BIG in Japan... Work Sharing

by the Sandwichman

This is how it begins. With baby steps. Experience with these kinds of programs in the past is that people learn they actually like the extra free time.

In the deep south of Japan sits the tiny island of Himeshima. Farmers cultivate delicious prawns, the rare chestnut tiger butterfly flitters around the beach and 2,400 islanders wallow in total job security.

It has been so on Himeshima for 40 years and suddenly, faced with the most alarming economic downturn since the Second World War, everyone from the central Government in Tokyo to the country's biggest industrial conglomerates is desperate to copy its secret: work sharing...

Tactics for hard times as Japanese turn to job-sharing

Business groups split over work sharing

Helping Employers Cut Hours, Not Jobs

Business bigwig suggests work-sharing schemes to cope with tough times

"the selflessness of workers who would rather cut their hours than see a friend lose their job..."

President Obama

INAUGURAL ADDRESS

As we consider the road that unfolds before us, we remember with humble gratitude those brave Americans who, at this very hour, patrol far-off deserts and distant mountains. They have something to tell us, just as the fallen heroes who lie in Arlington whisper through the ages. We honor them not only because they are guardians of our liberty, but because they embody the spirit of service; a willingness to find meaning in something greater than themselves. And yet, at this moment — a moment that will define a generation — it is precisely this spirit that must inhabit us all.

For as much as government can do and must do, it is ultimately the faith and determination of the American people upon which this nation relies. It is the kindness to take in a stranger when the levees break, the selflessness of workers who would rather cut their hours than see a friend lose their job which sees us through our darkest hours. It is the firefighter's courage to storm a stairway filled with smoke, but also a parent's willingness to nurture a child, that finally decides our fate.

Our challenges may be new. The instruments with which we meet them may be new. But those values upon which our success depends — hard work and honesty, courage and fair play, tolerance and curiosity, loyalty and patriotism — these things are old. These things are true. They have been the quiet force of progress throughout our history. What is demanded then is a return to these truths. What is required of us now is a new era of responsibility — a recognition, on the part of every American, that we have duties to ourselves, our nation, and the world, duties that we do not grudgingly accept but rather seize gladly, firm in the knowledge that there is nothing so satisfying to the spirit, so defining of our character, than giving our all to a difficult task.

ACCEPTANCE SPEECH, DEMOCRATIC NOMINATION

America, this is one of those moments.

I believe that as hard as it will be, the change we need is coming. Because I’ve seen it. Because I’ve lived it. I’ve seen it in Illinois, when we provided health care to more children and moved more families from welfare to work. I’ve seen it in Washington, when we worked across party lines to open up government and hold lobbyists more accountable, to give better care for our veterans and keep nuclear weapons out of terrorist hands.

And I’ve seen it in this campaign. In the young people who voted for the first time, and in those who got involved again after a very long time. In the Republicans who never thought they’d pick up a Democratic ballot, but did. I’ve seen it in the workers who would rather cut their hours back a day than see their friends lose their jobs, in the soldiers who re-enlist after losing a limb, in the good neighbors who take a stranger in when a hurricane strikes and the floodwaters rise.

This country of ours has more wealth than any nation, but that’s not what makes us rich. We have the most powerful military on Earth, but that’s not what makes us strong. Our universities and our culture are the envy of the world, but that’s not what keeps the world coming to our shores.

Instead, it is that American spirit – that American promise – that pushes us forward even when the path is uncertain; that binds us together in spite of our differences; that makes us fix our eye not on what is seen, but what is unseen, that better place around the bend.

Gun Nuts Exposed at Distorting Data and Results

In the latest Econ Journal Watch, just out, Ian Ayres and John J. Donohue III have a paper, "Yet another refutation of the more guns, less crime hypothesis - with some help from Moody and Marvell" accessible (hopefully) at http://www.aier.org/ejw/archive/comments/doc_view/4018-ejw-200901?tmpi=component&format=raw.

Besides recounting how the major study by John Lott and Mustard has lots of data problems and cut off just before the post-1992 crime decline, they focus on a paper by Moody and Marvell that claims that a study of 24 states showed a reduction in crime for increasing access to guns. It turns out that in this study 23 of the 24 states had the opposite result, and the aggregate result was solely due to Florida. However, the data in Florida is all messed up and also probably caught a general crime wave decline due to a regression to the mean after the Mariel boat landings from Cuba in the early 1980s. I am not doing their paper justice, but the media discussion is often dominated by Lott and his allies who are now pushing for loosened gun laws in Virginia, and are counting on Dems laying low and not challenging their incessantly repeated claims that such gun law relaxations reduce crime. They should not lay low. The claims are baloney and lies, based on distorted date and misrepresentations of results from ones with better data.

Communists at the Inaugural Concert!

I was happy to see Pete Seeger at he Inaugural Concert (with the Boss in tow), singing all of the verses of This Land is Your Land, including the rarely sung:

As I was walkin'
Right there in front of me
Was a great big sign,
Said "Private Property"
But on the other side
It didn't say nothin'
'Cause this land was made for you and me.

Oh and speaking of Paul Samuelson, as Barkley has been, he has to be one of the funniest of all economists - a low bar I know. For example, his "algorithm" for solving the Transformation Problem: "Write down Values. Erase. Write down Prices." I think this was the same article where he called Marx "a minor Post-Ricardian." I have to admit, though, when I first read the article, I wasn't laughing. Spitting, more like. Ah, youth!

Britain needs a shorter-hours culture

by the Sandwichman

David Spencer in the Guardian this morning echoes two of the Sandwichman's favorite talking points:

In a letter to the poet TS Eliot in 1945, he [Keynes] suggested that unemployment could be lowered by the reduction in working time. Indeed for Keynes this was the "ultimate solution" to the unemployment problem. Reducing work time not only extended the time during which workers could spend income and hence generate employment, but it also allowed jobs to be spread out more evenly across the available workforce, thereby reducing unemployment.

and...

Orthodox economic theory teaches that those who argue for shorter working time succumb to the "lump of labour fallacy". This is the idea that there is a fixed amount of work to be done in society, so any reduction in work hours must increase the number of available jobs. It is argued by orthodox economists that the amount of work is not fixed and that reductions in work time will simply add to firms' costs. But the above fallacy is not wholly persuasive. If reduced hours encourage people to work more efficiently, then the effect may be to lower prices and to increase the demand for goods and services and in turn the demand for labour.

UK Government Adopts Nationalization of Troubled Banks

Bloomberg reports that Gordon Brown has been listening to economists:

Prime Minister Gordon Brown’s government tightened its grip on Britain’s financial system, guaranteeing toxic assets and giving the Bank of England unprecedented power to buy securities. The plan will increase the cost of bailing out the nation’s banks by at least 100 billion pounds ($147 billion), the Treasury said in a statement today. The government raised its stake in Royal Bank of Scotland Group Plc to 70 percent and said it would use Northern Rock Plc to spur mortgage lending. “This is aiming to once and for all underpin faith in the banking system,” said Alan Clarke, an economist at BNP Paribas SA in London. “We’re breaking all conventions. The availability of credit is going down and the economic outlook is getting worse, so the government is having to throw more and more at it.” The new measures are the biggest steps by Brown to get banks lending again as Britain slides deeper into a recession that may be the worst since the aftermath of World War II. The government will require aid recipients to sign “specific and quantified” agreements to lend, reflecting Brown’s frustration at the failure of an October rescue to unlock credit markets.

Felix Salmon looks at the troubles at Bank of America and Citigroup and recommends we adopt nationalization:

Citi and BofA aren't suffering from liquidity problems. They have all the liquidity they need, thanks to the Fed. The problem is one of solvency: the equity markets simply don't believe that the banks' assets are worth more than their liabilities. I can't see a solution to this problem short of nationalizing both Citi and BofA, and summarily firing the hapless Vikram Pandit along with the overambitious Ken Lewis.

But it seems that we Americans are heading down a different route, which Paul Krugman doesn’t like:

On paper, Gotham has $2 trillion in assets and $1.9 trillion in liabilities, so that it has a net worth of $100 billion. But a substantial fraction of its assets — say, $400 billion worth — are mortgage-backed securities and other toxic waste. If the bank tried to sell these assets, it would get no more than $200 billion. So Gotham is a zombie bank: it’s still operating, but the reality is that it has already gone bust. Its stock isn’t totally worthless — it still has a market capitalization of $20 billion — but that value is entirely based on the hope that shareholders will be rescued by a government bailout ... Well, the government could simply give Gotham a couple of hundred billion dollars, enough to make it solvent again. But this would, of course, be a huge gift to Gotham’s current shareholders — and it would also encourage excessive risk-taking in the future. Still, the possibility of such a gift is what’s now supporting Gotham’s stock price. A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: it seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to a special institution, the Resolution Trust Corporation; paid off enough of the banks’ debts to make them solvent; and sold the fixed-up banks to new owners. The current buzz suggests, however, that policy makers aren’t willing to take either of these approaches. Instead, they’re reportedly gravitating toward a compromise approach: moving toxic waste from private banks’ balance sheets to a publicly owned “bad bank” or “aggregator bank” that would resemble the Resolution Trust Corporation, but without seizing the banks first.

Paul notes the American fear of the word nationalization and our willingness to give the troubled banks a gift by buying toxic assets at a “fair” price that exceeds the market value. In my view, this American way is just sheer insanity. We should watch and learn from the actions of the UK government.

Samuelson on Hayek, A Comment on Comments

Paul A. Samuelson has published "A few personal reminiscences of Friedrich von Hayek" in Journal of Economic Behavior and Organization, January 2009, vol. 69, issue 1, pp. 1-4, which I happen to edit, with an accompanying paper pp. 5-16 by Andrew Farrant and Edward MacPhail, entitled "Hayek, Samuelson, and the logic of the mixed economy?" One can link to Samuelson's paper at http://economistsview.typepad.com where Mark Thoma has it as one of his links for 2009-01-18 (easier than listing the whole url). In the last two days there have also been full blown postings on The Austrian Economists, Marginal Revolution, and Brad DeLong, with lots of furious commentary on the first two about it. While Samuelson praises Hayek's economics of information, saying he was the real winner of the socialist calculation debate and deserved his Nobel, PAS also criticizes his macroeconomic theory in comparison with Keynes's, argues his Road to Serfdom was wrong in forecasting that allowing for various forms of state intervention would lead to the road to serfdom, and dismisses Hayek's own criticisms of him on this matter, with Farrant and MacPhail examining the letter exchanges between them on this issue, and largely agreeing with PAS. The paper also has a long footnote highlighted by both Tyler Cowen at MR and Brad DeLong in which he reprises Melvin Reder's discussion of anti-Semitism by Keynes, Schumpeter, and Hayek, concluding that Keynes was the worst on this and Hayek the best of these three.

The comments on AE and MR have been mostly perfervidly livid at PAS over this article, going on about many points. However, I wish to address one in particular that has been brought up a bunch, one that was already mashed over in a posting and comments on Marginal Revolution by Tyler Cowen on 11/20/08. Responding to a nasty quote by PAS in Spiegel that "libertarians are emotional cripples," he linked to p. 416 of Mark Skousen's The Making of Modern Economics, who quoted the 13th edition of Samuelson and Nordhaus Economics from 1989, p. 387: "The Soviet economy is proof that, contrary to what many skeptics had earlier believed [a reference to Mises and Hayek](bracketed remark by Skousen) a socialist command economy can function and even thrive." Cowen and others have jumped on this as proof that Samuelson is "incompetent" and a lot worse, even though he cited CIA data for his claims, and also of course these commentators claiming the superiority of Hayek and how dare Samuelson say all those bad things about him.

Well, some of the language in Samuelson's paper (which I edited), is a bit strong, but I agree with the substance of most of it. Furthermore, while Hayek argued that centrally planned socialism would be inefficient, an argument PAS agrees with, Hayek no more forecast the moment of the Soviet collapse than did PAS or the CIA or pretty much anybody other than a French sociologist named Revel in 1976. Also, the severe economic decline in the Soviet bloc largely came after the political collapse of the bloc. It is not at all clear such a collapse would have happened without the political collapse, if the Soviet leaders in 1989 had cracked down on the independence demonstraters in Lithuania, the people fleeing across the Hungarian border into Austria, and of course supported the Honecker regime in East Germany in preventing the Berlin Wall from falling. After all, the upshot of the Chinese crushing the demonstrations in Tienanman Square was continued economic growth with a gradual transition to its current peculiar mixed economy that has grown very rapidly. And for all the carrying on many make about the Soviet economy, while it may have been inaccurate to describe it in 1989 as "thriving," and it was falling behind the US in growth, technical innovation, and quality of goods, it was functioning, and the population was not starving or homeless or without clothing or education or medical care, although it was politically repressed. But it had provided the industrial expansion that allowed it to build a military capacity that defeated Hitler's military at Stalingrad and Kursk. In short, this dumping all over PAS for these statements is fairly ridiculous, whatever one thinks of Samuelson's ultimate or broader influence on economics as the godfather of its mainstream neoclassical form in the last half of the 20th century.

The comments at The Austrian Economists can be found at http://austrianeconomists.typepad.com/weblog/2009/01/samuelson-reminiscences-hayek-in-jebo.htm and the ones at Marginal Revolution are at http://www.marginalrevolution.com/marginalrevolution/2009/01/samuelson-on-hayek.html.

Sandwichman Reads the Footnotes (so you don't have to)

by the Sandwichman

The title of my last post was a composite allusion to The Rise and Fall of Economic Growth by H.W. Arndt (1978)and to chapter nine of Fred Hirsch's Social Limits to Growth (1976): "Political Keynesianism and the Managed Market." In his Managing Without Growth, Peter Victor cited Arndt's book extensively in his retelling of the short history of economic growth as prime policy objective.

Arndt concluded his book with a somewhat optimistic, albeit qualified, assessment of growth -- "the realistic question to ask is not whether further economic growth is possible or desirable, or even how rapid it should be, but what kind of growth we should aim at." In discussion "the right kind of economic growth," he footnoted Hirsch's book, "While this present book was in press, the implications for economic growth as a policy objective of 'positional competition' have been spelled out much more fully in an important and exciting book..." (which would have been clearer if he had stated it as "...the implications of 'positional competition' for economic growth as a policy objective have been spelled out...").

Admittedly, there is some discussion going on of what kind of spending is desirable in a stimulus package. But this is neither a secondary question nor a transitory one. It is, as Arndt termed it, the realistic question. When the question becomes "what kind of growth" instead of "how much growth," then some things that have in the past been growing may come to be excluded from the calculus as kinds of growth we don't actually want because they don't benefit society and they impose unacceptable costs on the environment, sociability, etc. It could even be that the sum total of those expendable kinds of growth results in a decline in Gross Domestic Product, which at any rate is not a good measure of social welfare.

Hitherto the "weapon of mass destruction" in defense of economic growth has always been the assumption that only through continued and fairly brisk growth could full employment be attained. That assumption is not tenable for two reasons. One, the political linkage between growth and full employment has been broken... and it has been broken by proponents of growth. Two, the claim to exclusivity relies on the reactionary political assertion that work-time reduction cannot play a positive role in maintaining full employment. That assertion is groundless.

Beyond Growth: The Rise and Fall (and Posthumous Return) of Political Keynesianism

by the Sandwichman

The ghost of Montagu Norman notwithstanding, the fact that there are bad -- or even stupid -- arguments against something is not, in itself, a good argument for it. Some sort of stimulus package is, at this point, a foregone conclusion. Whether or not StimPack™ '09 is "big enough" or whether or not it will work as intended are questions the Sandwichman will leave for more learned Thebans to debate. What Sandwichman wonders is "what's growth got to do with it... do with it?"

Once upon a time, Keynesian policy was about "full employment", defined as a balance between the number of job seekers and the number of positions available. Then economic growth came to be seen as a prerequisite for attaining full employment. Then full employment was defined downward to the so-called natural rate or the non-accelerating inflation rate of unemployment (NAIRU). Now, even that natural rate seems too high a target for fiscal policy to aim at all at once. Full employment has become an empty promise.

Meanwhile, starting back as early as the 1950s, with John Kenneth Galbraith's The Affluent Society, questions began to emerge about the social and/or environmental efficacy of economic growth as a prime policy objective. Doubts compounded in the 1970s, with the Club of Rome's Limits to Growth and Fred Hirsch's Social Limits to Growth.

Now suddenly, after 30 years of neo-liberal orthodoxy -- a regression Hirsch presumed was unthinkable -- we're being beamed back to the pre-Reagan era for a refreshing blast of old-time Keynesian pump-priming. Happy days are here again! What am I missing? All those insights into the inherent contradictions of Keynesian demand management. The stuff about conservation of resources and the distinctions between the material economy and the positional economy.

What if the StimPack™ '09 answers we have are for problems people don't have? "They've got other problems and we don't have any answers."

House Republicans Want an Inadequate Stimulus Bill

Eric Cantor writes:

We Republicans believe we can help mitigate those risks if we are given a meaningful place at the table ... Specifically, we want to keep the stimulus bill -- as well as all other future economic "rescue" measures -- limited in scope and transparent. Our country has no other choice. The Congressional Budget Office (CBO) issued a sobering report that this year's deficit will likely climb to over 8 percent of U.S. gross domestic product, or $1.2 trillion. That's higher than at any point since World War II -- and those figures don't even account for the forthcoming stimulus. Such heavy borrowing runs the risk down the line of rampant inflation, which scares away foreign capital while making the purchasing power of the dollar weaker for American consumers.

The stimulus may be too big? Inflation and higher interest rates? This guy really doesn’t get it – does he? The letter to President Obama by Paul Krugman should go to the top of the read pile for Representative Cantor.

Measuring the Cost of TARP

The CBO blog has a very useful discussion of how to measure the cost of TARP:

Through December 31, 2008, the Treasury disbursed $247 billion to acquire assets under that program. CBO valued those assets using discounted present-value calculations similar to those generally applied to federal loans and loan guarantees, but adjusting for market risk as specified in the legislation that established the TARP. On that basis, CBO estimates that the net cost of the TARP’s transactions (broadly speaking, the difference between what the Treasury paid for the investments or lent to the firms and the market value of those transactions) amounts to $64 billion—that is, measured in 2008 dollars, we expect the government to recover about three quarters of its initial investment. The Office of Management and Budget’s (OMB’s) report on the TARP, issued in early December, only addressed the first $115 billion distributed under the program. CBO and OMB do not differ significantly in their assessments of the net cost of those transactions (between $21 billion and $26 billion), but they vary in their judgments as to how the transactions should be reported in the federal budget. Thus far, the Administration is accounting for capital purchases made under the TARP on a cash basis rather than on such a present-value basis—that is, the Administration is recording the full amount of the cash outlays up front and will record future recoveries in the year in which they occur. That treatment will show more outlays for the TARP this year and then show receipts in future years.

One view – popular among certain economists including yours truly – is that the deals under TARP are nothing more than asset trades. If the government exchanges $100 in cash for $100 in other assets, there is no expenditure and no deficit cost. As the Administration uses this cash basis for deficit accounting, it overstates the deficit by ignoring the present value of future recoveries.

But this view is an extreme one if what the government gets back for its $100 in cash outflows is actually assets worth less than $100. CBO is saying here that the government may be getting back $75 in present value terms for every $100 in cash outlays. If this holds up for the rest of the $700 billion in TARP funds, then taxpayers will have spent $175 billion on net to bail out these troubled financial institutions. Not as shocking as $700 billion but still a hefty price for the laissez faire policy of letting these institutions walk away with the upside of risk taking but having the rest of us bear the downside risk.

Policy by Ponzi

by the Sandwichman

Is change.gov's Citizen's Briefing Book the best thing since SinceSlicedBread.com? Is it a matter of good intentions thwarted by (abysmally) bad design? Or is it a timely and revealing demonstration of the principle of "positional economic goods" and thus an illustration of why economic growth is likely to disappoint our aspirations?

Three years ago, the Service Employees International Union held a contest seeking ideas on how to "strengthen the economy and improve life for working men and women and their families." People were encouraged to submit ideas and vote for their favorite ideas. The most popular ideas then became finalists from which the contest winners were selected by a panel of judges.

The functional design of the website was hideous. The most evident flaw was that the early leaders were displayed on the sites front page, giving them a formidable advantage. It was also possible to game the system by registering multiple times and voting repeatedly for your own idea. Once a gamester had elevated their idea to the top five, they could sit back and let it accumulate innocent votes.

It's hard to believe that no lessons were learned from the SlicedBread fiasco and no further developments have been made in online participatory software. The cynic might argue that these things are strictly public relations exercises and that thus there are no lessons to be learned or improvements that need to be made. But even in terms of p.r., the ersatz quality of the participation might just piss thoughtful people off instead of giving them the satisfaction of having had their say.

This is an example of the kind of situation Fred Hirsch identified as a feature of the "positional economy" in his Social Limits to Growth.

"The positional economy... relates to all aspects of goods, services, work positions, and other social relationships that are either (1) scarce in some absolute or socially imposed way or (2) subject to congestion or crowding through more extensive use."

With tens of thousands of "ideas" submitted, each one only gets a few seconds of front-page exposure before being buried in the database. However, ideas that grab an initial advantage continue to get exposure as "most popular" and thus continue to obtain even more votes. In the end, the highest-ranked ideas will not necessarily be the best ideas or even those that might have been ranked highest if all participants had somehow indefatigably viewed and voted on each idea.

Hirsch's point was that the presence of these scarce or potentially congested goods or services undermined the ideal that economic growth could lift all boats. Improvements in the material economy would tend to raise the relative demand for -- and cost of -- scarce positional goods and thus lead to disappointment. Hirsh's prime example of crowding is in the demand for prestige jobs. College education once offered access to such employment but with the democratization of higher education, the screening of job applicants became more intense and required higher credentials for entry to any given level of employment.

Although Hirsch doesn't consider Ponzi schemes, his concept could equally explain the role of such episodes in the saga of economic growth. A Ponzi scheme rewards early participants with the proceeds from later entrants. In crude outline, it is little different than the employment/education credentials story except that it cuts out the "waste" of actually acquiring the subsequently-devalued credential. In an economy that increasingly values positional goods, the Ponzi is a strictly positional investment. One might even suggest that as the "real economy" of work, employment credentials, production and income acquires a greater element of positional distribution of wealth, the lessons learned there translate into a greater propensity to engage in Ponzi-like speculative bubbles.

Non-arguments Against the Fiscal Stimulus

Greg Mankiw has another post where the reader might think there is some argument against the Obama fiscal stimulus proposal – but once again, the reader finds nothing:

John Cochrane, a professor at the University of Chicago Booth School of Business, says that among academics over the last 30 years, the idea of fiscal stimulus has been discredited and in graduate courses, it is "taught only for its fallacies." New York University economist Thomas Sargent agrees: "The calculations that I have seen supporting the stimulus package are back-of-the-envelope ones that ignore what we have learned in the last 60 years of macroeconomic research."

Beyond dropping a couple of well known names, what does this passage substantively tell us? Cochrane says the Keynesian multiplier has fallacies but fails to identify a single one. Sargent may be right that we have learned a lot in the last sixty years but exactly what lessons apply to this policy debate. This piece does not say. In other words, this passage is absolutely worthless as it says nothing of substance at all.

Then again, when Greg tried to tout the Fama theory by accounting identity approach – he took a rather harsh drubbing. Better to offer meaningless nothings than what appears to be a substantive argument until actually thinks about it. Maybe there are legitimate arguments against this fiscal stimulus – but for all his efforts, Greg Mankiw isn’t exactly producing convincing ones!

Obama Drinks Social Security Kool-Aid

This morning's Washington Post has a front page story that not only says social security deficits start in 2011 (2017 according to the Trustees intermediate projection), but reports that Obama has now specifically included social security as an item to be dealt with in the broader analysis of longer term deficit reduction. The precise quote, " 'Social Security can be solved," he said with a wave of his left hand," with him then going on to accurately note medicare and the health system as the more important and more difficult problem. There is no word on what he intends to do or even what sort of mechanism he intends to set up for figuring out how to do it, whatever it is. The only real positive here is that, perhaps looking to the bright side of that piece on huffingtonpost, there will be no privatization scheme as part of any proposal from his administration.

I see two factors in this. The first is the noxious influence of Larry Summers being in the apparent catbird seat as "economics czar." He was part of the Clinton group that was pushing this kool-aid back in the late 1990s. The other may be a more short-term political motive. In particular, "blue dog" Democrats are reportedly unhappy about the scale of the deficits in the fiscal stimulus and want to see some moves to lowering longer term ones. The most important figure in this is Kent Conrad of ND, Chairman of the Senate Finance Committtee, who in late 2007 was part of an effort with Treasury Secretary Paulson to cook up a deal involving both fica tax increases and future benefit cuts for social security, Conrad having long been a deep drinker of the ss kool-aid baloney. That effort was killed from both the left ("no benefit cuts, leave social security alone") and the right, particularly Dick Cheney ("no new tax increases"). Again, Obama's platform called for a possible imposition of fica on higher income individuals, "if needed" in 2019, with no call for benefit cuts. But the Conrad gang wants that, and I have long pointed out that any change would involve benefit cuts, as Republicans will simply filibuster any tax increase that does not also involve benefit cuts. As it is, I hope that Obama's plan runs into complications, and that in the end, nothing is done with or to social security.

Huffingtonpost Tells Liberal Democrats To Drink "Fix Social Security Now" Kool-Aid

Scott Bittle and Jean Johnson called posted yesterday on huffingtonpost "Why Liberals Should Want Obama To Take On Social Security Now," at http://www.huffingtonpost.com/scott-bittle-and-jean-johnson/why-liberals-should-want_b_157490.html. They claim that Obama's remark last week about looking at "entitlement spending" meant he wants to look at social security, and, of course, they buy the most moronic and hysterical projections about social security. If nothing is done now, "everyone will lose." Gag. While the system has not had such large surpluses now that we are in recession, it remains a fact that in nearly half of the years of the past decade, the system did better than the "low cost" projection under which the system never runs a deficit.

More specifically, Bittle and Johnson make four points: 1) that change now will be OK because the public does not want private accounts. That may be true, but to get Republicans on board we are talking about having to take benefit cuts for somebody, either now or in the future that may well not be needed at all. 2) Doing something now will "avoid a generation war." Why is this? There is no change that can be made that is not going to impact one group more than another. None. The supposed Bush plan would have hit a particular group very hard who were born over a six year period. This is just fantasy land stuff. 3) That doing something to social security is "easier than fixing health care." But, as Obama's campaign certainly knew, the big problem in entitlement spending is the sharply rising projections for health care costs, with the medicare fund already running the deficits that the social security fanatics keep freaking out might happen in 2017 or thereafter for social security. Health care may be harder, but it is far more important. And, as Bush discovered, social security is not all that easy, although perhaps these clowns think it is because they also have this delusion that somehow there is some solution that is not going to impact different age groups differently. Wrong. 4) The Dems are (will be) in control of both the WH and the Congress. So, this means they should do something both unnecessary and stupid? Of all the priorities we face right now, fooling with social security must be rock bottom, and at least the Obama campaign figured this out. Let us hope that the Obama administration remembers it as well after they get into power.

Getting the Most Bang for the Stimulus Buck

by the Sandwichman

Dean Baker has made this old Sandwichman very, very happy. Point seven of Dean's "Yes, We Can Make the Stimulus more Stimulating":

7) Pay for shorter workweeks and more vacations

The United States lags the rest of world in that its workers are not guaranteed any vacation time, sick leave, or family and parental leave. In Europe, five or six weeks a year of paid vacation is standard. Also, all Western European countries guarantee their workers some amount of paid sick leave and paid parental leave.

The stimulus gives us a great chance to catch up with the rest of the world. The government could make up the pay for two years for any paid cutback in hours, up to 10 percent of total hours worked in a year and $3,000 per worker. This means that if a firm offered workers who previously had no paid vacation five weeks of vacation a year, the government would provide a tax credit to pick up the tab, up to $3,000 per worker. Similarly, if they extended 10 days of paid sick leave, the government would provide a tax credit for the amount actually used. If employers of 70 million workers (half of the labor force) received an average tax break of $2,500, the cost would be $170 billion a year.

Wow. Wow. The other six points are great, too. But this is my favorite.

UPDATE: You can now vote for this idea at the "Citizen's Briefing Book" on the change.gov website!

Fiscal Stimulus Skeptics: Jonah Goldberg Outdoes Kevin Hassett

Just one day after my nomination, I have to rescind and give my nomination for the dumbest criticism of the Obama fiscal stimulus to Jonah Goldberg. After 7 paragraphs of Goldberg’s typical meaningless ramblings, we finally get this:

That might overstate it a bit, because some naysayers can be heard. Economist Kevin Hassett of the American Enterprise Institute, for example, notes that whatever the benefits of the proposed stimulus, they probably don't outweigh the enormous costs of the debt we would incur. As a result of the stimulus, the deficit this year would equal the total cost of the federal government in 2000. That's on top of $7.76 trillion in bailouts pledged by the government, according to Bloomberg News. The real reason the stimulus package will be gigantic is not that the smartest people with the best ideas say it needs to be. It's that Obama's real priority is to get the bill out as quickly as possible, which means every constituency gets something, including Republicans.

Where to begin? Hassett never did offer an estimate the estimated benefits but Obama’s own economists have – and the benefits can be readily measured at the estimated reduction in the enormous GDP gap that we would have if this fiscal proposal is not passed. To suggest running a transitional deficit is more costly that having a large GDP gap must have Art Okun rolling over in his grave!

Hassett did offer an estimate of the 2009 deficit - $1.2 trillion. I guess Mr. Goldberg is not aware that Federal spending is running at an annual clip in excess of $3 trillion. Of course, the nominal expenditures of the Federal government were less in 2000 – they were only $1.86 trillion. Now in real per capita terms, the difference between 2008 and 2000 spending wasn’t that large but there is no way any knowledgeable person can write “the deficit this year would equal the total cost of the federal government in 2000”.

As far as the amount of funds pledged for bailouts – these represent asset trades not expenditures. Again - any knowledgeable person who has followed this story would have known that. But then Jonah Goldberg has proven countless times, he does not qualify as a knowledgeable person.

As far as the crack about the smartest people with the best ideas not arguing we need a stimulus package as large as what Obama has proposed, most of the economists I’ve been reading are saying that the fiscal stimulus should be larger not smaller. But then again – Jonah Goldberg is infamous for not reading up on a topic before his writes one of his op-eds on it. I used live in Los Angeles and was generally proud of my hometown newspaper so I often questioned why the Los Angeles Times would embarrass itself with the serial stupidity that comes from the pen of Jonah Goldberg. His latest is just another example of what made me wonder.

Update: One of those smartest people who Mr. Goldberg apparently never bothers to read has a bang for the buck piece that provides rough estimates of the reduction in the GDP gap per dollar of fiscal stimulus:

But if $100 billion in spending raises GDP by $150 billion, and the marginal tax rate is 1/3, $50 billion of the spending comes back in additional revenue. So bang for the buck - increase in GDP per dollar of added debt - is 3, not 1.5. Since the main concern about stimulus is that it will add to government debt, it’s this bang for the buck measure, rather than the multiplier, that’s relevant. And 3 sounds a lot better than 1.5 ... Bang for the buck also heightens the contrast between effective and ineffective stimulus policies. Stay with c = 0.5, t = 1/3, and look at the effects of a tax cut; the multiplier is 0.75, half that for public investment, but bang for the buck is 1, only 1/3 that for investment.

If one is concerned about how much the deficit has to rise to get on back on the path towards full employment, then one should favor increases in government purchases over tax cuts according to this analysis. Some conservatives pretend to care about the deficit but then they also tend to favor the tax cut route. Me thinks these conservatives haven’t exactly thought this one through very carefully.

Hassett and the Paradox of Thrift

I nominate Kevin Hassett for the worse argument yet against the Obama fiscal stimulus:

We are in the midst of a crisis caused by so many financial institutions borrowing too much money. Somehow, a critical mass of policy makers now believes that the correct response is for the U.S. government to borrow too much money.

Financial institutions lend money to those who wish to invest more than they save. Our current problem is not that there is too much private investment – rather it is that there is too little private investment. OK, financial institutions may have made certain loans that defaulted – to which they are now lending less. But that is not the same thing as “financial institutions borrowing too much money”.

As Keynes noted – when the private sector invests less than it saves, an insufficiency of aggregate demand may lead to a recession unless the public sector decides to engage in fiscal stimulus. Yet, Hassert is advocating fiscal restraint which would further increase the national savings schedule leading to the well known paradox of thrift. Herbert Hoover would be proud!

On top of this silliness, we get:

How could the deficit increase so much, so fast? Part of the story is the decline in revenue, which the CBO forecasts will be $166 billion less than it was in 2008, a 6.6 percent decline. But relative to 2000, revenue has actually increased from $2 trillion to a scheduled $2.4 trillion in 2009. The deficit has skyrocketed because spending has grown from $1.8 trillion in 2000 to a projected $3.5 trillion in 2009, fully 95 percent higher. Of course, all that happened mostly on a Republican watch.

Nominal revenues will have risen by 20%! Wow! Oh wait – the price-level will have risen by about 25% so real revenues will have declined even in absolute terms. Real revenues per capita or revenues as a percent of GDP – you know the drill! While it may be true that Federal spending relative to GDP increased during the Bush Administration – any suggestion that real Federal spending per capita doubled would be laughable in the extreme.

Did Gary Becker Really Argue Complete Crowding-Out?

Conservative criticism of the Obama fiscal stimulus plan seems to be reverting to mischaracterizing what certain economists have said. Brad DeLong is calling one foul on this score:

Is there any way to interpret Greg Mankiw's Sunday New York Times other than as an elbow to Chtistie's ribs while he thinks the ref's eye is elsewhere? Christie certainly does not believe that tax multipliers are twice the size of spending multipliers.

Greg Mankiw is now citing Gary Becker as one who thinks any increase in public infrastructure will have almost no aggregate demand effect ala crowding out but let’s review the portions of Gary’s statement that Greg left out:

If the government increased its spending on infrastructure when the economy has full employment, its main impact would likely be to draw labor, capital, and raw materials away from various other activities. In effect, increased government spending under these employment conditions would "crowd out" private spending ... Of course, the present situation is not one of full employment but of underemployment and excess unemployment, and employment is still falling. How does one adjust the full employment analysis in the first paragraph to account for the presence of unemployed labor and capital? One extreme assumes no crowding out of other private spending when governments increase their spending with significant underemployment in the economy. Increased government spending through a stimulus package under these conditions might even have a "multiplier" effect that would greatly increase, not crowd out, other private spending. The reason is that the recipients of the government spending in turn would increase their spending, and thereby stimulate other activities. Intermediate assumptions assume partial crowding out of other private activities, so a stimulus package would still increase employment and GDP.

Gary presents us the standard reasoning and then asks us to apply it to the current situation. It is true that Gary makes the following argument:

For another thing, with unemployment at 7% to 8% of the labor force, it is impossible to target effective spending programs that primarily utilize unemployed workers, or underemployed capital. Spending on infrastructure, and especially on health, energy, and education, will mainly attract employed persons from other activities to the activities stimulated by the government spending.

In other words, he starts with the intermediate position and then tilts towards the full employment view but my reading of Romer-Bernstein suggests we are likely closer to the view held by the no crowding-out crowd.

We should welcome a real debate on this issue but cherry picking quotes is not exactly the best way to make a point.

Dick Cheney on the Recession – Does He Have a Point?

When Dick Cheney was Vice President-elect, he prematurely said we were in a recession. Now he is saying things are not that bad:

Appearing Sunday on the last broadcast of CNN's Late Edition, Vice President Dick Cheney defended the administration's handling of the recession and argued that its premature to call it the worst economic crisis since the Great Depression. "I can't say that. I don't think we know that yet. I think certainly if you look at some earlier periods in our history, I remember back in the late '70s when we had a high rate of inflation, stagflation in effect and a high rate of unemployment," Cheney said. He added, "We've had some difficult times. Is it the worst since World War II? I can't say that. I don't believe the data shows that yet but it is clearly a serious recession."

Late 1970’s? Oh – another dig at President Carter. Of course, the unemployment rate during his tenure never reached the 9% hit during May 1975. Of course, that was during Ford’s tenure when Cheney was chief of staff. And we certainly have not reached the 10.8% unemployment rate that we saw during the end of 1982. But Cheney can’t criticize Saint Reagan – can he?

I certainly hope we don’t reach 11% unemployment but only a Pollyanna would predict that we will not exceed the unemployment rate during Carter’s tenure. Of course, the rightwing will likely try to pin this recession on President Obama somehow. After all – the Bush-Cheney Administration was not responsible for anything that has happened over the past 8 years.

Good Jobs? Green Jobs?

Fifty years ago, John Kenneth Galbraith addressed a forum of Resources for the Future with the following question and observation:

If we are concerned about our great appetite for materials, it is plausible to seek to increase the supply, to decrease the waste, to make better use of the stocks that are available, and to develop substitutes. But what of the appetite itself? Surely this is the ultimate source of the problem. If it continues its geometric course, will it not one day have to be restrained? Yet in the literature of the resource problem this is the forbidden question. Over it hangs a nearly total silence. It is as though, in the discussion of the chance for avoiding automobile accidents, we agree not to make any mention of speed!

In the half-century since Galbraith made those remarks, many scientists and economists have asked the "forbidden question" about restraining growth. It becomes perplexing, therefore, when the old silence re-asserts itself, as it apparently has in the announced program of the Good Jobs, Green Jobs National Conference.

Clearly cleaner technologies, greater efficiency and renewable sources of energy are part of any solution to the problems of limited resources and adverse environment effects of industry. But another, essential part of a comprehensive green strategy has to focus on developing alternatives to the imperative of economic growth. Ultimately, the technological responses have to be integrated with the ethical and social responses.

One of the alternatives to economic growth is the reduction of working time. Economic growth was adopted as a policy objective in the 1950s and 1960s because it was viewed as a means to the end of full employment. In the 1960s, the AFL-CIO urged "creating jobs through shorter hours," recognizing that "even if other economic policies are successful in stimulating greater growth in the period ahead, the rate of advance in technology and other labor-displacing changes is gathering such momentum that, unless part of the gains in efficiency are distributed in reductions in hours, it is virtually inevitable that it will show up in persistent and increased unemployment" (Economic Trends and Outlook, American Federationist, November 1962).

Not only do shorter work hours present a strategy for creating good jobs, they are better for the environment. David Rosnick and Mark Weisbrot of the Center for Economic and Policy Research looked at the potential environmental effects of other countries adopted U.S. style long working hours in a report titled "Are Shorter Work Hours Good for the Environment: A comparison of U.S. and European Energy Consumption." They found that the levels of carbon emissions could increase substantially if workers in other countries worked as much as U.S. workers do. Conversely, if the U.S. adopted working times closer to the European average, energy consumption could be reduced significantly.

In his speech, Galbraith went on to inquire whether our happiness would be greatly impaired by more modest consumption. It is not unreasonable to expect that happiness could be enhanced by more generous leisure time.

How Bruce Webb And I Helped Save Social Security (Maybe)

A few days ago Obama was quoted as saying that "getting entitlement spending under control" would be part of the effort to deal with budgetary problems. Most think he is focusing on getting rising medical care costs under control, which was part of his platform. But the question of maybe he might do something with or to social security has arisen, and with Larry Summers whispering in his ear, who wanted to go after the program under Bill Clinton, this may be worrisome. As it is during the campaign, Obama opposed any cuts in benefits or moves to privatization, with his only proposal being to possibly implement fica taxes on those making more than $250,000 per year starting in 2019, if the program needs financial shoring up at that time, with the widely publicized mid-range forecast of the system having that being a year or so after the program is scheduled to start running annual deficits rather than the (large) surpluses it has been running, and will continue to run forever if the very unpublicized low-cost scenario comes to pass.

This is where Bruce Webb and I came in last spring. While the system did not do so last year and certainly will not this year, in a majority of years over the past decade it has done better than that low cost scenario, raising the likelihood that the system may in fact never run a deficit. It may not need any fixing ever, and is just fine as it is. Ain't broke and don't need no fixin'. Initially Obama was proposing to implement his added fica tax immediately after taking office. At a certain point, Bruce and I composed a memo laying out the above facts and some others that was sent through channels I shall not discuss to the highest levels of the Obama campaign. Soon thereafter came the change in position to move this proposed change off to 2019, although this decision may have had little to nothing to do with our memo. But I still hold to the position of that memo and hope that Obama is not listening too closely to Summers now on this matter. The system is doing just fine and should be left alone as it is for the duration of his presidency, however long it proves to be.

Obama’s Own Estimate of Employment Growth is Underwhelming

Reuters reports:

President-elect Obama said Saturday an analysis of his stimulus proposals shows that between 3 million and 4 million U.S. jobs could be saved or created by 2010, nearly 90% of them in the private sector.

Employment as of December 2008 was about 3.3 million jobs less than it was as of November 1007 according to the household survey. The employment-population ratio has declined to 61.0%. Even if we had an additional 3.5 million jobs today, the employment-population ratio would be only 62.5%. Now when they start talking about an additional 7 million new jobs, I’ll be impressed as that might get us closer to the 64% employment-population ratio we enjoyed in the late 1990’s.

David Brooks: Mendacity on Fiscal Policy

Brad DeLong is not happy with the latest from David Brooks. Brad writes:

David Brooks quotes Christina Romer out of context--taking her 1994 argument that monetary policy is more flexible and effective at ending small recessions and misinterpreting it to apply to big recessions like today, which are too big to end via monetary policy alone.

I also found this comment weird:

All the administrations, Democratic and Republican, resisted large-scale fiscal stimulus plans. They didn’t believe they could time a stimulus correctly. They didn’t trust Congress to pass the bills quickly or cleanly. They decided they shouldn’t be making policy in what Kennedy administration economists called “an atmosphere of haste and panic brought on by recession.”

But we did have tax cuts in 1964, 1975, 1981, and 2001. Those weren’t fiscal stimulus plans?

Update: The source for the “haste and panic” quote appears to be the 1963 Economic Report of the President on page XIII. And guess what? Brooks has misrepresented the context of this as well.

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.