Mankiw’s GOP Talking Points on Obama’s Budget

Greg Mankiw writes:

Rahm Emanuel, the incoming White House chief of staff, has said, “You don’t ever want to let a crisis go to waste: it’s an opportunity to do important things that you would otherwise avoid.” What he has in mind is not entirely clear. One possibility is that he wants to use a temporary crisis as a pretense for engineering a permanent increase in the size and scope of the government. Believers in limited government have reason to be wary.

He precedes this suggestion that President Obama is a big government liberal (at least he did not use the term socialism) with:

Federal Outlays as a Percentage of GDP
Average over the past half century: 20.2 percent
In 2007, the year before the crisis: 20.0 percent
In 2009, from the Obama budget: 27.2 percent
Average 2010-19, in Obama budget: 22.6 percent
In 2019, last year of Obama budget: 22.6 percent

This presentation is misleading in a couple of ways – which is why I’ve presented two graphs (both using data from this source). The first graph shows Federal expenditure (both total and current) as a percent of GDP. Notice that Federal spending as a share of GDP was about as high in 1985 as it is projected to be for 2019. Also notice that Federal spending as a share of GDP fell during the term of our last Democratic President only to rise under that Republican President that Greg Mankiw served. To be fair – much of this variation came from changes in the defense spending to GDP ratio and not from changes in domestic Federal spending as our second graph shows.

Our second graph also show Federal health spending as a share of GDP, which has risen from 0.5% of GDP in the early 1960’s to over 5% in the last few years. Part of this increase is attributable to changes in what the Federal government covers during George W. Bush’s tenure in office but we should also note that total U.S. health expenditure (public and private) as a share of GDP has been rising and is expected to continue to rise. Given this reality – I’m surprised that the projected share for 2019 is not higher than 22.6%.

Update: A New Era of Responsibility - Renewing America’s Promise does show that the projected Federal outlay to GDP ratio for 2019 under President Obama’s proposed changed in the budget will be 22.6% as Greg claims but what Greg did not tell us is that the baseline budget projected Federal outlays to be 23.2% of GDP by 2019. The document has all sorts of details including the projected increases in Medicare and Medicaid as well as the proposals to reduce defense spending relative to what is in the baseline budget.

Reduce consumption says head of IPCC

The 2007 report of the Intergovernmental Panel on Climate Change (IPCC), issued last year, highlights "the importance of lifestyle changes," said Rajendra Pachauri [head of the IPCC] at a press conference in Paris. "This is something that the IPCC was afraid to say earlier, but now we have said it....tame carnivorous impulses". Don't buy things "simply because they're available..." [*]

Also some excerpts from the State of the World 2009 report:
** Approximately two-thirds of the energy fed into the world's power plants is wasted-released into the environment as heat. (p. 142)

** it is technically and economically feasible to reduce greenhouse gas emissions fast enough .

** The process of tilling soil releases CO2 into the atmosphere.

** Perennial crops store more carbon in the soil than annually planted ones.

The report can be downloaded here.


[*] Lifestyle changes can curb climate change: IPCC chief
Jan 15, 2008
http://afp.google.com/article/ALeqM5iIVBkZpOUA9Hz3Xc2u-61mDlrw0Q

Anticipatory Revisionist History

Right now in some of the most important right-wing think tanks of the country, well-paid hacks are churning out definitive histories of the current crash. Obviously, market forces are part of the solution rather than the problem. We can agree with many of them that the Federal Reserve played a role.

This work follows in a long tradition. For example, their forefathers already figured out that the Smoot-Hawley tariff caused the Great Depression.

We know how innovative this school of thought can be. They've already figured out that government mandates to lend to poor people caused the subprime crisis.
Surely, excessive taxes will be part of the story, but I can't figure out how they will spin that.

What other kinds of regulations and interference with the market is responsible for the debacle?

An immoral or evil nature is not implied

“…To suggest that the Forestry Commission’s policy on clearfelling in dry forests is the result of ideologies does not imply any immoral or evil nature in the officers of the Commission since such ideologies are developed in an unconscious manner. If one has ever been present during a hot regeneration burn, however, it is easy to recognize the impact the event has on those involved. The fire-storm and condensation cloud as well as the immense heat are a far cry from just letting the forest grow back by itself. This active involvement that regeneration burning involves also has implications for the size of the organization, a fact that cannot be dismissed too quickly when analyzing the clearfelling decision. Every organization appears to have an inbuilt “desire” to expand.

The nature of bureaucracies and the theory of public policy can explain, in part, why the Forestry Commission employed clearfelling in dry forests. But much of the decision appears to have derived from individuals whose minds simply came made up; these people simply reasoned or justified that decision after the event as justification became more and more necessary.” [1]

Here's how the current Australian Labor Government fobs off attempts to regulate deliberate and unnecessary forestry infernos; by pretending that all biomass burns are acts of nature beyond the Government's control:

“If a country chooses to account for any Article 3.4 activities [Kyoto Protocol forest management], it must include, and report on, all emissions from all land nationwide on which those activities are undertaken. Australia has elected not to include any such activities because of the risk that random natural events, such as drought or bushfire, could result in significant emissions from those sources during a commitment period.... [If] natural events such as drought and fire result in the release of greenhouse gases over much shorter periods...[if they were] counted towards Annex I countries’ targets, then countries subject to natural disturbances would have no control over meeting or exceeding their targets...." [2]


The Federal and State Governments have amended the 'Regional Forest Agreement' to ensure that our law courts are unable to insist on real protection for the environment and people. Watering the RFA down to say "only that regard be given to the assessment of environmental, social, cultural and economic values..." [3] Effectively, that means that 'anything goes' (ie business as usual).

[Pictures of intense industrial forestry burnoffs in Tasmania were taken by Rob Blakers.]

[1] Clearfelling in Tasmania’s Dry Forests: Analysis of a Public Policy Decision
By David Harries.
Chapter 6. ‘Perspectives on Forest Policy in Tasmania’ edited by Aynsley J Kellow. University of Tasmania Environmental Studies Occasional paper 18. Published Hobart 1984. ISBN 0 85901 257 3. Page 140.

[2] Carbon Pollution Reduction Scheme: Australia's Low Pollution Future
White Paper. 15 December 2008. Executive summary
http://www.climatechange.gov.au/whitepaper/summary/index.html

[3] Environmental Defenders Handbook
http://www.edohandbook.org/doku.php?id=ch8#bushfire_damage_and_smoke_pollution

Economist.com Fires Back with Respect to its Alleged Backdoor Employment Tax Cut

When I criticized this, I should have placed the following in bold:

So the total taxes paid to the government do not fall – just who ends up directly paying the government.

The rebuttal goes something like this:

The assumption of highly inelastic labour is important, but I would argue that it does not always apply in typical labour markets, especially with respect to a single employer.

Actually, the assumption as to the elasticity of either the supply or the demand schedule is not important for the experiment described as follows:

One participant, who writes about technology, remarked that it is not unusual for tech firms to fire their employees and rehire them the next week as consultants. This is essentially a backdoor payroll tax reduction for the employer. When a worker is considered a contracter they become responsible for their full tax burden to Social Security and Medicare (and the cost of health and pension benefits).

Let’s do a very simple example of an employer-employee relationship where the employer ultimately pays $10 an hour for the services of the worker but the government collects $1.50 an hour in payroll taxes leaving the worker with $8.50 an hour after taxes. If the initial burden of the tax system were split evenly between the employer and the employee, both pay $0.75 an hour to the government with the employer paying the worker $9.25 an hour. Now if the employee becomes an independent contractor, he ends up paying all $1.50 an hour to the government but his check from the employer is $10 an hour. Notice something – I made no assumption about elasticity of demand or supply.

Why does this work out this way? In fact, we had a tax cut for the employer and an equivalent tax increase for the worker. Since the government tax bite has neither increased nor decreased, there is no net effect for either the before-tax wage paid by the employer or the after-tax wage paid by the worker.

To be fair, this demand equals supply model assumes that the labor market clears. I would hate to be accused (again) of “selective quotation” so let me note the following:

In an extremely loose labour market the employee will bear the full tax burden because his labour supply becomes more inelastic. Enough so an employer has the leverage to make that burden explicit and shift it entirely to his employee.

Since we are in a recession, maybe the whole use of demand and supply curve models is a bit misleading. But if one wishes to use such models, maybe one should start off the comparative statics exercise by first noting that the overall tax bit has not changed in the experiment being discussed.

While it is true that the effective wage for workers is likely to fall during periods of weak aggregate demand, this occurrence is not due to some reduction in the tax bite. Maybe the mechanism becomes the shifting of the tax burden without an offsetting increase in the before-tax wage. But the same effect could have been accomplished by simply reducing the wage rate. I guess one could postulate that wages are somehow sticky so employers look for ways around this fact by cutting compensation through some other means – as was once argued by Walter J. Wessels in Minimum Wages, Fringe Benefits, and Working Conditions. But to say that changing the primary incidence of who pays for an unchanged tax bite is the same thing as a tax cut is highly misleading.

Herbert Hoover Democrats

If we were at full employment, I might agree with what Evan Bayh wrote for the Wall Street Journal:

The Omnibus Appropriations Act of 2009 is a sprawling, $410 billion compilation of nine spending measures that lacks the slightest hint of austerity from the federal government or the recipients of its largess. The Senate should reject this bill. If we do not, President Barack Obama should veto it. The omnibus increases discretionary spending by 8% over last fiscal year's levels, dwarfing the rate of inflation across a broad swath of issues including agriculture, financial services, foreign relations, energy and water programs, and legislative branch operations. Such increases might be appropriate for a nation flush with cash or unconcerned with fiscal prudence, but America is neither.

Bayh later notes that we are in an “economic downturn” noting that this fact requires that we need “new policies”. Is Bayh saying we should excuse fiscal irresponsibility during periods of strong aggregate demand but then turn all Hoover-ish when aggregate demand is weak? As Manu Rasu reports, Bayh is not alone:

Moderate and conservative Democrats in the Senate are starting to choke over the massive spending and tax increases in President Barack Obama’s budget plans and have begun plotting to increase their influence over the agenda of a president who is turning out to be much more liberal than they are. A group of 14 Senate Democrats and one independent huddled behind closed doors on Tuesday, discussing how centrists in that chamber can assert more leverage on the major policy debates that will dominate this Congress. Afterward, some in attendance made plain that they are getting jitters over the cost and expansive reach of Obama’s $3.6 trillion budget proposal.

I can understand the desire to restrain the growth of Federal spending over the long-term, but I do not understand the call for fiscal austerity now.

Does Economist.com Understand Incidence of the Payroll Tax?

Backdoor Payroll Tax Cut lays out a silly argument:

One participant, who writes about technology, remarked that it is not unusual for tech firms to fire their employees and rehire them the next week as consultants. This is essentially a backdoor payroll tax reduction for the employer. When a worker is considered a contracter they become responsible for their full tax burden to Social Security and Medicare (and the cost of health and pension benefits).

So the total taxes paid to the government do not fall – just who ends up directly paying the government. Not to praise anything from the Heritage Foundation, but even Stephen Entin can explain the standard view with respect to who bears the incidence of the payroll tax:

The relatively elastic demand for labor, coupled with the assumption of a highly inelastic supply of labor, means that labor bears most of the initial economic incidence of taxes on labor income. It has become common to assert that all taxes on labor income fall on the worker, including the employers’ share of the pay¬roll tax, the employees’ share of the payroll tax, the unemployment compensation tax, and the portion of the income tax that falls on wages and salaries.

As the primary burden on the employer for paying this tax has been shifted to the worker, the standard model says that the wage rate being paid by the employer to the worker rises in an exactly offsetting fashion.

Funny Economics Cartoon

http://comics.com/frank&ernest/?DateAfter=2009-02-26&DateBefore=2009-03-03&Order=d.DateStrip+DESC&PerPage=1&x=42&y=10&Search=&Page=4

What is a Recession

Lou Proyect posted posted an AP story to my pen-l list today about Depressions, which had this discussion of the origin of the term recession. I had not heard this before: Any comments?

Associated Press. 2009. "The D-Word: Will Recession Become Something Worse?" (2 March).

"Before the 1930s, any serious economic downturn was called a depression. The term "recession" didn't come into common use until "depression" became burdened by memories of the 1930s, said Robert McElvaine, a history professor at Millsaps College in Jackson, Miss. "When the economy collapsed again in 1937, they didn't want to call that a new depression, and that's when recession was first used,'' he said."

World Growth To Be Negative In 2009 For First Time Since WW II

Previously here I reported on the IMF forecast of a positive one half of one percent world GDP growth rate, the worst since WW II. Now, given more rapid declines in US, UK, EU, and much of Asia, there is a forecast for 2009 that has that now at about a negative one half of one percent, the first actually negative global growth rate since WW II. This new projection is by the chief economist of BNP-Paribas, Philippe d'Arvusenet, at a site with the longest url I have ever seen (.pdf).

Anyway, whether or not I got that url right, this is not good news.

Arnold Kling and Amity Shlaes on Social Security

Arnold Kling attended an economic bloggers forum hosted by the Kauffman Foundation and provides us with this commentary:

Shlaes argued against cutting payroll taxes. She was making a comment during a discussion, rather than a formal presentation, so she might not agree with my interpretation of what she was saying. Economists take the view that Social Security benefits and Social Security taxes are basically disconnected, so it does not matter if you substitute another tax for payroll taxes to pay for benefits. Shlaes said that what economists would call the illusion that benefits and taxes are linked is actually a key to maintaining American exceptionalism and avoiding a welfare state. That is, our Social Security system falls within a tradition of individual contracts and obligations rather than a tradition of socialism. Cutting payroll taxes and substituting other taxes would be a cultural shift toward socialism. I may be putting words in her mouth, but I think that is what she was saying.

Never mind the fact that Amity Shlaes is not an economist having received a B.A. in English. Not all economists would agree with the proposition that “Social Security benefits and Social Security taxes are basically disconnected” as at least some of us consider the sum of the current Social Security Trust Fund reserve and the present value of expected future contributions to this fund as something that should be devoted to the present value of expected future Social Security benefits. By at least some forecasts, the sum of the current Social Security Trust Fund reserve and the present value of expected future contributions come very close to paying for the present value of expected future Social Security benefits. Which is why we get very concerned about GOP calls to cut Social Security benefits to pay for those General Fund deficits run up during Republican administrations since 1981. After all, President Reagan suggested back in 1983 that the increase in the payroll tax was supposed to go to paying for our future Social Security benefits and not an excuse to give reductions in tax rates for capital income. President George W. Bush, however, saw the Social Security Trust Fund reserve and the Social Security surpluses we’ll likely see through 2017 as a giant piggy bank to raid precisely to give fiscal goodies to his “base”.

Since I was not at this forum, I do not know whether Arnold Kling’s interpretation of what Amith Shlaes said is accurate. But if it is – she has this whole thing exactly backwards. But hers is not a bad question for those who would have had the fiscal stimulus focused more on reductions in payroll taxes. How would the resulting Social Security shortfall be paid for?

Update: Amity Shlaes leaves a long comment over at Arnold’s blog with the key features being:

Any U.S. government, GOP or Democrat, should be shoring up its social contract with citizens. It can do that without promising more, and instead saying: "Here's what I can give you, and here's what I can't. At least I'll be truthful." … So I will tell you now that there isn't enough money there if we keep the current system. Let's make a few adjustments, and have reduced payouts but a commitment to at least make those payouts.

OK – President Obama should be a lot more truthful than President Bush was in 2005. Maybe a “few” (as in small) adjustments will be needed but truth be told – those advocating larger adjustments are hoping to use the Social Security Trust Fund to bail out the General Fund deficit. And when I hear folks uttering “there isn't enough money there if we keep the current system”, this is the kind of dishonesty that Steve Benen called “conversation enders”.

The pulp and paper industry – a paradigm for Australia’s annihilation.

The economic strength of a society relies on their being adequate health care, a clean environment, broadly-based prosperity and the meeting of social needs in general. Yet the mode of operation of the now worldwide capitalist economy destroys all of these things because those in government (representatives of the most powerful economic players) seek to ensure monetary profit for a narrow elite. Such an objective is continually pitted against the public and planetary interests. The global pulp and paper industry represents an excellent study of how an industrial paradigm can bring economic and ecological collapse to an entire nation. The very idea of turning vast stands of pristine old-growth forests into woodchip for the superfluous consumption of paper and packaging - firstly by the global corporations [1] and, secondly, the consumer masses - was made possible by the dominance of a corporate media to promote a wasteful consumption lifestyle and over-development. The use of oil as a major energy source was also a major element in this unfolding. It allowed industry to enjoy virtually unfettered access to previously inaccessible wild forests and eased the way for greatly expanded unequal exchange of commodities around the world.

Here's a quick history of the pulp and paper industry in Australia.

In 1938 Australian Newsprint Mills Pty Ltd became incorporated. The Herald and Weekly Times and John Fairfax and Sons were major shareholders. The two major Australian newspaper companies funded research into paper making using Australian native trees. “….their chemists had eventually succeeded in matching the pulp of the long-fibred softwoods of the northern hemisphere with Eucalyptus regnans, the Tasmanian swamp gum, of which there were [then] vast stands in the Florentine and Styx tributaries of the Derwent River.” The Tasmanian government assisted the aspirations of these powerful interests by granting vast logging concessions as well as subscribing to 20% of the corporation’s initial capital. [2] [3]


In 1936 Associated Pulp and Paper Mills Ltd (APPM) was formed by Amalgamated Zinc, North Broken Hill, Broken Hill South and Consolidated Zinc. In 1938 APPM started the Burnie paper mill in North West Tasmania. Initially it used imported pulp. However by early 1939 the Burnie pulp mill was making bleached eucalypt soda as the major component of its printing and writing papers. The technology of kraft pulping of the eucalypts was attractive for the industry because this process gave a stronger pulp than either the soda or sulphite processes then widely in use. “Moreover a new method had just been developed in Canada -the Tomlinson recovery process -which greatly improved the economics of chemical recovery from spent kraft pulping liquor (black liquor).” [4]

The softwoods found in the northern hemisphere continued to be an important component of paper pulp around the world because the fibres improved ‘strength and runability’, an important quality for packaging. [4]

It wasn’t long before the spiraling environmental impacts of this more ‘efficient’ industry became apparent far and wide. In 1946, Pulitzer Prize winning author, Robert Penn Warren, wrote in his book, All The King’s Men:

“There were pine trees here a long time ago but they are gone. The bastards got in here and set up the mills and laid the narrow-gauge tracks and knocked together the company commissaries and paid a dollar a day… Till, all of a sudden, there weren’t any more pine trees. They stripped the mills. The narrow-gauged tracks got covered with grass. Folks tore down the commissaries for kindling wood. There wasn’t any more dollar a day. The big boys were gone, with diamond rings on their fingers and broadcloth on their back. But a good many of the folks stayed right on, and watched the gullies cut deeper into the red clay.”

From the 1960s onward the forests of Tasmania were being gutted at an alarming rate. “The Japanese pulp and paper industry played a brilliant ….strategy when it looked to Australia in the 1960s to secure a stable wood supply” from somewhere else and in order to protect its own forests. “…Japanese leaders understood the risks of purchasing unprocessed raw materials from a nation that harboured fresh war memories - especially prisoner-of-war memories - and whose people were becoming more strident about their nation's development. To cocoon itself from the potentially fatal political expression of these emotions, the Japanese woodchip buyers (at least initially) let Australian or majority Australian-owned companies export the chips, a trade that began in the early '70s. The Japanese paper companies then saturated them in profits.” The destruction of native forests gained enormous momentum as a result….” “Today, 80 to 90 per cent of the log cut in Australia's main native-forest logging regions is woodchipped.” [5]

In 2005 Jared Diamond observed, from his book ‘Collapse – How Societies Choose to Fail or Survive’ that “Ecologically the Australian environment is exceptionally fragile, the most fragile of any first world country except perhaps Iceland….“Australia is the most unproductive continent”, whose soils have on average the lowest nutrient levels, the lowest plant growth rates and the lowest productivity. As a consequence of low soil fertility, most of the nutrients in Australian forest are in the trees themselves. When we wood chip our forest we destroy the support system our life depends upon.” Diamond warned Australians that deforestation is the major cause of societal collapse of many civilisations such as Easter Island. If we continue to damage our forests, soils and climate then the same collapse will happen in Australia. [6]

Not surprisingly agroforestry tree plantations in Australia generally don’t do so well. With the low soil nutrient levels add low and unpredictable rainfall. The trees grow slowly and are far less profitable than 12 out of 13 countries that are among Australia’s principal competitors. The Tasmanian Blue Gum, grows much faster and more profitably in the plantations established in Brazil, Chile, Portugal, South Africa, Spain and Vietnam than in Tasmania itself. On the other hand, given Australia’s extremely limited resource in the way of fertile soil in areas of adequate rainfall it would be a crime to devote those small areas to a low value crop such as plantations for woodchip, as has been pointed out many a time in government public ‘consultation’ forums.

This month is the first time I have ever believed (in fact, ever thought) that Australia may be facing imminent collapse. But a closer examination of Australia’s recent industrial, climatic and bushfire history reveals many frightening omens.

Ever since the automobile became the most popular means of transport in the 1960s Australia has experienced a general warming trend that is consistent with human-induced climate change. “The south-east of Australia is also experiencing a long period of unusually dry weather….They are two of the critical elements that are needed to create a fire. The other two are low humidity and high wind speeds”[7]. The south-east of Australia is precisely where deforestation and the spread of fuel intense industrial eucalyptus plantations is most concentrated. Above 30 degrees centigrade eucalypt oil becomes gaseous and ignites readily as a ‘fireball.’ “On the day the bushfires started claiming lives, Melbourne reached a record 46.4 degrees for the first time in 154 years of record-keeping.” [7]

The industrial tree plantations established across Victoria are concentrated in heavily populated regions close to major towns and cities. In August 2003 the Fire Chief in New South Wales told an interviewer on ABC TV’s ‘7:30 Report’ that “to have any hope of ‘managing’ such a fire, fuel build up would need to be as low as 4-5 tonnes per hectare or less. This degree of fuel loading is apparently reached in plantations by 3-7 years.” Sure enough, firefighters in Victoria are reporting that the intensity and scale of the fires meant there was little they could do beyond watching with despair as small grass fires reached into and exploded industrial tree plantations where the flames then jumped quickly into one tourist towns after another. “Marysville, Narbathong, Buxton, Taggerty, Camberville, Kinglake, Pheasant Creek, Flowerdale, Glenburn, Humevale, Strathewen, Whittlesea, Strath Creek, Upper Plenty, Clonbinane, Reedsdale, Reedy Creek, Mittons Bridge, Wallan, Wondong, Heathcote Junction, Healesville, ChumCreek, Toolangi, Yarra Glen, Dixons Creek, Steels Creek, Christmas Hills and St Andrews….” [8] And from there onto the outer suburbs of the city of Melbourne itself. Large intense fires continue to straddle many other electorates.

The forest industry in Australia is a powerful vested interest group that is not amenable to logic, reason or reform if it gets in the way of profits. In fact corporate documents have reassuring statements to investors about their company’s intent to focus on profits even in the context of widespread community anger at their practices. The activities of the corporation, investors are told, are “not subject to any particular or significant environmental regulations under a Commonwealth, State or Territory law.” [9] So it’s not surprising to read submissions to government that express dismay about a failure to learn from previous fire experience. [10]

Whilst the full extent of damage from this summer’s fires in south east Australia is not yet known – indeed the fires are still raging across Victoria at present, the destruction tallied so far is at astronomical levels. This is the worst bushfire month in Australia’s recorded history. Around 250 people have died and many more are injured. About 7,000 individuals are homeless with hundreds now relying on daily food aid to subsist.

It’s hard to think of a more damaging industrial paradigm than the global pulp and paper industry. The inherent irrationality of consumerism whereby individuals purchase superfluous and easily replaceable paper products at the cost of destroying all the elements of the natural world that keeps our children and our own selves alive. The air is polluted with huge industrial burn-offs of forest biomass. The water is sucked up from the streams and rivers by the thirstiest trees known to man. The soils are depleted by short rotations. Rural towns and communities are burnt to the ground by the inevitable and intense infernos that go hand-in-hand with high fuel loads in a warming and dryer environment. All in the name of getting rid of the wealth-destroying fetters of regulation. Hey! To Australia’s National Security Hotline: I see something suspicious. When all it takes to become an effective terrorist in Australia is to throw your cigarette out of the car on the next hot day.

[1] It could be argued that the transnational corporation, itself, it the world’s biggest consumer of paper and forest products. Packaging represents most of world paper consumption.

[2] ‘The Media’ by Keith Windschuttle. Penguin Books, 1988. ISBN 0 14 011689 3. pp 132-133.

[3] “…the allocation of forest resources on Crown land in Tasmania can be seen as a continuation of a process (now almost complete) which began with, and is typical of, the colonial era. The distribution of land which is ‘unsettled’ (at least by the white colonizing society) provides a path to economic development which is both economically and politically easy. Little need be said on the ease with which economic development can be fostered. *
*See, for example:
(a) TURNER FJ 1920; ‘The Frontier in American History’; Henry Holt & Co., New York; or
(b) POTTER DM, 1974; ‘People of Plenty; Economic Abundance and the American Character; University of Chicago Press, Chicago.
The exploitation of the previously untapped resources of a colony swelled the coffers of many a colonial power; the problem for most colonies and former colonies (including Tasmania) has been to achieve some long-term basis for economic development which is not dependent upon simple resource extraction and export…”
As quoted in ‘Perspectives on Forest Policy in Tasmania’ edited by Aynsley J Kellow. University of Tasmania. Environmental Studies Occasional Paper 18. 1984. ISBN: 0 85901 257 3. Page 4.

[4] Technology in Australia. 1788 – 1988. Eucalypt pulp production begins
http://www.austehc.unimelb.edu.au/tia/247.html

[5] ALP up the wrong tree
Governments have bungled forest policy for decades, writes Judith Ajani, describing what can happen when myopic union leaders influence political decisions
The Australian
July 07, 2007 12:48am
http://www.news.com.au/story/0,25197,22029499-5001986,00.html

[6] Why our forests are so precious
Clive Blazey introduces Jared Diamond's latest book, 'Collapse', and its significance to our declining forests.
http://www.diggers.com.au/articleWhyOurForestsAreSoPrecious.shtml


[7] ‘The end of climate certainty’ February 14, 2009
All signs point to the climate becoming more extreme, write Marian Wilkinson and Ben Cubby.
* My country, my tyrant. David Marr Stay or go? A question everyone still asks
http://www.smh.com.au/environment/global-warming/the-end-of-climate-certainty-20090213-876f.html?page=fullpage#contentSwap1

[8 ]Fran reports to Parliament on the Victorian bushfires
Tuesday, 24 February 2009
http://franbaileymp.com/Pages/Article.aspx?ID=442

[9] “The operations of the Trust are not subject to any particular or significant environmental regulations under a Commonwealth, State or Territory law.”

Source: Annual report to investors
Year end to 30 June 2008
Concord Australian Equity Fund (which is a major investor in Gunns Ltd, the woodchipping and tree plantation company that dominates the Tasmanian forest industry. The responsible entity for Concord Equity Fund is Macquarie Investment Management Limited (MIML) which is a wholly owned subsidiary of Macquarie Group. Macquarie Group, in turn, enjoys a huge stable of former Australian politicians… Bob Carr, Alan Stockdale, Warwick Smith, Ross Cameron, Rob Knowles etc)
ARSN 116 355 465

[10] See for example:
Submission on the Green Paper on a Carbon Pollution Reduction Scheme
Mick Harewood, August 2008-09-01
http://www.climatechange.gov.au/greenpaper/consultation/pubs/0118-harewood.pdf
“…Section 5.3 : Fire Protection. This section seems to have been written without regard to lessons learned from the behaviour of the Canberra bushfires of January 2003. The description printed in the Canberra Times of the fire convection column by Wendy Catchpole, mathematician at the Australian defence Force Academy with
an interest in fire behaviour modelling, is informative. Wendy Catchpole said that the fuel loads in the pine plantations near Canberra were so high that, under conditions of high temperature, the fire created its own convection column and winds from all directions were drawn to the base of that column. The strength of these winds caused the trunks of fully grown Pine trees to snap well before the fire front had reached them.”

The Wall Street Journal and Golf

Besides an editorial denouncing Senator Kerry as "Secretary of Golf" for his concern about corporate golf tournaments, the papers' Golf Journal has been discussing the issue:

Newport, John Paul. 2009. "Golf Journal: Deals Amid the Distress." Wall Street Journal (20 February).

Since October, when American International Group was put in the stocks for staging a luxurious $400,000 weeklong retreat at a resort in California, one week after receiving $85 billion in federal bailout funds, corporations have been slithering under rocks when it comes to golf-related activities. Goldman Sachs, for example, last week canceled its big annual hedge-fund conference, scheduled for March, at the Fairmont Turnberry Isle resort in Miami. A company spokesman cited "the current environment." The Ritz-Carlton resort at Half Moon Bay, Calif., said more than 30 business groups have canceled retreats there since last fall, at a loss of more than $2 million in revenue. Wells Fargo took out a full-page ad in several newspapers last weekend to defend its practice of rewarding employees with outings -- it called such events "the heart of our culture because our product is service" -- but nevertheless canceled all of its major employee-recognition events for 2009.

The author concludes that the downturn offers golfers good deals.



Newport, John Paul. 2009. "Golf Journal: No Entertaining, Please -- It's Golf." Wall Street Journal (28 February).

The TMZ posting on Tuesday, concerning the title sponsorship of last week's Northern Trust Open at the Riviera Country Club near Los Angeles, read to me like a parody in the Onion of a local news outlet pouncing on a supposed outrage. "We're told Northern Trust paid millions to sponsor the PGA event which ended Sunday, but what happened off the golf course is even more shocking," TMZ said.

Northern Trust wasn't just treating clients to Diet Cokes while they walked around the course. It staged "lavish parties," "a fancy dinner" and concerts for clients "with famous singers" such as Sheryl Crow and Earth, Wind and Fire. TMZ's reporters spotted courtesy cars (standard at PGA Tour events) driving onto and off the Riviera property with people inside. Guests were reported to have left various functions with goodie bags.

[...]

Northern Trust accepted $1.6 billion in Troubled Asset Relief Program funds, despite record profits of $795 million and a solid balance sheet. The bank, in a letter to shareholders this week, said it didn't seek the funds but accepted them to accommodate "the government's goal of gaining the participation of all major banks in the United States".

[...]

Understandably spooked, Morgan Stanley, which received $10 billion in TARP funds, quickly announced that while it would continue to sponsor the Memorial tournament in June, it would not entertain clients there. Wells Fargo, a $25 billion TARP fundee which took over sponsorship of a PGA Tour event at the end of April when it acquired Wachovia, said it would seriously cut back spending at that event.

[...]

Golf, with its traditional fat-cat image, is an easy target for abuse ...

But the author defends such activities as job-creating.

Golf and Corporate Jets

In light of the furor regarding corporations on the dole spending money on gold tournaments, I thought that I would post a part of my discussion of golf from my book: The Consfication of American Prosperity.

David Yermack of New York University's Stern School of Business produced a paper with the delightful title "Flights of Fancy: Corporate Jets, CEO Perquisites, and Inferior Shareholder Returns," in which he investigated the relationship between this particular luxury and corporate efficiency. He found that the cost of corporate jets for CEOs who belong to golf clubs far from their company's headquarters is two‑thirds higher, on average, than for CEOs who have disclosed air travel but are not long‑distance golf club members (Yermack 2004).




Yermack's paper reported that "more than 30 percent of Fortune 500 CEOs in 2002 were permitted to use company planes for personal travel, up from a frequency below 10 percent a decade earlier." Since Yermack's study, the problem has continued to escalate. Between 2004 and 2005, the reported value of personal use of corporate aircraft increased 45 percent, according to government filings of the 100 largest public companies (Fabrikant 2006).

Not surprisingly, Raghuram Rajan, the chief economist of the International Monetary Fund, gallantly came to the defense of the corporations. He suggested, without the slightest hint of humor, that these expenditures may have actually been justified because they encouraged executives to be more efficient (Rajan and Wulf 2004). This justification does not seem particularly credible since Rajan's study did not bother to distinguish between planes used for business or personal purposes, including use by retired executives.

In fact, the personal use of corporate jets does not seem to be correlated with profitability at all. Of course, some of the firms that supply their executives with corporate jets for personal use are successful, despite such wasteful excesses, but the use of corporate jets is correlated with poor performance. According to Yermack: "Firms that permit personal aircraft use by the CEO under‑perform market benchmarks by about 4 percent or 400 basis points per year, after controlling for a standard range of risk, size and other factors" (Yermack 2004).

A Wall Street Journal article entitled "JetGreen" followed up Yermack's report. It described corporate jets "as airborne limousines to fly CEOs and other executives to golf dates or to vacation homes where they have golf‑club memberships" (Maremont 2005). Although executives must report such personal use of corporate jets as income, they rarely disclose anything near the full cost. Besides, hiding golfing expeditions as business activity is not particularly difficult.

Golf Digest provided further evidence of the negative consequences of corporate jets. Every two years, this publication informs the golfing public about who are the best golfers among executive leaders. A USA Today reporter investigated whether their companies performed as well in the business world as their leaders did on the golf links. The results were not surprising: of the companies run by the top 12 golfers two‑thirds fared worse than the Standard & Poor's 500 index in 2006 (Jones 2006).

Of course, high‑level corporate executives enjoy many other perks besides free travel, including the provision of luxury boxes at sports stadia, chefs, yard work, and a multitude of other benefits that ordinary people would have to pay for on their own, if only they could afford them. New York Times business columnist, Gretchen Morgenson, described the excesses of Donald J. Tyson, former chairman of Tyson Foods, which ranged from the personal use of corporate jets to housekeeping and lawn care. Echoing Leona Helmsley, she appropriately titled her article "Only the Little People Pay for Lawn Care" (Morgenson 2005).

On the mediocrity of Heterodox Economics

Ann Pettifore's recent article linked to Richard Portes' statement about heterodox economics.
http://www.guardian.co.uk/commentisfree/2009/feb/26/recession-economy-capitalism

Portes, Richard. 2008. "The Annual Report of the Secretary-General (of the Royal Economic Society).

http://www.res.org.uk/society/pdfs/newsletter/apr08.pdf

"Mediocrity is rationalised on the grounds that it is hard for the ‘heterodox’ to publish in top journals -- despite the examples of Joseph Stiglitz, Amartya Sen, Herbert Simon, Samuel Bowles, Herbert Gintis, and many others."

Consider his list of Heterodox economists. Herbert Simon? There is some overlap there, but he ceased to do economics and moved on to other fields. Joe Stiglitz did good stuff before he became active in public debates, but I think most economists would regard his more policy-oriented work as belonging in top journals. Amartya Sen also does interesting work, but has he ever been associated with the left.

Furloughing in the Wind

by the Sandwichman

Sandwichpal, John de Graaf is quoted in this New York Times feature about "A Slowdown That May Slow Us Down." "It ['furloughs'] may not ultimately be a sacrifice," John told the Times. "It may be exactly what they need to do to be happier and healthier."

The article also cites shorter work time mavens, Juliet Schor and Ben Hunnicutt and cite Dean Baker's tax credit for time off proposal.

Christina Romer: Following in the Tobin Tradition

Like the late James Tobin, Christina Romer argues for the efficacy of fiscal policy to pull us out of a recession. But that is not the motivation for my title – rather it is something Paul Krugman noted about Dr. Tobin:

He was a great economist and a remarkably good man; his passing seems to me to symbolize the passing of an era, one in which economic debate was both nicer and a lot more honest than it is today.

Let’s focus on the following from Dr. Romer’s paper:

The first issue is what it would mean for the policy to work. The President gave a very concrete metric: he wanted a program that would raise employment relative to what it would be in the absence of stimulus by 3 to 4 million by the end of 2010. Some on the blogosphere (such as the best man at my wedding, Greg Mankiw) call this metric meaningless: they complain that because we never observe the outcome under the no stimulus baseline, it isn’t verifiable. But it is, in fact, the intellectually sound and appropriate metric to use. Exactly what any macroeconomist would ask of a policy is what are its effects, holding constant all the other forces affecting the economy. I feel the strongest evidence that the President’s metric is a good one is that it has focused the debate on the right issue. Numerous forecasters, from Mark Zandi to Macroeconomic Advisers to CBO to the Federal Reserve, have looked at what they expect the Act to do. Rather than fighting over the differences in the no-stimulus baselines, which are substantial and largely outside the control of policymakers, the debate has centered on what the policy would accomplish. Of course, one can also debate the baseline and the question of whether creating or saving 3 to 4 million jobs will be enough to fully heal the economy. But, it is important to acknowledge that creating or saving that many jobs would be a tremendous accomplishment.

She was referring to this:

The expression "create or save," which has been used regularly by the President and his economic team, is an act of political genius. You can measure how many jobs are created between two points in time. But there is no way to measure how many jobs are saved. Even if things get much, much worse, the President can say that there would have been 4 million fewer jobs without the stimulus.

Romer could taken the approach that Brad DeLong took to this line:

Greg, Greg, Greg, Greg, Greg, Greg. Setting fire to your own credibility to please your political masters is a very myopic intellectual strategy. It is doubleplusungood to say: "It's bad when a Democratic president and his economic advisors do it, but it was just wonderful peachy when a Republican president and I did it."

To be fair, Greg Mankiw did update his post with the following:

A regular reader of this blog (who deserves anonymity) misinterpreted my meaning, so let me clarify: The 4 million job number is a counterfactual policy simulation of what the stimulus will do based on a particular model of the economy. As such, I have no objection to someone citing it in a policy discussion. In fact, macroeconomists use models to generate figures like this all the time. I have even done it myself.

And most economists draw up counterfactual policy simulation as Dr. Romer so politely points out. As Brad earlier noted, Greg Mankiw has unfairly gone after Christina Romer before:

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

Had she gave an elbow to Mankiw’s rib in reply, she would have been well justified. But hers was a very polite and professional reply. Let’s return to what Paul Krugman said back in 2002:

Why do I feel that Mr. Tobin's passing marks the end of an era? Consider that Kennedy Council of Economic Advisers, the most remarkable collection of economic talent to serve the U.S. government since Alexander Hamilton pondered alone. Mr. Tobin, incredibly, was only one of three future Nobelists then working at the council. Would such a group be possible today? I doubt it. When Mr. Tobin went to Washington, top economists weren't subject to strict political litmus tests -- and it would never have occurred to them that the job description included saying things that were manifestly untrue. Need I say more? Yesterday I spoke with William Brainard, another Yale professor who worked with Mr. Tobin, who remarked on his colleague's ''faith in the power of ideas.'' That's a faith that grows ever harder to maintain, as bad ideas with powerful political backing dominate our discourse. So I miss James Tobin, and I mourn not just his passing, but the passing of an era when economists of such fundamental decency could flourish, and even influence policy.

Bad ideas with powerful political backing may still be leading to some rather sharp elbows being thrown – but it would seem Christina Romer represents a return to fundamental decency.

Crowding-out for Spending Increases but Not Tax Cuts?

Lori Montgomery plays Steno Sue for the GOP:

Republicans quickly attacked the document as a recipe for economic disaster, saying it would raise taxes on businesses and consumers in the middle of a recession in order to bankroll a massive government expansion. "The era of big government is back, and Democrats are asking you to pay for it," said House Minority Leader John A. Boehner (R-Ohio). "The administration's plan, I think, is a job killer, plain and simple." White House budget director Peter Orszag rejected that analysis, saying none of the tax increases would take effect until 2011. But some economists worry that even in 2011 the economy may be too fragile to absorb a tax increase. Meanwhile, some Democrats joined Republicans in complaining that the budget plan does not go far enough to narrow the yawning budget gap.

Dean Baker objects to this nonsense:

While no economists are identified with the view that President Obama's tax increases on the wealthy in 2011 will harm a fragile economy, the article does not discuss at all the economic impact of the cuts in spending that "some Democrats" and Republicans apparently favor. The multiplier for almost possible spending cuts would be considerably larger than the multiplier for the tax increases on the wealthy. Any economists who were concerned that tax increases in 2011 could harm a still weak economy would almost certainly be much more concerned about the prospect of spending cuts in that year.

OK – this is the standard Keynesian view but we are seeing a parade of folks on display at this blog who would tell you: (1) the multiplier for tax cuts is indeed high; and (2) increases in government spending completely crowd-out investment even during periods of unemployment. After all, the Treasury View is what must be taught to their graduate students. Of course, all real economists know the Treasury View does not hold when fiscal stimulus comes in the form of tax cuts for the rich – right?

Not Part of the Remit? Part II

by the Sandwichman

The Sandwichman submitted the following comments to the "Middle Class Task Force" (formerly the White House Task Force on Working Families):

The Middle Class Task Force staff report on Green Jobs, issued today, cites the UN Environmental Programme's report, "Green Jobs: Towards Decent Work in a Sustainable, Low-Carbon World." I would like to call your attention to two brief but absolutely crucial sections in the UNEP report: "Rethinking Consumption" and "A New Approach to Work Hours".

In the section on rethinking consumption, the authors state, "Sooner rather than later… we need to confront the specter of insatiable consumerism itself. There is a danger that the consumer juggernaut will overwhelm even the most sophisticated methods and technologies that can be devised to make consumption lean and super-efficient. Consuming better does not obviate the need to consider moderation in overall consumption levels."

What this means, to be perfectly clear, is that if we DON'T confront the economic growth imperative all the rest of the good work we do to create green jobs will be moot.

That's a rather strong statement, tucked in inconspicuously in a one-page section of a 376-page document and, significantly, excluded from the summary report "for decision makers."

We know why this matter wasn't discussed more fully because the report tells us. The question about what to do about excessive consumption was "not part of the remit of this report." Let me repeat, it was "not part of the remit of this report" to look into a matter that could overwhelm (that is to say: bury, crush, submerge completely) all of the sophisticated methodological and technological innovations discussed in the other 375 pages of the report.

May I point out that is like getting ready to do a twelve-hour brain surgery without making sure there are double and triple back-ups in case of a power outage? As John Kenneth Galbraith remarked fifty years ago, it is like having a discussion about how to prevent traffic accidents while agreeing not to talk about speed.

There's a name for this bizarre phenomenon of skirting around the forbidden question. It's called "the elephant in the room." The White House blog mentioned the good-natured jockeying among cities and states for who was "greenest." By coincidence, earlier this week the City of Vancouver launched a program with the goal of making Vancouver "the greenest city in the world." In response to that, I started a facebook group called "The Greenest Elephant in the Room" because so much of the talk about green jobs sidesteps the single most direct and immediate way to cut greenhouse gas emissions (among other things) – reduce consumption, reduce the hours of work, share the work and spare the planet!

That brings me to the other brief section in the UNEP report, "A New Approach to Work Hours":

Industrial economies are extraordinarily productive-meaning that the same quantity of output can be produced with less and less human work. In principle, this can translate into either of two objectives: raising wages (in line with productivity) while holding working hours constant, or providing greater leisure time while holding income from wages constant. In practice, it has mostly been the former. Most people have been locked into a "work-and-spend" pattern.

Since the rise of mass industrialization in the late 19th century, there has been an ongoing tug-of-war between employers and unions over working hours… Employees have struggled for less work time – in the form of shortened workdays or weeks, extended vacation time, earlier retirement, or paid leave. These efforts were primarily motivated by a desire to improve the quality of life and to create more jobs. While environmental issues have not played a central role, channelling productivity gains toward more leisure time instead of higher wages that can translate into ever rising consumption also increasingly makes sense from an ecological perspective.

It is crucial to retool not only the economy, but also economic thought. Right now, economic actors are primed to respond to quantitative growth signals… A sustainable economy needs a different way of measuring human activity and of providing signals to investors, producers, and consumers. It needs a different theory, abandoning the outdated assumption that quantitative growth is unconditionally desirable and embracing instead the notion of qualitative growth.

The UNEP report "is correct when it states that it is crucial to retool not only the economy, but also economic thought." But then, amazingly, the report doesn't follow through on what could be done to retool economic thought! It focuses exclusively on the technological fix.

It takes courage to talk about what has become taboo to mention – to name the elephant in the room. The brief sections in the UNEP report that discuss "rethinking consumption" and "a new approach to work hours" are pithy. Their brevity, though, and lack of follow-through speaks volumes.

Not Part of the Remit? Part I

by the Sandwichman

Sooner rather than later, however, we need to confront the specter of insatiable consumerism itself. There is a danger that the consumer juggernaut will overwhelm even the most sophisticated methods and technologies that can be devised to make consumption lean and super-efficient. Consuming better does not obviate the need to consider moderation in overall consumption levels.

Notwithstanding the "danger that the consumer juggernaut will overwhelm even the most sophisticated methods and technologies that can be devised to make consumption lean and super-efficient," how to tame that consumer juggernaut was "not part of the remit of this report", this report being the United Nations Environment Programme's "Green Jobs: Towards Decent Work in a Sustainable, Low-Carbon World."

Is there an elephant in the room? I see one. Do you? But it is not part of the remit of this report to talk about the Greenest Elephant in the Room!.

When dealing with the juggernaut that could overwhelm even the most sophisticated methods and technologies is not in the remit, there is something fundamentally, radically, pathologically wrong with the remit.

Do Keynesian Economists Believe in Fairy Tales?

Oliver Staley and Michael McKee have a nice article entitled Yale’s Tobin Guides Obama From Grave as Friedman Is Eclipsed. John Cochrane is quoted as claiming the following:

while Tobin made contributions to investing theory, the idea that spending can spur the economy was discredited decades ago. “It’s not part of what anybody has taught graduate students since the 1960s,” Cochrane said. “They are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children but it doesn’t make them less false.” To borrow money to pay for the spending, the government will issue bonds, which means investors will be buying U.S. Treasuries instead of investing in equities or products, negating the simulative effect, Cochrane said.

Maybe Professor Cochrane is not aware that Dr. Tobin was including Keynesian economics in his graduate classes at Yale University. I’m sure other the macroeconomic classes in other graduate programs also spend considerable time explaining the contributions of Keynes, Tobin, et al. And we see that Professor Cochrane is still stuck on this discredited Treasury view. To claim that Keynesian economic represents a fairy tale that has been proven false shows how out of the loop Professor Cochrane happens to be.

Update: Brad DeLong wonders if Cochrane has an economic model to back up his argument for complete crowding-out. As Brad tries to fill in the blanks left by Cochrane, he realizes the following:

If Cochrane were to present his model and argument for crowding out, it would sound--to me at least--pretty silly. It would carry the implication not just that government spending can't spur the economy, but that private spending by high-tech startups in the 1990s or by homebuilding compaanies in the 2000s did not spur the economy either--that it was simply chance that high-tech investment spending boomed in the late 1990s and the unemployment rate fell at the same time and that it was simply chance that home construction spending boomed in the mid 2000s and the unemployment rate fell at the same time. And Cochrane's position had not to my knowledge been seriously advanced--certainly Milton Friedman did not advance the view that there was always 100% crowding-out of fiscal policy--since R.G. Hawtrey and the "Treasury View" of the 1920s.

Pieces of Mind - Kyoto Protocol

Piece One:
Global models that include the feedbacks between climatic change and the carbon cycle have all shown decreased carbon sinks over the next century. [1]



Piece Two:
Growing trees absorb net quantities of CO2, and the higher levels of CO2 and nitrogen in the atmosphere are themselves stimulating tree and plant growth…. But the researchers expect these effects to reach saturation point and cease to have an effect. [2]

Piece Three:
What the researchers found limited the trees' capacity to respond to carbon fertilisation was a shortage of other nutrients, especially nitrogen. The availability of water was also important. ….The US and the other members of the so-called Umbrella Group (Japan, Switzerland, Canada, Australia, Norway, New Zealand and Russia) wanted to rely considerably on sinks in meeting their Kyoto targets for reducing emissions of greenhouse gases that may be warming the global climate. The European Union and others opposed this, arguing that open-ended use of sinks to absorb CO2 could allow countries to avoid making any actual emission cuts at all. [3]

Piece 4:
[Tree] respiration increases in response to temperature rises, which are triggered by the rising levels of CO2. Many scientists believe that respiration may be about to accelerate, turning the forests from sinks to sources of carbon…. They failed to recognise that this could happen because, although CO2 take-up is instantaneous, the warming that triggers respiration has a built-in delay of about 50 years, mainly because of the oceans' thermal inertia. So planting more trees could soon prove a quick way of speeding up climate change, not of moderating it. Bob Scholes, of the South African Government's research agency, CSIR, says it could be a costly mistake. "The carbon cycle has a very long equilibrium time. The consequences of actions taken now will persist for many centuries." [4]


[1] The First State of the Carbon Cycle Report (SOCCR)
The North American Carbon Budget and Implications for the Global Carbon Cycle
The Carbon Cycle in Land and Water Systems, Part III Overview.
Lead Author: R.A. Houghton, Woods Hole Research Center
http://www.climatescience.gov/Library/sap/sap2-2/final-report/sap2-2-final-part3overview.pdf

[2] Forests 'only temporary carbon absorbers'.
Wednesday, 7 November, 2001, 19:13 GMT
By Alex Kirby. BBC News Online environment correspondent
http://news.bbc.co.uk/2/hi/science/nature/1643156.stm

[3] Tree planting warning over global warming
Tree at sunset BBC
Trees may not live up to expectations for storing carbon dioxide
By BBC News Online's environment correspondent Alex Kirby
http://news.bbc.co.uk/2/hi/science/nature/1347068.stm

[4] Trees 'will not avert climate change'
Wednesday, October 20, 1999 Published at 22:49 GMT 23:49 UK
Sci/Tech
The world's forests can buy a little time, before they start adding to the warming
By Environment Correspondent Alex Kirby
http://news.bbc.co.uk/2/hi/science/nature/480339.stm

The Greenest Elephant in the Room

by the Sandwichman

The Sandwichman has started a facebook group called Greenest Elephant in the Room and fondly invites all EconoSpeak readers to join. There will be a Greenest Elephant in the Room contest, too!

No one can avoid noticing an elephant in the room. But respectable folks somehow know it's not polite to mention that it's there.

In response to the City of Vancouver's upcoming "Greenest City in the World" initiative (it will be announced sometime this week), the Greenest Elephant in the Room is dedicated to raising the "forbidden question" of reducing the workweek.

It's the most immediate and direct way to reduce material throughput while preserving and even creating jobs. Yet even as the current economic and environmental crises make the reduction of working time more urgent, serious proposals to do so are treated as curiosities from the fringe. Why is this so?

The Greenest Elephant in the Room suspects that there are a lot of economists, politicians and other respectable folks who would rather be silly than look silly by marching out of step with their silly peers. As John Maynard Keynes remarked of bankers, "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."

Jindal’s Reply to Obama’s Speech: I Have No Clue What You Intend To Do

As I post this, the President is speaking to the Congress on the economy. The Republican response will be delivered by a clueless person:

To solve our current problems, Washington must lead. But the way to lead is not to raise taxes and put more money and power in hands of Washington politicians ... Democratic leaders say their legislation will grow the economy. What it will do is grow the government, increase our taxes down the line, and saddle future generations with debt. Who among us would ask our children for a loan, so we could spend money we do not have, on things we do not need?

Jindal cannot argue that the stimulus bill raises taxes today as it cuts taxes at least in the short-run. Yes – the present value of future government spending plus any current debt must be financed by the present value of future taxes. So if the President was proposing a permanent increase in government spending, then Jindal might have a point. But had Jindal bothered to actually listen to what the President has been saying – the long-run plan is for fiscal restraint following the current temporary fiscal stimulus.

Jindal is seen by many in Republican circles as their next leader. Yes – Republicans does have a habit of letting economic know-nothings rise to the top of their party.

Update: I did not stay up to actually watch Jindal but some folks at Faux News did and they were not impressed. As David Weigel notes:

Brutal. No one seems to think Jindal performed well.

Is There a Speculative Bubble in Gold?

The price of gold topped $1,000 per ounce this past Friday, only the second time it has done that, the last being last March for a few days. Yes, I think there is a bubble, but some other observers disagree (Patrick Heller: "Gold Reaches $1,000 Again: This Time It's Different"). Heller claims that "this is different" (from last March), with "prudent buyers" still buying, and various "mainstream pension funds" getting into the act, with him forecasting a major "shortage" of gold coins and loose jewelry later this spring. He suggests we will not see a price below $1,000 again any time soon.


Quite aside from my vague sense from people coming up to me randomly with this sort of frenzied tone when asking me about gold (always a bad sign), there are some aspects of this that do not smell right. Sure, I would not be surprised if the price rises some more. This bubble could bubble away for some time more, even some months. But usually the drive to gold is a flight from currency based on fears of inflation. Now, maybe there are people fearing hyperinflation from the fiscal stimulus, but a lot of forward swap markets still show expectations of deflation. Jim Hamilton at econbrowser is all pleased that there was a slightly positive increase in the US CPI in January, but is still hoping for much more inflation (his favored target is a 3% rate), and the price of oil has only gone down since then.

Of course, a deeper possibility here is probably a fear of just total collapse of everything, call it fleeing from nameless black swans that may be flying towards us. The same sort of thing probably explains the newly recent highs we are seeing on the US dollar, this absurd "flight to quality" to the dollar, when it is facing massive foreign imbalances and indebtedness, rather like what happened in mid-September when we briefly saw negative nominal interest rates. However, the most likely Awful Event still does not look like the sort of hyperinflation that feeds the gold bugs's mania, but a deep decline into deep depression, which would mean deflation. This would mean a collapse of the price of gold. Sure looks like a speculative bubble to me.

Update on "Gradual Decline Before the Crash"

Last July 12 I posted here on both old and recent work of mine on modeling how most bubbles experience "period of financial distress" after a peak during which they gradually decline for awhile before crashing. I noted the declines in deriviatives markets, identifying August 2007 as the peak. I warned of the danger of a crash, while holding back from outright forecasting one or when it might occur. Well, it occurred in mid-September with the general global meltdown after the failure of Lehmann Brothers, and was followed by a pretty steep crash of stock markets around the world.

I also note that housing continues to follow my forecast, that it is in a gradual decline since its peak in mid-2006, with no sign of a full-scale crash, although we are pretty clearly still well above a bottom. The other pattern for bubbles, of a crash immediately following a peak still looks like what happened to oil this past summer. Again, for the record, in the fourth edition of his Manias, Panics, and Crashes, of the 47 historical bubbles identified by Charles Kindleberger in his Appendix B, 37 of them followed the "period of financial distress" pattern, including all the really big ones, with the remainder about evenly split between the other two patterns.

Does Rick Newman Understand Either Moral Hazard or Option Valuation?

Rick Newman calls the possibility of temporarily nationalizing troubled banks “scary” for reasons that are being properly ridiculed – a topic we’ll come to in a moment. But let’s start with this claim:

It wouldn’t solve the underlying problem. The main problem at struggling banks like Citigroup is a mountain of losses – which the banks may not have enough cash to cover … The government can pump taxpayer dollars into banks to help cover losses, which it’s already doing. But even if it owns the banks, “the government can’t make embedded losses go away,” says economist James Barth of the nonprofit Milken Institute. “The question is how to prevent additional losses.” If troubled banks were making wild decisions that were exacerbating their problems, then a government takeover might be one way to install more prudent management. But by most accounts, government regulators are now watching troubled banks so carefully that they’re effectively clamping down on any risky moves anyway.

The problem is not past decisions but the possible future decisions of zombie banks, that is, banks with liabilities exceeding the value of their assets. The fact that the government can observe a troubled bank does not erase the moral hazard dilemma inherent in letting the owners of these zombies continue to make management decisions. But the claim that is getting the most ridicule is as follows:

A government takeover would vaporize a lot of wealth. This is why the markets freak out every time there’s a rumor, or a rumor of a rumor, about nationalization. If the government took over a bank, public shares would suddenly be worthless and shareholders would lose everything. With Citi and Bank of America shares down more than 90 percent over the last 12 months, many shareholders have already lost a fortune. But there’s still a chance they’ll get some of it back if the bank recovers. That potential upside would disappear if the feds stepped in.

TPM reader AC nails this:

the only reason that the 90% to 95% losses that many have taken is not 100% is because of the chance that the feds bail out the banks but leave some equity outstanding (e.g., the 40% Citi solution). This, of course, is just a transfer of wealth from taxpayers to bank shareholders--like Paulson's funding of Citi greater than their market cap, to take meaningfully less than a 100% stake.

Paul Krugman recently made the same point:

And the market caps of these banks did not reflect investors’ assessment of the difference in value between their assets and their liabilities. Instead, it largely — and probably totally — reflected the “Geithner put”, the hope that the feds would bail them out in a way that handed a significant windfall gain to stockholders. What’s happening now is a growing sense that the federal government, in return for rescuing these institutions, will demand the same thing a private-sector white knight would have demanded — namely, ownership.

While Newman is correct in the claim that there is some remote possibility that the future cash flows of these banks will turn positive, there is also the strong possibility that the future cash flows will turn even more negative. The difference between the current market price of these bank shares and this Geithner put option is the current expected present value of cash flows – with each element of the probability matrix accounted for. Dr. Krugman et al. argues that the present value is negative. What I guess scares Mr. Newman is that the bank shareholders might lose the value of this Geithner put option, which of course is what we taxpayers would be giving away for free if we do not nationalize these troubled banks.

The Kyoto Protocol. Oh No!

"Under Kyoto, emissions are allocated to the country where they are produced. By these rules, the UK can claim to have reduced emissions by about 18% since 1990 - more than sufficient to meet its Kyoto target. But research published last year by the Stockholm Environment Institute (SEI) suggests that, once imports, exports and international transport are accounted for, the real change for the UK has been a rise in emissions of more than 20%...." [1]

"VICTORIA'S bushfires have released a massive amount of carbon dioxide into the atmosphere - almost equal to Australia's industrial emission for an entire year. Mark Adams, from the University of Sydney, said the emissions from bushfires were far beyond what could be contained through carbon capture and needed to be addressed in the next international agreement. "Once you are starting to burn millions of hectares of eucalypt forest, then you are putting into the atmosphere very large amounts of carbon," Professor Adams said. In work for the Bushfire Co-operative Research Centre, he estimated the 2003 and 2006-07 bushfires could have put 20-30million tonnes of carbon (70-105 million tonnes of carbon dioxide) into the atmosphere. "That is far, far more than we're ever going to be able to sequester from planting trees or promoting carbon capture," he said..... [2]

Whatever were the chances of success of the Kyoto forum? The Australian (Labor) Government appointed the heads of the Australian National Association of Forest Industries (NAFI) as members of the official Australian delegation to the United Nations Framework Convention on Climate Change (UNFCCC) meeting in Bali in December 2007. [3] Prime Minister, Rudd, placed little value on selecting delegates with an appropriate background of study on climate change dynamics. NAFI CEO, Catherine Murphy was then free to spout her usual ill-informed logic at this critical international forum "Forestry is the only carbon positive industry and plays a significant role in reducing greenhouse gases in the Earth’s atmosphere....” [4]

James Lovelock would have been a much better forestry delegate: ". "Carbon offsetting? I wouldn't dream of it. It's just a joke. To pay money to plant trees, to think you're offsetting the carbon? You're probably making matters worse. You're far better off giving to the charity Cool Earth, which gives the money to the native peoples to not take down their forests." [5]

In these times of rapid and threatening climate change we can still enjoy life...for now...with the lights off.



[1] West blamed for rapid increase in China's CO2
[Consumer exports behind 15% of emissions - study]
Duncan Clark. The Guardian, Monday 23 February 2009
http://www.guardian.co.uk/environment/2009/feb/23/china-co2-emissions-climate

[2] Bushfires release huge carbon load
Asa Wahlquist, Rural writer | February 13, 2009
Article from: The Australian
http://www.theaustralian.news.com.au/story/0,25197,25047322-11949,00.html

[3] NAFI represents Australian forest industry at Bali climate change meetings
http://www.nafi.com.au/news/view.php3?id=1788

[4] NAFI welcomes ratification of Kyoto Protocol by the Australian Government. December 2007. http://www.nafi.com.au/news/view.php3?id=1789

[5] 'Enjoy life while you can'
* Decca Aitkenhead * The Guardian, * Saturday March 1 2008
http://www.guardian.co.uk/theguardian/2008/mar/01/scienceofclimatechange.climatechange?gusrc=rss&feed=networkfront

Senator McConnell: For Short-term Fiscal Restraint But Against Long-Term Fiscal Restraint

Advocates of long-term fiscal restraint often argue ala the Solow growth model that increases in national savings lead to more investment as long as we can assume full employment is maintained. During periods of weak aggregate demand (such as the current one), a strong case for short-term fiscal expansion can be made. The Obama stimulus bill was designed to reverse the slide in aggregate demand. However, Senator McConnell and other Washingtonian Republicans – aka the neo-Hooverites - opposed this fiscal stimulus on the grounds that it sacrificed fiscal responsibility.

President Obama has trumped these fools by arguing for long-term fiscal responsibility. John King asked Senator McConnell about the President’s proposal to reduce the government deficit over the long-run in part by letting the Bush tax cuts for the very rich sunset:

So we have got to ask ourselves whether increasing capital gains taxes, dividend taxes and taxes on small businesses is a great thing to do in the middle of a deep recession.

Excuse me but recessions do not last forever and the President was clear that he has been talking about a mix of short-term fiscal stimulus and long-term restraint. Is McConnell really this stupid? I doubt it as his hypocrisy has been standard Republican practice for over a generation. They justified the 1981 tax cut on the grounds that we had a recession to deal with – never mind the fact that fiscal policy was operating at cross purposes with Volcker’s monetary policy. We would have had more national savings had we had less fiscal stimulus and a quicker path to lower interest rates. Bush43’s tax cuts may have been sold as dealing with the 2001 recession but the truth was they were not as much about immediate fiscal stimulus and more backloaded in their impact on aggregate demand. We continued to hear GOP calls for making the tax cuts permanent even as the economy rebounded and the Federal Reserve chose to raise interest rates.

For McConnell to use the recession as an excuse not to eventually raise taxes is pure hypocrisy. But it is also standard Republican rhetoric – as stupid as this rhetoric may be.

Unemployment Rates in the States Where the Governors Reject Federal Unemployment Assistance

We noted the silly argument made by Louisiana’s governor as to why he wants to turn down the $98 million in federal unemployment assistance – which amounts to less than 2% of the total stimulus going to his states. CNN reports that Jindal has company:

Though they support some federal action to help their states recover from the recession, several Republican governors said Sunday they plan to turn down a portion of what's offered in the stimulus bill that President Obama signed last week. "If we were to take the unemployment reform package that they have, it would cause us to raise taxes on employment when the money runs out -- and the money will run out in a couple of years," Mississippi Gov. Haley Barbour told CNN's "State of the Union" on Sunday. The Republican governors of Idaho, Alaska, Texas, South Carolina and Louisiana have expressed similar concerns.

I guess Barbour got the same talking points that were given to Jindal. Steve Benen reports on the nonsense coming from the governor of South Carolina:

As for Sanford's notion of a "fundamental misdiagnosis," what does the South Carolinian believe is the wisest course of action? "When times go south you cut spending," Sanford recently explained. "That's what families do, that's what businesses do, and I don't think the government should be exempt from that process." It is Neo-Hooverism in its most obvious form.

As these governors decide that the unemployed of their states are less important than a little political pandering to the rightwing, maybe we should check with this source as to how much the unemployment rate has increased from December 2007 to December 2008:

Alaska: 6.5% to 7.5%

Idaho: 2.7% to 6.4%

Louisiana: 4.0% to 5.3%

Mississippi: 6.3% to 8.0%

South Carolina: 6.2% to 9.5%

Texas: 4.2% to 6.0%

Crop Scientists Say Biotechnology Seed Companies Are Thwarting Research.

Pollack, Andrew. 2009. "Crop Scientists Say Biotechnology Seed Companies Are Thwarting Research." New York Times (19 February).
http://www.nytimes.com/2009/02/20/business/20crop.html?ref=business

"Biotechnology companies are keeping university scientists from fully researching the effectiveness and environmental impact of the industry’s genetically modified crops, according to an unusual complaint issued by a group of those scientists. “No truly independent research can be legally conducted on many critical questions,” the scientists wrote in a statement submitted to the Environmental Protection Agency. The E.P.A. is seeking public comments for scientific meetings it will hold next week on biotech crops."



"The researchers, 26 corn-insect specialists, withheld their names because they feared being cut off from research by the companies. But several of them agreed in interviews to have their names used. The problem, the scientists say, is that farmers and other buyers of genetically engineered seeds have to sign an agreement meant to ensure that growers honor company patent rights and environmental regulations. But the agreements also prohibit growing the crops for research purposes. So while university scientists can freely buy pesticides or conventional seeds for their research, they cannot do that with genetically engineered seeds. Instead, they must seek permission from the seed companies. And sometimes that permission is denied or the company insists on reviewing any findings before they can be published, they say. Such agreements have long been a problem, the scientists said, but they are going public now because frustration has been building. “If a company can control the research that appears in the public domain, they can reduce the potential negatives that can come out of any research,” said Ken Ostlie, an entomologist at the University of Minnesota, who was one of the scientists who had signed the statement."

"The companies “have the potential to launder the data, the information that is submitted to E.P.A.,” said Elson J. Shields, a professor of entomology at Cornell."

"The growers’ agreement from Syngenta not only prohibits research in general but specifically says a seed buyer cannot compare Syngenta’s product with any rival crop. Dr. Ostlie, at the University of Minnesota, said he had permission from three companies in 2007 to compare how well their insect-resistant corn varieties fared against the rootworms found in his state. But in 2008, Syngenta, one of the three companies, withdrew its permission and the study had to stop. “The company just decided it was not in its best interest to let it continue,” Dr. Ostlie said."

"Mark A. Boetel, associate professor of entomology at North Dakota State University, said that before genetically engineered sugar beet seeds were sold to farmers for the first time last year, he wanted to test how the crop would react to an insecticide treatment. But the university could not come to an agreement with the companies responsible, Monsanto and Syngenta, over publishing and intellectual property rights. Chris DiFonzo, an entomologist at Michigan State University, said that when she conducted surveys of insects, she avoided fields with transgenic crops because her presence would put the farmer in violation of the grower’s agreement."

"Dr. Shields of Cornell said financing for agricultural research had gradually shifted from the public sector to the private sector. That makes many scientists at universities dependent on financing or technical cooperation from the big seed companies. “People are afraid of being blacklisted,” he said. “If your sole job is to work on corn insects and you need the latest corn varieties and the companies decide not to give it to you, you can’t do your job".”

Gov. Jindal Rejects $98 Million in Unemployment Assistance – Senator Landrieu Must Just Be Smarter than the Governor

Jan Moller has a very insightful story with respect to what the headline notes as Jindal rejects $98 million in stimulus spending:

Saying that it could lead to a tax increase on state businesses, Gov. Bobby Jindal announced Friday that the state plans to reject as much as $98 million in federal unemployment assistance in the economic stimulus package.

Rather that go off on what at first glance appears to be a knne-jerk GOP preference for business owners over the average working class family down on their luck, let’s pull what might appear to be Jindal’s reasons for this stance:

Jindal, who has emerged as a leading Republican critic of the $787 billion spending and tax-cut bill signed into law this week by President Barack Obama, said the state would accept federal dollars for transportation projects and would not quarrel with a $25-per-week increase in unemployment benefits. Both of those items are financed entirely with federal dollars and require the state only to accept the money. The part that Jindal rejected would require permanent changes in state law that the governor said makes it unacceptable. "You're talking about temporary federal spending triggering a permanent change in state law," Jindal said ... At issue are two pots of federal money that states can access only if they agree to change their laws to make it easier for unemployed workers to qualify for benefits. To access the first pot of money, worth $32.8 million over 27 months, Louisiana would have to offer benefits to workers who have held jobs for as little as three months before becoming unemployed. Workers now have to hold a job for at least a year before they are eligible to collect unemployment. The Louisiana Workforce Commission, which administers the state's unemployment insurance system, estimates that an additional 4,000 former workers would become eligible for benefits under that change. A second pot of money, valued at $65.6 million, would be available to Louisiana only if it agreed to other, larger expansions of benefits. For example, the state could extend benefits to part-time workers or change the law so that people could collect unemployment if they voluntarily left their job for "compelling" family reasons. As the Jindal administration interprets the law, Louisiana would be required to keep providing the expanded benefits even after the federal stimulus dollars run out at the end of 2010. That, in turn, would lead to higher costs on businesses, whose taxes finance the state's unemployment compensation fund. According to the Workforce Commission, the expanded benefits would cost Louisiana companies $12 million a year after the federal money ends. The businesses, in turn, would pass those costs on to their workers. “I don't think it's good policy to take temporary federal dollars to create a permanent state spending obligation,” Jindal said.

Senator Landrieu has another view:

But U.S. Sen. Mary Landrieu, D-La., disputed the governor's interpretation and said the new unemployment benefits are designed to be temporary. "This bill is an emergency measure designed to provide extra help during these extraordinarily tough times, " Landrieu said. "To characterize this provision as a 'tax increase on Louisiana businesses' is inaccurate." … A senior aide to Landrieu agreed that the state would have to change the law to take advantage of the windfall but said the change would not have to be permanent. Instead, the Legislature could write the new law with a "sunset provision" so it expires when the federal stimulus dollars run out.

Republicans should understand sunset provisions – it’s how they claimed that the 2001 tax cuts would not permanently drive up the deficit. The governor of Louisiana is turning down almost $100 million in federal unemployment assistance becomes he cannot think out of the box? Isn’t this complete incompetence grounds for his removal from public office?