KLUDGE

There once was a very wealthy man whose children loved to play with toys. One day he came home only to see that his house was on fire.

"Fire! Fire!" the man shouted, as loud as he could. But the children didn't hear and went on playing with their toys.

"I have some wonderful new toys for you!" he called. And out of the house they ran and were saved.

Can TPP Be Saved And Is It Worth It?

Of those who post here and probably most of our readers, I remain more attached to the general argument for free trade, which is the cause that the TP, now doing badly in the US Senate after the failure to stop debate on fast track authority for it.  However, as Dean Baker has been pointing out from Day One, it is unclear if it is really a free trade agreement at all.  I see three big problems with it, and one possible thing that might both improve it and help it pass.

The one that would help improve it would be add some serious assistance for laid off workers.  It may be that the GOPsters simply will not support this, but this would probably get some Dems in the Senate to change their votes, and it is the right thing to do.  I have been looking at the international data on Active Labor Management Policies, and the US simply has near zero.   We are way behind all other high income nations on this.  Those Nordic nations are very open, far more than we are, totally dependent on exports, and so very free trade, and they spend a lot on this, with Denmark spending 2.3% of its GDP on it.  Sweden used  to be tops, but they are down to 1.1%, making Denmark the "new Sweden."  OTOH, the US is barely above zero, and if anything the TTP is supposed to cut the little we have.  What is with this?  This is really a no brainer.  Help those who might lose out, and maybe it might be worth it.

Maybe.  The next big problem with it is all the secrecy.  We do  not know what is in this, and the president and its supporters have gone out of their way to keep it secret.  This is just insane.  Senators can only look at it in a sealed room with no aides.  What are they hiding?  This just makes me lose pretty much all enthusiasm I might have for this.  What were (are) they thinking.  Just plain nuts.  (BTW, I have read that Vietnam would be the big gaining country, which I have no problem with, but given all this secrecy, how is anybody supposed to know?)

Finally, there is the whole intellectual property rights part.  Again, details are missing, but most reports suggest that enforcing US intellectual property rights abroad is a very big part of this, maybe the biggest, a point Dean B. has emphasized.  But it is probably the case that we have overdone this already in the US.  We are already paying way too much for drugs, and why on earth should Disney own the rights to Winnie the Pooh nearly a century after the books were written.  We are supposed to support the imposition of this sort of rent seeking nonsense on the rest of the world too?  My enthusiasm is nowhere at all on this part, quite the opposite.  Dump this stuff.

Again, at the bottom line, given that we do not even know which industries in the US are  most likely to be hurt by all those Vietnamese imports, it would behoove the supporters to do something to minimize the damage to those who might be injurned, the laid off workers.  Put some decent support in their for those, and this thing might be worth passing, might.

Barkley Rosser

The Power of Framing and the Framing of Power

In their review of framing analysis literature, Vliegenthart and van Zoonen pointed out that "'frames' are part of a collective struggle over meaning..." thus "an individualist approach to political sense-making does not do justice to the interactive and social nature of interpreting politics." That is to say, neither the construction nor the reception of frames takes place in a vacuum..

So called libertarian paternalism ("NUDGE-ing") is oblivious to this social context of power and collective struggle over meaning. It is all about molding individual choices and meanings to better align with presumed (by the noodges?) deliberative preferences.

There is a history of framing discourse that goes back -- explicitly using the word -- at least to Gregory Bateson's "A theory of play and fantasy" (1955) and Erving Goffman's Frame Analysis: An Essay of the Organization of Experience (1974). The concept of gestalt, articulated by Wertheim in 1912, has obvious salience too, as is acknowledged by Kahneman and Tversky. Amos Tversky was married to Barbara Tversky, a cognitive psychologist who specialized in visual perception, no stranger to gestalt theory.

In a 1993 article, which has subsequently become "the standard reference in frame research," Robert Entman defined framing in the following terms:

To frame is to select some aspects of a perceived reality and make them more salient in a communicating context, in such a way as to promote a particular problem definition, causal interpretation, moral evaluation and/or treatment recommendation Framing essentially involves selection and salience. To frame is to select some aspects of a perceived reality and make them more salient in a communicating text, in such a way as to promote a particular problem definition, causal interpretation, moral evaluation, and/or treatment recommendation for the item described.

... 

Frames, then,

• define problems -- determine what a causal agent is doing with what costs and benefits, usually measured in terms of common cultural values; 
• diagnose causes -- identify the forces creating the problem; 
• make moral judgments -- evaluate causal agents and their effects; and
• suggest remedies -- offer and justify treatments for the problems and predict their likely effects.

... 

Frames highlight some bits of information about an item that is the subject of a communication, thereby elevating them in salience. The word salience itself needs to be defined: It means making :i piece of information more noticeable, meaningful, or memorable to audiences.

Vliegenthart and van Zoonen fault Entman's definition for assuming an intentionality to the framing while at the same time ignoring the contingency of a frame's power. Earlier frame studies had emphasized that frames were "the result of interactions and conflicts between collective and individual social and media actors," Here, again, is an instance of "reification":

Reifications are simultaneously an accurate portrait of existing social reality and a false consciousness, serving the existing framework of values and interests. Psychological reifications clothe existing social arrangements in terms of basic and inevitable characteristics of individual psychological functioning; this inadvertently authenticates the status quo, but now in a disguised psychological costume. What has been mediated by a sociohistorical process — the forms and contents of human consciousness and of individual psychological experience — is treated as though it were an "in-itself," a reality independent of these very origins. 

Frames do indeed define problems, diagnose causes, make moral judgments and suggest remedies but they don't do so universally or at the discretion of the policy architect. The problem with libertarian paternalism is not that Sunstein and Thaler are evil-doers or that the nudge machinery might fall into the wrong hands. The problem is that the approach subsumes collective action problems under a illusory rubric of individual preferences mediated by a sort of deliberative Maxwell's demon -- a nudgineer of human choices. Social, political or economic power is nowhere to be seen in this rather flat drama. The nudgineer --or noodge -- is a benevolent technocrat, first cousin to the Walrasian auctioneer and most likely indistinguishable in countenance (or should I go with the spell checker's suggestion, incontinence?).

Guy Standing sees "social policy, which has become directive and moralistic... driven by libertarian paternalism, or behavioural economics" as a threat to freedom:

The drift to behavioural nudging gives discretionary and arbitrary power to bureaucrats, commercial surrogates and ‘experts’ lurking behind politicians. Social policy is becoming part panopticon, with dataveillance supplementing surveillance, and part therapy, manipulating people’s minds, with cognitive behavioural therapy a favoured tool of utilitarians. 

To arrest this drift to social engineering, the Voice of those subject to the steering should be inside the institutions responsible for social policy. This means more than putting token ‘community leaders’ on boards. It must be a collective democratic voice. At present, we see the opposite, with privatisation and commercialisation of social policy. We need social policy democracy, before it is too late.

One might again paraphrase Marx to observe that "framing is collective or it is nothing."

Sandwichman Denies Fraternizing with the Ghost of Joe McCarthy

premise 1: X criticizes Y
premise 2: Z criticizes Y
conclusion: X is "in league with" Z

Let's be more specific:

Sandwichman likes Harold Rosenberg's critique of party Marxism.
Joe McCarthy was also a critic of Marxism.
Therefore Sandwichman is "in league with" McCarthyism.

By the same token, of course, anyone who objected to Sandwichman's tacit alliance with McCarthy could be accused of being "in league with" that other Joe.

It's all so complex.

Obama and Shell: Betting on Climate Policy Failure

Bill McKibben nails the main point in his op-ed in today’s New York Times: a sane response to the climate crisis will require that most existing oil, coal and gas now under the ground, stay there.  So what’s the sense in expediting more fossil fuel development projects in vulnerable environments?

But there’s a specifically economic aspect to this madness.  Shell is proposing to spend billions of dollars to bring additional arctic oil to global markets.  If there’s a spill, and happy talk from the company doesn't make that prospect any less likely, it will cost them billions more.  As a financial proposition, this makes sense only in a world that goes on, year after year, failing to act on climate change.  If the policy paralysis were to end, and if tough limits were placed on the amount of oil and other fossil fuel resources that can be extracted, the high-cost operations, like those in deep water or extreme locations like off Alaska’s north coast, would have to be abandoned and the investments in them written off.  (The same argument applies to the Alberta oil sands and the Keystone pipeline.)

In other words, Shell is betting billions that we will fry ourselves before we take effective action to limit greenhouse gases.  Obama is saying, based on our record, it looks like a good bet.  Go for it.

One of the arguments I've been trying to make is that the single most valuable thing economists can contribute to the climate debate is careful analysis of how we can reduce the interim disruption serious policy will have on our living standards.  The most obvious observation is that we will suffer less loss of wealth if we don’t sink costly investments into long term projects that will be valueless when policy finally kicks in.

Never Enough, Greek Style

So, today we read in various news outlets that Greece has made its latest debt payments necessary for continuing not to default.  But the news stories, such as that in the NY Times, give them little credit for this and instead emphasize how much deep doo doo they are in and how they must kowtow to their creditors on a variety of things that the creditors are demanding they do.  Otherwise, as has accompanied every other payment and adjustment this year, we are told doom will appear come early June or late June or when the moon is in the Seventh House or when Varoufakis takes off his shirt in public and mkes naughty remarks about other finance ministers in Europe.

So, what are these demands that the mass media reporters pass on from the European VSPs as so important that Greece must kowtow and do them Or Else?  Details are not given, but they apparently involve pension cuts and labor market "reforms."  On the former, without doubt, cutting pensions reduces budgetary layouts, thus reducing fiscal pressures in the short run (although by leading to reduced spending by pensioneers down the road, this contributes to an economy-depressing austerity down the road that may make it harder to lower that debt/GDP ratio).  The details of the labor market reforms are not reported on, but let me say here that these do not have a direct effect on the budgetary pressure, and only may have some longer run effect, although, frankly, the scholarly studies on this topic are not nearly as clearcut as those demanding these changes think they are.

Something completely not mentioned in any of these stories that I have seen is that Greece has already engaged in exactly these kinds of policies, notably in 2012 in the wake of the crisis set off by the Greek government admitting that it had been misrepresenting the size of its budget deficit for many years.  The pension cuts exceeded $4 billion, and there were changes in labor market policies.  These were followed by substantial declines in Greek GDP, leading to this round of further demands of More of the Same, Never Enough.  The argument is that Greece is paying a higher percent of its GDP as pensions than any other euro member, but without noting that what it pays per pensioneer is well below the eurozone average.

Another thing not noted in the current stories is that part of Greece's ability to make this payment was not just due to scrabbling together funds from local governments and other odd and unsustainable sources as noted in the stories, but also due to an actual (and unpredicted by the troika VSPs) increase in tax collections.  Granted, these are still not enough to get through that June/July round without some further restructurings, but that is going to go on anyway and as always.  But no credit is given, even though the Greek government, including that awful tieless Varoufakis predicted they would.  This just goes to show how right those other fin ministers were to get annoyed by all his "lecturing."

This is clearly an ongoing negotiation.  Varoufakis and Tsirpas have said that indeed they will engage in further pension cuts and labor market changes, although whatever they are proposing apparently is Not Enough for the troika gang.  Recognizing that such changes are not what they were elected to do, Tsirpas has suggested a possible referendum on all this, if it comes to it.  German Finance Minister Wolfgang Schauble, who seems to have been most annoyed by the tieless and lecturing Varoufakis, has said, fine, let the Greek people decide if they are willing to do what "is necesary."

Let us be clear.  None of this is "necessary."  It is posturing as part of a negotiation where in fact the creditor side of things will also have to bend on their demands.  If they do not, they will regret the outcome, and not admitting that, while not good game playing, is not something that Very Serious People should pretend about.

Barkley Rosser

Libertarian Paternalism and the Pantomime of the Rational Actor

Harold Rosenberg prefaced his 1949 essay, "The Pathos of the Proletariat" with a quote from Marx, "the working class is either revolutionary or it is nothing." "The hero of history," Rosenberg explained, "was to be a social class, a special kind of collective person."

But this collective person, the Proletariat, is "without human motivation, whether individual or collective." In Rosenberg's view, Marx never explained how an inert personification was supposed to transform itself into the heroic subject of history. When volume III of Capital finally got around to addressing class, the mute reply to Marx's question, "What constitutes a class?" was the epitaph, HERE THE MANUSCRIPT ENDS.

Rosenberg described Marx's conception of revolutionary subjectivity as "un-Marxian" in that it derived neither from political economy nor materialism but from dramatic formulas and imaginative metaphors:

The self-consciousness that converts the class from economic personification into historical actor is not an intellectual comprehension of class interests and relations but is part of the revolutionary act itself. The class engages itself in the drama of history by its passionate and willful poetry of the event [italics in original].

But this modern poetry can have nothing to do with the ecstatic, hallucinatory poetry of the past. The bourgeois French revolutionaries recognized their identity through a re-enactment of ancient Rome. The working class does not have the luxury of such indulgences. They are scarcely motivated to act "until the situation has been created which makes all turning back impossible." That situation constitutes a "growing mass of misery" and worsening crisis. But even that is not enough.Such misery could as easily precipitate escape into fantasy.

To sustain the revolutionary struggle, the conditions themselves must be joined by a remarkable collective act of will, a "readiness to sacrifice itself for the moment alone":

The proletariat must be prepared to die in order to exist and for nothing else. Such appears to be the impasse of truly secular (without ideologies, as well as without myths) historical creation.

The trouble is, until the revolution happens it's all just a hypothesis. And the longer the absence of evidence supporting that hypothesis endures, the more likely it is to be read as evidence against. Here is where things get messy.

Marx... refuses to regard proletarian action as an if of creative hazard. For him the revolution is an historical certainty. From this translation of the dramatic into the "scientific" arise the essential ambiguities of Marxism. ...though he thinks of the revolution as a tragedy, he does not behold its incidents as tragic, and his work lacks the pathetic tonality appropriate to its notion of the workers transforming themselves through constant risk of their lives. The rationalism of Marx's prose... wins against his beloved Shakespeare and Aeschylus. An optimism with respect to the historical drama as a whole subdues the anguish of the hero's striving against utter defeat through which the happy resolution is to be reached. Even in his description of the Commune and its executioners, the peak of his revolutionary eloquence, it is the foes of the revolution that he most vividly evokes.... For him the Commune is a single lost battle in a war that can have but one conclusion. Thus Marx himself prepares the shallow trust of Marxism in rationalistic formulas.

According to Rosenberg, the dilemma for Marxism is that it must either admit the radical contingency of a revolutionary class consciousness, "or it must reduce the situation to a given number of external elements, definable in advance, and thus become identical with what is known as 'vulgar materialism' or 'mechanical Marxism.'" There is no "happy medium" of a foreseeable autonomy."The failure of the situation to give rise to revolutionary consciousness leads Marx and Marxists to a second type of effort to guarantee the revolution: through politics and propaganda."

Politics and propaganda -- or to use more modern terminology, nudge the proletariat into actions aligned with its revealed revolutionary destiny. The comparison I am seeking to draw is with the segue from rational choice theory to behavioral economics. To paraphrase Marx, Homo economicus is either rational or it is nothing. The failure of humans to comply with the standards of rationality prescribed by rational choice theory informs policies "to motivate behaviour change among those who, on reflection, would have liked to have made different choices for themselves." 

From "Nudging, Shoving, and Budging: Behavioural Economic-Informed Policy," Adam Oliver, Public Administration, early view published online 2015:

Thaler and Sunstein use the term libertarian to modify the word paternalism in order to signify that their approach is liberty-preserving. In nudge policy, there should be no burden on those who choose their pre-existing behaviours rationally and thus wish to continue with those behaviours. Therefore, the approach does not allow regulation or bans. The approach is only paternalistic in the sense of wanting to motivate behaviour change among those who, on reflection, would have liked to have made different choices for themselves. That is, a nudge is meant to bring the instantaneous decisions of those who think that their non-reflective actions are irrational into better alignment with their deliberative preferences, and therefore relies on the assumption that deliberative preference is necessarily rational. Thus, the focus is on reducing negative internalities – the longer term harms that people impose on themselves through their own ill-considered automatic decisions.

Libertarian paternalism rules out using significant financial incentives or overt persuasion to change behaviour. The essence of the approach is that behavioural economic insights, such as those summarized above, can and should inform the design of what Thaler and Sunstein call the choice architecture, or in other words, the context or the environment, so that more people make automatic decisions that, on reflection, they would like to make and yet, due to bounds on their rationality and human error, ordinarily fail to do so. 

The concept of libertarian paternalism and its application in the form of nudges has attracted the attention of governments in a number of countries, but none more so than that of the United Kingdom, where a right-of-centre coalition government lauded the apparent promise of the approach to offer non-regulatory inexpensive demand-side solutions to some of the most profound problems in contemporary societies. ‘This new approach’, according to a 2010 government report, ‘represents an important part of the Coalition Government’s commitment to reducing regulatory burdens on business and society, and achieving its policy goals as cheaply and effectively as possible’, Soon after being appointed Prime Minister in 2010, David Cameron established the Behavioural Insights Team (BIT), colloquially known as the Nudge Unit. Whether or not this moniker is appropriate requires an assessment of whether the interventions that were advocated as nudges by the BIT comply with the original requirements of libertarian paternalism laid out by Thaler and Sunstein.

Oliver maintains the term "nudge" has become a popular generic label for "a whole spectrum of policies, some of which are informed by weak evidence bases and others of which are divorced from the original requirements of libertarian paternalism." Some of these approaches Oliver describes as "coercive paternalism" and "behavioral regulation." The parallel with Rosenberg's critique of Marxism suggests we have been here before. It wasn't pretty.

For Engels in 1893 the continuity of the revolutionary movement no longer depends upon the reflexes of a proletariat that has been forced into revolt; it is no longer subject to the intermittences of the heart and mind of the working class.

In order that the masses may understand what is to be done, long, persistent work is required, and it is just this work which we are now pursuing, and with a success which drives the enemy to despair. 

Instead of learning in action, the working class is put to school by the Party; it marches with its will in the secure custody of the leadership. Marching has indeed replaced revolutionary action, the movement which was to have been the source itself of the "alteration" of the workers.

Rosenberg referred to this substitution of party leadership for class spontaneity a "demonic displacement of the ego of the historical collectivity":

As a liberating program Marxism founders on the subjectivity of the proletariat. So soon as it declares itself, rather than their common situation, to be the inspiration of men's revolutionary unity and ardor - how else can it offer itself simultaneously to the French working class and to non-industrial French colonials? - Marxism becomes an ideology competing with others. When fascism asserted the revolutionary working class to be an invention of Marxism, it was but echoing the Marxist parties themselves. If the class as actor is a physical extension of the Party, fascism was justified in claiming that a magical contest in creating mass-egos could decide which collectivities are to exist and dominate history. Moreover, it proved that heroic pantomime, symbolism, ritual, bribes, appeals to the past, could overwhelm Marxist class consciousness. What choice was there for the workers between the fascist costume drama and a socialism that urged them to regard their own working clothes as a costume? In Germany and Italy the working class was driven off the stage of history by the defeat of the Party - in Russia it was driven off by its victory.

Similarly, as an exercise in "libertarian paternalism" behavioral economics founders on its takeover of rationality on behalf of the misbehaving humans. It reveals itself as yet another ideology competing with other ideologies. Instead of misbehaving, we will get marching in time to deliberative preferences. Instead of marching nudged by paternalistic libertarians, we will get marching led more forcefully by parties more aesthetically inclined to "heroic pantomime, symbolism, ritual, bribes, appeals to the past..."

The Long Arm of the Cold War

One thing I didn't mention earlier (but you can find in the literature) is that a great deal of rational choice and behavioral economics research was sponsored by the Defense Department. RAND Corporation, ARPA, Office of Naval Research...

You might call the military-industrial complex an "invisible hand" guiding vendors to the marketplace of methodological individualist ideas. Paid for with YOUR tax dollars -- or at least by siphoning off part of the increment in national income stimulated by funding research on rational choice. When I posted these thoughts to Economist's View, anne responded with the following column from 2011 by John McCumber:

The Failure of Rational Choice PhilosophyBy JOHN MCCUMBER
June 19, 2011 

According to Hegel, history is idea-driven. According to almost everyone else, this is foolish. What can “idea driven” even mean when measured against the passion and anguish of a place like Libya?

But Hegel had his reasons. Ideas for him are public, rather than in our heads, and serve to coordinate behavior. They are, in short, pragmatically meaningful words. To say that history is “idea driven” is to say that, like all cooperation, nation building requires a common basic vocabulary.

Rational choice philosophy promulgates a clear and compelling moral imperative: increase your wealth and power!

One prominent component of America’s basic vocabulary is ”individualism.” Our society accords unique rights and freedoms to individuals, and we are so proud of these that we recurrently seek to install them in other countries. But individualism, the desire to control one’s own life, has many variants. Tocqueville viewed it as selfishness and suspected it, while Emerson and Whitman viewed it as the moment-by-moment expression of one’s unique self and loved it. 

After World War II, a third variant gained momentum in America. It defined individualism as the making of choices so as to maximize one’s preferences. This differed from “selfish individualism” in that the preferences were not specified: they could be altruistic as well as selfish. It differed from “expressive individualism” in having general algorithms by which choices were made. These made it rational.

This form of individualism did not arise by chance. Alex Abella’s “Soldiers of Reason” (2008) and S. M. Amadae’s “Rationalizing Capitalist Democracy” (2003) trace it to the RAND Corporation, the hyperinfluential Santa Monica, Calif., think tank, where it was born in 1951 as “rational choice theory.” Rational choice theory’s mathematical account of individual choice, originally formulated in terms of voting behavior, made it a point-for-point antidote to the collectivist dialectics of Marxism; and since, in the view of many cold warriors, Marxism was philosophically ascendant worldwide, such an antidote was sorely needed. Functionaries at RAND quickly expanded the theory from a tool of social analysis into a set of universal doctrines that we may call “rational choice philosophy.” Governmental seminars and fellowships spread it to universities across the country, aided by the fact that any alternative to it would by definition be collectivist. During the early Cold War, that was not exactly a good thing to be.

The overall operation was wildly successful. Once established in universities, rational choice philosophy moved smoothly on the backs of their pupils into the “real world” of business and government (aided in the crossing, to be sure, by the novels of another Rand—Ayn). Today, governments and businesses across the globe simply assume that social reality is merely a set of individuals freely making rational choices. Wars have been and are still being fought to bring such freedom to Koreans, Vietnamese, Iraqis, Grenadians, and now Libyans, with more nations surely to come....

Great Moments in Presidential Logic (TPP Edition)

".....what I tell them is, ‘You know what? If you’re opposed to these smart, progressive trade deals, then that means you must be satisfied with the status quo.’”

Barack Obama, Portland, May 8, 2015, as quoted in the New York Times.

China’s Dark Anti-Matter?

I earlier noted an update to the old US “dark matter” parable:

Tim cites the latest from the BEA which indicates that the U.S. holds $24.6 trillion in foreign assets while foreigners hold $31.6 trillion in our assets. So we have net debtor position equal $7 trillion at these recorded values. BEA’s Table 4.1 - Foreign Transactions in the National Income and Product Accounts – shows that we received $0.8 trillion in income on our holdings of foreign assets while foreigners receive only $0.6 trillion. What to make of this fact that the return on our holdings of foreign assets is 3.25% while foreigners receive only a 1.9% return? … If we updated their Dark Matter story using a 2% government bond rate representing current market conditions, the value of our holdings of foreign assets would be $40 trillion whereas the value of the U.S. assets held by foreigners would be only $10 trillion. In other words, they might argue that this is $17 trillion in Dark Matter.

There are other explanations for this data including transfer pricing manipulation but let’s turn to China:

China’s global assets grew 14% last year to $5.94 trillion, driven largely by accumulation of reserves and outward FDI. Foreign assets in China expanded 18.5% to $3.97 trillion as economic growth and currency expectations pulled in foreign investment. China’s unfavorable balance sheet structure continues to worsen: Despite its hugely positive net foreign asset position of $1.97 trillion, China paid $60 billion of net interest to the world last year, due to lower rates of return on its overseas assets … despite this hugely positive NFA position, China remains a net payer of investment income to the world. In 2013, China received income payments of $168 billion on its assets overseas, but paid $228 billion in interest to foreigners

So China’s holding of foreign assets are $4 trillion but receive a 2.8% return while foreign holdings of Chinese assets are $2 trillion but receive a 5.7% return. Is this Chinese dark anti-matter? Discounting these income flows by 3%, their assets are worth only $5.6 trillion while their liabilities are worth $7.6 trillion turning a $2 trillion credit position on book to a $2 trillion debtor position in terms of market value. Joshua Aizenman, Yothin Jinjarak, Huanhuan Zheng note:

According to the State Administration of Foreign Exchange (SAFE), China’s external financial assets were about $6 trillion at the end of 2013, of which two-thirds were international reserves ($3.9 trillion), the outbound direct investment about 10%, securities investment about 4%, and other investment about 20%. The country’s external liability position was $4 trillion, out of which FDI in China was $2.35 trillion (60% of the total liability). The investment in securities and other aspects took up 10% and 30%, respectively.

Their discussion was far ranging but within are transfer pricing implications worth further discussion.

FUDGE: False consciousness, rational choice, analytical Marxism and behavioral economics

One of the advantages of growing older is that you can remember intellectual fashions that have gone out of style but whose outlines are clearly discernible in the latest craze.

A long, long, long time ago -- the late 1970s and early 1980s -- critical theory, the Frankfurt School and Georg Lukacs was all the rage. An English translation of Lukacs's History and Class Consciousness was published in 1971 and reached the pinnacle of its celebrity by the end of the decade. Some people even read it (disclaimer: I did). The notion of false consciousness seemed to leftist university students to explain why The Proletariat hadn't brought about The Revolution.

I simplify, of course.

Then along came Analytical Marxism to bore and confound the academic left and Post-Modernism to entertain it (and bore and confound everyone else). Workers didn't suffer from false consciousness, after all. It was in their best interest to support capitalism and anyway they constructed a multitude of their own identities.

When workers pursue strategies that lead to a compromise, the state does what appears necessary to reproduce capitalism because this is the choice of the workers as well as the capitalists. The organization of the state as an institution and the policies pursued by this institution constitute an expression of a specific class compromise. ("The Structure of Class Conflict in Democratic Capitalist Societies," A. Przeworski and M. Wallerstein, 1982 [corrected reference])

Look, over there! It's Madonna, subverting the cultural codes!

Meanwhile, at around the same time false consciousness was been hounded out of respectable discourse, it was being revealed that "the most basic rules of the theory [of rational choice] are commonly violated by decision makers." Tversky and Kahneman argued that:

the deviations of actual behavior from the normative model are too widespread to be ignored, too systematic to be dismissed as random error, and too fundamental to be accommodated by relaxing the normative system.

So workers allegedly rationally calculate that capitalism is good for them even though they are probably incapable of consistently choosing between two identical pairs of options. How does this work, again?

I'm going to take a short cut here and quote extensively from a 1981 article, "Cognitive Psychology and Ideology," by Edward Sampson. In part, I'm doing this to save me the trouble of summarizing the argument. But also I want to emphasize the not inconsiderable detail that this argument was "already out there" and has been for 34 years.

It is clear from the treatment that Lukacs gives to reification, and from the subsequent critical analyses which Gergen and I have offered, that psychological reification tends to serve primarily ideological functions.Reifications are simultaneously an accurate portrait of existing social reality and a false consciousness, serving the existing framework of values and interests. Psychological reifications clothe existing social arrangements in terms of basic and inevitable characteristics of individual psychological functioning; this inadvertently authenticates the status quo, but now in a disguised psychological costume. What has been mediated by a sociohistorical process—the forms and contents of human consciousness and of individual psychological experience—is treated as though it were an "in-itself," a reality independent of these very origins. 

... 

[Tversky and Kahneman] clearly adopt the forms of statistical and scientific analysis as the correct standard of judgment against which they measure the judgmental principles followed by lay people and even by professional clinicians and counselors. Tversky and Kahneman view most adults' intuitive predictions to be in error when compared with the true standard of excellence, statistical and scientific thought itself. They refer to these error-ridden everyday forms as "illusions" and express surprise that after a lifetime of experience most people still fail to "experience such fundamental statistical rules as regression toward the mean, or the effect of sample size on sampling variability," and so continue to make error-filled predictions.

Ain't Misbehaving?: further thoughts on the Kahneman-Tversky experiments

I've been reading through some previous Sandwichman posts with the aim of extending the essay outlined in yesterday's Decisions... Decisions. When I was writing that, I resisted the temptation to call attention to the seemingly irrelevant detail that the hypothetical disease was described as "Asian." What is that about? Does originating in Asia give the disease some exotic elan? Or does the superfluous detail lend it an air of realism? Could this faux verisimilitude distract from the very unreal condition of having allegedly definitely-known probabilities of the results of various treatments?

I am wondering if perhaps many of the subjects in the experiment disregarded the literal but incongruous descriptions of the outcome probabilities and substituted more intuitive -- but also more ambiguous -- interpretations. Under these re-interpretations, the two sets of choices would not be equivalent. I am thinking here of the kind of "perceptual reorganization" investigated by Jerome Bruner and Leo Postman in their classic 1949 study, "On the perception of incongruity: a paradigm." Their assumption -- that "most people come to depend upon a certain constancy in their environment and, save under special conditions, attempt to ward off variations from this state of affairs" -- would seem to have salience in the Kahneman-Tversky experiments.

Is it not the case that the behavioral economists are looking at the case in terms of individuals failing to attain some presumed standard of rationality attributed to a so-called rational agent. This concedes too much "observation, fixed by reason" to so-called rational choice scheme. What if we view these anomalous outcomes from the perspective that the normative model is a magical pseudo-scientific one,"hedged round by observances, mysteries and taboos"?

Reprising material from an earlier post, rather than merely linking to it: In Magic, Science and Religion, anthropologist Bronisław Malinowski discussed the interplay between the systematic rational knowledge and the magical pseudo-science of the Trobriand Islanders, observing that "even with all their systematic knowledge, methodically applied, they are still at the mercy of powerful and incalculable tides, sudden gales during the monsoon season and unknown reefs."

It is in dealing with these formidable uncertainties that magic comes into play. "Science," Malinowski explained, "is founded on the conviction that experience, effort, and reason are valid; magic on the belief that hope cannot fail nor desire deceive." In contrast to the reliance of science on "observation, fixed by reason," the domain of magical pseudo-science is "hedged round by observances, mysteries and taboos."

The "mainstream/heterodox" distinction in economics is otiose (and odious). The demarcation that matters is between observation of economic regularities, which is limited, and the proliferation and persistence of economic pseudo-science in the face of "powerful and incalculable tides" and "sudden gales." "Theorists have a natural urge toward precise and determinate theorems or laws," John Maurice Clark wrote 65 years ago. "But..." he continued:

"...the facts of economic life show little consideration for this urge, and remain, to a large extent, perversely and persistently indeterminate. This is the skeleton in the closet of economic theory. What is a proper attitude for a would-be science, forced to deal with such refractory material? One thing economists do is to construct hypothetical simplified 'models.' These can be used in two ways: as an approach to reality or as an escape from it. My problem is how to promote the first kind of use and set up safeguards against the second." 

Would Clark's attitude toward this "skeleton in the closet of economic theory" make him "heterodox"? How has the bureaucratically-imposed conventional cost-benefit analysis and the Kaldor-Hicks criterion that justifies it achieved its canonical status? How about the notion of shirking in New Keynesian models of sticky wages? The ritual invocation of the lump-of-labor fallacy claim? Ceteris paribus? General equilibrium?

The urge for formulas in economic analysis is strong, especially from official "deciders" who yearn for guidelines, criteria or rules-of-thumb that will immunize their decisions from criticism for favoritism, arbitrariness or bias (all the more convenient if favoritism and bias are non-transparently built-in to the formula!). In an article also published in 1950, Paul Samuelson wrote:

"Improved measurement of national income has been one of the outstanding features of recent progress in economics. But the theoretical interpretation of such aggregate data has been sadly neglected, so that we hardly know how to define real income even in simple cases where statistical data are perfect and where problems of capital formation and government expenditure do not arise."

In his article, Samuelson warned that "the last word on the subject will not be uttered for a long time." Not that anyone would still be listening when that proverbial "last word" (or even the next word) was uttered. Hedged in by observances of bureaucratic standards and procedures, mysteries of discounted net present value and taboos on interpersonal comparisons of utilities, the aggregate data of national income came to ritually stand in for its own interpretation.

Usage and custom have shifted the burden of proof from the believers in economic magic to the skeptics. Disproving the magic is impossible. As Malinowski explained:

First of all, magic is surrounded by strict conditions: exact remembrance of a spell, unimpeachable performance of the rite, unswerving adhesion to the taboos and observances which shackle the magician. If any one of these is neglected, failure of magic follows. And then, even if magic be done in the most perfect manner, its effects can be equally well undone: for against every magic there can be also counter-magic [ceteris paribus]. 

The 70th Anniversary Of The End Of World War II In Europe

May 9 is the 70th anniversary of victory over Hitler's Germany in the European part of World War II, which would continue for several more months in Asia.  Roughly 30 "world leaders" will attend the ceremonies in Red Square, with some of those "nations" essentially fakes whose existence is there because Vladimir Putin says they exist.  This particularly disreputable group includes "South Ossetia," "Abkhazia," "Serbian Republic of Bosnia-Herzoginia" and some others of this ilk.

Who will actually be attending this important event remains a bit up in the air, even as some are certain.  Among those apparently likely to be there are the following (somebody, not necessarily either the Head of State or Executive Leader of the Nation): Belarus, Armenia, Azerbaijan, China, Mongolia, Kazakhstan, Turkmenistan, Kygyzstan, Tajikistan, Cuba. Venezuela, Brazil, South Africa, India, Bosnia-Herzoginia, Serbia, Montenegro, Macedonia, Cyprus, and some others I apologize for failing to remember right now.

Obviously some of the allies of the USSR in WW II are not attending, obviously because of Putin's recent violations of international agreements and law.  These include the US, Canada, UK, and France, as well as somewhat questionable Italy.  The latter has been a matter of much of huffing and puffing on TASS and other Russian media, with them clearly hoping especially for France to appear, even though of course like the USSR they for serious parts of the war were in alliance with Hitler's Germany.  In any case, Hollande has made it clear that he will not attend the ceremonies.

Besides France, the other nation regarding which there has been a lot of huffing and puffing who appears in the end not to be appearing is North Korea's Kim Jong-Un.  Russian media says this has to do with "internal matters," and I am sure this is true. Hey, this year was officially according to the North Koreans to be "the year of Russia."  That Kim is not making this his first official foreign appearance is a big deal and a big embarrassment for both Russia and the DPRK. 

I note that I do not  have the exact list of who will be there and who willl not, but the very fact that there has been essentially zero coverage of this in the US and elsewhere is an important matter.  This is a big deal. An important part of it is that the entire EU is apparently not attending due to their protests against Russian conduct in Ukraine, with it clear that Putin will try to justify his unjustifiable conduct in that country on May 9, which will be utterly disgusting and beneath contempt, a profound insult to the dead of the former Soviet Union who heroically sacrificed their millions of lives to save the world from the horrible Nazi menace.

Despite the completely unacceptable conduct of Vladimir Putin, I personally think that the US government should overlook this and send an appropriate official to celebrate this world historical event that is far beyond the current nonsense. The obvious person to send is Vice President Joe Biden.  The US screwed up by not sending Biden for the Charlie Hebdo ceremony in Paris.  So, send him to Moscow for this  supremely important commemoration, even as the US President should not attend, given Putin's violation of the Budapest Accord of 1994, when Russia agreed to respect the territorial integrity of Ukraine in return for Ukraine handing over its nuclear weapons.

Update:  Probably just about everybody reading this knows this, but, just in case any of you do not, a major reason to especially respect the Russian celebration of this anniversary is that they (or more precisely, the former Soviet Union) suffered far more deaths than any other nation in the conflict, somewhere between 20 and 30 million, as well as being the nation primarily responsible for defeating Hitler's Germany, with the genearlly accepted turning point being the bloodiest battle in world history, Stalingrad, and the effective death knell being the Battle of Kursk, the largest tank battle in history.  The citizens of both Moscow and what was then called Leningrad but is back to bing St. Petersburg, suffered severe sieges, with the German troops on the edges of those cities, with many hundreds of thousands dying of starvation and other privations in the latter city in particular.  Given all this, it really is too bad that Putin's bad behavior and clear intention to use this celebration to support his current bad behavior are leading to many nations that were allies of the USSR in the war to boycott this fundamentally worthy celebration.

J. Barkley Rosser, Jr.
http://cob.jmu.edu/rosserjb

Decisions... Decisions

Note: I've been thinking of the following connections for the past week and started writing this morning. Just as I had gotten to the section on economic growth toward the end (How to Stop a Leak), I noticed that Mark Thoma had posted commentary by Brad DeLong about a New York Times review of Misbehaving, the soon-to-be-published book on behavioral economics by Richard Thaler. What follows below is not a response to Thaler's book because I haven't read it but perhaps my notes may be read as a "presponse."

...there is no Art that hath bin more canker'd in her Principles, more soil'd, and slubber'd with aphorisming pedantry, then the art of Policy... -- John Milton, Of Reformation

In their classic 1981 article, "The Framing of Decisions and the Psychology of Choice," Daniel Kahneman and Amos Tversky described an experiment in which subjects were presented with the following problem; a roughly equal number of subjects (152, 155) were offered either a choice between Programs A and B or between Programs C and D:

Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimates of the consequences of the programs are as follows:

If Program A is adopted, 200 people will be saved. 

If Program B is adopted, there is 1/3 probability that 600 people will be saved, and 2/3 probability that no people will be saved. 

If Program C is adopted 400 people will die. 

If Program D is adopted there is 1/3 probability that nobody will die, and 2/3 probability that 600 people will die.

72 percent of the subjects given a choice between A and B chose A, while 78 percent of those given the choice between C and D chose D -- even though the outcome of Program C was identical to that of Program A and the outcome of D was identical to B. These anomalous findings are replicated in various similar experiments. Over the years the authors persistently pointed out the implications for rational choice theory of these experimental behavioral findings.

One thing that struck me right away about Kahneman and Tversky's result was its similarity to the experimental results of Booth-Sweeney and Sterman regarding perceptions of stocks and flows. It turns out that Sterman has extensively cited Kahneman and Tversky's findings in his own work, so the affinity is not coincidental.

Booth-Sweeney and Sterman presented a more difficult problem to their experimental subjects but it was solvable without advanced math or any specialized scientific knowledge using the analogy of the stock/flow relationship of a bathtub. For atmospheric concentrations of CO2 to stabilize, emissions must equal net removal. The images below summarize the task and a typical subject response.

In the typical response, pictured above, future CO2 emissions are correlated with the concentration scenario rather than falling to equal net removal. 84% of the 212 graduate student participants drew similarly erroneous graphs.

Many years ago I stumbled across Daniel Ellsberg's PhD dissertation, Risk Ambiguity and Decision, and his 1961 article, "Risk, Ambiguity and the Savage Axioms". Sure enough, Ellsberg's contribution to decision theory is extensively cited in Kahneman and Tversky's work. Kahneman wrote a blurb for the 2001 publication of Ellsberg's PhD dissertation, calling it "a major landmark in the history of decision research."

Imagine an urn known to contain 30 red balls and 60 black and yellow balls, the latter in unknown proportion. (Alternatively, imagine that a sample of two drawn from the 60 black and yellow.balls has resulted in one black and one yellow.) One ball is to be drawn at random from the urn; the following actions are considered:

Action I is "a bet on red," II is "a bet on black." Which do you prefer?  

Now consider the following two actions, under the same circumstances: 

Action III is a "bet on red or yellow"; IV is a "bet on black or yellow."  

Which of these do you prefer? Take your time!

Ellsberg didn't restrict his experimental trials to graduate students. His subjects included G. Debreu, R. Schlaiffer, P. Samuelson J. Marschak, N. Dalkey, H. Raiffa and  L. J. Savage. 

A very frequent pattern of response [including at least 3 of the above] is: action I preferred to II, and IV preferred to III. Less frequent is: II preferred to I, and III preferred to IV. Both of these, of course, violate the Sure-thing Principle, which requires the ordering of I to II to be preserved in III and IV (since the two pairs differ only in their third column, constant for each pair).'

Violating the sure-thing principle when drawing coloured balls out of an urn may not seem to have quite the consequences of miscalculating the GHG emissions reduction necessary to stabilize atmospheric concentrations. Appearances can be deceiving. One of the implications Ellsberg drew from his research was that there may be a bias toward "status quo" or "present behavior" and against innovation, even to the extent of self-deceptively "ignoring some treacherous possibilities" in "familiar ongoing patterns of activity." This, of course, was one of the central findings of the "Pentagon Papers" study of the history of decision-making in the Vietnam War.

As Pete Seeger sang. "we we're waist deep in the big muddy and the big fool said to push on."

A further link in the chain is revealed in David Ellerman's criticism that the Kaldor-Hicks compensation criterion is based on a same yardstick fallacy. Don't let the eponymous label confound you, the K-H criterion is deeply embedded  -- by administrative fiat -- in standard cost-benefit analysis. The idea behind it is that a Pareto improvement -- making some people better off without making anyone worse off -- is nigh on impossible. But the compensation criterion allows for at least a "potential" Pareto improvement.

Ellerman has argued that the supposed distinction between "efficiency" and "equity" is an illusory one imposed by the choice of numéraire (or standard commodity). Change the unit in which efficiency is evaluated and the two categories change sides:

Consider a transfer of an apple from Mary to John and a transfer of $0.75 from John to Mary. Use Kaldor-Hicks to evaluate each part as a "project" with the other part as the "compensation". Using money as the numeraire and the apple transfer as the "project", we see under the assumptions that the transfer of the apple increases social wealth measured in dollars so that is the recommendation based on "efficiency", and the payment of the "compensation" of $0.75 is a matter of "equity" of concern to politician, theologians, and philosophers but not to the professional economist. Now reverse the numeraire taking apples as the numeraire and the transfer of the $0.75 as the "project". Then the transfer of the apple (= "compensation") does not change social wealth = size of the apple pie, but the transfer of the $0.75 increases the size of the social apple pie by 3/4 of an apple so it is the transfer of the $0.75 that is recommended on efficiency grounds by hard-nosed economists while the transfer of the apple is left to politicians, theologians, and the like as a matter of "equity."

The citation linkage tying the numéraire illusion to the previous three anomalies is indirect, but unambiguous. Ellerman's same yardstick metaphor came from Paul Samuelson's 1974 article, "Complementarity: An Essay on The 40th Anniversary of the Hicks-Allen Revolution in Demand Theory." In a 1977 article on the "St. Petersburg Paradoxes," Samuelson didn't use the same yardstick metaphor but he did recycle a counter-argument about the concavity of the utility function that accompanied it.

Compare Samuelson's 1974 account:

The dollar I stand to win in a fair gamble is worth less to me than the dollar I stand to lose. So you have to offer me better than even odds if I'm to agree to gamble and thereby maximize my expected value of (or first moment of) utility.

...to his 1977 version:

"The dollar I win is not as worthwhile to me as the dollar I lose, and that is why I will shun a bet at 'fair' odds (and, of course, at 'unfair' odds)." This is how the Peters and Pauls of the world explain to themselves why they behave as they do, make risk-averse decisions as if to maximize in stochastic situations the expected value of a strictly concave ["utility"] function of money wealth rather than to maximize the expected value of money wealth itself.

The "ordinary" St. Petersburg Paradox referred to in Samuelson's 1977 article acquired its label because Daniel Bernoulli, who "solved" it was professor of mathematics at the University of St. Petersburg. Bernoulli's solution was the basis of the "normative model" from which Kahneman and Tversky found deviations "too widespread to be ignored, too systematic to be dismissed as random error, and too fundamental to be accommodated by relaxing the normative system." Here is Bernoulli's argument:

"...the determination of the value of an item must not be based on its price, but rather on the utility it yields. The price of the item is dependent only on the thing itself and is equal for everyone; the utility, however, is dependent on the particular circumstances of the person making the estimate. Thus there is no doubt that a gain of one thousand ducats is more significant to a pauper than to a rich man though both gain the same amount..."

Another way of stating the same-yardstick fallacy, would be to point out that Kaldor-Hicks the standard cost-benefit analysis assumes -- contrary to Bernoulli! -- that the marginal utility of income is a constant, This may seem subtle or even pedantic, but here we have not mere individuals but an institutionalized policy decision rule violating the rationality norm. It is worth pointing out here that the reversibility of the standard cost-benefit efficiency/equity distinction parallels the reversibility of program choice due to framing bias found by Kahneman and Tversky.

How to Stop a Leak

To be plainer, sir, how to solder, how to stop a leak, how to keep the floating carcass of a crazy and diseased monarchy or state, betwixt wind and water, swimming still upon her own dead lees, that now is the deep design of a politician! -- Milton

What about so-called "economic growth"? One common objection to the dominant "fetish of national income statistics" has been that an increase in GDP is not the same as an improvement in national welfare. Robert Kennedy eloquently objected that the national product "counts special locks for our doors and the jails for the people who break them" but "does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials."

Although compelling, one needn't rely on the quantity/quality distinction to question the coherence of the growth paradigm. What "grows" in GDP growth is a flow. Income could just as easily be labeled inflow. As Roefie Hueting has stressed, this is an asymmetric accounting in that it doesn't account for the associated outflows from natural or social wealth -- commonly referred to as social costs. Think again of the bathtub analogy. The inflow, or annual income, is only one element in the equation. The level of total wealth only rises to the extent that inflow exceeds outflow. This dependency was explicitly ignored by the archetypical "growthman," Leon Keyserling, in his formative "siphoning off" contribution to Cold War military-industrial complex double-speak in NSC-68:

...if a dynamic expansion of the economy were achieved, the necessary build-up could be accomplished without a decrease in the national standard of living because the required resources could be obtained by siphoning off a part of the annual increment in the gross national product.

Take note of the implied equivalence between expansion of the economy, (non) decrease in national standard of living and annual increment of gross national product. The economy and standard of living are stocks; the gross national income is a flow. "Siphoning off" is also a flow; it is in fact an outflow that offsets the increment to the inflow that it presumably stimulates. Coincidentally, in a 1950 article, "Evaluation of Real National Income," Paul Samuelson had explained that including "such wasteful output as war goods" in the calculation of national income served only to indicate the potential for producing "useful things... in better times." NSC-68 contrived counting wasteful output as a direct contribution to maintaining the standard of living.

There's that word, "potential" again. NSC-68 was contemporary with the Bureau of the Budget adoption of the standard cost-benefit analysis. So a potential for producing useful things was joined to a potential for compensating the losers. Whoop-de-doo. Never mind the bathtubs; here's the siphons!

Ike (aka 1952 presidential candidate Dwight D. Eisenhower) was dubious about Keyserling's growth prescription. So was conservative columnist Henry Hazlitt. But their principal objection -- that it was inflationary -- was a distraction. The more serious flaw in growthmanship was its fundamental reliance on waste as the "future of prosperity." This is a theme that Kenneth Burke satirized in 1930 and then returned to 26 years later, after Business Week had featured an article extolling the virtues of the consumerist "Borrow. Spend. Buy. Waste. Want" cycle.

My article like all burlesques was based on what I thought was a grossly exaggerated statement of my case. But recently [1956] (in their May 5 and June 16 issues) Business Week published two articles that startled me, and even nonplussed me, by offering as simple gospel a line that, if I could have thought of it when I was writing my burlesque a bit more than a jubilee ago, I'd certainly have used as the perfect frisky summing-up of my thesis "Just past the midmark of the 20th Century," we read, "it looks as though all of our business forces are bent on getting every one . . ." (and here is the notable slogan) to "Borrow. Spend. Buy. Waste. Want."  

I would then have looked upon such a slogan as ideal material for a farce. Now presumably it is to be taken in full earnest.  

What might have been "material for a farce" in 1930 and "taken in full earnest" a quarter century later has by now -- another sixty year on -- become a long forgotten and taken-for-granted substrate. Ecological modernizers rhapsodize about decoupling GDP growth from greenhouse gas emissions as if that growth were something entirely unrelated to the "siphoning off" and "planned obsolescence" contrived by government officials and business leaders, respectively. 

Of course, merely decoupling GDP growth from GHG emissions is not enough to stabilize atmospheric concentrations. So what? Politicians and economists -- to borrow an eloquent excoriation from James Augustus St. John --"with all their incapacity, they want not the wit to perceive, that so soon as justice and a regard for the public good shall become the directing principles of government, the great business of the nation will be taken out of their hands to be confided to others more worthy."

"To make a long and unpleasant story very brief," John Dean wrote, of the Nixon "plumbers" unit:

...when the FBI could not get its act together to pursue the leakers of the Pentagon Papers, an angry president decided to created a super-secret Special Investigations Unit within the White House, using his staffers, who would oversee the activities of all the agencies who, by law, had responsibilities to deal with such leaks. This unit reported to senior presidential aide John Ehrlichman, who in turn reported to the president the failure of anyone in the executive branch to assist in uncovering the leaks they were investigating, or in taking actions they felt were needed.  If necessary, the president would personally intervene to get the job done, using the full weight of his office.  

David Young, an attorney and former aide to Henry Kissinger, was assigned to the new unit.  When David went home for Thanksgiving that Fall, his grandmother asked him what he was doing at the White House.  David said, “Oh, I am helping the president find and fix leaks.”  To which his grandmother responded, “Well, David, that is very nice, you've become a plumber.”  When David shared this Thanksgiving story with his colleagues in the Special Investigation Unit, they cracked up, and he could not resist breaking their secrecy protocol by placing a sign on the unmarked basement door of their unit that read: “The Plumbers.” While the sign was not there for long, the name stuck.

How to solder, how to stop a leak...that now is the deep design of a politician.

Was There Ever Really a Big Tradeoff Between Equality And Efficiency?

Probably not.

In the last couple of days there was a big meeting at the Brookings Institution to celebrate the 40th anniversary of the publication of Arthur Okun's influential 1975 book, Equality and Efficiency: The Big Tradeoff, an idea that went into the textbooks and became a VSP de rigueur truism for quite some time.  The conference was asking its relevance today, which it looks like some questioned.  Many big cheeses were participating, representing a range of views from Mankiw on the right to Heather Boushey on the left, with Larry Summers making the introductory speech, and Janet Yellen in the audience.  But the real  question is: Was it ever at all true to begin with?

Mark Thoma provides some quotations from Summers's opening address.  He clearly seems to think that the relationship has gone off the rails.  The quoted material talks a lot about rising inequality and increasing problems in the financial sector, with the undertow of slower growth and his bugaboo of secular stagnation.  Nothing I saw there looked unreasonable.  But, again, I am wondering if anybody asked the deeper question in a location where the late Okun was long highly revered, and I think still  is.  I never met the man, but plenty there think he was just wonderful, and maybe he was.  But I think he was never right about this Big Tradeoff, or not very right.

OK, so back in the day we had the Big Poster Boy of communist states with lots of equality, think Maoist China, but not a lot of either growth or high income.  Yes, there was certainly an argument there: a society with essentially no incentives to make capital investments or technological innovations, with those incentives maybe leading to greater inequality (and indeed the fall  of communism did lead to higher inequality, with China in particular growing rapidly since, an outlier to support Okun's argument, even as many other former socialist states did  not do all that well).   So, he had some things going for him.  But all along there was this problem of Latin America and parts of Africa, with the highest levels of  inequality in the world and pretty pathetic growth and income records.  This led to an eventual  modification of the truism, usually voiced as indeed going against this deep truth, the idea that the relationship between at least per capita income and inequality being an inverted U-shape.  It also increasingly was noted that the source of inequality was important, with it coming from being "earned" rather than inherited or through corruption making a big difference.

That the relationship was not  all that it was cracked up to be dates back at least to the turn of the century, even among those who ideologically might be inclined to support it.  Thus, in 2000 Robert Barro published a paper in the Journal  of Economic Growth, Inequality in a panel of countries.  He summarized that there is "little overall relation between income inequality and rates of growth and investment."  Barro also noted the likely inverted U-shape  relationship between per capita income and inequality.

In the previous year, a long paper by Aghion et al in the JEL argued that it looked increasingly like if anything the relationship might be the other way around, with more equal  naitons growing more  rapidly and programs to increase equality being associated with accelerated growth.  They posed the Philippines and South Korea, equal in per capita  income in 1960, but with the Philippines having twice the quartile income ratio of South Korea.  We know what their subsequent growth records have been.

I would push this forward to note the experience of Latin America, one of the poster boys for high inequality and poor growth performance.  During the Great Recession this was arguably the best performing region in the world in terms of growth compared to its several decades past.  Curiously, it was the only major region of  the world where incomes were becoming more equal, if still more equal than in the rest  of the world.  This does not prove anything, but then that China fits Okun's story does not prove it, and that nation increasingly looks like a big outlier, quite aside from its decelerating growth rate.

Update: I read the speech by Larry Summerslarrysummers.com/2015/05/04/okuns-equality-and-efficiency at the event. He praise Okun as brilliant, of whom Paul Samuelson basically said that he never said anything incorrect, someone not only insightful in economic policy, but also of philosophical depth.  His only comment on how things were back then was that the income distribution did not change.  He did not directly comment on the basic issue of whether or  not there really was an equality/inefficiency big tradeoff then.  He does now think that rising inequality has been linked to slowing growth. 

Second Update:  Mark Thoma links for 5/6/15 to Heather Boushey's talk at the Brookings conference, and after long discussing how inequality has soared since Okun's day, she finally comes to the same conclusion I do, that Okun was basically wrong and that his legacy is part of our problem today.  There  never was a Big Tradeoff, just a Big Myth about there being one (latter is my terminology).

Barkley Rosser