Joel Kupferman, who has done great work on the World Trade cleanup scandal, just sent me this. The last line gives a deep insight into the mindset of people with authority in the U.S. today.
WTC insurance funds used for food, drinks
Published: Nov. 11, 2007
NEW YORK, Nov. 11 (UPI) -- Records show officials tied to the $1 billion World Trade Center insurance fund have been using that money for dinners and cocktails in New York.
Designated for Ground Zero cleanup and potential liability claims against the city, the insurance fund has been used by fund lawyers and executives to pay for a series of drinks and dinners in local establishments, the New York Post said Sunday.
Those expenditures have been criticized by U.S. Rep. Jerrold Nadler, D-N.Y., who said the money should be focused on aiding the victims of Sept. 11.
"The captive fund was never meant to serve as an open-ended expense account for well-paid lawyers," Nadler said. "Every dime wasted is money that could, and should, have gone to those who continue to suffer because of their exposure at Ground Zero."
The Post reported that Caroline Gentile, a spokeswoman for the fund, has defended the expenditures. She said the dinner and beverage costs were legitimate business expenses and added that the fund has grown by $15 million since its inception due to interest.
Sunday, November 11, 2007
More Economic Imbalances
The tightly wound economy is such that when adjustments to contradictions take place in one spot they create new contradictions elsewhere, at least that is what an old German philosopher once said. Here is an example:
"Washington Mutual Inc. got what it wanted in 2005: A revised bankruptcy code that no longer lets people walk away from credit card bills. The largest U.S. savings and loan didn't count on a housing recession. The new bankruptcy laws are helping drive foreclosures to a record as homeowners default on mortgages and struggle to pay credit card debts that might have been wiped out under the old code, said Jay Westbrook, a professor of business law at the University of Texas Law School in Austin and a former adviser to the International Monetary Fund and the World Bank. "Be careful what you wish for,'' Westbrook said. "They wanted to make sure that people kept paying their credit cards, and what they're getting is more foreclosures"."
Also, I wonder how much the increasing Japanese yen will unwind the carry trade, which is been a major source of cheap finance for speculation.
"Washington Mutual Inc. got what it wanted in 2005: A revised bankruptcy code that no longer lets people walk away from credit card bills. The largest U.S. savings and loan didn't count on a housing recession. The new bankruptcy laws are helping drive foreclosures to a record as homeowners default on mortgages and struggle to pay credit card debts that might have been wiped out under the old code, said Jay Westbrook, a professor of business law at the University of Texas Law School in Austin and a former adviser to the International Monetary Fund and the World Bank. "Be careful what you wish for,'' Westbrook said. "They wanted to make sure that people kept paying their credit cards, and what they're getting is more foreclosures"."
Also, I wonder how much the increasing Japanese yen will unwind the carry trade, which is been a major source of cheap finance for speculation.
economic imbalances
Look at the comparison between changes in household debt and the current account balance. I hope that Peter will throw some more light on this relationship. An eminent retired blogger whom may of you appreciate formatted this graph for me.
http://www.un.org/esa/policy/policybriefs/policybrief4.pdf
Saturday, November 10, 2007
Rubin’s Fallacy and the Paradox of Thrift
When I choose my blog pseudo-name – PGL or ProGrowthLiberal – Angrybear suggested I was a Rubinesque Bear, that is, a believer that fiscal restraint could promote long-term growth through higher national savings. I hate to say this but Paul Krugman had to give a stern lecture to Robert Rubin over the simple issue of transmission mechanisms. Before we get to the details of international macroeconomics, let’s do an analogy drawn from the paradox of thrift.
Classical economists used to have faith that a rise in national savings would automatically lower real interest rates enough to increase investment demand such that the economy would stay at full employment. Keynes noted that sticky prices – or a decision by the Central Bank to peg interest rates – could frustrate this transmission mechanism, which would mean that the rise in the savings schedule could lead to a recession, which would result in less investment and savings. Without further ado, let’s turn the microphone over to Paul by first noting Rubin’s fallacy:
Paul harkens to the doctrine of immaculate transfer noted by John Williamson as Paul notes that accounting identities do not induce expenditure-switching unless they are accompanied by changes in the real exchange rate. Paul also notes that a fall in national savings could lead to fewer imports if it means a recession. But aren’t we trying to avoid a recession as we find means of encouraging more investment and net exports? If so, we should be hoping for lower real interest rates and a real devaluation of the dollar.
Classical economists used to have faith that a rise in national savings would automatically lower real interest rates enough to increase investment demand such that the economy would stay at full employment. Keynes noted that sticky prices – or a decision by the Central Bank to peg interest rates – could frustrate this transmission mechanism, which would mean that the rise in the savings schedule could lead to a recession, which would result in less investment and savings. Without further ado, let’s turn the microphone over to Paul by first noting Rubin’s fallacy:
You could have had surpluses that affected the savings rate and would have helped the trade balance. I think you would have had more confidence in the policy framework and you would have had a better dollar,” he says regretfully. He pauses to reflect. “But we are where we are.”
Paul harkens to the doctrine of immaculate transfer noted by John Williamson as Paul notes that accounting identities do not induce expenditure-switching unless they are accompanied by changes in the real exchange rate. Paul also notes that a fall in national savings could lead to fewer imports if it means a recession. But aren’t we trying to avoid a recession as we find means of encouraging more investment and net exports? If so, we should be hoping for lower real interest rates and a real devaluation of the dollar.
Could Obesity Lead to a Longer Life Expectancy?
Greg Mankiw reproduces a table from the Carpe Diem blog that shows a series called “standardized life expectancy” noting that the U.S. leads in this constructed figure. Greg writes:
Why this might be misleading is explained after the jump.
OK, Greg is likely correct in his assertion that obesity – along with homicide and accidents – tend to lower life expectancy as traditionally measured but notice that his previous post asserted that higher spending should lead to better health outcomes. Let’s turn to Carpe Diem’s source, which was a PowerPoint presentation by Robert Ohsfeldt and John Schneider, which discusses health care reform by starting with a bullet point entitled “Dimensions of underperformance”. The sub-bullets are excessive spending, poor health outcomes, and inadequate access to care. Slide 6 notes that the US spends twice as much per capita as nations such as Canada, France, Germany, and the UK. The authors do, however, note that one would expect at least a little higher spending per capita given the fact that the U.S. has higher income per capita. The authors also provide a lot of evidence on the quality of health care debate as well as how many Americans go uninsured.
The contributions to this debate made by Ohsfeldt and Schneider appear to go well beyond the standardized life expectancy comparison that Mark Perry (Carpe Diem) and Greg have emphasized. I for one would love to study the details of their research more closely. But for now, let me rephrase Greg’s query as follows:
I have not studied the details behind the construction of these numbers, but they are asking a sensible question … Given how overweight we Americans are compared with citizens of other countries, it is amazing that we live as long as we do.
Why this might be misleading is explained after the jump.
OK, Greg is likely correct in his assertion that obesity – along with homicide and accidents – tend to lower life expectancy as traditionally measured but notice that his previous post asserted that higher spending should lead to better health outcomes. Let’s turn to Carpe Diem’s source, which was a PowerPoint presentation by Robert Ohsfeldt and John Schneider, which discusses health care reform by starting with a bullet point entitled “Dimensions of underperformance”. The sub-bullets are excessive spending, poor health outcomes, and inadequate access to care. Slide 6 notes that the US spends twice as much per capita as nations such as Canada, France, Germany, and the UK. The authors do, however, note that one would expect at least a little higher spending per capita given the fact that the U.S. has higher income per capita. The authors also provide a lot of evidence on the quality of health care debate as well as how many Americans go uninsured.
The contributions to this debate made by Ohsfeldt and Schneider appear to go well beyond the standardized life expectancy comparison that Mark Perry (Carpe Diem) and Greg have emphasized. I for one would love to study the details of their research more closely. But for now, let me rephrase Greg’s query as follows:
Given our much we Americans spend on health care compared with citizens of other countries, it is amazing that we don’t live longer.
Back to School on Exchange Rates
Menzie Chinn has done us all a service with his review of recent exchange rate theory, which I also skimmed in this. I was particularly intrigued by his reference to Frydman and Goldberg’s “Imperfect Knowledge Economics” approach. I read their article but not their book, and at the risk of thereby embarrassing myself offer these thoughts.
1. F&G are certainly right that a single model should not be expected to explain xrate movements over long periods of time because the market determinants are changing. This fits to a Kuhnian view: there are periods of “normal” trading, where movements respond predictably to economic news, and paradigm shifts—discontinuities in trading behavior.
2. PPP is a weak attractor at best. This is because the vast majority of transactions in international markets concern stocks, not flows. Forex markets are more like stamp or coin markets than markets in toothpaste, but PPP is based on the toothpaste template. Self-fulfilling prophecies can persist until the effects of currency misalignment are so disruptive that macro events force a correction; arbitrage doesn’t regulate. Any intermediate xrate would appear to be a statistical attractor due to mean reversion; is there any evidence that PPP outperforms other values in that respect?
3. F&G frame their argument in terms of forecasting, which on a practical level is certainly the test. The larger question, however, is whether their approach, or any of the alternatives, is consistent with the role assigned to xrates in micro models of international trade. This was the issue I raised in Challenge. The general answer, I still think, is that they don’t. F&G in particular present a view that, in theory, cannot be reconciled with strict comparative advantage. If a shifting bundle of macro fundamentals determine xrates, and if their weights change from one period to the next, how then can international prices be relied on to settle at levels that balance trade at the margin?
F&G end with the habitual sop toward trade orthodoxy, continuing the Hayekian tradition of deep insight into the process of markets combined with an inability or unwillingness to see that the normative view of markets has been eviscerated.
1. F&G are certainly right that a single model should not be expected to explain xrate movements over long periods of time because the market determinants are changing. This fits to a Kuhnian view: there are periods of “normal” trading, where movements respond predictably to economic news, and paradigm shifts—discontinuities in trading behavior.
2. PPP is a weak attractor at best. This is because the vast majority of transactions in international markets concern stocks, not flows. Forex markets are more like stamp or coin markets than markets in toothpaste, but PPP is based on the toothpaste template. Self-fulfilling prophecies can persist until the effects of currency misalignment are so disruptive that macro events force a correction; arbitrage doesn’t regulate. Any intermediate xrate would appear to be a statistical attractor due to mean reversion; is there any evidence that PPP outperforms other values in that respect?
3. F&G frame their argument in terms of forecasting, which on a practical level is certainly the test. The larger question, however, is whether their approach, or any of the alternatives, is consistent with the role assigned to xrates in micro models of international trade. This was the issue I raised in Challenge. The general answer, I still think, is that they don’t. F&G in particular present a view that, in theory, cannot be reconciled with strict comparative advantage. If a shifting bundle of macro fundamentals determine xrates, and if their weights change from one period to the next, how then can international prices be relied on to settle at levels that balance trade at the margin?
F&G end with the habitual sop toward trade orthodoxy, continuing the Hayekian tradition of deep insight into the process of markets combined with an inability or unwillingness to see that the normative view of markets has been eviscerated.
Oh...My....God: Business and the Bard
Today's Times Business section has an article called "Lessons in Shakespeare, From Stage to Boardroom" that I recommend heartily: one of the funniest things I've read in ages - albeit unintentionally so. A few gems follow under the fold:
Remember Ken Adelman ( one of founders, if I'm not mistaken, of that pack of jackals we've since come to know and love as the neo-CONS) : he and his wife, Carol, "have been dressing managers in Elizabethan costumes since the 1990's. Senior executives have been increasingly joining the classes and re-enacting the speech in which Henry V urges his 'band of brothers' to fight to the death."
Then we have Stephen Coleman, of Shakespeare & Company, "who said he noticed the chief executives in a recent audience grow pale as he played the role of Hamlet confronted by the ghost of his father. 'The ghost demands, if you love me, you will avenge my murder.' The CEO's told him, Mr Coleman said, 'This is the dilemma we face: what is our responsibility to shareholders, to employees, to clients.'" Say what? You can't make this stuff up. Finally we have one James Fugitte, CEO of Wind Energy Corporation, who finds inspiration in Falstaff: "It's a Falstaffian world. When I began my career, there was a scarcity of capital. Now there's an abundance of capital. Falstaff, he added, c'est moi." Oh. Fellas, make the friggin' widgets and leave Shakespeare out of it.
On second thought, this isn't funny: this is terrifying. Where is S. J. Perelman whne you need him?
Remember Ken Adelman ( one of founders, if I'm not mistaken, of that pack of jackals we've since come to know and love as the neo-CONS) : he and his wife, Carol, "have been dressing managers in Elizabethan costumes since the 1990's. Senior executives have been increasingly joining the classes and re-enacting the speech in which Henry V urges his 'band of brothers' to fight to the death."
Then we have Stephen Coleman, of Shakespeare & Company, "who said he noticed the chief executives in a recent audience grow pale as he played the role of Hamlet confronted by the ghost of his father. 'The ghost demands, if you love me, you will avenge my murder.' The CEO's told him, Mr Coleman said, 'This is the dilemma we face: what is our responsibility to shareholders, to employees, to clients.'" Say what? You can't make this stuff up. Finally we have one James Fugitte, CEO of Wind Energy Corporation, who finds inspiration in Falstaff: "It's a Falstaffian world. When I began my career, there was a scarcity of capital. Now there's an abundance of capital. Falstaff, he added, c'est moi." Oh. Fellas, make the friggin' widgets and leave Shakespeare out of it.
On second thought, this isn't funny: this is terrifying. Where is S. J. Perelman whne you need him?
Friday, November 9, 2007
Revised Introduction: The Invisible Handcuffs
I very much appreciated the comments from my first posting of the introduction. Please indulge me for posting another version. I have changed it radically, especially after the first paragaphs. Any more comments would be appreciated:
The Invisible Handcuffs of Capitalism:
How Market Control Undermines the Economy by Stunting Workers
Setting the Stage
The Invisible Handcuffs makes the case that the modern economy has matured to the point where markets do not and cannot harness anything near the full productive potential of society; and even more seriously, that markets significantly undermine economic performance. Even though purely monetary incentives may appear to work effectively when one takes a narrow view of their operation, from a larger perspective, the invisible hand turns out to be akin to invisible handcuffs for the economy, as well as for society as a whole.
Other books address the cultural, social, and ethical shortcomings of markets. But The Invisible Handcuffs is unique because it will emphasize the way that markets affect people in their lives as workers in contrast to the usual perspective that judges an economy by how well it serves people as consumers.
Certainly, the current U.S. economy falls short on a maddening array of counts. Here is the most powerful economy in the world, yet it seems powerless to meet the most pressing needs of society. The list of pervasive problems includes excessive poverty, inadequate health care, environmental damage, pervasive toxins, just to name a few. Although the United States policymakers pay insufficient attention to such problems in order to nurture the market, the relative economic strength of its economy still seems to be eroding.
The contradictory nature of the U.S. economy raises a host of relatively obvious consumer oriented questions: Surely, an economy with a communication system that would have been unimaginable only a few years earlier should be able to foster a sense of community or at least create a satisfying culture. Why has a widening circle of poverty begun to engulf more and more people, even after the pace of technological change began to accelerate in the late twentieth century?
Although the majority of the population may have access to considerable material goods, the current economic system fails miserably in creating a satisfying quality of life. For example, social scientists have found that happiness in the United States has not increased since the 1950s, despite enormous economic growth (Layard 2005, p. 29).
This book will argue that the producer oriented perspective suggests promising answers to such problems. For example, a major cause of the lack of satisfaction is an inattention to the quality of people's working lives. Most of all, The Invisible Handcuffs emphasizes that even though the rationale of the market system is to create an efficient economy, market control undermines the economy by stunting workers and ignoring their potential.
The stakes are far higher than just the ability to supply consumers with more commodities the purported purpose of the economy. At a time when the world faces difficult threats, such as global warming and scarcity of vital materials including water and petroleum society cannot afford to waste a resource as valuable as human potential. In this sense, the importance of looking at the economy from the perspective of workers becomes undeniable.
Overview
The first chapter begins with the theological defense of markets, by people as far apart in time and in stature as Edmund Burke and George W. Bush. According to such people market relations ensure not only efficiency, but higher qualities, such as freedom and justice. Questioning markets become akin to blasphemy. The Invisible Handcuffs suggests that a more appropriate theology of markets might come from Greek mythology in particular, the legend of the sadistic Procrustus, whose story is introduced in this chapter.
The second chapter introduces the subject of labor, both direct discipline in the workplace and macroeconomic discipline by creating unemployment, what Alan Greenspan referred to as the traumatization of labor. Ironically, policy makers pretend that all other objectives whether higher wages, better working conditions, environmental protections, or the quality of life must give way to the creation of jobs, at the same time as the maintenance of unemployment is necessary to sustain labor discipline. The two concluding sections of the chapter offer quantitative estimates of some of the human and economic costs of labor discipline and a brief discussion of the path that led economists to adopt the narrow perspective that makes them uncritical of the present form of labor discipline.
The third chapter turns to the motives for why economic theory pays no attention to working conditions. Instead, work becomes nothing more than the absence of leisure. In addition, relations between workers disappear from consideration in economic theory. Perhaps, the greatest defect of all is the reduction of workers into a factor of production, comparable to coal or steel.
Even when economists treat workers' skills, they do so by conceptualizing abilities as "human capital." This perspective is especially destructive because it blocks economists (and those whose vision is shaped by economists) from seeing people as anything more than a commodity.
The fourth chapter discusses what policy based on the narrow market perspective means for everyday life, including the amount of time that jobs consume as well as the extension of controls on people's behavior outside of the workplace. At the same time, these controls interfere with people's opportunity to improve their own capacities.
The fifth chapter briefly extends the subjects treated earlier to the international economy.
The sixth chapter puts the subject in historical perspective by looking back at the economic perspective bequeathed by Adam Smith. The chapter emphasizes Smith as a harsh disciplinarian. It shows how Smith eliminated any discussion of modern industry in order to allow him to offer a vision of freedom and liberty.
Smith realized that the harmonious society he advocated depended upon a prior coercion of labor to accept the discipline of the workplace. At that time, violent measures were often required to leave people with no option but to accept the new conditions of wage labor. Even after people became corralled into wage labor, Smith realized that controls had to go deeper into people's lives, including state regulation of religion. In short, for all his positive rhetoric about freedom, Smith's concern was to control people in order to make them obedient workers.
The seventh chapter analyzes the consequences of Smith's work. It describes how later economists simplified Smith's writings and removed its uncomfortable ideological implications. The result was an effective, but unrealistic, propagandistic shell.
The eighth chapter looks at the concept of the Gross Domestic Product, a seemingly straightforward measure of the success of an economy. The chapter reviews the evolution of this highly political concept, showing how, just like with Adam Smith's theory, the Gross Domestic Product focused on convenient matters that put the market in the best possible light.
The chapter ends by contrasting the Gross Domestic Product with the results of a recent field of "happiness studies," in which social scientists, including economists, recognize the disconnect between the Gross Domestic Product and a satisfying quality of life.
Chapter 9 surveys some of the innumerable ways in which capitalism even fails in its narrowly conceived objective of increasing the Gross Domestic Product. In keeping with the theme of this book, this chapter only looks at ways in which the control of labor is self defeating. For example, unwieldy bureaucracies driven by purely financial motives are incapable of efficiently organizing and inspiring people.
These shortcomings fall into two classes. In the first one, efforts to control labor are wasteful, even though they seem necessary given the present capitalist system. The more interesting second class emphasizes the way that the present this organization of production stunts workers potential.
The final chapter offers some hints about the future possibilities of people working together to create a better life.
The Invisible Handcuffs of Capitalism:
How Market Control Undermines the Economy by Stunting Workers
Setting the Stage
The Invisible Handcuffs makes the case that the modern economy has matured to the point where markets do not and cannot harness anything near the full productive potential of society; and even more seriously, that markets significantly undermine economic performance. Even though purely monetary incentives may appear to work effectively when one takes a narrow view of their operation, from a larger perspective, the invisible hand turns out to be akin to invisible handcuffs for the economy, as well as for society as a whole.
Other books address the cultural, social, and ethical shortcomings of markets. But The Invisible Handcuffs is unique because it will emphasize the way that markets affect people in their lives as workers in contrast to the usual perspective that judges an economy by how well it serves people as consumers.
Certainly, the current U.S. economy falls short on a maddening array of counts. Here is the most powerful economy in the world, yet it seems powerless to meet the most pressing needs of society. The list of pervasive problems includes excessive poverty, inadequate health care, environmental damage, pervasive toxins, just to name a few. Although the United States policymakers pay insufficient attention to such problems in order to nurture the market, the relative economic strength of its economy still seems to be eroding.
The contradictory nature of the U.S. economy raises a host of relatively obvious consumer oriented questions: Surely, an economy with a communication system that would have been unimaginable only a few years earlier should be able to foster a sense of community or at least create a satisfying culture. Why has a widening circle of poverty begun to engulf more and more people, even after the pace of technological change began to accelerate in the late twentieth century?
Although the majority of the population may have access to considerable material goods, the current economic system fails miserably in creating a satisfying quality of life. For example, social scientists have found that happiness in the United States has not increased since the 1950s, despite enormous economic growth (Layard 2005, p. 29).
This book will argue that the producer oriented perspective suggests promising answers to such problems. For example, a major cause of the lack of satisfaction is an inattention to the quality of people's working lives. Most of all, The Invisible Handcuffs emphasizes that even though the rationale of the market system is to create an efficient economy, market control undermines the economy by stunting workers and ignoring their potential.
The stakes are far higher than just the ability to supply consumers with more commodities the purported purpose of the economy. At a time when the world faces difficult threats, such as global warming and scarcity of vital materials including water and petroleum society cannot afford to waste a resource as valuable as human potential. In this sense, the importance of looking at the economy from the perspective of workers becomes undeniable.
Overview
The first chapter begins with the theological defense of markets, by people as far apart in time and in stature as Edmund Burke and George W. Bush. According to such people market relations ensure not only efficiency, but higher qualities, such as freedom and justice. Questioning markets become akin to blasphemy. The Invisible Handcuffs suggests that a more appropriate theology of markets might come from Greek mythology in particular, the legend of the sadistic Procrustus, whose story is introduced in this chapter.
The second chapter introduces the subject of labor, both direct discipline in the workplace and macroeconomic discipline by creating unemployment, what Alan Greenspan referred to as the traumatization of labor. Ironically, policy makers pretend that all other objectives whether higher wages, better working conditions, environmental protections, or the quality of life must give way to the creation of jobs, at the same time as the maintenance of unemployment is necessary to sustain labor discipline. The two concluding sections of the chapter offer quantitative estimates of some of the human and economic costs of labor discipline and a brief discussion of the path that led economists to adopt the narrow perspective that makes them uncritical of the present form of labor discipline.
The third chapter turns to the motives for why economic theory pays no attention to working conditions. Instead, work becomes nothing more than the absence of leisure. In addition, relations between workers disappear from consideration in economic theory. Perhaps, the greatest defect of all is the reduction of workers into a factor of production, comparable to coal or steel.
Even when economists treat workers' skills, they do so by conceptualizing abilities as "human capital." This perspective is especially destructive because it blocks economists (and those whose vision is shaped by economists) from seeing people as anything more than a commodity.
The fourth chapter discusses what policy based on the narrow market perspective means for everyday life, including the amount of time that jobs consume as well as the extension of controls on people's behavior outside of the workplace. At the same time, these controls interfere with people's opportunity to improve their own capacities.
The fifth chapter briefly extends the subjects treated earlier to the international economy.
The sixth chapter puts the subject in historical perspective by looking back at the economic perspective bequeathed by Adam Smith. The chapter emphasizes Smith as a harsh disciplinarian. It shows how Smith eliminated any discussion of modern industry in order to allow him to offer a vision of freedom and liberty.
Smith realized that the harmonious society he advocated depended upon a prior coercion of labor to accept the discipline of the workplace. At that time, violent measures were often required to leave people with no option but to accept the new conditions of wage labor. Even after people became corralled into wage labor, Smith realized that controls had to go deeper into people's lives, including state regulation of religion. In short, for all his positive rhetoric about freedom, Smith's concern was to control people in order to make them obedient workers.
The seventh chapter analyzes the consequences of Smith's work. It describes how later economists simplified Smith's writings and removed its uncomfortable ideological implications. The result was an effective, but unrealistic, propagandistic shell.
The eighth chapter looks at the concept of the Gross Domestic Product, a seemingly straightforward measure of the success of an economy. The chapter reviews the evolution of this highly political concept, showing how, just like with Adam Smith's theory, the Gross Domestic Product focused on convenient matters that put the market in the best possible light.
The chapter ends by contrasting the Gross Domestic Product with the results of a recent field of "happiness studies," in which social scientists, including economists, recognize the disconnect between the Gross Domestic Product and a satisfying quality of life.
Chapter 9 surveys some of the innumerable ways in which capitalism even fails in its narrowly conceived objective of increasing the Gross Domestic Product. In keeping with the theme of this book, this chapter only looks at ways in which the control of labor is self defeating. For example, unwieldy bureaucracies driven by purely financial motives are incapable of efficiently organizing and inspiring people.
These shortcomings fall into two classes. In the first one, efforts to control labor are wasteful, even though they seem necessary given the present capitalist system. The more interesting second class emphasizes the way that the present this organization of production stunts workers potential.
The final chapter offers some hints about the future possibilities of people working together to create a better life.
Iran-Iraq Oil Pipeline: So much for Iraqi anti-Iran effort!
Today, http://www.iraqoilreport.com reports that groundbreaking has taken place on an oil pipeline from Iraq to Iran. Crude will be shipped there to be refined. Another pipeline is being planned to ship refined products back to Iraq. So much for Bush's effort to get the Iraqis on board with an anti-Iran war effort!
Nihilism, continued
This is the gist of what was lost from the previous post. The Friedman/Cowen story has the liberal tourists keeping the price above the equilibrium price with their do-gooding, as if they were governments imposing price supports. But they aren't governments imposing price supports. Nevertheless, the market adjusts, via seller's waiting times, so that the disequilibrium price becomes an equilibrium - given the time spent waiting for a sale, the quantity supplied will equal quantity demanded - but the resulting "equilibrium" features enormous waste.
Here is the implicit nihilism. Imagine a market like this. Trading begins at noon. At a given price, sellers and buyers converge at mid-day. If there are more sellers than buyers, then tomorrow sellers arrive earlier - and in fewer numbers, since the net price - net of the opportunity cost of the time lost waiting for the market to open- is lower. If there is still excess supply, waiting times grow, fewer sellers come. Finally we get an equilibrium with the appropriate waiting time - quantity demanded will equal quantity supplied - given the wait - and so there are no forces acting to change either waiting time or price. It's a lousy and inefficient equilibrium, but an equilibrium just the same. And nothing in the standard theory rules out such an equilibrium. Any price can be an equilibrium, with the appropriate waiting time on the part of either buyers or sellers. The textbooks implicitly imagine an auctioneer - the famous Walrasian one- who refuses to allow trade at any prices other than the unique price that gives an equilibrium with no waiting time. There is no such figure - not only does he have no clothes, he is a fiction! Anything can happen. "Market forces", with no help from the dead hand of the interfering state, needn't give us a waste-free equilibrium. All we need is a little bit of price rigidity and the endogenous adjustment of waiting times.
Here is the implicit nihilism. Imagine a market like this. Trading begins at noon. At a given price, sellers and buyers converge at mid-day. If there are more sellers than buyers, then tomorrow sellers arrive earlier - and in fewer numbers, since the net price - net of the opportunity cost of the time lost waiting for the market to open- is lower. If there is still excess supply, waiting times grow, fewer sellers come. Finally we get an equilibrium with the appropriate waiting time - quantity demanded will equal quantity supplied - given the wait - and so there are no forces acting to change either waiting time or price. It's a lousy and inefficient equilibrium, but an equilibrium just the same. And nothing in the standard theory rules out such an equilibrium. Any price can be an equilibrium, with the appropriate waiting time on the part of either buyers or sellers. The textbooks implicitly imagine an auctioneer - the famous Walrasian one- who refuses to allow trade at any prices other than the unique price that gives an equilibrium with no waiting time. There is no such figure - not only does he have no clothes, he is a fiction! Anything can happen. "Market forces", with no help from the dead hand of the interfering state, needn't give us a waste-free equilibrium. All we need is a little bit of price rigidity and the endogenous adjustment of waiting times.
Stepping In It, or the Market Nihilism of Libertarian Economics
Brad Delong reviews the glut of Freakonomics-style books here:
http://chronicle.com/temp/reprint.php?id=ldhnqhyg1grv71j1t99yfvp04t0csw1c
He likes Tyler Cowen's Discovering Your Inner Economist. He cites a passage where Cowen claims that "liberal" foreign tourists who insist on paying high prices to the poor for services don't actually help them. From what I can make out from Delong's account ( I haven't read Cowen's book), it is a rent-dissipation argument. Lots of people line up to get the high prices the tourists are paying; the difference between the price and opportunity cost at the less-than-optimal quantity of services offered becomes the opportunity cost of waiting for the "big score-" a pure deadweight loss - a cost to the sellers that is a benefit for no one. I may be putting words into Cowen's mouth from David Friedman, who has a similar argument, centered on rickshaw drivers in Hong Kong and generous Western tourists, in his Hidden order - an older book also mentioned in Delong's review. Silly liberal Do-gooders. Being altruistic is being selfish! Being selfish is being good! It's so nice when the expedient (offer the lowest price you can get away with) coincides with what is right!
But think about what's going on here. The tourists' behaviour is keeping the price above its equilibrium price - just like a government-enforced minimum wage would do. The ensuing waiting time then makes what was a disequilibrium price an equilibrium after all - but a wasteful equilibrium. The price the tourists offer just compensates the seller for his opportunity cost plus the lost time waiting for a sale. But the tourists, nota bene, are not a government! Where are the famous "market forces" here? In their eagerness to score one off liberals, Friedman and, it appears, Cowen, have exposed a dirty little secret of free-market economics, that it has nothing to say about disequilibrium. Think of a market like this: Trading begins at noon. Given a price, sellers and buyers appear at noon. If more sellers appear than buyers, then tomorrow sellers will arrive earlier than noon - but fewer sellers than yesterday since the price, net of the opportunity cost of lost time waiting, is lower than yesterday. If there are still more sellers than buyers, they arrive even earlier (but in even fewer numbers) tomorrow. We have an equilibrium when the opportunity cost of the time spent waiting for the market to open equals the difference between the price and the opportunity cost proper. Then the number of sellers equals the number of buyers and there is nothing causing the waiting time - or the price- to change. And we have big deadweight losses. And there is no dead hand of the state to pin the blame on. Any price, under these dynamics, can be an equilibrium - coupled with the appropriate waiting time for either buyers or sellers. What would rule this out? What rules it out in the textbooks is the implicit assumption of the famous Walrasian auctioneer who refuses to allow trading to take place at "false" prices - prices other than that one where quantity supplied equals quantity demanded with zero waiting time on the part of either buyers or sellers. But there is, alas, no auctioneer. Anything can happen!
http://chronicle.com/temp/reprint.php?id=ldhnqhyg1grv71j1t99yfvp04t0csw1c
He likes Tyler Cowen's Discovering Your Inner Economist. He cites a passage where Cowen claims that "liberal" foreign tourists who insist on paying high prices to the poor for services don't actually help them. From what I can make out from Delong's account ( I haven't read Cowen's book), it is a rent-dissipation argument. Lots of people line up to get the high prices the tourists are paying; the difference between the price and opportunity cost at the less-than-optimal quantity of services offered becomes the opportunity cost of waiting for the "big score-" a pure deadweight loss - a cost to the sellers that is a benefit for no one. I may be putting words into Cowen's mouth from David Friedman, who has a similar argument, centered on rickshaw drivers in Hong Kong and generous Western tourists, in his Hidden order - an older book also mentioned in Delong's review. Silly liberal Do-gooders. Being altruistic is being selfish! Being selfish is being good! It's so nice when the expedient (offer the lowest price you can get away with) coincides with what is right!
But think about what's going on here. The tourists' behaviour is keeping the price above its equilibrium price - just like a government-enforced minimum wage would do. The ensuing waiting time then makes what was a disequilibrium price an equilibrium after all - but a wasteful equilibrium. The price the tourists offer just compensates the seller for his opportunity cost plus the lost time waiting for a sale. But the tourists, nota bene, are not a government! Where are the famous "market forces" here? In their eagerness to score one off liberals, Friedman and, it appears, Cowen, have exposed a dirty little secret of free-market economics, that it has nothing to say about disequilibrium. Think of a market like this: Trading begins at noon. Given a price, sellers and buyers appear at noon. If more sellers appear than buyers, then tomorrow sellers will arrive earlier than noon - but fewer sellers than yesterday since the price, net of the opportunity cost of lost time waiting, is lower than yesterday. If there are still more sellers than buyers, they arrive even earlier (but in even fewer numbers) tomorrow. We have an equilibrium when the opportunity cost of the time spent waiting for the market to open equals the difference between the price and the opportunity cost proper. Then the number of sellers equals the number of buyers and there is nothing causing the waiting time - or the price- to change. And we have big deadweight losses. And there is no dead hand of the state to pin the blame on. Any price, under these dynamics, can be an equilibrium - coupled with the appropriate waiting time for either buyers or sellers. What would rule this out? What rules it out in the textbooks is the implicit assumption of the famous Walrasian auctioneer who refuses to allow trading to take place at "false" prices - prices other than that one where quantity supplied equals quantity demanded with zero waiting time on the part of either buyers or sellers. But there is, alas, no auctioneer. Anything can happen!
WHACK-A-MOLE 101 REVISITED
by the Sandwichman
"There’s an arcade game called Whack-a-Mole in which a plastic mole pops up and you pound its head with a mallet. The lump-of-labor fallacy is the Whack-a-Mole of arguments about jobs. As often as you slam it, it reappears somewhere else." -- Timothy Taylor
It has taken three years but the Sandwichman's rebuttal to Timothy Taylor -- originally posted to MaxSpeak in the fall of 2004 -- is now published in the September issue of the Review of Social Economy: "Why Economists Dislike a Lump of Labor".
"There’s an arcade game called Whack-a-Mole in which a plastic mole pops up and you pound its head with a mallet. The lump-of-labor fallacy is the Whack-a-Mole of arguments about jobs. As often as you slam it, it reappears somewhere else." -- Timothy Taylor
It has taken three years but the Sandwichman's rebuttal to Timothy Taylor -- originally posted to MaxSpeak in the fall of 2004 -- is now published in the September issue of the Review of Social Economy: "Why Economists Dislike a Lump of Labor".
Thursday, November 8, 2007
Very flattering review of The Confiscation of American Prosperity
Instability Inc.
The Confiscation of American Prosperity: From Right-Wing Extremism and Economic Ideology to the Next Great Depression
Michael Perelman
Palgrave Macmillan
By Seth Sandronsky
The Confiscation of American Prosperity: From Right-Wing Extremism and Economic Ideology to the Next Great Depression
Michael Perelman
Palgrave Macmillan
By Seth Sandronsky
Can a recent history of the U.S. economy read a bit like a crime story? Yes, in the hands of Michael Perelman, an author and economics professor at CSU Chico.
His new book, The Confiscation of American Prosperity, is a timely arrival this fall. The housing bubble is shrinking and harming many, and the author’s analysis puts such current affairs into a sane context. Perelman writes that the early 1970s was the end of the “Golden Age” of post-World War II prosperity. Corporate America’s rate of profits slumped in the late 1960s due to German and Japanese rivals grabbing market shares and profits. How to try and get it back? Politicians and think tanks united to weaken corporate regulation and taxation. And the two political parties targeted New Deal and Great Society policies, which protected the American people from the market economy.
What followed was a sea change for the nation’s majority. Perelman focuses on how this happened, who led the charge and to what ends.
The author details how a small but strong minority of Americans hoarded the bulk of growth from the sweat of a diverse labor force. As the nation’s gross domestic product tripled from 1970 to 2003, the “top 13,000 tax-paying households ... saw its wages and salaries increase fifteen-fold.” Meanwhile, for the bottom 99 percent of Americans, average income remained basically unchanged between 1970 ($36,008) and 2004 ($37,295). Perelman surveys a wide variety of sources, defining his and their concepts and terms. The author’s prose is jargon-free. That may startle some readers used to opaque English from economists such as Alan Greenspan, former head of the nation’s central bank.
Wednesday, November 7, 2007
Dems overcome anti-illegal immigrant frenzy in Virginia
In yesterday's election, the Democrats won back control after over a decade of the State Senate by gaining four seats, mostly in tending-Dem Northern Virginia. It was close, and the Republican effort to save themselves came to a head in Prince William County, where the local Board of Supervisors has enacted a draconian law to go after illegal immigrants, worst in the nation. This was the new Republican red meat issue, scaring people in the Tsongas race in Mass., and embarrassing Hillary Clinton in the last Dem debate. In any case, here in Virginia, in the end it did not save the bacon for the GOP. (They still hold the House of Delegates, but Dems gained about 4 seats there also.)
Tuesday, November 6, 2007
Gisele Bündchen and Exchange Rates
I don’t think anyone would question whether Gisele Bündchen is simply breathtakingly beautiful. Well it seems BBC thinks she has particular views about the value of the dollar versus the value of the Euro:
CNBC notes, however, the BBC may have gotten the story wrong:
Even if Ms. Bundchen was as bearish against the dollar as Mr. Buffet, she could let Proctor & Gamble pay her in dollars, consume what she wants in NYC, and for any funds left over – convert those into Euros in a very efficient capital market. Sure – there’d be some transaction costs but with an annual salary of $30 million per year, she’s already playing in the big leagues where transactions costs represent a very small fraction of the volume traded.
The world's richest model has reportedly reacted in her own way to the sliding value of the US dollar - by refusing to be paid in the currency. Gisele Bündchen is said to be keen to avoid the US currency because of uncertainty over its strength. The Brazilian, thought to have earned about $30m in the year to June, prefers to be paid in euros, her sister and manager told the Bloomberg news agency.
CNBC notes, however, the BBC may have gotten the story wrong:
CNBC Squawk Box producer Stephanie Landsman spoke by telephone with Anne Nelson, Bundchen's manager. Nelson tells us reports that Gisele wants to be paid in euros are "false." Nelson's take: "Some idiot in Brazil reported something just to make news." Nelson points out that Gisele lives in New York City, and thus needs U.S. dollars for her big-city lifestyle. Of course, anyone who disagrees with Warren Buffett's investment wisdom does so at their own risk. But we have to think Gisele gets enough U.S. dollars that she can absorb any potential weakness against the Euro and avoid giving the unfortunate impression that she is negative about the United States in any way.
Even if Ms. Bundchen was as bearish against the dollar as Mr. Buffet, she could let Proctor & Gamble pay her in dollars, consume what she wants in NYC, and for any funds left over – convert those into Euros in a very efficient capital market. Sure – there’d be some transaction costs but with an annual salary of $30 million per year, she’s already playing in the big leagues where transactions costs represent a very small fraction of the volume traded.
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