The 70th Anniversary Of The End Of World War II In Europe

May 9 is the 70th anniversary of victory over Hitler's Germany in the European part of World War II, which would continue for several more months in Asia.  Roughly 30 "world leaders" will attend the ceremonies in Red Square, with some of those "nations" essentially fakes whose existence is there because Vladimir Putin says they exist.  This particularly disreputable group includes "South Ossetia," "Abkhazia," "Serbian Republic of Bosnia-Herzoginia" and some others of this ilk.

Who will actually be attending this important event remains a bit up in the air, even as some are certain.  Among those apparently likely to be there are the following (somebody, not necessarily either the Head of State or Executive Leader of the Nation): Belarus, Armenia, Azerbaijan, China, Mongolia, Kazakhstan, Turkmenistan, Kygyzstan, Tajikistan, Cuba. Venezuela, Brazil, South Africa, India, Bosnia-Herzoginia, Serbia, Montenegro, Macedonia, Cyprus, and some others I apologize for failing to remember right now.

Obviously some of the allies of the USSR in WW II are not attending, obviously because of Putin's recent violations of international agreements and law.  These include the US, Canada, UK, and France, as well as somewhat questionable Italy.  The latter has been a matter of much of huffing and puffing on TASS and other Russian media, with them clearly hoping especially for France to appear, even though of course like the USSR they for serious parts of the war were in alliance with Hitler's Germany.  In any case, Hollande has made it clear that he will not attend the ceremonies.

Besides France, the other nation regarding which there has been a lot of huffing and puffing who appears in the end not to be appearing is North Korea's Kim Jong-Un.  Russian media says this has to do with "internal matters," and I am sure this is true. Hey, this year was officially according to the North Koreans to be "the year of Russia."  That Kim is not making this his first official foreign appearance is a big deal and a big embarrassment for both Russia and the DPRK. 

I note that I do not  have the exact list of who will be there and who willl not, but the very fact that there has been essentially zero coverage of this in the US and elsewhere is an important matter.  This is a big deal. An important part of it is that the entire EU is apparently not attending due to their protests against Russian conduct in Ukraine, with it clear that Putin will try to justify his unjustifiable conduct in that country on May 9, which will be utterly disgusting and beneath contempt, a profound insult to the dead of the former Soviet Union who heroically sacrificed their millions of lives to save the world from the horrible Nazi menace.

Despite the completely unacceptable conduct of Vladimir Putin, I personally think that the US government should overlook this and send an appropriate official to celebrate this world historical event that is far beyond the current nonsense. The obvious person to send is Vice President Joe Biden.  The US screwed up by not sending Biden for the Charlie Hebdo ceremony in Paris.  So, send him to Moscow for this  supremely important commemoration, even as the US President should not attend, given Putin's violation of the Budapest Accord of 1994, when Russia agreed to respect the territorial integrity of Ukraine in return for Ukraine handing over its nuclear weapons.

Update:  Probably just about everybody reading this knows this, but, just in case any of you do not, a major reason to especially respect the Russian celebration of this anniversary is that they (or more precisely, the former Soviet Union) suffered far more deaths than any other nation in the conflict, somewhere between 20 and 30 million, as well as being the nation primarily responsible for defeating Hitler's Germany, with the genearlly accepted turning point being the bloodiest battle in world history, Stalingrad, and the effective death knell being the Battle of Kursk, the largest tank battle in history.  The citizens of both Moscow and what was then called Leningrad but is back to bing St. Petersburg, suffered severe sieges, with the German troops on the edges of those cities, with many hundreds of thousands dying of starvation and other privations in the latter city in particular.  Given all this, it really is too bad that Putin's bad behavior and clear intention to use this celebration to support his current bad behavior are leading to many nations that were allies of the USSR in the war to boycott this fundamentally worthy celebration.

J. Barkley Rosser, Jr.
http://cob.jmu.edu/rosserjb

Decisions... Decisions

Note: I've been thinking of the following connections for the past week and started writing this morning. Just as I had gotten to the section on economic growth toward the end (How to Stop a Leak), I noticed that Mark Thoma had posted commentary by Brad DeLong about a New York Times review of Misbehaving, the soon-to-be-published book on behavioral economics by Richard Thaler. What follows below is not a response to Thaler's book because I haven't read it but perhaps my notes may be read as a "presponse."

...there is no Art that hath bin more canker'd in her Principles, more soil'd, and slubber'd with aphorisming pedantry, then the art of Policy... -- John Milton, Of Reformation

In their classic 1981 article, "The Framing of Decisions and the Psychology of Choice," Daniel Kahneman and Amos Tversky described an experiment in which subjects were presented with the following problem; a roughly equal number of subjects (152, 155) were offered either a choice between Programs A and B or between Programs C and D:

Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimates of the consequences of the programs are as follows:

If Program A is adopted, 200 people will be saved. 

If Program B is adopted, there is 1/3 probability that 600 people will be saved, and 2/3 probability that no people will be saved. 

If Program C is adopted 400 people will die. 

If Program D is adopted there is 1/3 probability that nobody will die, and 2/3 probability that 600 people will die.

72 percent of the subjects given a choice between A and B chose A, while 78 percent of those given the choice between C and D chose D -- even though the outcome of Program C was identical to that of Program A and the outcome of D was identical to B. These anomalous findings are replicated in various similar experiments. Over the years the authors persistently pointed out the implications for rational choice theory of these experimental behavioral findings.

One thing that struck me right away about Kahneman and Tversky's result was its similarity to the experimental results of Booth-Sweeney and Sterman regarding perceptions of stocks and flows. It turns out that Sterman has extensively cited Kahneman and Tversky's findings in his own work, so the affinity is not coincidental.

Booth-Sweeney and Sterman presented a more difficult problem to their experimental subjects but it was solvable without advanced math or any specialized scientific knowledge using the analogy of the stock/flow relationship of a bathtub. For atmospheric concentrations of CO2 to stabilize, emissions must equal net removal. The images below summarize the task and a typical subject response.

In the typical response, pictured above, future CO2 emissions are correlated with the concentration scenario rather than falling to equal net removal. 84% of the 212 graduate student participants drew similarly erroneous graphs.

Many years ago I stumbled across Daniel Ellsberg's PhD dissertation, Risk Ambiguity and Decision, and his 1961 article, "Risk, Ambiguity and the Savage Axioms". Sure enough, Ellsberg's contribution to decision theory is extensively cited in Kahneman and Tversky's work. Kahneman wrote a blurb for the 2001 publication of Ellsberg's PhD dissertation, calling it "a major landmark in the history of decision research."

Imagine an urn known to contain 30 red balls and 60 black and yellow balls, the latter in unknown proportion. (Alternatively, imagine that a sample of two drawn from the 60 black and yellow.balls has resulted in one black and one yellow.) One ball is to be drawn at random from the urn; the following actions are considered:

Action I is "a bet on red," II is "a bet on black." Which do you prefer?  

Now consider the following two actions, under the same circumstances: 

Action III is a "bet on red or yellow"; IV is a "bet on black or yellow."  

Which of these do you prefer? Take your time!

Ellsberg didn't restrict his experimental trials to graduate students. His subjects included G. Debreu, R. Schlaiffer, P. Samuelson J. Marschak, N. Dalkey, H. Raiffa and  L. J. Savage. 

A very frequent pattern of response [including at least 3 of the above] is: action I preferred to II, and IV preferred to III. Less frequent is: II preferred to I, and III preferred to IV. Both of these, of course, violate the Sure-thing Principle, which requires the ordering of I to II to be preserved in III and IV (since the two pairs differ only in their third column, constant for each pair).'

Violating the sure-thing principle when drawing coloured balls out of an urn may not seem to have quite the consequences of miscalculating the GHG emissions reduction necessary to stabilize atmospheric concentrations. Appearances can be deceiving. One of the implications Ellsberg drew from his research was that there may be a bias toward "status quo" or "present behavior" and against innovation, even to the extent of self-deceptively "ignoring some treacherous possibilities" in "familiar ongoing patterns of activity." This, of course, was one of the central findings of the "Pentagon Papers" study of the history of decision-making in the Vietnam War.

As Pete Seeger sang. "we we're waist deep in the big muddy and the big fool said to push on."

A further link in the chain is revealed in David Ellerman's criticism that the Kaldor-Hicks compensation criterion is based on a same yardstick fallacy. Don't let the eponymous label confound you, the K-H criterion is deeply embedded  -- by administrative fiat -- in standard cost-benefit analysis. The idea behind it is that a Pareto improvement -- making some people better off without making anyone worse off -- is nigh on impossible. But the compensation criterion allows for at least a "potential" Pareto improvement.

Ellerman has argued that the supposed distinction between "efficiency" and "equity" is an illusory one imposed by the choice of numéraire (or standard commodity). Change the unit in which efficiency is evaluated and the two categories change sides:

Consider a transfer of an apple from Mary to John and a transfer of $0.75 from John to Mary. Use Kaldor-Hicks to evaluate each part as a "project" with the other part as the "compensation". Using money as the numeraire and the apple transfer as the "project", we see under the assumptions that the transfer of the apple increases social wealth measured in dollars so that is the recommendation based on "efficiency", and the payment of the "compensation" of $0.75 is a matter of "equity" of concern to politician, theologians, and philosophers but not to the professional economist. Now reverse the numeraire taking apples as the numeraire and the transfer of the $0.75 as the "project". Then the transfer of the apple (= "compensation") does not change social wealth = size of the apple pie, but the transfer of the $0.75 increases the size of the social apple pie by 3/4 of an apple so it is the transfer of the $0.75 that is recommended on efficiency grounds by hard-nosed economists while the transfer of the apple is left to politicians, theologians, and the like as a matter of "equity."

The citation linkage tying the numéraire illusion to the previous three anomalies is indirect, but unambiguous. Ellerman's same yardstick metaphor came from Paul Samuelson's 1974 article, "Complementarity: An Essay on The 40th Anniversary of the Hicks-Allen Revolution in Demand Theory." In a 1977 article on the "St. Petersburg Paradoxes," Samuelson didn't use the same yardstick metaphor but he did recycle a counter-argument about the concavity of the utility function that accompanied it.

Compare Samuelson's 1974 account:

The dollar I stand to win in a fair gamble is worth less to me than the dollar I stand to lose. So you have to offer me better than even odds if I'm to agree to gamble and thereby maximize my expected value of (or first moment of) utility.

...to his 1977 version:

"The dollar I win is not as worthwhile to me as the dollar I lose, and that is why I will shun a bet at 'fair' odds (and, of course, at 'unfair' odds)." This is how the Peters and Pauls of the world explain to themselves why they behave as they do, make risk-averse decisions as if to maximize in stochastic situations the expected value of a strictly concave ["utility"] function of money wealth rather than to maximize the expected value of money wealth itself.

The "ordinary" St. Petersburg Paradox referred to in Samuelson's 1977 article acquired its label because Daniel Bernoulli, who "solved" it was professor of mathematics at the University of St. Petersburg. Bernoulli's solution was the basis of the "normative model" from which Kahneman and Tversky found deviations "too widespread to be ignored, too systematic to be dismissed as random error, and too fundamental to be accommodated by relaxing the normative system." Here is Bernoulli's argument:

"...the determination of the value of an item must not be based on its price, but rather on the utility it yields. The price of the item is dependent only on the thing itself and is equal for everyone; the utility, however, is dependent on the particular circumstances of the person making the estimate. Thus there is no doubt that a gain of one thousand ducats is more significant to a pauper than to a rich man though both gain the same amount..."

Another way of stating the same-yardstick fallacy, would be to point out that Kaldor-Hicks the standard cost-benefit analysis assumes -- contrary to Bernoulli! -- that the marginal utility of income is a constant, This may seem subtle or even pedantic, but here we have not mere individuals but an institutionalized policy decision rule violating the rationality norm. It is worth pointing out here that the reversibility of the standard cost-benefit efficiency/equity distinction parallels the reversibility of program choice due to framing bias found by Kahneman and Tversky.

How to Stop a Leak

To be plainer, sir, how to solder, how to stop a leak, how to keep the floating carcass of a crazy and diseased monarchy or state, betwixt wind and water, swimming still upon her own dead lees, that now is the deep design of a politician! -- Milton

What about so-called "economic growth"? One common objection to the dominant "fetish of national income statistics" has been that an increase in GDP is not the same as an improvement in national welfare. Robert Kennedy eloquently objected that the national product "counts special locks for our doors and the jails for the people who break them" but "does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials."

Although compelling, one needn't rely on the quantity/quality distinction to question the coherence of the growth paradigm. What "grows" in GDP growth is a flow. Income could just as easily be labeled inflow. As Roefie Hueting has stressed, this is an asymmetric accounting in that it doesn't account for the associated outflows from natural or social wealth -- commonly referred to as social costs. Think again of the bathtub analogy. The inflow, or annual income, is only one element in the equation. The level of total wealth only rises to the extent that inflow exceeds outflow. This dependency was explicitly ignored by the archetypical "growthman," Leon Keyserling, in his formative "siphoning off" contribution to Cold War military-industrial complex double-speak in NSC-68:

...if a dynamic expansion of the economy were achieved, the necessary build-up could be accomplished without a decrease in the national standard of living because the required resources could be obtained by siphoning off a part of the annual increment in the gross national product.

Take note of the implied equivalence between expansion of the economy, (non) decrease in national standard of living and annual increment of gross national product. The economy and standard of living are stocks; the gross national income is a flow. "Siphoning off" is also a flow; it is in fact an outflow that offsets the increment to the inflow that it presumably stimulates. Coincidentally, in a 1950 article, "Evaluation of Real National Income," Paul Samuelson had explained that including "such wasteful output as war goods" in the calculation of national income served only to indicate the potential for producing "useful things... in better times." NSC-68 contrived counting wasteful output as a direct contribution to maintaining the standard of living.

There's that word, "potential" again. NSC-68 was contemporary with the Bureau of the Budget adoption of the standard cost-benefit analysis. So a potential for producing useful things was joined to a potential for compensating the losers. Whoop-de-doo. Never mind the bathtubs; here's the siphons!

Ike (aka 1952 presidential candidate Dwight D. Eisenhower) was dubious about Keyserling's growth prescription. So was conservative columnist Henry Hazlitt. But their principal objection -- that it was inflationary -- was a distraction. The more serious flaw in growthmanship was its fundamental reliance on waste as the "future of prosperity." This is a theme that Kenneth Burke satirized in 1930 and then returned to 26 years later, after Business Week had featured an article extolling the virtues of the consumerist "Borrow. Spend. Buy. Waste. Want" cycle.

My article like all burlesques was based on what I thought was a grossly exaggerated statement of my case. But recently [1956] (in their May 5 and June 16 issues) Business Week published two articles that startled me, and even nonplussed me, by offering as simple gospel a line that, if I could have thought of it when I was writing my burlesque a bit more than a jubilee ago, I'd certainly have used as the perfect frisky summing-up of my thesis "Just past the midmark of the 20th Century," we read, "it looks as though all of our business forces are bent on getting every one . . ." (and here is the notable slogan) to "Borrow. Spend. Buy. Waste. Want."  

I would then have looked upon such a slogan as ideal material for a farce. Now presumably it is to be taken in full earnest.  

What might have been "material for a farce" in 1930 and "taken in full earnest" a quarter century later has by now -- another sixty year on -- become a long forgotten and taken-for-granted substrate. Ecological modernizers rhapsodize about decoupling GDP growth from greenhouse gas emissions as if that growth were something entirely unrelated to the "siphoning off" and "planned obsolescence" contrived by government officials and business leaders, respectively. 

Of course, merely decoupling GDP growth from GHG emissions is not enough to stabilize atmospheric concentrations. So what? Politicians and economists -- to borrow an eloquent excoriation from James Augustus St. John --"with all their incapacity, they want not the wit to perceive, that so soon as justice and a regard for the public good shall become the directing principles of government, the great business of the nation will be taken out of their hands to be confided to others more worthy."

"To make a long and unpleasant story very brief," John Dean wrote, of the Nixon "plumbers" unit:

...when the FBI could not get its act together to pursue the leakers of the Pentagon Papers, an angry president decided to created a super-secret Special Investigations Unit within the White House, using his staffers, who would oversee the activities of all the agencies who, by law, had responsibilities to deal with such leaks. This unit reported to senior presidential aide John Ehrlichman, who in turn reported to the president the failure of anyone in the executive branch to assist in uncovering the leaks they were investigating, or in taking actions they felt were needed.  If necessary, the president would personally intervene to get the job done, using the full weight of his office.  

David Young, an attorney and former aide to Henry Kissinger, was assigned to the new unit.  When David went home for Thanksgiving that Fall, his grandmother asked him what he was doing at the White House.  David said, “Oh, I am helping the president find and fix leaks.”  To which his grandmother responded, “Well, David, that is very nice, you've become a plumber.”  When David shared this Thanksgiving story with his colleagues in the Special Investigation Unit, they cracked up, and he could not resist breaking their secrecy protocol by placing a sign on the unmarked basement door of their unit that read: “The Plumbers.” While the sign was not there for long, the name stuck.

How to solder, how to stop a leak...that now is the deep design of a politician.

Was There Ever Really a Big Tradeoff Between Equality And Efficiency?

Probably not.

In the last couple of days there was a big meeting at the Brookings Institution to celebrate the 40th anniversary of the publication of Arthur Okun's influential 1975 book, Equality and Efficiency: The Big Tradeoff, an idea that went into the textbooks and became a VSP de rigueur truism for quite some time.  The conference was asking its relevance today, which it looks like some questioned.  Many big cheeses were participating, representing a range of views from Mankiw on the right to Heather Boushey on the left, with Larry Summers making the introductory speech, and Janet Yellen in the audience.  But the real  question is: Was it ever at all true to begin with?

Mark Thoma provides some quotations from Summers's opening address.  He clearly seems to think that the relationship has gone off the rails.  The quoted material talks a lot about rising inequality and increasing problems in the financial sector, with the undertow of slower growth and his bugaboo of secular stagnation.  Nothing I saw there looked unreasonable.  But, again, I am wondering if anybody asked the deeper question in a location where the late Okun was long highly revered, and I think still  is.  I never met the man, but plenty there think he was just wonderful, and maybe he was.  But I think he was never right about this Big Tradeoff, or not very right.

OK, so back in the day we had the Big Poster Boy of communist states with lots of equality, think Maoist China, but not a lot of either growth or high income.  Yes, there was certainly an argument there: a society with essentially no incentives to make capital investments or technological innovations, with those incentives maybe leading to greater inequality (and indeed the fall  of communism did lead to higher inequality, with China in particular growing rapidly since, an outlier to support Okun's argument, even as many other former socialist states did  not do all that well).   So, he had some things going for him.  But all along there was this problem of Latin America and parts of Africa, with the highest levels of  inequality in the world and pretty pathetic growth and income records.  This led to an eventual  modification of the truism, usually voiced as indeed going against this deep truth, the idea that the relationship between at least per capita income and inequality being an inverted U-shape.  It also increasingly was noted that the source of inequality was important, with it coming from being "earned" rather than inherited or through corruption making a big difference.

That the relationship was not  all that it was cracked up to be dates back at least to the turn of the century, even among those who ideologically might be inclined to support it.  Thus, in 2000 Robert Barro published a paper in the Journal  of Economic Growth, Inequality in a panel of countries.  He summarized that there is "little overall relation between income inequality and rates of growth and investment."  Barro also noted the likely inverted U-shape  relationship between per capita income and inequality.

In the previous year, a long paper by Aghion et al in the JEL argued that it looked increasingly like if anything the relationship might be the other way around, with more equal  naitons growing more  rapidly and programs to increase equality being associated with accelerated growth.  They posed the Philippines and South Korea, equal in per capita  income in 1960, but with the Philippines having twice the quartile income ratio of South Korea.  We know what their subsequent growth records have been.

I would push this forward to note the experience of Latin America, one of the poster boys for high inequality and poor growth performance.  During the Great Recession this was arguably the best performing region in the world in terms of growth compared to its several decades past.  Curiously, it was the only major region of  the world where incomes were becoming more equal, if still more equal than in the rest  of the world.  This does not prove anything, but then that China fits Okun's story does not prove it, and that nation increasingly looks like a big outlier, quite aside from its decelerating growth rate.

Update: I read the speech by Larry Summerslarrysummers.com/2015/05/04/okuns-equality-and-efficiency at the event. He praise Okun as brilliant, of whom Paul Samuelson basically said that he never said anything incorrect, someone not only insightful in economic policy, but also of philosophical depth.  His only comment on how things were back then was that the income distribution did not change.  He did not directly comment on the basic issue of whether or  not there really was an equality/inefficiency big tradeoff then.  He does now think that rising inequality has been linked to slowing growth. 

Second Update:  Mark Thoma links for 5/6/15 to Heather Boushey's talk at the Brookings conference, and after long discussing how inequality has soared since Okun's day, she finally comes to the same conclusion I do, that Okun was basically wrong and that his legacy is part of our problem today.  There  never was a Big Tradeoff, just a Big Myth about there being one (latter is my terminology).

Barkley Rosser

Osborne-economics

Peter Spence has a long and rambling discussion of the debate in the UK over macroeconomic policy, which includes this from George Osborne:

George Osborne, the Chancellor, has also spoken in defence of the central bank’s aggressive response to the financial crisis. He has argued that a combination of “tight fiscal policy and loose monetary policy is the right macroeconomic mix” to help rebalance the economy.

The “right macroeconomic mix” depends on what the question was. Suppose you were an economist working for Reagan’s Council of Economic Advisers in early 1983 when a toxic mix of expansionary fiscal policy offset by incredibly tight monetary policies had sent interest rates soaring and the currency through an incredible real appreciation. Back then the Volcker FED was begging policy to change the macroeconomic mix. Wouldn’t you advise the President to take up the offer? But the UK has been in a very different situation as Paul Krugman explains:

The interesting line, however, is Yates’s note that Britain had relatively high inflation in 2010-2011, which might have meant that the economy faced supply-side rather than demand-side problems, so contractionary policy might have been appropriate. My question is this: even if you accepted that argument, wasn’t that an argument for monetary rather than fiscal contraction? And if the BoE didn’t consider the evidence of overheating sufficient to justify pulling back on its quantitative easing, which had already tripled the size of its balance sheet, why should the Treasury have decided to tighten on its own? After all, the basic logic of the situation is that you should wait until monetary tightening — until the central bank is starting to move off the zero lower bound — before fiscal consolidation. That way you can trade off fiscal tightening for a slower pace of monetary tightening, and avoid deepening the slump. But in 2010-2011 the British central bank wasn’t ready to tighten in any case, so fiscal policy should have waited.

But it gets worse when you consider what Peter Spence was writing about:

After a full parliament of near zero interest rates and quantitative easing, some are beginning to wonder whether the nation’s savers have been forgotten. The Bank of England has taken the brunt of the protests, accused of forgetting the interests of the thrifty at best, and at worst of stealing from them by generating inflation.

It may be true that low real interest rates have led to lower portfolio income for certain savers but this is not the doing of the Bank of England as it was the stupid decision to pursue fiscal austerity that kept UK economic growth low, which induced the Bank of England to do the right thing – lower interest rates. Had the Cameron government not engaged in this fiscal austerity, the UK economy would be closer to full employment which would likely mean higher real interest rate might be a reasonable monetary policy.

Dark Matter or Base Erosion & Profit Shifting?

Tim Taylor provides some interesting data but I think his discussion fell short:

Here's the evolution of US net international investment position, as shown by the size of foreign assets and liabilities, in the last few years … In the last few years, the gap between US assets and liabilities has clearly been rising.

Tim cites the latest from the BEA which indicates that the U.S. holds $24.6 trillion in foreign assets while foreigners hold $31.6 trillion in our assets. So we have net debtor position equal $7 trillion at these recorded values. BEA’s Table 4.1 - Foreign Transactions in the National Income and Product Accounts – shows that we received $0.8 trillion in income on our holdings of foreign assets while foreigners receive only $0.6 trillion. What to make of this fact that the return on our holdings of foreign assets is 3.25% while foreigners receive only a 1.9% return? Tim notes this simply as:

US investors abroad are more likely to make higher-risk, higher-return investments in equities or ownership of foreign assets.

Ricardo Hausmann and Frederico Sturzenegger took the income flows reported by BEA and discounted them by 5%, which was the long-term government bond rate back then. If we updated their Dark Matter story using a 2% government bond rate representing current market conditions, the value of our holdings of foreign assets would be $40 trillion whereas the value of the U.S. assets held by foreigners would be only $10 trillion. In other words, they might argue that this is $17 trillion in Dark Matter. Willem Buiter’s Cold Fushion casts serious doubts about this Dark Matter as did BEA’s Ralph Kozlow. Kozlow’s transfer pricing story is still on the BEA website:

Transactions between foreign direct investors and their U.S. affiliates may occur at prices (“transfer prices”) that result in the U.S. affiliates recording low profits. Earnings on foreign direct investments, while still relatively low, have grown briskly over the last few years. Is the rate of return for foreign direct investment in the U.S. artificially low because foreign direct investors understate their U.S. profits through transfer pricing? Some researchers have argued that transfer pricing explains why the rate of return that foreign investors earn on their direct investments in the U.S. is lower than what U.S. investors earn on their direct investments abroad.

Kozlow also credits a paper by Daniel Gros. The OECD Base Erosion & Profit Shifting crowd is interested in these issues as Action Plan 11 states:

Establish methodologies to collect and analyse data on BEPS and the actions to address it. Specifically to: Develop recommendations regarding indicators of the scale and economic impact of BEPS and ensure that tools are available to monitor and evaluate the effectiveness and economic impact of the actions taken to address BEPS on an ongoing basis. This will involve developing an economic analysis of the scale and impact of BEPS (including spillover effects across countries) and actions to address it. The work will also involve assessing a range of existing data sources, identifying new types of data that should be collected, and developing methodologies based on both aggregate (e.g. FDI and balance of payments data) and micro-level data (e.g. from financial statements and tax returns), taking into consideration the need to respect taxpayer confidentiality and the administrative costs for tax administrations and businesses.

This strikes me as an incredibly ambitious agenda. If anyone knows of an update to the Buiter-Gros-Kozlow insights, this could prove very useful.

Redaction

A funny word this, "redaction."  In French, a redacteur is an editor. In English, redaction means "editing,"although we do not use "redactor" at all.  However, increasingly this word has come to mean a particular form of editing, in particular a removal of text containing information that the editor does not want to publish.  Increasingly the reasons for such redaction is indefensible, immoral even.  I am tempted to  quote Steve Waldman of Baltimore, aka, Interfluidity, who, when talking about superficial commentators on the Baltimore riots said, "Fuck you, go to hell."

The term has been taken over by the US intelligence establishment.  You file a Freedom of Information Act request?  Well, if you hit the right topic or set of reports, good chance it will come back covered with black marks that cover up much of what you were looking for, in some cases including nearly everything on the requested report, essentially undoing the whole point of the FOIA, ha ha!  So much is so important to the national security, just like in Vladimir Putin's Russia.  You want the truth?  We have those Very Serious Black Marks of Redaction for You.

At a much lower level we have in scholarly research this problem also increasingly an issue.  There the problem is less frequently matters of national  security and big bad government agencies roaring in, although that does occur for sure,  but concerns over legal  vulnerability, that someone or other might sue the publisher if an inappropriate thing is published that might upset somebody.  Freedom of speech?  Academic freedom?  Naah.  The protection of worthless fucking assholes who are known to be litigious (or are suspected of being so)  is far more important than the truth.  We must keep our priorities straight.

So, let me make this both personal and professional.  I am the author of a chapter in Secrets of Economics Editors, MIT Press fairly recently, with a completely incompetent and stupid review by Robert Moffitt in the latest JEL  Several of the essays in there have  caused stirs to various degrees, with the one by William Barnett about the fracturing between the Journal of Economic Dynamics and Control, the Review of Economic Dynamics, and Macroeconomic Dynamics (which he edits and founded) being an example, which involves central disputes over macroeconomics, as well as problems in publishing and editing journals.

So, my chapter's short title is "Secrets from the Crypt," and one can find the unredacted unexpurgated version that has been used in various considerations that I cannot publicly reveal.  It has been around, and you can read it on my website at http://cob.jmu.edu/rosserjb.  However, that is not all that close to  what appears in the book.  The version in the book has a much shorter second half, also leading to a bibliography cut in half, redacted on advice of MIT Press attorneys to avoid possible lawsuits by "Professor X."  That Professor X is a completely worthless and disgusting piece of scum will be quite clear to anybody who reads even the redacted version in the book, although the unredacted version really hammers this fact in.

I shall add a bit more not in either version, which involves the econoblogosphere.  After Professor X sent out his mass messages, I replied to relevant parties about my position on the matter. One of those  on the receiving end of  my reply is a good friend of a major blogger  with NY Times connections.  He asked  me if  he could send all of it to this blogger and thus to the Times.  I replied that he should not as this was what Professor X wanted, to have his worthless claims put into a "He said, she said," framework, as in the old, "Professor A says the earth is round, but Professor B argues that it might be flat."  I knew that the victims of Professor X's scurrilous attacks did not want this situation to result, and I agreed, and I am grateful that the person who asked me this agreed, and this did not become more public.  As it is, Professor X, who really is a big fat zero, has all but disappeared in terms of academic or any other discourse, and those whom he tormented have been liberated from his baseless attacks.

OTOH, I  must  recognize that in this situation, I myself exercised redaction.  Who am I therefore to  raise questions about its possibly excessive use?

Barkley Rosser

May Day! May Day! Arise, ye prisoners of starvation...

"Ultimately, the trend toward widening inequality in America, as elsewhere, can be reversed only if the vast majority, whose incomes have stagnated and whose wealth has failed to increase, join together to demand fundamental change."  -- Bob Reich

Workers of the world, unite. What kind of fundamental change does Bob Reich have in mind? Giving workers "the bargaining leverage they need to get a larger share of the gains from growth."

Full employment was a substitute for collective action. Growth was a substitute for full employment. "We're all in this together" sacrifice (austerity) was a substitute for growth. Collective action to get a larger share of the gains from growth begins to sound like the conservative motto, "a fair day's wage for a fair day's work."

“Workers ought not to be exclusively absorbed in these unavoidable guerilla fights incessantly springing up from the never ceasing encroachments of capital or changes of the market. They ought to understand that, with all the miseries it imposes upon them, the present system simultaneously engenders the material conditions and the social forms necessary for an economical reconstruction of society. Instead of the conservative motto, ‘A fair day's wage for a fair day's work!’ they ought to inscribe on their banner the revolutionary watchword, ‘Abolition of the wages system!’”

Full Employment, Growth and Immiseration

Once upon a time there was full employment. Full employment after the war, to be exact.

And then there was "growth." Not exactly the same idea as full employment but there was a compelling resemblance.

At last we have arrived at "expansionary contraction" -- otherwise known as austerity (formerly referred to as immiseration). And they all lived happily ever after?

Now, none of the things is "just like" the others. But we can talk about them as if they were "equal in exchange value.".

Or we could mind the gaps.

"They wonder why they are working longer hours for lower wages..."

Should we tell them?

Because,

Whether you work by the piece 

Or work by the day 

Decreasing the hours 

Increases the pay.

-- Mary Steward

EXPERT DECRIES CUT IN WORK WEEK

Study Finds Reduction Won't Necessarily Create Jobs 

Special to The New York Times

ITHACA, N. Y. Jan. 4—A reduction in the number of working hours a week in American industry will not necessarily create more jobs, a study recently completed by a former research assistant at Cornell's New York State School of Industrial and Labor Relations has found.

In a bulletin, "The Shorter Work Week," issued by the school, Marcia L. Greenbaum has reported that the 40-hour work week is likely to disappear, but much more gradually than many labor leaders seem to want. 

Miss Greenbaum notes that many of the nation's labor leaders believe that a 35-hour week with the same weekly pay now earned for 40 hours of work and double time for overtime will help to solve the problem of unemployment. However, she has pointed out that to maintain take-home pay will require a 14.3 per cent wage increase. 

In turn, she reported, this will mean an increase in management's labor costs that, in highly competitive industries will require the laying off of workers, increasing productivity and a passing on of costs to consumers. 

Her study, she reports, found that management and Government officials contend that a shorter work week at the same pay would probably mean a drop in living standards. 

"The 14.3 per cent wage increase is almost five times more than the normal annual productivity increase of 3 per cent," Miss Greenbaum said. "Productivity would have to increase as much as wages increase to prevent inflation." 

She added that, as a result, "real wages would be less since rising prices would mean higher living costs." The shorter work week would also lead, Miss Greenbaum reported, to a probable increase in moonlighting and an increase in the labor force of secondary workers such as housewives and retired workers. 

"There are other ways of decreasing hours of work, such as longer weekends, longer vacations and' earlier retirement ages," Miss Greenbaum reported. She also suggested sabbatical leaves for older employes.

The above article appeared on page 94 of the January 4, 1964 New York Times. Here is how the "former research assistant" Marcia Greenbaum summarized her chapter on the economic implications of the shorter work week:

If this chapter has painted a gloomy picture of the economic implications of the shorter workweek, it is simply reflecting the nearly unanimous opinion of economists outside of the labor movement. Every other labor proposal for coping with unemployment -- such as the AFL-CIO's recommendations concerning tax cuts, public works, aid to depressed areas, and retraining the unemployed-receives support from at least some economists and public officials. In their plea for shorter hours, however, union leaders stand alone, attacked even by the leading officials of a friendly Administration. 

Labor's arguments are simple and straightforward. If the government can not solve the severe unemployment problem, then unions must devise some method of inducing individual employers to hire more workers. If an employer can work each employee only 35 instead of 40 hours a week, then it is believed that he will hire more employees to make up the lost production. At the same time, labor claims, purchasing power can be maintained, or even increased, by requiring that weekly pay be kept at the 40-hour level. 

The objections to the shorter workweek, we have seen, center almost entirely on its cost impact. If hours are reduced in one large jump, labor's insistence upon maintaining weekly take-home pay means that the employer is faced with a huge hourly wage increase and perhaps some other costs as well. In that event, it is assumed that the employer will attempt to offset these increased costs by raising prices or taking other action that will most likely result in no net employment increase and might even cause a loss of more jobs. On the other hand, if labor asks only that shorter hours be introduced gradually, in step with productivity increases, then again the employer has no incentive to hire any additional workers, for nothing has happened either to his costs or to his demand. 

As labor leaders point out, the majority of economists have often been wrong before and perhaps they are wrong again on this issue. Until experience proves otherwise, however, prevailing opinion is that the shorter workweek is not the answer to the very real problem of unemployment which has plagued our economy in recent years.

The April, 1966, Labor Law Journal carried an article by Howard G. Foster, "a Teaching Assistant at the New York State School of Industrial and Labor Relations" that quoted the first paragraph of the above passage from Greenbaum's bulletin. Rather than simply citing what "management and Government officials contend" and the "nearly unanimous opinion of economists," Foster did the math. There was no report on Foster's findings in the New York Times. Not even on page 94.

The Saudi Royal Family Shakeup

So, new Saudi King Salman, using the official channel  of the 35-member Allegiance Council, has shaken up the top leadership of the royal family, most particularly the kingship succession itself.  Out as next in line is now former Crown Prince Muqrin, the youngest of the "First Generation" of sons of  the kingdom's founder, Abdulaziz, aka "Ibn Saud."  The second generation now former Deputy Crown Prince (the #2 spot), Prince Mohammed bin Nayef, a full nephew of the king, and the first of the Second Generation to be put in line for the throne, has replaced Muqrin as Crown Prince.  His position has now been filled by the much younger son of Salman, Mohammed bin Salman, currently Defense Minister.  It is unclear what is behind this, although reportedly Muqrin "requested" to step down.  Somehow I doubt that.  There has been so far no speculation on why this has happened anywhere that I have seen, including the highly knowledgeable blogs, Crossroads Arabia, where only the bare facts have been reported, or Juan Cole, who has so far had nothing to say about this at all.

So, my quick speculation is that this involves cementing the royal succession into the hands of descendants of the so-called "Sudeiri Seven," of whom Salman is the last one living.  Always very powerful, they were the sons of the favorite wife of the late Abdulaziz, Assa as-Sudeiri, reported to be his first cousin, or at least some sort of relative.  It was rumored that near the end of her life in the early 80s she was actually running the country from her deathbed through her powerful sons, whom she reportedly totally dominated.  This just goes to show that in a totally sexist society, a woman can achieve great power by having powerful sons whom she dominates, an iron matriarch, and she was it, sort of like the dowager empress of China, Cixi, in the late 19th century.

Muqrin's weakness on this front was reported even back when he was first appointed at the time of the succession of Salman on the death of former King Abdullah a few months ago.  His problem?  A low class concubine mother, no match for the formidable, if long dead, Assa as-Sudeiri.  I suspect that there were other factors, with the general closeness of Salman of the newly appointed.  But Muqrin was clearly vulnerable due to his mother. I presume we shall learn more sometime eventually about what other factors may have been involved here, although some observers note that both of the guys now in line are more or less hardliners in the burgeoning conflict with Iran and such places as Yemen (indeed, I think that Muqrin had some sort of Yemeni links, which probably did not help him).

Another shift is the final stepping down after  40 years as foreign minister, Saud bin Faisal bin Abdulaziz al Sa'ud, aka "Saud al Faisal."  This was for health reasons, and in his last public appearance about a month ago, he was using a walker and looked in pretty bad shape.  However, he is  not gone form the scene, apparently now being appointed a minister without portfolio and senior adviser to King Salman.  Many thought he should have been the first of the Second Generation to be king, but he was too old and ill, not to be.  He is  being succeeded by the current ambassador to the US, Adel al-Jubeir, not a member of royal family.

A curious fact is that since the official formation of the Saudi foreign ministry in 1930, either Saud or his late father the former King Faisal, served as foreign minister for 83 of the 85 years since that time.  Indeed, while it had not been officially formed, Faisal had effectively held that position for the 11 years prior to the formation of  the ministry, having represented his father at the Versailles Treaty conference in 1919 when he was all of a whopping 16 years old.  If you see a photo of him then, you will be looking at just about the oldest and most serious looking 16 year old you will ever see.

The only two years they were not in that position was 196-62, when Faisal was trying to overthrow his older brother, the corrupt and incompetent Saud, who had succeeded their father.  When he succeeded, he retook that position even as he became king, holding it until his assassination by a nephew in 1975, when his son, Saud, succeeded him, lasting in it until today.  Many consider Faisal to have been the most intelligent and competent of  the 43 sons of Abdulaziz, and Saud may well  be the same for all of his grandsons.  (The guy who served as FM in 60-62 was an obscure non-royal family member, Ibrahim bin Abdullah al-Sowaiyel.)

Barkley Rosser

Update:  Based on press reports, a bit mroe is clear.  Probably the main reason Prince Muqrin is out is that he had been chosen by the former king, Abdullah, and is clsoe to sons of Abdullah.  Hence, this is very much about putting the line of succession into the hands of the Sudeiris and especially keeping the sons of Abduallah out of the line of succession.  There have also been reports about how strong the new guys are on national security and how independtne of the US they are.  But, this is a joke in that Muqurin also has strong national security credentials, and when the new Crown Prince was first named Deputy Crown Prince after Abdullah's death, his closeness to US officials was stressed.  This is internatl family politics, pure and simple.

Another Update:  WaPo has an editorial for May 4 I largely agree with on all this.  They again fail to note the intra-family politics of this, but they do accurately note that no one should expect improvements in human rights in Saudi Arabia from this shakeup.  The only woman in the cabinet, a deputy minister of education, has been removed, and the highly repressive religious police have had restrictions on their activities removed.  This probably reflects the elevation of the new Crown Prince, who is Minister of the Interior, following his later father, both of them noted as hardliners on such issues.   

Puzzling in America

Technology and Jobs: Should Workers Worry?

Responding to a question from Maryland at 46:20:

Barro: "...you could have a gradual decline in hours worked per week by a full-time employee and a gradual decline in the number of years that people participate in the labor force and that would do a lot on the labor supply side to deal with declines in labor demand..."

Delong: "And in America it's puzzling we haven't... right? That we've been stuck at forty hours a week as full time or so since world war II even though there's been 75 years since then..."

Writing in Fortune magazine 61 years ago, Daniel Seligman predicted achievement of the four-day week by 1980. He based that prediction on projection of historical trends. It didn't happen.

The future of work has a chequered past.

"And in America it's puzzling we haven't... right?"

Wrong. It's only puzzling if you don't know anything about the role of American economists in opposing, castigating and ridiculing proposals for work time reduction ("economists call it the lump of labor fallacy -- the idea that there is only a fixed amount of work to be done").

Larry Summers remembers: "when I was an undergraduate at MIT in the 1960s there was a whole round of concern about this -- will automation displace all the employment? And what I was taught as an undergraduate was that basically the people who thought it would were a bunch of idiot Luddites and that obviously there would eventually be enough demand and it would all sort of work itself out, and if people got more productive they'd be richer and they'd spend and maybe we needed some transition assistance, but that it was all basically going to be okay. That was what I was taught."

Puzzle solved!

Lowballing Estimates of Potential Output

Simon Wren Lewis notes one of the Cameron excuses for fiscal austerity:

As I noted in my previous post, the very big government budget deficit in 2010 was largely the result of the recession. That fact is difficult to square with the myth that the coalition government rescued the economy from an impending financial crisis, so it is important to push another explanation for the large deficit: that it reflected the profligacy of the previous government.

The Great Recession increased the deficits for a lot of nations including those that undertook the Herbert Hoover economics of fiscal austerity during a period of weak aggregate demand. Over 60 years ago, E. Cary Brown noted that an analyst needs to separate the automatic stabilizer effects on the actual deficit from changes in fiscal policy. This is often accomplished by examining the structural surplus (deficit). Simon also notes:

The only way you can sustain the myth that Labour was fiscally profligate is by suggesting that immediately before the recession the UK was experiencing a massive boom. In an economic boom tax receipts are high and spending on transfers low, so the budget should be in surplus. If it is in fact in significant deficit, that indicates serious fiscal laxity.

He continued with a criticism of how the IMF changed it estimate of the UK’s potential output, which we also noted. Simon’s latest continues the discussion:

The first point is to stop talking about GDP, and start talking about GDP per head ... As the chart shows, we have failed as yet to make up for any of the ground lost not just in the 2009 recession, but also ground lost as a result of fiscal austerity in 2010 and 2011 … So we have not really seen a recovery. Maybe the pessimists are right, and we will never recover any of that lost output, but still you do not call it a recovery. I can put it another way. Quarterly growth in GDP per head since the beginning of 2013 has averaged about 2% at an annual rate. That is below the average growth rate since 1955. A recovery from a deep recession would have growth rates well above the long term average … the prosperity of the average citizen in this country has hardly increased over the period of this coalition government - a result that is totally unprecedented since at least WWII. As recoveries from recessions go, this does not seem like a recovery worthy of the name. Yet we keep being told by mediamacro that the Coalition’s strong card is its economic record!

As we noted when we presented Bill Martin’s aggregate demand explanation versus the productivity pessimist story: Bill comes down on the latter explanation as does Paul and Simon. The former view is a Real Business Cycle tale of negative productivity shocks. We heard those stories 30 years ago but the US economy finally did fully recover. Let’s hope the same occurs for the UK economy. But let’s suppose for a moment that the productivity pessimists are correct. Then Cameron’s government should cease gloating how well the UK economy is doing as a permanent fall in real income per capita is not good news. Let me just add that if this productivity pessimism argument was valid, the expansionary monetary policy from the Bank of England should have been inflationary. But the record shows it was not. Paul Krugman adds a lot more but I found this part of interest:

Chart 3 shows estimates of our old friend the cyclically adjusted primary balance since 2009. I’ve included three sources – the IMF, the OECD, and Britain’s own Office of Budget Responsibility – just in case someone wants to argue that any one of these sources is biased. In fact, every one tells the same story: big spending cuts and a large tax rise between 2009 and 2011, not much change thereafter.

Paul’s chart 3 were drawn from three measures of the cyclically adjusted primary balance that assumed the UK output gap was severely negative in 2007 even if Paul noted why these measures were likely low balling potential GDP. Of course, fiscal impact is about the change in fiscal policy but leave the UK for now. We are having a few debates about U.S. monetary policy and inflation that revolve around low ball estimates of potential GDP. Our two graphs show how I would estimate the output gap for two 7 year periods, which is by using the CBO estimate of potential GDP. John Taylor has been at this argument for way too long:

the Fed has returned to its discretionary, unpredictable ways, and the results are not good. Starting in 2003-05, it held interest rates too low for too long and thereby encouraged excessive risk-taking and the housing boom.

There have been a lot of effective rebuttals to this claim. Our first graph suggests that we did not see the output gap disappear until the end of 2005 and the period of excessive demand was very short lived and was already being offset by the FED’s increase in interest rates. Yet we see this canard:

There are multiple measures of the output gap that show the U.S. economy overheating during this time. Below is a figure from this article that compares the real-time and final measures of the U.S. output gap. Everyone shows ex-post an overheating economy during the housing boom.

David Beckworth had earlier argued we were witnesses a series of positive productivity shocks and yet he wants to argue the CBO overestimated potential output. Something does not add up. Our second graph relates to something from perhaps the last honest supply-sider - Bruce Bartlett:

In this article, the author reviews the continuing controversy over the Reagan tax cut. Republicans often assert that it was so expansionary that there was no revenue loss, something the Reagan administration itself never claimed. The truth is that the tax cut lost a lot of revenue, but helped the economy transition from high inflation to low inflation at an unexpectedly low economic cost.

Paul Krugman rightfully points to the first part of this as evidence that the three stooges (Lawrence Kudlow, Art Laffer, and Stephen Moore) misrepresent the 1980’s record but I would question Bruce’s claim that the economic cost of the disinflation was low. In fact Paul noted that the cost was expected:

Keynesians came into the Volcker disinflation — yes, it was mainly the Fed’s doing, not Reagan’s — with a standard, indeed textbook, model of what should happen. And events matched their expectations almost precisely.

Using the CBO measure of potential GDP during the 1980’s, the Volcker disinflation involved what Paul calls a PLOG – a prolonged large output gap.

Truthiness, media framing and the political economy of economics

Concealed deep in the bowels of the ivory tower is this little-known academic endeavor sometimes referred to as "political economy of communications." These guys study "media bias" or "media framing." They've even done content analysis that goes beyond harping at the very serious personhood of this or that individual columnist or newspaper.

For example, in Framed! Labor and the Corporate Media, Christopher Martin identified Five Dominant Frames in the media coverage of labor disputes:

(1) The consumer is king;
(2) The process of production is none of the public’s business;
(3) The economy is driven by great business leaders and entrepreneurs;
(4) The workplace is a meritocracy; and
(5) Collective economic action is bad.

Stated somewhat more evasively, these also happen to be the tenets of the dominant frame in contemporary economics  -- the "equilibrium price-auction view of the world" (aka subjective preference theory or conservative ideal). Surprise, surprise!

Has it ever occurred to anyone that the dominance in elite economics of a particular economic ideology may owe more to the dominance of a congenial corporate media frame than to any inherent theoretical elegance or empirical support? Of course not.

There is this peculiar rhetorical mise en abyme in which editorial punditry takes its Delphic authority from what "economists say" while what they say simply regurgitates something they read (over and over again) in the press.

"I'm an economist and I'm O.K. I say what I've been told that 'economists say'."

Wouldn't it be worthwhile to ask whether the economics practiced today is, in effect, a subsidiary of the corporate mass media rather than an independent academic discipline?

"Let’s stop making a fetish of national income statistics and percentage rates of growth”

by Henry Hazlitt.