Unresolved Issues In Happiness Economics From The Conference Honoring The Retirement Of The Field's Founder

That would be Richard A. Easterlin, age 92, retiring this spring from the U. of Southern California after being there since 1981, following an earlier stint at U. of Penn, where he got his PhD under Simon Kuznets.  Kuznets in turn got his from Wesley Clair Mitchell, who was in turn the student of Thorstein Veblen, and it was mentioned (by me actually) at this conference that happened over this past weekend at USC that Easterlin's work has emphasized the issue of social comparisons that was strongly developed by Veblen in his 1899 Theory of the Leisure Class.  This applies not only to his famous Easterlin Paradox, the starting shot shown in his long ignored 1974 book chapter that started happiness economics, but also in his earlier Easterlin Hypothesis on demography in economic history.  As it was, this conference focused on happiness economics, with several leading figures in the field present.  I shall note some matters that were disputed at the conference and remain open.

Probably the most hotly disputed is the matter of the relationship between age and happiness (more frequently labeled "social well being" or "life satisfaction").  The current more or less conventional  view is that this is on average a U-shaped relation, at least in the US, with people happy at 20 but with this declining to about 45 or so, and then rising after that.  There are serious problems with measuring this, especially the fact that we do not have full panel data following individuals throughout their lives so as to avoid the bias induced by the fact that happier people tend to live longer than unhappy ones, which skews results at the upper age end for simple cross-section studies.  A more recent finding from European nations suggests this may be more of an M-shape, with happiness actually rising a bit from 20 into the late 20s or so, declining to about 45, rising to about 70, but then either plateauing or even declining slightly after that.

However, looking across nations one finds apparently more diverse findings, with some showing patterns that simply decline from youth on.  This seems more prevalent in poorer nations where there may not be old age pension systems.  Another matter is that there may be changes in the shapes of this pattern across nations based on kinds of employment systems, family relations, and community patterns, with supposedly "nicer" systems leading to some smoothing out of that midlife crisis dip.  This argument, put forward by John Helliwell at the conference, lead author of the recent UN study on happiness, was sharply challenged by Andrew Oswald in the most heated exchange of the conference.  This matter is definitely an open and unresolved question that can get people worked up.

On the matter of old age pensions possibly playing a role in improving happiness for older people, a general theme not seriously disputed, although details were, is that better social safety nets seem to  be associated with higher levels of happiness in nations (along with greater income equality).  This was a major theme in Easterlin's own closing remarks, who claimed that in general social safety nets are spreading or improving around the world, despite some setbacks here and there, leading him to take an ultimately optimistic view of the future of the world.  A particular case discussed in several of the 24 presentations by some of his former students involved China (not all presentations were by his former students).  There reported happiness levels were declining from about 1990 to 2005, with them rising since then.  Easterlin and his students identify as a likely important factor in this a collapse of the social safety net during the declining happiness period, with a reinstitution of it since supporting the increase in happiness.  This has involved both health care and old age pensions, with the introduction of an old age pension system in rural areas between 2009 and 2013 important for the turnaround and recent increase in happiness. 

The other major area of disagreement, although people were less vigorous in arguing about this as it is a central view of Easterlin's himself, involved his famous Paradox.  The Easterlin Paradox is that at any point in time in a nation, happiness is positively correlated with income, but over time, rising income does not increase happiness.  People seem to view themselves relative to others, the central Veblenian argument. The poster boys for this from his 1995 JEBO paper were the US, where measured happiness peaked in 1956 (and is falling sharply now) and Japan.  However, many, especially Justin Wolfers and coauthors (none of them at the conference), have sharply challenged this argument.  In a paper, "Paradox Lost," in the special issue honoring him that Easterlin wrote and I published in the journal I edit, Review of Behavioral Economics (ROBE), he responded to his critics and argued that his paradox holds in some disputed nations (especially in Eastern Europe) if one examines the data carefully and properly enough.  He did not address this himself at the conference, but several papers did.  According to several, some nations clearly fit the paradox, with US, Japan, China, and most of Northern Europe doing so.  Some others clearly do not (with rising incomes apparently being associated with rising happiness levels), with Southern Europe and parts of Latin America fitting that, with others up in the air, including Eastern Europe.  This is a complicated matter clearly open to further research and debate.

Regarding the US, a presentation by Carol Graham was very pessimistic about the near term future of the US, with a collapse of happiness among poor whites the main theme, with declining life expectancies and the opioid epidemic major themes.

In any case, I was honored to be invited to participate, and I look forward to future research on this and other related matters in the future (with the relation between gender and happiness also an open question, although less discussed at the conference than these others).

Barkley Rosser

Pseudo-Equity: Further Remarks on the Politics of Mandatory Diversity Training at Evergreen

This post follows the previous one and explains why I get so exercised about the politics of equity at a place like Evergreen State College.  The single issue at the heart of activism at Evergreen for the past two years is mandatory diversity training for faculty.  This was first proposed by the Equity Council (which was set up by the college administration and whose name changed a bit from year to year) and brought before the faculty, where it failed on a secret ballot.  Equity people were furious and concluded that (a) the faculty had just demonstrated its deep-seated racism, and (b) they would have to go directly to top administrators to impose these trainings anyway.  This perspective was picked up by activist students, who felt that only confrontation could rid the campus of its plague of professors who refused to deal with their own racism.  This is a bit of a cartoon version, I admit, but it is broadly accurate and provides essential context for understanding why someone like Bret Weinstein got the treatment he received.

So what about mandatory training?

I agree completely that it takes a tremendous amount of skill to negotiate issues involving race, gender and sexual preference in the classroom.  I've learned a lot over the years, and I definitely don't think I've arrived at perfect wisdom.  I'm always trying to improve.  For me this is about both better serving the students in front of me and addressing the larger inequalities we're all enmeshed in because we live when and where we do.  I'm absolutely in favor of providing lots of resources for all faculty to work on this front.

Mandatory?  Maybe, but go into it with your eyes open.  It's not like Evergreen is the first institution to set up a system of mandatory trainings.  This is widespread throughout corporate America, the military, government offices, and nonprofit organizations.  There is a vast literature that studies the effectiveness of these programs in meeting their goals.  Of course, the findings will differ from one situation to the next, but generalizing, here's how it went: the first generation of studies, up to maybe ten years ago, was largely negative.  They looked for across-the-board, average effects and found almost nothing.  The conclusion at that point is that you can't reach the worst apples by subjecting them to mandatory retraining.  That's what I was aware of when the Evergreen debates first flared up.  When the shit hit the fan I went back and looked up the latest round of studies, and I'm glad I did, since now there is a new generation of them, more careful and fine-tuned than the first.

The new studies don't look for an overall average effect; they are more interested in how the specifics of each program interact with the context (the other things that are happening in the institution that puts the program in place) to get or not get results.  Out of this has come a much more nuanced and realistic sense of what trainings can do, and what else should be done concurrently so the combined effect really gets at racism, sexism, etc.

Now I'm not an expert in all this.  Please don't put me on a committee, because I'm just an amateur who reads a few studies and tries to increase my knowledge.  There are people out there who really know about this stuff, and we should look to them.  The absurdity of the conflict at Evergreen is that no one charged with addressing diversity and inequality in the classroom made a single reference to the accumulated knowledge of what works and what doesn't in mandatory trainings.  You won't find any awareness that there even is such knowledge in documents like the Equity Plan, and none of this learning has gone into the drafting of Evergreen's version of the program.

What to make of this?  What I conclude is that "equity" at Evergreen for this crowd is purely symbolic.  It's about showing you care and want to do something, which means you are on the right side of the issue, while anyone who opposes you is on the wrong side, racist and irredeemable.  But that isn't going to solve the problem.  If you really care about achieving equity you will want to approach the issue the best way you can.  You will draw on the accumulated knowledge of people who have studied this stuff to create the most effective program possible, and you will also establish a process to see how effective it is in your own context.  (See "adaptive management of complex systems".)  Why should I even have to say this in an institution of higher education, where learning from existing knowledge in order to change the world is the core of the mission?

Damn.

But it gets worse.  What a lot of the grumbling about mandatory diversity trainings, which has now been decisively suppressed at Evergreen, was ultimately about was a fear that this would devolve into mandatory ideological boot camp.  Is this paranoid?  I don’t think so, precisely because the people organizing these events at Evergreen, and perhaps elsewhere, are not motivated by the philosophy that you study the research, apply it, and assess outcomes.  I’ve been to many of them, and, while some have been better than others, it’s clear that a lot of the content is ideological.  The primary form of argumentation is appeal to authority rather than addressing the evidence.  Now it happens that I’m open to the content of this ideology, because my values are also about overcoming eons of oppression.  Nevertheless, the form of these events, their dogmatism and group-think, offend me.  And again, what matters to me and should matter to anyone who shares my values, is not affirming righteousness with ever more elaborate terminology but actually changing the world: achieving real, demonstrable liberation.  You can’t do that if you don’t question yourself and allow the possibility of evidence proving you wrong.

Finally, and here’s the crowning touch: the whole brouhaha at Evergreen was about mandatory training and similar stipulations for “reflection” on equity in annual self-evaluations, hiring decisions and so on.  Meanwhile, there is no language in the faculty’s collective bargaining agreement that makes equitable treatment of students an actionable responsibility of faculty, nor was any attention given to this lacuna by our putative equity warriors.  All the struggle has been about changing consciousness, and none of it has been about providing students a workable channel for redressing unacceptable faculty behavior.  This says quite a bit about the pseudo-politics of equity at Evergreen, doesn’t it?

I hope it’s clear that my outrage at the way this issue has been framed at the college, and is upheld by the latest “independent” report, is miles away from the narrative about Evergreen peddled by the Right.  I want to make real progress, at every scale, in dissolving the hierarchies and injustices that pervade this society, and I don’t like seeing this cause abused by those claiming to represent it.

Kudlow’s Trade Coalition of the Willing

Who knew when I posted this:

We could go back to 2002 and how the Authorization for Use of Military Force Against Iraq Resolution of 2002 was sold to people like Senator John Kerry and Senator Hillary Clinton. The Bush-Cheney White House sold this as a means to encourage Iraq to comply with certain UN resolutions and not necessarily a prelude to war. Of course the White House was lying as we knew by March 2003. Of course Bush-Cheney lied about a lot of things with respect to Iraq back then including its forecast that an invasion would be quick, low cost, and very effective in establishing a Western democracy in Iraq. How did that work out exactly? Kudlow helped the White House cheerlead for this invasion arguing it would lead to so much Iraqi oil production that oil prices would fall to $12 a day. How did that work out again?

I was reacting to Kudlow claiming we are not in a trade war. Just as I thought Kudlow had reached all heights of stupidity, he exceeds expectations:

White House chief economic adviser Larry Kudlow said Sunday he couldn't name members of his promised "Trade Coalition of the Willing," or other countries who were also open to impose tariffs in response to China's alleged intellectual property rights infringements.,"I can't answer that, I don't even want to answer that," Kudlow told "Fox News Sunday." "All I'm saying is my 'Trade Coalition of the Willing' will put the whole world behind the United States' actions against China and this is going to have a big effect on China.

Could someone please tell Mr. Kudlow that our 2003 invasion of Iraq was a monumental blunder?

Are We in a Trade War?

President Trump sent two of his minions out yesterday to lie about this question. Kudlow:

We are not in a trade war. What this is is an attempt to right some of the wrongs with respect to China.

Our Treasury Secretary said essentially the same thing:

Our objective is still not to be in a trade war with [China] … I'm cautiously optimistic that we will be able to work this out.".

We could go back to 2002 and how the Authorization for Use of Military Force Against Iraq Resolution of 2002 was sold to people like Senator John Kerry and Senator Hillary Clinton. The Bush-Cheney White House sold this as a means to encourage Iraq to comply with certain UN resolutions and not necessarily a prelude to war. Of course the White House was lying as we knew by March 2003. Of course Bush-Cheney lied about a lot of things with respect to Iraq back then including its forecast that an invasion would be quick, low cost, and very effective in establishing a Western democracy in Iraq. How did that work out exactly? Kudlow helped the White House cheerlead for this invasion arguing it would lead to so much Iraqi oil production that oil prices would fall to $12 a day. How did that work out again? We should have listened to Anthony Zinni:

Former Centcom Chief General Anthony Zinni Calls Iraq War a Blunder

He was saying invading Iraq would be a blunder even back in 2002. Of course Trump says we will win the trade with China. On Trump’s absurd claim, perhaps we should listen to Luke Skywalker :

This Is Not Going To Go! The Way You Think

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