Evergreen Looks in the Mirror and Says It’s OK

The “Independent” External Review Panel on The Evergreen State College Response to the Spring 2017 Campus Events (quotes not in the original) just released its report, and it says that everything campus administration has done in connection with this episode and everything it is now doing in response to it is beyond reproach.  It repeats the arguments of the college’s “equity” faction (again my quotes—it has little to do with equity) in the faction’s own language and omits any information that might undermine their point of view.  Of course, it was impaneled by the college’s president and interviewed only a few authorized informants (listed in the report), so we shouldn’t be too surprised. If anyone on campus thinks it offers independent support for the “equitarian” perspective on the Evergreen imbroglio, they are really and truly credulous.

That’s the short version, which is probably all—maybe more than all—most readers of this blog care about.  The long version would require a report of its own, and I won’t bother with that.  It isn’t worth it; outside the Evergreen bubble no one will take this seriously.

Still, there’s a reason to spend another few minutes with it because, in its perverse way, the report will ultimately solidify the standard narrative about a campus gone wild with violent ultra-leftism.  This is because, by avoiding all the uncomfortable questions, it leaves their answers to right wing ideologues.

What the report does say:

The disruptions on campus reflected national and local political trends concerning opposition to racial injustice.

They were handled in an ideal fashion by the college.

Those videos-that-went-viral misrepresented what happened.

Bret Weinstein “took advantage” of the protests to promulgate his views in right wing media.

Nevertheless, the bad publicity, stoked by misinformation, has had a large negative effect on college enrollments.

Going forward, we should further embrace the initiatives already underway at the college:
support the Equity Plan
mandatory diversity training
hire more staff in diversity support
reform the curriculum to make it more “student-ready”, with clearer goals and standards
improve campus communications
provide an equity justification for every faculty position and hiring decision
require faculty statements on diversity in all course syllabi (not yet underway as far as I know)

And here are some of the things not mentioned by the report:

1. The videos were sadly quite accurate, since they were largely posted by the activists themselves, who were initially proud of what they did.

2. Nothing was mentioned about vigilante activity at the college, which might cast the “calm” response of certain administrators in a different light.

3. There were no ongoing student organizations involved in the protest.  Leaders emerged solely by virtue of charisma and were not accountable to any democratic process whatever.  Few political demands were made, and the main point was to vent.  (The video of the protest at the inauguration of Purce Hall is a gem in this respect.)

4. There is *no* Equity Plan to be implemented.  A document by that name was presented at the “canoe event” of November, 2016—another great video—but it was pasted together in a couple of hours, never proofread, and largely consists of language taken verbatim from nationally distributed diversity manuals.

5. Even though it is open admission, the college lacks both a developmental curriculum and the resources to genuinely support students from academically disadvantaged backgrounds in the “normal” curriculum (insofar as any curriculum at Evergreen is normal).  There *is* an initiative to rectify this in the area of math and quantitative literacy, but it hasn’t been funded yet and was not mentioned in this report.  A committee charged to develop a parallel proposal in writing (which included prominent “equity warriors”) chose not to develop one.

And there’s much, much more, but I have to stop.

This whole business has been terrible.  I think Evergreen is a national, even an international treasure.  It is not perfect, but it has followed its own path for decades and has made large contributions to our understanding of how college-level learning can take place.  There are lots of brilliant, hyper-dedicated people working there.  It does indeed suffer from serious equity gaps, partly because the entire country suffers from them and passes them along with each cohort of students we take, and partly from real neglect on our part.  It also suffers from the pseudo-politics of the callout culture and its ritual symbolism, also a fixture of politics everywhere.  It has lots of potential, but it needs a moment of honest communication with the outside world or it may just get crushed.

Trump’s Trade War, Stranded Assets, and Wilbur Ross’s Shipping Company

Paul Krugman relates declines in stock valuations to the insanity of trade policy from Donald Trump and taught me a new expression - stranded asset:

An asset that is worth less on the market than it is on a balance sheet due to the fact that it has become obsolete in advance of complete depreciation.

Paul notes:

Yet there is a reason why stock prices might overshoot the overall economic costs of a trade war. For a trade war that “deglobalized” the U.S. economy would require a big reallocation of resources, including capital. Yet you go to trade war with the capital you have, not the capital you’re eventually going to want – and stocks are claims on the capital we have now, not the capital we’ll need if America goes all in on Trumponomics. Or to put it another way, a trade war would produce a lot of stranded assets ... But the costs to the economy as a whole might not be a good indicator of the costs to existing corporate assets. Since about 1990 corporate America has bet heavily on hyperglobalization – on the continuance of an open-market regime that has encouraged complex value chains that sprawl across borders. The notebook on which I’m writing this was designed in California, but probably assembled in China, with many of the components coming from South Korea and Japan. Apple could produce it entirely in North America, and probably would in the face of 30 percent tariffs. But the factories it would take to do that don’t (yet) exist. Meanwhile, the factories that do exist were built to serve globalized production – and many of them would be marginalized, maybe even made worthless, by tariffs that broke up those global value chains. That is, they would become stranded assets. Call it the anti-China shock. Of course, it wouldn’t just be factories left stranded by a trade war. A lot of people would be stranded too.

Companies in the export sector have already seen their stock valuations take a hit from the upcoming trade war. But why am I focusing on Wilbur Ross as an owner of a shipping company? Permit me to state I was trying to come up with some way of making sense of one narrow aspect of our overly complicated income tax law – how provisions known as GILTI (global intangible low tax income) as Defined Foreign Intangible Income (DFII) segment the return to tangible assets versus profits attributable to intangible assets. Law firms want to make this complicated but it comes down to this:

GILTI includes any income over and above a 10 percent return on the tax basis of tangible assets

Multinationals are now scrambling to figure out how guilty they are but why 10% of the book value of assets and not an appropriate return to the market value of assets? Shipping companies own a lot of tangible assets but few if any intangible assets. If I had to venture an estimate of the cost of capital for this sector, it would be only 9 percent. Now to Wilbur Ross:

U.S. Commerce Secretary Wilbur Ross is divesting his interests in shipping firms Diamond S Shipping and Navigator Holdings, an official said Tuesday

Navigator Holdings has a lot of stranded assets. The book of its ships is recorded at approximately $1.7 billion but the market value of equity is over $300 million below the book value. What happened was that the shipping companies invested heavily in ships during the commodity boom so much that there is an excess supply of ships. Ross likely sold his shares at a considerable loss but it is good for him that he got out before the trade war he is now promoting as that will further exacerbate this excess supply.

A Half Century Ago Today

 A half century ago today Martin Luther King, Jr. was shot dead in Memphis, Tennessee.  This remains one of the saddest events in our history.  This will not be a long post other than remembering this event that ended the life of this great man.  I have only two observations. 

One is that in yesterday's Washington Post there was a long article about how King's family believe he was not shot by James Earl Ray and that it was ultimately a plot by J. Edgar Hoover that did him in.  I had long dismissed these arguments, but the article contained a lot of information about the many loose ends and problems with the assassination.  Whereas I have gone from believing some of the conspiracy theories about the JFK assassination to accepting that it was almost certainly done by Lee Harvey Oswald alone, this article has sown serious doubts in my mind about the MLK assassination.  They are doubts as there is no clear resolution of this, and I fear we shall not be able to determine the truth of this with so many principals in the matter no longer among the living.

The other is to remember that King was concerned with issues of economic justice as well as of racial justice and a peaceful foreign policy.  He was supporting a strike by workers in Memphis when he was assassinated.  So this anniversary is a matter of more concern for this blog than the assassinations of some other famous people of the past. Let us remember this and honor his struggles in all their aspects on this sad anniversary.

Barkley Rosser

Our Depleted National Defense Budget?

Our title is perhaps the most obnoxious line in the Hoover Five oped per some of the appropriately harsh comments to Cochrane’s post, which alas I did not cover here. Before I do so, let me turn the microphone over to Jonathan Chait:

It is a foundational belief of Republican Party doctrine that tax cuts cannot have any adverse impact on the national debt. Indeed, Republicans have invented a new language in which budget deficit does not actually mean the difference between revenue and outlay at all. It is a term used exclusively to express panic over social spending. Economists and intellectuals associated with the party are therefore required to, in essence, keep two different sets of books when discussing fiscal policy in public. In November, a group of Republican luminaries, including Michael J. Boskin, John H. Cochrane, John F. Cogan, George P. Shultz, and John B. Taylor co-authored an op-ed cheering on the Trump tax cuts. Isn’t it a little dangerous to permanently increase the deficit, especially during the peak of an economic expansion? Nonsense, they argued. The effect on interest rates of higher debt “is likely to be modest, given that the United States operates in an international capital market, which means that the impact of changes in interest rates resulting from greater investment demand and government borrowing are likely to be relatively small.” No need to worry your pretty little heads about interest rates, since international capital markets will supply as many buyers of Treasury bills as needed, forever. Party on! Now that the Trump tax cuts have passed, though, they have pivoted to a message of deep concern about rising debt. Boskin, Cochrane, Cogan, Shultz, and John B. Taylor have written another oped. It applauds the tax cuts and calls for more. Yet it warns that the failure to cut social spending will lead to catastrophe. Including higher interest rates

Well said! Now to defense spending. I could go all nominal like the Hoover Five and note that nominal defense spending rose by 90% from 2000 to 2017 but then nominal GDP rose by 88.5% over the same period. So we have updated the graph provided by Jeffrey Miron:

Figure 6 Defense Spending as a Percentage of GDP

For both series – about half of this increase is from inflation with real GDP and real defense spending both up by just under 40%. Our update of Miron’s graph reminds us that defense spending as a share of GDP has been a huge driving force in terms of deficits over the past 53 years. During the Vietnam War, this ratio soared to 11% but fortunately fell to 6% by 1980 when we still fighting the Cold War. Saint Reagan greatly increased defense spending even relative to GDP as he showered tax cuts for the rich – which led to a huge increase in the debt/GDP ratio. We achieved a partial reversal of the debt/GDP ratio in part because we did raise taxes and in part because of the Peace Dividend which lowered defense spending as a share of GDP to less than 4% by 2000. Of course George W. Bush had his misadventure in Iraq so defense spending rose relative to GDP all of course “paid for” by more tax cuts for rich people. This most recent spike in defense spending/GDP has again fortunately been reversed leaving defense spending/GDP at less than 4%. For five economists who think we need to lower government spending – one has to wonder why they think defense spending has been “depleted”. Could it be that their political masters insisted on this bizarre line? We earlier noted the Vietnam War so maybe we should turn to Country Joe & The Fish

now come on wall street don't be slow, why man this's war a-go-go,there's plenty good money to be made, supplyin' the army with the tools of the trade

Why “Entitlement” Cuts and Not Tax Increases Again?

John Cochrane has to remind us that he co-authored a really bizarre oped:

Unless Congress acts to reduce federal budget deficits, the outstanding public debt will reach $20 trillion a scant five years from now, up from its current level of $15 trillion. That amounts to almost a quarter of million dollars for a family of four, more than twice the median household wealth. This string of perpetually rising trillion-dollar-plus deficits is unprecedented in U.S. history.

Oh good grief! Can one say relative to GDP? We are also about to see a $20 trillion per year level of national income – “unprecedented in U.S. history”. But yea – they did begin with mocking this Trump nonsense:

President Trump's recently released budget is a wake-up call. It projects that this year, a year of relatively strong economic growth, low unemployment and continued historically low interest rates, the deficit will reach $870 billion, 30 percent greater than last year.

Relatively strong economic growth is not exactly the same as Kudlow’s forecast of 5% growth is it? Oh wait – Cochrane and company have been touting strong growth effects from the Trump tax cuts. Never mind. Back to Cochrane the new found deficit alarmist:

In recent months, we have seen an inevitable rise in interest rates from their low levels of recent years. Rising interest rates and increasing deficits threaten to build upon each other to send public debt spiraling upward even faster. When treasury debt holders start to doubt our government's ability to repay, or to attract future lenders, they will demand higher interest rates to compensate for the risk. If current spending and tax policy continue unaltered, higher interest costs will have to be financed by even more debt. More borrowing puts more upward pressure on interest rates, and the spiral continues. If, for example, interest rates were to rise to 5 percent, instead of the Trump administration's prediction of just under 3.5 percent, the interest cost alone on the projected $20 trillion of public debt would total $1 trillion per year. More than half of all personal income taxes would be needed to pay bondholders. Such high interest payments would crowd out financing of needed expenditures to restore our depleted national defense budget, our domestic infrastructure and other critical government activities. Unchecked, such a debt spiral raises the specter of a crisis. Some may think that such concerns are overblown, as there is no current evidence in financial futures markets that a crisis is on the horizon.

Let’s stop right there and note that the interest rate on 30-year government bonds is only 3% not 5%. But of course Cochrane knows so much more than the market knows – I guess. But yea there is a long-run government budget constraint so let’s get to the policy prescription:

To address the debt problem, Congress must reform and restrain the growth of entitlement programs and adopt further pro-growth tax and regulatory policies. The recently enacted corporate-tax-reform plan is a good first step, as it sharply increases the incentive to invest and grow businesses, which will increase incomes. The revenue loss, which amounts to about 0.4 percent of gross-domestic product in 2025, is not by itself a budget buster, considering both the offsetting revenue reflow from higher incomes and the far larger long-run entitlement explosion.

Yea – that Laffer curve! Kudlow is a genius! PLEASE! Their message is that tax cuts for the rich as fine and dandy but we cannot afford to honor your Social Security benefits. Didn’t we cover this already? AddendumOf course I should turn the microphone over to the two Justins! Justin Fox is right: Beware of Economists Crying 'Entitlement Explosion'- Our inability to speak frankly about the nation's fiscal situation has real consequences. He is criticizing the same oped as he provides a much more detailed and honest discussion of the issues. Meanwhile Justin Wolfers does a nice job of debunking the supply-side silliness:

Corporate tax cuts will put billions of dollars back in the hands of businesses this year. Naturally, people want to know how those businesses will spend it. But the answer doesn’t really matter, at least not for understanding whether the tax cuts were a good idea. That’s because the economic case for corporate tax cuts has almost nothing to do with what corporations do with the extra cash. Economists generally recognize that corporate tax cuts have two quite distinct effects. First, a tax cut increases the incentive to invest... This incentive effect drives most economic models of investment, and few economists debate its underlying logic, although there’s considerable debate as to whether it will yield a large or small increase. Second, a tax cut showers extra cash on companies. That cash largely comes from companies that are suddenly paying a lower tax rate on profits earned from past investments. This windfall has a big effect on the distribution of income, with billions of dollars going to owners of capital at the expense of taxpayers. But few economists believe that this cash transfusion will do much to bolster future investment, because the profitability of a new capital project depends on future revenues and expenses, not on how much cash a company has lying around.

Most models of investment also note that a higher cost of capital discourages investment. Cochrane et al. are worried about higher interest rates but then they ignore this effect on investment as they hype the incentive effects. It is entirely plausible that the extra consumption from rich people getting showered with the Trump tax cuts will actually crowd out investment and reduce long-term growth. So what we will get is mainly a higher deficit. When Cochrane calls this a good first step – one has to wonder what the real agenda is.

Anniversary of Yeshua bin Yusuf dying on a cross.

Today is "Good Friday" for most of established world ruling Christianity. It is indeed the recognition of the single most historically realistically accepted event of the life of this world historical individual, his death on the cross a bit under 2000 years ago. Three of the Gospels, Matthew, Mark, and John, two of which reportedly observed this as live personal observers (Matthew and John) agree on the final words of this world-historical individual. Those were according to Matthew and Mark (the oldest of the gospels), "Lama lama, Sabacthania," ("My God, why hast thou forsaken me?").  This is , the mother-tongue of Yeshua bin Yusuf, the man who died on a cross just short of 2,000 years ago.

The woosey version of this comes from Luke, not an actual personal observer of this, the single most historically for real event of the life of Yeshua in Yusuf. He claims that when Yeshua died his last words were "Father forgive them, for they know not what they do."  But unlike Matthew and John he was not there, so there (and Mark's earliest Gospel) what the eyewitnesses saw is probably what happened.  For better or worse this is one of the most important people who ever lived, and his death is the single event most observed and recorded, and those who were actually there do not have this frankly bs line about forgiving those who made him suffer on the cross. This is the bowdlerized version of what happened that Luke sold to the world based on Paul's revision of what went down, a vision that it is not clear Yeshua bin Yusuf would have accepted.

I have twice visited the generally accepted site of the Crucifixion, in the Church of the Holy Sepulchtre, a very strange place beyond it's containing the most likely location of the most seriously recorded event of the life of the wise Jewish Prophet, Yeshua bin Yusuf.  That just before he "gave up the ghost" as the KJV books of Matthew and Mark and John say, he said in his  mother tongue of Aramaic, "Lama lama, sabachthani," translated into English as "My God, my God, why hast thou forsaken me?"

Well, I appreciate that this is not the standard fare for this blogsite, so I apologize to any and all for my posting this.  But this is how I view what really went down. And as someone who knows about torture personally, well, I have sympathy for this wise person who suffered in a way none of us will.

Barkley Rosser  
   

The Coordinated Activity Theory of the Firm

I just got around to posting this paper on SSRN, although it was written a couple of years ago.  I need to cite it for other work I’m currently doing, so it has to be out there, somewhere.  It is a more concise version of the theory than previous renditions and stays closer to the main point.

What it shows:

There is a simple explanation for why firms exist, why they have the boundaries they have, and why they are organized as they are, which is superior to the alternatives—and it has nothing to do with transaction costs or anyone whose name begins with the letter C.

This theory is implicit in much of the management literature, especially strategic management.

It’s based on the same math as fitness landscapes, but it doesn’t draw on evolutionary theory.

It exemplifies a more general methodological approach that de-emphasizes hill-climbing (optimization theory derived from concave programming) and emphasizes instead hill-finding.  There are many potential applications in economic theory, but the theory of the firm stands out.

For the life of me, I don’t understand why this approach to the economics of the firm isn’t universally accepted.  Hardly anyone even knows it exists.  It strikes me as too obvious to take credit for or be proud of.

Here's the abstract:

This paper proceeds from the assumption that economies are characterized by a high degree of interactive nonconvexity in most activities and at most scales.  The consequence is nonconvex production and preference sets and the corresponding inefficiency of myopic algorithms.  One application of this perspective is the theory of the firm.  Conventional theories explain the existence, boundaries and internal organization of firms on the basis of contracting costs that impede the otherwise optimizing properties of market decentralization.  I propose instead an approach in which the motive for organizing production within rather than between institutions is to internalize nonconvexities, thereby obtaining the benefit of explicitly coordinated plans.  A useful device for representing this problem is the profit landscape, understood to be nonconvex in the sense that fitness landscapes are in evolutionary theory.  Firms face three types of challenges, optimizing with respect to a particular profit hill (the problem analyzed in standard microeconomics), selecting a desirable hill, and achieving flexibility to transition between hills in the face of environmental change.  These entail tradeoffs, which are reflected in the diversity of personnel, organizational, and innovation strategies observed in actual enterprises.  While the use of the landscape metaphor in coordinated activity theory resembles a similar deployment in evolutionary economics, the two approaches differ in the questions they ask and the units of observation and analysis they employ.  The applicability of the coordinated activity model is underscored by its congruence with the bulk of management literature, which can be understood more readily in terms of hill-selection than, or in addition to, the hill-climbing paradigm of conventional economics.  In this sense, the existing management literature already provides a body of empirical and applied support for coordinated activity theory, although not generally for the socially-founded objectives of economics.

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This Is Tax Simplification?

I happen to support tax simplification that does not increase regressivity of the tax system, and I recognize that there are a few parts of the Trump tax change that do that.  But mostly it massively increases regressivity, along with massively increasing the budget deficit at a time when we are not too far from full employment.  As it is, however, the new tax law turns out to be riddled with all kinds of ridiculous unintended consequences that complicate the tax code absurdly and that in some cases were not meant to be put in and are creating major problems for  certain groups of people.  One that is reportedly hurting especially are farmers, and GOPs in Congress now want to fix some of these blunders.  Of course much of this is due to their super hurry to get the bill passed without proper hearings and vetting that obviously were called for in the case of such a massive change in our tax laws.  We are going to be discovering these gliltches for some time to come.

There was an article in yesterday' Washington Post ("Tax 'planning frenzy': The hunt for loopholes," by Jeff Stein) noting some of the nonsense that is going on, especially regarding professionals.  Stein  says that "doctors are going berserk" and they are the ones especially caught up in the "tax planning frenzy."  To give some idea of what is going on I shall simply quote the opening paragraph of the article, which provides further details.

"In hopes of paying less in taxes, several surgical centers in Louisiana are considering spinning off their parking garages into separate businesses. Eye doctors in Florida are looking at separating their eyeglass business from their medical practices. And small and midsize law firms around the country are pondering treating their offices as distinct real estate companies."

One of the virtues of real tax simplification is that it would reduce our society's massively wasteful use of tax accountants for rent seeking tax avoidance.  But this new law is clearly going to provide a major bonanza for that socially useless profession.

Oh, one final tidbit.  Apparently there are (at least) 39 "unresolved tax problems for which the American Institute of CPAs, the nation's leading association of accountants, has asked for 'immediate guidance'" on from the IRS.  But the IRS is swamped, with its budget cut, and in no hurry to resolve these matters.  Such fun and games.  No, tax simplification this is not.

Barkley Rosser

LOLFF on TED

In a TED talk, "3 myths about the future of work and why they are not true" from December 2017, Daniel Susskind channels Sandwichman:

Now the third myth, what I call the superiority myth. It’s often said that those who forget about the helpful side of technological progress, those complementarities from before, are committing something known as the lump of labor fallacy. Now, the problem is the lump of labor fallacy is itself a fallacy, and I call this the lump of labor fallacy fallacy, or LOLFF, for short. Let me explain. The lump of labor fallacy is a very old idea. It was a British economist, David Schloss, who gave it this name in 1892. He was puzzled to come across a dock worker who had begun to use a machine to make washers, the small metal discs that fasten on the end of screws. And this dock worker felt guilty for being more productive. Now, most of the time, we expect the opposite, that people feel guilty for being unproductive, you know, a little too much time on Facebook or Twitter at work. But this worker felt guilty for being more productive, and asked why, he said, “I know I’m doing wrong. I’m taking away the work of another man.” In his mind, there was some fixed lump of work to be divided up between him and his pals, so that if he used this machine to do more, there’d be less left for his pals to do. Schloss saw the mistake. The lump of work wasn’t fixed. As this worker used the machine and became more productive, the price of washers would fall, demand for washers would rise, more washers would have to be made, and there’d be more work for his pals to do. The lump of work would get bigger. Schloss called this “the lump of labor fallacy.”

And today you hear people talk about the lump of labor fallacy to think about the future of all types of work. There’s no fixed lump of work out there to be divided up between people and machines. Yes, machines substitute for human beings, making the original lump of work smaller, but they also complement human beings, and the lump of work gets bigger and changes.

But LOLFF. Here’s the mistake: it’s right to think that technological progress makes the lump of work to be done bigger. Some tasks become more valuable. New tasks have to be done. But it’s wrong to think that necessarily, human beings will be best placed to perform those tasks. And this is the superiority myth. Yes, the lump of work might get bigger and change, but as machines become more capable, it’s likely that they’ll take on the extra lump of work themselves. Technological progress, rather than complement human beings, complements machines instead.

The Unsolved Riddle of Poverty Reduction

A submission to the B.C. Poverty Reduction Strategy engagement process
March 23. 2018

"What makes one poor is not the lack of means. The poor person, sociologically speaking, is the individual who receives assistance because of the lack of means." – Georg Simmel

“A tight labor market is important for all workers, but especially for historically disadvantaged groups." – Janelle Jones, Economic Policy Institute

Executive Summary

Forty percent of the 678,000 British Columbians living below the poverty line are working adults. This submission focuses on the reduction of poverty among employed adults.

"What do you think are the best ways to reduce poverty in British Columbia?" (p. 3)

Poverty is not simply a problem of insufficient wherewithal but more fundamentally a problem of disparities of political and social power grounded in grossly disproportionate wealth. Reduction of the hours of work is an economic solidarity strategy whose greatest benefit is the enhancement of the collective bargaining strength of employees relative to that of employers.

An unsound economic theory of "leisure choice" has obscured the crucial role that work time reduction plays in mitigating social, economic and political inequality. Although this theory has been systematically refuted, it continues to dominate economic thinking and consequently public policy through sheer institutional and intellectual inertia. This obstacle to social justice must be repudiated.

"What can we do as a province, a community or as individuals to reduce poverty and contribute to economic and social inclusion?" (p. 6)

Historically, reductions in working time have resulted from mass popular movements and collective action, not from well-meaning administrative fiat. What the provincial government can do, though, is to promote cultural change and collective action by setting an example in its own employment practices, sponsoring research, data collection and education, and by directly challenging the economic malpractice that promotes social inequality in the name of "choice."

"What does success look like in a BC Poverty Reduction Strategy?" (p. 6)

An analysis is presented based on S. J. Chapman's authoritative theory of the hours of labour. Hours of work that aim at maximizing total output are shown to be detrimental to workers' welfare. This analysis estimates that a 25% reduction in standard, full-time hours would result in a net benefit to the worker of 23%, when the value of leisure, increased productivity and decreased physical and psychological "wear and tear" are taken into account. A reduction in the standard work week of 10 hours a week would, conservatively, yield an estimated 2.5 to 3.3 hours of new employment.

"What if a poverty reduction strategy could also, incidentally, reduce greenhouse gas emissions and thus constitute a climate change mitigation strategy?" (p. 12)

Prosperity without Growth, the 2009 report of the U.K. Sustainable Development Commission, featured “sharing the available work and improving the work-life balance” as one of its “12 steps to a sustainable economy.” The Commission argued that work time reduction was essential “to achieve macro-economic stability” and “to protect people’s jobs and livelihoods” in a non-growing economy. To date there have been only a few empirical studies done but these suggest that a reduction of working time by 1% is associated with a reduction of carbon emissions of between 0.8% and 1.3%.

Download a .PDF file of the full submission (17 pages): The Unsolved Riddle of Poverty Reduction

The Father Of "Market Failure" Analysis Dies

That would be Francis M. Bator. Born in 1925 in Budapest (moving to US in 1939 with family), Francis M. Bator died at age 92 a few days ago after being hit by a human-driven car while crossing the street. The funny thing is that when I read of it, I  was surprised he was still alive, thinking he had died some time ago.

It turns out that for the public he is best known as an economic and national security adviser to LBJ in the 1960s, being for awhile the Deputy National Security Adviser to McGeorge Bundy and thus partly responsible for the war in Vietnam policies.  I did not know about that and am uninterested in commenting on that, although supposedly he left the administration in 1967 mostly because of his lack of enthusiasm for that war, after encouraging friendlier relations with both the USSR and western Europe.  He also seems to have been one of the founders of what is now the Kennedy School of Government at Harvard,  where he went after being in the LBJ administration, retiring in 1994.  In later years he wrote much about interaction between fiscal and monetary policy, but little of it is of much longer term interest.

Why Bator interests me and why I am posting this is because of his intellectual role dating from 1957 and 1958, soon after here got his PhD from MIT under Robert Solow, with a pair of highly influential articles that essentially set textbook discussions of the matters they discussed (and as I basically had not heard of him since the 1960s is why I thought he was dead, not being aware of how young he was when he wrote those papers).  The second one is the more important and gave the label to his now widely accepted formulation, "The Anatomy of Market Failure." It was Bator who coined that term and who also laid down the standard list of reasons for  "market failure," the syndrome of a free market possibly failing to be Pareto optimal, essentially a large caveat on Pareto's First Welfare Theorem that says that general equilibrium is Pareto optimal.  The textbook four reasons for such possible market failure according to  Bator are monopoly power, collective consumption (or "public") goods, externalities, and imperfect information.

Probably the most important part of his formulating this widely accepted list is that he was the first to clearly distinguish between the second two of these: collective consumption (public) goods and externalities.  It is easy to forget that both of these involve collective aspects in one way or another, but in slightly different ways.  But in our accepting his distinction we have come to forget that some of our most important problems involve both simultaneously being involved, with global climate change being perhaps the most important current example.  Pollution leading to climate change involves externalities while the condition of the global climate is clearly a collective consumption good of the highest order.

As it was, externalities were first rigorously analyzed by Pigou in 1922 in his Economics of Welfare, with the "Pigovian" view becoming the standard textbook view, and still is with some caveats.  Thus the 1960 critique by Ronald Coase in his "Theory of Social Cost" made it clear that under the right conditions, well-defined property rights and low transactions costs, markets might succeed in internalizing externalities, and much environmental policy since, including cap and trade, have been inspired by trying to bring about an internalization of externalities using markets.  It must be noted that Bator's paper appeared two years prior to Coase's.

The part that had not been clarified until shortly before Bator's papers involved collective consumption goods, with this being done in 1954 in a famous paper by Paul Samuelson, who would have been teaching Bator when he was a grad student at MIT.  Samuelson's famous formulation is that such good involve non-depletion and non-excludability due to  their collective nature, which implies that to find true market demand one must vertically sum individual demand curves in the form of "willingnesses to pay" in contrast to the horizontal summation of demand curves we see in markets for purely private goods.  Super individualists sometimes argue that there are no pure collective consumption goods, and it is true that some classic examples such as lighthouses have been shown not to be such, but some certainly do exist, with global climate a pretty clear case.

In any case, presumably influenced by the recent publication of Samuelson's clarifying paper on collective consumption goods (where Samuelson did not comment on the matter of externalities), Bator proceeded to produce his list and analysis, which indeed went into the textbooks a long time ago, much  to the annoyance of some free market Coasian types, such as the late James Buchanan, who regularly publicly debated Richard Musgrave, who played a key role in putting Bator's analysis into the public finance and public economics textbooks.  I am unaware of anybody ever suggesting that Bator should get a Nobel Prize for what he did, but serious rumor has it that when Buchanan got his for public choice, the person who  nearly shared it with him and did not was not Gordon Tullock but Buchanan's long-running debating partner, Musgrave, who is probably more widely identified with advocating the "market failure" analysis than is Bator.  But it was Bator who first formulated it.

Barkley Rosser

Moishe Postone 1942-2018

Presente!

Kudlow Predicts An Investment Boom

Kudlow channels his inner Gerald Friedman:

Larry Kudlow, picked to be President Trump’s new economic adviser, has privately told the White House that the nation’s economy is on the verge of 4 percent to 5 percent growth, or more than double the last decade. In a recent gathering with Trump, he said that many firms held back investing until the tax reform package passed and “some of that is already showing up.” What’s more, he told the president, “We’re on the front end of the biggest investment boom in probably 30 to 40 years.” The president responded, “Well, I couldn’t have said it any better.”

OK - I get that Friedman was looking at a progressive fiscal agenda whereas Kudlow supports Starving the Beast to pay for more tax cuts for rich people. My point is that both of them take a cavalier modeling of potential GDP. And when Friedman’s supporters try to argue that potential output has been growing by 3.5% per year since 2000, I noted that his is also Kudlow’s approach:

It is sort of funny that Kudlow and Novak were making a Keynesian economics argument given both of their disdain for Keynesian economics. Of course summing 8 numbers when the right approach would be to take the average of 8 numbers is a conceptual error that one would trust a first grader could point out. It is also interesting that Kudlow wanted to assume that potential real GDP always grows at 3.5% as he is likely going to be Trump’s chief economic adviser. Trump is even bragging that Kudlow now favors tariffs. And why not – Lawrence Kudlow’s entire career has been telling any lie that his political master want him to tell as long as there is another tax cut for rich people in store.

Brad DeLong has this silly idea that we should take modeling seriously:

The rule-of-thumb is that each 1% point rise in investment as a share of national product adds 0.1% point to the annual growth rate. To get from a growth rate of 2.5% up to 4.5% would thus require a 20% point jump in the investment share of national product—if you were to get it from investment. If you were to get it from employment growth, with Okun's Law, you would need the unemployment rate to fall by 1% point per year—which means the unemployment rate would hit zero by the start of 2022. And there are no signs of a productivity growth recovery: given demography, labor productivity growth would have to consistently hit 3.75% per year in order to get to 4.5% per year real GDP growth.

When I read this, I noted over at Brad’s place:

I guess Kudlow thinks the FED will keep interest rates really low even if we soar past full employment and inflation takes off! Me thinks he learned the wrong lessons from the 1980's when the Volcker FED made sure real interest rates soared in response to the 1981 tax cuts. Of course given that it is Kudlow, he likely does not know the difference between changes in nominal interest rates v. changes in real interest rates.

So what was the quip about something that happened over 30 years ago? Oh yea – we have very strong growth over the 1983 to 1985 period – something else the Friedman supporters are fond of noting. But of course that was the recovery from the deep Reagan recession. If one looks at potential GDP growth over the 1981 to 1992 period or even actual real GDP growth over the same period, the growth rate was closer to 3% per year in large part because the Reagan fiscal stimulus crowded out investment. Menzie Chinn recently suggested:

Mr. Kudlow is apparently on the short list for new National Economic Committee chair. Maybe a good time to review some of his macro predictions.

OK – his track record on economic forecasts is dreadful. So why would this time be any different? Then again when people were filling out their brackets for March Madness the thought process was generally that no 16 seed had ever defeated a 1 seed.

Trump on Our Trade Surplus/Deficit With Canada

Menzie Chinn listens to the latest from Donald Trump so we don’t have to:

And by the way, Canada? They negotiate tougher than Mexico. Trudeau came to see me, he’s a good man, he said we have no trade deficit with you, we have none. Donald, please. Nice guy, good looking guy. Comes in. Donald we have no trade deficit. He’s very tough. Everyone else, getting killed or whatever. But he’s tough. I said, well Justin, you do. I didn’t even know. Josh, I had no idea. I just said you’re wrong. You’re wrong. It was so stupid. [LAUGHTER]. I thought it was fine. I said, you’re wrong Justin. He said, nope we have no trade deficit. I said, well in that case I feel differently. I said but I don’t believe it. I sent one of our guys out. His guy, my guy. They said check because I can’t believe it. Well, sir you’re actually right, we have no deficit but that doesn’t include energy and timber. [LAUGHTER]. Well you don’t have timber, and when you do we’ll lost $17 billion. It’s incredible.

Menzie provides this source on our 2016 bilateral trade surplus with Canada:

U.S. goods and services trade with Canada totaled an estimated $627.8 billion in 2016. Exports were $320.1 billion; imports were $307.6 billion. The U.S. goods and services trade surplus with Canada was $12.5 billion in 2016.

OK we had a trade surplus when measuring both goods and services. But wait:

Goods exports totaled $266.0 billion; goods imports totaled $278.1 billion. The U.S. goods trade deficit with Canada was $12.1 billion in 2016. Trade in services with Canada (exports and imports) totaled an estimated $ 83.7 billion in 2016. Services exports were $54.2 billion; services imports were $ 26.9 billion. The U.S. services trade surplus with Canada was $24.6 billion in 2016.

Trump has a propensity to ignore our service surpluses focusing on our goods deficit, which was $12.1 billion in 2016. Census notes for 2017, we exported $282 billion to Canada and imported almost $300 billion from Canada so we continue to have a modest goods trade deficit, which is likely what Trump was referring to. I submitted two comments at Menzie’s place with this one making it to his blog:

My God – Trump is really stupid and people laugh it off? I do not grow fruits and vegetables but since I try to eat healthy, I buy a lot of them from my grocery store. To say I “lost” a lot of money to them is beyond stupid. No I earn my income another way and my firm I guess has lost money to me even if they profit quite well from my services. Jeffrey Sachs had a great line on Trump’s utter stupidity the other day – something I featured over at Econospeak.

Not sure what happened to the other one but this is the one that captures my utter frustration with Trump’s idiocy which I did note here:

Trump equates our trade deficit with us being ripped off. Let’s do this as a simple example. You walk into Best Buy and purchase a $1000 computer but do not have cash. So you put it on your credit card incurring a $1000 liability. Even though you now have the computer and Best Buy does not – Best Buy just ripped you off as you have a $1000 financial obligation. An odd statement from someone who routinely defaulted on his financial obligations!

Jeffrey Sachs nailed this:

But don't expect an impulsive and ignorant man like Trump to heed the lessons of economic history, logic of retaliation, and the basics of trade. His actions are based on three primitive fallacies. First, Trump thinks that America runs trade deficits with countries like China and Germany because the US is being swindled by them. The real reason is that the US saves too little and consumes too much, and it pays for this bad habit by borrowing from the rest of the world. The Trump theory of international trade is like a man in deep debt who blames his creditors for his spendthrift behavior. Come to think of it, that is precisely how Trump has spent his whole business career: over-borrowing, going bankrupt, and blaming his creditors.

If we add our imports of pulpwood and woodpulp, newsprint, and paper and paper products, we imported $5.4 billion from Canada. But to call this a loss is incredibly dumb. We happen to export about $5 billion of goods in these sectors to Canada. We also export over $30 billion in cars, buses, and trucks to Canada but import $46 billion in the same sector. So why is Trump picking on timber and not vehicles? Of course we run trade surpluses for other goods sectors so is Trump saying Canada lost to us with respect to trade in those sectors? The only thing that is “incredible” is the level of stupidity that our President utters.