Job Market Continues to Deteriorate

The BLS lead sounds bad enough:

Nonfarm payroll employment declined sharply in December, and the unemployment rate rose from 6.8 to 7.2 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Payroll employment fell by 524,000 over the month and by 1.9 million over the last 4 months of 2008. In December, job losses were large and widespread across most major industry sectors.

But notice that the household survey reported employment losses of 806,000 with this:

The employment-population ratio fell by 0.4 percentage point to 61.0 percent over the month and by 1.7 percentage points in 2008.

Our graph shows the employment-population ratio and labor force participation over the past 10 years. As the latter has declined, the rise in the unemployment rate understates to the true decline in the ratio of employment to population.

This news should tell Congress that we need a big stimulus package ASAP and one that has a lot of bang for the buck. On this score, I think the Senate Democrats have it right:

President-elect Barack Obama's proposed tax cuts ran into opposition Thursday from senators in his own party who said they wouldn't do much to stimulate the economy or create jobs … Sen John Kerry, D-Mass., said, "I'd rather spend the money on the infrastructure, on direct investment, on energy conversion, on other kinds of things that much more directly, much more rapidly and much more certainly create a real job."

Update: Bruce Bartlett provides a very interesting discussion on the effectiveness of various fiscal stimulus proposals.

Can the Fed Target Interest Rates Below the Zero?

Yes. I have posted here previously on how we have actually seen nominal interest rates below zero, including recently for both the actual federal funds rate and certain Treasury bill rates. During August to November of 2003, the repo market rates regularly went negative, this being the market the Fed normally uses for controlling the federal funds rate. And Japan had negative rates off and on in the late 1990s. Thus, if actual rates were to go negative and stay, the Fed could push the target rates below zero. This situation might well arise if the economic crisis worsens severely, and we fall into deflation. This would open up a new tool for the Fed, overcoming the limits of the liquidity trap.

The main theoretical argument for why interest rates cannot be negative, or not over a sustained period, as it is now clear that they can be so for at least short periods of time, has been the argument of cash as an alternative. That there was a lot of cash around in the 1930s may well have been why we never saw negative interest rates during that period of deflation and extreme economic decline. However, now cash is a tiny fraction of the money supply and of wealth more generally. It is not a meaningful alternative to government securities on a large scale for serious wealth holders, and such alternatives as checking accounts or CDs are all ultimately backed by government securities anyway, if the FDIC were to go under in a general further wave of bank collapses. Under such circumstances, the negative interest rate tool may be the only way out, especially if this follows a failed fiscal expansion.

Does Andrew Sullivan Think State and Local Government Don’t Tax Us?

If Andrew Sullivan knows that that state and local governments do tax us – then why is he touting certain silliness from Greg Mankiw?:

These figures include all federal taxes, not just income taxes.

Also excluded from these effective tax rate calculations are the deferred taxes being piled up by those Bush deficits that I’m sure Sulli knows about.

Good Jobs? Green Jobs? Shorter Hours!

by the Sandwichman

A contest announcement arrived in the Sandwichman's inbox yesterday. It was from Working America, the "community affiliate" of the AFL-CIO:

Working America is going to be sending two grand prize winners and up to three honorable mention winners to the Good Jobs, Green Jobs National Conference, to be held Feb. 4–6, 2009, in Washington, D.C. Winners won't just get a free trip (up to a value of $1,500), they'll get an opportunity to hear from activists and experts from around the country on how we can create jobs and help the environment at the same time.

To enter, go here and answer the question: "Why do you want to fight for a green jobs economy and why are you the right person to represent Working America's members at the Good Jobs, Green Jobs National Conference?"

So the Sandwichman visited the conference website and perused the agenda. M.S., B.S., Phd. (more of the same BS piled higher and deeper). To remedy the apparent lack of analysis besetting the GJGJ conference, the Sandwichman is offering a prize of his own to contest entrants pointing out the contribution that the reduction of working time can make to a greener economy (see for example, the CEPR paper by David Rosnick and Mark Weisbrot and "Are Shorter Work Hours Good for the Environment? A Comparison of U.S. and European Energy Consumption").

The Sandwichman will award copies of Peter Victor's book, Managing Without Growth: Slower by design, not disaster to up to six contest entrants who make the environmental case for shorter hours. One of those prizes will go to the entry I like the best and up to five book prizes will go to any shorter hours entries that are selected as finalists by Working America. Just send a copy of your entry to the Sandwichman at "lumpoflabor(remove this)at(this too)telus(ditto)dot(ditto)net".

By the way, entries arguing against shorter working time will also be eligible for the prize, if anyone is so inclined! Here's the Sandwichman's own entry (not eligible for the prize):

The name "Good Jobs, Green Jobs" rings a bell. It recalls the theme of an issue of the Canadian environmental magazine, Alternatives, from 2001: "Green Jobs, Good Work." One of the articles, "Good Work, Less Toil" by Anders Hayden, explored the relationship between work, consumerism and the environment. As Hayden pointed out, "much of our work today feeds unsustainable forms of production that torment the planet." That article was concerned with more than just the tension between the slogan of "jobs, jobs, jobs" and the environment. It also addressed the time famine that many over-worked North Americans endure even while others remain underemployed or out of work. Sharing the work is thus an indispensable part of sparing the planet.

The dream of cleanly, efficiently and renewably retrofitting an economy addicted to unlimited growth is seductive but futile. As the 19th economist W. Stanley Jevons predicted -- and American experience in the wake of the energy crisis of the 1970s confirmed -- increasing energy efficiency alone leads to more, not less, total consumption. Similarly, green technologies can indeed lower emissions of greenhouse gases per dollar of output. But it is total emissions -- not just the intensity of emissions -- that need to be reduced. Urgent targets for reducing total emissions are only achievable by combining greener technology with slower or no economic growth.

In Managing Without Growth, Peter Victor, an ecological economist at York University in Canada modeled the effects on the environment, poverty and unemployment of various economic-growth scenarios. If we rely on economic growth averaging 2.5 percent annually to supply jobs, greenhouse gas emissions will increase by around 75 percent over the next 30 years even if the intensity of emissions continues to decline at a rate consistent with the historical trend. Even so, poverty and unemployment will creep upward. Simply ceasing economic growth, however, would result in catastrophic increases in poverty and unemployment. Only by slowing economic growth, reducing working time and targeting investment and regulatory policy on greenhouse gas reductions in combination can the goals of environmental protection and reduction of poverty and unemployment be approached simultaneously.

But how does the reduction of working time square with the goal of creating good jobs? Eighty years ago, economist Raymond Henry Mussey wrote that, "no student of American labor history can fail to be struck with the extraordinary importance of the eight-hour issue in union thinking during the formative years of the American Federation of Labor." Mussey affirmed that the shorter hours theory ideally fit the organizational needs of the labor movement. Indeed, in the face of the depression of the 1930s and concerns about job loss to automation in the 1950s and 1960s, the labor movement returned again and again to the issue of the shorter workweek. Today, what needs above all to be understood is that the reduction of working time creates opportunity for greater freedom and enjoyment through leisure and not a grim necessity to be borne with regret and resignation.

Another day in the forests of Indonesia

“On Thursday, 18th December 2008, mobile police brigades in Riau, together with ordinary police officers and 500 paramilitaries stormed the settlement of Suluk Bongkal in order to evict the population. The background is the claim which the plantation company PT Arara Abadi is making on the land, and the company’s support by sectors of the government.” “The settlement of Suluk Bongkal, Beringin, in the district of Bengkali, Riau Province, Sumatra has been attacked by security forces. Two toddlers have been killed. 400 villagers have fled into the mountains and 58 people remain in the village. They are under extreme psychological pressure.” “State security forces, which are supposed to serve the population, have committed a crime against human rights with their attack on the population of Suluk Bongkal. There are strong indications that the violence was planned: Police and paramilitaries even used a special incendiary bomb in order to burn the village, they used fire arms and tear gas and a helicopter which appears to belong to PT Arara Abadi.” Since 1984 twenty six conflicts have been registered between local Indonesian populations and the ‘forestry’ corporation Arara Abadi. “The main cause is land rights conflicts. People are losing the right to their land, without receiving fair and timely compensation.” [1] Arara Abadi holds forestry and land concessions for around 3000 km2 in the Riau and Jambi provinces in Sumatra – an area covered by peatland forests that represent an enormous store of global carbon. This company feeds the paper mills of Asian Pulp and Paper (APP). Both companies are controlled by the Sinar Mas Group, one of Indonesia's largest conglomerates with a network of paper mills and land holdings that extends into China, India, Cambodia, Papua New Guinea. Sinar Mas Group is owned by Eka Tjipta Wijaya [2] the prominent Chinese entrepreneur. “according to data published in November 2007, its customers include Unilever, Proctor & Gamble, Henkel, Pizza Hut, McDonalds, Burger King, Danone, AAK and Cargill [3] . Other customers are the Swedish corporations of Cellmark, Ekman and Elof Hansson [4]. No doubt these companies are amongst many other corporations and their conglomerates around the world.

My bet is that, as long as we continue to consume the products of these corporations, the violence will continue.


[1]‘End the violence on pulp and paper plantations’ by Ade Fadli. 22nd December 2008.
http://www.eng.walhi.or.id/kampanye/hutan/konversi/pulp_arara/

[2] Forestry Giant Lobbying for Huge Plantation
By Luke Reynolds. The Cambodia Daily, Story of the Month, September 15 2004
http://www.camnet.com.kh/cambodia.daily/story_month/September-15-2004.htm

[3] Golden Agri-Resources, 2007. Company Presentation. November 2007 as quoted in Greenpeace Briefing ‘SINAR MAS: Indonesian Palm oil menace’. Published by Greenpeace Southeast Asia – Indonesia.

[4] www.swedwatch.org/swedwatch/content/download/277/1408/file/Summery.doc

Raising Tax Rates on the Well to Do: Lane Kenworthy Gets It

I have been arguing that cutting taxes for households who are not borrowing constrained will NOT increase aggregate demand. Lane Kenworthy takes this argument one step further:

It’s unlikely to delay economic recovery by reducing consumer spending, since most of those affected will still have sufficient income to be able to spend as much as they desire. The tax-rate increase is small enough that it should have little or no adverse impact on investment; when the rate was 39.6% in the late 1990s, investment didn’t suffer. And the added tax revenues could be used either to boost the size of the stimulus package or to reduce its impact on the federal deficit.

Well said!

Obama Goes For Tax Cuts

Jonathan Weisman and Naftali Bendavid report:

President-elect Barack Obama and congressional Democrats are crafting a plan to offer about $300 billion of tax cuts to individuals and businesses, a move aimed at attracting Republican support for an economic-stimulus package and prodding companies to create jobs. The size of the proposed tax cuts -- which would account for about 40% of a stimulus package that could reach $775 billion over two years -- is greater than many on both sides of the aisle in Congress had anticipated. It may make it easier to win over Republicans who have stressed that any initiative should rely more heavily on tax cuts rather than spending.

Will this appeal to a bipartisan approach going to reduce the effectiveness of the fiscal stimulus? I have made this argument:

If one is a believer of propositions such as the life cycle model of consumption or the Barro-Ricardo equivalence proposition, one would dismiss out of hand this notion that we can accelerate aggregate demand by passing a tax cut today that will one day have to be financed by a tax surcharge.

But this is weird:

Economists of all political stripes widely agree the checks sent out last spring were ineffective in stemming the economic slide, partly because many strapped consumers paid bills or saved the cash rather than spend it.

HUH? If “strapped consumers” means those facing borrowing constraints, it is precisely these households that are more likely to consume rather than save a tax cut.

Update: Mark Thoma weighs in on this issue and provides us another story by Peter Baker and Carl Hulse that notes:

The legislation Mr. Obama is developing with Congressional Democrats will devote about 40 percent of the cost to tax cuts, including his centerpiece campaign promise to provide credits up to $500 for most workers, costing roughly $150 billion. The package will also include more than $100 billion in tax incentives for businesses to create jobs and invest in equipment or factories.

So only half of the tax cut will go to borrowing constrained households with the rest being given to corporations who are not likely to invest anything extra during this period of weak aggregate demand. Ahem!

Wonk v. Wank II: The Big Picture

by the Sandwichman

Not all economic models lack "any connection with reality". In "Managing Without Growth: Slower by Design, not Disaster", Peter Victor used a model called LowGrow "to explore different assumptions, objectives and policy measures" regarding the Canadian economy. I suppose the biggest difference between LowGrow and Paul Krugman's Optimal Fiscal Policy in a Liquidity Trap model (I'll call it OptiTrap) is that LowGrow uses actual data to explore possibilities while OptiTrap assumes consumers who "maximize an intertemporal utility function".

In other words, OptiTrap leaves all the important qualitative decisions to a bunch of spectral rational agents tucked away in a black box. The obvious question would be: if those agents were so rational how did they get into such a liquidity trap mess in the first place?

The point of LowGrow is to make the nature of qualitative choices that must be made and the variety of outcomes based on different choices as transparent as possible. There is not a single, "optimal solution" in LowGrow. Nor is there a single, "big bang" policy prescription that issues from it -- like OptiTrap's "So let's get those [spending] projects going." Instead, multiple runs of tLowGrow using different assumptions are made to tease out an array of complementary policy recommendations.

At first glance it may seem that OptiTrap ignores such issues as climate change, peak oil, poverty, mass unemployment and happiness. Not so! It just assumes that its intertemporal utility-maximizing rational agents will deal with that shit.

All OptiTrap needs to worry about is how to get the damned economy moving again. Once it's back on the good old growth track those rational agents -- who, incidentally, bought all those overpriced houses with securitized sub-prime mortgages and voted for George W. Bush twice -- anyway, as I was saying those rational agents will take care of the ah... er... nevermind.

But if you'd like to view a cogent discussion of the disappointments of economic growth, the limitations of natural resources and how it may be possible to avoid both environmental and economic disaster and possibly even live richer fuller lives, please watch the video of Peter Victor's lecture at the Royal Canadian Institute for the Advancement of Science from November 23, 2008.

Wonk v. Wank I

by the Sandwichman

A few days ago on his blog, Paul Krugman offered up an "unreadable little paper" with a "fully-specified model" to examine the case for "big government spending in the face of a liquidity trap". The bottom line: "When the economy is depressed and monetary policy can’t set it right, the true opportunity cost of government spending is low. So let’s get those projects going."

Unreadable as Krugman's little paper may have been, seventy or so readers managed to comment on it insightfully. It's too bad Krugman doesn't reply to his commentators. I suppose it's the custom of simplistic economic model building to hide behind the abstract generality, simplicity and unreadability (to non-wonks) of the model. Nevertheless, several commentators had little difficulty identifying what was missing in Krugman's "fully-specified" model: The Big Picture.

Below are excerpts from several of the comments:

Umm… while we’re at it, Dr. Krugman, perhaps you could please explain just why consumption has to be so high to prevent economic meltdown.

... why does the economy require that people spend money they can’t afford on stuff they don’t need now, in order to keep the economy moving at all?

Better, surely, to have the government buy public goods that are at least needed–education, insulation, health care, efficient transportation.

But when, if ever, can we enter Keynes’ vision of a world at leisure, with plenty of time, jobs with family-compatible hours, and enough goods to keep us smiling? Will our economic system ever permit it? Can we use a crisis as a time to think about the possibility?

Can you please explain. Fiscal stimulus forever - or only until consumer spending resumes? Earlier this year you wrote in the NY Times that “weak spending is treatable and the economy could be saved”.

In the last 6 years everyone bought new cars, new computers, new mobile phones, new houses! These will last at least 10 years.

What now? Perpetuate the spending Greenspan ignited?

Consumer spending on “exotic” upgrades? - replacing a perfectly good car or computer with a more expensive model? $400 sun glasses, $300 joggers, the latest mobile phone? Is that the idea - spend like we use to? Maybe the government should stimulate advertising! Maybe brainwash the people - they really do need to buy these goods!
Or make it compulsory to have all cars, computers, TVs etc. destroyed if they are older than say 5 years. Then people will have to buy new ones! Creative destruction!
Spending restored and economy saved!

Keep people employed making and selling things we don’t really need = full employment in jobs nobody likes. Is that it?

The problem you face is convincing people that since excessive debt got us into this mess, even more debt (Federal this time) will get us out of the mess. And you have to do it without math.

Is there any chance that a liquidity trap is actually a manifestation of any or all of the following:

Too much debt; wealth/income inequality; and/or negative real earnings growth for most people

Why do almost all economists assume that preventing price deflation requires MORE DEBT??? I DO NOT believe that the solution to too much middle and lower class debt is MORE DEBT (whether gov’t debt or not)!!!

As was forwarned , the paper was too tough to follow. I have an equally difficult time understanding why complex wonkish academic theory and analyisis trumps and ignores common sense and the more obvious. What is right before our eyes is the fact that no matter what we do to stimulate the economy our major downfall is our lack of manufacturing ability which we gave away to China and the like. Sadly our national focus and young talent has migrated to financial ( funny money) engineering from engineering that creates new technology. And for too long the foundation of our new economy has been based on borrowed money and not on import income from making quality things. The more we borrow ( which we now have no choice but to do ) the more we dig our selves down into the black hole which may now be too deep to ever to get out of . The wonkish analysis seems to ignore what is obvious to the lesser intelligent people. Me and most of my friends who are about as equally unintelligent as me, were able to see the crazy mortgage/housing bubble and also the fact that our economy was a house of cards because it is based on borrowed and funy money. And this was obvioius to us several years ago while the wonkish lot ( ie economists such as Greenspan and company) were producing analytic outcomes that suited themselves so as to perpetuate the massive wealth accumulation for the very wealthy.

As I see it, full employment is not a binary predicate in any real economy.

You will always have sectors with over-full employment, sectors with full employment and sectors with less than full employment. The same is true for different geographic areas. There is plenty of skill and location stickiness that ensures that this is always true.

This means that there is no point in time in which you reach full employment in the whole economy, which also means that at no point in time does anything dramatic happen. The cost curve will never become a discontinuous function.

Rather, for every new job that is being added, there’s an increasing chance that the next job will appear in a tight part of the job market. As long as you have non-perfect distribution of new jobs only to the sectors and regions that have less than full employment, you will see the marginal cost increase for every created job, and from the start you’ll see faster than linear cost growth.

With government programs, it’s likely that certain sectors are stimulated more than others. Due to skill stickiness this will mean that the mismatch between available skills and requested skill grows. I believe this means that it’s highly likely that the cost curve crosses the benefit curve well before the mythical state of full employment.

Maximization of consumption is totally different from sustainable consumption. Your model is not comprehensive and tough only some parts of economy.

But the biggest point is we think only maximization but that is not sustainable. We have over consumption and over debts. The more government uses, the more the next generation will have to pay tax and the less the next generation will have to consume.

All optimization economic models we contribute cannot bring the sustainability of economy. We may look back to see Ramsey model to find why we have too much consumption, too much debts and low saving because we use optimization of consumption model that is all wrong in concepts.

Government can bring the full employment in short term to optimize consumption like we did for nearly 70 years on Keynesian tools but we cannot sustain full employment in the long run if the government and private debts stay at unsustainable high level.

Does Amity Shlaes Even Know How to Be Honest?

It has been well established that Ms. Shlaes does not know any economics but her latest goes beyond the pale in dishonesty:

The United States has entered the era of the experiment. President-elect Barack Obama is putting forward an infrastructure program whose plans and price tag are unclear. Treasury Secretary Henry Paulson whipped up the Troubled Asset Relief Program to buy up bad mortgage instruments, and, expanding on that experiment, President Bush wants to try extending TARP to autoworkers. The idea that experiments are warranted in current circumstances comes from the New Deal.

No – the logic behind the Troubled Assets Relief Program’s variation that the government make direct equity investment in troubled financial institutions by many economists including Paul Krugman:

Before I explain the apparent logic here, let’s talk about how governments normally respond to financial crisis: namely, they rescue the failing financial institutions, taking temporary ownership while keeping them running. If they don’t want to keep the institutions public, they eventually dispose of bad assets and pay off enough debt to make the institutions viable again, then sell them back to the private sector. But the first step is rescue with ownership. That’s what we did in the S&L crisis; that’s what Sweden did in the early 90s; that’s what was just done with Fannie and Freddie; it’s even what was done just last week with AIG. It’s more or less what would happen with the Dodd plan, which would buy bad debt but get equity warrants that depend on the later losses on that debt.

Paul has been critical with certain aspects of TARP but he notes that not only has the basic idea of equity infusion is what financial economic theory suggests is a viable policy means for addressing the financial crisis but it has also been successfully tried.

The logic behind fiscal stimulus in general was explained in the 1936 General Theory authored by Lord Keynes. Lawrence Summers recently explained the specific logic behind Obama’s call for an acceleration of infrastructure investment. Summers appeals to conventional economic wisdom and not some longing for the New Deal.

While her alleged ties of the current policy proposals to the New Deal falls in its face, Shlaes repeats her debunked claim that the New Deal made the Great Depression worse:

Modern economists, monetarist or Keynesian, have not rejected this story line. The trouble with the 1930s, in their view, is that government did not fiddle enough. Had the Federal Reserve, the Treasury or the White House fiddled more, the Depression might have been shorter or less severe. The New Deal Fed, they say, never got the price level quite right. Or, the New Deal stimulus programs were too little. And so on. But there is significant evidence that the very arbitrariness of the New Deal made the Depression worse.

What is this “significant evidence” you ask? Oh yea – the past writing of one Amity Shlaes! If the Washington Post really wants to make an argument against Obama’s fiscal policy proposals, might I suggest they find an economist rather than a discredited rightwing hack to make that case?

Shoe 2008

Idiot Year

2008 is over. For many global citizens this year may one day be described as the year of revelation. A full century of environmental and economic abuse along with political intrigue and deceit may have finally come into full view. It seems unlikely that we will continue much longer to accept the counsel of those who tell us that we must fill our world with poisonous chemicals and overexploit our natural resources or take senseless and frightening risks with the employment of new technologies. In the world of politics another range of possibilities is apparent. False pretensions and embedded assumptions of national sovereignty and liberal democracy are unlikely to be accepted without serious questioning in western industrialized nations. With the obvious no longer hidden we may not be as easily fooled ever again. This breakdown of assumed ‘norms’ truly represents the end of an era and it’s happening just at the time a positive feedback loop of Arctic warming kicks in to alter the planetary air conditioner of the Northern Hemisphere [1]. Dramatic and unprecedented social and political change portends in the year that Prince Charles warned the world that we had 18 months to stop climate change. [2]

On 10th September last year the Maidstone Crown Court in the UK decided that “the threat of global warming is so great that [environmental] campaigners were justified in causing more than £35,000 worth of damage to a coal-fired power station.” Six Greenpeace activists were cleared of charges of criminal damage [3]. Just as three of these British protesters responded to systemic collapse in the ecosphere (by painting Gordon Brown's name on the British coal plant's chimney as a metaphor for political accountability) Ben Bernanke of the US Federal Reserve responded to another global crisis with a slightly more concrete metaphor of his own. Helicopter drops of money were used to bail the rich out with increasingly worthless fiat money and on an absolutely extraordinary scale. The surviving handful of Wall Street banks hoarded cash and refused to lend to each other as their four-decades-long global ponzi scheme of money and credit manipulation fell apart [4]. In turn this banking collapse was prompted by the oligopoly dynamics of concentrated economic power in a small number of corporate networks and conglomerates generally[5]. Fictitious capital [6] grew at an ever-increasing rate and fomented unbelievable distortions in what we are told is ‘economic development’ across the globe but is actually a well-managed path designed to generate dependency on the global corporations along with the stronger states that sponsor them.

In 2008 it became clear to many more people that ‘globalisation’ was not a spontaneous result of ‘free market’ dynamics as we had been repeatedly told. Rather it was revealed to be “the deeply political result of political choices made by successive governments of one state: The United States” [8]. Both Republican and Democratic administrations have used overt and covert means to topple democratically-elected governments around the world [7] and to tilt the balance of political and economic advantage unfairly towards North America in other ways [9].

2008 was the year when conventional wisdom became obsolete. It did not allow us to perceive the essential nature of things nor adequately anticipate the consequences of our actions. In 2008 everything became open to question. The ‘pluralism’ of the two-party system was found to be a delusion. There were no safeguards in place to protect against one group gaining too much power over the whole of society nor even the whole of the planet. How obvious it was that the private sector was not balanced by the public one as we saw ‘leaders’ in one national government after another working to a corporate narrow interest agenda. There are bad men on the Earth, after all.”...if nothing happens even though we're entering an ecological crisis of historic gravity, it's because those who have power in the world want it to be this way." [10]

The gift of 2008 is the revelation of important and critical truths. Its legacy is to come to terms with everything.



[1] Changes 'amplify Arctic warming'
By Jonathan Amos, Science reporter, BBC News. 16th December 2008
http://news.bbc.co.uk/2/hi/science/nature/7786910.stm

[2] Prince Charles: Eighteen months to stop climate change disaster. By Andrew Pierce
Last updated: 1:08 PM BST 18/05/2008
http://www.telegraph.co.uk/news/newstopics/theroyalfamily/1961719/Prince-Charles-Eighteen-months-to-
stop-climate-change-disaster.html?service=print

[3] Under the defence of "lawful excuse", a legal principle that “allows damage to be caused to property to prevent even greater damage” as quoted in the article:
Cleared: Jury decides that threat of global warming justifies breaking the law
By Michael McCarthy, Environment Editor. Thursday, 11 September 2008
http://www.independent.co.uk/environment/climate-change/cleared-jury-decides-that-threat-of-global-warming-justifies-breaking-the-law-925561.html

[4] A point had been reached where a huge volume of capital was held in such a small number of private hands that were largely outside any regulatory structure. This was accompanied by an even smaller number of trading and banking networks that resulted in a ‘common tilt’ in multinational corporations’ decisions and processes. See: ‘The World’s Money – International banking from Bretton Woods to the brink of insolvency’ by Michael Moffitt. Touchstone Book, Simon and Schuster New York. 1983. ISBN: 0-671-50596-3 Pbk.

[5] Instability in the global economy became inevitable, as global corporations played a zero sum game by combining high-productivity technologies with large, low-wage labour supplies in ‘under-developed’ nations. As economic power concentrated trade became dominated by non-market intra-corporate transactions where multinational corporations arbitrarily set unrealistic prices in exchanges between parent and affiliates in order to reduce taxes and tariffs, avoid currency exchange controls and optimize profits.

[6] paper claims on wealth (in the form of profit, interest and ground rent) in excess of the total available surplus value, plus available loot from primitive accumulation.

[7] The US was involved in coups in the Democratic Republic of the Congo, in Iran (Operation Ajax in 1953) , in Ecuador (Jaime Roldos), Brazil (1964) in Vietnam, in Indonesia (1967), Panama, Guatemala (Operation PBSUCCESS in 1954), Chile (1973) Australia (1975), Somalia. It attempted coups in Cuba in the early 1960s. there were covert CIA operations in Laos. The JFK assassination has all the qualities of a coup.

There's a longer (but incomplete) list at:
http://en.wikipedia.org/wiki/Covert_U.S._regime_change_actions

[8] The Global Gamble: Washington's Faustian Bid for World Dominance by Peter Gowan.

[9] American US dollar hegemony, for instance, that entails other nations having to earn US dollars first in order to purchase critical commodities such as oil or have syndicated loans lent to the third world denominated in US dollars and be subject to unilateral interest rate decisions by the US Federal Reserve. (In 1979 US Fed Chairman Volker’s decision to limit money supply led to catastrophic rises in global interests rates that resulted in third world debt becoming permanently unpayable.)

[10] From Hervé Kempf's "How the Rich Are Destroying the Planet."

END.

Chicago Economist Claims Homeowners Choose to Default on Their Mortgages And Quit Their Jobs

On Christmas eve, Casey Mulligan claimed that the employment decline was due to an inward shift of the labor supply curve to which we noted that he had yet to give us his explanation for WHY the labor supply curve shifted inwards.

Well – it has been a week and Casey Mulligan offers us this explanation:

Though ubiquitous these days, mortgage modification programs create terrible work incentives. This is one reason the current recession is so different from previous ones … Because of the low resale values, foreclosing on any of the homes will not yield lenders their entire principal; lenders in those cases must rely on the good behavior of the borrowers … these “modification programs” encourage lenders to reduce mortgage payments so that each borrower’s housing payments (including principal, interest, taxes and insurance) are 38 percent of the borrower’s gross income. The payments are to be reduced for five years, or when the mortgage is paid off (whichever comes first) ... I do not expect every adult among those in the 12 million underwater households to be without a job because of the modification rules.

Mulligan is essentially saying that those poor saps who have lost their jobs actually quit so they can game the mortgage system. In other words, there is no such thing as involuntary unemployment or being forced to either lose one’s home versus enter into one of these mortgage modification programs. I’m sorry – but Casey Mulligan is clearly writing from some ivory tower and needs to get out into the real world.

IMF Economist Backs Obama’s Fiscal Plan

Olivier Blanchard also seems to disagree with Jeffrey Miron:

Olivier Blanchard, the IMF's chief economist, said "the size corresponds roughly to what we think is needed." He backed the Obama approach of targeted tax cuts, saying the money should go to consumers who are "truly credit constrained." In an accompanying research paper, Mr. Blanchard and three other IMF economists advised against broad cuts in corporate tax rates, dividends and capital gains -- Republican favorites -- which they judge "likely to be ineffective" because profits are low. The changes "are often difficult to reverse," they added. In an interview, Mr. Blanchard said a general tax cut may be less effective than other measures because many consumers would save the money.

If we choose to go the fiscal stimulus route – shouldn’t we be interested in getting some real bang for the buck? I’m glad to see that Olivier Blanchard thinks so!

Zero Is Not A Lower Bound For Interest Rates

In recent days Paul Krugman has been flailing a model of the term structure of interest rates and the liquidity trap based on the idea that there is an absolute lower bound of zero percent for nominal interest rates. This may have been true in the distant past, but it is not true anymore. We have seen numerous episodes of negative interest rates, with several outbreaks in the last few months, including on the actual federal funds rate and on 90 US Treasury bills, as well as on Japanese interbank rates in the late 1990s, when their target rate was at 0%. A not widely known episode that went on off and on between August and November of 2003 was in the repo market, which used to be used by the Fed for open market operations, as reported in a New York Fed study from April 2004 by Fleming and Garbade, accessible at http://www.newyorkfed.org/research/current-issues/ci10-5.html. It has only been convention and a left over belief like the old religious view that negative numbers did not exist that has led so many economists and others to think that zero is some absolute lower bound on interest rates. We may well see that bound breached more seriously and frequently in the months ahead, if the economic crisis continues to deepen.

The prejudice against believing in negative interest rates, sometimes viewed as the "price of time," is not unrelated to the long-held opposition to the idea of negative prices. We see them regularly in real life, but they often get assumed away by defining paying for the removal of something (such as excess water) as a different market with a positive price from providing the same good when we want more of it (water for irrigation), even when the same activity does both things (building a dam with an irrigation system). Negative real estate prices often are associated with environmental problems, such as kaput coal mines leaking toxic waste that the owner is responsible for paying the cleanup of. In some countries, brides have a positive price while in some grooms do, although as Michael Perelman recently reported, Herodotus tells us of bride auctions in ancient Babylon where some are sold for positive and some for negative prices in the same auction. The great efforts by the general equilibrium theorists to avoid negative prices (not a problem for Walras) were a waste of time, as were all the huffings about negative surplus value in the Sraffian debates. Time to get over it, especially if we start seeing widespread negative interest rates.


Hidden conclusion here.

Jeffrey Miron’s Preference for Ineffective Fiscal Policy

Jeffrey Miron claims:

Is a fiscal stimulus good policy? The answer is no if the stimulus consists of increased spending. The stimulus may be good policy, though, if it consists of lower taxes.

We will likely hear this slogan a lot from conservatives over the next few weeks. Miron’s argument against increasing spending goes something like this:

If the new spending is for projects that are beneficial for society overall, and if the private sector cannot or will not undertake these projects, then the expenditure is worthwhile independent of what it does to fight the recession. A standard example might be repair of the interstate highway system ... Even if certain components of the nation's spending are too low, nothing guarantees that new spending will be directed to these areas. Instead, experience suggests that much will be for repairing "bridges to nowhere," especially those located in the districts of influential legislators. The Keynesian argument for a spending stimulus does not, of course, assume this spending is for projects that have economic or social value. The theory, in fact, suggests that digging ditches and then filling them up is effective at stimulating the economy. This cannot make sense in the long run; government spending must be paid for with taxes, so it ultimately comes at the expense of private spending. Projects that do not make economic sense are then pure waste. Yet the history of government spending indicates the stimulus package will include countless zoos, aquariums, museums, parks and other pork barrel projects for which the private demand does not come close to justifying the investment. In many cases, these projects will persist for decades.

If Jeffrey Miron is worried that the new Administration is about to push for a bunch of pork barrel projects, maybe he should talk to Lawrence Summers. So let me address instead Miron’s faith in tax cuts as the cure for our lack of aggregate demand.

Tax cuts also stimulate demand via the standard Keynesian channels of increased disposable income for consumers

The underlying Keynesian premise for short-term fiscal stimulus is that we need to accelerate aggregate demand but eventually aggregate demand will be restored either through more consumption (public or private) or more investment. When Miron talks about government purchases crowding-out private spending, he is referring to the period known as the long-run and not the short-term concerns that will be the dominant macroeconomic theme for 2009. If one is a believer of propositions such as the life cycle model of consumption or the Barro-Ricardo equivalence proposition, one would dismiss out of hand this notion that we can accelerate aggregate demand by passing a tax cut today that will one day have to be financed by a tax surcharge. I should hasten to add there are a couple of ways of addressing this critique of tax cuts – one of which Miron hints at:

For those who advocate smaller government, the case for a tax cut is easier; short-run increases in the deficit are not a major concern if government should be smaller (and can eventually be reduced in size) in the long run. If the level of spending is too high, the U.S. can have its cake and eat it too: cut taxes now to improve efficiency and stimulate the economy and cut spending later to balance the budget.

Of course, this smaller government canard was a rational for the 1981 tax cut and almost every Republican call for tax cuts since. But even when the Republican Party dominated fiscal policy decision making, we never saw any significant reduction in the size of the government.

Some Keynesians would argue that the life cycle or Barro-Ricardo equivalence models of tax cuts and consumption ignore the fact that some households face borrowing constraints. On this score, Miron might consider what Philip Rucker reported yesterday:

President-elect Barack Obama’s economic stimulus plan will include an immediate tax cut for middle-class families

In other words, the plan is to give tax cuts to those who may indeed be facing borrowing constraints. I guess Miron might complain that President Obama intends to make these middle class tax cuts permanent by increasing taxes on the wealthy – who likely do not face borrowing constraints. But the redistribution of the tax burden is not likely to have much of a net effect on aggregate demand. Simply put – I do not see how Miron’s call for tax cuts will have as much bang for the buck in terms of accelerating aggregate demand as the set of fiscal proposals being advanced by the President-elect’s economic team.

The Mexican Recession and Fiscal Policy

Elisabeth Malkin must not have ever heard of Lord Keynes and his General Theory:

But this recession, it is the profligate United States pulling down fiscally disciplined Mexico. Like a host of middle-class countries, from South Africa to Brazil, Mexico is credited by economists with prudent economic policies that reduced debt and tamed inflation, but that has not saved any of them from the pain of a global recession ... When the American economy began to spiral downward, officials here argued that Mexico’s hard-won macroeconomic stability would protect it ... Now, as each week brings more bad news from the United States, those forecasts seem quaintly optimistic. The North American Free Trade Agreement, or Nafta, which so tightly bound Mexico and the United States and turns 15 on Thursday, is helping drag Mexico down with the United States just as it helped bolster it when times were good north of the border. When the American economy was growing, successive governments here counted on foreign investment and exports to generate growth. Exports account for almost a third of Mexico’s gross domestic product. But more than 80 percent of them go to the United States, and when American consumers stop buying, there is no market for Mexican-made big-screen televisions, auto parts or expensive winter fruit.

Well – at least she introduced the open economy aspects. With the peso hovering around 10 pesos per dollar until August 1 of this year (since then it has devalued by about 33 percent), fiscal stimulus in the U.S. led us to import more goods from Mexico which should boost Mexican aggregate demand. As an aside, Dean Baker is not been that impressed with Mexico’s real GDP growth.

Malkin goes onto note that the fall in U.S. aggregate demand has led to a fall in Mexican exports with a concern that Mexico that will also suffer a recession. If that is the case, fiscal restraint is precisely the wrong policy to adopt at this time.



Update: I checked with this source to see if it is true that US imports from Mexico have declined. Our graph shows these imports from January 2007 to October 2008. Maybe economists are forecasting a decline but we had not seen it as of a couple of months ago.

Google Monetizes Public Libraries?

With public libraries reeling under expanded budget cuts, Google's new deal with the publishers seems to threaten public libraries, which offer Internet service.

Karen Coyle's warning about Google's new plan is short enough that I need not summarize it. Google's response seems disingenuous.

Keep in mind that the major university libraries supplied books that were subsidized by public money.

Whatever happened to "do no harm"?

http://www.opencontentalliance.org/2008/12/06/a-raw-deal-for-libraries/

Federalize Medicaid!

There has been much justified concern and talk about the fiscal problems of the state and local governments in the current crisis, most of whom have some form of balanced budget rule in place, forcing them to engage in automatic destabilizing policy in the form of cutting spending or raising tax rates as the recession lowers tax revenues. One of the most significant of rising costs that is hitting all the state governments, and has been even when times have been better, has been Medicaid, the needs-based program to pay for the medical care of poorer people. Unlike non-needs based Medicare and Social Security, this program is partly funded by the states as well as the federal government, which also means that poorer states face a larger burden.

Although I have heard nobody propose this, and it would cost a lot of money at the federal level, there is an obvious move here that would help in both the short term and the longer term. Federalize Medicaid! Besides essentially eliminating the fiscal crises of the states, it would also provide a more level playing field in the longer term between the states.

Do High Income Individuals Have a Lower Marginal Propensity to Consume or a Higher Propensity to Import?

Kevin Drum seems to believe the former:

One way or another, there's really no way for the economy to grow strongly and consistently unless middle-class consumers spend more, and they can't spend more unless they make more … The only sustainable source of consistent growth is rising median wages. The rich just don't spend enough all by themselves.

Kevin seems to be arguing that as income distribution gets more tilted from the poor and middle class towards the rich, consumption as a share of national income will fall. OK, we are currently concerned about an insufficiency of aggregate demand given that the sum of net investment and net exports is barely above zero. During the transitional (perhaps defined as a couple of years) Keynesian period of weak investment demand, we have the paradox of thrift where any upwards shift of the national savings schedule will only deepen the recession.

But even the most die-hard Keynesians accept the Solow proposition that in the long-run, any increase in national savings will encourage more investment. And if Kevin is right about the rich having a lower propensity to consume – that is, a higher propensity to save – the old trickle down nonsense about taking from the poor to give to the rich would at least spur more investment demand and long-term growth.

Paul Krugman, however, isn’t buying this assumption:

There’s no obvious reason why consumer demand can’t be sustained by the spending of the upper class — $200 dinners and luxury hotels create jobs, the same way that fast food dinners and Motel 6s do. In fact, the prosperity of New York City in the last decade — largely supported off of super-salaried Wall Street types — is a demonstration that you can have an economy sustained by the big spending of the few rather than the modest spending of large numbers of people.

I’m not sure I’m buying this notion that distributing income from the rich to the poor is going to necessarily reduce our national savings rate either. But here’s a related query related to the Keynesian multiplier related to certain open economy musings by Dani Rodrik:

It is pretty easy to increase the multiplier; just raise import tariffs by enough so that the marginal propensity to import out of income is reduced substantially (to zero if you want the multiplier to go all the way to 2.8). Yes, yes, import protection is inefficient and not a very neighborly thing to do--but should we really care if the alternative is significantly lower growth and higher unemployment? More to the point, will Obama and his advisers care? Being the open economy that it is, I fear that the U.S. will have to confront this dilemma sooner or later. In an environment where the dollar has already appreciated against the Euro and even more significantly against emerging market currencies, fiscal stimulus here will produce an even larger current account deficit. If American consumers decide to spend 40 cents of a dollar of additional income on cheap imports from China and other foreign countries, the multiplier will be a mere 1.3. How long will it take before politicians of all stripes cry foul over the leakage through the trade account and the "gift to foreigners" that this represents? And they will have Keynesian logic on their side.

Let’s postulate for a moment that the rich have a high marginal propensity to consume imported goods than do the poor. Even if redistributing income from the rich to the poor does not increase overall consumption (that is, we as a nation still save the same amount), it might induce less imports and more domestic spending.

Truism and Consequences

by the Sandwichman

"Any cub productivity theorist can upset the idea by a mere reference to long-time effects on wages; but the unionists were blissfully ignorant of such theories..."



The quote is from Raymond Henry Mussey's "Eight-Hour Theory in the American Federation of Labor" (1927). The image is a page from a letter from John Bates Clark to Franklin H. Giddings in which Clark explains the reason for the delay in publication of his productivity theory of wages.

..By the way I want to tell you in confidence that George Gunton
wrote to the Columbia people proposing to write for them an article
in criticism of my Wage theory. They wrote asking whether I would
rather have it come out before or after my article in the [Political
Science] Quarterly. This was then expected in Sept. I said let Mr.
G.'s article come in Sept. and let me reply in Dec. After thinking
the thing over for a while they concluded not to publish the
symposium or friendly melee at all, and asked me then to send the
article for Sept. independently. By that time I had concluded I must
for the reasons stated, defer the article till December. Mr. Gunton
said of me "He seems to have been much impressed by Stuart Wood's
article in the Quarterly Journal of Economics." This is a true
statement or guess -- I was impressed by the article. Mr. Gunton
seemed to me to think I was a trifle more dependent than I supposed
I was on my good friend's paper. I wonder just a little whether Mr.
Gunton's impression, if such as I surmise is his impression, is a
natural one. Bah! This is an illustration of the essential
littleness and selfishness of the human heart. What does it matter
whether A or B discovered the major part of an economic law, if so
be that it is a law and does a work in interpreting facts of life?...

George Gunton -- who formalized the American Federation of Labor's eight-hour philosophy in a 1889 pamphlet, "The Economic and Social Importance of the Eight-Hour Movement" (which was serialized on EconoSpeak a few months ago) -- was not "blissfully ignorant" of John Bates Clark's productivity theory of wages. On the contrary, Gunton was familiar enough with Clark's theory to write published critiques of it and to detect "impressions" in it of Wood's theory that Clark himself was not entirely aware of.

How I Misrepresented Nassim Nicholas Taleb On Barbell Strategies

[long, wonkish, and personal]

If one googles "barbell strategy," one mostly finds discussions of a bond-trading strategy (and a related definition) that involves putting half of funds in long term bonds and half in short term bonds, with no money in intermediate term bonds. The money at both ends makes this a "barbell." Whether or not such a strategy makes more money than the "bullet strategy" of buying only intermediate term bonds (or all time horizon bonds) depends on the shape of the term structure of interest rates and how it changes over time. Another variation is for a takeover raider to buy both very large firms and very small ones, but not mid-sized ones. A more general definition of a barbell strategy is one that combines very safe investments with very risky ones, while not buying ones of intermediate riskiness. In his book, The Black Swan (TBS), Nassim Nicholas Taleb recommends (pp. 205-26) a variation on this in which one puts 85-90% of one's assets in "extremely safe assets, like Treasury bills" and the rest in "extremely speculative bets, as leveraged as possible (like options), preferably venture-style portfolio," with a footnote suggesting that this remaining 10-15% involve "as many of these small bets as possible."

In various blogs, including here, I have described his barbell strategy accurately with regard to the first part, but misrepresented the second part as involving specifically buying puts on major crashes. I then criticized this as a strategy that would lose money in most years (although obviously it would make money this year if properly done) based on a paper by Oleg Bonderenko, "Why are Put Options So Expensive," available at http://tigger.uic.edu/~olegb/research.htm. In a link on his website, http://fooledbyrandomness.com/fake.htm, Taleb has sharply criticized me for this (others dumped on there are Tyler Cowen, Robin Hanson, Alan Greenspan, Robert C. Merton, Kenneth Rogoff, and Paul Seabright, for various alleged sins, some more serious in my eyes than others, some not sins at all). In any case, I have now gone back to his book and see that my frequently repeated description of his barbell strategy was a misrepresentation. For this, I apologize to him publicly.



Needless to say, there is more to this than I have said so far, for those of you who are interested, and I will say that quite a bit of what Taleb says on his website involves serious misrepresentations. I would strongly suggest that he alter the inaccurate parts and publicly apologize, as I altered parts of an original posting back on maxspeak over a year ago at his request that was at the origin of all this. So, for those of you who are curious, here is the rest of the story, at least as I see it.

So, in the summer of 2007 I happened to read TBS. I found it mostly very interesting and stimulating, and in general I was then and remain in agreement with most of the ideas in it. I enjoyed (and still do) many of the tales and neologisms he came up with there, although on my second reading I find much of it more superficial and self-contradictory than I did the first time around, although this may reflect a more critical approach given our bad relations since. Anyway, after reading it, and becoming aware that he had a number of technical papers floating around on substantive aspects of it that were unpublished, I sent him a friendly email, praising his book and inviting him to submit any papers he might wish to the journal I edit, the Journal of Economic Behavior and Organization (JEBO). He has posted part of that email on his site.

What he does not note on his site is that his reply to me, somewhat delayed, was a form email telling me that he was too busy to reply to my email. I was not all that surprised by this as this was the time when TBS was on the bestseller list, and I could understand that indeed he might be very busy. He said nothing about JEBO and did not say anything about my invitation.

Now, there is at this point a crucial event that he did not realize. He argues that what followed was due to my "feeling rebuffed" that he had "refused [my] invitation to submit in his technical journal." Well, he had not refused. He had simply said he was too busy to reply, and I was in fact still awaiting a reply. However, I became aware of this paper by Bondarenko and saw some discussions on some blogs by some other people whom he does not attack and whom I shall not bring up who argued that Bondarenko's results showed that Taleb's barbell strategy was a money loser in most years, even if the losses would not be all that great, which is his ultimate defense of the strategy ("My barbell strategy has nothing to do with making money - although it does OK - but with being robust to model error"). It was after seeing this, and also hearing of some bizarre conduct of his regarding another blogger, whom I shall not mention, that I then put up a post on the old maxspeak, the predecessor of this blog.

In that post I spent most of my time praising TBS, something that Taleb has somehow never noticed or commented on, I guess assuming that everybody should praise his book without any questions or criticisms. I then, as had Tyler Cowen in a review in Slate (the reason Tyler is on his bad list), said that the main weakness of the book was that his barbell strategy would lose money most of the time. I went too far and said that he would probably not be able to make much money personally with it and would do better by writing and selling his successful books.

Well, now within 20 minutes of putting this up, I got an email from this guy who was "too busy" to reply to my friendly earlier email. It warned me in pretty strong language that I did not know how he made his money and that I should be careful what I said, pointing out specific wording mentioned above. So, I altered that wording to make the post not say what he definitely would do or not do in terms of making money, but still criticizing him. He then sent me another email in which he essentially threatened to sue me, which he has done to others who criticize his financial strategies (whatever else he is, he is ridiculously thin-skinned). I then put up his emails in the comments section of the post and ripped him harshly for his hypocrisy.

I now realize that part of what happened here was a miscommunication. He did not realize that I had changed my views somewhat on his book because of something I read after I sent my original email. That was unfortunate, because, as I said to him both on the blog and in an email, he and I are very close in views and admire and respect many of the same people, some of whom we share as friends. We actually ought to get along, but fell into a very unpleasant contretemps. In any case, I have continued to blast him here and there until now on all this.

A few substantive remarks beyond all this soap opera, and I shall let this go. One is that whether or not any barbell strategy either makes money or even succeeds in insuring one against big losses while preserving that option of making big money depends on the details of the strategy. He sells it as insurance against black swans (unforeseen events), but its ability to insure depends on having "safe assets" that will be safe even in the event of a black swan. In the case of his specific recommendation of US T-bills as the safe asset, while all the world has run to them in the last few months, it is now very far from clear how safe they are, at their near zero rates, and with the possibility of a major crash of the dollar sitting out there. Great grandma's old "cash in the cookie jar" may well be better, maybe along with some euros and yen and a couple of other currencies. A crash of US government securities could well be the next Black Swan.

The strategy again only will work if not too many people are doing it. If too many people are doing it, then the generalization of Bondarenko's critique will hold: those endpoint assets will be overpriced and money will be made by buying the intermediately risky ones. Also, if everybody does it, the economy will belly up with no financing of those intermediately risky activities that constitute the majority of the economy.

Furthermore, while it is very popular now to attack "economists" in general, Taleb rather makes a hash of things. On the broader part of his website he says somewhere that the only two economists he respects are dead: Hayek and Shackle. However, in TBS we find him praising Keynes, Knight, Minsky, and Kindleberger, all of whom I also admire. He also cites many living economists at least not critically, and some positively, with Robert Shiller probably most frequently. Yes, Merton and Scholes (and Samuelson) all look bad, and yes, the textbooks should stop pushing models based on Gaussian distributions, but by now most of us, and certainly the contributors to and readers of this blog know better.

Finally, he does remain in contradiction with himself in TBS, although he knows this and sort of acts like it is all very cute and philosophical (p. 296: "Half the time I am intellectual, the other half I am a no-nonsense practitioner... Half the time I am shallow, the other half I want to avoid shallowness," etc.). But he does have major contradictions, which make me less inclined to be so charitable about his slams on so many people over pretty trivial stuff (although not all of his slams are over trivial matters). So, he spends most of the book denouncing Gaussian distributions and those who push them (not very many these days, kind of a straw man). He seems to contrast that "Mediocristan" with "Black Swan" world of "Extremistan." But then, he spends time talking about econophysics and his papers with Mandelbrot on multi-fractal distributions and so forth, which he admits are not really either; they are "grey swans." Yes, he does cover his behind, but after all his rhetoric and carrying on, it looks pretty hypocritical.

A final btw. On his site he states that he did not wish to submit to JEBO because of his "no-nonsense orientation [that] clashes with academic resume building." Hmmm. Well, that might be fine, but I do see him publishing in American Statistician, Quantitative Finance (edited by our mutual friend, Jean-Philippe Bouchaud), and currently in the process of co-editing a special issue of the International Journal of Forecasting. Well, I wish him good luck with all that academic resume building (Oh, and I still think that he is a popularizer, although that is not necessarily a bad thing, but no, he will not get a Nobel for his ideas, sorry).

Employment Decline – Casey Mulligan Blames Inward Shift of Labor Supply

Believe it or not this explanation made it in print:

Because productivity has been rising — almost as much as the Douglas formula predicts — the decreased employment is explained more by reductions in the supply of labor (the willingness of people to work) and less by the demand for labor (the number of workers that employers need to hire). Why would some people have fewer incentives to take a job in 2008 than they did in 2006 and 2007 (and employers fewer incentives to create jobs)? I will tackle that question in my next post, but even without a specific answer we learn a lot about today’s recession from the conclusion that labor supply – not labor demand – should be blamed. First of all, it suggests that a fundamental solution to the recession would encourage labor supply (perhaps cutting personal income tax rates, so people can keep more of their wages), rather than tinker with demand.

Actually – Mulligan decides not to tell us what specifically induced people to reduce their offering of labor after all. The key item in his first post was referred to his next post? OK. But if there was some supply-side reason why workers decided to reduce their offerings of labor along an unchanged demand curve – wouldn’t that mean real wages would have gone up? Funny thing – Mulligan also fails to talk about this aspect of his bizarre explanation.

Financial Regulatory Daisy Chain

I read that Marc Mukasey, son of Atty. Gen. Michael Mukasey, who works for Rudolph Giuliani's law firm, is representing Frank DiPascalli, whom the Wall Street Journal reports is suspected as being in the center of the Madoff scheme. Of course, Madoff himself and his family had numerous connections with regulators.

Now just imagine that Madoff had been a poor person cheating on welfare. How long could he have gotten away with it?

Feldstein Advocates Surge in Defense Spending

Martin Feldstein says Defense Spending Would Be Great Stimulus:

As President-elect Barack Obama and his economic advisers recognize, countering a deep economic recession requires an increase in government spending to offset the sharp decline in consumer outlays and business investment that is now under way. Without that rise in government spending, the economic downturn would be deeper and longer. Although tax cuts for individuals and businesses can help, government spending will have to do the heavy lifting. That's why the Obama team will propose a package of about $300 billion a year in additional federal government outlays and grants to states and local governments ... A temporary rise in DOD spending on supplies, equipment and manpower should be a significant part of that increase in overall government outlays. The same applies to the Department of Homeland Security, to the FBI, and to other parts of the national intelligence community. The increase in government spending needs to be a short-term surge with greater outlays in 2009 and 2010 but then tailing off sharply in 2011 when the economy should be almost back to its prerecession level of activity. Buying military supplies and equipment, including a variety of off-the-shelf dual use items, can easily fit this surge pattern.

Feldstein’s call for some surge in government purchases with a scaling back when we reach full employment strikes me as good macroeconomics. However, we can do the same thing with public schools, bridges, and roads. Of course, I had a similar reaction to something Bill Kristol wrote.

Merry Christmas from the forest in Tasmania

A human being is a part of the whole, called by us the 'Universe' - a part limited in time and space. He experiences himself, his thoughts and feelings, as something separated from the rest - a kind of optical delusion of his consciousness. This delusion is a kind of prison for us, restricting us to our personal desires and to affection for a few persons nearest to us. Our task must be to free ourselves by widening our circle of compassion to embrace all living creatures and the whole of Nature in its beauty.

Albert Einstein

The Hubbard-Mayer Proposal to Nationalize Housing Finance – Can the Government Make Money on Socialism?

James Kwak has a nice discussion of a proposal that Brad DeLong endorses thusly:

We are drifting toward nationalizing housing finance. And as long as the government can borrow at the Treasury rate it can buy up and refinance the country's stock of mortgages without paying a dime in the long run. The largest risk-arb operation in history--and since the government can mobilize the entire risk-bearing capacity of America, a very low-risk one

According to the Federal Reserve, long-term mortgage rates are near 5.2 percent so the Hubbard-Meyer proposal is to finance them at rates well below current market rates with long-term Treasury rates are near 2.5 percent. How much of this difference represents the expected return premium that Brad hints at versus the expected losses from default, which the government will inherent? I’m not sure but Kwak offers us the following:

One question is whether the loans will be sustainable. Hubbard and Mayer say that 1.9% is more than enough because the ordinary spread is 1.6%. But these are not ordinary times, and even if the plan does help turn around the economy, we are probably looking at 1-2 more years of rising unemployment and resulting defaults. Furthermore, conforming mortgages rates are already down to 5.2% (thanks in part to the Fed talking rates down), so Fannie and Freddie could face the problem of getting stuck with riskier mortgages while the private sector keeps the better ones.

While this discussion does not answer the question, it does suggest that default risk today is higher that the historical spreads that Hubbard and Mayer are relying upon.

The Griots

"I was .. out walking toward Lycabettus, crossing for one more time the empty ''bombed'' streets, and the looted stores, having the most confused feelings. As the words of Mao ''Great unrest excellent condition'' suddenly hit my mind..." [1]

"What we face in Greece, it is not a simple reaction to the murdering of the young student Alexis Grigoropoulos, but something that we could describe as a general exegersis, somehow simular to what happened in Los Angeles in 96 or in Brixton in the 80's." [2]

"a group seen by an overwhelming majority in society as monstrous has itself labelled other people as monsters who can be attacked with impunity." [3]



[1] GRIOTS _day 4
Wednesday, 10 December 2008
Pictures from fucked up generation blog

[2] GRIOTS _day 2
Monday 8 December
http://foldedin.blogspot.com/

[3] Folded-in and The making of Balkan wars:The game at Monsters exhibition in Dresden. MONSTERS. Part II: Beat the Monsters!
http://foldedin.blogspot.com/
Thursday, 13 November 2008

Oil and Iraq: The Latest

As the Sunni insurgency in Iraq gradually dies down, ethnic and religious conflicts tied to oil are becoming more central, as reported by Ben Lando at Iraqi Oil Report, http://www.iraqoilreport.com. The northern cities of Mosul, and especially Kirkuk, remain violent, flashpoints partly because the struggle between Kurds, Arabs, and Turkmen for control, also involves control of a major oil producing center, with the Kurdish Regional Government already cutting its own separate oil deals with outside companies. Lando also reports that there is a move on now in southern Basra to vote on attaining autonomy, which would allow that region, where most of the rest of the oil is, to cut its own deals separate from the central government. Meanwhile the collapse of oil prices means the central government will probably go from running a budget surplus this year to a deficit, with cutbacks in reconstruction spending, although having been so far down, Iraq may be in better shape than other oil exporters, such as Russia, who needs $70 per barrel to balance its budget (and has had its stock market drop by 80% this year), or even Saudi Arabia who needs the now-too-high $40 per barrel, same price the oil companies reputedly have used to make their long term production investments.

Speaking of oil prices, this is an area where I was partly right, but did not go nearly far enough. So, in late spring, sometime after the price moved above $120 per barrel, I told a local TV station that it was looking like a speculative bubble, and the price could easily go down, "maybe even below $90 per barrel, although probably not below $70, and we will never see $2 per gallon for gas in the US again." Ooops! Wrong again. At least I recently talked a friend out of buying a six month forward contract on oil when it was at $53 per barrel, warning it could go as low as $25, which may yet also prove too high. But then, in 1930, at the beginning of the Great Depression, after the great East Texas oil field was discovered, the price fell in a six month period from about $1 per barrel to about 5 cents. A similar drop now would take it down to a bit over $7 per barrel from the peak of $147 in July, but then I am not expecting a find of an easy to pump oil field on the magnitude of the now largely depleted East Texas one.



Hidden conclusion here.

Notable

"We are not in a recession. We are not even in a depression. We are at the end of an era." -- Robert Paterson (by way of James Fallows).

THE FUNDAMENTALS ARE SOUND: A MaxSpeak Flashback

by the Sandwichman

To commemorate finding $800 in an ATM yesterday, from May 2006: THE FUNDAMENTALS ARE SOUND by the Sandwichman. The story of a poor sandwich-man from Lithuania who found a fortune in a snow bank, went nuts and ended up back where he started, told entirely in headlines.

It's Friday in Tokyo and the Nikkei is down 2.4%
as the Yen rises to a 8-month high against the Dollar.

Gold hit a 26-year high of $728 an ounce
before closing at $721.50 in New York,
while the Dow Jones Industrial Average
"plunged" 142 points on Thursday.

It's time for the Sandwichman to make a prediction:

The stock market will not crash on Friday!

However, just in case it does,
below the jump is an improbable story,
told completely in headlines,
about a poor sandwich-man
who found a fortune in stock certificates
in a snow bank on Wall Street.

——————————
'Sandwich Man' Restores $45,000
To Brokers but Goes Unrewarded
—————
$1-a-Day Sign Carrier Finds Wallet
in Snow Outside Stock
Exchange and Gives It to Policeman
— Owners of Stock
Think Recompense, if Any,
Is Up to Surety Company.
—————
$1-A-DAY MAN FINDS
$45,000 IN STOCKS
—————
Wouldn’t Keep Real Money Either.
—————
Once Found $60 at Dance.

——————————
REWARDS SHOWER
ON ‘SANDWICH’ MAN
—————
Finder of $45,000 Securities
Gets $105 Cash and Promise
of Clothing and Job.
—————
WEEPS AT PRESENTATION
—————
Surety Concern Also Will Give
Him $20 for Next 10 Weeks
— Banker Among Donors.
—————
Saw 'Sandwich” Man in Gale.
—————
Surety Concern to Give $275.
—————
Gets $25 More.

——————————
FINDER OF $42,000
'IN WALL ST.' NOW
—————
'Sandwich' Man Lays
Aside His Boards to Take Job
as a Broker's Messenger.
—————
EATS WITH NEW EMPLOYER

—————
Trips to Haberdashery and a

Barber Shop Complete His
Busy Day Downtown.
—————
Reports on New Job Today.
—————
More Gifts Are Sent in.
——————————
'SANDWICH MAN' HELD
IN PSYCHOPATHIC WARD
—————
After 'Look' at Him,
One Man Drops Dead

——————————
LUCK BRINGS WOE
TO 'SANDWICH MAN'

—————
Finder of $45,000,
Glorified for
Honesty, Is Deranged by
Sudden Affluence.

—————
RICHER DIET MAY BE CAUSE
—————

Doctors Hope for Recovery of
Former Derelict Whose ‘Look’
Killed an Associate

——————————
THE TOO IMPROBABLE.
——————————
SANDWICH MAN UNCHANGED
Tests on Greges at Bellevue Not
Yet Completed.
——————————
DELUSIONS ENDED FOR
SANDWICH MAN
—————
Finder of $45,000, Who Rose
to Sudden Riches and Fame,
Leaves Bellevue Today.
—————
BUT DOCTORS ADVISE REST
—————
Frank Greges, However, Says He
Is ‘Full of Pep’ and Wants
to Get Back to Job

——————————
‘SANDWICH MAN'
GOES HOME IN TAXI
—————
He Leaves Bellevue to 'Take It
Easy' on Rewards for His
Return of Securities.
—————
PHYSICIAN GIVES HIM $5
—————
With This ‘Change’ in Pocket,
He Poses for Photographers,
Then Rides Off on $1.20 Trip

——————————
‘SANDWICH MAN'
RETURNS TO BEAT
—————
Greges Carries Boards Once
More After Touch of Fame
for Restoring $45,000.
—————
PHILOSOPHICAL ABOUT IT
——————
Has ‘Maybe a Couple Hundred
Dollars’ of His Rewards for
Honesty — Snubs Farm Work

Fiscal Stimulus of $850 Billion Over Two Years

Me thinks Lori Montgomery needs a new calculator:

President-elect Barack Obama and congressional Democrats have entered discussions over an economic stimulus package that could grow to include $850 billion in new spending and tax cuts over the next two years ... Obama is putting together a package of $670 billion to $770 billion but that he expects additions by Congress to jack up the total to about $850 billion, or 6 percent of the nation's economy.

GDP is about $14.4 trillion per annum so $850 billion over two years is just under 3 percent – not 6 percent. Aside from this nitpicking on my part, there is some interesting information in this story:

A package of that size - which would include at least $100 billion for cash-strapped state governments and more than $350 billion for investments in infrastructure, alternative energy and other priorities - is a significant increase over the numbers previously contemplated by Democrats. It would exceed the $700 billion bailout of the U.S. financial system, as well as the annual budget for the Pentagon ... Furman and Schiliro said the package would include $100 billion to help states cover the expanding cost of Medicaid, the federal health program for the poor. With more than half of states reporting budget shortfalls this year, the package also could include big increases in state block grants and other programs intended to help local governments avoid layoffs or tax increases.

Uh oh – I have to nitpick again. First of all, it is true that defense spending is running at something near $700 billion per year so how is $850 billion over two years a larger figure? And if the extra cost of Medicaid eats up all of the $100 billion devoted to “cash-strapped state governments”, then what is left over to address what we discussed here? Maybe Ms. Montgomery needs more than a new calculator. Maybe she needs a better editor.

Not Quite Radical

Minus the amazement about the money multiplier, this proposal published in Yes! Magazine bears a superficial resemblance to mine. The big difference, of course, is that Brown would have the good citizens assume responsibility for all the liabilities of the banking system she would seize. This is why I have argued against bank nationalization and for new public institutions to take their place. A minor note: Germany is a somewhat more substantial instance of public banking than North Dakota. Not that I have anything against North Dakota. In fact, we’re having their weather right now in the Pacific Northwest.

Sandwichman Finds $800 in ATM

by the Sandwichman

Times are tough. But not so tough that some people won't go and withdraw 800 bucks from an ATM machine and then forget to take the money (and the withdrawal slip)! Of course I did the right thing and turned the money over to the credit union where the bank machine was. Coincidentally, there was a story in the New York Times in the 1930s about a sandwich man who found $45,000 in securities in a snow bank on Wall Street. I did a post on that story on MaxSpeak. I'll have to see if I can dig it up again.

The End of Federal Reserve Open Market Operations As We Knew Them

It is being widely noted that the latest Fed interest rate cut pretty much uses up that tool for stimulating the economy, even though zero is a floor only in convention, and we have seen negative interest rates in fact. But there is more going on here than has been remarked on. To a substantial degree the latest Fed move involves covering up how seriously it has lost its ability to control the federal funds rate, its supposed main policy tool. The latest cut to 0-.25% simply moves the target down to where the actual ffr has been in recent weeks, well below the previous target of 1%.

The deeper problem is that the recent turmoil and decline of interest rates to near zero is collapsing the repo market. This point was made on Dec. 16 in "Ultra-low US rates undermine repo market" by Michael Mackenzie, also linked to on marginal revolution by Tyler Cowen. MacKenzie stresses the general problems for liquidity in financial markets arising from this collapse, but did not note the rarely made point that this has been the market where the Fed has generally carried out its open market operations that control the ffr. So, the collapse of this market may well be why the Fed has been unable to control the ffr, which fact they may now be trying to cover up. MacKenzie notes that a major problem in the repo market is that people borrowing securities from dealers are not returning them on time, leading to "failed trades." Also, the low rates leave too small spreads for the dealers to engage in intermediation. In any case, the Fed has lost its favorite policy tool.

Local Government Spending Cuts – This is Why We Need Federal Revenue Sharing

Our graph, which shows the share of GDP from both revenues and expenditures of our state & local governments from 1999 to current, has a surprise – at least for me. While we often hear about the pro-cyclical nature of state & local fiscal policy, expenditures have appeared to be countercyclical – but this might change:

The worst budget crisis in decades is forcing states to cut funding to cash-strapped cities, which already are slashing police, firefighters and other services … In today's recession, both state and local revenues are suffering across the board. In the past 30 years, state spending has grown by an average of 6.3%. States cut a total of 0.1% from their budgets for fiscal 2009, which ends in June; the faltering economy is increasing projected deficits in the coming months. States are facing $30 billion in budget deficits for the current fiscal year, according to the Fiscal Survey of States released this week by the National Governors Association and National Association of State Budget Officers. That figure is likely to grow in the coming months. Twenty-two states, including Georgia, California and Nevada, already have cut spending from their 2009 budget. This week Minnesota's governor and legislators said cities and counties can expect aid to decrease soon. The state is coping with estimated shortfalls of $426 million for this year and $5 billion for the two-year budget period that begins in July. New York Gov. David Paterson's budget proposal, released this week, would cut about $240 million in aid to New York City.

The story continues with all sorts of suggestions as to how to avoid the spending reductions. All good ideas but state & local governments are often restricted from running deficits so the best idea seems to be Federal revenue sharing as the states appear to be ready to reduce their aid to the local governments.

Never Say Never

by Sandwichman,

Over at TPM, in reply to prompting by the Sandwichman, Randall Wray wrote:

Work week reduction (or "work sharing") has never, anywhere, eliminated involuntary unemployment and underemployment; indeed, it has never had a significant effect. That reserve army of the unemployed persisted despite reduction to the 12 hour day, the 10 hour day, and the 8 hour day. It will persist even if we can move to the 6 hour day.

Meanwhile, Dean Baker wrote that one of two simple answers to the problem of secular stagnation was:

Work fewer hours - while workers in other wealthy countries can count on 4-6 weeks a year of vacation, workers in the United States are guaranteed no paid time off. As a result, the average work year in the United States involves almost 20 percent more hours than the work year in Western European countries. As fringe benefits a shorter work year can be more family friendly and also we can be less polluting if we take the benefits of our productivity growth in leisure instead of income.

Stimulus and Stagnation

by the Sandwichman

Economic stimulus is the talk of the town. Over at Talking Points Memo (and on his own blog), Robert Reich has raised the specter of "secular stagnation" -- what happens if we stimulate the economy but consumers refuse to go back to their old, pre-crisis spending ways?

Dean Baker thinks secular stagnation is easy and takes a page from the Sandwichman's blog: reduce the hours of work. Sandwichman thinks "secular stagnation" is just the economists' way of being dissing cornucopia. Sandwichman engages Randall Wray in a discussion of shorter working time in which Professor Wray warns against saddling the good idea of shorter hours with "unwarranted claim that they will relieve involuntary idleness."