The United States has a long history of using humanitarian ventures as a cover for promoting its own self-interest. Here is an example I found from the early 20th century regarding Herbert Hoover's relief work following World War I.
Andelman, David A. 2008. A Shattered Peace: Versailles 1919 and the Price We Pay Today (New York: J. Wiley).
31: "Colonel Edward House recognized that the peace was likely to be won by the power that had the best understanding of the situation on the ground of each of the territories that the delegates were about to carve up and remodel. So in mid-November House and Van Deman hit on an original approach to the rapid establishment of an effective spy network throughout Europe. Van Deman described it in his own words: "It will be remembered at the time Herbert Hoover had been given charge of providing food and relief for certain devastated sections of Europe. We desired to send with Mr. Hoover's workers going into those areas certain intelligence agents who were familiar with the country, but to this Mr. Hoover violently objected."
31: "It was a brilliant system of the utmost simplicity. Herbert Hoover, who would become the 31st president of the United States, then headed network of private relief workers in the defeated nations. They could move with total freedom and without a scintilla of suspicion among all the subject people of Europe. Indeed, as the dispensers of life-giving food and water they would be welcomed as saviors. The only remaining problem was to persuade Hoover himself. House insisted as his allies you Gibson, a gifted young American diplomat. While serving as principal aide to Hoover and his relief efforts in Belgium during the war, and Gibson also managed to distinguish himself in gathering battlefield intelligence by wriggling through German lines. House now promised Gibson a cushy post as coordinator of the intelligence effort at the U. S. Legation in Vienna if he would persuade Hoover to go along with the plan."
32: "Gibson was surpassingly discreet, but he and House prevailed. In a face-to-face showdown in Paris was Col. House, Hoover, who never really managed to overcome his roots as a simple mining engineer from Iowa was forced to give in. The coordinator of the largest international relief effort ever mounted was persuaded to the use of his pan-European organization as a cover for the first network of spies the United States ever fielded in a coordinated fashion across the continent."
Saturday, February 21, 2009
California Budget Follies
California is doing whatever it can to mismanage its way to disaster. Here is a graphic showing how the California State University system keeps piling on administrators, while expecting the staff and faculty to take on more responsibilities. In so far as teaching is concerned, the model is becoming more like No Child Left Behind -- more and more silly ways to generate numbers that have nothing to do with education.
With all the superficial complaints about education, virtually nobody in authority takes issue with the managerial bloat. Anyway, enjoy the graphic.
http://www.calfac.org/competingpriorities.html
With all the superficial complaints about education, virtually nobody in authority takes issue with the managerial bloat. Anyway, enjoy the graphic.
http://www.calfac.org/competingpriorities.html
Friday, February 20, 2009
Geographers Goof Up on Bin Laden Whereabouts
Juan Cole today (http://www.juancole.com) reports on the controversy over a recent paper by Gillespie et al, some geographers, in the MIT International Review, which has also gotten a lot of media attention. By doing analysis from space they claim that Osama bin Laden is probably hiding in the largest city in frontier zone of Pakistan near the Afghan border, Parachinar, and even identify three building complexes in it as likely locations for him to be. The obvious implication is for the US military to bomb the heck out of those buildings, or maybe at least to drop some Special Forces or whomever into there to try and capture him.
Cole reprints a letter from a former resident of the area to the MIT International Review, Murtaza Haidar, a professor at Ryerson University. Haidar points out a reason why Gillespie and crew are almost certainly wrong, and why it would be a major mistake for anybody to attack the place. While this zone is overwhelmingly Sunni Muslim, as is bin Laden and his closest followers, the city of Parachinar is inhabited overwhelmingly by Shi'i Muslims, with the city under siege and attack by their neighbors. Al Qaeda and the Taliban in the area have been responsible for the deaths of many Shi'a, so that there is simply no way that anyone from either group would be remotely welcome in Parachinar, most especially bin Laden himself. But , this is not the first time we have seen American "experts" calling for military action on the basis of ideas from outer space that are not at all in touch with the facts on the ground.
Cole reprints a letter from a former resident of the area to the MIT International Review, Murtaza Haidar, a professor at Ryerson University. Haidar points out a reason why Gillespie and crew are almost certainly wrong, and why it would be a major mistake for anybody to attack the place. While this zone is overwhelmingly Sunni Muslim, as is bin Laden and his closest followers, the city of Parachinar is inhabited overwhelmingly by Shi'i Muslims, with the city under siege and attack by their neighbors. Al Qaeda and the Taliban in the area have been responsible for the deaths of many Shi'a, so that there is simply no way that anyone from either group would be remotely welcome in Parachinar, most especially bin Laden himself. But , this is not the first time we have seen American "experts" calling for military action on the basis of ideas from outer space that are not at all in touch with the facts on the ground.
Raymond J. Keating is Silly
by the Sandwichman
Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. Karen Kerrigan is President and C.E.O. of the Council and is chairperson of the Coalition to End Union Violence, a project of the Small Business Survival Committee (of which she is chairman and founder). These folks and organizations share an office suite on L Steet in D.C. with Grover Norquist and his American's for Tax Reform. Get the picture? Cogs in the vast right-wing Wurlitzer.
Keating also happens to have the distinction of being the only economist the Sandwichman knows of who has published a commentary on Dean Baker's shorter work-time proposal.
But the Sandwichman only brings up the matter of Raymond J. Keating's silliness to underscore the fecklessness of prominent liberal economists whose silence on Baker's proposal for shorter working time amounts to a tacit endorsement of the Keating/Kerrigan/Norquist growth-at-any-cost paradigm.
Raymond J. Keating is silly. The silent liberals are feckless.
Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. Karen Kerrigan is President and C.E.O. of the Council and is chairperson of the Coalition to End Union Violence, a project of the Small Business Survival Committee (of which she is chairman and founder). These folks and organizations share an office suite on L Steet in D.C. with Grover Norquist and his American's for Tax Reform. Get the picture? Cogs in the vast right-wing Wurlitzer.
Keating also happens to have the distinction of being the only economist the Sandwichman knows of who has published a commentary on Dean Baker's shorter work-time proposal.
These are serious and rather grim economic times.It may be germane to point out that Keating is one of those climate change denial guys and that Kerrigan's outfits are funded by the likes of Exxon and R.J. Reynolds Tobacco. According to her bio on Inc., "A seasoned player in the conservative movement, Kerrigan made a name for herself by playing a key role in derailing the Clintons' health care plan." Smoking good. Health care bad. Tax cuts good. Unions bad.
After all, the current recession is over a year old, and real GDP growth in the fourth quarter of last year registered a dire -3.8 percent. And nobody sounds cheery about 2009.
Belying such seriousness, however, there are a lot of silly ideas being kicked around when it comes to economic policy.
Consider the suggestion made by Dean Baker, co-director of the Center for Economic and Policy Research, in a commentary piece in the Jan. 28 New York Daily News.
Baker argued that President Barack Obama and Congress should be "creating incentives for companies to reduce the workweek and work year for many Americans." He claims that this would "provide a quick boost to the economy and jobs - and lasting gains in reduced unemployment."
Hmmm, working and producing less somehow translates into higher economic growth. Lower productivity then must be a plus for the economy. Baker claims that with certain tax incentives, workers could get paid the same for less work, more workers would have to be hired, and apparently all this would be just ducky for business.
Does any of this make sense? Of course not. Lost productivity, higher business costs and reduced economic growth would result if this were implemented.
But the Sandwichman only brings up the matter of Raymond J. Keating's silliness to underscore the fecklessness of prominent liberal economists whose silence on Baker's proposal for shorter working time amounts to a tacit endorsement of the Keating/Kerrigan/Norquist growth-at-any-cost paradigm.
Raymond J. Keating is silly. The silent liberals are feckless.
The Lucas Critique
I see the eminent Nobelist has explained to all of us why the Stimulus hasn't a chance in Hell. This is a man who told Arjo Klamer (in Conversations With Macroeconomists) that macroeconomics, before he bestrid (?) it, Colossus-like, was a complete waste of time, since it was devoted to explaining a fiction invented by Keynes. The "fiction?" Why, Involuntary Unemployment, of course! So let's pay careful attention to what he has to say about fixing things. What is there to fix, after all. Ain't broke!
Thursday, February 19, 2009
Bard College has fired Joel Kovel
I am biased since I admire Joel. Lou Proyect has done an excellent job in putting the case into context.
http://louisproyect.wordpress.com/2009/02/19/bard-college-terminates-joel-kovel/
http://louisproyect.wordpress.com/2009/02/19/bard-college-terminates-joel-kovel/
Great Moments in Labor Relations
In a Letter from the Gatling Gun Company to B&O Railroad in 1877:
"... we have the honor to suggest that you strengthen yourselves now against such emergencies in the future, by providing yourselves with Gatling guns."
Full letter here:
http://groups.google.com/group/maryland-labor-history?pli=1
"... we have the honor to suggest that you strengthen yourselves now against such emergencies in the future, by providing yourselves with Gatling guns."
Full letter here:
http://groups.google.com/group/maryland-labor-history?pli=1
5,000 Characters
by the Sandwichman
The White House Task Force on Middle Class Working Families has increased their comment submission length from 500 to 5000 characters. The Sandwichman submitted the following 4,994 character summary, along with a link to a longer version:
The key to addressing the issues of work and family balance, labor standards, equitable distribution of the fruits of economic progress and protection of the environment lies in regulating and limiting the hours of work. In the absence of countervailing union pressure or government policy, there is a structural bias that leads to the prevalence of socially and environmentally harmful long hours of work. This summary outlines the case for work time reduction and draws attention to a promising policy innovation to redress the current imbalance. A full, hyperlinked version of this submission is available [at the end of this post].
American families have changed substantially since the 1960s but many policies aimed at assuring income security have remained unchanged since the New Deal of the 1930s. Today, two-thirds of all families with children are either single-parent or dual-earner families. Between 1979 and 2000, the hours worked per year by married couples with children increased by 16 percent, or nearly 500 hours. Bernstein and Kornbluh noted that without that increase in hours worked, the incomes of middle- and lower-income families would have stagnated or declined. That conclusion, however, overlooks the possibility that the increased supply of hours may itself have contributed, through a feedback effect, to wage stagnation.
Most work-family advocates in the U.S. focus on the need for family-friendly policies such as child-care, paid family leave and flexible scheduling that mitigate the effects of a seemingly immutable working time regime. "The challenge," though, Kornbluh has noted, "is to frame work-life balance as a broader political economy issue."
Historically, work-life balance was framed as a broader political economy issue in labor agitation for shorter working time. For nearly a century, from the 1860s to the 1950s, American labor unions also put forward the reduction of working time as their focal strategy for combating unemployment. After the Second World War, though, the unions' enthusiasm for shorter hours waned. Instead, the AFL-CIO primarily focused its efforts on urging government spending to foster economic growth and only sought shorter hours as a "last resort."
What changed between the 1930s and the 1960s was the acceptance of the idea that government spending could stimulate economic growth. Although popularly referred to as "Keynesianism," Keynes himself did not accept the idea that boundless expansion of production and consumption was worthwhile for its own sake. Instead, he specified working less as the "ultimate cure" for unemployment. The imperative for growth was a notion added by later economists.
Continued economic growth, fostered by government fiscal and monetary strategies, has led to an increase in effective demand for what Hirsch called positional goods. Competition for these socially or physically scarce or congested goods draws resources away from the output of final consumption goods and also exacts a personal cost in terms of time pressure. Individuals are compelled to spend more time in market activities and thus have less time to spend in non-commercial pursuits such as production for home consumption, leisure and sociability. "This has helped to upset a long-held expectation about the potential fruits of economic growth – namely, that they will be taken increasingly in the form of relief from material pursuits."
Rosnick and Weisbrot estimated that if European countries adopted the long working hours prevailing in the U.S., they would consume 25 percent more energy. Conversely, if the U.S. adopted working times closer to the European average, it would consume 20 percent less energy. Assuming that the intensity of greenhouse gas emissions per unit of GDP continues to decline at a rate consistent with the historical trend, economic growth averaging 2.5 percent annually would increase emissions by around 75 percent over the next 30 years. Meanwhile, poverty and unemployment will creep steadily upward. The alternative to continual economic growth and a resulting environmental and/or social catastrophe is to reduce the average hours of work for the bulk of the working population and increase employment opportunities for the unemployed and the underemployed.
Dean Baker has proposed government subsidies for shorter hours and vacation pay as part of the economic stimulus plan.
The White House Task Force on Middle Class Working Families has increased their comment submission length from 500 to 5000 characters. The Sandwichman submitted the following 4,994 character summary, along with a link to a longer version:
The key to addressing the issues of work and family balance, labor standards, equitable distribution of the fruits of economic progress and protection of the environment lies in regulating and limiting the hours of work. In the absence of countervailing union pressure or government policy, there is a structural bias that leads to the prevalence of socially and environmentally harmful long hours of work. This summary outlines the case for work time reduction and draws attention to a promising policy innovation to redress the current imbalance. A full, hyperlinked version of this submission is available [at the end of this post].
American families have changed substantially since the 1960s but many policies aimed at assuring income security have remained unchanged since the New Deal of the 1930s. Today, two-thirds of all families with children are either single-parent or dual-earner families. Between 1979 and 2000, the hours worked per year by married couples with children increased by 16 percent, or nearly 500 hours. Bernstein and Kornbluh noted that without that increase in hours worked, the incomes of middle- and lower-income families would have stagnated or declined. That conclusion, however, overlooks the possibility that the increased supply of hours may itself have contributed, through a feedback effect, to wage stagnation.
Most work-family advocates in the U.S. focus on the need for family-friendly policies such as child-care, paid family leave and flexible scheduling that mitigate the effects of a seemingly immutable working time regime. "The challenge," though, Kornbluh has noted, "is to frame work-life balance as a broader political economy issue."
Historically, work-life balance was framed as a broader political economy issue in labor agitation for shorter working time. For nearly a century, from the 1860s to the 1950s, American labor unions also put forward the reduction of working time as their focal strategy for combating unemployment. After the Second World War, though, the unions' enthusiasm for shorter hours waned. Instead, the AFL-CIO primarily focused its efforts on urging government spending to foster economic growth and only sought shorter hours as a "last resort."
What changed between the 1930s and the 1960s was the acceptance of the idea that government spending could stimulate economic growth. Although popularly referred to as "Keynesianism," Keynes himself did not accept the idea that boundless expansion of production and consumption was worthwhile for its own sake. Instead, he specified working less as the "ultimate cure" for unemployment. The imperative for growth was a notion added by later economists.
Continued economic growth, fostered by government fiscal and monetary strategies, has led to an increase in effective demand for what Hirsch called positional goods. Competition for these socially or physically scarce or congested goods draws resources away from the output of final consumption goods and also exacts a personal cost in terms of time pressure. Individuals are compelled to spend more time in market activities and thus have less time to spend in non-commercial pursuits such as production for home consumption, leisure and sociability. "This has helped to upset a long-held expectation about the potential fruits of economic growth – namely, that they will be taken increasingly in the form of relief from material pursuits."
Rosnick and Weisbrot estimated that if European countries adopted the long working hours prevailing in the U.S., they would consume 25 percent more energy. Conversely, if the U.S. adopted working times closer to the European average, it would consume 20 percent less energy. Assuming that the intensity of greenhouse gas emissions per unit of GDP continues to decline at a rate consistent with the historical trend, economic growth averaging 2.5 percent annually would increase emissions by around 75 percent over the next 30 years. Meanwhile, poverty and unemployment will creep steadily upward. The alternative to continual economic growth and a resulting environmental and/or social catastrophe is to reduce the average hours of work for the bulk of the working population and increase employment opportunities for the unemployed and the underemployed.
Dean Baker has proposed government subsidies for shorter hours and vacation pay as part of the economic stimulus plan.
The government could give employers an incentive to provide paid time off now by giving tax breaks to cover all or most of the paid time off…There would undoubtedly be technical challenges to implementing a scheme such as that outlined by Baker. But there are challenges to implementing any stimulus package or policy reform.
This is a neat form of stimulus because it directly gives employers an incentive to hire more workers, as can be easily shown…
If employers of 50 million workers took up the deal, then this 6 percent would translate into 3 million jobs…
Wednesday, February 18, 2009
Does Eric Cantor Heart the Economic Consequences of Mr. Churchill?
Josh Marshall says he is a big Winston Churchill fan but doubts that Republican House Whip Eric Cantor knows much about Mr. Churchill’s political career. Josh makes this claim after reading this:
Should we remind both of them about a piece Lord Keynes wrote in 1925 entitled The Economic Consequences of Mr. Churchill? Churchill as Chancellor of the Exchequer had the British pound return to the gold standard after the First World War at too what turned out to be too high of a value. Keynes correctly predicted adverse economic consequences. British macroeconomic policy during this period also was the kind of macroeconomic mix the U.S. saw in the early Reagan years – tight money combined with tax cuts. The prices of British exports such as coal and textiles became uncompetitive on world markets leading to deflation and unemployment. As Keynes predicted, this strong pound policy also caused a trade deficit. The Reagan macroeconomic mix also created a fall in net exports, which contributed to the 1982 recession.
Churchill later recognized that the 1925 return to the gold standard was a mistake. One would think that U.S. Republicans would recognize that had we chose to repeat Herbert Hoover’s policies, we would be making an even greater economic mistake. But then Eric Cantor hearts Churchill’s leadership during this period. Go figure.
But Rep. Eric Cantor (Va.), the House minority whip who led the fight to deny Obama every GOP vote for the plan, is studying Winston Churchill's role leading the Tories in the late 1930s, a principled minority that was eventually catapulted into power over the Labor Party. He calls the stimulus bill "a stinker."
Should we remind both of them about a piece Lord Keynes wrote in 1925 entitled The Economic Consequences of Mr. Churchill? Churchill as Chancellor of the Exchequer had the British pound return to the gold standard after the First World War at too what turned out to be too high of a value. Keynes correctly predicted adverse economic consequences. British macroeconomic policy during this period also was the kind of macroeconomic mix the U.S. saw in the early Reagan years – tight money combined with tax cuts. The prices of British exports such as coal and textiles became uncompetitive on world markets leading to deflation and unemployment. As Keynes predicted, this strong pound policy also caused a trade deficit. The Reagan macroeconomic mix also created a fall in net exports, which contributed to the 1982 recession.
Churchill later recognized that the 1925 return to the gold standard was a mistake. One would think that U.S. Republicans would recognize that had we chose to repeat Herbert Hoover’s policies, we would be making an even greater economic mistake. But then Eric Cantor hearts Churchill’s leadership during this period. Go figure.
Tuesday, February 17, 2009
Happy Birthday, Dear Leader!
Yesterday was the 67th birthday of Kim Il Jong, the "Dear Leader" of the Democratic Peoples' Republic of (North) Korea.
In a column in today's Washington Post, the knowledgeable Selig Harrison reports on a trip he took about a month ago to Pyongyang, where met with top leaders and discussed possible options for deals on nuclear weapons. Apparently Kim did have a stroke last August, and while still participating a bit in decisions, is no longer running the government in any detail. The person on top effectivel now is his brother-in-law, Chang Soon Teak. Furthermore, the hardline National Defense Commission is on top, and Harrison was not allowed to meet with any of the "pragmatists" he has met in the past who favor a friendlier deal with the US and the rest of the world. Upshot is that they will not negotiate regarding the plutonium produced during the Bush years that is now "weaponized." They might negotiate on not producing any more, but there is a much harder line now in place there, unfortunately.
In a column in today's Washington Post, the knowledgeable Selig Harrison reports on a trip he took about a month ago to Pyongyang, where met with top leaders and discussed possible options for deals on nuclear weapons. Apparently Kim did have a stroke last August, and while still participating a bit in decisions, is no longer running the government in any detail. The person on top effectivel now is his brother-in-law, Chang Soon Teak. Furthermore, the hardline National Defense Commission is on top, and Harrison was not allowed to meet with any of the "pragmatists" he has met in the past who favor a friendlier deal with the US and the rest of the world. Upshot is that they will not negotiate regarding the plutonium produced during the Bush years that is now "weaponized." They might negotiate on not producing any more, but there is a much harder line now in place there, unfortunately.
China on the Buy American Provisions
AP reports on an editorial from the Xinhua News Agency:
I suspect that Robert Scott will find this claim that China is an advocate of free trade hard to shallow:
While Greg Mankiw wants to pretend that “China favors free trade, even if U.S. doesn’t”, one has to wonder if he also endorses the Chinese government’s policy of maintaining an undervalued yuan.
Update: Just in case someone reminds us that the exchange rate used to be 8.28 yuan per dollar and is now only 6.83 yuan per dollar, our graph shows this but it also shows that after this 17.5 percent exchange rate change, the exchange rate has not appreciably changed since July 2008. Just after the Presidential election, Bloomberg reported:
It would seem that government officials in both nations view the exchange rate as part of the overall trade policy stance.
Measures in a $789 billion U.S. stimulus package that favor American goods are a "poison" that will hurt efforts solve the financial crisis, an editorial by China's official news agency said. Provisions in the U.S. stimulus bill approved Friday favoring American steel, iron and manufactured goods for government projects are protectionist measures that could trigger trade disputes, said the editorial issued late Saturday by the Xinhua News Agency. "History and economics have told us, facing a global financial crisis, trade protectionism is not a solution, but a poison to the solution," the editorial said. U.S. labor groups that pushed hard for inclusion of the measures have argued that their main purpose is to ensure that U.S. Treasury dollars are used to the fullest extent to support domestic job creation. China has promised to avoid "Buy China" protectionist measures in its own multibillion-dollar stimulus effort, and appealed to other governments to support free trade.
I suspect that Robert Scott will find this claim that China is an advocate of free trade hard to shallow:
The growth of U.S. trade with China since China entered the World Trade Organization in 2001 has had a devastating effect on U.S. workers and the domestic economy ... A major cause of the rapidly growing U.S. trade deficit with China is currency manipulation. China has tightly pegged its currency to the dollar at a rate that encourages a large bilateral surplus with the United States. Maintaining this peg required the purchase of about $460 billion in U.S. treasury bills and other securities in 2007 alone. This intervention makes the yuan artificially cheap and provides an effective subsidy on Chinese exports. The best estimates place this effective subsidy at roughly 30%, even after recent appreciation in the yuan (Cline and Williamson 2008).
While Greg Mankiw wants to pretend that “China favors free trade, even if U.S. doesn’t”, one has to wonder if he also endorses the Chinese government’s policy of maintaining an undervalued yuan.
Update: Just in case someone reminds us that the exchange rate used to be 8.28 yuan per dollar and is now only 6.83 yuan per dollar, our graph shows this but it also shows that after this 17.5 percent exchange rate change, the exchange rate has not appreciably changed since July 2008. Just after the Presidential election, Bloomberg reported:
Barack Obama's calls for changes in China's yuan policy may put the president-elect on a collision course with the U.S.'s second-largest trade partner, which is holding the currency stable to support its export-led economy. Obama said China must stop manipulating the currency in a letter to the National Council of Textile Organizations released on Oct. 24. The People's Bank of China has kept the yuan almost unchanged against the dollar since mid-July as it shifts focus from countering inflation to sustaining growth amid a global credit crisis. The Foreign Ministry said last week the U.S. shouldn't blame its trade deficit on exchange rates.
It would seem that government officials in both nations view the exchange rate as part of the overall trade policy stance.
Reading Hicks (so Brad DeLong won't have to)
by the Sandwichman
In his diatribe against David Harvey, Brad DeLong invoked the authority of John R. Hicks more than once. "He (Harvey) doesn't understand Keynes, probably never read Hicks..."
And most tellingly,
Of course, the story is more complex than that, even, and for Pasinetti's full take on Hick's Conversion there is no substitute for reading the article, even if for no other reason than to relish Joan Robinson's acerbic remark that:
So much for "knowing more about Keynesian economics than Joan Robinson". DeLong thus cited as definitive a "little analytical toy" that the toy-maker himself repudiated and cherry picked quotes from a Joan Robinson who elsewhere disparaged the very toy that DeLong upheld as definitive. Sheesh.
I don't want to belabor 'uncle' J.R.'s culpability for "little analytical toys" and "simplifying assumptions" that made the neo-classical economist's work more excitingly elegant, remunerative and less relevant to the real world. But I do want to mention Hicks's assumption about the hours of work that has displaced an important argument from neo-classical economics that, if widely known, would decisively demonstrate the futility of the tautologies contemporary neo-classicals amuse themselves with -- Sydney Chapman's theory of the hours of labor. Think of it as the labor version of the Cambridge Capital Controversy.
As Chris Nyland wrote some twenty years ago, Chapman's theory essentially confirmed Marx's regarding the extensive and intensive dimensions of the hours of work. Sadly, with few exceptions, Marxists appear no more eager than neo-classicals to examine this theoretical convergence.
In his diatribe against David Harvey, Brad DeLong invoked the authority of John R. Hicks more than once. "He (Harvey) doesn't understand Keynes, probably never read Hicks..."
And most tellingly,
And it is at this point that we draw on neoclassical economics to save us--specifically, John Hicks (1937), "Mr. Keynes and the Classics," the fons et origo of the neoclassical synthesis. Hicks's IS curve gives us a menu of combinations of levels of production and interest rates at which private investment spending and public deficit spending are financed out of the flow of savings.Presenting the J.R. Hicks of "Mr. Keynes and the Classics" and his IS curve as the ultimate authority on Keynes is disingenuous. In the 1970s, Hicks himself repudiated his earlier formulation. But meanwhile its adoption by the US proponents of the "Keynesian neo-classical synthesis" could best be understood as an effort to inoculate economics against the more radical implications of Keynes's theory. A footnote from an essay by Luigi Pasinetti elaborates:
A simplified didactical tool, a mere device of exposition, had become so widespread as to become misleading -- too restrictive a tool for the purpose of accurately conveying Keynes's complex original message. Hicks kept on re-thinking his theory and slowly moving away from his original IS/LM formulation. In the late 1960s, early 1970s, he courageously took a break-away step. He strongly criticised, and actually, explicitly repudiated his successful little analytical toy. To stress his break-away, he went as far as declaring openly that he had ceased to be a neoclassical economist (in his words: "J.R. Hicks, [is] a 'neoclassical' economist now deceased..."). And in order to underline his change of mind, he even ceased to sign his articles by the name of J.R. Hicks and began to sign them by the name of John Hicks (in his words: "Clearly I need to change my name... John Hicks [is] a non-neoclassic who is quite disrespectful towards his 'uncle' [J.R.].
Of course, the story is more complex than that, even, and for Pasinetti's full take on Hick's Conversion there is no substitute for reading the article, even if for no other reason than to relish Joan Robinson's acerbic remark that:
John Hicks noticed the difference between the future and the past and became dissatisfied with the IS/LM but (presumably to save face for his predecessor, J.R.) he argued that Keynes's analysis was only half in time and half in equilibrium.
So much for "knowing more about Keynesian economics than Joan Robinson". DeLong thus cited as definitive a "little analytical toy" that the toy-maker himself repudiated and cherry picked quotes from a Joan Robinson who elsewhere disparaged the very toy that DeLong upheld as definitive. Sheesh.
I don't want to belabor 'uncle' J.R.'s culpability for "little analytical toys" and "simplifying assumptions" that made the neo-classical economist's work more excitingly elegant, remunerative and less relevant to the real world. But I do want to mention Hicks's assumption about the hours of work that has displaced an important argument from neo-classical economics that, if widely known, would decisively demonstrate the futility of the tautologies contemporary neo-classicals amuse themselves with -- Sydney Chapman's theory of the hours of labor. Think of it as the labor version of the Cambridge Capital Controversy.
As Chris Nyland wrote some twenty years ago, Chapman's theory essentially confirmed Marx's regarding the extensive and intensive dimensions of the hours of work. Sadly, with few exceptions, Marxists appear no more eager than neo-classicals to examine this theoretical convergence.
Monday, February 16, 2009
Capturing the Success of Non-traditional Monetary Policy: Are BAA Interest Rates a Good Metric?
While President Obama is about to sign a bill that provides significant fiscal stimulus for the ailing U.S. economy, most economists would likely argue that this is a necessary but not sufficient condition for restoring full employment. Ben Bernanke made the following observations on January 13, 2009:
The abrupt end of the credit boom has had widespread financial and economic ramifications. Financial institutions have seen their capital depleted by losses and writedowns and their balance sheets clogged by complex credit products and other illiquid assets of uncertain value. Rising credit risks and intense risk aversion have pushed credit spreads to unprecedented levels, and markets for securitized assets, except for mortgage securities with government guarantees, have shut down. Heightened systemic risks, falling asset values, and tightening credit have in turn taken a heavy toll on business and consumer confidence and precipitated a sharp slowing in global economic activity. The damage, in terms of lost output, lost jobs, and lost wealth, is already substantial.
We noted that the credit crunch is consistent with being in a liquidity trap as Paul Krugman also noted:
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.
Bernanke also noted:
The Federal Reserve has responded aggressively to the crisis since its emergence in the summer of 2007 ... As indications of economic weakness proliferated, the Committee continued to respond, bringing down its target for the federal funds rate by a cumulative 325 basis points by the spring of 2008. In historical comparison, this policy response stands out as exceptionally rapid and proactive … Although the federal funds rate is now close to zero, the Federal Reserve retains a number of policy tools that can be deployed against the crisis ... Other than policies tied to current and expected future values of the overnight interest rate, the Federal Reserve has--and indeed, has been actively using--a range of policy tools to provide direct support to credit markets and thus to the broader economy. As I will elaborate, I find it useful to divide these tools into three groups. Although these sets of tools differ in important respects, they have one aspect in common: They all make use of the asset side of the Federal Reserve's balance sheet. That is, each involves the Fed's authorities to extend credit or purchase securities.
The chairman of the Federal Reserve went on to describing in some detail these non-traditional monetary policy tools. The fact that interest rates on short-term government debt fell from around 5 percent in early 2007 to near zero now – with longer-term rates falling from around 5 percent to around 3 percent at the end of 2008 is testimony that the Federal Reserve did all it could do using conventional monetary policy and yet interest rates on BAA rated corporate debt rose from just over 6 percent as of late 2006 to around 9.5 percent towards the end of October 2008. While the beginning of the recession preceded the enormous spike in interest rates on BAA rated corporate debt, the panic signals over the credit crunch were the result of the unprecedented surge in credit spreads towards the end of 2008.
The title of this post suggests that watching the BAA interest rate may be a decent proxy for the success of non-traditional monetary policy. It is a metric that can be followed on a daily basis and is readily understood. If the proximate problem is high credit spreads and if investment demand is sensitive to the BAA interest rate, then this metric should be closely related to the policy problem and how it gets transmitted to the real economy.
So if one accepts my premises that the BAA interest rate is a good metric for the success of non-traditional monetary policy – how are we doing? I would submit that we have seen some – but not nearly enough – success. After all, an interest rate of 7.9 percent is not as burdensome as an interest rate of 9.5 percent. However, these interest rates are still quite high.
An Important Question (that is never asked)
by the Sandwichman
Brad DeLong wrote: "The question of should Americans be working less, and why aren't we working less already, is an important one. It has nothing to do with whether the Obama stimulus is doomed to fail:"
I disagree. Harvey's argument is not that there is a technical imposibility to a stimulus that worked (the Treasury view) but that there are political obstacles to implementing a stimulus that is large enough and appropriately targeted. My claim is that one of the political obstacles to the appropriate targeting of a stimulus is the systematic exclusion of one of the three "ingredients of a cure" prescribed by Keynes.
Keynes was very explicit. He viewed investment as first aid. He viewed work time reduction as the ultimate solution. But political Keynesianism over the past 60 years has applied first aid over and over again and has systematically excluded Keynes's ultimate solution. Now if Brad thinks Keynes was wrong, that's another matter. Show why. But you can't just assert that it has "nothing to do with whether the Obama stimulus is doomed to fail". In medicine, you don't keep applying first aid over and over and never address the fundamental problem. Is it not the same in economics?
Brad DeLong wrote: "The question of should Americans be working less, and why aren't we working less already, is an important one. It has nothing to do with whether the Obama stimulus is doomed to fail:"
I disagree. Harvey's argument is not that there is a technical imposibility to a stimulus that worked (the Treasury view) but that there are political obstacles to implementing a stimulus that is large enough and appropriately targeted. My claim is that one of the political obstacles to the appropriate targeting of a stimulus is the systematic exclusion of one of the three "ingredients of a cure" prescribed by Keynes.
Keynes was very explicit. He viewed investment as first aid. He viewed work time reduction as the ultimate solution. But political Keynesianism over the past 60 years has applied first aid over and over again and has systematically excluded Keynes's ultimate solution. Now if Brad thinks Keynes was wrong, that's another matter. Show why. But you can't just assert that it has "nothing to do with whether the Obama stimulus is doomed to fail". In medicine, you don't keep applying first aid over and over and never address the fundamental problem. Is it not the same in economics?
David Harvey vs. Brad DeLong Dustup!
In a post that Andrew Jackson, social and economic policy director of the Canadian Labour Congress, calls "absolutely brilliant and compelling," David Harvey argues that the stimulus package is bound to fail. On the one hand, the current package is not big enough and on the other hand, the US can't finance a big enough stimulus package because of its recent debt history. Brad DeLong calls Harvey's argument "intellectual masturbation." To which Harvey responds, lamenting the arrogance of neoclassical economists.
And now, the Sandwichman jumps into the fray with his two cents worth...
A distinction needs to be made between “Keynesianism” (even Harvey’s “strong”, “true” or “full-fledged” Keynesianism) and what Keynes actually thought about economic stimulus and full employment.
Keynes viewed government investment in infrastructure as “only one particular application of an intellectual theorem”. The other two were consumption and reduction of the hours of work. We hear about the first two applications, consumption and investment, incessantly but it was the third strategy, working less, that Keynes pronounced the “ultimate solution” to full employment. See his 1943 Treasury Department memorandum on “The Long Term Problem of Full Employment” and his 1945 letter to the poet, T.S. Eliot.
Keynes was concerned with full employment, not with economic growth. It was his successors who shifted the emphasis from the one to the other. They did so, I would argue, to suit their mathematical models more than anything. Be that as it may, in the 1970s Fred Hirsch showed how economic growth drained resources from both non-market activities and even from final consumption goods. Increased competition for scarce positional goods diverted resources into intermediate goods.
There remains a taboo against talking about work-time reduction as a possible response to the crisis. Dean Baker (he who ‘called’ the housing bubble in 2002) wrote a pair of op-ed pieces a few weeks ago in the Guardian and the New York Daily News calling for tax breaks for work time reduction. I have seen no uptake of Dean’s suggestion from the stable of liberal Keynesian economists — Krugman, et. al.
And now, the Sandwichman jumps into the fray with his two cents worth...
A distinction needs to be made between “Keynesianism” (even Harvey’s “strong”, “true” or “full-fledged” Keynesianism) and what Keynes actually thought about economic stimulus and full employment.
Keynes viewed government investment in infrastructure as “only one particular application of an intellectual theorem”. The other two were consumption and reduction of the hours of work. We hear about the first two applications, consumption and investment, incessantly but it was the third strategy, working less, that Keynes pronounced the “ultimate solution” to full employment. See his 1943 Treasury Department memorandum on “The Long Term Problem of Full Employment” and his 1945 letter to the poet, T.S. Eliot.
Keynes was concerned with full employment, not with economic growth. It was his successors who shifted the emphasis from the one to the other. They did so, I would argue, to suit their mathematical models more than anything. Be that as it may, in the 1970s Fred Hirsch showed how economic growth drained resources from both non-market activities and even from final consumption goods. Increased competition for scarce positional goods diverted resources into intermediate goods.
There remains a taboo against talking about work-time reduction as a possible response to the crisis. Dean Baker (he who ‘called’ the housing bubble in 2002) wrote a pair of op-ed pieces a few weeks ago in the Guardian and the New York Daily News calling for tax breaks for work time reduction. I have seen no uptake of Dean’s suggestion from the stable of liberal Keynesian economists — Krugman, et. al.
Sunday, February 15, 2009
The Proposition That the GOP Cares About the Burden of the Debt is Bogus
Mark Thoma listened to John McCain so we did not have to:
Mark does a nice job of noting why this rhetoric is misplaced. Jeff Frankel has a related and interesting post noting that while the fiscal stimulus may not be enough to get us back to full employment, it may raise danger signals in international financial markets:
While Jeff is correct about the hypocrisy of the modern Republican Party, I think he could have gone further. Not only did these Republicans support the Bush43 increase in the debt to GDP ratio, they still praise the fiscal policies of the Reagan-Bush41 era, a period when the debt to GDP ratio doubled.
I would also beg to differ that a transitional period where the debt to GDP ratio rose as a result of a short-term fiscal stimulus that was necessary to avoid a major recession will lead to fiscal ruin. We have seen much larger increases in the debt to GDP ratio before without fiscal ruin but as Robert Barro noted in his On the Determination of the Public Debt (Journal of Political Economy, 1979), U.S. policymakers before the advent of the modern Republican Party was committed to retiring public debt over time.
In 1993, the Clinton Administration passed a deficit reduction package that included tax increases. Unfortunately – he got even less support from Senate and Congressional Republicans than President Obama received for the legislation he is about to sign. David Waldman reminds of the incredibly petty and stupid things said by Republican Congressional leaders in 1993. These leaders did not care about fiscal responsibility back then and their newly found devotion to fiscal austerity today sounds insincere. But as Barro’s 1979 paper suggests – we eventually need to get back to the pre-Reagan fiscal stance of using fiscal stimulus only during times of recessions or other national emergencies. We will not get there unless the Republican Party changes its ways or disappears as a force in American politics.
I saw Senator McCain on CNN talking about how the stimulus package is, essentially, reaching into the pockets of future generations and transferring their wealth to the present generation.
Mark does a nice job of noting why this rhetoric is misplaced. Jeff Frankel has a related and interesting post noting that while the fiscal stimulus may not be enough to get us back to full employment, it may raise danger signals in international financial markets:
The 2009 fiscal-year deficit is already expected to exceed $1.2 trillion, so we are talking about deficits thereafter that could surpass 10 per cent of GDP. This is far above the levels that are considered danger signals when they come from any other country. Until now, the US has not been “any other country;” The rest of the world has been willing to finance American profligacy cheerfully. But there have already been signs in the last few weeks that the prospect of this much Treasury debt coming onto the markets is already beginning to push bond prices down and long-term interest rates up. My feeling is that if the current stimulus package were to break the $1 trillion mark, it might truly alarm international financial investors, who would in that case stop acquiring dollar assets, thus precipitating the hard landing of the dollar that so many of us have feared for so long. In those circumstances, the Fed would lose the ability to keep interest rates low, and we could be in even worse trouble than today. Everything would be different if we had spent the last 8 years preserving the budget surpluses that Bill Clinton bequeathed to George Bush. Then we would have paid down a big share of the national debt by now, instead of doubling it. We would be in a strong enough fiscal position to undertake the expansion today that we really need. In that light it is ironic, to say the least, that the politicians who are warning against the size of the stimulus bill (”generational theft”), particularly the Congressmen who are voting against it, are mostly the same Republicans who supported the original fiscal policies that gave us the doubling of the national debt: the huge long-term tax cuts of 2001 and 2003 and the greatly accelerated rate of government spending. What we need now is a fiscal policy that maximizes short-run demand stimulus relative to long-run damage to the national debt. Lots of bang for the buck. The Republicans supported fiscal policies that did the opposite. Lots of buck for the bang.
While Jeff is correct about the hypocrisy of the modern Republican Party, I think he could have gone further. Not only did these Republicans support the Bush43 increase in the debt to GDP ratio, they still praise the fiscal policies of the Reagan-Bush41 era, a period when the debt to GDP ratio doubled.
I would also beg to differ that a transitional period where the debt to GDP ratio rose as a result of a short-term fiscal stimulus that was necessary to avoid a major recession will lead to fiscal ruin. We have seen much larger increases in the debt to GDP ratio before without fiscal ruin but as Robert Barro noted in his On the Determination of the Public Debt (Journal of Political Economy, 1979), U.S. policymakers before the advent of the modern Republican Party was committed to retiring public debt over time.
In 1993, the Clinton Administration passed a deficit reduction package that included tax increases. Unfortunately – he got even less support from Senate and Congressional Republicans than President Obama received for the legislation he is about to sign. David Waldman reminds of the incredibly petty and stupid things said by Republican Congressional leaders in 1993. These leaders did not care about fiscal responsibility back then and their newly found devotion to fiscal austerity today sounds insincere. But as Barro’s 1979 paper suggests – we eventually need to get back to the pre-Reagan fiscal stance of using fiscal stimulus only during times of recessions or other national emergencies. We will not get there unless the Republican Party changes its ways or disappears as a force in American politics.
Nassim Nicholas Taleb and I Make Peace
I finally received an email reply from Nassim Nicholas Taleb. He wrote, "you are off the hook" I checked, and the innaccurate (and insulting) material that he had on his website about me has been removed. I thank him for reconsidering the matter and correcting the situation. While I have been critical of him on several counts, I am largely in agreement with his analysis of the current situation and the broader problem of "black swans," or to use the more conventional terminology of Keynes and Knight, fundamental uncertainty. I also repeat that his books contain much interesting information and are fun to read.
Regarding barbell investment strategies, there is no single one that necessarily will do well all the time, and Taleb has stated that. He has indeed more fundamentally made the point that we all must keep this profound degree of uncertainty in mind. I also remind that there are many different forms that barbell strategies can take, and that one might be doing well even as others might not be doing well. In any case, I welcome an end to this feud that probably should never have occurred in the first place.
Regarding barbell investment strategies, there is no single one that necessarily will do well all the time, and Taleb has stated that. He has indeed more fundamentally made the point that we all must keep this profound degree of uncertainty in mind. I also remind that there are many different forms that barbell strategies can take, and that one might be doing well even as others might not be doing well. In any case, I welcome an end to this feud that probably should never have occurred in the first place.
Sandwichbam
by the Sandwichman
S'man's cookie fortune from Friday night: "The world will soon be ready to receive your talents."
S'man's cookie fortune from Friday night: "The world will soon be ready to receive your talents."
Minute Dream
By the Sandwichman
I woke up this morning and glanced over at the clock. It was 7:08. Then I dozed off again and started to dream. I dreamed I turned on a light and the light bulb burned out. I woke up and looked at the clock. It was 7:09.
I woke up this morning and glanced over at the clock. It was 7:08. Then I dozed off again and started to dream. I dreamed I turned on a light and the light bulb burned out. I woke up and looked at the clock. It was 7:09.
Saturday, February 14, 2009
Claiming the Fiscal Stimulus Bill Failed
Let’s start with a sensible account from David Espo:
Didn’t Rush Limbaugh say early on in the next Administration that he wanted our new President to fail? Boehner marshaled the House Republicans to follow Limbaugh’s lead even if it meant endorsing Herbert Hoover economics. And of course Jonah Goldberg had to follow suit:
The only manure I smell is the nonsense emanating from rightwing hacks such as Boehner and Goldberg. The main problem with the U.S. economy is a lack of aggregate demand - but these economic know nothings cannot understand that increasing aggregate demand via more government spending is indeed stimulus that will create more jobs. Brad DeLong makes this point:
When Bill Clinton first became President, certain Republicans such as Bob Barr were hoping to impeach him on just about anything, which eventually became known as the Monica Lewinsky scandal – all gift wrapped by Jonah Goldberg’s mother. It seems that these hacks are still putting partisan politics ahead of the nation’s interest even as we desperately something to reverse this recession.
Update: Rush Limbaugh wants the stimulus bill to fail – so do certain GP Congressman. It follows that these rightwing hacks actually want this recession to continue. Those of you who are suffering from being unemployed – guess this in mind.
In a major victory for President Barack Obama, Democrats muscled a huge, $787 billion stimulus bill through Congress late Friday night in hopes of combating the worst economic crisis since the Great Depression. Republican opposition was nearly unanimous. The Senate approved the measure 60-38 with three GOP moderates providing crucial support. Hours earlier, the House vote was 246-183, with all Republicans opposed to the package of tax cuts and federal spending that Obama has made the centerpiece of his plan for economic recovery. The president could sign the bill as early as next week, less than a month after taking office. Supporters said the legislation would save or create 3.5 million jobs ... Vigorously disagreeing, House Republican leader John Boehner of Ohio dumped a copy of the 1,071-page bill to the floor in a gesture of contempt. "The bill that was about jobs, jobs, jobs has turned into a bill that's about spending, spending, spending," he said ... Republicans complained they had been locked out of the early decisions, and Democrats countered that Boehner had tried to rally opposition even before the president met privately with the GOP rank and file.
Didn’t Rush Limbaugh say early on in the next Administration that he wanted our new President to fail? Boehner marshaled the House Republicans to follow Limbaugh’s lead even if it meant endorsing Herbert Hoover economics. And of course Jonah Goldberg had to follow suit:
The stimulus bill has failed. Barack Obama has failed. The Trojan Horse of Hope and Change crashed into the guardrail of reality, revealing an army of ideologues and activists inside. Now, before I continue, let me say that Barack Obama will still be popular, he will still get things done, and he will declare victory after signing a stimulus bill. But Obama’s moment is gone, and politics is about nothing if not moments. The stimulus bill was a bridge too far, an overplayed hand, ten pounds of manure in a five-pound bag. The legislation’s primary duty was never to stimulate the economy, but to stimulate the growth of government, the scope of the state. By spending hundreds of billions on things that have absolutely nothing to do with providing an immediate stimulus for the economy, Democrats hoped to make a down payment on their dream government.
The only manure I smell is the nonsense emanating from rightwing hacks such as Boehner and Goldberg. The main problem with the U.S. economy is a lack of aggregate demand - but these economic know nothings cannot understand that increasing aggregate demand via more government spending is indeed stimulus that will create more jobs. Brad DeLong makes this point:
Had John McCain won the presidential election last November, a similarly-sized fiscal boost bill--more tax cuts, fewer spending increases, tilted toward the rich rather than toward the poor and middle class--would now be moving through the congress with genuine bipartisan support. But Barack Obama won the presidency. And so the Republicans decide to try to make America a poorer nation with higher unemployment: 246-183-1 in the House, with not a single Republican representative voting yes
When Bill Clinton first became President, certain Republicans such as Bob Barr were hoping to impeach him on just about anything, which eventually became known as the Monica Lewinsky scandal – all gift wrapped by Jonah Goldberg’s mother. It seems that these hacks are still putting partisan politics ahead of the nation’s interest even as we desperately something to reverse this recession.
Update: Rush Limbaugh wants the stimulus bill to fail – so do certain GP Congressman. It follows that these rightwing hacks actually want this recession to continue. Those of you who are suffering from being unemployed – guess this in mind.
Friday, February 13, 2009
Looting Social Security with the Old Bait & Switch Fraud
William Greider is a saint:
Yes, let’s insist that the President echo the call to keep those grubby hands off of our Social Security Trust Fund reserves. Greider reminds us of the 1983 payroll tax increases and the double role they have played in American politics ever since:
Ah – the old fight about whether to talk about the “unified” deficit versus the “general fund” deficit. Just call me a general fund deficit type who thinks that this run-up in the total Federal debt to GDP ratio should later be reduced on tax increases on very high income groups and not backdoor employment tax increases disguised as reductions in Social Security benefits that exceed any promised reductions in payroll taxes in present value terms. Didn’t we already go through this nonsense four years ago?
These players are promoting a tricky way to whack Social Security benefits, but to do it behind closed doors so the public cannot see what's happening or figure out which politicians to blame. The essential transaction would amount to misappropriating the trillions in Social Security taxes that workers have paid to finance their retirement benefits. This swindle is portrayed as "fiscal reform." In fact, it's the political equivalent of bait-and-switch fraud ... Will Obama take the bait? Surely not. The new president has been clear and consistent about Social Security, as a candidate and since his election. The program's financing is basically sound, he has explained, and can be assured far into the future by making only modest adjustments. But Obama is also playing footsie with the conservative advocates of "entitlement reform" (their euphemism for cutting benefits). The president wants the corporate establishment's support on many other important matters, and he recently promised to hold a "fiscal responsibility summit" to examine the long-term costs of entitlements. That forum could set the trap for a "bipartisan compromise" that may become difficult for Obama to resist, given the burgeoning deficit ... The Social Security fight could become a defining test for "new politics" in the Obama era. Will Americans at large step up and make themselves heard, not to attack Obama but to protect his presidency from the political forces aligned with Wall Street interests? This fight can be won if people everywhere raise a mighty din--hands off our Social Security money!--and do it now, before the deal gains momentum.
Yes, let’s insist that the President echo the call to keep those grubby hands off of our Social Security Trust Fund reserves. Greider reminds us of the 1983 payroll tax increases and the double role they have played in American politics ever since:
To understand the mechanics of this attempted swindle, you have to roll back twenty-five years, to the time the game of bait and switch began, under Ronald Reagan. The Gipper's great legislative victory in 1981--enacting massive tax cuts for corporations and upper-income ranks--launched the era of swollen federal budget deficits. But their economic impact was offset by the huge tax increase that Congress imposed on working people in 1983: the payroll tax rate supporting Social Security--the weekly FICA deduction--was raised substantially, supposedly to create a nest egg for when the baby boom generation reached retirement age. A blue-ribbon commission chaired by Alan Greenspan worked out the terms, then both parties signed on. Since there was no partisan fight, the press portrayed the massive tax increase as a noncontroversial "good government" reform. Ever since, working Americans have paid higher taxes on their labor wages--12.4 percent, split between employees and employers. As a result, the Social Security system has accumulated a vast surplus--now around $2.5 trillion and growing. This is the money pot the establishment wants to grab, claiming the government can no longer afford to keep the promise it made to workers twenty-five years ago. Actually, the government has already spent their money. Every year the Treasury has borrowed the surplus revenue collected by Social Security and spent the money on other purposes--whatever presidents and Congress decide, including more tax cuts for monied interests. The Social Security surplus thus makes the federal deficits seem smaller than they are--around $200 billion a year smaller. Each time the government dipped into the Social Security trust fund this way, it issued a legal obligation to pay back the money with interest whenever Social Security needed it to pay benefits.
Ah – the old fight about whether to talk about the “unified” deficit versus the “general fund” deficit. Just call me a general fund deficit type who thinks that this run-up in the total Federal debt to GDP ratio should later be reduced on tax increases on very high income groups and not backdoor employment tax increases disguised as reductions in Social Security benefits that exceed any promised reductions in payroll taxes in present value terms. Didn’t we already go through this nonsense four years ago?
Thursday, February 12, 2009
Australia’s catastrophic Summer - Update
See previous story describing the background to the massive fire outbreaks in Southern Australia.
World media have focused a lot of attention on the enormity of the tragedy but have failed to mention that all levels of government in Australia have imposed the widescale spread of industrial tree plantations in the very areas most affected by these fires. The fires in Victoria actually began in a pine and eucalyptus monocultures near the township of Churchill.
Tasmania, however, is the state with the highest concentration of these massive fire liabilities. The issue of fire risk has been highlighted in Federal Senate inquiries and many other forums for well over a decade. Without success.
I am personally affected by this neoliberal industry and the related culpability of our so-called regulatory authorities. See 'Twelve years of pain'
There will be no resolution to, nor prevention of these tragedies until Australian governance is fixed at all levels.
Karl Rove Misrepresents CBO Estimate of the Fiscal Stimulus
Can’t the WSJ find someone other than Karl Rove to write op-eds on economics?
My most estimates, the bill that will finally be hammered out will be less stimulative than the original Senate bill. Brad DeLong has a nice summary of the short-term impacts as estimated by the CBO. Without the stimulus, CBO estimates that the GDP gap in 2011 will be 4.1% and the unemployment rate will be 7.5%. With this somewhat less stimulative bill, the estimated gap will be between 2.9% and 3.7% and the unemployment rate will be between 6.5% and 7.2% - all depending on whether one uses the low estimate of the effect of the plan versus the high estimate. That is not a negligible short-term impact.
Steve Benen has more on the political nonsense being peddled by Mr. Rove. As far as the long-run impact of the current fiscal stimulus - Tim Fernholz is on the right track especially as he notes that the rightwing pundits have been misrepresenting what the CBO is saying but didn’t we cover this one already?
Update: Ed Rollins joins in the criticism of this fiscal stimulus by suggesting that the President has not been exactly truthful. Why? Because Rollins thinks that the Federal government is too much in debt to be going for fiscal stimulus. Somehow – the stupidity of certain rightwingers have given them license to call the President a liar?
They also asked the Congressional Budget Office if the Democratic Senate bill was actually stimulative. The nonpartisan CBO found it would have a "negligible" impact on jobs by 2011 and hurt economic growth and prosperity over the next decade.
My most estimates, the bill that will finally be hammered out will be less stimulative than the original Senate bill. Brad DeLong has a nice summary of the short-term impacts as estimated by the CBO. Without the stimulus, CBO estimates that the GDP gap in 2011 will be 4.1% and the unemployment rate will be 7.5%. With this somewhat less stimulative bill, the estimated gap will be between 2.9% and 3.7% and the unemployment rate will be between 6.5% and 7.2% - all depending on whether one uses the low estimate of the effect of the plan versus the high estimate. That is not a negligible short-term impact.
Steve Benen has more on the political nonsense being peddled by Mr. Rove. As far as the long-run impact of the current fiscal stimulus - Tim Fernholz is on the right track especially as he notes that the rightwing pundits have been misrepresenting what the CBO is saying but didn’t we cover this one already?
Even the most ardent Keynesian would concede that long-term fiscal stimulus leads to long-term crowding-out. Only those pseudo-economists who were apologists for the Bush43 fiscal stimulus would try to deny this. In my view, the ideal fiscal stance would be short-term stimulus followed by long-term fiscal restraint once the economy approached full employment. This was the policy of the Clinton Administration as I understand it – it is what is being recommended to President Obama by his economic advisors.
Update: Ed Rollins joins in the criticism of this fiscal stimulus by suggesting that the President has not been exactly truthful. Why? Because Rollins thinks that the Federal government is too much in debt to be going for fiscal stimulus. Somehow – the stupidity of certain rightwingers have given them license to call the President a liar?
What Congress forgot to ask the bankers
Yesterday when the bankers were telling Congress how much they have been lending, I don't know of anyone who asked them how much of these loans in response to pre-existing lines of credit. One of the ways banks try to get fees is to collect interest on lines of credit -- money that they have not yet lent, but stand willing to lend in the future. Banks are contractually obligated to fulfill these loans.
With credit tightening, many borrowers have taken advantage of these lines of credit. Doing so, they give the impression that banks are increasing their loans, but the arrangements for these loans, in effect, may have been made quite some time ago.
With credit tightening, many borrowers have taken advantage of these lines of credit. Doing so, they give the impression that banks are increasing their loans, but the arrangements for these loans, in effect, may have been made quite some time ago.
Wednesday, February 11, 2009
CNN Pundits Claim Poor Have a Zero Marginal Propensity to Consume
Full disclosure – every time I have to endure listening to Ali Velshi opine on economic matters – I want to scream. So before we discuss his latest, let’s let Brad DeLong have the microphone:
That is a very nice summary of the political debate so which people have a high propensity to spend. Well – don’t listen to a CNN pundit:
I’ll grant that a household with low income will not be consuming as much as say Bill Gates and his family. But the issue is not the absolute level of consumption per person but rather the marginal propensity to consume, that is, how much of each extra dollar of disposable income will be spent. Ricardian Equivalence types – that is those permanent income types who also impose the long-run government budget constraint in their consumption model – might tell you that tax cuts for those who are not borrowing constrained will not increase consumption. But when Campbell Brown talks about “people who are in the most dire straits”, I would suggest she is talking about people who are borrowing constrained.
If Ali Velshi understood economics, he would have told Ms. Brown that the issue is the marginal propensity to consume, which would imply she had this exactly backwards. Then again – Ali is not an economist getting his degree in religious studies. So why does CNN put this economic know nothing on as some sort of expert in business and economics?
With the exception of the wingnuts in the neo-Hooverite caucus, both Republican and Democratic economic advisors were telling their legislative principles by late fall that a fiscal boost would be a good thing--Republican economists saying that they would prefer tax cuts targetted toward people with a high propensity to spend out of income, Democratic economists saying that they would prefer direct spending on shovel-ready projects. Barack Obama proposes a bipartisan compromise: do some tax cuts and some spending, with a 35-65 split because, after all, the Democrats won the election.
That is a very nice summary of the political debate so which people have a high propensity to spend. Well – don’t listen to a CNN pundit:
On No Bias, No Bull, Brown asserted: "Food stamps, unemployment benefits not likely to stimulate the economy because these are the people who are in the most dire straits spending the bare minimum." After Velshi replied, "That's right," Brown stated, "So the stimulus part comes from the big spending package that we're going to talk about." Velshi responded: "Right. And, you know, maybe the $500 or $1,000 you get per family. But you're absolutely right. There are some of these things that are more about recovery than stimulus. The administration likes to call it a recovery bill. If you're giving food stamps and you're giving unemployment benefits, that's not stimulus; that's simply helping people out who are in a lot of trouble."
I’ll grant that a household with low income will not be consuming as much as say Bill Gates and his family. But the issue is not the absolute level of consumption per person but rather the marginal propensity to consume, that is, how much of each extra dollar of disposable income will be spent. Ricardian Equivalence types – that is those permanent income types who also impose the long-run government budget constraint in their consumption model – might tell you that tax cuts for those who are not borrowing constrained will not increase consumption. But when Campbell Brown talks about “people who are in the most dire straits”, I would suggest she is talking about people who are borrowing constrained.
If Ali Velshi understood economics, he would have told Ms. Brown that the issue is the marginal propensity to consume, which would imply she had this exactly backwards. Then again – Ali is not an economist getting his degree in religious studies. So why does CNN put this economic know nothing on as some sort of expert in business and economics?
Monday, February 9, 2009
The Role Economists Play in the Obama White House as Compared to the Last 8 Years
The Economist makes an interesting observation:
I wonder how this compares to how things operated when Bill Clinton was President.
Mr Obama continues to seek sensible economic advice. It was emblematic of George Bush’s low regard for economists that in 2003 he moved the Council of Economic Advisers (CEA), the administration’s in-house think-tank, from the White House complex to a drab office building a block away. Mr Obama has moved it back. Each morning he gets a memo prepared the previous night by the CEA and the Treasury, then spends about 30 minutes with his economic team. In regular attendance are Mr Summers, Mr Geithner, Peter Orszag (the budget director) and Christina Romer, who chairs the CEA.
I wonder how this compares to how things operated when Bill Clinton was President.
Hookah-Smoking Caterpillar Keynesians II
by the Sandwichman
In the previous post, the Sandwichman concluded that Humpty-Dumpty hookah-smoking Caterpillar Keynesianism is not as daft, at least, as the alternatives offered by the likes of Niall Ferguson and Peter Schiff. It remained to wring a bit more daftness out of political Keynesianism.
Keynes, it has been pointed out, was not a Keynesian. What passes for Keynesianism these days is a hodge-podge of public-spending agendas upheld by opportunistic textual exegesis. The New Deal functions as a flexible exemplar for public spending. The New Deal was both Keynesianish and yet not Keynesian enough. Actually, it was ("hey, hey") LBJ and Tricky Dick, not the sainted Franklin Delano Roosevelt, who put full-fledged political Keynesianism to the test.
At the end of A Living Wage, Lawrence Glickman offered an interpretation of the New Deal that challenges traditional assumptions. Instead of viewing the focus on sustaining consumption as originating with the New Deal and Keynes, Glickman traced it back to the "living wage" ideology of labor that had evolved over the final three decades of the 19th century. It wasn't the ideas that were new, it was only their (relative) respectability.
Glickman's account of that evolution in labor ideas centered on the distinction between a traditional "producerist" ideology and the emerging consumerist ideology that characterized Samuel Gompers' American Federation of Labor. When asked the question, "what does labor want?" Gompers famously replied,
All this is saying is that the actual political constituency for fiscal stimulus is quite a different matter than adherence to an intellectual construct. As World War II drew to a close there was near unanimity among economists, politicians and the general public in favor of doing whatever needed to be done to maintain full employment (which is not to say economic growth).
If the goal of Keynesianism was to "save capitalism from the stupidity of its managers", who would spare the saviors from the hubris of their expertise? According to Fred Hirsch:
The Achilles heel of Political Keynesianism resides not in the pseudo-economic objection that "the money has to come from somewhere" but in the fuzzier notion that the motivating obligations and instincts have to come from somewhere other than the market. Keynesianism cannot succeed -- as its modern day adherents delude themselves it can -- as a technocratic exercise in estimating multipliers and shortfalls in capacity utilization. The technocratic, mathematical defense of fiscal stimulus policy consents to a rhetorical deck of cards where the reactionary clowns hold all the jokers.
"To live outside the law, you must be honest." That includes living outside the metaphorical "laws" of classical political economy.
In the previous post, the Sandwichman concluded that Humpty-Dumpty hookah-smoking Caterpillar Keynesianism is not as daft, at least, as the alternatives offered by the likes of Niall Ferguson and Peter Schiff. It remained to wring a bit more daftness out of political Keynesianism.
Keynes, it has been pointed out, was not a Keynesian. What passes for Keynesianism these days is a hodge-podge of public-spending agendas upheld by opportunistic textual exegesis. The New Deal functions as a flexible exemplar for public spending. The New Deal was both Keynesianish and yet not Keynesian enough. Actually, it was ("hey, hey") LBJ and Tricky Dick, not the sainted Franklin Delano Roosevelt, who put full-fledged political Keynesianism to the test.
At the end of A Living Wage, Lawrence Glickman offered an interpretation of the New Deal that challenges traditional assumptions. Instead of viewing the focus on sustaining consumption as originating with the New Deal and Keynes, Glickman traced it back to the "living wage" ideology of labor that had evolved over the final three decades of the 19th century. It wasn't the ideas that were new, it was only their (relative) respectability.
Glickman's account of that evolution in labor ideas centered on the distinction between a traditional "producerist" ideology and the emerging consumerist ideology that characterized Samuel Gompers' American Federation of Labor. When asked the question, "what does labor want?" Gompers famously replied,
"We want more schoolhouses and less jails; more books and less arsenals; more learning and less vice; more leisure and less greed; more justice and less revenge; in fact, more of the opportunities to cultivate our better natures, to make manhood more noble, womanhood more beautiful, and childhood more happy and bright."This is sometimes abbreviated as "More!" or "More, more, more..." The New Deal thus incorporated labor movement ideas about an American 'standard of living'. Organized labor, in turn, appropriated a technocratic, "Keynesian" language regarding 'purchasing power' and 'aggregate demand'. Even big business got into the act with the National Association of Manufacturer's billboard campaign trumpeting the world's highest wages and standard of living and the world's shortest working hours.
All this is saying is that the actual political constituency for fiscal stimulus is quite a different matter than adherence to an intellectual construct. As World War II drew to a close there was near unanimity among economists, politicians and the general public in favor of doing whatever needed to be done to maintain full employment (which is not to say economic growth).
If the goal of Keynesianism was to "save capitalism from the stupidity of its managers", who would spare the saviors from the hubris of their expertise? According to Fred Hirsch:
...Keynes's interpretation of managed capitalism retains a vital importance precisely because of its unquestioning reliance on obligations and instincts deriving from an earlier preindustrial culture. It is in the complete Keynesian system that we can best observe the limits of the guided market, because Keynes took for granted supportive characteristics that his own system could not preserve but that the purer system of his successors in economic liberalism ignored.The Sandwichman's crucial amendment to Hirsh's view is to point out that the cultural ground for those non-market obligations and instincts need not be "preindustrial" but can as readily be extra- or counter- industrial, as in the 19th century labor movement's notion of a living wage. What is important, though is that these obligations and instincts operate outside any "laws of the market", even as modified by the intervention of the state. This means you, 'aggregate demand' and 'multiplier'.
The Achilles heel of Political Keynesianism resides not in the pseudo-economic objection that "the money has to come from somewhere" but in the fuzzier notion that the motivating obligations and instincts have to come from somewhere other than the market. Keynesianism cannot succeed -- as its modern day adherents delude themselves it can -- as a technocratic exercise in estimating multipliers and shortfalls in capacity utilization. The technocratic, mathematical defense of fiscal stimulus policy consents to a rhetorical deck of cards where the reactionary clowns hold all the jokers.
"To live outside the law, you must be honest." That includes living outside the metaphorical "laws" of classical political economy.
Sunday, February 8, 2009
A Postal Savings Bank Solution?
Michael Perelman has suggested that banks may serve a public utility function and should be nationalized. I assume he means the functions of holding people's money as deposits and using it for some sort of basic investing, without getting into fees for packaging mortgages or other more exotic financial activities. I suggested in a comment on his post that a model of this might be the old postal savings banks of much of Europe and Japan, the latter being the largest in the world. I do think something along their lines, however owned, might offer an alternative, simple banks that do simple things.
As it is the current trend is for those old banks to be privatized in some form. This happened finally in Japan in October, 2007, to the Japan Post, which does more than serve as a bank. In today's NY Times is a story that there is a move by Post A.G., Deutsche Bank, and Swiss Reinsurance to take over the still nationally owned Post Bank A.G of Germany, their postal savings bank. See http://query.nytimes.com/gst/fullpage.html?res=9E02E7D91439F930A35753C1A063958260.
As it is the current trend is for those old banks to be privatized in some form. This happened finally in Japan in October, 2007, to the Japan Post, which does more than serve as a bank. In today's NY Times is a story that there is a move by Post A.G., Deutsche Bank, and Swiss Reinsurance to take over the still nationally owned Post Bank A.G of Germany, their postal savings bank. See http://query.nytimes.com/gst/fullpage.html?res=9E02E7D91439F930A35753C1A063958260.
McCain on the Fiscal Stimulus
The GOP 2008 nominee for the Presidency appeared on Face The Nation and made some incredibly stupid remarks:
Let’s take these in reverse order. Let’s suppose that by the time the recession bottoms out, the GDP gap is 8 percent or more. Even after a couple of quarters of modest growth, the GDP gap will still likely be massive but McCain would have us shift towards fiscal restraint?
McCain knows we need tax cuts and infrastructure but his own party is making sure that infrastructure spending is as small as possible to make room for more tax cuts. So what is it that he wants if “this is not it”. Incidentally, McCain says that he wants more bang for the buck but he concedes at the same time that the kind of tax cut we tried earlier during this recession has little impact on consumption. And yet he wants more tax cuts and less spending.
Now I will concede that an $800 billion fiscal stimulus is larger than anything we saw in the 1930’s in nominal aggregate terms. But nominal GDP was less than $100 billion back then. The proper comparison would have to be done either in real per capita terms or relative to GDP. But does Senator McCain not understand that we had very little fiscal stimulus during the New Deal, which is one reason why it took so long for the economy to get back to full employment? If McCain’s Republican colleagues have their way, we are going to repeat the policy mistake of not doing enough fiscal stimulus, which will insure that the current recession will be deeper and last longer.
Thank goodness we did not select this economic know-nothing to be President!
I think it’s a massive -- it’s much larger than any measure that was taken during the Great Depression ... I know America needs a stimulus. We need tax cuts. We need to spend money on infrastructure and on other programs that will immediately put people to work. But this is not it ... we got 44 votes, on a trigger, on a trigger that said that, once we have GDP growth for two quarters -- in other words, the economy recovers -- that we will stop the spending and we’ll put America on a path to a balanced budget.
Let’s take these in reverse order. Let’s suppose that by the time the recession bottoms out, the GDP gap is 8 percent or more. Even after a couple of quarters of modest growth, the GDP gap will still likely be massive but McCain would have us shift towards fiscal restraint?
McCain knows we need tax cuts and infrastructure but his own party is making sure that infrastructure spending is as small as possible to make room for more tax cuts. So what is it that he wants if “this is not it”. Incidentally, McCain says that he wants more bang for the buck but he concedes at the same time that the kind of tax cut we tried earlier during this recession has little impact on consumption. And yet he wants more tax cuts and less spending.
Now I will concede that an $800 billion fiscal stimulus is larger than anything we saw in the 1930’s in nominal aggregate terms. But nominal GDP was less than $100 billion back then. The proper comparison would have to be done either in real per capita terms or relative to GDP. But does Senator McCain not understand that we had very little fiscal stimulus during the New Deal, which is one reason why it took so long for the economy to get back to full employment? If McCain’s Republican colleagues have their way, we are going to repeat the policy mistake of not doing enough fiscal stimulus, which will insure that the current recession will be deeper and last longer.
Thank goodness we did not select this economic know-nothing to be President!
Could Someone Inform Alan Reynolds of the 1981-82 Recession?
NBER says we had a recession from July 1981 to December 1982 but I guess Alan Reynolds does not know this:
Reynolds uses this piece of disinformation as part of his attack on Paul Krugman. But let’s look at table 1.1.6 of the National Income and Product Accounts. From 1980QIII to 1981QIII, real GDP rose from $5107.4 billion to $5329.8 billion, which of course, is the recovery that NBER identifies. But Reynolds and other rightwing apologists for the Reagan recession omit this period in their discussion. From 1981QIII to 1982QIII, real GDP fell to $5185.2 billion before we saw the recovery that Paul Krugman discussed.
If one looked at the economy that Bush41 left Clinton to the one that Carter left Reagan, both would be described as economies that were slowly and tentatively recovering from recessions with similar unemployment rates. So if we looked at real GDP growth during the Reagan-Bush41 periods, we could be relatively assured that we would be picking up more of the long-term growth and less of Keynesian features. Real GDP growth during this period was 3% as compared to around 3.5% from thirty years before the Reagan-Bush41 era and 3.7% during the Clinton term. But Alan Reynolds wants to distort this fact and to do so, he has to deny the 1981-82 recession.
This suggests the entire period from early 1983 to mid-1990 was nothing more than a routine recovery from recession. That is wrong. Real GDP peaked in the first quarter of 1980 at $5,221.3 billion, measured in 2000 dollars. By the first quarter of 1983, real GDP reached $5253.8 billion; the economy had already passed from recovery to expansion. Industrial production hit 59.5 by 1984—well above the peak of 56.6 in 1979.
Reynolds uses this piece of disinformation as part of his attack on Paul Krugman. But let’s look at table 1.1.6 of the National Income and Product Accounts. From 1980QIII to 1981QIII, real GDP rose from $5107.4 billion to $5329.8 billion, which of course, is the recovery that NBER identifies. But Reynolds and other rightwing apologists for the Reagan recession omit this period in their discussion. From 1981QIII to 1982QIII, real GDP fell to $5185.2 billion before we saw the recovery that Paul Krugman discussed.
If one looked at the economy that Bush41 left Clinton to the one that Carter left Reagan, both would be described as economies that were slowly and tentatively recovering from recessions with similar unemployment rates. So if we looked at real GDP growth during the Reagan-Bush41 periods, we could be relatively assured that we would be picking up more of the long-term growth and less of Keynesian features. Real GDP growth during this period was 3% as compared to around 3.5% from thirty years before the Reagan-Bush41 era and 3.7% during the Clinton term. But Alan Reynolds wants to distort this fact and to do so, he has to deny the 1981-82 recession.
Saturday, February 7, 2009
Why Rescue Banks?
What is it that a bank really does? In college, many decades ago, I was taught that banks served to bundle many small investments to make them available for investors to create productive businesses. More recently, the idea became popular that banks specialized in accumulating information that made them ideally suited to determine which investment projects would be viable and which would lack merit. Of course, with the demise of Glass-Steagall, banks did accumulate massive amounts of information -- especially when the same company ran a person's bank, stockbroker, insurance company, and credit card. But that kind of information is something entirely different.
By the time this new idea of banks as information specialists became widely accepted, the business of lending to large corporations was shrinking. Large corporations were able to finance themselves by borrowing directly in the commercial paper market. To compensate for this lost business, banks began to see their future in collecting -- organizing mergers and acquisitions, bundling financial investments in novel ways, and, on the retail side, late fees from unwary customers. And yes, bundling subprime loans. Is any public purpose served by slicing and dicing financial paper?
We all know that until recently they were very successful, but the question is whether their success reflected any public purpose. We now know that the financial system was not particularly efficient in gathering information. If it was, TARP would not exist.
Why couldn't banks be more like a public utility, as they were supposed to be in the age of Glass-Steagall? Just as a public utility sends water or electricity to where it is needed, public banks could run checking accounts for the public, paying bills and accepting deposits.
By the time this new idea of banks as information specialists became widely accepted, the business of lending to large corporations was shrinking. Large corporations were able to finance themselves by borrowing directly in the commercial paper market. To compensate for this lost business, banks began to see their future in collecting -- organizing mergers and acquisitions, bundling financial investments in novel ways, and, on the retail side, late fees from unwary customers. And yes, bundling subprime loans. Is any public purpose served by slicing and dicing financial paper?
We all know that until recently they were very successful, but the question is whether their success reflected any public purpose. We now know that the financial system was not particularly efficient in gathering information. If it was, TARP would not exist.
Why couldn't banks be more like a public utility, as they were supposed to be in the age of Glass-Steagall? Just as a public utility sends water or electricity to where it is needed, public banks could run checking accounts for the public, paying bills and accepting deposits.
Friday, February 6, 2009
Hookah-Smoking Caterpillar Keynesians
by the Sandwichman
We are all Keynesians now but some are more Keynesian than others. Keynes was NOT a Keynesian. There are, nevertheless, New Keynesians, post-Keynesians, bastard Keynesians, Popular Front New Dealers, military-industrial complex Keynesians, StimPack™ salesmen and supply-side tax-cutting trickle-down voodoo economics crypto-Keynesians.
Most commonly encountered are the hookah-smoking Caterpillar Keynesians and the Humpty-Dumptians. It is conceivable -- indeed it is almost inevitable -- for a self-styled Keynesian to be both a Caterpillar and a Humpty-Dumptian simultaneously.
For the hookah-smoking Caterpillars, the federal budget is a mushroom, one side of which makes the economy grow taller and the other makes it shrink. For the Humpty-Dumptians, economic growth means "there's a nice knock-down argument for you!" When H-Ds use a multiplier it means just what they choose it to mean -- neither more nor less. Taken together -- the Humpty-Dumptians with the Caterpillars -- there is only one side of the mushroom that matters.
Astonishing as it may seem, there is a kernel of truth to the mushroom and multiplier story. To get at that kernel, though, it is best to eschew the platitudes and tautologies of the Caterpillars and Humpty-Dumptians themselves and listen (critically) to the Village Idiots instead. Peter Schiff is an Idiot. So is Niall Ferguson. Harold Cole and Lee Ohanian are certifiable Idiots. These people are Idiots because they find an inherent flaw in the conventional wisdom and they run with it -- not seeming to notice (or care) that there are parallel weaknesses in their own analyses and prescriptions.
Cole and Ohanian took it for granted that working fewer hours was a bad thing. Enough said. Ferguson rails against debt and then prescribes a wholesale "restructuring" of debt that would, in effect, amount to a substantial default on debt. As Ferguson acknowledges, one "objection to such a procedure is that it would reward the imprudent." He waves that objection away with the glib assurance that "bad behavior only matters if it is likely to be repeated" and the reckless assumption that such a restructuring would be a one-off bonanza. Not only would such a plan reward the imprudent, it would also bestow a windfall on prudent debtors while leaving prudent non-debtors out in the cold. So why not just gather everything up into one big pile and give an equal share to everyone?
Schiff worries that government intervention will only perpetuate a phony economy based on borrowing and spending. The Sandwichman has tremendous sympathy for Schiff's moral outrage against phoniness. So what is Schiff's prescription? Let the market run its corrective course and make people "take the tough medicine." After all, if it tastes like poison, it must be good for you. Oh, doctor! doctor! The attentive reader may notice that while Ferguson and Schiff share an aversion to prolonging the phony debt economy through deficit spending, they offer diametrically-opposed policy prescriptions -- even before reckoning with the political palatability of either of their approaches.
It is only through a process of elimination that the Caterpillars and Humpty-Dumptians remain standing as the "least daft". In my next post, I will propose a method for wringing a bit more of the daftness out.
We are all Keynesians now but some are more Keynesian than others. Keynes was NOT a Keynesian. There are, nevertheless, New Keynesians, post-Keynesians, bastard Keynesians, Popular Front New Dealers, military-industrial complex Keynesians, StimPack™ salesmen and supply-side tax-cutting trickle-down voodoo economics crypto-Keynesians.
Most commonly encountered are the hookah-smoking Caterpillar Keynesians and the Humpty-Dumptians. It is conceivable -- indeed it is almost inevitable -- for a self-styled Keynesian to be both a Caterpillar and a Humpty-Dumptian simultaneously.
For the hookah-smoking Caterpillars, the federal budget is a mushroom, one side of which makes the economy grow taller and the other makes it shrink. For the Humpty-Dumptians, economic growth means "there's a nice knock-down argument for you!" When H-Ds use a multiplier it means just what they choose it to mean -- neither more nor less. Taken together -- the Humpty-Dumptians with the Caterpillars -- there is only one side of the mushroom that matters.
Astonishing as it may seem, there is a kernel of truth to the mushroom and multiplier story. To get at that kernel, though, it is best to eschew the platitudes and tautologies of the Caterpillars and Humpty-Dumptians themselves and listen (critically) to the Village Idiots instead. Peter Schiff is an Idiot. So is Niall Ferguson. Harold Cole and Lee Ohanian are certifiable Idiots. These people are Idiots because they find an inherent flaw in the conventional wisdom and they run with it -- not seeming to notice (or care) that there are parallel weaknesses in their own analyses and prescriptions.
Cole and Ohanian took it for granted that working fewer hours was a bad thing. Enough said. Ferguson rails against debt and then prescribes a wholesale "restructuring" of debt that would, in effect, amount to a substantial default on debt. As Ferguson acknowledges, one "objection to such a procedure is that it would reward the imprudent." He waves that objection away with the glib assurance that "bad behavior only matters if it is likely to be repeated" and the reckless assumption that such a restructuring would be a one-off bonanza. Not only would such a plan reward the imprudent, it would also bestow a windfall on prudent debtors while leaving prudent non-debtors out in the cold. So why not just gather everything up into one big pile and give an equal share to everyone?
Schiff worries that government intervention will only perpetuate a phony economy based on borrowing and spending. The Sandwichman has tremendous sympathy for Schiff's moral outrage against phoniness. So what is Schiff's prescription? Let the market run its corrective course and make people "take the tough medicine." After all, if it tastes like poison, it must be good for you. Oh, doctor! doctor! The attentive reader may notice that while Ferguson and Schiff share an aversion to prolonging the phony debt economy through deficit spending, they offer diametrically-opposed policy prescriptions -- even before reckoning with the political palatability of either of their approaches.
It is only through a process of elimination that the Caterpillars and Humpty-Dumptians remain standing as the "least daft". In my next post, I will propose a method for wringing a bit more of the daftness out.
Mitt Romney Does Not Understand Ricardian Equivalence Either
I guess CNN felt compelled to allow Mitt Romney words to be aired because Romney was once a Presidential contender but the following is really stupid:
Maybe Romney is thinking along the lines of the Friedman permanent income hypothesis when he calls for permanent tax cuts but he also noted we have a huge deficit. Paul Krugman understands how to put the Friedman permanent income hypothesis together with the long-run government budget constraint and apply it to increases in government spending as well as tax “cuts” which are actually only tax deferrals:
The same logic falls under the heading of Ricardian Equivalence - a topic that Robert Barro understands. Yet- Mitt Romney gets this all completely backwards. I guess when he was running for President, he never quite grasped these basic topics even though Greg Mankiw was one of his economic advisors!
These are extraordinary times, and like a lot of Republicans I believe that a well-crafted stimulus plan is needed to put people back to work. But the Obama spending bill would stimulate the government, not the economy … We're on an economic tightrope. The package that passed the House is a huge increase in the amount of government borrowing. And we've borrowed so much already that if we add too much more debt, or spend foolishly, we could invite an even bigger crisis … First, there are two ways you can put money into the economy, by spending more or by taxing less. But if it's stimulus you want, taxing less works best. That's why permanent tax cuts should be the centerpiece of the economic stimulus.
Maybe Romney is thinking along the lines of the Friedman permanent income hypothesis when he calls for permanent tax cuts but he also noted we have a huge deficit. Paul Krugman understands how to put the Friedman permanent income hypothesis together with the long-run government budget constraint and apply it to increases in government spending as well as tax “cuts” which are actually only tax deferrals:
a temporary increase in government spending should have a larger impact on demand than a permanent increase, not a smaller impact. And that’s actually an important point: one way to explain why government spending is better than tax cuts as a stimulus is to say that temporary tax cuts aren’t effective at increasing demand, but temporary spending increases are. Here’s the logic (which follows directly from Milton Friedman’s permanent income hypothesis, by the way): suppose that the government introduces a new program that will cause it to spend $100 billion a year every year from now on. To pay for this, it will have to raise taxes by $100 billion a year, permanently — and if consumers take this into account, they might well cut their spending enough to offset the increase in government purchases. But suppose the government introduces a one-time, $100 billion program to repair bridges over the next year. The government will have to issue debt to pay for this, and will have to service that debt, requiring higher taxes — say, $5 billion a year. That’s a much smaller impact on consumers’ future after-tax income than the permanent program. So much less of the spending rise will be offset by a fall in consumer demand. (I’m not considering the effect of the spending in raising income, which would probably cause consumer demand to rise rather than fall.) So economic theory — Milton Friedman’s theory! — says that spending is a more effective form of stimulus than tax cuts.
The same logic falls under the heading of Ricardian Equivalence - a topic that Robert Barro understands. Yet- Mitt Romney gets this all completely backwards. I guess when he was running for President, he never quite grasped these basic topics even though Greg Mankiw was one of his economic advisors!
Australia’s catastrophic Summer of 2009
The image on the right is of a koala in South Australia that sought refuge from the extreme heat this last fortnight by climbing into a tub of water in a resident's back porch.This week 60 percent of the northern Australian state of Queensland is subject to flooding while the Southern state of Victoria is scorched with unprecedented record temperatures of 43 degrees Celsius. Tomorrow’s temperature is expected to reach 44 degrees in Melbourne and 46 degrees in rural Victoria, making it the hottest place on the planet. This extraordinary and unprecedented heat, combined with strong dry winds, is expected to worsen the fires in industrial tree plantation and native bush already raging in this state. The high temperature is also expected to lead to yet more large power blackouts so there’s a question mark tomorrow as to whether residents will be able to relieve their heat-stress by switching on their fans or air conditioners…or even their fridges? [1] Last Friday “half a million homes and businesses were blacked out, and patients were turned away from hospitals.” [2] The number of bodies being stored at the city’s morgue is witness to the fact that over three times as many people are dying at this time. [3]
The Melbourne heat has also caused an electricity substation to explode. That shut down the city's entire train service, trapped people in lifts, and blocked roads as traffic lights failed. [2] Further severe disruptions to the city’s train system is expected tomorrow as well and this is exacerbated by railway lines warping and becoming unusable as a result.
Victorian farmers have lost many crops this summer as vegetables died from the heat and fruit crops stewed on the trees. The situation for them was already bad. Last October it was reported that “a combination of high temperatures and close to no rainfall” had meant that “hundreds of farmers had then reached the point of no return.” The Mallee, Wimmera and north-east wheat crops were destroyed by a combination of the heat and dry winds and low irrigation allocations were then placing a question mark over continued production in the Victorian horticulture and dairy industries this summer. [4]
Even in my normally mild Tasmania the state suffered its second-hottest day in a row, as temperatures reached 42.2C in some areas. “Two days before, Adelaide hit a staggering 45.6C. After a weekend respite, more records are expected to be broken this week.” [2] Fish populations are under stress in the Murray-Darling Basin of Victoria, New South Wales, South Australian and Queensland. Low water levels and hot temperatures have resulted in fish kills in parts of the system. Water shortages also pose risks of algal blooms and severe damage to the ecosystems. [5]
Climate Change Minister Penny Wong said the record heat is yet another sign of global climate change scientists have forecasted."Eleven of the hottest years in history have been in the last 12, and we also note, particularly in the southern part of Australia, we're seeing less rainfall," Wong told reporters."All of this is consistent with climate change, and all of this is consistent with what scientists told us would happen." [6]
Many people around me are trying to change the way they live. They have a creeping conviction that they will not survive unless quick change occurs and have stopped waiting for government to take the lead. I pray that it’s not too late?
"Despite the very serious nature of the threat to environmental preservation, the inherent inertia of our system will probably block effective action at least until public concern is galvanised by some catastrophic disaster."
'Citizens' Action - Vital Force for Change', Wm. Michael Kitzmiller and Richard Ottinger, Center for a Voluntary Society 1971.
[1] Power switched off in heat wave
30th January 2009
http://www.abc.net.au/rn/breakfast/stories/2009/2477962.htm
[2] Parched: Australia faces collapse as climate change kicks in
Geoffrey Lean and Kathy Marks report on the worst heatwave in the country's history
Sunday, 1 February 2009
http://www.independent.co.uk/news/world/australasia/parched-australia-faces-collapse-as-climate-change-kicks-in-1522529.html
[3] Heat behind a crush at the mortuary
Erdem Koch, February 7, 2009
http://www.theage.com.au/national/heat-behind-a-crush-at-the-mortuary-20090206-7zzk.html
[4] Record heat destroys Victorian wheat crops
Wires, October 02, 2008 09:28am
http://www.news.com.au/heraldsun/story/0,21985,24434725-5017353,00.html
[5] Murray-Darling needs quick action: environmental group
Ξ February 5th, 2009
http://watersanity.com/?m=200902
[6] Australian Heat Wave To Last Six Days, Signaling Global Warming
Posted on: Thursday, 29 January 2009, 16:58 CST
http://www.redorbit.com/news/science/1631148/australian_heat_wave_to_last_six_days_signaling_global_warming/
The Rise in the Unemployment Rate Understates the Weakness in the Labor Market
BLS leads with some bad news in its January 2009 Employment Situation Summary:
The news further down paints an even darker picture:
The civilian labor force participation rate was 65.7% as of December 2008 and had been as high as 66.4% as of December 2006, which means the rise in the unemployment rate actually understates the fall in the employment-population ratio, which fell from 61% as of December 2008 to 60.5% last month. The employment-population ratio had been 63.4% as of December 2006. While some of us were unimpressed with the employment-population ratio being only 63.4% given that this ratio was at or above 64% for much of Clinton’s second term in office, I’d be incredibly happy if we could see the employment-population ratio approach this level in the next couple of years. Of course, this is not likely to happen unless Congress pass a stimulus bill over the objections of the Herbert Hoover faction.
Nonfarm payroll employment fell sharply in January (-598,000) and the unemployment rate rose from 7.2 to 7.6 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Payroll employment has declined by 3.6 million since the start of the recession in December 2007; about one-half of this decline occurred in the past 3 months. In January, job losses were large and widespread across nearly all major industry sectors.
The news further down paints an even darker picture:
The civilian labor force participation rate, at 65.5 percent in January, has edged down in recent months. The employment-population ratio declined by 0.5 percentage point to 60.5 percent over the month, and by 2.4 percentage points over the year.
The civilian labor force participation rate was 65.7% as of December 2008 and had been as high as 66.4% as of December 2006, which means the rise in the unemployment rate actually understates the fall in the employment-population ratio, which fell from 61% as of December 2008 to 60.5% last month. The employment-population ratio had been 63.4% as of December 2006. While some of us were unimpressed with the employment-population ratio being only 63.4% given that this ratio was at or above 64% for much of Clinton’s second term in office, I’d be incredibly happy if we could see the employment-population ratio approach this level in the next couple of years. Of course, this is not likely to happen unless Congress pass a stimulus bill over the objections of the Herbert Hoover faction.
We’re All Keynesians Now
Remember when Richard Nixon said this line. Daniel Gross does too:
Gross notes that those Republicans who are responsible for run state and local governments support the Obama stimulus but the current crop of Washingtonian Republicans support the Hoover approach. Speaking of Hoover - Dick Cheney got it right:
How come the only Washingtonian Republicans who seem to get this issue are also two of the most evil people ever to be allowed in the White House?
There are three options government can pursue when the economy goes south. First, the Fed can cut interest rates, buy up assets, and extend credit, all of which the central bank has already done. Second, Congress can cut taxes on businesses and consumers in the hope they will spend more. The first effort—last year's tax rebates—didn't have the intended effect since consumers used much of the windfall to pay down debt or save … The third option is for the government to directly purchase goods and services, to substitute the demand that consumers and businesses aren't providing. The Washington remnant of the Republican Party—40 senators and 178 representatives—is all for Options 1 and 2, cheap money and tax cuts. But they're having great difficulty with Option 3. They have forgotten Richard Nixon's famous line that "we're all Keynesians now." To them, spending government funds to goose the economy is unacceptable, not just because of the possibility of poor execution—i.e., pork. No, many are rejecting it as a matter of principle. Even though several Republican governors are pleading for assistance in the form of federal spending, Washington Republicans are saying no.
Gross notes that those Republicans who are responsible for run state and local governments support the Obama stimulus but the current crop of Washingtonian Republicans support the Hoover approach. Speaking of Hoover - Dick Cheney got it right:
Administration officials have been warning for weeks that failure to pass the bill could lead to an even deeper recession. That was the message Vice President Dick Cheney brought to a closed-door Senate GOP lunch Wednesday, reportedly warning that it’ll be “Herbert Hoover” time if aid to the industry was rejected, according to a senator familiar with the remarks.
How come the only Washingtonian Republicans who seem to get this issue are also two of the most evil people ever to be allowed in the White House?
Thursday, February 5, 2009
How to Set Up a Right Wing Think Tank
With the economy tanking and people having to scramble for good jobs -- here is an opportunity too good to be missed: How to set up a right wing think tank.
Read this & enjoy.
http://www.archive.org/details/HowToStartARightWingThinkTank
Read this & enjoy.
http://www.archive.org/details/HowToStartARightWingThinkTank
Stimulus Porn: Commonsense Observations
I do not pretend to be an expert on stimulus plan, but it seems to be too little, misdirected, too much infected with tax cuts, and filled with special interest nonsense.
The Republican speak authoritatively as if tax cuts are the best way to get investment going, but real investment, the kind that results in the production of goods has been terribly anemic in spite of decades of tax cuts.
I do note that one of the most direct ways during the recession is to eliminate costs, including debts, that hold the economy back. Letting assets falling value raises the rate of profit, once the realization sets in that the asset prices have hit bottom.
Leaving banks fail and writing off debts will cause some dislocation, but they will leave both the economy and society stronger.
In terms of getting money spent, putting it in the hands of the poor and the unemployed seems far more reasonable likely to create spending than to give to the rich, who may just pump up asset prices once they feel confident, undoing some of the stimulus.
In terms of public works, Gray Brechin, has been doing remarkable research showing how much the public works of the New Deal have contributed to the country to this present day. The government has the opportunity to sell bonds at less than 3%. Interest costs of public works represent a significant part of the total costs. Taking advantage of the bargain basement cost of credit now represents a major savings, increased jobs, plus the opportunity to make a significant contribution to both the economy and society.
The Republican speak authoritatively as if tax cuts are the best way to get investment going, but real investment, the kind that results in the production of goods has been terribly anemic in spite of decades of tax cuts.
I do note that one of the most direct ways during the recession is to eliminate costs, including debts, that hold the economy back. Letting assets falling value raises the rate of profit, once the realization sets in that the asset prices have hit bottom.
Leaving banks fail and writing off debts will cause some dislocation, but they will leave both the economy and society stronger.
In terms of getting money spent, putting it in the hands of the poor and the unemployed seems far more reasonable likely to create spending than to give to the rich, who may just pump up asset prices once they feel confident, undoing some of the stimulus.
In terms of public works, Gray Brechin, has been doing remarkable research showing how much the public works of the New Deal have contributed to the country to this present day. The government has the opportunity to sell bonds at less than 3%. Interest costs of public works represent a significant part of the total costs. Taking advantage of the bargain basement cost of credit now represents a major savings, increased jobs, plus the opportunity to make a significant contribution to both the economy and society.
Fiscal Stimulus: Are the Senate Moderates Consulting with Martin Feldstein?
The close of Martin Feldstein’s An $800 Billion Mistake had the right tone:
Getting the most bang for the buck has been a theme of Keynesians on the left so I find it hard to disagree with Feldstein’s overall objective even if I differ with him on some of the details such as:
Fortunately, I don’t see a lot of push from those with any leverage to greatly increase DoD spending. There are proposals to give tax breaks for homeowners and car buyers, but I’m not sure if those will get very far either. But Steve Benen is reporting on what might be the ultimate Senate deal with this (draw mainly from some excellent reporting from the gang at Talking Points Memo):
Some of us have argued for more Federal revenue sharing but Feldstein said this was not a good idea and the Senate may go along. The states have balanced budget restrictions so they may have to cut spending, which is Hoover economics – right? Feldstein counters with:
I guess the states could raise taxes. Given that state and local taxation tends to be less progressive than Federal taxation, we’d see the partial realization of the goal of some conservatives – shifting the tax burden from the rich to the working poor. Not only does this go against what most progressives would see as good policy, it might also be bad macroeconomics if those facing the tax increases are borrowing constrained. In other words, even temporary tax increases on such households could reduce consumption. No, I don’t agree with the details of the Feldstein op-ed even if the Senate moderates seem to be falling in line. Ahem!
Then again – we can be thankful that the Senate moderates are not taking the advice of Jeffrey Miron.
The problem with the current stimulus plan is not that it is too big but that it delivers too little extra employment and income for such a large fiscal deficit. It is worth taking the time to get it right.
Getting the most bang for the buck has been a theme of Keynesians on the left so I find it hard to disagree with Feldstein’s overall objective even if I differ with him on some of the details such as:
Instead, the tax changes should focus on providing incentives to households and businesses to increase current spending. Why not a temporary refundable tax credit to households that purchase cars or other major consumer durables, analogous to the investment tax credit for businesses? Or a temporary tax credit for home improvements? ... The largest proposed outlays amount to just writing unrestricted checks to state governments. Nearly $100 billion would result from increasing the "Medicaid matching rate," a technique for reducing states' Medicaid costs to free up state money for spending on anything governors and state legislators want. An additional $80 billion would be given out for "state fiscal relief." ... If rapid spending on things that need to be done is a criterion of choice, the plan should include higher defense outlays, including replacing and repairing supplies and equipment, needed after five years of fighting.
Fortunately, I don’t see a lot of push from those with any leverage to greatly increase DoD spending. There are proposals to give tax breaks for homeowners and car buyers, but I’m not sure if those will get very far either. But Steve Benen is reporting on what might be the ultimate Senate deal with this (draw mainly from some excellent reporting from the gang at Talking Points Memo):
it's not at all clear what kind of concessions were necessary to cross the 60-vote threshold. TPM, for example, obtained a staff paper circulated today with nearly $78 billion in cuts, with a lot less money for states, healthcare, and education. Did the Democratic leadership sign off on these cuts? (Maybe.)
Some of us have argued for more Federal revenue sharing but Feldstein said this was not a good idea and the Senate may go along. The states have balanced budget restrictions so they may have to cut spending, which is Hoover economics – right? Feldstein counters with:
Will these vast sums actually lead to additional spending, or will they merely finance state transfer payments or relieve state governments of the need for temporary tax hikes or bond issues?
I guess the states could raise taxes. Given that state and local taxation tends to be less progressive than Federal taxation, we’d see the partial realization of the goal of some conservatives – shifting the tax burden from the rich to the working poor. Not only does this go against what most progressives would see as good policy, it might also be bad macroeconomics if those facing the tax increases are borrowing constrained. In other words, even temporary tax increases on such households could reduce consumption. No, I don’t agree with the details of the Feldstein op-ed even if the Senate moderates seem to be falling in line. Ahem!
Then again – we can be thankful that the Senate moderates are not taking the advice of Jeffrey Miron.
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