Thursday, April 21, 2016

Friedman-Mason Version 4.0?

I wish Gerald Friedman would stop writing lines like this:
When I conducted an assessment of Senator Bernie Sanders’ economic proposals and found that they could produce robust growth, the negative reaction among powerful liberal economists was swift and vehement…liberal economists have virtually abandoned Keynesian economics
The claim that economists like Christina and David Romer bought into the New Classical revolution is both absurd and dishonest. Friedman’s “assessment” fell far short of an actual analysis as it only looked at the aggregate demand side. Putting aside whether his multipliers made sense, you cannot do an analysis without at least some consideration of potential output and it how it will grow between now and 2026. Menzie Chinn is a great place to start:
What Is the Assumed Output Gap in the Friedman Projections? Or, “Is current output really 18% below potential output?” … I do not know what the output gap actually used in the Friedman study, as it is not reported….One thing that should be remembered is that the trend line extrapolated from 1984-2007 implies that the output gap as of 2015Q4 is … -18%. A graphical comparison which highlights the implausibility of the -18% output gap is shown below…By way of comparison, the CBO’s estimate is -2.2%... I want to stress that estimating potential GDP and the output gap is a difficult task.
Menzie is noting problems with Friedman-Mason Version 1.0 (the paper with no consideration of potential output) and Friedman-Mason Version 2.0, which assumes potential GDP has been growing at a 3.5% clip since the beginning of the century. This bizarre trend line analysis was how Lawrence Kudlow tried to tell us we were having a Bush boom. The reality is that average real GDP growth over the first 7 years of this century was only 2.5% and we ended 2007 near full employment. To his credit J. W. Mason later accepted the premise that potential GDP growth was 2.5% for these years as he noted that the CBO was forecasting this trend to continue through 2015. Friedman-Mason Version 3.0 would therefore suggest that the GDP gap at the end of 2015 was 10% not 18%. Brad DeLong raises this objection:
These are principal causes of "hysteresis". I do not believe that the output gap is the zero that the Federal Reserve currently thinks it is. But it is very unlikely to be anywhere near the 12% of GDP needed to support 4%/year real growth through demand along over the next two presidential terms. We could bend the potential growth curve upward slowly and gradually through policies that boosted investment and boosted the rate of innovation. But it would be very difficult indeed to make up all the potential output-growth ground that we have failed to gain during the past decade of the years that the locust hath eaten
As I read what Brad has been saying, I would put the GDP gap at something closer to 5% rather than 10%. But let’s note how Dr. Friedman ended his latest:
we have a research agenda for many graduate student papers and dissertations. The strength of Verdoorn’s Law associating productivity growth with economic growth rates and the level of labor shortage. The impact of pro-growth government investment policies – including investment in Research and Development as well as investments in roads, bridges, and other public utilities. The investment accelerator and its role in fiscal stimulus, or in theories of secular stagnation. The determinants of changes in labor force participation and the effect of increasing employment opportunities. Responsiveness of immigration, especially undocumented, to labor demand. The sensitivity of US imports to economic growth, an issue complicated by the international role of the dollar.
I could get snarky and note that none of this was in his original paper. But is indeed a grand research agenda and I wish Dr. Friedman well as getting a credible analysis together would help in the fall elections as we know that Team Republican will have their analyzes for whatever they are worth. Two Updates: Paul Krugman gets this right:
Only after this was pointed out did they turn to declaring that the standard analysis was all wrong, and that Keynesians like Christina and David Romer are really just neoclassical types.For those of us who participated in the austerity debates, that’s pretty amazing and disheartening. Remember when Robert Lucas accused Christy Romer of corruptly producing “schlock economics to justify government spending?”
Now mind you I am not about to criticize Susan Sarandon as my post was not about politics. Rather – I’m disappointed in the latest from J.W. Mason:
Now I don’t think we want to get caught up in the specific strengths or weaknesses of that paper or the plausibility of particular numbers. I think that there are some problems with the paper. If you were to do the same exercise more carefully you would probably come up with lower numbers…Is there good reason to think that a big expansion of public spending could substantially boost GDP and employment?... The position on the other side, the CEA chairs and various other people who’ve been the most vocal critics of these estimates, has been implicitly or explicitly: “This is as good as we can do.” We’re not talking about core macroeconomic policy issues because they’re not a problem right now that we have 5 percent unemployment, which is full employment. The economy is at potential, more or less. There isn’t any aggregate demand problem to solve.
There were serious problems with the original paper but I am glad they are admitting the original assessment was on the high side. But we critics do admit we are below full employment and we have been calling for fiscal stimulus. On this score, the latest from J.W. Mason is even more dishonest than the latest from Gerald Friedman. Guys – you do not win a debate by lying about the other side’s position.

Two Things I Learned About Michael Kinsley

The New York Times published a review today of Kinsley’s latest book, Old Age: A Beginner’s Guide.  Reading attentively, I learned at least two things about him.

First, he’s an off-the-charts genius whose intellect simply can’t be compared yours or mine.  According to the reviewer, “Mr. Kinsley possesses what is probably the most envied journalistic voice of his generation: skeptical, friendly, possessed of an almost Martian intelligence.  If we ever do meet Martians, or any alien civilization, he has my vote as the human who should handle Earth’s side of the initial negotiations.”

OK, I’m reading a bit between the lines, assuming the Martians must be really smart to have developed an advanced civilization on such a barren planet.  I know; I saw the movie.  (Jordanians must be pretty brainy too.)  But the review goes on to plead with Kinsley to write more books, a whole shelf of them, before it’s too late.

And the second thing I learned is that Kinsley’s idea for a grand gesture by the Baby Boom generation, before it marches off into the land of assisted living, is to completely retire the government’s fiscal deficit.  I haven’t read the book to get the details, but this must mean something like: boomers vote for politicians who will raise taxes enough to buy back the bonds held by, well, some of them and some of their younger relatives.  As a last idealistic act, the énragés of 1968 will remove US treasuries from the world’s portfolios.  Searching for a heroic sacrifice comparable to waging WWII, Kinsley has hit on the idea of cashing in US bonds and, I suppose, replacing them with bonds from England or Switzerland or wherever.

Very Martian indeed.

Tuesday, April 19, 2016

Time Out for Some Hippie Punching

The higher wisdom, as we all know, is that the Left and Right are equally enemies of Truth, which resides somewhere in the enlightened Center.  Since we might forget this amid the climate denialism of Republicans, the absurd economic claims of austerians and the like, Eduardo Porter is here to remind us in this morning’s New York Times.

The poster child for liberal anti-scientism is hostility to nuclear power which, we are told, is an essential component of climate change mitigation.  This question has been fully resolved by science, and only the Left’s elevation of emotion over reason prevents it from joining the consensus.

Well excuse me.  Without going into boring detail, here are a few directions rational thought might take: (1) Nuclear power is way more expensive than the alternatives.  (2) Nuclear power’s inflexible output makes it an inefficient supplement to intermittent energy sources like wind and solar.  (3) Since its inception, nuclear power has been repeatedly subject to unanticipated safety concerns.  It is pure hubris to think that we now know every risk this technology presents to us.  (4) Mitigating climate change means keeping fossil fuel in the ground, which is not the same as investing in non-fossil energy sources, since total energy use is not constant.

I guess this makes me anti-science, huh?

Incidentally, the article makes a huge error in claiming that evolution by natural selection operates at too slow a pace to be perceptible by ordinary (non-scientist) humans.  The evolution of bacteria and viruses is real-time and crucial.  The evolution of crop pests in response to pesticides also occurs right in front of our eyes and is, or ought to be, a major public concern.

If you’re going to punch hippies for being anti-science, you might want to get your science straight first.  Just sayin’.

Saturday, April 16, 2016

The Saudi “Threat” to Dump Treasuries

A bill now going through Congress would chip away at Saudi Arabia’s sovereign immunity defense against claims that they abetted the 9/11 terrorists, which they apparently did.  The Saudi government, with its tender commitment to due process and human rights, has threatened to retaliate by selling its hoard of US treasuries.

You’d have to be pretty naive to tremble at this.  For every sale there has to be a purchase, so the Saudis have to find buyers for these bonds.  Presumably the buyers will be those who hold close substitutes (relatively risk-free sovereigns issued by other secure states), who can be induced by a small premium to rebalance their bond portfolio in a dollar-denominated direction.  Meanwhile, the Saudis will likely take the cash and purchase these other, non-US, sovereigns.  The result will be a slight temporary decrease in the price of treasuries and perhaps a slight easing in the value of the dollar, which would actually be good news for the US economy.  (Although my understanding is that most of the actual accounts in which the Saudi-owned treasuries are held are located in London; correct me if I’m wrong.)  If the Fed had any concerns about the one-time selling pressure against treasuries it could quantitatively ease by buying a bunch of them itself.

Of course, maybe this is desperation disguised as bluster.  With the fall in oil prices, the Saudis may need to liquidate some of their holdings to keep their race horses properly groomed and fed.  Why not portray this is a weapon to prevent disclosure of its past deeds?

Good Jobs for Non-College Grads

It’s good to see that Katherine Newman has spoken up for really investing in kids who aren’t going on to college, which will always be a substantial chunk of them, no matter what.  If there’s any sort of social contract worth defending, it has to include them.  This means high quality technical programs in high school, staffed by teachers who are well respected and remunerated.  Read her op-ed piece.

But that’s only one side of the story, the supply side.  The demand side, the willingness of firms to hire well-trained young people to good jobs with long-term career possibilities, is the other.  Newman makes a passing reference to Germany’s apprenticeship system, which has become fashionable.  But German firms find places for these apprentices, actually paying them to learn the ropes—unlike the unpaid internships that are proliferating over here.  Companies design jobs to be staffed by skilled, committed workers, so the requirement of a credential is not just a formality.  And behind it all, the reason why these commitments are still (mostly) honored, is codetermination—worker participation in management—in large firms and the central role played by public financial institutions in financing small and medium size enterprises.  The German labor movement has been saying out loud that this system is under attack, and a major reason for the decline of the SPD is the criticism that they are not standing up for workers at a critical moment.  Even so, however, the role of production workers in German firms is light years ahead of the situation in the US.

It’s necessary but not sufficient to promote widespread technical training; there have to be jobs that take advantage of skill and reward it accordingly.  That means a politics of changing who runs firms and for what purposes.

Monday, April 11, 2016

Are Wall Street Banks Paying Their Fair Share of Taxes?

Residents of New York are being graced by the five remaining Presidential candidates. John Kasich finally figured out how to get a nice Italian meal while Hillary Clinton struggles with the subways. Bernie Sanders is running a commercial that will likely get Jamie Dimon calling his tax director to mansplain the fact that JP Morgan Chase pays around $8 billion in income taxes per year. Bank of America paid over $6 billion in income taxes last year. But before we accuse Mr. Sanders of not doing his homework, let’s remember that both of these banks have very high levels of pretax income. Both of these banks also have effective tax rates below 30% even though the U.S. Federal tax rate is 35%. How did that happen? The 10-K filing for JP Morgan Chase includes passages such as:
Tax-exempt income…Represents securities which are tax exempt for U.S. federal income tax purposes…Non-U.S. subsidiary earnings…Predominantly includes earnings of U.K. subsidiaries that are deemed to be reinvested indefinitely.
10-K filing for Bank of America notes:
The effective tax rate for 2013 was 29.3 percent and was driven by our recurring tax preference items and by certain tax benefits related to non-U.S. operations, partially offset by the $1.1 billion negative impact from the U.K. 2013 Finance Act, enacted in July 2013, which reduced the U.K. corporate income tax rate by three percent.
The UK income tax rate is 20% and if these banks strangely used transfer pricing to shift income out of the UK into the US, their income tax authority would surely object. Of course the IRS should make sure income shifting is not going the other way. But I know of no evidence that either bank is abusing transfer pricing to avoid U.S. income. The other item in both of their 10-K filings relate to the tax exemption for municipal bonds. During those debates this week, maybe someone should ask Mr. Sanders if he wants to end this subsidy for state and local governments. If he does, is he proposing more Federal revenue sharing? If not – I fear more stupid state fiscal austerity.

Thursday, April 7, 2016

How Long Before You Have to Order a Refill for the Keynes Day Planner?

Is Keynesianism a philosophy of the short run?  Brad DeLong reprints a piece of his from a few years ago in which he excoriates Niall Ferguson, and before him Hayek and Schumpeter, for pushing the calumny that Keynes didn't care about the future, perhaps (as Schumpeter wrote) because he didn't have any children.  (Wink, wink.)  You know, "In the long run we are all dead."  Etc.  DeLong cites chapter and verse to show there is nothing to this, and that Keynes was looking as far ahead as any free market obsessive.  Good job.

Now I'll quote myself in the comments:

You are right to call out this trail of dishonesty, but I think there are two other factors.  First, Keynes does (esp in his later writings) advocate the promotion of spending in various forms to counteract shortfalls in income.  From an economic viewpoint this should be self-evident, but it challenges the the cultural biases that many conservatives harbor.  Keynes was perfectly clear in including investment in that spending imperative, but he also saw moral as well as intellectual worth in pure consumption.  From a political standpoint, the flashpoint is savings, which loses its intrinsic virtue in a world where I (largely) determines S rather than the other way around.

The second issue is that the theory wars of the 1970s led to a partition in the 1980s: Keynesians were given the short run (when prices were sticky and money illusion ruled) and classicals the long run.  From this arrangement, which has little to do with the thought of Keynes himself (representing him as if he were a proponent of the Treasury View), many people read backward and assumed it stemmed from JMK's short run fixation.

In fact, the problem of time horizons is perhaps greater than ever before.  Climate change is all about this, and at the same time our flexibilized economy is in a permanent short run.  Right issue, wrong theory.

Tuesday, April 5, 2016

Zero-Sum Foolery 4 of 4: Wage Prisoner's Dilemma

Soon after the wages-fund doctrine fell out of favor with economists, it was immediately attributed to trade unionists under the label of the "fixed work-fund fallacy" and then the "Theory of the lump of labour." In denunciations of the lump-of-labor fallacy, it has become fashionable recently to appeal to the notion of the "zero-sum game" in addition to the customary allegation of a "fixed amount of work to be done."

What follows is a brief sketch of the wage prisoner's dilemma that I modified from one posted last June. The outline can be elaborated by thinking of the dilemma in terms of Garrett Hardin's "Tragedy of the Commons" and Elinor Ostrom's analysis of common-pool resources. I have previously presented the perspective of labor power as a common-pool resource and a full treatment of wage prisoner's dilemma would incorporate those arguments. I've added a pay-off matrix at the end.

The principle of labor as private property is enshrined in the chapter, "Of Property," in John Locke's Second Treatise of Civil Government:
...every man has a property in his own person: this no body has any right to but himself. The labour of his body, and the work of his hands, we may say, are properly his.
Except for the most part we are not talking about just "the labour of his body, and the work of his hands." We are referring to a complex division of labor, co-operation and means of production that dwarfs the manual labor of a person. Regarding this augmented labor power as a common-pool resource recognizes the greatly-enhanced social productivity of labor. The wages system is calculated to siphon off the lion's share of that social productivity and award it to the owners of capital.

How does that happen?

Consider the wage prisoner's dilemma: given a choice between working long hours for more money and working short hours for less money, many will chose to work longer hours. But if a preponderance of workers choose (or are compelled) to work long hours, they will oversupply the labor market, depressing wages. They may end up working longer hours for less money.

This is not rocket science. It is elementary supply and demand: an observed regularity. And, no, it does not imply or assume "a fixed amount of work to be done." If I flood the market with bananas, it is likely the price of bananas will fall even if the demand for bananas increases in response to the lower price. It is conceivable that the temporarily lower price could instigate a banana craze that subsequently overwhelms the initial price decline. But as a rule...

Imagine the following scenario:

One hundred workers are fully employed for 40 hours a week. The current wage is $10 an hour. Due to some inscrutable technical feature of the production process, it is determined that optimal scheduling requires workweeks of either 36 hours or 44 hours. However, weekly output per worker is the same for a 36-hour worker and a 44-hour worker. Hourly output is correspondingly higher for the 36-hour worker. Pay is determined by averaging total output and aggregate hours of the workforce as a whole.

After adjustment to the new schedules, the uniform wage rate will be somewhere between $9.09 and $11.11 an hour, depending on the proportion of workers who choose each schedule. Weekly pay will thus range between $328 and $400 for those working a 36-hour week and between $400 and $488 for those working a 44-hour week.

If half the workers choose a 36-hour week and half choose a 44-hour week, hourly wage will remain at $10 and thus the weekly pay will be $360 and $440 respectively.

One payoff matrix – out of 99 – for each worker would look something like the following, with the worker's choice occupying the rows:


Assuming an individual was indifferent about the loss of leisure time, that individual would be "better off" choosing a 44-hour workweek whether all the other workers chose 36 hours or 44 hours. Aside from that assumption, the best option would depend on the relative strengths of the worker's preference for leisure, risk aversion and assumptions about other workers' preferences.

This is, of course, an extremely simple-minded example. It is meant only to suggest that "zero-sum thinking" is not the sole possible explanation for people's anxieties about unemployment – it is unlikely to be the most plausible.

Despite all the arrogant rhetoric about zero-sum fallacies committed by advocates of shorter working time, early retirement, trade protectionism or limiting immigration, there doesn't appear to have been any research to substantiate the claims empirically. There has, however, been empirical research on prisoner's dilemmas or social traps, as the tragedy of the commons model is also known. Elinor Ostrom was one of the authors of "Cooperation in PD games: Fear, greed and history of play" that references Rapoport's earlier studies. "Take-Some Games: The Commons Dilemma and a Land of Cockaigne," by Peter Mitter is included in Paradoxical Effects of Social Behavior: Essays in Honor of Anatol Rapoport.

Another kind of game has evolved with a primarily didactic rather than investigative purpose. Julian Edney's nuts game and Linda Booth Sweeney's harvest game exemplify the commons dilemma or social trap learning game. In principle, there is no obstacle (other than time and money) to incorporating a harvest-type game into a research design similar to the prisoner's dilemma research conducted by Rapoport, Ostrom and their respective colleagues.

Epilogue: Is the Road to Hell Paved with Pareto Improvements?

Monday, April 4, 2016

The Paul K Smear Patrol

Krugman can be ferocious going after the Right, but he also has a thing for the Left, as I recall from his trade purism of the 90s.  Right now, he’s on an anti-Bernie, pro-Hillary jag and pulling no punches.

So the New York Times ran an article about how Sanders’ slow start in campaigning has put him in a hole it’s difficult for him to dig out of.  Fair enough.  In general, there were two points: he assumed early on that he didn’t have a realistic chance of winning, so he geared his campaign to spreading a message rather than building a constituency; also, he postponed direct criticism of Clinton over things like her Wall Street “will talk for money” shtick.  Ultimately, I think the problem haunting Bernie is one the US Left has had for decades, adaptation to powerlessness.  It has internalized its defeats in the 1970s and 80s and chosen expressive over practical politics.  That’s a longer story for another day, but I think Bernie was as blindsided by his success as anyone else.

But that’s not what Krugman reads.  According to him, Sanders is being criticized by the Left for not smearing Clinton soon and aggressively enough.  By “smear” Krugman refers to Clinton’s accommodations to the fossil fuel industry, finance, etc.  Lefties are deluded into believing Clinton is guilty of these things because they are under the spell of yesteryear’s “vast conspiracies” against the (Bill) Clinton presidency.

Well, what to say?  He reads an informative news article through a rather restrictive lens.  He is too partisan to recognize that the Clinton machine—the Foundation, the campaign—are accommodative toward big pools of money.  My speculation is that PK thinks the Left is a bunch of amateurs who have no business being anywhere near power, and that the citadels of expertise (which includes economists who are affiliated or will affiliate with Clinton) need to be defended against the barbarians.  If it isn’t that, something is causing this guy to lose his analytical balance.

Zero-Sum Foolery 3 of 4: Forecast Factory

Long before the issue of anthropogenic climate change arrived on the doomsday agenda, Lewis F. Richardson anticipated climate modeling with his failed attempt to forecast weather numerically. His calculations predicted surface pressures 150 times higher than observed:
Paradoxically, then, the most time-consuming, precisely calculated forecast in history was also among the least accurate ever prepared by any method.
Some consolation could be had, though, from Richardson's fantasy of the "forecast factory." In A Vast Machine: Computer Models, Climate Data, and the Politics of Global Warming, Paul Edwards praised Richardson's metaphors of the factory for "reach[ing] to the heart of computing as a coordinated human activity that harmonizes machines, equations, people, data, and communications systems":
At the same time, they stand in stark contrast to today’s dominant metaphors of computation, which are mostly individual: the brain, memory, neurons, intelligence. Richardson’s forecast-factory remains a better description of the practical reality of computing. The limits of computer power, even today, stem from these human and material dimensions.
Richardson had more success investigating the mathematics of arms races. The September 1957 issue of Conflict Resolution was devoted to Rapoport's essay on Richardson's mathematical theory of war, an essay that Schelling described as "magnificent."

In his assessment of the failures and successes of Richardson's theory, Rapoport stressed the investigative rather than explanatory function of mathematical models: "Contrary to a prevalent meaning of 'model' in many theoretical formulations, the main function of a mathematical model is not an 'explanatory' one." The distinction is fundamental to Rapoport's profound methodological objection to the pretentious "rational" pursuit of solutions to problems and answers to questions. In Strategy and Conscience, Rapoport reaffirmed that "The important end product of such [experimental] research is not an answer but a question."

The value of game theory, Rapoport was later to insist, lay precisely in its demonstration of the limits of supposedly rational choice. This is an insight that the strategists have either never grasped or refused to acknowledge. Philip Mirowski has been scathing in his criticism of "the strategic community" – including Schelling – for their misrepresentations of "what game theory could ever hope to do." The strategists' "image of game theory was one of the purest instrumentality, of the labcoated expert 'thinking about the unthinkable.'"

Not all "unthinkable" things were eligible to be thought about, though. Some thoughts, namely Rapoport's eloquent critique of strategic thinking, had to be castigated and dismissed as "defeatist," "moralistic" – much as the economists feel compelled to ridicule the fallacies of those who refuse to genuflect to the prescribed articles of faith.

As Rapoport observed in his reply to Albert Wohlstetter's bitterly dismissive commentary on Strategy and Conscience:
...the cognitive assumptions of the strategists are neither revealed truths nor self-evident facts. They are rather derivatives of a power-oriented value system, which sharply delimits the cognitive horizon of its adherents. It is high time we stopped identifying narrowness of vision with 'realism.' It is high time to stop calculating long enough to think awhile, perhaps even to listen to the voice of our conscience.
Rapoport's reply compared the strategists' assumptions to the way that 19th century political economy "conceptualized man's economic activity in a way which made it appear inevitable that the poor must forever remain poor." Central to that conceptualization were reverence for what eventually became known as Say's Law and the wages-fund doctrine, which conceived the wages-fund as a zero-sum game in which trade union action to secure higher wages for one group of workers could only result in lower wages for others.

Zero-Sum Foolery 4 of 4: Wage Prisoner's Dilemma

Sunday, April 3, 2016

Do Rising Rents, Especially For The Poor, Mean We Do Not Have A Housing Bubble?

Aggregate housing prices in the US have recently been approaching the levels seen at the peak of the housing bubble back in 2006.  Indeed, in some locations they have gone higher than they did then, such as in San Francisco.  This has led some to speculate that the US is getting back into a housing bubble again.  Maybe, but probably not, and the reason is not something to be happy about: rising rents, especially for lowest income Americans who cannot afford to buy even a cheap house.

When in 2005 Robert Shiller published the second edition of his influential book, Irrational Exuberance, his new second chapter that documented the long historical path of price-rent ratios in US housing pretty much convinced anybody who looked at it that indeed the US was having a housing bubble as that ratio had been sharply rising and was at all time historical highs.  Indeed, it would peak a year later, with prices falling while rents did not as we plunged into the crash that led to the Great Recession through many channels.

The Economist has provided some more detailed data on prices and rents for three major US  cities, high growth San Francisco, more  intermediate growth New York, and more slowly growing Philadelphia.  Checking the various charts at this site one finds that San Francisco now has noticeably higher house prices than at the 2006 peak, New York has come up from its bottom by about a third to  the former peak, and Philadelphia has nearly fully recovered its peak, but not quite.  OTOH, price to rent ratios have behaved very differently.  At the peak, San Francisco was at 30, but is now just at 20, although rising somewhat.  New York's has not been rising at all, was at 25 at the peeak and now about 14 and stagnant.  Philadelphia was at 15 at the peak, at 10 at its bottom, but now only at 11.  It is simple arithmetic that if prices have been rising substantially while price to rent ratios have not been, then rents must be rising.

Dan Crawford, reposting work by New Deal Democrat at Angry Bear today, lays out more details on what is going on, including one graph that shows the steady rise in rents over time.  More striking and disturbing is the information about rents being paid by lower income people, particularly the bottom third in income of renters.  Their rents spiked noticeably in 2014 (data since not yet available), with the proportion of their incomes these people now paying on rent approaching 50%.  This is a serious problem, and I do not know why exactly this is happening. But there has been little notice or publicity about it. In any case, it is precisely these people who are not able to  afford to buy a house and thus must rent in order to live somewhere.

So, no, despite housing prices approaching former peaks, it does not look like we have a housing bubble (although possibly in a few locations).  But it certainly looks like we have an acute low income rental housing crisis that has not been publicized that has become very severe, making life much harder for those at the bottom in what is supposedly a nicely recovering, almost "Goldilocks," economy.

Addendum:  After posting this read today's Business section of the Washington Post where on p. 2 there is a fairly substantial article by Emily Badger detailing the cost of  living problems for basics for the poor, nothing that transportation, food, and medical costs have also  risen for the poor, although houising cost increases have been the most serious and reconfirming the figure that for the poorest third of renters, housing costs now consume nearly 50% of their income.

Barkley Rosser

The Recession Template, Except there Isn’t One

Barry Ritholtz reassures us that there’s no recession on the horizon.  He could be right, but his argument isn’t.  He says that the business cycle follows a predictable pattern: after its drubbing in the latest downturn, the economy slowly picks up steam.  Growth accelerates and unemployment falls.  Wages rise.  Eventually inflation breaches the central bank’s target, and interest rates are hiked to cool things down.  That’s when we get another recession.  Since wages have barely begun to move, inflation is minimal, and interest rates are scraping bottom, we can be sure that we are a long way from the next slump.

Sounds good, except it imposes a single model on business cycles, when in fact they don’t all fit in one box.  There are three different kinds of cycles, as helpfully laid out in an exemplary textbook I’m familiar with.  One is the policy cycle, as described by Ritholtz.  Yes, that one is flashing a steady green.  The second is the investment/profit cycle, whose theoretical basis goes back to Marx, includes Samuelson’s accelerator model, and is driven by the interaction of business costs (including wages), demand, and new investment.  The key indicator there is of course profit (and expected profit), and there are no clouds on that horizon at the moment.  The third is the financial cycle, of which 2008 was the most recent example.  Instability of that sort results from credit growth that props up asset prices rather than increasing revenues or from mismatches between liabilities and revenues.  In theory it’s possible to see this kind of trouble in advance, although the actual record is spotty.  If we are in for a crunch within the coming year it will probably come from financial forces.

The bottom line is that there are different kinds of business cycles that display different patterns.  You can’t show that one type is signaling expansion and conclude that risk is minimal.  I don’t put any effort myself into forecasting, and I have no idea how likely a recession is in 2016.  People ask me, and I say something like one in three, but that’s just an uninformed prior.

Zero-Sum Foolery 2 of 4: Doomsday Climate Machine

We have met the doomsday machine and it is us.


The "doomsday machine" became a household word after Herman Kahn speculated about building such a device in his 1960 book, On Thermonuclear War. Stanley Kubrick's Dr. Strangelove: How I learned to stop worrying and love the bomb (1964), immortalized the doomsday machine in the following exchange between two Peter Sellers characters, President Merkin Muffley and Dr. Strangelove:
Muffley: Dr. Strangelove, do we have anything like that in the works? 
Strangelove: A moment please, Mr. President. Under the authority granted me as director of weapons research and development, I commissioned last year a study of this project by the BLAND corporation. Based on the findings of the report, my conclusion was that this idea was not a practical deterrent, for reasons which, at this moment, must be all too obvious. 
Muffley: Then you mean it is possible for them to have built such a thing? 
Strangelove: Mr. President, the technology required is easily within the means of even the smallest nuclear power. It requires only the will to do so. 
Muffley: But, how is it possible for this thing to be triggered automatically, and at the same time impossible to untrigger? 
Strangelove: Mr. President, it is not only possible, it is essential. That is the whole idea of this machine, you know. Deterrence is the art of producing in the mind of the enemy... the fear to attack. And so, because of the automated and irrevocable decision making process which rules out human meddling, the doomsday machine is terrifying. It's simple to understand. And completely credible, and convincing. 
General Turgidson: Gee, I wish we had one of them doomsday machines, Stainsy. 
Muffley: But this is fantastic, Strangelove. How can it be triggered automatically? 
Strangelove: Well, it's remarkably simple to do that. When you merely wish to bury bombs, there is no limit to the size. After that they are connected to a gigantic complex of computers. Now then, a specific and clearly defined set of circumstances, under which the bombs are to be exploded, is programmed into a tape memory bank.... 
Strangelove: Yes, but the... whole point of the doomsday machine... is lost... if you keep it a secret! Why didn't you tell the world, eh?
Also in 1964, Rapoport's Strategy and Conscience was published.

Rapoport used a systematic exposition of decision theory to demonstrate the essential irrationality of strategic thinking, which prides itself on its supposedly rigorous rationality. Of course, the strategic thinkers missed Rapoport's point, stayed calm and carried on thinking strategically.

It would be timely to revisit Herman Kahn's footnote on the feasibility of a doomsday machine and ask if it doesn't describe something that exists today and is actually in operation:
While I would not care to guess the exact form that a reasonably efficient Doomsday Machine would take, I would be willing to conjecture that if the project were started today [1960] and sufficiently well supported one could have such a machine by 1970. I would also guess that the cost would be between 10 and 100 billion dollars. … The mechanism used would most likely not involve the breaking up of the Earth, but the creation of really large amounts of radioactivity or the causing of major climatic changes or, less likely, the extreme use of thermal effects.
I have added emphasis to the phrase, "the causing of major climatic changes." Nowadays, we refer to it simply as climate change. Anthropogenic climate change is a doomsday machine. Who would have thought?

How and why does one build such a terrible thing? Well, it turns out one doesn't have to build it -- it builds itself. All one needs to do is to keep thinking strategically and to broaden the scope of strategic thinking from brinkmanship to growthmanship.

Kubrick read a reprint of an article by Thomas Schelling, "Meteors, Mischief and War," that had originally been published in the September 1960 Bulletin of the Atomic Scientists. In his article, Schelling reviewed Peter George's novel (published under the pen name of Peter Bryant), Red Alert. Kubrick tracked down the novelist and together they visited Schelling at Cambridge. The three of them concluded that the new ICBMs rendered the plot line of Red Alert no longer plausible. Dr. Stranglove was gestated in these deliberations.

A central issue Rapoport raised in Strategy and Conscience is the pressure on strategic thinkers to reduce non-zero-sum game situations to the zero-sum dimension. He stressed the  point again at a conference in Berkeley in 1964, discussing Schelling's investigation of the role of communication in non-zero-sum games:
In this situation, the center of interest has switched to persuasive skills. If the interplay of persuasive attempts can also be cast in the form of a game of strategy, the resulting game will be viewed as a zero-sum game, since persuading the other is conceptualized in strategic thinking as a "win," while having been  persuaded is interpreted as a "loss." Therefore, introducing communication in this manner reduces the non-zero-sum game to a zero-sum game on another level. 
There is thus a relentless pressure inherent in strategic thinking to cast conflict situations in the framework of zero-sum games, i.e., to view them as conflicts of irreconcilable interests. Schelling has said that thinking derived from game theory is trapped by the conceptualization of the zero-sum game. I heartily agree with this verdict and would amplify it by pointing out that even when situations are cast in non-zero-sum game models (of which Chicken is an example), strategic analysis, as it is usually practiced, leads toward a formulation which reintroduces the zero-sum game on another level.
Schelling's Strategy of Conflict (1960), was ranked in 1995 by Times Literary Supplement as one of the hundred most influential books published since World War II. Reviews by James Meade and Charles McClelland discussed Schelling's contribution in relation to Kenneth Boulding's Conflict and Defense and Anatol Rapoport's Fights, Games and Debates.

Boulding, Schelling and Rapoport collaborated in the Journal of Conflict Resolution in the late 1950s. But their relationship appears to have grown increasingly tense because of disagreements about the rationality and the military applications of strategic thinking.

Schelling reviewed Rapoport's Fights, Games and Debates and Strategy and Conscience and Boulding's Conflict and Defense. Both Boulding and Rapoport reviewed Schelling's Strategy of Conflict. Rapoport judged the greatest value of that book was to suggest "that the very framework of thought in which the strategist must operate precludes a breakout from our present situation..." Boulding's review was blunter, even impolite:
Schelling's world, rational as it pretends to be, is in reality a world of rational nightmare, devoid of "mercy, pity, peace and love," slipping into rational deceit, rational cruelty, endless and implacable rational hostility, rational despair, and rational terror. It all ends, one fears, in the rational lunacy of eventual mutual annihilation. One fears Schelling has been seduced by the RAND Corporation which he so much admires.
Paul Erickson offers a fascinating glimpse into the complicated relationships between these three men in The World the Game Theorists Made. Erickson cites reviews by Oskar Morgenstern and Martin Shubik of both Fights, Games and Debates and Strategy and Conflict, both of which are much kinder to Rapoport's book than to Schelling's. In his autobiography, Rapoport recalled that at first neither he nor Schelling realized that their positions were "poles apart" (Certainties and Doubts, p. 128). Perhaps it was the initial illusion of accord followed by the shock of discovering fundamental differences that stoked the apparent resentments.

Starting with his role as an adviser on environmental issues to the Carter administration, Schelling has written prolifically on the economics of global warming. In 1996, Schelling was the first to speculate about the strategic aspects of geo-engineering and ambiguously refers to himself as "perhaps" to be included among the "enthusiasts" for it.

My familiarity with Schelling's writing on climate change is limited, but judging from this 2008 Cournot Centre forum, Economics and Climate Change: Where Do We Stand and Where Do We Go from Here?, moderated by Robert Solow, Schelling's view of the urgency of action would appear to be more closely aligned with Martin Weitzman's than with either William Nordhaus's or Nicholas Stern's.  Responding to Stern's enthusiasm about prospective global emission reduction targets, Schelling observed that, "announcing a radical target for the future won't be taken seriously..."



Zero-Sum Foolery 3 of 4: Forecast Factory

Saturday, April 2, 2016

Zero-Sum Foolery 1 of 4: Game Theory Gamesmanship

It has become fashionable recently, in denunciations of the lump-of-labor fallacy, to appeal to the notion of a "zero-sum game" in addition to the customary allegation of a "fixed amount of work to be done." In this manner, pseudo-intellectual poseurs can evoke the urgency and panache of mathematical game theory without knowing the first thing about it.

Here are a few examples:
The main reason the lump of labor theory is wrong is that it is based on the assumption that everything that is going to be invented has been invented, and that therefore economic competition is a zero-sum game, a fight over a fixed lump. – Thomas Friedman, The World is Flat.
The idea that increased participation of older workers will negatively affect employment for younger people is known as the lump of labor fallacy. This fear of displacement is grounded in the assumption of a zero-sum labor market in which every job occupied by an older worker is one less potential job for a younger person. – World Bank, Live Long and Prosper: Aging in East Asia and Pacific (with credit to Munnell and Wu, and Zhang and Zhao).
The argument that jobs taken by low-skilled immigrants are jobs forgone to native-born Americans rests on the erroneous assumptions that immigrant labor can easily substitute for native labor and that employment is a zero-sum game. The fallacy, known as the lump of labor.” was popularized in 1891 by the economist David Schloss, who described it as the erroneous belief that the amount of work was fixed and could be parceled out in various ways. – Susan K. Brown and Frank D. Bean, "Population Growth" in Debates on U. S. Immigration, edited by Judith Gans et al.
One misunderstanding we ought to dispel immediately is the so-called lump of labor hypothesis. This philosophy maintains that there is a fixed amount of work to be done—a lump of labor—so if the elderly can be encouraged to leave the workforce, there will be more jobs for the young. This zero-sum thinking is simply wrong. Economists treat labor as one of the primary inputs into economic output, and the more input, the more output. – George P. Shultz and John B. Shoven, Putting Our House in Order: A Guide to Social Security and Health Care Reform.
As far as I can determine, Paul Samuelson was the first to use this analogy in a 1978 Newsweek column on the "Economics of Discrimination":
Upon thoughtful analysis of the nature of the economic system, economists find that it is essentially not a zero-sum game. Economists call it "the lump-of-labor fallacy" to believe that in any period – 1933 or 1978 – there are only so many jobs: it is false philosophy of despair, economists point out, to insist on cutting down on each worker's weekly hours in order to spread out an allegedly limited total of work and of income among as many people as possible.
Sandwichman has previously noted in passing the zero-sum allusions but hasn't paid much attention to them. That is about to change.

Arguably, the most likely assumption of the unidentified non-economists (those nobodies presumed to commit the alleged fallacy) is not a "zero-sum game" but a repeated prisoner's dilemma. It is Samuelson, Shultz, Munnell, Friedman and their ilk who plunge zealously into what Anatol Rapoport described as a zero-sum TRAP – which is to say, the conceptual reduction of non-zero-sum games to zero-sum games in order to render them "solvable" as a predetermined type of "problem." Attributing a zero-sum view to their opponents enables the propagandists to insinuate that their alternative is a bowl of cherries. If zero-sum is win/lose, then non-zero sum must be win/win, right?

The arguments supporting my critique of Samuelson et al.'s fraudulent game-theory gamesmanship are rather involved. So why would anyone want to spend time reading about the refutation of yet another bucket of boilerplate propaganda? Because this one bears not only on crap economic policy but also on crap arms race strategy and crap climate change policy, which I will get to in the second post in this series.

In his preface to Strategy and Conscience, Rapoport recounted an exchange he had with a strategist who had come to his university to talk about "Defense and Strategy in the Nuclear Age." Overcome with revulsion at the speaker's clinical detachment in addressing mass extermination, Rapoport asked the speaker, "how would he defend himself if at some future time he were a co-defendant in a genocide trial." The speaker respectfully replied that "he would plead 'partially guilty.'" But it was the response of many of his colleagues to his question that rattled Rapoport. They thought the very question was inappropriate and violated the standards of academic discourse. Somehow, even in discussing "the unthinkable," some thoughts must remain taboo.

Unlike Rapoport's strategist, the propagandists who recite the lump-of-labor, zero-sum fallacy catechism are unlikely to acknowledge even partial responsibility for promoting economic inequality and social injustice. After all, why should they? They were only repeating what they have heard and have been told to say. They didn't know what they were talking about.


Zero-Sum Foolery 2 of 4: Doomsday Climate Machine

Friday, April 1, 2016

Dr. Krugman Loves a Lump

From Equities.com:
Free Trade Claims that Deserve Some Lumps 
Alan Tonelson | Thursday, 31 March 2016 09:54 (EST) 
All knowledgeable students of economics know that a big reason for rejecting most critiques of U.S. trade policy is their allegedly heavy reliance (explicitly or not) on the “lump of labor fallacy.” 
As explained by economics Nobel-ist and New York Times columnist Paul Krugman, the fallacy holds that “there is a fixed amount of work to be done in the world, so any increase in the amount each worker can produce reduces the number of available jobs.” And it’s especially pernicious, Krugman explained, because it “feeds protectionism. If the public no longer believes that the economy can create new jobs, it will demand that we protect old jobs from new competitors in China and elsewhere.” 
So it was interesting, to say the least, to see a leading economist this week make clear that this fallacy isn’t so fallacious, and that its existence strengthens the case for U.S. policies that depart from the free trade norm. Even more interesting: His name is Paul Krugman.