The Sanders Economic Analysis Flap

Not often is a single economics paper propelled to the front of the news cycle, but this is what happened to Gerry Friedman’s analysis of Sandernomics.  The bottom line as I see it is that, while Friedman was doing his best (as he saw it) to promote his candidate, he ended up harming him.  The ultimate effect will not be too great, assuming most voters forget what happened more than a week ago, and the Sanders campaign pivots a bit to limit the damage.  Nevertheless, I think there are lessons to be learned, especially for economists and similar researchers.

I suspect that what we witnessed was a sort of Rosie Ruiz moment.  Rosie Ruiz, you’ll remember, was a woman who entered the New York and Boston Marathons in 1980, leaving the routes early to hop on a subway, and then rejoining each race just before the finish line.  No one might ever have noticed, except she placed first among women in Boston by a wide margin, and then the scrutiny began.  Eyewitness reports confirmed that she had not actually completed either race, and the result is that she was stripped of her records.

Now, I’m not saying Friedman was cheating or violating any other academic rules, but he clearly cut several corners, not anticipating how the spotlight would come down on him once his work was disseminated.  My guess is that he thought the most important thing was to get his results to the public before the next round of primaries, pulled lots of late-nighters and didn’t stop to think about what would happen when he would suddenly become a focus of national attention.

So what were some of those corners?

1. He never presented his model.  The appendix to his report jumps immediately to parameter estimates, but there is no list of all parameters nor a formal model displaying how they relate to one another.  I take it that the implicit model calculates GDP growth from spending projections subject to a multiplier, and that this translates into labor demand with productivity as a residual.  The microeconomic results are determined by macro outcomes plus additional sector-specific factors.  There does not appear to be a simultaneous relationship between macro and micro (especially labor market) outcomes, which is a cause for concern.  Moreover, there is no discussion of the history of his model: who else has used it and what its track record has been.  I can imagine that these are the sorts of things one would put aside if one were in a race to publish, but Friedman should have expected that academic economists would savage him for this.

2. His estimate of the national income multiplier is suspect.  He gives a verbal description of how he calculated the multiplier, but it’s not entirely clear: “I assume the multiplier is two in first-quarter of 2009 and then falls by 20 times the reduction in the output gap.”  Can you write that equation?  But what makes it really suspect is that the multiplier remains close to 1 (.87) even at the end of the analysis horizon in 2026 after a decade of unprecedented economic growth.  It leaves the impression that Sanders can simply expand national income almost indefinitely by perpetual increases in spending.  It is the multiplier assumption, in conjunction with the structure of his model (whatever it is), that gives Friedman shockingly large predictions for income, employment and productivity gains.

3. There is no sensitivity analysis.

4. He apparently ended his work as soon as he generated his results.  This is an instructive mistake, in my opinion.  When I teach statistics and research methods, I always emphasize that, while models produce results, results test models.  Look at your output.  If it appears to be unreasonable you better be able, based on your model structure, to tell a plausible story that justifies it.  Otherwise you have evidence of a flaw in the model itself.  The highly unlikely predictions for GDP, employment and productivity should have sent Friedman back to the drawing board to see if one or more of his assumptions might be questionable.  Of course, this describes an iterative process that would make it difficult to meet what he may have believed were his political deadlines.

5. He didn’t circulate his results to skeptics.  The people you feel closest to are the most likely candidates to be reviewers, but the feedback you actually need is from those whose bias is to reject you and your work.  Friedman knew he was going to release his report to be devoured by a pack of wolves, so having an honest wolf or two provide a pre-release assessment would have been a good idea.  His list of acknowledgments does not suggest he did this.  Granted, it is not always possible to find a critic willing to play this role, but I’m pretty sure that there are Clinton partisans among economists in Gerry’s wider circle that he could have drawn on.

I realize I’m being hard on Gerry in this post mortem.  I know him a tiny bit (just a few moments here and there), and he seems like a very nice guy.  But I think he lost track of the larger picture and probably now regrets some of his choices.  The rest of us can learn from his experience.

Incidentally, for the record, I don’t for a moment believe I could have done better myself.  First, I’m not a macro guy, so I wouldn’t take on the job in the first place.  Second, the careful, comprehensive, cross-checking approach I’ve described is beyond the capacity of any one person within a short timespan.  If the Sanders people needed an economic analysis asap, before South Carolina and Nevada, they should have assembled a team to carry it out.

And as for the Sanders campaign, they should thank Gerry for his efforts and then say that, given its results, his analysis represents the upper limit of what Sanders can accomplish, and they welcome more analyses providing a range of predictions.  As most commentators have pointed out, the attractiveness of the Sanders program is not based on its performance in economic models, which are unreliable predictors in any event.  It is enough to show that the program is internally consistent and not vulnerable to large downside risks.  More finely tuned analysis can wait for the aftermath of the election, when it will be time for drafting policies in detail.

UPDATE: I’ve been taken to task for assuming that Friedman is a Sanders supporter, which I inferred from his work with the Sanders campaign on health care reform finance, as well as the flashy headline numbers from his latest study.  If he is actually for Clinton I can’t understand why he seemed to be in such a hurry to get his work out.

I’ve also been directed to Josh Mason’s defense of full-bore stimulus to get the economy back to full employment and potential output.  Overall, I agree with Josh, but I still think the extremely rapid rates of growth, year after year, for a full decade are problematic.  Our current macro situation calls for expansionary policy, but there is no precedent in a developed economy for this sort of velocity over this duration.  After such a massive downturn followed by many years of no rebound, it’s not plausible that the US can return to the pre-2007 trend in less than a decade.

To repeat (just so it’s clear): on the policy point, Mason is entirely correct.  The right thing to do is to apply large amounts of fiscal and monetary stimulus as long as incomes and employment are depressed or until these measures show signs of being counterproductive for some other reason.

Post Post Work Post

"Automation may mean a post-work society but we shouldn't be afraid," writes Paul Mason at the Guardian. Mason writes, "to properly unleash the automation revolution we will probably need a combination of a universal basic income, paid out of taxation, and an aggressive reduction of the official working day."

Don't get me wrong. The Sandwichman is all for aggressive reduction of working time. But not because magical robots are going to usher in a Utopian (or dystopian) post-work society.

Let me tell you a secret: although machines are used to produce things, they are not about producing things. They are about power -- the power of one human being with a will over other human beings with wills. Exchange value is a manifestation of this power relationship.

Twenty years ago, George Caffentzis explained "Why Machines Cannot Create Value." His essay began, "Thirty years ago...

...my generation was told by economists, sociologists, and futurologists to expect a society in which machines had taken over most repetitive and stressful tasks and the working day would be so reduced by mechanization that our existential problem would not be how to suffer through the working day but rather how to fill our leisure time.

Twenty years plus thirty years makes fifty years. It might as well be a hundred years or a hundred and fifty. Perhaps fifty years from now some thinker will be predicting that some as yet unheard of technology is about to usher in a post-work society. Don't believe it.

And no, it's not because supply creates its own demand or because technology creates more jobs than it destroys.

Why did the most sophisticated analysts of the last generation go wrong and why is there a still continual stream of texts to this day like Rifkin’s The End of Work, which see in technological innovations the promise of a new era of workerless production?

Caffentzis asked in his essay.

And why twenty years later does Paul Mason regurgitate the Rifkinesque fantasy? Caffentzis answers his own question with an examination and defense of "Marx's original claim that machines cannot produce value" and an update of that claim from the perspective of the late twentieth century. The essay is reprinted in In Letters of Blood and Fire, a 2013 anthology of Caffentzis's essays.

Caffentzis's explanation is erudite and probably redundant. Those who have misinterpreted Marx's argument by viewing it through an economistic lens, will presumably do the same to Caffentzis's defence of Marx.

That is, when someone insists that wealth refers to a vault full of gold coins and/or a warehouse full of useful stuff, that person will no doubt presume that a labor theory of value refers to some sort of ratio between the coins and the stuff. Thus the critics attribute to Marx the position that Marx fundamentally critiqued. Kill the messenger.

Set aside the coins and the stuff, please. Wealth refers to, on the one hand, disposable time and on the other hand, command over the labor of other people. That is to say wealth expresses a power relationship between people -- always a precarious balance between autonomy and coercion. Precarious because "total power" over the other terminates the relationship by murdering the other.

Robots do what they do without autonomy or coercion. They do not desire time off from work "to seek recreation... to enjoy life... to improve the mind." That which they do not possess -- and do not want to possess -- cannot be taken from them. Robots are already dead. Thus they cannot create value in the sense of giving up a portion of their autonomy.

This perspective is difficult to grasp not because of any inherent complexity but because it lies outside the distorting frame in which wealth and value are conventionally viewed. But it bears repeating:

Machines cannot creates value because they are already dead.

New Monetarist Stephen Williamson Completely Loses It

New Monetarist Stephen Williamson has declared "The End of Central Banking." He focuses on the central banks recently announcing negative nominal target rates, such as in Sweden and Japan, all supposedly to try to reach now apparently far out of  reach 2% inflation targets. They, along with the Fed, simply are pathetic losers unable to get anywhere near those target rates.  Of course, the reason for this is the truth of neo-Fisherian new monetarist economics that  argues that to raise inflation one central banks should increase their target rates.  He goes on to argue that all schools of macroeconomic thought support such an argument, except for the loser ISLM/Phillips Curve school, supposedly in control at all these loser central banks, now coming to their end.

Well, it may well be true that large amounts of modern macro theory support this view, apparently with little empirical evidence to support this view that depends on agents adapting their expectations appropriately.  Sounds nice, but in fact we are still waiting for this to actually happen, although, of course, we all know that it takes time, lots of  time, for these expectations to adjust.

Well, as far as I am concerned, Williamson has just completely lost it. In his post (see link) he presents data showing sharply falling inflation expectations, in particular a FRED graph showing the "10 year inflation breakeven point" over time, this reflecting the difference between 10 year nominal US bond rates, and the US 10 TIPS rate.  The rate went sharply negative down to nearly -2% during the 2008 crash, but fairly quickly rebounded to a not unreasonable positive rate.  So, what has this measure Williamson focuses on so strongly been doing recently?

Well, he  makes a big deal  about how it is now lower than ever except for that brief super decline during 2008, reachin 1.18% "currently."  This reflects a sharp decline in the last few months from a rate around 1.5% quite recently.

So why does this suggest that he has completely lost it?  Because the Fed raised its target rate in December, and most of this decline has happened since then.  Now maybe we must wait some appropriate long period of time, just as all the hyperinflationistas (not in same camp as Williamson) have been insisting that eventually, sooner or later, the horrible overly stimulative Fed policy of  the last years will certainly certainly eventually lead to hyperinflation, or at least some noticeable increase in the inflation rate.

As it is, we have seen the Fed do what Williamson recommended in order to increase the inflation rate (and certainly the expectations of that).   But, instead we have seen his favorite measure of inflation expectations crashing hard, and the trend looks like it is straight down.  Williamson needs to phone home, or maybe phone Milton Friedman, or maybe even Irving Fisher himself, I do  not know.  In any case, the data he himself touts seems to be completely at odds with what he argues so  presumptuously. More monetary crackpottery, if more responsible  than a lot of it.

Addendum:  I have just gone to his original post where I added a comment making the main points here, if more  briefly and with less of the punch.  Williamson's reply is that market participants now expect that there will be no more  rate increases by the Fed, and that indeed, US rates will converge to  those of  Japan (he has a long convergence argument in his post).  This is in the face of Yellen still maintaining the official line before a congressional committee that more  rate increases, if more slowly than previously stated, are in store from the Fed.  I think Williamson is  right that indeed the rate increases are not likely to happen, and it is just a matter of time before the FOMC climbs off its official high horse on this matter.  But his argument that it is completely reasonable that this increase in target rates (by only 25 bp) should lead to a crashing breakeven inflation rate continues to make no sense whatsoever, even if the Fed is not going to increase target rates further.

Barkley Rosser   

Ted Cruz's Mendacity and Calumny are Breathtaking

Sunday, on Meet the Press, Senator Cruz had this to say:

By the way, the Senate's duty is to advise and consent. You know what? The Senate is advising right now. We're advising that a lame-duck president in an election year is not going to be able to tip the balance of the Supreme Court. 

That we're going to have an election, and if liberals are so confident that the American people want unlimited abortion on demand, want religious liberty torn down, want the Second Amendment taken away, want veterans' memorials torn down, want the crosses and stars of David sandblasted off of the tombstones of our fallen veterans, then go and make the case to the people. [emphasis added]

I don't think the American people want that. I'm very happy to take that case directly to Hillary Clinton, directly to Bernie Sanders. And I would note, look, how do we know Donald Trump's record on this is going to be bad? He has supported liberals for four decades: Jimmy Carter, John Kerry, Hillary Clinton, Chuck Schumer, Harry Reid. 

Anyone who cares about judges would not be supporting Harry Reid and Chuck Schumer and John Kerry and Hillary Clinton. And the consequence is, if either Hillary or Bernie or Donald Trump is the president, we will see the Second Amendment written out of the constitution. This is a basic question, who will defend our liberties?

That business about sandblasting crosses and stars of David off the tombstones of veterans may sound like just some crazy piece of paranoid fantasy rhetoric but it is worse than that. R. Ted Cruz was one of the petitioners in Salazar v. Buono, a case argued before the Supreme Court in October 2009. Elena Kagan, Solicitor General, was counsel on behalf of the petitioners.

Got that? The Obama administration was on R. Ted Cruz's side, seeking to NOT tear down a veteran's memorial in accordance with a lower court injunction that the Bush administration had not appealed.

The life cycle of the T. cruzi parasite 

What Will Humans Do?

The Guardian asks "Would you bet against sex robots? AI 'could leave half of world unemployed'":

Machines could put more than half the world’s population out of a job in the next 30 years, according to a computer scientist who said on Saturday that artificial intelligence’s threat to the economy should not be understated. 

Expert Moshe Vardi told the American Association for the Advancement of Science (AAAS): "We are approaching a time when machines will be able to outperform humans at almost any task. 

"I believe that society needs to confront this question before it is upon us: if machines are capable of doing almost any work humans can do, what will humans do?"

Given the article's salacious headline, one can well imagine what the humans would be doing. While half the humans are kept busy servicing the sex robots, economists will be fully employed reassuring the other half that supply creates its own demand, technology creates more jobs than it destroys and there is not a fixed amount of work to be done.

The amount of work to be done is admittedly not fixed but supply does not "create its own demand." Say's Law is neither Say's nor is it a law. Meanwhile, there is only so much cheap and cheerful energy to go around and a certain quantity of atmosphere to accumulate carbon dioxide in.

Fifteen years before Jean-Baptiste Say's birth, in Reflections on the Expediency of a Law for the Naturalization of Foreign Protestants, Josiah Tucker, Rector of St. Stephen's in Bristol and Chaplain to the Right Reverend the Lord Bishop of Bristol, asked:

Whether Sir Josiah Child did not call it a VULGAR ERROR to say, We have more Hands than we can employ? Whether he was a Judge of Trade? And Whether it is not an infallible Maxim, That one Man's Labour creates Employment for another?"

The relentless questioning of the "Important Queries occasioned by The Rejection of the late Naturalization Bill," in Tucker's Reflections, made the tract unusual but not unique in eighteenth century writings on political economy. In 1736, George Berkeley published the 895-question tract, The Querist. The significance of this interrogative genre was noted in an intriguing analysis by George Caffentzis, "Querying the Querist," in his Exciting the Industry of Mankind: George Berkeley’s Philosophy of Money.

Caffentzis points out that Berkeley was a master of elenchus, which he practiced daily. In a footnote, Caffentzis cites Peter Walmsley's discussion of elenchus in Berkeley's work. Walmsley offers the following explanation of the exercise:

For the ancients, elenchus was primarily an exercise for students in logic and definition. Its technique was developed in the teaching practices of Socrates and the sophists, and its rules were later laid down by Aristotle at the Academy. These are, briefly, as follows. One student, who accepts the role of answerer, states a thesis. Another then attempts to refute this thesis, not by direct argument or evidence, but by asking a series of simple questions. To each question the answerer may only reply 'yes' or 'no'. The questioner's aim is to force the answerer to contradict his initial statement. This idiosyncratic form of debate entails several constraints. The initial thesis must be of a form that permits analysis: a maxim or a definition rather than a plain statement of fact. … Similarly, the progress of elenctic dialogue depends on the answerer's ability to resist the temptation to qualify his answers. In the Protagoras, for example, Socrates strives in vain to convince the sophist that short answers are called for. Finally, it is essential to successful elenchus that the answerer speak his mind. Plato shows how the dispute can become mired when an evasive answerer, such as Euthydemus, pretends to hold ridiculous but consistent views, rather than admit self-contradiction. In the eyes of Plato and Aristotle such dishonest thinkers played not elenchus, but eristic, which term seemed to designate nothing but the disputants' failure to commit themselves to the pursuit of truth.

Is there a fixed Amount of Work to be done? Does Technology create more Jobs than it destroys? Does Supply create its own Demand? Is it not an infallible Maxim, That one Man's Labour creates Employment for another? The surprising answer to these questions -- or about them -- is that they are not stand-alone questions with stand-alone, indubitable answers. They function as elements in a sequence of questions, the purpose of which is to encourage the questioning of popular prejudices, not to impose the dogma of received wisdom.

The answers to the various questions are not uniformly positive or negative. Thus the phrasing, "is it not an infallible Maxim," can only be approached with suspicion.

The Political Economy of Oil (and Other Sectors of a Modern Economy, Considered Separately)

There has been a lot of talk recently about the impact of falling oil prices on global equity and bond markets.  One simple comparison can’t capture all that’s going on, but for starters here’s how the daily price of West Texas Intermediate stacks up with the S&P 500.  I’ve converted both to indexes of their initial values as of July 1, 2015.

Source: FRED

The first thing to notice is that oil prices are far more volatile than this specific equity index, but that’s not very enlightening, since oil is a single commodity while the S&P is a basket of 500 different items.  More interesting is whether they’re aligned in any way.  I don’t think formal tests will help much because equity prices are influenced by many factors that typically emerge and recede in importance over time.  A better way to consider it is to look at different historical episodes and ask whether they are consistent with a compact set of plausible stories.

Obviously there are periods when the two indices move together and periods when they come apart.  It is pertinent that two particular episodes of oil price distress, late August and late January, are associated with sharp equity downturns.  The period from November to January, however, saw oil prices slide while equities held their own.  Perhaps the rate of oil price decline is a factor: it has to be rapid enough to move equities.

Now the reason I mention all this is not because I want to improve anyone’s investment performance, but because it poses what I regard as one of the central questions in political economy, whether the “branches of capital” metaphor has lost most of its salience.  To put it in very simple terms, once upon a time it was common to think of capital as divided between various sectors: there was industrial or manufacturing capital (maybe divided between light and heavy industry or home market and exporters), financial sector capital, real estate capital and so on.  If you were interested in the relationship between capital and political processes, you thought in terms of the agency or structural influence of these various branches on political outcomes.  Whether a government took action that favored or undermined a particular sector depended on the power, potential and actualized, of that sector.  The data that political scientists use to assess the role of wealth (capital) in politics is largely organized on such a sectoral basis.

But what if the sector delineation is less important now than in the past?  For instance, what if the fortunes of non-oil sectors of capital (expected future profits) are tied more closely to the fortunes of the oil producers than in the past?  This would fundamentally alter how we think about the political economy of oil and have large implications for strategies to curtail the use of fossil fuels, for instance.

The short run relationship between oil prices and equities, even if we restrict it to episodes that support the “integration of the branches” hypothesis, is not very revealing.  It could be, for instance, that oil price movements are interpreted as coincident indicators of macroeconomic forces: falling oil prices mean falling incomes and demand in advance of the statistical reports that might validate these trends.  But it could also mean that, in a more financialized economy, there is more cross-dependence of the values of a range of financial instruments on one another: think of the large financial portfolios now held by nonfinancial corporations, greater diversification of portfolios in general, the integration associated with many types of derivatives, and the network effects of increased securitization (use of some financial instruments as collateral for others).

You could approach the same question from the starting point of politics.  When Clinton was elected in 1992 there was a big surge of public interest in and support for health insurance reform.  Remember Harris Wafford?  He was elected in a special senatorial election in Pennsylvania in 1991 in which his advocacy of public health insurance was the overriding issue.  The momentum seemed to be on the side of reform.

The political strategy of reformers was to isolate the health insurance companies.  Yes, they were rich and powerful, but surely their interests were in conflict with nearly every other branch of capital.  After all, most employers were suffering from the high cost of health care provided as a form of compensation to employees; surely they could be enlisted to neutralize or even overwhelm the bleatings of just one sector.  Based on this strategy there was a long period of negotiation over policy details to bring as many other branches of capital on board.  In the end, however, the strategy failed: no amount of policy tinkering could convince the rest of business to oppose the health insurers, and Harry and Louise were left without debating partners.

Nor was the situation very different in 2009 when Obama turned his attention to health care reform: the absence of a public option is directly due to the lack of any financial counterweight to the health insurance sector.  Safeguarding the profits of insurers was the price of getting a bill passed.

And now the issue of the day is climate change, and the sector under direct threat is fossil fuels.  Activists have largely converged on a strategy that is reminiscent of what was tried in health care in the early 90s: isolate the energy companies.  Only a small portion of capital is actually invested in oil, coal and natural gas; make this one sector the target and bring the rest of capital on board.  But this will work only if the branches-of-capital metaphor actually applies, and there is every reason to doubt that it does.  There was no great coalescence (pun intended) of non-carbon capital around climate legislation in 2009, nor should we count on it in the future.  My reading of the recent history of the European Trading System, moreover, is that energy-invested capital has not been isolated there either; this is ultimate reason why carbon prices collapsed into meaningless.

To sum up, the question of the extent to which the interests and power of capital are integrated and can’t be decomposed into particular branches is one of the central uncertainties in political economy, and the answer has great significance for political strategy on the ground.  I think some insight can be gained from more fine-grained analysis of co-movements across financial sectors, particularly in combination with event studies.  Carefully examined case studies might help as well.  At this point, what I most want to say is that there is lots of talk about political economy but hardly any research on the political economic problems that matter most for political action.

How Much Profit Should Vanguard Make on Managing Your Assets?

Justin Fox reports on a weird transfer pricing issue that I have been following:

Near the end of last month, mutual-fund giant Vanguard announced that it had lowered the expense ratios on 35 of its mutual funds. That’s after a December announcement that it had lowered expense ratios on 53 funds. All in all, Vanguard estimated, the changes resulted in an $87.4 million reduction in the fees paid by its customers. Isn’t that outrageous!?!?! I mean, seriously, how shameless can these guys get? That, in short, is the argument Vanguard tax lawyer turned whistle-blower David Danon and his hired expert, University of Michigan law professor Reuven S. Avi-Yonah, are making. Yes, there's a more complicated legal angle involving transfer pricing. More on that in a bit. But the underlying reasoning is simple: Vanguard is cheating state and federal tax authorities by charging its customers much less than other fund companies do.

We’ll return to the transfer pricing later as well. I’m not a tax lawyer so forgive me if I get this one wrong. Vanguard’s customers are also its shareholders. If they did raise the fee so as to make C corporate profits taxable at 35% - would not their rich customer/owners get a deduction off their taxable income which may now be at a rate of 39.6% (under Bernie make that 52%)? OK – let me turn to something I do get – transfer pricing:

Danon and Avi-Yonah argue that it is still required to charge “arm’s length” fees similar to what other management companies charge. At almost every mutual-fund group other than Vanguard, the management company is out to make a profit

I have a lot of respect for Avi-Yonah as a tax professor but when I read his report, I realized any competent economist for Vanguard could push back. And the reason is in that Morningstar report:

The asset-weighted expense ratio for passive funds was just 0.20% in 2014, compared with 0.79% for active funds.

Avi-Yonah’s analysis would take the overall average of 0.64% for the intercompany fee for Vanguard which is four times its costs. A profit to cost ratio of 300% sounds incredibly high. But Vanguard is a passive fund not an active fund. So wouldn’t the appropriate comparable fund analysis suggest a fee closer to 0.2% of assets under management so the profit to expense ratio would be around 25%? Justin Fox does a nice job of presenting whether or not the IRS could or even should pursue this. But if they did – one would hope their transfer pricing analysis would be a bit better developed.

Social Security Replacement Rates as Reported by the CBO

Brian Faler warned us a year ago:

Republicans on Friday named Keith Hall head of the Congressional Budget Office, installing a conservative Bush administration economist atop an agency charged with determining how much lawmakers’ bills would cost. Hall, who served on George W. Bush’s Council of Economic Advisers, is a critic of the Affordable Care Act who shares Republican skepticism of government spending and regulation.

Keith Hall just admitted:

After questions were raised by outside analysts, we identified some errors in one part of our report, CBO’s 2015 Long-Term Projections for Social Security: Additional Information, which was released on December 16, 2015. The errors occurred in CBO’s calculations of replacement rates—the ratio of Social Security recipients’ benefits to their past earnings.

Who were these outside analysts and what was this about? Alicia Munnell explains:

CBO suggests that Social Security is getting more generous every day. The stage is being set for cuts in Social Security, and the Congressional Budget Office (CBO) has become a major player in this effort. The agency's most recent report shows not only a huge increase in the 75-year deficit, but also an enormous increase in the generosity of the program as measured by replacement rates -- benefits relative to pre-retirement earnings. None of the changes that increase the deficit -- lower interest rates, higher incidence of disability, longer life expectancy, and a lower share of taxable earnings -- should have any major effect on replacement rates. CBO has simply been revising its methodology each year in ways that produce higher numbers

. Alicia provides the details and concludes:

Putting out such a high number without any effort to reconcile it with the historical data is irresponsible. And those waiting for an opportunity to show that Social Security is excessively generous have pounced on the new CBO replacement rate number and publicized it in op-eds from coast-to-coast. Social Security is the backbone of the nation's retirement system. Its finances need to be treated more thoughtfully.

Agreed. My only question is whether anyone in Congress can the courage to demand that Mr. Hall explain this irresponsible reporting.

It's been about resource control not sustainability or efficiency

An important point raised by Vandana Shiva is that the choice of technologies employed in modern industrial societies has not been chosen on the basis of 'efficiency' or 'sustainability'.  And neither, suggests the Reverend Thomas Malthus in 1830, have jobs been created to provide 'a living' for workers. 

"The increasing demand for agricultural labour must always tend to better the condition of the poor; and if the accession of work be of this kind, so far is it from being true that the poor would be obliged to work ten hours for the same price that they before worked eight, that the very reverse would be the fact;  and a labourer might then support his wife and family as well by the labour of six hours as he could before by the labour of eight....A great accession of work from manufacturers, though it may raise the price of labour even more than an increasing demand for agricultural labour, yet, as in this case the quantity of food in the country may not be proportionately increasing, the advantage to the poor will be but temporary, as the price of provisions must necessarily rise in proportion to the price of labour." ['And Essay on the Principle of Population']

 Malthus is clearly saying that 'inflation' is not a purely monetary phenomenon.  RIP Milton Friedman?

Exit Strategy? plus half a dozen or so years

M. King Hubbert, 1940:

By the year 1937 industrial production was again approaching and in some instances exceeding the previous all-time high in 1929. At this stage the spokesmen of business, still imbued with the doctrines of the economists concerning the efficacy of 'confidence' and apparently unaware that the government spending was the only important source for making up the deficit in the business budget, set up a hue and cry for the government to balance its budget. Promises to balance the budget were made and the excess of government expenditures over receipts was reduced from 4.8 billions of dollars in 1936 to 2.8 in 1937. The immediate consequence of this was the most drastic curtailment of industrial production yet known. Between September, 1937 and January, 1938--but 4 months--the volume of industrial production dropped by an amount which in the 1929 'crash' required the 20 months from October, 1929 to July, 1931.

BREAKING: Marco Rubio announces running mate

Taglines for Rubio

His latest bot episode has sent me to the drawing board:

“Vote for Rubio!  Do you really want to go through the rest of the primaries without him?”

“Rubio: he’s one weird dude.”

“Rubio for President: Nothing Can Possibly Go Wrong Go Wrong Go Wrong Go Wrong...”

Or you can play a game with it:

Who’s Marco’s favorite painter?  Botticelli.

Who’s Marco’s favorite chess player?  Botvinnik.

What’s Marco’s favorite country?  Botswana.

And so on.  Let the comments begin.

Why The Secular Stagnationists May Be Wrong: Rapidly Falling Solar And Wind Prices

The voices of pessimistic secular stagnationists have been growing louder and louder.  Robert Gordon's recent book has been the poster boy recently, emphasizing technological stagnation, productivity slowdowns, and a lack of likely new products of any real value to humans.  He and Tyler Cowen focus on the relationship between IT and the rest of the economy, seeing a slowdown in productivity improvements in the economy coming from this important sector.  Lawrence Summers emphasizes demand side stagnation, but sees his view as complementary to the supply-side technological pessimism coming from Gordon and others.

A particular reason from the supply-side that these forecasts of increasing stagnation may prove to be oveblown comes from a sector that none of these doomsayers ever mention, but which remains fundamental to the world economy: energy.  In particular, both solar and wind energy have been experiencing dramatic declines in costs, which many are projecting will continue in the foreseeable future. For one among several sources on solar energy see Ramen Naam, from August, 2015.  Obviously one must take such projections with caution, but this post projects solar costs to be about two thirds of current ones in a decade and about half of current ones in two decades.  This is dramatic.  On wind a report from the US Department of Energy, also in August 2015, makes no projections, but reports costs in the low-cost interior of the US falling from $70/MWh in 2009 to $23/MWh in 2014.  Anything like this continuing would be important.  Their prices are now competitive with conventional sources.

Those who see these numbers, or ones like them, but dismiss them, emphasize what a small percentage of current energy comes from these sources (so far mostly useful for electricity production), although in certain locations such as Denmark have more substantial portions relying on them.  But, this is the point.  If  indeed we see dramatic further reductions in costs that put theses sources far lower in cost than current ones, we may well see massive investments in shifting to them that could substantially transform the energy sector of the world economy and the world economy itself more broadly, including allowing for major productivity increases and an acceleration of growth in the real economy, irrespective of whatever is going on in  the IT sector or whether wonderful new products that make the indoor toilet look boring and unimportant will be discovered.  Producing the same old stuff at much lower real costs can provide a powerful growth stimulus, not to mention that such sources would help substantially in dealing with the climate change problem.

A more sci fi issue is the possibility of getting commercially viable nuclear fusion breakthrough.  I am less optimistic on this front, where there have been many false announcements.  However, for better or worse, there seems to be a lot of noise on this front about possible breakthroughs, coming from such sources as the International Atomic Energy Agency (IAEA).  Thus, the possibility of some major breakthrough in this area could happen, and this could also be a major game changer as well.

Barkley Rosser

Tyler Cowen exposed!

Despite finding a high proportion of what Tyler  and Alex Tabarrok have to say about economics on their blog, Marginal Revolution,  maddening, I am a more or less regular reader, chiefly because Tyler's erudition in matters cultural and literary is astounding. Any book I think looks interesting, and that I add to  an impossibly long 'things to get to when I have more time," Tyler has already read.  But I am now taking him straight off the cultural sage pedestal I had heretofore placed him on: in an interesting interview with Kareem Abdul-Jabar, he asks the latter which are the most under-rated of Miles Davis' recordings. Kareem mentions Seven Steps to Heaven, and Porgy and Bess - good choices. (I like Miles Ahead - another Gil Evans collaboration, like P&B- and the amazing Birth of the Cool. )


But Tyler puts in his two cents, giving the nod to.......Fillmore East!, which he recommends as a "souped-up Bitches Brew." This is a recommendation? Say it isn't so, Tyler: you can't, can't, can't  be a lover of that horrible, terrible abomination that is "Jazz Fusion." No!

Dueling Economic Models and How to Score Them

An article in today’s New York Times compares two wildly different assessments of the proposed Trans-Pacific Partnership trade and investment deal, one by the Peterson Institute, a Washington think tank financed by business interests, and the other by the Global Development and Environment Institute (GDAE) of Tufts University.  The Peterson people tell us their model predicts income gains from TPP; GDAE’s model predicts losses.  The article is strictly he said, she said.

How should economists present their modeling work to the public?  And how should journalists report it?  The current dispute falls well short of best practice.  Here’s how I think it should go:

Modelers should list all the key assumptions embodied in their models.  In order to generate predictions, any model has to hold certain parameters constant; the technical term is “closing the model”.  (It’s because nothing is held constant in real life that prediction is so dicey.)  The results depend on which parameters are fixed in advance and how they’re fixed.  Reasonable people can disagree about how to do this, but there’s no way to discuss it unless the assumptions are presented openly.

Here’s an example.  Peterson uses the GTAP model (Global Trade Analysis Project) of Purdue, which I briefly discuss in my micro text in the chapter on general equilibrium theory.  This model assumes full employment and holds trade balances fixed, so that a trade deal shock is not permitted to change any country’s current account or unemployment rate.  It is erroneous, then, for the Times report to state that the Peterson economists “concluded” that “there would be no net change in overall employment in the United States.”  That’s not a conclusion—that’s an assumption.  There’s a big difference.  (Dean Baker critiques this assumption over on his soapbox.)

The GTAP model also assumes the optimality of market equilibration, so that any impediment to trade is necessarily welfare-reducing; the only question is how much, which is precisely what the model is designed to estimate.  Meanwhile GDAE does not make this assumption but is concerned instead with how a trade deal such as TPP will alter trade balances, which are not assumed to be fixed.

The way it should work is that each team, in presenting its results, would list all their key assumptions.  Journalists would translate these lists into terms that could be understood by their readers.  Then all of us could have an intelligent discussion about which set of assumptions is more appropriate to the questions we care about.

Second, economic models like GTAP and GDAE’s Global Policy Model are typically employed over and over.  They have track records.  Journalists should be able to review their prior predictions and tell readers how well they fared.  For instance, GTAP has been around for decades.  How well did it do in predicting the outcomes of past trade agreements or exchange rate adjustments?  Did it tell us anything useful in advance about China’s accession to the WTO?  And how has GDAE’s model performed?

The he said, she said approach is now recognized as unacceptable in reporting on climate change and other topics where the weight of evidence is crucial.  Economics shouldn’t be an exception.