallacy claim for an authentic economic theory may have obstructed fruitful dialogue about working time and the appropriate policies for regulating it.

Most Public Intellectuals Today Aren't Literati: Is That a Problem?

I finally got around to reading the very long, very thin screed, “What’s Wrong with Public Intellectuals?” by Mark Greif, printed in last Friday's Chronicle of Higher Education.  Greif longs for the golden age when elegant writing and clever thinking emanated from the pages of the Partisan Review.  He tried to put the magic back in the can with n+1, but couldn’t find the authors he was seeking among the engagé professoriat.

Well, I’m sorry that I have to be the one to say this, but times have changed.  Back in the 1940s, if you were an intellectual drawn to political and social critique, you were a novelist, a poet or a critic.  The social sciences were still getting on their feet, and the few people who could bridge the worlds of economics/sociology/political science/etc. and politics were also writers and critics—J. K. Galbraith (novelist), David Riesman and the like.  A literary epoch.

Today there are scads of public intellectuals using their social science chops to tackle the big themes of politics and culture.  By and large, they are not literary stylists.  They are active researchers, typically using abstruse methods to shed light on large or murky data sets.  Their professional writing is incomprehensible to those without grounding in the relevant academic literatures.  To reach a more general audience they are forced to commit the very sin that Greif excoriates, dumbing down.

My problem is that my world has too many public intellectuals.  I can spend all day reading fascinating blog posts by economists and other social scientists and postpone forever doing my own work.  This writing does not have the literary flair (usually) that the finest writers are able to display, but the ideas are far more precise and engaged with empiricism than anything you will find in the archives of Partisan Review.  You can learn more from a good day in the social science blogosphere than a year of reading Dwight Macdonald, and I actually like Dwight Macdonald.

Being a superior writer is no longer a sufficient basis for expertise in culture and politics.

Did Scott Walker Really Answer That Question About Evolution?

Wisconsin Governor Scott Walker, very much the flavor of the day among many Republicans to be their nominee for president in 2016, managed to get somewhat embarrassed while visiting London recently, something that seems to have become a not uncommon occurrence among them.  I must grant that much of what he was criticized for he had a good cover story for.  He went out of his way not to say much of anything substantive in reply to any questions at a Chatham House forum, supposedly on foreign policy, where he mostly wanted to tout Wisconsin products such as cheese.  He said that he did not wish to criticize current US foreign policy while on foreign soil, a not unreasonable and traditional position, although many think it was because he knows zip about foreign policy and did not want to get caught making some seriously silly snafu due to his ignorance.  As it was, he got in trouble for something else.

That something else was evolution.  He was asked if he believes in it, and he replied by saying that he would like to "punt"on that.  He was immediately taken to task for that and a lot of publicity about his non-answer on that one got around.  He complained about the media attention to this, but obviously he could not claim that he was trying to maintain some formal unity about US foreign policy while on foreign soil with it.  He subsequently produced a tweet on the matter that many declared was "just what he should have said in the first place," as if the tweet answered the question.

However, it did not.  His tweet said the following: "Both science & my faith dictate my belief that we are created by God.  I believe that faith & science are compatible & go hand in hand." Does this answer the question?  I do not see it doing so.  It looks like a carefully crafted hedge to make it look like he might be on either side of the question, but I must say that the wording tends to tilt to the anti-evolution side.  That is because he emphasized specifically the "created by God" point.  Sure, saying that he thinks faith and science are "compatible" suggests that he does accept evolution, but he does not come right out and say so.  I would certainly accept that one can believe in both God and evolution (heck, one can say that God simply directs or oversees evolution, cannot be disproven). But, he did not say that.  Of course, this is the convenience of tweets: they are so short one does not have the time or space to fill things out, along with not facing any obvious pesky followup questions.

I guess what bothers me here is Walker himself, along with how well he seems to be doing.  I am from Wisconsin and have been following this college dropout for some time.  I cannot think of a single thing he has done that I agree with that was not just something boilerplate that everybody does and agrees with.  I shall not list all the stuff he has done that I do not like, because it is a long list, and I suppose I should not be prejudiced against college dropouts for becoming president, but among his latest actions are proposing a 13% cut in the University of Wisconsin system budget, along wiht a proposal that the state fund the building of a Milwaukee Bucks arena.  The state is facing a fiscal crisis due to tax cuts aimed mostly at the rich he passed, imitating Brownback in Kansas, opining a la Laffer that this was going to stimulate the economy so much that there would no revenue problems, but in fact Wisconsin is performing more weakly in terms of growth and employment than its neighbors.  But when push comes to shove, this lying ignoramus goes after higher education.

So, there is indeed a broader issue here about science and public policy, with the trend of Republicans in particular pushing anti-scientific views on climate and evolution at the top of the worry list (although it must be admitted that some Dems have joined the anti-science team, see liberal anti-vaxxers and some other issues).  Clearly Walker wants to try to elide the issue for the moment at the national level and keep his appeal to both the fundamentalist creationist crowd, while keeping the establishment big money people not too scared.  But, I, for one do  not see any reason to keep the heat off this guy, whom I think comes out of the Joe McCarthy wing of the Wisconsin Republican Party rather than its progressive wing, which dated to the founding of the Republican Party in 1854 in Ripon, Wisconsin, you know, the Abraham Lincoln wing of the party, now all but defunct.

Barkley Rosser

Update:  Guess I should confess for any who do not know that I take attacks on the UW system more personally than those on others as I am an alum of the UW-Madison for both undergrad and grad school, as well as currently having a daughter there in grad school in neuroscience.  So, I am especially resentful that this hypocrite's anti-higher ed agenda is aimed at my school.

Israel in the Long Run

In the long run, does Israel have a viable alternative to peace and reconciliation?  What if it remains surrounded by countries hostile to it, or that are home to hostile groups, or whose politics fluctuate between cautious cooperation and hostility?  In other words, what if there are well-organized groups beyond Israel’s borders, but not too far beyond, who object to Israel’s policies, or even its existence, and refuse to accept defeat?

Israel is vastly more powerful militarily than any country, group, or set of countries and groups that oppose it.  It can defend its borders—build a giant fence in fact—and project violence at will throughout the region.  Such superiority seems to have convinced a majority of Israelis that peace is optional.

At the present time, the long-distance weapons available to Hamas, Hezbollah and other forces that take the Palestinian side in the Israel-Palestine dispute are inaccurate and largely ineffective.  They cause enough damage to provoke retaliation and foster an understandable bunker solidarity among Jewish Israelis, but not more than this.

That’s the situation now.  What about several years from now?  Small, toy-size weaponized drones are already within the means of private citizens.  Smart guidance technology in ballistics can only become cheaper and more widely available as digital technology and GPS improve.  Is it unrealistic to think that, in the not-distant future, it will become as possible for Israel’s opponents to target and execute individual Israelis as it is for Israel to locate and assassinate those on its hit list?

What long run strategy makes sense of Israeli intransigence?

"Union Arguments for Shorter Hours"

In the summer of 1959, Loren Goldner and I hung out together at the City of Berkeley's Camp Cazadero. Loren called me "Stick" because I was skinny and because my last name was Walker. Walking stick > Stick Walker. I'm not sure if that was the year the boys' camp did a talent show skit based on exclamatory action comic book sound-effects words.

Pow! Bam! Gulp! Rat-a-tat-tat! Neeeiyow! Vrooom!

When I came across this Hours of Work pamphlet, below, the author's name and affiliation with UC Berkeley were sure tip-offs that it was by my old camp buddy Loren's dad. Inside is the only extant artist's depiction of a "lump of work." The pamphlet also contains one of the most tantalizingly ambiguous "refutations" of union arguments that shorter hours create more jobs:

The fear of unemployment runs through much of the trade unions' justification for shorter hours. In the last half of the nineteenth century, the make-work idea was expressed in its very crudest form. The concept prevailed that there was just a given 'lump of work." Shorter hours of work meant that more men had to be found to do the job. Increased demand for workers, labor contended, drove wages up. 

After World War I, the economic arguments made by unions became more refined, but the basic ingredients were the same. Unions argued that shortened hours coupled with higher wages and employment increased total spending; increased purchases led to more production, and this, in turn, created even more employment. 

Actually, the 'lump of work" argument and its more complicated variation described above fail to consider two important factors. First, changes in hours of work are frequently accompanied by changes in productivity. If per unit costs of production decrease with shortened hours and increased productivity, there is a possibility that lower prices will expand demand. The "lump of work" grows larger under these commonly occurring circumstances. 

Secondly, there are usually other economic factors at work which tangibly increase the "lump of work." 

Actually, the first factor reinforces the "more refined" economic arguments for shorter hours. To reiterate: shorter hours lead to increased productivity resulting in lower prices that expand demand thereby creating jobs. The second factor simply affirms that ceteris is not paribus and thus is irrelevant to the refined arguments. In short, Goldner confirmed that shorter hours may indeed create more jobs but not for the "crude" or "refined" reasons that the pamphlet attributes to union advocates of shorter hours. 

The logical/rhetorical gymnastics are dazzling. 

Who said there was just a given lump of work? 

Well, the unions didn't actually say it but it can be "inferred" from their advocacy of shorter hours. 

What were the "basic ingredients" that stayed the same between the crude and the refined arguments?

That shorter hours created more employment. 

What "important factors" did both the nineteenth century argument and its more complicated post-World War I successor "fail to consider"? 

Well, um, that the jobs resulting from the productivity gains from shorter hours made the lump of work grow larger, therefore there wasn't a fixed lump of work.


In other words, it's like those math exams in high school where you get marked wrong even though you got the right answer because your pencil work didn't conform to the way they did the proof in the textbook. Only in this case, it is as if the teacher ignores what you actually wrote and marks you on the basis of what he assumes you must have been thinking based on who your friends are and what desk you sit at in class.

I should mention, in passing, that the editor of the pamphlet was Irving Bernstein, whose 1946 article "Labor and the Recovery Program" supplied a key detail for my post on "The Black bill, Green and the Blue Eagle."

What is it?

Economic Law and Order

The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread. -- Anatole France

Economists forget, at their peril and ours, that "economic laws" are contingent on "The Law," in Anatole France's sense. When the rich find it convenient to house their servants under bridges, the majestic law that forbids both rich and poor to sleep there will go unenforced or be repealed.

The "law of supply and demand" is no exception. Nor is "Say's" law of markets (which I would prefer to call the law that a cheap market will always be full of customers).

The repeal in 1814 of the apprenticeship clauses of the Elizabethan Statute of Apprentices may appear to be of no more than antiquarian interest. From today's perspective, the ancient requirement of seven years servitude to qualify for particular trades would be indefensible. In this case, at least, laissez faire does indeed seem more reasonable than the letter of the old law. But there was a darker subtext to the agitation for repeal. Combinations of workers were illegal; petitioning for enforcement of the law gave tradesmen a legal loophole under which they could conduct a semblance of collective bargaining.

The decisive argument in favor of repeal -- which according to T.K. Derry, "echoed through the debates" -- was the one Serjeant Arthur Onslow, M.P. outlined in a speech of April 27, 1814: ",,,the continuance of this law is highly prejudicial, and affording a color for the most dangerous combinations: nothing would so much tend to unnerve them, as repealing these restrictions."

Viewed in isolation from its historical context and the complex of other legal restrictions, repeal of the apprenticeship clause seems to make "economic" sense. In context, though, it appears as a strategic manoeuvre to suppress a residual avenue for redress available to a politically disenfranchised group. There are no "economic laws" in isolation from their historical and legal contexts.

The Black bill, Green and the Blue Eagle: "to bargain collectively through representatives of their own choosing"

The story is told by three of the key actors, Frances Perkins, Leon Keyserling and Rexford Tugwell, of how the Roosevelt administration, in its eagerness to "get rid" of the Black thirty-hour bill and to put something in its replacement to placate labor, incorporated the right to collective bargaining in section 7(a) of the National Industrial Recovery Act.

"When we first came to Washington in 1933," Perkins wrote in her memoir, The Roosevelt I Knew, "the Black bill was already before the Congress. Introduced by Senator Hugo L. Black, it had received support from many parts of the country and from many representatives and senators." Meanwhile, according to Keyserling, the architects of the NRA "would not have included either Section 7(a) or the wage or hour or labor standard provisions. These emerged through a series of haphazard accidents reflecting the desire to get rid of  the Black bill and to put something in to satisfy labor." "It will be remembered," confirmed Tugwell in his memoir, "that one of the reasons why NRA was sponsored by Roosevelt, and why the act was passed in the special session of spring, was the threat of a thirty-hour law being pushed by Senator Hugo Black."

Perkins chronicled the events leading up to the scuttling of the House (Connerly) version of the Black bill. The Senate had already approved the measure by a vote of 53 to 30:

Roosevelt had a problem. He was in favor of limiting the hours of labor for humanitarian and possibly for economic reasons and therefore did not want to oppose the bill. At the same time, he did not feel that it was sound to support it vigorously. But the agitation for the bill was strong. Its proponent insisted that it was a vital step toward licking the depression. I said, "Mr. President, we have to take a position. I'll take the position, but I want to be sure that it is in harmony with your principles and policy." 

Finally we agreed that I should go before the congressional committee holding hearings on the bill. I would propose amendments to guarantee a floor under wages, that is, some kind of minimum wage machinery. I would point out the necessity for possibilities of variation from the strict application of the thirty-hour week. ... 

So I went, with his encouragement, to testify. It was a trying experience. Except for my appearance for the bill providing for the Civilian Conservation Corps, it was my first appearance as a cabinet member before a committee of Congress, and this was a full dress affair. Senator Black apparently wanted it that way. Furthermore the attendance of Miss MacDonald and Mrs. Roosevelt made it a matter of considerable publicity. One could not avoid the ballyhoo of the photographers, the press, the radio, the klieg lights... .

At any rate, Roosevelt was fully committed. From that time on, Congress, the newspapers, the people, knew he was in favor of doing something by law to mitigate the hardships of unemployment by techniques of control of hours, wages, and working conditions. He was committed to the principle but not to this particular program. 

The Black bill did not go through. Instead, the National Industrial Recovery Act was evolved and adapted. Some biographers of Roosevelt have gone so far as to say that Roosevelt betrayed the Black bill in favor of the National Industrial Recovery Act. They regard this as disloyalty to principle. They say that the Senate committee was about to add a paragraph to the bill which would have set up a minimum wage principle. But those of us who were close to the situation could not detect, at any time, that the adoption of a minimum wage clause was in the making. And, as events showed, the Supreme Court in those days would surely have found the Black bill unconstitutional.

Perkins, Ishbel MacDonald and Eleanor Roosevelt descending the steps of the Capitol after attending House Labor Committee hearings on the thirty-hour bill

Perkins left out of her account a crucial detail -- the amendment to the House thirty-hour bill offered by the president of the American Federation of Labor, William Green. Irving Bernstein supplied the missing detail in his 1946 account of "Labor and the Recovery Program." After mentioning that Perkins had not consulted the A.F. of L. about her proposed amendments to the thirty-hour bill, which "did not raise her in its esteem," Bernstein presented the following account of President Green's House Labor Committee testimony:

He did not approve the increase in maximum hours, but accepted it on the ground that it represented the viewpoint of the Labor Department and the Administration. Minimum wages, however, were opposed, except insofar as they applied to women and children. The federation traditionally rejected legal minimum wages, since they tended to become maximum wages and thereby lowered the rates of high-paid workers. The tripartite boards would not act in the interest of labor where collective bargaining did not exist. He urged, therefore, that the bill be amended to guarantee workers "the free exercise of the right to belong to a bona fide labor organization and to collectively bargain for their wages through their own chosen representatives."

The wording of that amendment was not completely original. During World War I, the National War Labor Board had stipulated that "The right of workers to organize in trade unions and to bargain collectively through chosen representatives is recognized and affirmed." In 1919, President Woodrow Wilson convened a "First Industrial Congress," with representatives from business, labor and "the general public" (more businessmen), at which the labor group proposed a resolution, vigorously opposed by business, that affirmed, "The right of wage earners to be represented by representatives of their own choosing in negotiations and adjustments with employers in respect to wages, hours of labor, and relations and conditions of employment."

Perkins gave the following account of the lead up to inclusion of section 7(a) in the NIRA:

At the earliest opportunity I reported to the President that two fairly complete plans were being mapped out — one by Wagner and Jacobstein, the other by Tugwell and Johnson. They both rested on the idea of suspending the effect of the anti-trust laws in return for voluntary agreement by industries for fair competition, minimum wage levels, and maximum hours. I told him that the plans were not very different and both apparently had gotten around constitutional difficulties. The President asked Henry Wallace and me to get the two groups together. That was arranged, and the conferees met daily. When they had completed their draft bill, the President showed it to me. It was novel. It seemed generally satisfactory, but it had some weaknesses. 

"This is very drastic," I said. "The hours of labor and wages are involved, and I think I ought to get the president of the American Federation of Labor to go over it." 

I called in William Green. He liked some of it but said that no provision was made for collective bargaining. He thought the bill could be used as a method for putting the labor unions out of business. General Johnson took the bill and redrafted it, incorporating Section 7(a), which was meant to assure labor's right to collective bargaining. Written in general terms 7(a) was a problem in semantics. It was a set of words to suit labor leaders, William Green in particular. When they discovered later what could be done under 7(a), they called it "labor's Magna Charta."

Charles Coiner's original design for the "Blue Eagle"

The text of Section 7(a) stated as follows:

Employes shall have the right to organize and bargain collectively through representatives of their own choosing, and shall be free from the interference, restraint or coercion of employers of labor, or their agents, in the designation of such representatives or in self-organization or in other activities for the purpose of collective bargaining or other mutual aid or protection.

The wording of Section 7 of the 1935 National Labor Relations Act (Wagner Act) retained verbatum the wording of the phrase, "[to] bargain collectively through representatives of their own choosing":

Employees shall have the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection, and shall also have the right to refrain from any or all of such activities except to the extent that such right may be affected by an agreement requiring membership in a labor organization as a condition of employment as authorized in section 158 (a)(3)of this title.

Now pay attention to what happened here. Labor bargained for the right to bargain collectively. The A.F. of L. had something -- "support from many parts of the country and from many representatives and senators" for the Black bill -- that William Green exchanged for the inclusion of section 7(a) in the NIRA. Labor owns the right to bargain collectively. They (we) bought it. Nobody gave it to them. Anyone who tries to take that right away is a thief. Got it?