Why Sir Worthington Laming Worthington-Evans Wears a Top Hat

Why is it, then, that Sir Laming holds such very odd opinions? It is like asking me why he wears a top hat. He is a Conservative. The reasons are wrapped in the mists of history. But, roughly, I think I know them. He half understands an ancient theory, the premises of which he has forgotten. 

This theory assumes that all the productive resources -- savings, labour and the gifts of nature -- which are at any time in existence are normally employed because, so the argument assumes, whenever they are unemployed they are ready to accept a lower rate of remuneration, and employment will always be forthcoming at a sufficiently low rate of wages. That is to say, the theory starts off by assuming the non-existence of the very phenomenon which is under investigation. -- J.M. Keynes, A Cure for Unemployment, April 19, 1929

The Chimerical Analogies of Growth and Distribution

Together with Simon Kuznets, Atkinson more or less single-handedly originated a new discipline within the social sciences and political economy: the study of historical trends in the distribution of income and property.... All subsequent work on historic trends in income and property inequality to a certain extent follow in the wake of Kuznets’s and Atkinson’s groundbreaking studies. -- Thomas Piketty,"A Practical Vision of a More Equal Society"

Note that word "historical" there. Simon Kuznets's 1947 essay on "Measurement of Economic Growth" outlined many of the biases and obstacles in the way of defining and measuring income and thus growth.

Growth is a concept whose proper domicile is the study of organic units, and the use of the concept in economics is an example of that prevalent employment of analogy the dangers of which have been so eloquently stressed recently by Sidney Hook.

The Sidney Hook reference is to a contribution by him to a slim volume on Theory and Practice in Historical Study, which sought to bring some coherence and consistency to historians' use of terminology. Recall that when economists are writing about historical trends they are practicing historiography. The following are some key passages from Hook's entry on the use of analogy in historiography:

An analogy is a comparison which, on the basis of certain points of resemblance between two cases, suggests the existence of some further resemblance selected because of its relevance to the purposes of the comparison. As a figure of speech it functions as a metaphor to enliven and enrich historical style, e.g , when a revolution is described as a "storm that shook the land" or as a "fever" through which society has passed. As an argument it is formally worthless and never logically compelling. An argument from analogy can be countered usually with another argument from analogy which leads to a diametrically opposed conclusion. E.g., when an analogy has been drawn between colonies and children to suggest the duty of accepting the rule of the mother country, it can be countered with an analogy between colonies and matured offspring whose subsequent growth depends upon independence of their parents.  

At best an analogy can only suggest a plausible conclusion whose validity must then be established on other grounds. The uncritical use of analogies is the bane of much historical writing, particularly when the resemblances lack clear definition or when they are blurred and presented as identities. The two most pervasive analogies in historiography are those drawn from biology and physics. For example, "cultures are organisms and world history is their collective biography" (Spengler). "This country will yet be viewed and reviewed as an organism of historic growth, developing from minute germs from the very protoplasm of state-life" (H. B. Adams). The belief that society is an organism is an old but fanciful notion. It can only be seriously entertained by closing the eye to all the respects in which a group of separate individuals differs from a system of connected cells, and by violently redefining terms like "birth," "reproduction," and "death." 

Although the proper domicile of the concept of "growth" may indeed be the study of organic units, as Kuznets observed, there is actually another, more crucial and more subtle, analogy being employed in the national income and product accounts. That is the analogy between the firm and the nation. To paraphrase Hook, the analogy between nation and firm is no less formally worthless and logically deficient as an argument than is the analogy between nation and organic unit.

As Hook pointed out, analogy as a figure of speech functions as a metaphor. In the case of "economic growth" (and consequently income distribution) this double analogy -- to firm and to organic unit -- is a decidedly mixed metaphor, which invites all kinds of interpretive mischief from conveniently switching back and forth between features of firms and the features of organisms.

Throw in the mathematical models whose "proper domicile" is neither the organic unit nor the profit-seeking firm but the machine and the historiographic study of economic growth and income inequality truly resembles a dog's breakfast of scientific incoherence.

The most helpful applications of mathematics to economics are those which are short and simple, which employ few symbols; and which aim at throwing a bright light on some small part of the great economic movement rather than at representing its endless complexities.  

Thus, then, dynamical solutions, in the physical sense, of economic problems are unattainable. -- Alfred Marshall, "Distribution and Exchange:"

But, as Egmont K-H asked, "Who said what to whom -- and does it matter?"

Well, if you really want to know what Kuznets meant about the dangers of analogy, you have to know what the text he was referencing said. Kuznets, as Piketty pointed out, was the originator of a discipline. He didn't reject analogies; he employed them, critically. Today, we use the analogies indiscriminately. This uncritical abuse of metaphor gets very close to (psst... this is an analogy) Gregory Bateson's description of schizophrenia:

...the ‘word salad' of schizophrenia can be described in terms of the patient’s failure to recognize the metaphoric nature of his fantasies. In what should be triadic constellations of messages, the frame-setting message (e.g., the phrase 'as if') is omitted, and the metaphor or fantasy is narrated and acted upon in a manner which would be appropriate if the fantasy were a message of the more direct kind. 

Making the World Safe for Usury

Thanks to John Halasz, this tidbit from "The Growth Delusion," a post on Anne Pettifor's blog, Debtonation:

There are limits. Not just to the lifespan of firms, markets and human lives, but above all to our ecosystem and planet. 

So why, when we apply this language to the economy do we assume ‘growth’ is limitless?

...snip...

...while there are clear limits to the growth of the real economy, there appears to be an infinite boom in the growth of credit.

Is that so hard to understand? Any impediment to "economic growth" is an impediment to the growth of credit and any impediment to the growth of credit is an impediment to the accumulation, and concentration of an increasing proportion of, income-yielding assets in the hands of the creditors. Otherwise, how could compound interest compound limitlessly?

Stephen Moore Declares a North Carolina Miracle

Stephen Moore has another silly parade of disinformation:

the unemployment rate started to decline rapidly and job growth climbed. Not just a little. Nearly 200,000 jobs have been added since 2013 and the unemployment rate has fallen to 5.5% from 7.9%. There is a debate about how many of North Carolina’s unemployed got jobs and how many dropped out of the workforce or moved to another state. But the job market is vastly improved and people didn’t go hungry in the streets.

Moore wants to claim employment has soared and he says there was a “debate” about how many people dropped out of the workforce. Paul Krugman addressed this last year:

because employment in North Carolina hasn’t actually shown any upward bump. Here’s employment in NC and the nation as a whole … There has been a sharp drop in the NC labor force, probably in large part because workers who could no longer get unemployment benefits — which require that you search actively for work — gave up on what they knew was a hopeless quest. The point is that to the extent that there has been a distinctive drop in North Carolina’s measured unemployment rate, it has to do with reduced job search rather than increased employment.

Krugman’s graph document the decline in the labor force after the reduction in unemployment insurance benefits. And Moore wants to say there was a debate? If we go back to February 2008 and graph employment in North Carolina, the net increase has only been 57 thousand not 200 thousand. So there has not been a miracle increase in North Carolina. Average hourly earnings of all employees in North Carolina has increased from $21 an hour in 2010 to $21.85 as of April 2015. A 4 percent nominal increase over a 5 year period is below what we have seen on a national level. This does not sound like an economic miracle at all. I guess the Wall Street Journal will publish even the dumbest of dishonesty.

Secular Stagnation vs. Global Warming

Who needs decoupling when we've already got maximum feasible disconnect? Is there a difference? Probably not.

"Decoupling" refers to the wishful thinking that GDP growth can be decoupled from greenhouse gas emissions. There are two problems with this pipe dream -- actually three problems. The first problem arises from the distinction between relative and absolute decoupling. Relative decoupling means that GHG emissions continue to rise, just not as fast as GDP growth. Relative decoupling happens.

Absolute decoupling requires that GHG emissions stop growing or decrease while GDP continues to grow. It has never happened.

The second problem is that mere absolute decoupling of GHG emissions from GDP growth is not enough. To stabilize or reduce atmospheric GHG concentration requires reducing GHG emissions to a level at or below the natural rate of absorption of GHG.

The third problem is that there doesn't appear to be the political will to even aim at mere absolute decoupling. The rhetoric of decoupling obscures the distinction between relative and absolute decoupling and celebrates the former as if it was a "sign of progress" toward the latter.

In contrast to the decoupling discourse, disconnect simply talks about restoring output growth to its "potential" without mentioning or considering the relationship between industrial activity and GHG emissions. In disconnect mode, there is no need to pretend that relative decoupling is a sign of progress toward absolute decoupling. That's another department.

But, really, since relative decoupling is inherent in the technological trend, anyway. It probably makes little difference whether one is ignoring the connection between industrial activity and GHG emissions or pretending that a worsening situation is a sign of progress toward improvement.

Those FT monkeys

Because... Marat/Sade.

Those FT monkeys covered in banknote
Have champagne and brandy on tap
They're up to their eyeballs in franc notes
We're up to our noses in crap
Those gorilla-mouthed fakers
Are longing to see us all rot
The gentry may lose a few acres
But we lose the little we've got
Revolution, it's more like a ruin
They're all stuffed with glorious food
They think about nothing but screwing
And we are the ones who get screwed

Hey Presto, A Lump of Boilerplate!

Gosh, I guess there are only so many words to go round!

Those FT monkeys, covered in banknotes, "The short working week that holds France back," Financial Times, May 28, 2015:

Introduced in the late 1990s by the Jospin government with that cool disregard for the “lump of labour” fallacy that only those educated at top French universities can contrive, this sought to cut unemployment by reducing the number of hours each individual worked. Do that and, hey presto, the idea was that there would be more jobs to go round. 

Ruth Lea, "Personal view: It's time to break the Government's web of tax fallacies," The Telegraph, Feb. 20, 2006,

My second fallacy is the "lump of public services fallacy". This is based on the idea that there is an immutable relationship between public spending and public services output. Spend the money, which the Chancellor will insist on calling "investment", and, hey presto, there will be a "lump" of "high quality" services.

The Economist: Economics: An A-Z Guide, 2003:

One of the best-known fallacies in ECONOMICS is the notion that there is a fixed amount of work to be done - a lump of LABOUR — which can be shared out in different ways to create fewer or more jobs. For instance, suppose that everybody worked 10% fewer hours. FIRMS would need to hire more workers. Hey presto, UNEMPLOYMENT would shrink.

What explains this remarkable coincidence of terminology?

The key is to exploit journalists’ incredible laziness. If you lay out the information just right, you can shape the story that emerges in the media almost like you were writing those stories yourself. In fact, that’s literally what you’re doing, since many reporters just copied and pasted our text.

Meanwhile, over at Jacobin there is a nice little non-boilerplate, non-plagiarized, non-bullshit essay by Michel Husson and Stephanie Treillet, Liberation Through Vacation: "Reducing working hours is more than a path to full employment. It could help millions live more fulfilling lives.":

Reducing forced labor time opens up various prospects for human and social emancipation. The possibility of emancipating ourselves from forced labor cannot be dissociated from the possibility of reducing exploitation in forced labor. This is the meaning of Simone Weil’s sentence: “No one would accept to be a slave for two hours; to be accepted, daily slavery must last long enough to break something in a human.”

Unpuzzling the Politics of Growth and Redistribution: What hath growth wrought?

"If there is a future for cosmopolitanism in Europe, it needs a credible politics of growth and redistribution." -- Peter Dorman, "Europe, Where Two Rights Make a Wrong"

Sandwichman wonders how such a politics would differ from the "ostensible socialist" wing of the neoliberal coalition. First, it would help to have a credible definition of what it is that is supposed to be growing. "Growth" sounds good... as long as you don't have to pin it down. But what supposedly grows -- national income and product accounts -- is an incomplete, monetized aggregate of disparate things, some of which are double counted, and "more" of which could mean just about anything or nothing. 

It is wishful thinking to assume that more of "whatever" will inevitably be better than a well-specified less.

Barkley Rosser took Sandwichman to task for suggesting that the mix of empirical information, speculation and wishful thinking about the relationship between economic growth and income inequality has probably worsened since Simon Kuznets 1954 estimate of "5 per cent empirical information and 95 per cent speculation, some of it possibly tainted by wishful thinking":

But the hard fact is that there is lots more data out there on many aspects of economics, including the precise issues that Kuznets was studying when he made his complaint about "speculation."

Barkley is right about there being more data and empirical work out there, although it is unnerving that the example he cited as a sign of the empirical work -- Thomas Piketty's work -- doesn't support the complacent conventional wisdom regarding the unquestionable beneficence of economic growth. I would like to add another source that supports Barkley's claim about empirical work but contradicts the dominant complacency about growth: François Bourguignon and Christian Morrisson's widely-cited "Inequality among World Citizens: 1820-1992":

To summarize, this analysis shows that world income inequality worsened dramatically over the past two centuries. ... Changes in inequality within countries were important in some periods, most notably the drop in inequality within European countries and their offshoots in America and in the Pacific during the first half of the 20th century. In the long run, however, the increase in inequality across countries was the leading factor in the evolution of the world distribution of income. ... World inequality seems to have fallen since 1950 as a result of the pronounced drop in international disparities in life expectancy. But now that disparities in life expectancy are back to the levels before the big divergence of the 19th century, this source of convergence has lost its influence.

Bourguignon and Morrisson's empirical analysis -- along with Piketty's -- controverts that initial, tentative summary of long-term trends that puzzled Simon Kuznets:

...a long-term constancy, let alone reduction, of inequality in the secular income structure is a puzzle. For there are at least two groups of forces in the long-term operation of developed countries that make for increasing inequality in the distribution of income before taxes and excluding contributions by governments. ... What is particularly important is that the inequality in distribution of savings is greater than that in the distribution of property incomes, and hence of assets. ... Other conditions being equal, the cumulative effect of such inequality in savings would be the concentration of an increasing proportion of income-yielding assets in the hands of the upper groups -- a basis for larger income shares of these groups and their descendants.

The puzzle is solved because there isn't "a long-term constancy, let alone reduction, of inequality in the secular income structure" after all. This is not to say that the relationship between economic growth and inequality is an uncomplicated one, wholly determined by the disproportion of savings between people in different income groups. But it does fundamentally undermine the conclusions of cross-country regressions, "on the basis of which," as Bourguignon put it, "it would be tempting to conclude that 'growth (of any nature) is good for the poor'."

But what about a politics of economic growth (of any nature?) and redistribution? It might work -- just as a politics of general copulation could reduce the birth rate if combined with effective measures of contraception. Long live the revolution, indeed!

On the other hand, why make redistribution conditional on achieving growth targets in the first place? In bargaining parlance, that is what's known as a fall-back position. You don't present your fall-back position in your opening proposal. That's called "giving away the farm."

A few days ago, Sandwichman promised to expound on why the perpetual fallacy mantra even matters. Here is why. Those FT monkeys (covered in banknotes) would simply prefer to rhetorically prohibit the only opening gambit that could force real concessions from the folks who have champagne and brandy on tap. That effective initial offer would be a demand that doesn't stupidly assume, but actively pursues a "fixed amount of work" with a more equitable distribution. The only "credible politics of growth and distribution" would put distribution first and leave it to the owners of a disproportionate share of income-yielding assets to offer a growth and redistribution compromise in their counter-proposal.

But, alas, those FT monkeys' strategy seems to be working. They think about nothing but screwing growing their income-yielding assets and we are the ones who get screwed yielded.

The Del Mar Inn, Vancouver, B.C.: "UNLIMITED GROWTH INCREASES THE DIVIDE"

Artist Statement (from "The Interventions of Kathryn Walter" by Bill Jeffries, Contemporary Art Gallery, Vancouver, 1990):

"The strategy behind 'Unlimited Growth...' is direct. It is directed at those who operate our free-market economy in their own interests, while excluding those interests that would be 'responsive to the needs of the community'. The subtext to 'Unlimited Growth...' relates to several aspects of public art including the need to address the use of site-specific work as a way of intervening in local issues, and in this instance, acting as a marker of resistance by the economically marginalized, as represented by a parallel gallery and a hotel providing affordable housing. Walter raises questions related to the systems underlying the transactions and power-plays that constitute normal business in the world of real estate development. In Walter's art the museum without walls is also a museum OF walls, walls new and old, as well as those walls that perpetuate economic class distinctions. Her text on the façade of the Del-Mar Hotel will stand as a witness to the various power-plays, including the threat to move B.C. Hydro's head office to the suburb of Burnaby, that led to the development surrounding 553-555 Hamilton Street." 

On Missing Minsky

Yes, we miss the late Hy Minsky, especially those of us who knew him, although I cannot claim to be one who knew him very well.  But I knew him well enough to have experienced his wry wit and unique perspective.  Quite aside from that, it would have been great to have had him around these last few years to comment on what has gone on, with so many invoking his name, even as they have in the end largely ended up studiously ignoring him and relegating him back into an intellectual dustbin of history, or tried to.

So, Paul Krugman has a post entitled "The Case of the Missing Minsky," which in turn comments on comments by Mark Thoma on comments by Gavyn Davis on discussions at a recent IMF conference on macroeconomic policy in light of the events of recent years, with Mark linkhttp://economistsview.typepad.com/economistsview/2015/06/the-case-of-the-missing-minsky.htmling to Krugman's post.  He notes that there seem to be three periods of note: a Minsky period of increasing vulnerability of the financial system to crash before the crash, a Bagehot period during the crash, and a Keynes period after the crash.  Krugman argues that, despite a lot of floundering by the IMF economists, we supposedly understand the second two, with his preferred neo-ISLM approach properly explaining the final Keynes period of insufficiently strong recovery due to insufficiently strong aggregate demand stimulus, especially relying on fiscal policy (and while I do not fully buy his neo-ISLM approach, I think he is mostly right about the policy bottom line on this, as would the missing Minsky, I think).  He also says that looking at 1960s Diamond-Dybvig models of bank panics sufficiently explain the Bagehot period, and they probably do, given the application to the shadow banking system.  However, he grants that existing official models do not sufficiently explain the Minsky period, the runup, how things got so fragile that they could collapse so badly.

Now I do not strongly disagree with most of this, but I shall make a few further points.  The first is that in effect Minsky provided a model and discussion of all three stages, although his model of the Keynes stage is not really all that distinctive and is really just Keynes.  But he probably did a better job of discussing the Bagehot stage than did Bagehot, and more detailed, if less formal, than Diamond and Dybvig.  I suspect that Bagehot got dragged in by the IMF people because he is so respectable and influential regarding central bank policymaking, given his important 1873 Lombard Street, and I am certainly not going to dismiss the importance of that work.  But the essentials of what go on in a panic and crash were well understood and discussed prior to 1873, with Minsky, and Kindlegerger drawing on Minsky in his 1978 Manias, Panics, and Crashes, quoting in particular a completely modern discussion from 1848 by John Stuart Mill (I am tempted to produce the quotation here, but it is rather long; I do so on p. 59 of my 1991 From Catastrophe to Chaos: A General Theory of Economic Discontinuities), which clearly delineates the mechanics and patterns of the crash, using the colorful language of "panic" and "revulsion" along the way.  Others preceding Bagehot include the inimitable MacKay in 1852 in his Madness of Crowds book and Marx in Vol. III of Capital, although admittedly that was not published until well after Bagehot's book. 

One can even find such discussions in Cantillon early in the 1700s discussing what went on in the Mississippi and South Sea bubbles, from which he made a lot of money, and then, good old Adam Smith in 1776 in WoN (pp. 703-704), who in regard to the South Sea bubble and the managers of the South Sea company declared, "They had an immense capital dividend among an immense number of proprietors.  It was naturally to be expected, therefore, that folly, negligence, and profusion should prevail in the whole management of their affairs. The knavery and extravagance of their stock-jobbing operations are sufficiently known [as are] the negligence, profusion and malversation of the servants of the company."

It must be admitted that this quote from Smith does not have the sort of detailed analysis of the crash itself that one finds in Mill or Bagehot, much less Minsky or Diamond and Dybvig.  But there is another reason of interest now to note these inflammatory remarks by Smith.  David Warsh in his Economic Principals has posted in the last few days on "Just before the lights went up," also linked to by the inimitable Mark Thoma.  Warsh discusses recent work on Smith's role in the bailout of the Ayr Bank of Scotland, whose crash in 1772 created macroeconomic instability and layoffs, with Smith apparently playing a role in getting the British parliament to bail out the bank, with its main owners, Lord Buccleuch and the Duke of Queensbury, paying Smith off with a job as Commissioner of Customs afterwards.  I had always thought that it was ironic that free trader Smith ended his career in this position, but had not previously known how he got it.  As it is, Warsh points out that the debate over bubbles and what the role of government should be in dealing with them was a difference between Smith and his fellow Scottish rival, Sir James Steuart, whose earlier book provided an alternative overview of political economy, now largely forgotten by most (An Inquiry into the Principles of Political Oeconomy, 1767).

I conclude this by noting that part of the problem for Krugman and also the IMF crowd with Minsky is that it is indeed hard to fit his view into a nice formal model, with various folks (including Mark Thoma) wishing it were to be done and noting that it probably involves invoking the dread behavioral economics that does not provide nice neat models.  I also suspect that some of these folks, including Krugman, do not like some of the purveyors of formal models based on Minsky, notably Steve Keen, who has been very noisy in his criticism of these folks, leading even such observers as Noah Smith, who might be open to such things, to denounce Keen for his general naughtiness and to dismiss his work while slapping his hands.  But, aside from what Keen has done, I note that there are other ways to model the missing Minsky more formally, including using agent-based models, if one really wants to, these do not involve putting financial frictions into DSGE models, which indeed do not successfully model the missing Minsky.

Barkley Rosser

Update: Correction from comments is that the Ayr Bank was not bailed out.  It failed.  However, the two dukes who were its main owners were effectively bailed out, see comments or the original Warsh piece for details.  It remains the case that Adam Smith helped out with that and was rewarded with the post of Commissioner of Customs in Scotland.

Europe, Where Two Rights Make a Wrong

The New York Times has an article this morning describing the turn towards anti-immigration populism in France, inspired by the renaming of the Gaullist opposition party as The Republicans.  This is seen as an attempt to attract voters who have gone over to Marine Le Pen’s National Front, an overtly chauvinist party with a semi-fascist past.  The article points to the rise of similar movements in other countries; most worrying is Finland, a country in which the extreme right has played a major political role at key times during the past century, and where a nativist party is now part of the governing coalition.

The irony is that the nativists themselves, in order to expand, have had to move to the left on economic issues.  This has been widely noticed with the National Front, whose base was once small entrepreneurs.  Nativistis now claim to be the staunchest defenders of the welfare state and the interests of the working class.  The steady erosion of social protections and living standards, they say, can be halted only by ending immigration, especially from the “incorrigible” populations of the Middle East and North Africa—i.e. Muslims.  The name change in France makes a subtle play for this attitude by claiming the anti-clerical mantle of the French Revolution, now seen as a weapon against the influence of Islam.  Yet it also implies a leftward orientation on social and economic matters, since Republicanism has historically meant identification with the goals of the Revolution, as against the conservative, clerical and aristocratic opposition.  It perfectly captures the current moment: embracing the nativist Right while pretending to be more Left on other matters.

Meanwhile, the real Right can be found in the halls of power in every major European country.  This Right is socially liberal but against exactly the things the populists are trying to preserve: equality, improvement in living standards and generous social protection.  The political isolation of Greece within the eurozone, for instance, demonstrates how rentier ideology has completely triumphed over Keynesian and social democratic perspectives throughout the continent.  The ostensible socialists are as much a part of this conservative coalition as the official conservatives.

Is it any surprise, under these circumstances, that nativism has taken wing?  A large part of the European working class has concluded that scarcity and stagnation are permanent, and that the promises of the Left can’t be trusted any more.  All that remains is the politics of exclusion, making sure you have yours by locking the others out.  So high unemployment is the new normal?  Then the jobs belong to us.  Can’t afford the welfare state any more?  Send immigrants from poor countries back home.  On a gut level it makes perfect sense.

If there is a future for cosmopolitanism in Europe, it needs a credible politics of growth and redistribution.

FT monkeys' false fallacy eruption

The Sandwichman has been out of town since last Wednesday and the Financial Times (those FT monkeys) has seized the opportunity to publish not one but two articles foisting the farcical lump of labour fallacy fable on an unsuspecting public. This is evidence of a complete lack of journalistic ethics. A simple fact check would reveal that the fallacy claim is bogus.

Some time later this week I expounded on why this even matters.

Trade, Bribes and Yardsticks

In the conclusion to their 1941 article "Protection and Real Wages," Wolfgang Stolper and Paul Samuelson wrote:

...it has been shown that the harm which free trade inflicts upon- one factor of production is necessarily less than the gain to the other. Hence, it is always possible to bribe the suffering factor by subsidy or other redistributive devices so as to leave all factors better off as a result of trade.

This is an instance of the infamous Kaldor-Hicks compensation criterion, which David Ellerman has shown to be a "same yardstick" fallacy. Ironically, Ellerman took the same yardstick analogy from another paper by Samuelson and elsewhere Samuelson is dismissive of the Kaldor-Hicks criterion.

Ian Little described the K-H criterion as unacceptable nonsense. But, hey, let's fast-track the TPP and maybe one of those winners will toss us a bribe!

 

The Fundamentals are Sound!

Uh oh.

My bottom line on the economy is: The fundamentals are sound. The underlying momentum in job growth remains solid. I expect wage growth to continue to rise and consumer confidence to continue to pick up steam. Monetary policy will remain highly accommodative—regardless of what may or may not happen with rates this year—which will spur spending. -- John C. Williams

As Sandwichman always says, when they're telling you "the fundamentals are sound," they are unloading.

Piketty Did Not Endorse Social Security Fraud

Kevin Williamson takes us back to some dishonesty we saw a decade ago:

The Left’s favorite economist of the moment, Thomas Piketty, organizes his argument in Capital in the Twenty-First Century around the statement r > g, where r is the rate of return on capital and g is the rate of economic growth ... r > g is a stronger argument for privatizing Social Security than it is for a global capital tax.

After telling workers what they put into the Social Security Fund, he jots off this lie:

That money is not invested, so there is no return on it.

The Trust Fund does put these funds into government bonds which earn the real return to government bonds but I interrupted Williamson’s parade of lies:

Professor Piketty estimates that the return on capital over the coming decades will be between 4 percent and 5 percent; historical returns to equity investments run about 7 percent, but let’s be conservative and split Professor Piketty’s estimate, assuming a 4.5 percent return.

So many rates of return, so little insight. What is at stake here? Let’s assume the risk-free real return is 3 percent and add a 4 percent premium if someone chooses to hold risky stocks instead of government bonds. And let’s also assume some worker was able to accumulate $1 million under Williamson’s preferred world of privatization. Even if this worker was able to avoid the bad advice and huge fees from the financial advisors that Williamson is lobbying for, he is likely to get a 5 percent return if he chooses to put half of his portfolio into stocks and the other half into bonds. After all, this worker knows stocks are risky. I sometimes wonder if the champions of privatization do as their writings seem to suggest they don’t get Finance 101. So back to Williamson’s complaint about our current system:

You pay, officially, 6.2 percent of income up to $117,000 a year for Social Security. Your employer pays another 6.2 percent, and many economists and nine out of ten people who were born at night but not last night assume that you really pay that part, too, in the form of lower wages.

In our example suppose that this has taken $400,000 of our worker’s portfolio and put that into government bonds earning 3 percent. Our worker – who we are assuming knows more finance that apparently Williamson does – redoes his portfolio optimization putting $100,000 of his $600,000 into bonds and the rest into stocks. The basic message is that his retirement income is exactly the same. This is basic finance and maybe I’m being unfair. Maybe Williamson knows all of this. If so, then he has chosen to lie to his National Review readers hoping they are this stupid.

John Nash As Cryptanalyst

Rakesh Vohra of the Game Theory Society reports that not only was John Nash returning from the airport after returning from Norway to receive the Abel Prize in mathematics, its equivalent of the Nobel (the Fields medal is the equivalent of the John Bates Clark award, given for those under 40), which he got for his embedding theorem, which he always viewed as more important than his Nobel prize winning game theory equilibrium, which he considered to be mathematically trivial, despite its wide applicability in economics and other disciplines, but it has only recently been revealed that he had a third major intellectual breakthrough that has only become public since 2012 when the National Security Agency declassified a letter Nash initially wrote in 1950 to its predecessor, the NSA not becoming officially organized until 1952.

In this letter Nash proposed a form of possible encryption used decades later by the NSA based on computational complexity theory, particularly the distinction between P, or polynomial length programs, and NP, or non-deteriministic polynomial (exponential and greater) length programs, relative to the key.  While declaring this to be a true distinction, he foresaw the later problem that it might be impossible to prove, and so far it has not been, becoming the greatest unsolved problem of computational complexity theory.  Nevertheless Nash used this as the key to hardening encryption code systems, with his thoughts on this far ahead of any of the thinking at that time, although it took those he wrote to a long time to realize it and follow up on his advice.

This makes me understand a bit more a famous incident in 1958 reported in Sylvia Nasar's book, A Beautiful Mind, although it did not turn up in the movie version.  A. Adrian Albert, chair of the math department at the University of  Chicago, then one of the top in the world, offered Nash a position, with him then in the MIT department.  He turned down the offer on the grounds that he was expecting to shortly be appointed "Emperor of Antactica."  In fact, this was one of the first signs of his developing mental illness, although at the time Albert dismissed this as mere eccentricity, which many brilliant mathematicians exhibit.

What makes this new report from Vohra interesing in light of this is that this secret letter may have been the key to Albert's invitation.  The reason for this was a little known fact even now, that during World War II Adrian Albert was almost certainly the top cryptanalyst in the US, with some of his work remaining classified for decades as well.  Under the circumstances, it is highly likely that Albert was one of the few people who was privy to Nash's letter at the time and understood its significance.  I have no confirmation of this, but the facts about Albert are fairly clear if one googles him properly, with his role in these matters in the US publicly, but not widely, known (I provide a link to his Wiki entry, which is both sparse and contains at least one mistake).  He remains a relatively obscure mathematician, but one , whose importance far outweighs his reputation.

Update:  So, there is more about the Albert-Nash link that I have been thinking about, with a further speculation completely unprovable regarding why it was this year that Nash (with Nirenberg) got the Abel Prize.   First let me note that Abel's work is closely linked to that of Albert, with Abelian groups being a central  focus of Albert's study and linked to the algebraic forms he used in his cryptanalytic (or cryptographic) work.  I also suspect that while officially Nash received the prize for his embedding theorem, the revelation of his letter on computational complexity to the NSA (sent in 1955, closer to the year Albert made his job offer to Nash, with that even more evidence that the secret letter was crucial to that rejected job offer),  The revelation of this letter  may well have provided a tipping point for finally giving the award to Nash, although he had almost certainly been on the list for a long time for the embedding theorem, as he himself considered it his most important work, at least in his public comments, having kept quiet about this letter until its public revelation.

The further wiggle on this is the appearance and success during the past year of the movie about fellow cryptanalyst, Alan Turing, The Imitation Game.  Again, I do not know, but my speculation is that this could not have hurt.  Both Nash and Turing were the prime subjects of popular movies that depicted both their sufferings and their classified work, although in the movie about Nash it did not show his most serious classified work, but rather depicted it as the central part of his fantasy, and his fantasies did involve matters of international peace and war, with himself both the victim of red-tie wearing communist agents as well as thinking he was an international messianic figure who would achieve world peace between the superpowers.  Indeed, the matter of his thinking he would become the Emperor of Antarctica, the ostensible reason he rejected Adrian Albert's job offer, was tied to such fantasies, 1958 being the Internatinal Geophysical Year of Antarctica, when the US and the USSR and 10 other nations signed a treaty to mutually  manage Antarctica.

This matter of the letter was not in Sylvia Nasar's book, but he did work for RAND, although probably not on this openly, with most of his more known work there being on game theory, with him becoming upset there by the Dresher-Flood experiments on the repeated prisoner's dilemma showing agents not using the Nash equilibrium but cooperating a lot in the experiments, including even the very rationalistic, Armen Alchian.  This upset him so much that it would lead him to abandon game theory work, leaving the naming of the prisoner's dilemma game to his major professor, the late Albert W. Tucker.  But, in the end , the more fantastical version in the movie may have been closer to reality, with his close link to the also suffering and highly secret Alan Turing possibly a key to  his eventual  receipt of this prestigious award, clearly the culmination of his life.  It was indeed "going out at the top" that happened in this particular case of a husband-wife death, for better or worse (with their schizophrenic son, Johnny, the clear victim of this situation)..

Further update:  The error that I am aware of in Adrian Albert's Wiki entry is the claim that in 1961-62, he was  the first director of the Communications Research Division of the Institute for Defense Analysis, located in John von Neumann Hall on the Princeton campus, an NSA front research group.  He was the second such director, not the first. (One can find a discussion of Princeton's IDA/CRD unit, no longer on the campus, in James Bamford's seminal book on the NSA, The Puzzle Palace.)

Barkley Rosser

Further Update, 5/38/16: I thank Dan Weber and "Jake," commenters on Marginal Revolution for noting errors in my original post, with Dan catching the especially elementary (and egregious) one that polynomial length programs are "P," not "N," duh.  I have corrected the text to fix the points raised (Jake's were more esoteric but valid about the nature of NP).