Do We Really Import Microsoft Software from Ireland?

John Ensign - Republican Policy Committee Chairman – claims we do:

You know, we have the second highest corporate tax rate in the industrialized world. Microsoft, which is a great American company, has zero exports from the United States. They have a lot of exports from Ireland, because, guess what, Ireland has a 12.5 percent corporate tax rate; we have a 35 percent corporate tax rate.

Microsoft does not manufacture products in Ireland to sell to the U.S. It designs all sorts of software that we can place on our personal computers. While you might argue that Microsoft has to manufacture things like the Xbox – such manufacturing is contracted to third parties. During fiscal year ended December 31, 2008, Microsoft incurred $8.2 billion in R&D expenditures according to its 10-K filing. This R&D is in part performed in Ireland but it also occurs in the U.S., Canada, China, Denmark, India, Israel and the UK.

Microsoft has used the provision of the U.S. transfer pricing regulation under section 1.482 to have whatever is developed by their R&D personal around the world to be jointly owned by the U.S. parent and its Irish subsidiary – even if most of the R&D occurs in the U.S. They do so under a series of contract R&D and Cost Sharing arrangements where the Irish subsidiary had to at one point compensate the U.S. parent for any pre-existing intangible assets. In the usual game, the multinational corporation hires some transfer pricing “expert” to write a “valuation” that supports a really low compensation. The IRS then has the right to challenge this valuation as to whether the compensation is truly arm’s length or fair market value. Often, it is below fair market value which would give the appearance that much of the value is being created by the Irish entity even if much of the value is truly being created within the U.S. To use the actual accounting when intercompany prices are not consistent with arm’s length prices to make the kind of inferences made by John Ensign is really silly.

Ricardian Equivalence Does Not Imply That Obama’s Fiscal Stimulus Will Be Ineffective

Kevin Quinn noted that the Wikipedia discussion of Ricardian Equivalence had the following error:

Ricardian equivalence states that a deficit-financed increase in government spending will not lead to an increase in aggregate demand. If consumers are 'Ricardian' they will save more now to compensate for the higher taxes they expect to face in the future, as the government has to pay back its debts. The increased government spending is exactly offset by decreased consumption on the part of the public, so aggregate demand does not change.

As noted here, John Cochrane made the same error. I would hope the Myron S. Scholes Professor of Finance at the University of Chicago Booth School of Business does not rely upon Wikipedia for his economic research. Alas, in an otherwise excellent post on fiscal policy, Menzie Chinn sort of falls into this trap as well:

Case 5 (government debts will have to be paid off in its entirety the future): When budget constraints hold with certainty intertemporally, and there is no way to default even partially on government debt (say via unexpected inflation), then increases in government debt due to tax cuts (for instance) induce no change in current consumption because households fully internalize the present value of the future tax liability

Menzie is right about transitional changes in tax policy not being able to change consumption in this Barro-Ricardo model, which is why GOP calls for using tax cuts to stimulate demand are likely not going to be the most effective policy tool. But what about transitional changes in government purchases? It is interesting that Wikipedia noted Ricardo’s 1820 Essay on the Funding System:

Ricardo studied whether it makes a difference to finance a war with the £20 million in current taxes or to issue government bonds with infinite maturity and annual interest payment of £1 million in all following years financed by future taxes. At the assumed interest rate of 5%, Ricardo concluded that "In point of economy there is no real difference in either of the modes, for 20 millions in one payment, 1 million per annum for ever ... are precisely of the same value".

Let’s modernize this example. Suppose we decide to have an additional $100 billion in public investment in 2009. In Ricardo’s example, permanent taxes will increase by $5 billion per year which would have a very modest offsetting reduction in consumption. So if government purchases rise by $100 billion and consumption falls by $5 billion, then isn’t the direct impact on aggregate demand closer to $95 billion for the year rather than zero?

Update: Republicans will oppose more government spending as they prefer tax cuts:

Hours before a meeting with President Barack Obama, House Republican leaders sought to rally opposition Tuesday to a White House-backed economic stimulus measure with an $825 billion price tag. Several officials said that Reps. John Boehner of Ohio, the GOP leader, and Eric Cantor of Virginia, his second-in-command, delivered the appeal at a closed-door meeting of the Republican rank and file. Both men said the legislation contains too much wasteful spending that will not help the economy recover from its worst nosedive since the Great Depression, the officials added ... Senate Republican Leader Mitch McConnell, R-Ky., said in a televised interview that Obama was having problems with Democrats, whom he said favor spending over tax cuts as a remedy for the economic crisis.

If Ricardian Equivalence holds, the GOP is opposing fiscal stimulus that will impact aggregate demand preferring tax cuts that will not increase aggregate demand. Go figure!

When Less is More

Dean Baker in the Guardian today:

Shortening the workweek would create jobs and stimulate the US economy – and give workers the benefits other countries provide.

What amuses the Sandwichman is the predictable bullying froth from opponents of shorter working time. A study in social pathology.

Cochrane’s Fiscal Fallacies

Greg Mankiw has found another critic of fiscal stimulus with this one being even more silly than the predecessors. John Cochrane claims the proponents of fiscal stimulus rest their case on three fallacies. The first is that Fama crowding-out by identity canard:

First, if money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This is just accounting, and does not need a complex argument about “crowding out.”

Calling Brad DeLong:

Now the NIPA savings-investment identity holds in all models--it is, after all, an identity, true by definition and construction. And every single model that has been built in which there is a possibility of high unemployment and idle resources is a model in which fiscal policy works because increases in government spending lead to unexpected declines in inventories and unexpected declines in inventories lead to firms to expand production, which leads to increases in income and saving. I would, therefore, say that Fama's claim is "wrong". Not only does it not hold in all models in the class, it does not hold in any models in the class.

His second “fallacy” is just strange:

Second, investment is “spending” every bit as much as consumption. Fiscal stimulus advocates want money spent on consumption, not saved. They evaluate past stimulus programs by whether people who got stimulus money spent it on consumption goods rather save it. But the economy overall does not care if you buy a car, or if you lend money to a company that buys a forklift.

Any reading of the General Theory by Lord Keynes would also say that advocates of fiscal stimulus would assign as high a multiplier to increasing investment demand as we assign to increasing consumption. Has Cochrane not noticed that the Obama fiscal policy wants to increase public investment rather than stimulate consumption?

He closes by showing he does not understand Ricardian Equivalence:

Third, people must ignore the fact that the government will raise future taxes to pay back the debt. If you know your taxes will go up in the future, the right thing to do with a stimulus check is to buy government bonds so you can pay those higher taxes. Now the net effect of fiscal stimulus is exactly zero, except to raise future tax distortions. The classic arguments for fiscal stimulus presume that the government can systematically fool people.

Oh good grief! If we were talking about temporary reductions in taxes – which would have to later be followed by tax surcharges – then Ricardian Equivalence predicts no increase in aggregate demand. But if we are talking about temporary increases in government purchases then rational households would realize that the increase in their lifetime tax bills would be quite modest, which would imply a small reduction in consumption demand relative to the large increase in government purchases.

I have to wonder John Cochrane could even pass the macroeconomic class offered at Greg Mankiw’s college! I also have to wonder why Greg Mankiw keeps posting without comment such incredibly silly arguments against fiscal stimulus.

Liquidity Traps, Credit Crunches, the Past Two Recessions, and Interest Rates on Long-Term BBB Debt

Jack Healy and Vikas Bajaj tell us that the cost of borrowing has zoomed up:

But with the credit markets still tight, corporations are being forced to pay much higher interest rates than they did a few years ago, putting more strain on balance sheets already hammered by falling profits and a grinding recession.

For those of you who have heard we are in a liquidity trap, remember that this refers to short-term interest rates on government debt whereas Healy and Bajaj are talking about long-term corporate debt. Interest rates on 20-year Federal bonds aren’t that high but credit spreads are:

Even companies with strong credit ratings are paying about 5 percentage points more than the federal government to borrow money, according to Standard & Poor’s. That is more than double the premium they paid last January. Companies with so-called junk credit ratings are paying a 15 percent premium. “That’s an extraordinary spread,” said Diane Vazza, head of global fixed-income research at Standard & Poor’s. “That’s unprecedented in the speculative-grade market.”

Sloped Curve takes these market rates to suggest that Paul Krugman is wrong about the liquidity trap argument:

Professor Krugman is also discussing only one side of the issue when it comes to where the economy is today. Professor Krugman is taking the fact that the US is in a liquidity trap for granted, and that the US is wrestling with the zero-lower-bound for interest rates, even though there are obvious reasons for why you would argue that the US is not in or near a liquidity trap ... the economic actors are not exposed to 0% interest rates. No final loans to private individuals or companies are made at or near a 0% interest rate ... There is another phenomenon, that is not a liquidity trap, but that can also create disinflation and even short-lived deflation. The phenomenon is a credit crunch. In a credit crunch credit becomes hard and/or expensive to come by, and this dampens the willingness to borrow, spend and invest. The difference between a liquidity trap and a credit crunch is that in a liquidity trap people have ample access to cheap credit and still choose to not borrow money, while in a credit crunch people do not borrow money either because they can't or because they view borrowing as too expensive. The basic attributes of these two phenomena are such that they are mutually exclusive. In a credit crunch you have limited access to cheap credit, in a liquidity trap you have ample access to nearly free credit; you can't have both.

I would beg to differ that one cannot have both as we are talking not only about interest rates are very different types of financial instruments but also about very different aspects of monetary policy. Our graphs are based on the monthly averages of interest rates on 20-year government bonds, AAA corporate bond rates, and BBB from January 1994 to December 2008. If we go back to 2001, it is interesting to note that the interest rate on BBB debt as of October 2001 was about the same as the interest rate as of January 2001 despite the fact that both AAA rates and rates on 20-year Federal bonds fell slightly. You may recall that this was the period where short-term rates fell dramatically but longer-term rates fell more modestly. But the big story was the climb in credit spreads – especially the BBB spread (BBB-s) which began in 2000 and continued through 2002. During the current recession, long-term Federal bond rates have fallen more dramatically but interest rates for companies with credit ratings of BBB or lower have increased as credit spreads have skyrocketed.

Traditional monetary policy can lower risk-free interest rates but recessions are also often associated with rising default risk. This recession in particular seems to have one of its underlying causes being increases in default risk and the associated troubles facing our financial institutions. Maybe this is why Ben Bernanke is frustrated with certain politicians not getting the need to release the remaining TARP funds:

This may be as close as we’re going to get to a Fed chairman labeling some in Congress as irresponsible. Sure, Federal Reserve Chairman Ben S. Bernanke was typically careful with his wording in a Jan. 13 speech in London. “The public in many countries” is “understandably concerned” that government is spending money to rescue the financial industry, “when other industries receive little or no assistance,” Bernanke said. After explaining how the world economy “is critically dependent on the free flow of credit,” Bernanke issued his challenge: “Responsible policy makers must therefore do what they can to communicate to their constituencies why financial stabilization is essential for economic recovery and is therefore in the broader public interest.” Three days after that speech, 33 of 39 Republican senators ignored Bernanke’s warning and voted against releasing the remaining $350 billion in Troubled Asset Relief Program money. (So did eight Democrats, mostly liberals, plus independent Bernie Sanders of Vermont.) Fortunately, that left enough supporters, mostly Democrats, to clear the release of the much-needed money. Too many senators shrugged their shoulders at Bernanke’s wise words.

As one of the fiscal stimulus critics that Greg Mankiw loves to cite, Gary Becker writes:

It is relevant in answering this question that the origins of this recession were in the financial sector, and especially in the excessive mortgage credit to sub prime and other borrowers. The widespread collapse of the financial sector, and the wholesale retreat from risky assets, clearly has called for a highly pro-active Fed. But it is not obvious why this should lead to greater confidence in the power of government spending stimulus packages. Of course, perhaps the prior emphasis on crowding out, and skepticism toward the stimulating effects of government spending, were wrong, or that recessions were too short and mild after the 1981-82 recession to call for Keynesian-type stimulus packages.

Becker has already been criticized for failing to note that interest rates were very high in 1982 but are nearly zero now. But he may indeed be right for the type of non-traditional monetary policy being advocated by our FED chairman today. Alas, many in the Republican Party are against both fiscal stimulus and this non-traditional monetary policy. I just don’t get it!

Update: Paul Krugman is kind enough to link to my post and then writes:

Well, my definition of a liquidity trap is, purely and simply, a situation in which conventional monetary policy — open-market purchases of short-term government debt — has lost effectiveness. Period. End of story. Now, if you prefer a different definition of a liquidity trap, OK; call our current situation a banana, instead. But changing the name does not change the essential fact — namely, conventional monetary policy has lost effectiveness. Yes, there are other things the Fed could do — and it’s doing them, on an awesome scale. But they’re controversial, precisely because, unlike conventional monetary policy, they involve picking and choosing among potentially risky investments. And there’s a much stronger case for fiscal policy than in normal times, because we don’t know how well these unconventional measures will work.

Might I add that I agree with Paul 100%!

The Fed as Financial Regulator

The Washington Post reports about a move afoot to give the Federal Reserve more regulatory power over the financial system.

http://www.washingtonpost.com/wp-dyn/content/article/2009/01/25/AR2009012501686.html?hpid=topnews

Considering that the Federal Reserve is supposed to be independent of the government, it would seem that getting such powers to the Fed would be ill-advised.

In addition, considering that the Fed's posture in the bailout makes the Treasury Department looks like a paragon of transparency, giving such powers to the Fed seems even more questionable.

When the Democrats promised change, I thought they meant change for the better. Maybe I was wrong.

Observations on China

I'm just now getting my energy back after my trip to China and a bout of food poisoning that I brought back. I hope I can be more attentive to the blog.

Just as an experiment, I tried to record a 15 minute discussion about my observations of China. I have to warn you that you should not expect any deep insights from fairly quick trip in which I spent most of my time in the corridors of various universities.

http://www.archive.org/details/ObservationsOnChina

The First Fleet Whores on Australia’s Invasion Day

Today is Australia Day, though the vast majority of Australian aboriginal people would understandably prefer to call it ‘invasion day’. At least in these times Aboriginal grievances in relation to this awkward day get some mainstream media airing. The plight of my white female ancestors still doesn’t. They were the unwilling and much-abused first immigrants to this country.

“The First Fleet consisted of 1,480 people more than half of whom were convicts. There were 586 male and 192 female convicts as well as a large number of seamen, marines, servants and officials. Only a tiny fraction of these were accompanied by their wives and children.”

“…Within the penal colony, women were assigned only one main function – they were there primarily as objects of sexual gratification. The main difficulty, as far as the British authorities were concerned, was to find a sufficient number of women convicts, and to do this they had to impose preponderantly harsher sentences on women.….

The sexual abuse of female convicts began on the ships. Although after 1811 the women traveled on separate ships from the male convicts, they had the crews to contend with. WHR Brown told the Select Committee on the State of Gaols in 1819 that:

“These women informed me, as well as others of their shipmates, that they were subject to every insult from the master of the ship and sailors; that the master stript several and publickly whipped them; and that one young woman, from ill treatment, threw herself into the sea and perished, that the master beat one of the women that lived with me with a rope with his own hands till she was much bruised in her arms, breasts, and other parts of her body. I am certain, from her general good conduct, she could not have merited any cruelty from him.” [1]

My great, great grandmother was Mary O’Neill born in Maitland in New South Wales in 1843. On the genealogical history now finally revealed it is possible that she was related to another Mary O’Neill. A woman that is referred to in the journal of William Elyard, a surgeon superintendent on the "John Bull" which sailed from Cork on 25 July 1821 via St. Jago, to arrive in Sydney on 18 December 1821. Mary is described as one of “an aggressive pair” of women. Mary O'Neill and another woman, Ellen Nolan, were “identified as assaulting one of the men while cleaning” on this “troublesome voyage” of the convict ship taking the women to the Paramatta Factory. [2] The latter “operated as a prison, a maternity home, a marriage bureau, an employment exchange and a hostel or refuge for women in transit between jobs. All its inmates, however, were strictly speaking prisoners...’ What a comment on the common status of all females of the lower classes!” [3]

So cheers to our Mary O’Neills and our damned whores. May we continue to break the handle of many a hammer in our go-slow rebellions against enslavement and worse.

“…..the damned whores the moment that the[y] got below fel a fighting amongst one another and Capt Meredith order the Sergt. Not to part them but to let them fight it out…..”
- Lt Ralph Clark of the First Fleet, ‘The Journals and Letters of Lt Ralph Clark 1787-1792.



[1] In CMH Clark, ‘Select Documents in Australian History 1788-1850, Angus & Robertson, Sydney, 1965, p48. As quoted in ‘Damned Whores and God’s Police’ by Anne Summers.

[2] Will Elyard’s Journal.
http://members.optusnet.com.au/elyard/elyard_aust/wsg1771-voy.htm

[3] ‘The most outrageous conduct’ Convict rebellions in colonial Australia
By Tom O'LINCOLN
http://www.anu.edu.au/polsci/marx/interventions/convicts.htm

The Fiscal Policy Debate Today on the Sunday Talkies – Who Listens to Economists?

While the Republicans are complain that the Democrats are not considering their ideas, Nancy Pelosi says that good ideas will be considered:

Appearing on ABC's This Week, Nancy Pelosi said that Republicans have had the opportunity to be included in crafting the stimulus bill -- even if not many of their ideas have been adopted. "Well, we will take some," said Pelosi. "We will judge them by their ability to create jobs, to -- to help turn the economy around, to stabilize the economy, and to see how much they cost."

John McCain appeared on Faux News and said:

In an appearance on Fox News Sunday, John McCain said he won't vote for President Obama's stimulus package as it stands now. McCain said there need to be more tax cuts for businesses, payroll tax cuts, and for existing tax cuts to be made permanent: " Well, the plan was written by the majority in -- a Democrat majority in the House, primarily. And so, yeah, I think there has to be major rewrites if we want to stimulate the economy."

Mark Thoma brings us a piece by Larry Mishel that basically says McCain and his Republicans colleagues are clueless.

"Not a Cure All, But..."

by the Sandwichman

From the Globe and Mail Report on Business, yesterday:

Yes you can: Save jobs by sacrificing your time and money.

As employers and employees confront the spectre of mass layoffs, creative measures are coming to the fore, including individual workers cutting their workweek to four days, with a proportional cut in pay.

The idea gained currency this week in U.S. President Barack Obama's call-to-duty inauguration speech. America's recovery, he said, in part will rely on "the selflessness of workers who would rather cut their hours than see a friend lose their job."

The Sandwichman points out the potential pitfall of the "proportional cut in pay" line. If workers are expected to handle the same workload in four days, it's just a speed-up with a pay cut. And what does that do to consumer spending? Here's where government needs to step in to make up the difference in pay as part of its economic stimulus package. More on that angle from Dean Baker in Monday's Guardian.

Charlton Heston: Gun Nut or Sandwich Man?

Sandwichman thinks he may have discovered a way to build traffic to the site. For the record, Sandwichman wonders, "what's the fuss?" One the one hand, I feel more threatened by SUV drivers talking on cel phones than I do by goons carrying guns. On the other hand, how come there isn't a second amendment right to bring your own damn water or toothpaste onto an airliner? I mean, "airport security" is so obviously about conditioning people to follow orders and not question authority.

Galbraith Part 2 on "Can Obamanomics Solve the Crisis?"

James K. Galbraith has a second part to his interview with Paul Jay on the real news. He goes on greater length about how it would be unwise to cut social security or medicare. He worries that Obama may be listening to those who want this, including conservative Democrats, but also notes that his public statements so far have not specifically said what to do about social security. "Wait and see," says Galbraith. He also addresses several other issues including the status of the dollar and the need for aid to those in danger of home foreclosures.

The link.

A Grammar of the Multiplier

by the Sandwichman

Paolo Virno's A Grammar of the Multitude is a short book, but it casts a very long shadow. Behind it looms the entire history of the labor movement and its heretical wing, Italian "workerism" (operaismo), which rethought Marxism in light of the struggles of the 1960s and 1970s....

6.5. Thesis 4

For the post-Fordist multitude every qualitative difference between labor time and non-labor time falls short...

The concept of "full employment" is obviously essential to any consideration of the Keynesian "multiplier". Yet the very distinction between employment and unemployment is what, according to Virno, is at stake in Post-Fordist society.

The Sandwichman can do little more here than simply to note the existence of the operaismo analysis. I have my reservations about the degree of abstraction of that analysis and it's exclusive historical contextualization in a brief and recent expanse of European history. Nevertheless, the very term, "Post-Fordist," calls into question glib manipulation of Keynesian terminology.

If we can say that Fordism incorporated, and rewrote in its own way, some aspects of the socialist experience, then post-Fordism has fundamentally dismissed both Keynesianism and socialism. Post-Fordism, hinging as it does upon the general intellect and the multitude, puts forth, in its own way, typical demands of communism (abolition of work, dissolution of the State, etc.). Post-Fordism is the communism of capital.

James Callaghan, in 1976:

We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.

Barro on the Fiscal Policy Multiplier: Does He Understand the Full Employment Constraint?

Robert Barro writes an op-ed critiquing the Obama fiscal policy proposal that is far below his intellectual standards. He starts off well:

Team Obama is reportedly using a number around 1.5. To think about what this means, first assume that the multiplier was 1.0. In this case, an increase by one unit in government purchases and, thereby, in the aggregate demand for goods would lead to an increase by one unit in real gross domestic product (GDP). Thus, the added public goods are essentially free to society. If the government buys another airplane or bridge, the economy's total output expands by enough to create the airplane or bridge without requiring a cut in anyone's consumption or investment. The explanation for this magic is that idle resources -- unemployed labor and capital -- are put to work to produce the added goods and services. If the multiplier is greater than 1.0, as is apparently assumed by Team Obama, the process is even more wonderful. In this case, real GDP rises by more than the increase in government purchases. Thus, in addition to the free airplane or bridge, we also have more goods and services left over to raise private consumption or investment.

In other words, Barro understands that the Keynesian multiplier theory rests on the proposition that the economy is below full employment – which seems like a plausible characterization of today’s economy. But then Barro pulls some empirical research from a period where we were likely near full employment:

A much more plausible starting point is a multiplier of zero. In this case, the GDP is given, and a rise in government purchases requires an equal fall in the total of other parts of GDP -- consumption, investment and net exports. In other words, the social cost of one unit of additional government purchases is one … What do the data show about multipliers? Because it is not easy to separate movements in government purchases from overall business fluctuations, the best evidence comes from large changes in military purchases that are driven by shifts in war and peace. A particularly good experiment is the massive expansion of U.S. defense expenditures during World War II … I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8 (430/540). The other way to put this is that the war lowered components of GDP aside from military purchases. The main declines were in private investment, nonmilitary parts of government purchases, and net exports -- personal consumer expenditure changed little. Wartime production siphoned off resources from other economic uses -- there was a dampener, rather than a multiplier.

After saying “good grief”, I turn the microphone over to Paul Krugman:

Consumer goods were rationed; people were urged to restrain their spending to make resources available for the war effort. Oh, and the economy was at full employment — and then some. Rosie the Riveter, anyone? I can’t quite imagine the mindset that leads someone to forget all this, and think that you can use World War II to estimate the multiplier that might prevail in an underemployed, rationing-free economy.

Mainstream Media Fights for the Little Guy in the Spirit of the Muckrackers

This article shows the ridiculous lengths that economists can go in defending the indefensible:

I. J. ALEXANDER DYCK, University of Toronto - Joseph L. Rotman School of Management
DAVID A. MOSS, Harvard Business School - Business, Government and the International Economy Unit

LUIGI ZINGALES, University of Chicago, National Bureau of Economic Research (NBER), Centre for Economic Policy Research (CEPR), University of Chicago - Polsky Center for Entrepreneurship, Graduate School of Business, European Corporate Governance Institute (ECGI)

We argue that profit-maximizing media help overcome the problem of "rational ignorance" highlighted by Downs (1957) and in so doing make elected representatives more sensitive to the interests of general voters. By collecting news and combining it with entertainment, media are able to inform passive voters on politically relevant issues. To show the impact this information has on legislative outcomes, we document the effect "muckraking" magazines had on the voting patterns of U.S. representatives and senators in the early part of the 20th century. We also show under what conditions profit-maximizing media will cater to general (less affluent) voters in their coverage, providing a counterbalance to special interests.

Galbraith on "Can Obamanomics Solve the Crisis?"

The answer is, maybe not. The crisis is deep and more direct intervention will be needed in both banking and shoring up purchasing power, according to James K. Galbraith in an interview on the real news, accessible here.

He especially worries about the shift I have posted on here in a worried manner that Obama seems to have drunk the social security kool-aid and may be looking at long term cutbacks in benefits. Instead of my "stand pat" and do nothing to/with social security, he actually calls for increasing social security benefits.

BTW, the tux he is wearing in the clip was apparently for going to some bipartisan inaugural ball in honor of John McCain. Go figure.

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.