The Power of Economics vs. The Economics of Power

I just finished a draft of paper regarding the exclusion of the concept of power in economic theory.

Any comments will be appreciated.

http://michaelperelman.files.wordpress.com/2011/09/power.pdf

Kotlikoff’s Five Ideas to Boost the Economy

Laurence Kotlikoff has put forth 5 proposals to get us closer to full employment. Proposal #4 – “get prices and wages unstuck” – has already been rightfully criticized and his fifth proposal is fiscal contraction, which is even more absurd. But what about his first 3 proposals?

Proposal #1 is “stop paying interest on bank reserves”, which Kotlikoff argues would encourage banks to make more loans. But that is exactly the hope of any expansionary move by the Federal Reserve. The problem is not so much that the banks don’t wish to make new loans but firms are as interested in taking out loans when aggregate demand is so depressed.

Proposal #3 is in the same vein as its goal is more investment demand – “compel corporate America to invest”:

They are waiting for the economy to improve before they invest, but it won’t improve until they all do so. The president can help resolve this problem by assembling in one room the CEOs of the largest 1,000 U.S. companies and getting them to collectively pledge to double their U.S. investment over the next three years. If they all invested simultaneously, they would immediately create much of the demand needed to make their investments worthwhile.

Presidential jawboning as an inducement to increase investment? By the same logic – passing the President’s bill to increase public infrastructure investment would generate a similar self sustaining recovery. But then Kotlikoff rejects fiscal stimulus with this incredibly silly claim:

The president’s new-yet-familiar jobs bill entails more spending and more tax cuts, neither of which is affordable absent new revenue.

Which leaves us with his proposal #2:

President Barack Obama could call on the workers and shareholders in these companies to voluntarily hire 7.5 percent more workers and do everything possible to maintain the higher level of employment going forward. How, one might ask, would all the new workers be paid? Existing employees could agree to a 7.5 percent wage cut in exchange for immediately vested shares of their companies’ stock of equal value.

I leave it to others to discuss how his creative proposal might work.

Opera, Einstein, and Why Economics Is Not a Real Science

Congratulations (maybe) to the Opera (Oscillation Project with Emulsion-Tracking Apparatus) team for their (possibly) revolutionary finding that a few neutrinos were able to defy Einstein and travel from Geneva to central Italy faster than the speed of light.  If true, it will require a revision of basic physics that borders on science fiction.

I heard through the grapevine, however, that some senior scientists with this project did not give permission for their names to be on the article setting out the results, including one of the individuals who helped conceive and organize Opera from the start.  They are passing up the opportunity to be connected to a historic breakthrough in their field.  Why?

The answer is that, with such an extraordinary anomaly, there is a risk of error.  Mismeasuring the distance within the apparatus by 12 meters, for instance, would reverse the results.  Above all—and this is why economists should be interested—a physicist would suffer a huge, possibly irreparable blow to his or her career by being attached to a claim that is later found to be wrong.  Type I error (false positives) are taken very seriously.  The logic of this extreme asymmetry, so much weight on Type I, so much less on Type II, is explained in this earlier EconoSpeak post.

It’s rather different in economics, isn’t it?  If someone shows you have made a false claim in a published article, you can write a gracious response thanking the critic and go on. More likely, you will double down and spin out more studies defending your original argument.  Either way, if you’re wrong it’s no big deal.  Lots of the top economists in the professional firmament have been wrong at one time or another (or even all the time), and it hasn’t set them back.  Meanwhile, physics evolves over time toward ever-closer approximation of the real universe, while economics accumulates error along with insight.

UPDATE: Note that these neutrinos made their trip through the rugged terrain of the Alps and Apennines at an "impossible" speed.  I think they should be checked for doping, and if they turn up positive they should be disqualified.

Does John Cornyn Not Realize that Capital Gains is a Form of Income?

I guess private citizens don’t have the right to express their own views on tax policy without the Republican Party demanding to see their tax return:

Republicans on Capitol Hill have found a new hidden document conspiracy to push to now that President Obama's long-form birth certificate is a matter of public record. Warren Buffett, they demand, show us the tax return!

But what cracks me up is this statement from Senator Cornyn:

I know that Mr. Buffett's not likely to release his tax records but I'll bet what it'll show you is that most of what he earns is from capital gains, which is taxed at a 15 percent tax rate rather than deriving it as income [for] which he'd pay a much higher tax rate," Cornyn said. "If he doesn't derive ordinary income and if all of his, what he puts in his pocket is based on capital gains, I think that would be an important information.

Capital gains allow one to either consume more or enjoy an increase in one’s wealth. So it is income – but income taxed at a much lower rate than other characterizations of income. Which is the point that people that Mr. Buffett are making. If someone does not understand this simple point – then why are they qualified to serve in the Senate?

Dems to SuperCommittee – First Do No Harm (to employment)

Brian Beutler reports on a good idea from 11 Democratic Senators:

The idea here is to require CBO to analyze the Super Committee bill's impact on employment -- not just budget deficits. The goal is for members to know, and for journalists to report, not just that the legislation reduces deficits by some trillions of dollars, but that it might cost a huge number of jobs. If that's the story, then they'll be more amenable to considering direct job creation measures or at the very least finding deficit savings that don't lead directly to furloughs and layoffs.

For many of us – the output gap and the resulting effect on employment prospects should be priority #1 with the need to close the budget gap in the long-run being priority #2. I suspect the folks at CBO would be most happy to report the estimated impact on employment as well as the deficit from any proposed bill. And it should be mandatory for journalists to accurately portray these findings.

Be Careful with Those “Sorry You Lost Your Job” Cards

I suppose it’s nice that Hallmark now has a line of cards you can send someone who’s been laid off.  A word of caution, however: don’t send one to a coworker unless you know for sure they’ve been told.

The Paradox Of Pay Toilets Revisited

I have blogged previously on this obscure and odd topic, but staying in Europe for extended periods as I am doing now (based in Florence, Italy for the semester, but traveling around giving lectures) always reminds me of it. Plus, I have new observations on some of the supposed explanations.

So, the paradox is that in the supposedly more market capitalist US, there simply are no pay toilets, at least not overtly, although there were some a half century ago, usually with slot for coins on the doors of them, not somebody sitting at the entrance taking money for you even to get into one. However, in supposedly more socialist Europe, at least some of its countries, certainly including France, Italy, and Russia, one finds this latter in many public toilets: someone sitting at the entrance taking money before you can enter at all. Why?

One explanation I have heard is that it is an employment preserving device. However, increasingly I see those people being replaced by slots for coins in the newer ones at the entrances.

Another is that it is necessary to pay for their upkeep. Well, I was just in one the other day in Siena that had the woman out front taking money, but it was in terrible shape without even seats on the toilets. Yes, I grant that the newer ones are usually in good shape. But, this does not answer why we do not do this in the US. Indeed, in Virginia in the last few years the rest areas on the interstates were closed for awhile due to funding shortages (since reopened), but not a single solitary soul suggested publicly that maybe the resolution was to make people pay for using them.

In short, I do not see either the employment or paying for their upkeep arguments as holding much water. This remains basically a mystery to me. Somehow in the US we think releaving oneself for free is a divine right, even as audiences laugh and cheer at the idea of people dying who do not pay for health insurance, while in much of Europe it is taken for granted that one must pay to releave oneself, even as they have universal health insurance coverage.

BTW, I do recognize that de facto private toilets are often for pay in that businesses will make them available only to paying customers. But one finds this in about equal proportions in both the US and most of Europe as near as I can tell.

A Simple but Possibly Correct Theory of the Capitalist Financial Process

I rarely bother to read grand theories of economics (or politics or history) that fit into a blog post or even a short essay.  How likely is it that someone has figured out a huge idea that generations of smart, knowledgeable people have all missed?

So you can stop reading here.  In my defense, I recognize that most of the elements of what I’m about to say have been worked over rather thoroughly, but I’m not aware that anyone has put them together in quite this way.

A Little Basic Economics Would Go a Long Way for Paul Kasriel and Joe Nocera

Nocera has a wide-eyed piece in this morning’s New York Times that touts a presentation by Paul Kasriel, an economist with Northern Trust.  Kasriel has convinced Nocera (with “the force of revelation”) that there is a single economic problem hobbling us, unwillingness of banks to supply credit, and a single solution, more (and more and more) bond purchases by the Fed.

It’s painful to say this, but Kasriel seems to not understand that a reduction in lending could be driven either by shortage of demand or shortage of supply (or both).  He simply assumes it comes from the supply side.  With nonfinancial corporations sitting on something like $2 trillion in liquid reserves, could it just possibly be the case that demand is deficient?  An oversight as fundamental as this is not just a random blip; it is the result of not thinking through the economic logic of a supposed argument.

I could burrow down into some of the details (yes, there is a credit constraint on small business, but this represents an intensification of a long-running problem in our dual economy; no, the collapsed ratio of credit creation to monetary base is not due to so much less of the numerator but so much more of the denominator, the old “pushing on a string”), but I’ll save your time and mine.

Social Security v. the Republican Alternative

M.S. writing for The Economist notes:

Up until about 2007, the goal of such attacks was clear: conservatives wanted to replace it with a Chilean-style defined-contribution plan that would be invested in securities. Within its own assumptions, that programme did at least make sense; but since the financial crisis, and with average returns from Wall Street now sharply negative over an entire decade, both the logic and the political support for any such programme have evaporated.

This “goal” would represent two fundamental changes: (a) investing surplus funds in risky securities as opposed to government bonds; and (b) converting a defined benefits program to a defined contribution program. Part (a) was supposed to increase the expected return at the cost of bearing stock market risk – which as M.S. notes has witnessed average returns being well below expected returns of late. The Galveston Plan, however, implemented part (b) but kept surplus funds in a portfolio with lower risk and lower expected return. But not everyone was necessarily better off under this Galveston Plan.

Advocate vs Advocate For

After venting on such peripheral matters as the fate of the global economy and the relationship between power and policy, I think it’s time to get to the really important stuff, like the painful misuse of “advocate for”.

It sounds terrible and it drives me crazy.

Once, long ago, we didn’t have this problem.  No one ever advocated for anything, they just advocated.  It was simple, clear and correct.  Then, out of the world of social services, where “advocate” is a job title, came the practice of advocating for.  People started by advocating for the homeless or low-income youth, which is fine, and ended up advocating for changes in tax policy or agency budget increases, which is not fine at all.

It comes down to the difference between means and ends.  You advocate for an end.  You advocate a means to that end.  Are activists of such limited moral imagination that they think a higher tax bracket here or more regulations there are ends in themselves?  It sure sounds this way.  If your true goals are economic fairness and public health, however, you will advocate for them, and not for specific policies to bring them about.

The fight for maintaining linguistic distinctions is ultimately about maintaining mental distinctions.  We need those.

Eurozone 101

This morning’s blogpile brought wise words from Jeffry Frieden about the Eurozone crisis.  If you haven’t read it, follow this link straightaway.  Even if you think you already know the whole story, his clarity and ability to get to the heart of the matter is a breath of fresh air.  Naturally, I like his Keynesian take on the credit relationship:

For two years, Europe’s governments have been grappling with how to address this continuing debt crisis. But most of the public discussions have been highly misleading. In Northern Europe, and especially Germany, the tone has been one of outraged indignation. This high moral tone is misplaced. Certainly many Southern European banks and households, and the Greek government, borrowed irresponsibly; but German and other Northern European banks and investors lent just as irresponsibly. It’s not clear that there’s any real ethical distance between irresponsible borrowers and irresponsible lenders.

The Hole at the Heart of the Left

This from a review by Beverly Gage of Michael Kazin’s book, American Dreamers: How the Left Changed a Nation:

The left is in crisis because its animating vision — of a world transformed through socialism — has all but collapsed. Kazin is right to note that not all leftists identified as Socialists or Communists, and not all have considered economics the central site of contest. But socialism was always the big idea that explained how issues like racial inequality, gender oppression and factory wages all fit together.

Exactly right.  Socialism also played a crucial political role by mobilizing its followers into a counterforce against the dominant class.  In its absence we are left with appeals to reason and morality: all well and good, but not enough if you think that power of the political-economic variety largely determines how the world works.

After the Double Dip

Even though most industrialized economies are groaning under stagnant growth and high unemployment, elite opinion has it that the really important thing is to reduce fiscal deficits.  This is orthodoxy in the US and gospel in Europe.  Largely because of procyclical policy we are staring at a possible second dip into the Great Recession.

Among the many nasty outcomes of such a re-dip, one is sure to be a further deterioration in public debt-GDP ratios.  Everything conspires to this: tax revenues will fall, transfers to the swelling ranks of the poor and unemployed will rise, and the denominator—GDP itself—will shrink.  “Responsible fiscal policy” will be a victim of the downturn, and nothing can be done about it.

So let’s look ahead.  Suppose we end up in this second dip, and government debt undergoes a new round of expansion: what then?  If current debt-to-GDP ratios are “unsustainable”, what will the guardians of fiscal responsibility say about the even higher levels on the horizon?  Is this another sort of doom loop, a downward spiral of economic collapse and self-defeating austerity?

I don’t have a crystal ball, but a little ground-level political economy is the next best thing.  I predict that all concern about fiscal rectitude will be thrown out the window as soon as the next downturn takes hold.  A sudden consensus will emerge everywhere that governments must borrow to the hilt in order to bail out investors and set a floor under effective demand.  In fact, today’s austerian orthodoxy will vanish from public memory, as if it never existed.

After this it becomes a bit more difficult to forecast.  As with all models, the political economy model (the dominant class of wealth-holders spans the feasible political space) ends up extrapolating from the past.  It tells us that, after private portfolios are again rebalanced toward publicly issued assets in the crisis, concern will shift back to the solvency of sovereigns, and austerity will once more be on the table.  But this assumes that learning does not take place.

And it also assumes that, in the next panic, there is no force, internal to the financial elite or outside them, that ejects them from the driver’s seat.

Environmental Regulation and Jobs, Again

Over at Econbrowser, James Hamilton argues that environmental regulation may be a job-killer after all.  There are two themes: the first is that US trade is weighted toward natural resources, and regulation is raising costs and reducing capacity in these tradables, and the second is that, in recessionary times, jobs lost due to regulations are not regained elsewhere.  I think he overstates his points, but he clarifies important issues that tend to get muddied in economic debates.