The Incredibly Bad Timing of John Wilkes Booth

When John Wilkes Booth assassinated President Abraham Lincoln 150 years ago today on April 14, 1865, it happened to be a Good Friday.  I do not know if he and his associates thought about how this would be viewed by the American people of that time, including even most southerners, much less the longer run view of history, but the timing instantly turned a man who had been quite unpopular in many quarters even in the North into a martyred and sanctified Christlike figures.  Perhaps Booth thought people would view him that way, but he was mistaken.

Barkley Rosser

GE Capital and Repatriation Taxes

Peter Eavis writes:

More than 10 years ago, the kinds of investors who seek out weak companies were circulating presentations on Wall Street that argued that General Electric’s enormous lending business was a ticking time bomb. The financial crisis of 2008 proved those skeptics right, and on Friday, they appeared to have the final laugh. General Electric announced that it was selling most of the loans inside its financial division, GE Capital, leaving a G.E. that will be dominated by industrial businesses. The shift, to be completed by 2018, would end one of the riskiest experiments in finance. It also indicates that regulations intended to limit destabilizing financial practices are starting to bite.

That Dodd-Frank reforms take away the joys of regulatory arbitrage just bites. And I guess paying U.S. taxes also bites as noted by Steve Goldstein:

General Electric’s deal to sell off real estate and get out of most of the finance business contains a little sweetener for the U.S. government, in the form of up to $4 billion worth of taxes on repatriated earnings. The issue of tax repatriation is arguably the hottest one in corporate tax policy. Right now, U.S.-based multinationals are not taxed by the U.S. government on what they earn overseas — until they bring that money back to the U.S.

GE is saying that this repatriation tax might be as much as $7 billion. But the GE Capital alone segment was parking $36 billion overseas. They have paid a modest amount of foreign taxes so they get a Foreign Tax Credit. And its other divisions are still parking a lot of profits overseas, which will likely not be repatriated allowing the effective tax rate for these other segments of their business to remain below 20%. Steve continues:

According to a report in March by Credit Suisse’s David Zion, the cumulative earnings parked by S&P 500 companies overseas is over $2 trillion

Under current law, the repatriation tax would be 35% minus any Foreign Tax Credits. Let’s assume that foreign taxes are 20% of foreign earnings. This would mean the US Treasury could net 15% of this $2 trillion if deferral benefits were ended. And $300 billion could finance a lot of infrastructure investment. But Steve notes that Washington is proposing to change this tax:

President Barack Obama has proposed a one-tax 14% tax on $2 trillion of overseas earnings, followed by a 19% minimum tax on future profit, and former House Ways and Means Committee Chairman Dave Camp proposed a one-time tax of 8.75%.

For companies whose foreign earnings are in tax havens, these proposals would raise at least some tax revenues but for companies where the foreign tax rate is above 19%, even the Obama proposal would effectively eliminate the repatriation tax given the Foreign Tax Credit.

UBI Caritas (the best things in life are free)

The miraculous Max Sawicky resumes wrestling with Universal Basic Income at MaxSpeak. This time the incitement comes from Dylan Matthews at Vox, who argues that a secondary benefit of basic income would be that "it enables a transition to a world of less work and greater leisure."

That would indeed be a good thing. But as the Sandwichman pointed out two weeks ago, advocates for basic income seemingly make exactly the opposite argument. Guy Standing, co-president of the Basic Income Earth Network, cited a recent experiment in India -- and earlier experiments in North America and Europe -- as evidence for the claim that a basic income guarantee "would not reduce labor supply... The simple fact is that people with basic security work harder and more productively, not less."

Guy Standing on top of an airplane

The contradiction between the two arguments is less extreme than it may at first appear. A U.B.I. might reduce the dire incentive to "work or starve" at the same time as it increases opportunities and incentives to pursue the bright elusive butterfly of "meaningful work." That would be good if it was the only consideration. But it is not. There is also an inconvenient truth about the relationship between productivity and fossil fuel consumption. In the industrial economy, larger amounts of better work mean more greenhouse gas emissions. Productivity is a double-edged sword.

Max is right to point out that a Universal Basic Income scheme would involve lots of money sloshing around, creating lots of opportunity for misappropriation. His alternatives -- a family allowance and a retirement floor -- also involve money, albeit targeted to where the need is likely to be.

In my view, that only addresses one side of "the need". The other side is the need to reduce superfluous production and consumption. We have long since passed the point where capital "diminishes labour time in the necessary form so as to increase it in the superfluous form; hence posits the superfluous in growing measure as a condition – question of life or death – for the necessary."

Currently, world-wide carbon emissions per year are roughly double what can be re-absorbed by oceans and plants. This is not to say that the re-absorption by oceans is harmless --it leads to acidification. But clearly more than half of the emissions are superfluous to sustainability. Lo and behold, carbon emission increase in virtual lockstep with hours of work. In the U.S., the  correlation between the two has been about 95% over the last quarter century.

Don't even think of using the "correlation doesn't prove causation" gambit. We are talking about a "water is wet" relationship. Fossil fuel is burned to do work. Period. If you can't fit those two pieces together, go home.

So the bottom line is we either need to cut hours of work at least in half or the remaining hours need to be less productive not more. Does the Sandwichman have a policy proposal for accomplishing such a Herculean task? Of course. The Moon Belongs to Everyone. Just to save you the trouble of clicking on that link from two years ago, I've copied the scheme below.

The Moon Belongs to Everyone

Dorning Rasbotham, Esq., was a friend of the poor. Nay, from the bottom of his heart, he was a friend of the poor! He felt tenderly for the poor man and his family. After all, what would become of the rich if there were no poor people to till their fields, pay their rents and manufacture their goods?

Squire Rasbotham laid down the following principle in a pamphlet he published in 1780: "A cheap market will always be full of customers." Let's not waver from that principle as we consider the facts in the following table:

"Hours" in the above table refers to billions of hours of paid employment in the U.S. in each of the specified years. "GHGs" refers to billions of tons of greenhouse gas emissions. Both totals increased from 1990 to 2011 and those increases were 88% synchronized between the two variables. If one went up, the other went up. If one went down, the other went down -- 88% of the time!

Correlation does not imply causation. In this case, though, the correlation is exactly what theory would predict. The correlation here is not "implying" anything. It is evidence in support of a theory that existed long before people even thought of measuring greenhouse gas emissions.

That theory is an extended version of Squire Rasbotham's principle that a cheap market is always full of customers. In 1865, William Stanley Jevons applied that same principle to the economy of fuel:

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, for the moment, throws labourers out of employment. But such is the increased demand for the cheapened products, that eventually the sphere of employment is greatly widened.... 

Now the same principles apply, with even greater force and distinctness, to the use of such a general agent as coal. It is the very economy of its use which leads to its extensive consumption....

And if such is not always the result within a single branch, it must be remembered that the progress of any branch of manufacture excites a new activity in most other branches, and leads indirectly, if not directly, to increased inroads upon our seams of coal.

This theory is known as the Jevons Paradox or the rebound effect. Substitute "fossil fuel" for coal and the theory predicts pretty accurately the results presented in the above table.

Fast forward to today. We want more jobs -- that is to say more hours of work --but we want less greenhouse gas emissions. We face not only a paradox but a dilemma. The horns of this dilemma are yoked together, not just "in principle" but in the physical, mechanical agent of both the economy of fuel and the economy of labor: the machine.

"When we try to pick out anything by itself, we find it hitched to everything else in the Universe." John Muir, My First Summer in the Sierra.

It gets rather tedious watching one group of experts "solve" one side of the dilemma while completely ignoring the other side while yet another group of experts "solves" the other side while ignoring the first. "Crackpot realism" was C. Wright Mills's name for it but there's nothing realistic about it. It's just plain old crackpot.

So what's the solution, then? I'll tell you after the break. Listen to this song first.

The moon belongs to everyone,
The best things in life are free;
The stars all shine for everyone,
They're shining for you and me. 

The flowers in Spring,
The birdies that sing,
The sunbeams that shine,
They're yours--they're mine. 

The sky belongs to everyone...

And that's not just the lyrics to an old song any more. That's the ruling of Judge Gisela Triana, of the Travis County, Texas, District Court in July 2012. From the Boston Globe, July 12, 2012:

The lawsuit was brought by the Texas Environmental Law Center, and is part of a court campaign in a dozen states by an Oregon-based nonprofit, Our Children’s Trust. The group is using children and young adults as plaintiffs in the lawsuits — some state and some federal — filed in Alaska, Arizona, California, Colorado, Iowa, Minnesota, Montana, New Jersey, New Mexico, Oregon, Texas, and Washington.

By relying on ‘‘common law’’ theories, the group hopes to have the atmosphere declared a public trust for the first time, granting it special protection. The doctrine has been used to clean up rivers and coastlines, but many legal experts have been unsure if it could be used successfully to combat climate change.

As David Morris reported in On the Commons, Peter Barnes proposed treating the sky as a public trust in his 2001 book, Who Owns the Sky. Barnes's idea was the basis for a "cap-and-dividend" bill proposed in the U.S. House of Representatives in 2009.

Cap-and-dividend is a variation on the cap-and-trade concept of a market-based emissions regulatory mechanism. Some of the main criticisms of such market-based schemes have to do with enforcement mechanisms, non-compliance, transparency and regulatory capture.

The idea of trading pollution allowances originated in Ronald Coase's "The Problem of Social Cost" and was further developed by J. H. Dales in Pollution, Property and Prices. Coase's article centered on a critique of the "Pigouvian tradition" that advocated a prominent role for the state in taxation to offset the effects of environmental externalities.

In his critique, Coase didn't consider that there was both an environmental and a labor component to Pigou's analysis. Pigou's analysis of the labor question was not reducible to the environmental one and relied at a key point on Sydney J. Chapman's theory of the hours of labor. I have discussed this in detail in "The Hours of Labour and the Problem of Social Cost."

I mention this to emphasize that the hours of work is not just some random, unconnected variable that I've pulled out of a hat. It is fundamental to the analysis of social cost. It stands to reason that it should also be fundamental to the resolution of problems arising from social cost shifting.

I have therefore proposed a friendly amendment to the cap and dividend proposition that I will provisionally call The Lump-of-Labor Rebound GHG Cap and Trade Remedy.

I will just sketch a rough outline of how such a policy might operate followed by some remarks on how it can be integrated with a community-based valuation of the "temporal commons":

According to our table above, there were 6.7 billion tons of GHGs emitted in the U.S. in 2011 and 225.6 billion hours worked. That same year the adult population in the U.S. was about 240 million. Suppose that the government adopted a target of cutting emissions by two-thirds by the year 2040. To do so would require a 3.7% annual reduction in greenhouse gas emissions.

The best greenhouse gas reduction on record (apart from economic fluctuations) in the period 1990 to 2011 was a little less than 2.5%. The average annual reduction was about 0.5%. Taking an average of the two gives a 1.5% reduction as something that is feasible but ambitious. To get from a 1.5% reduction to a 3.7% reduction would then require a reduction in aggregate hours of work of 2.2%.

Dividing the reduced hours number by the adult population produces an annual transferable hours credit of 936. If we assume that the labor force participation remained constant, the hours transferred from those outside of the labor force would raise the average annual hours of those in the labor force to 1460 hours, although it is conceivable that some recipients might chose to neither use nor transfer their credits. In that case, the hours reduction and the associated greenhouse gas reduction would be steeper than planned.

This is not to assume that the benchmark GHG reduction of 1.5% will occur automatically or that the further reduction in GHGs as a result the reduction of work hours will be proportional to the reduction of hours. These are targets only and there need to be programs put in place to try to meet them and monitoring to evaluate how successful those efforts were.

So far the discussion has focused on a policy that could only be implemented by a government with radically different priorities than those that any actually existing government of a wealthy industrial country has. It is a political Utopia. But the gist of this policy proposal is not restricted to a global emissions reduction strategy. My own research project began some 15 years ago by looking at collective bargaining practices and how they might be modified to promote job creation through the redistribution of working time.

One of the fruits of that project, "Time on the Ledger" examined how employment can be considered as a common-pool resource. A different valuation of benefits of leisure time and of unpaid work and of the costs of unemployment and of environmental damage could lead to a very different set of priorities in collective bargaining and those different goals could reignite a labor movement in place of a marginalized, ineffectual and increasingly irrelevant organized labor.

Jeffrey Sachs’ Feeble Defense of David Cameron

Greg Mankiw reads this as a defense of David Cameron:

Finally, there is output growth. In the UK, real (inflation-adjusted) GDP fell by 3.8% from the fourth quarter of 2007 to the second quarter of 2010. It then rose by 8.1% from that point until the fourth quarter of 2014. In the US, real GDP fell by 1.6% from the fourth quarter of 2007 to the second quarter of 2010, and then rose by 10.5% from then until the fourth quarter of 2014. Thus, both countries have experienced moderately high and broadly similar growth rates since May 2010, when Cameron’s government took power.

I have no idea what Paul Krugman did to tick off Jeffrey Sachs so I’ll let him speak for himself. But let’s note the fact that the real GDP in the US was a mere 8.7% higher in 2014QIV than it was in 2007QIV. That is by any measure a terrible economic performance. We should also note that real GDP in the UK has increased only 3.7% over the same period. For anyone to suggest that such a dismal economic record justifies fiscal austerity leaves me wondering where this person learned their macroeconomics.

Of Bathtubs, Bombshells and Boilerplate

The bathtub in question is the analogy Linda Booth Sweeney and John Sterman use to illustrate a dynamic stock-flow system, such as the relationship between greenhouse gas emissions (a flow) and the accumulation of greenhouse gases in the atmosphere (a stock). Gernot Wagner and Martin Weitzman stress the importance of the bathtub analogy in their new book, Climate Shock.

What's fascinating about the bathtub analogy is how consistently people get the dynamics of accumulation wrong. Or at least how often business school graduate students with backgrounds in science, technology, math and economics get it wrong. Sterman has pioneered a cottage industry publishing articles about the inability of large numbers of students to correctly identify the effects of flow variations on stock levels. A frequent source of error is something Booth Sweeney and Sterman call "correlation heuristic": students often expect that changes in stock will have the same shape as changes in flow. 

This common error has implications for people's attitudes about the action and policy needed to mitigate climate change, Booth Sweeney and Sterman point out. According to the correlation heuristic logic, many people would assume that a reduction in greenhouse gas emissions would directly translate into less greenhouse gases in the atmosphere. It doesn't.

A bombshell dud

A few weeks ago, Scientific American called the International Energy Agency's announcement a week earlier that global GHG emissions for the generation of energy were unchanged in 2014 from 2013 a "bombshell" that "flew in the face of established economic wisdom." The article went on to point out that scientists had "mixed opinions" about the long term significance of this momentary and sector-limited decoupling of emissions from GDP growth. Some thought it was a hopeful sign that decoupling is already happening. Others warned that emissions were likely to resume their upward trend in 2015.

The article neglected to mention that even if total global emissions were to remain flat for years to come, the concentration of GHGs in the atmosphere would continue to increase relentlessly. Annual emissions would need to be cut to around half their current levels just to stabilize atmospheric concentrations at current levels. That's the difference between stocks and flows.

Happy talk about decoupling GDP growth from resource consumption and waste generation to achieve "green growth" ignores this crucial distinction. Even the more sober "prosperity without growth" critique that highlights the huge disparity between relative decoupling and absolute decoupling ignores this distinction. Accumulation is the bottom line. No mitigation without disaccumulation.

From shocks to stocks and flows... to lumps

The boilerplate is not Paul Guinan's imaginary steampunk contraption -- shown at left -- but the proverbial "fixed amount of work to be done" which has performed oh-so-much work for lazy journalists and economists assuaging those unfounded fears about unemployment that emanate from the economic illiterati. Come to think of it, though, a make-believe robot makes a good mascot for an oft-told tale about a make-believe fallacy. 

Do the erring graduate students in Sterman's and Booth Sweeney's experiments assume there is a fixed amount of water in the bathtub? No, they don't. They realize that the change in flow of water into the tub affects the accumulation of stock in some way. But they systematically mis-specify the timing and magnitude of the effects.

What happens if we dial back the preposterous "fixed amount of work" assertion of the lump-of-labor fallacy claim to a more plausible "correlation heuristic"? Instead of assuming that there is only so much work to go 'round, the benighted Luddites, trade unionists and other economic populists might be suspected merely of committing the more common error of assuming that job losses in the economy as a whole are homologous to losses in a particular trade as the result of labor-saving technology. From a distance the two fallacies may appear indistinguishable. But there is a difference -- several differences, actually.

For starters, the correlation heuristic has been experimentally documented, not just asserted. Evidence trumps mere allegation. Secondly, the heuristic is not as obviously preposterous as the belief in a fixed amount of work. It seems more likely that people -- even Luddites -- would make a plausible error than an implausible one. But perhaps most importantly, the correlation heuristic error may pertain equally to those who allege the fallacy as to those who are alleged to commit it.

How so? Economists making the lump-of-labor fallacy claim insist that the price mechanism automatically adjusts the demand for labor to accommodate changes in the supply of labor. In terms of the bathtub analogy, this is the same as saying that the outflow of the drain self-adjusts to correlate with the inflow from the faucet. One can indeed imagine a device that could accomplish this feat -- a bulb, floating on the surface of the water, attached by a chain of a given length to a plug in an auxiliary drain, such that when the water rises above a certain level, the floating bulb pulls the plug out of the auxiliary drain.

It could work...

Unfortunately, as Mr. Keynes explained long ago, the propensity to consume doesn't float like a bulb on the surface of income. The economists' cherished notion of equilibrium remains a heuristic and nothing more. The pot has been calling the kettle black.

Out of the bathtub and into the frying pan

Why does the Sandwichman keep harping on this arcane specimen of journalistic and economic boilerplate? Because heuristics aside, there are statistical series that seriously, relentlessly correlate: energy consumption and hours of paid employment. Energy intensity per dollar of industrial production has declined for nearly a century. That's relative decoupling. Energy intensity per hour of paid employment does not decline. Greenhouse gas emissions per hour of paid employment does not decline. There is no relative decoupling, let alone absolute decoupling or -- sustainable pie in the sky -- disaccumulation of GHGs in the atmosphere.

To cut greenhouse gas emissions in half, we must cut hours of paid employment at least in half. What would John Sterman say to that?

With a few important exceptions (the work of Herman Daly and colleagues, e.g., Daly and Townsend 1993 ; see also Princen et al. 2002 ; Meadows et al. 2004 ; DeGraaf et al. 2005 ; Whybrow 2005 ; Victor 2008 ; Schor 2010 ), most of the research, teaching, and popular discourse on sustainability continues to focus on technological solutions—more energy, more resources, more efficient eco-friendly growth—while the actual leverage point—voluntarily limiting our consumption—remains largely undiscussable, particularly among our business and political leaders.

DeGraaf 2005, Victor 2008 and Schor 2010, by the way, all prescribe reductions of working time as key to reducing emissions. Wagner and Weitzman on Sterman's bathtub analogy: "climate scientists -- and the rest of us -- would be well advised to remind ourselves daily of its significance." Paul Krugman on Martin Weitzman's fat tail analysis: "So what I end up with is basically Martin Weitzman’s argument: it’s the non-negligible probability of utter disaster that should dominate our policy analysis. And that argues for aggressive moves to curb emissions, soon "

1. the possibility of disaster...
2. the significance of the bathtub analogy...
3. the actual leverage point... 
4. measured rather than heuristic correlations

Billie Holiday was born on this day in 1915

She's so sublime, words that I write of her rhyme.   Here she is with Lester:

https://www.youtube.com/watch?v=Y3gXc1fybYs&list=PLBD0F7699C6BDF68F


Happy Birthday, Lady Day!

Revised Job Data Survey

Here is a revised version of the data interpretation survey. I have edited the graph and the survey to (hopefully) get rid of ambiguities. I would be grateful to anyone who anyone who completes the survey, which should take no more than ten minutes.

Create your own user feedback survey

North Korea, Iran, And Anti-Nuclear Weapons Policy

Probably the biggest foreign policy blunder of the second Bush administration after the invasion of Iraq was something few think about that happened within the first two months of Bush becoming president.  Against the advice of Sec. of State Colin Powell but at the urging of Cheney and Rumsfeld, when South Korean President Kim Dae-Jung arrived for a formal state dinner in March, 2001, he was given the cold shoulder on nuclear negotiations with North Korea, which had been going on since 1994.  The DPRK was a signatory to the NNPT and had shut down its nuclear weapons program.  Further negotiations were ongoing, and Kim wanted support for continuing them, support Powell had assured him the US would provide.  This was not forthcoming in March, 2001, leading to outbursts of anger in the ROK against the US.

The stated theory of Cheney and Rumsfeld was that the DPRK was on the verge of collapse like the USSR had been a few years earlier.  All that was needed to bring about regime change was to apply more pressure through sanctions and to abandon the nuclear weapons negotiations.  Easy as pie.

What then followed over several years was that the North Korea withdrew from the NNPT, expelled foreign observers, restarted all its nuclear reactors, and within a few years began producing nuclear bombs, which it has tested on several occasions since.  The nuclear aresenal of the DPRK may not amount to much, but they are now a bona fide nuclear weapons power, and their regime has not fallen, despite the pollyanna predictions of Cheney and Rumsfeld.  I can think of few foreign policy failures by the US bigger than this one in the last quarter century, although few talk about it.  But, it was a total flop, making a bad situation far more dangerous.

OK, so this approach of Cheney and Rumsfeld to North Korea looks to me prettty much like the current attitudes of most of the GOP critics of Obama's negotiations with Iran,  not to mention the views of Israeli PM BiBi Nethanyahu.  Oh, if only we apply tighter sanctions, we shall get a better deal than the one Obama has gotten (or nearly gotten, as important details apparently remain to be pinned down, but the opponents of the deal want to "blow it ups" (to quote Scott Walker) before ever that can happen).

Offhand, it looks to me that the outcome of following these critics will end up resembling what happened with North Korea.  Iran will not collapse.  If we "blow up the deal," our P+1 negotiation partners will end their sanctions, and the remaining US unilateral sanctions, which have been in place since 1979, will not do doodley-squat.  If Israel and the US insist on aggressing more actively against Iran militarily or however, Supreme Leader Khamenei may well withdraw his anti-nuclear wepaons fatwas, Iran might withdraw from the NNPT and expel all current observers, and, well, follow the path of North Korea and begin building nuclear weapons for which indeed they do have the capcity to do. Is there a stupider path out there to follow?   Oh yeah, we could start bombing them or invade them, thus replicating the one foreign policy blunder of George W. Bush that exceeded his ending of the nuclear weapons negotiations with North Korea.

Barkley Rosser

The Iran Nuclear Deal

OK, so there is not a final agreement, and we do not know all the details.  But I think in the face of various individuals and groups screaming that Obama is Neville Chamberlain and so on, let me note a few things that I do not see many out there stating.  I shall stay away from the reported details of the agreement other than to note that some commentators think that it gets more out of Iran in terms of concessions than many thought was possible in terms of limiting its nuclear weapons capability.

1)  For about the umpteenth time, not only is Iran a party to the Nuclear Non-Proliferation Treaty, its supreme leader and commander-in-chief, Vilayat-e-faqih ("Supreme Jurisprudent") Ali Khamenei, has issued fatwas against Muslims owning nuclear weapons.  It must be admitted that these were only issued after Iran stopped having a nuclear weapons program when the US invaded Iraq (one of the few good things to come out of that invasion), a program that had started under the Shah with US support at the time.

2)  Given that he is a major religious leader, I do not think Khamenei is lying when he issues these fatwas.  He really means it.  If there is a danger, it is that a successor to him might undo those fatwas.  But I view that as more likely if there is no agreement with Iran on these matters that provides them with economic and other benefits, as so many seem to want.  In any case, I think as long as he is in power, there will be no further active nuclear weapons program in Iran with or without this agreement, even if Iran did once had one and remains somewhat unwilling to fully disclose what went on with it (the main area that Iran has still been secretive about).

3)  While many outsiders continue to be thoroughly convinced that Iran is deadset on acquiring a nuclear weapon as fast as possible, this is not supported by the population.  I do not have a recent poll, but one in October 2013 by a Gallup poll (sorry, link to it not working but can be tracked down by google) found that while 34% supported getting a nuclear weapon, 41% opposed that, even as 56% support Iran having a civilian nuclear energy program.  And, while democracy is somewhat limited in Iran, it is not completely nonexistent, and the current president, Rouhani's election reflects these sentiments pretty well, and I think that even the theorcratic leaders like Khamenei do not want to get too far away from popular opinion (and Khamenei has already forbidden nuclear weapons anyway, as noted above).

4) While Netanyahu and his cabinet, along with a lot of US politicians, have roundly and fiercely denounced this agreement as threatening the existence of Israel, it has long been the case that both the entire US intelligence establishment as reported in official National Intelligence Estimates, as well as most of the Israeli military intelligence establishment, agree that Iran is not in fact currently actively pursuing nuclear weapons.  It has also been the case that many former Israeli intel people have openly criticized Netanyahu on this issue, even accusing him of lying, and some supporting this agreement, if cautiously, one just a few hours ago, General Amos Yadlin, a former military intelligence director who among other things was one of the pilots bombing the Osirak nuclear reactor in Iraq.

5)  Finally, while powerful elements in Iran have certainly supported various foreign terror groups, Iran itself has not invaded a neighbor without having first been attacked since 1765.  Those suggesting some Hitlerian drive to conquer neighbors by the Iranians are simply ignorant of history.

Barkley Rosser

Economists Discover the World!

Jared Bernstein exclaims : "The macro blogosphere is on fire, as Bernanke, Summers, and Krugman are having a fascinating discussion... we've made important diagnostic progress here by bringing the international dimension... into the discussion."

You mean to tell me that up to now economists have left out the international dimension? If only these New Keynesians had read Keynes, they would have known that Keynes was on to this dilemma in the early 1930s. "National Self-sufficiency," 1933:

"...I have become convinced that the retention of the structure of private enterprise is incompatible with that degree of material well-being to which our technical advancement entitles us, unless the rate of interest falls to a much lower figure than is likely to come about by natural forces operating on the old lines. Indeed the transformation of society, which I preferably envisage, may require a reduction in the rate of interest towards vanishing point within the next thirty years. But under a system by which the rate of interest finds, under the operation of normal financial forces, a uniform level throughout the world, after allowing for risk and the like, this is most unlikely to occur. Thus for a complexity of reasons, which I cannot elaborate in this place, economic internationalism embracing the free movement of capital and of loanable funds as well as of traded goods may condemn this country for a generation to come to a much lower degree of material prosperity than could be attained under a different system."

Guy Standing Out In His Field

Guy Standing on basic income:

A basic income would help people be more rational, more long-term in their outlook, and more prepared to take entrepreneurial risk. 

It would not reduce labor supply. This was shown by our pilots in India, in which we were able to provide over 6,000 men, women and children with a basic income for 18 months and monitor what happened by comparison with a larger number not provided with one, through a randomized control trial. It has also been shown in experiments in the US, Canada and several European countries.

The simple fact is that people with basic security work harder and more productively, not less

A commenter:

NO. I don’t know how you set up that experiment in India, but common sense says the conclusion is wrong. 

Proof (if any was needed) that "el mayor necio es el que no se lo piensa y a todos los otros define."

Guy Standing on a lump of labor:

There is an adage in economics known as ‘the lump of labor fallacy’. It is that technological change is destroying jobs and generating rising unemployment. It rests on an image of a finite number of jobs.

This is nonsense. What is happening is more subtle and potentially liberating, but also potentially generating a dystopia of socially unsustainable inequality, in which a growing share of the population will be mired in chronic insecurity, through no fault of their own.

Who is the greater fool: smart Guy with his condescending "subtlety" or stupid guy with his anti-evidence "common sense"? My middle-sized facts post the other day started out a couple of weeks ago with a somewhat different meditation on Dr. Pepper's inquiry into the limits of unknowing.

What I was thinking about was the practice of attributing "assumptions" to people based on hypothetical models that they are unlikely to have ever entertained. The proverbial "image of a finite number of job" -- whether fallacious or not -- would only be meaningful in the context of some kind of a simple theoretical model of the job market with interactions between supply and demand. As rudimentary as one might imagine such a model, it is likely to be as alien to "the common man" as Fred Flintstone's car would to prehistoric Homo sapiens.

The image of a finite number of jobs contains an amusing substitution. Someone must have thought a fixed amount of work to be done sounded too unbelievable to attribute to people and figured that finite would add credibility. What then is the meaning of an infinite number of jobs? If that is subtle, the Sandwichman is a brontosaurus-burger.

Guy standing on top of an airplane:

CCI. Son tontos todos los que lo parecen y la mitad de los que no lo parecen.

Alzóse con el mundo la necedad, y si hay algo de sabiduría, es estulticia con la del cielo; pero el mayor necio es el que no se lo piensa y a todos los otros define. Para ser sabio no basta parecerlo, menos parecérselo: aquel sabe que piensa que no sabe, y aquel no ve que no ve que los otros ven. Con estar todo el mundo lleno de necios, ninguno hay que se lo piense, ni aun lo recele.

Endogenous Growth on Tin-Pan Alley

I was talking to a class about the growth of knowledge, and the trade-off , in protecting intellectual property, between creating incentives for new discoveries, and  maximizing the effect of new knowledge as input for further knowledge. As an example of this last, "standing-on-shoulders" effect, I mentioned the astonishing number of great jazz compositions that have been based on the chord changes of "I Got Rhythm." But instead of attributing the song to Gershwin, correctly, or even to Irving Berlin, who is at least a songwriter, I attributed it to ISAIAH Berlin. Oy! You don't know about Berlin's residence on Tin-Pan Alley? Well, who do you think wrote

Two Concepts of Blue Skies
A Pretty Girl is Like a Hedgehog - Unless She's Like a Fox
Alexander Herzen's  Ragtag Band,

inter alia?

Middle-Sized Facts vs. IS-LMist Fundamentalism

"So I don't care whether Hicksian IS-LM is Keynesian in the sense that Keynes himself would have approved of it, and neither should you. What you should ask is whether that approach has proved useful -- and whether the critics have something better to offer." -- Paul Krugman, "Unreal Keynesians"

The issue, of course, is not whether 'the master' would have approved of the IS-LM gadget but whether it represents an analytical advance or a regression from the insights that Keynes achieved. In a 1980 "explanation," Hicks conceded that "as time has gone on, I have myself become increasingly dissatisfied with it." In a commentary on Hicks's explanation, though, G.L.S. Shackle was less ambivalent. I have selected and re-arranged passages from Shackle's commentary to highlight his central point -- that uncertainty and equilibrium are fundamentally incompatible concepts.

The one big thing in Keynes' ultimate conception is our unknowledge of what will create itself in time-to-come. "We simply do not know." The author of A Treatise on Probability expressly rejects the notion that probability can turn this unknowledge into its opposite. When we accept this view, the possibility of involuntary unemployment becomes self-evident. 

Sir John Hicks' paper was the first presentation of IS-LM and has been for forty and more years the most famous and the most influential interpretation of Keynes. Central and essential to its argument is a notion of equilibrium. 

Sir John still does not seem to me to acknowledge the essential point: the elemental core of Keynes' conception of economic society is uncertain expectation, and uncertain expectation is wholly incompatible and in conflict with the notion of equilibrium. 

In the literature of economics the word equilibrium covers a multitude of ideas and of vacuous substitutes for thought. Its pervasive presence and the ascendancy its serious meanings have exercised show plainly that it "does something" for the economic theoretician. What does it do? It enables him to exhibit the economic world as determinate, explicable, calculable, and even predictable. Equilibrium is orderliness, harmony, the advancement of one's own interest by serving that of others. Equilibrium is interactive rationality, the recognition that society is an organism. Above all, it is the necessary condition, the basis and sanction of proof. Pride in proof is legitimate. Proof is certainty, an end to debate, and it is more, in the scale of values and sensibilities of many of us. Proof is beauty. If economic theory is to validate its claim to be a deductive system, a science, then the equilibrium idea is indispensable. But proof can exist only in a closed world. It depends upon "givens." If we are not supplied with "givens," and if we are not defended from things not given, of which we were not told, things which can blow in on us in the cold draught from time-to-come, there is no proving things.

Shackle doesn't go far enough. Well, he probably goes far enough in outlining the incompatibility of the notion of equilibrium with the conception of uncertain expectations. But I think it is possible to go a further step in comprehending the incompatibility of the notion of equilibrium with itself. That is to say, the essential incongruity of the notion of equilibrium. 

In an appendix to Significance and Basic Postulates of Economic Theory, T.W. Hutchison admonished, "It is high time to put these theories [laissez faire and equilibrium doctrines] firmly back in their place as Utopian constructions." He cited S. Bauer's 1931 article, "Origine utopique et métaphorique de la théorie du “laissez faire” et de l’équilibre naturel."

Prominent in Bauer's discussion of the origins of the notions of laissez faire and equilibrium is the role of Baltasar Gracian's Oráculo Manual -- which was translated into French by Amelot de la Houssaie in 1684 -- in popularizing both the notion and the term, laissez faire. Pierre le Pesant Boisguilbert is credited with introducing the term into political economic thought in a book published in 1707. Below is the maxim extolling the art of leaving things alone:

Where this story of equilibrium starts to get convoluted is in the Spanish Baroque's philosophical tradition of radical skepticism that Gracian exemplified. In the introduction to his English translation of Gracian's Pocket Oracle, Jeremy Robbins describes the "world of deception and illusion" central to Baroque thought:

Gracián posits a world of deception and illusion, in which appearances predominate and malice and cunning are omnipresent. Hence the distrust, pessimism and misanthropy that characterize his world-view. The key concept here is deceit (engaño): this covers, for Gracián, not simply the deception of one individual by another, but our self-deception as to the true nature and value of the world, and hence our deception by the world. It is a term at once moral and epistemological: to fail to know the world for what it is condemns us to moral error and to failure. Because of our tendency to accept appearances and to follow our desires, passions and emotions, we are mired in a world of deceit. There is consequently an urgent need for disillusionment (desengaño), the other key concept of the Spanish Baroque, For Gracián and his contemporaries, disillusionment means the realization of the true worth of things, seeing them as they really are: in essence, that this world and all within it is worthless. For many writers, this means explicitly viewing things not from a human or worldly perspective, but from the perspective of eternity, on the grounds that the here and now, being transient, amounts to mere appearance, true reality being what awaits us after death.

Robbins is the author of an introduction to seventeenth century Spanish literature titled The Challenges of Uncertainty, in which he argues that Spanish literature, "creatively responded to the unprecedented sense of uncertainty fostered by developments across Europe... it was above all this scepticism which led Spaniards to employ literature and art to question the boundaries of reality and illusion." 

Something weird is going on here. An aesthetic response to uncertainty about the bounds of reality and illusion has been adapted and transformed into a fundamental assumption about the nature of the the world. Uncertainty has been overcome by... an imaginary Utopia,

In "The Quest for Ignorance or the Reasonable Limits of Skepticism" Stephen Pepper argued that "Utter skepticism -- a skepticism void of all knowledge -- could not know itself and stands refuted in its very utterance." There are limits to what we cannot know. The Utopia of equilibrium is not simply incompatible with uncertainty -- it is an inevitable symptom of unreasonable uncertainty. Pepper asked, "How little can we know? What is the maximum of a reasonable unbelief?" His answer relied on the acknowledgement, first, of what he called "middle-sized facts":

These middle-sized facts are the matrix of all knowing. We are so immersed in them all the day long that we ordinarily miss their significance. The common man does not think about them, because he is moving among them; and the specialist does not think about them, because he has made assumptions that raise him above them. They get left out in most discussions of knowledge and fact. But they constitute the lowest limit of skepticism.

Monetary Policy: Bernanke and Yellen v. Taylor

The economist bloggers should all rejoice the fact that Ben Bernanke has joined us. His first post is excellent and I will present a key quote shortly. But let me express my main frustration with how some people are using the Taylor rule versus something that Janet Yellen recently noted:

Even with core inflation running below the Committee’s 2 percent objective, Taylor’s rule now calls for the federal funds rate to be well above zero if the unemployment rate is currently judged to be close to its normal longer-run level and the “normal” level of the real federal funds rate is currently close to its historical average. But the prescription offered by the Taylor rule changes significantly if one instead assumes, as I do, that appreciable slack still remains in the labor market, and that the economy’s equilibrium real federal funds rate–that is, the real rate consistent with the economy achieving maximum employment and price stability over the medium term–is currently quite low by historical standards. Under assumptions that I consider more realistic under present circumstances, the same rules call for the federal funds rate to be close to zero

Taylor has been arguing for some time that monetary policy is keeping interest rates too low for too long. OK, if one believes were are near full employment and one believes that Wicksellian natural interest rate is still 2 percent, this follows. But many of us – including Yellen - reject both premises. What is Taylor’s response?

So the main argument is that if one replaces the equilibrium federal funds rate of 2% in the Taylor rule with 0%, then the recommended setting for the funds rate declines by two percentage points. The additional slack due to a lower natural rate of unemployment is much less important. But little or no rationale is given for slashing the equilibrium interest rate from 2% percent to 0%. She simply says “some statistical models suggest” it. In my view, there is little evidence supporting it, but this is a huge controversial issue, deserving a lot of explanation and research which I hope the Fed is doing or planning to do.

Might I suggest Taylor start his research by reading Bernanke’s first blog post:

Low interest rates are not a short-term aberration, but part of a long-term trend ... The real interest rate is most relevant for capital investment decisions, for example. The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited. Except in the short run, real interest rates are determined by a wide range of economic factors, including prospects for economic growth—not by the Fed. To understand why this is so, it helps to introduce the concept of the equilibrium real interest rate (sometimes called the Wicksellian interest rate, after the late-nineteenth- and early twentieth-century Swedish economist Knut Wicksell). The equilibrium interest rate is the real interest rate consistent with full employment of labor and capital resources, perhaps after some period of adjustment. Many factors affect the equilibrium rate, which can and does change over time. In a rapidly growing, dynamic economy, we would expect the equilibrium interest rate to be high, all else equal, reflecting the high prospective return on capital investments. In a slowly growing or recessionary economy, the equilibrium real rate is likely to be low, since investment opportunities are limited and relatively unprofitable. Government spending and taxation policies also affect the equilibrium real rate: Large deficits will tend to increase the equilibrium real rate (again, all else equal), because government borrowing diverts savings away from private investment.

The converse is true as the unwise fiscal austerity evidenced both in the U.S. and Europe is driving down the Wicksellian natural rate. Has John Taylor not been paying attention to the real world over the past several years? Fortunately for us, Ben Bernanke and Janet Yellen have been.