The Optimism of a Double-Dip

A crisis is the method by which a capitalist economy partially purges itself of the effects of past mistakes while imposing misery on the masses.

Economists often characterize the outcomes as by the shape of letters of the alphabet. A "V" indicates a quick collapse and an equally quick recovery. "L" suggests a collapse followed by a very weak recovery. And a "W" indicates a double-dip in which the quick recovery is followed by another collapse. Ironically, our previous president was known as "W" will and our present president could be known as zero, which approximates the first letter of his last name.

A V-shaped recovery suggests that the economy was fundamentally strong, allowing the economy to quickly pick up steam. A W-shaped outcome is a telltale sign of an economy that was leaked to begin with, propped up by external support, which was withdrawn prematurely. For example, Roosevelt succumbed to outside pressure in 1937, leading to an expected setback. Under far less pressure, Obama followed suit.



Both the crisis and the recovery can only be understood in terms of the long-term processes that caused the initial collapse. In "The Confiscation of American Prosperity: From Right-Wing Extremism and Economic Ideology to the Next Great Depression" I tried to tell the story of the gradual weakening of the US economy. The book explained how the unusual postwar prosperity was created by a sequence of the Great Depression and then the war. The postwar period up to the late 1960s is often described as The Golden Age because the economy performed better than ever before.

The business class believed that this exceptional performance was the norm. As the economy began to falter in the late 1960s, capitalists set out to restore their sagging profits. During the Golden Age, prosperity also meant that competitive pressures were not strong. In the absence of competitive pressures, business had little need to improve productivity. Management could coast along assuming that high profits were due to their outstanding managerial skills.

Unprepared and unwilling to adapt to the new economic conditions, capitalists set out to remake the economic structure in a way that would allow profits to recover. However, they did so by subtracting from the rest of society, rather than by contributing anything productive. Anything that stood in the way of profit maximization, whether unions, regulation, or taxes, had to be swept away. Business was surprisingly successful in this endeavor, but it did nothing to make the economy stronger. In fact, this strategy undermined economic strength.

Obscene inequality of wealth and income meant that business would be unlikely to prosper by selling goods to the masses. The rise of international competition made that strategy less likely. Instead, business turned to finance, at the same time as the regulatory forces that might have imposed a modicum of rationality were no longer operative.

I use the term Confiscation of American Prosperity to indicate that in this period from the late 1960s until 2007, when the book was published, to indicate that growing profits were not a sign of strength, but an indication of how much capitalism was subtracting, or as Marx would say, vampire-like parasitically sucking away the strength of the economy.

I will not speculate whether the money thrown at the banks was a continuation of the process of confiscation or whether the people in charge actually believed that this misconceived strategy would be sufficient to create a quick recovery. In any case, it did little to the bleeding -- except for the large mass of the public, which had been being bled her for more than three decades, since the end of the Golden Age.

On top of the withdrawal of the federal life support for the economy, the confiscatory strategy has been escalated. The attack on unions, regulation, and taxes is now on steroids. If the previous attack was crucial in creating the present crisis, this all-out attack seems certain to make things considerably worse. A double-dip may be just an ice cream cone and any expectation of a W-like outcome may be overly optimistic.

The Lucas Explanation of the Persistence of the Great Recession: The Barro Objection

Robert Lucas offers the following as one of his reasons for the persistence of the Great Recession:

Likelihood of much higher taxes, focused on the “rich”

Gavyn Davies and Paul Krugman argue that the Lucas attempt to explain the persistence of the Great Recession on purely classical principles lacks credibility with Davies noting:

As yet, there has been no increase in taxation, on the rich or anyone else. Nor have the Obama administration’s medical and financial sector reforms really taken effect. It would take a remarkably far sighted private sector to have already reacted adversely to this set of long term reforms, even if they might do so eventually.

One could argue, however, that the Barro reformulation of Ricardian Equivalence would argue that it is not current taxation that matters but the expectation of future taxes when government spending outstrips taxes. But if one is basing one’s argument thusly, I don’t see what has fundamentally changed in the past few years. We knew back in the 1980’s that Reagan’s fiscal policy has spending outstripping taxes until we got the return to fiscal sanity during the Clinton years. Of course, that changed when a new Administration took office but that new Administration took office in 2001 – not 2009. Professor Lucas does not explain to us why he believes that the Obama Administration signals an even further long-term commitment to more government spending. In fact, the medical reforms he mentions were designed to reduce long-term spending. So if the rich were forward looking ala Ricardian Equivalence, the likelihood of much higher taxes would have been realized well before the Great Recession.

The Macro Identity Cuts the Cant

I’ve been pretty busy, and in lieu of writing a real post, I’ll mostly quote Yves Smith:

The reason most people don’t like government deficits is that they are assumed to crowd out private sector borrowing, thus discouraging business investment. But companies in the US, even in the last expansion, were net savers. That pattern has taken hold in advanced economies, even in many emerging economies ex China, since the mid 2000s, and some as early as the late 1990s. Andrew Haldane, the director of financial stability for the Bank of England, confirmed that companies and investors are taking an excessively short-term perspective, which is leading to underinvestment.

In simple terms, the household sector always wants to save. If the business sector also perversely wants to save, then government needs to take up the slack and deficit spend, otherwise wages and GDP will contract (if you run a big trade surplus, you can escape that conundrum, but that isn’t germane for the US). If GDP contracts, debt to GDP gets worse, not better. Conversely, when the economy is strong and the business sector is borrowing to expand operations is when the government sector should run a surplus.

What she is doing here is simply applying the fundamental macro identity, one of whose forms is that the sum of private and public budget positions plus the current account is zero. I’m increasingly convinced that just starting from the relevant version of the identity eliminates the 90% of economic debate that is nonsense. After that we can start discussing the other 10%—like whether the net savings of the business sector are only due to short-termism. (I think not, but that’s another, longer, more time-intensive post.)

Should We Panic Over the Level of Federal Debt?

Glenn Hubbard thinks our Federal debt problem is worse than it was at the end of World War II:

The US has addressed debt burdens before. Between the end of the second world war and 1960, the nation cut its debt-to-gross domestic product ratio in half from 109 per cent to 46 per cent through economic growth and avoiding additional debt accumulation. The US debt problem is now more difficult. Since 2008, the ratio of federal debt held by the public to GDP has risen from 40 per cent on its way to over 90 per cent by 2020, an alarming increase outside of major wartime experience. Today’s problem is not a past war, but ever-rising future debt burdens unless we take action.

Our chart shows the federal debt held by the public (DHP) to GDP ratio as well as total Federal Debt (TD) relative to GDP from 1939 to 2011 (projected) as reported in table B.79 of the Economic Report of the President 2010. Note that this 90% projection for DHP/GDP in 2020 is not as high as the ratio for 1945 but it is entirely possibly that TD/GDP will reach 120%.

Why would the Federal debt problem be more difficult now or even in 2020? This topic has received substantial attention of late – with a couple of mentions to Paul Krugman and the CBPP . Paul talks about debt arithmetic, which is reminiscent of Sargent and Wallace’s Unpleasant Monetarist Arithmetic . Let’s pessimistically assume that by 2020 we have a steady state real interest rate equal to 4% and real growth equal to 3%. If we could obtain a non-interest surplus to GDP ratio equal to or greater than 1.2%, then we could avoid a debt explosion and in fact might even see the debt ratio decline over time.

Glenn argued that we enjoyed a reduction in the debt ratio from 1945 to 1960, which is true. In fact, the debt ratio continued to decline during the 1960’s and 1970’s despite the Vietnam War spending and the various recessions we had during the Nixon, Ford, and Carter Administrations.

The CBPP chart shows that the explosion in the public debt ratio discussed by Glenn Hubbard comes from three primary sources: (1) the Bush tax cuts (I don’t exactly recall Glenn objecting to these when he worked for the Bush Administration); the two wars started at a similar time; and (3) the recession and fiscal policy moves designed to limit the recession. Robert Barro back in 1979 noted that the US economy often saw jumps in the debt to GDP ratio as the result of major wars and recessions but for its history up to then, long-term fiscal policy tended to retire this debt over time. Ah but this was another example of the Cheshire Cat in economics – as soon as an economist documents this tendency for long-term fiscal responsibility, we get the Reagan tax cuts which were not accompanied by meaningful spending cuts. So the debt ratio rose dramatically until the fiscal discipline movements of the 1990’s – which were in part defense spending cuts and largely tax increases – began to show up in a debt ratio that began to decline. At least until we had the fiscal irresponsibility of the Administration that Glenn Hubbard served.

We should, however, mention the elephant in the room which is the projected increase in Federal spending on health care. The Administration that Glenn Hubbard served made the problem worse as it added a prescription drug benefit without adding any revenues to pay for it. The current Administration managed to pass health care reforms that would tend to limit this growth in spending but with no support from the Republican Party. And yet it is this same Republican Party that not only refuses to consider any revenue increasing measures but wants to cut taxes even more.

We should close with admonition that fiscal discipline during a weak economy does not necessarily improve the situation with a hat tip to Brad DeLong .

There Was Neither Medicare Nor Medicaid In 1958

So what, you might ask? Well, the word is out that the most recent year tax revenues as a percent of GDP were as low as they are now was 1958, http://www.usgovernmentrevenue.com/downchart_gr.pap?years1900_2010%units=p&title=Revenue%20%20percent%20%20GDP . This might explain why in the push for a balanced budget, while cutting taxes even further, the Ryan plan seeks to drastically cut Medicare by turning it into a premium support voucher system, with the elderly having to cover most of their expenses out of pocket. Back in 1958, both the old and the poor had to pay for all their own medical care. What a paradise!

So, if there was neither Medicare nor Medicaid, what was in the budget back then? Of course, government spending was lower as a percent today, those Eisenhower budgets generally being close to balanced, although as 1958 was a recession year, there was a deficit in that one. Well, the much bigger item in percent terms was national defense. After all, it was the Cold War, and the year before the Soviets had beaten us into space scarily with their launching of Sputnik.

But, we need to pay respect here to this drive to lower taxes. After all, we could go back further to when there was no Social Security either, and defense was lower, you know, maybe 1917 when we were just getting into WW I and that darned debt ceiling first got installed, only four years after the federal income tax was adopted, an even greater paradise!

Or, better yet, go all the way back to a century ago before there was a federal income tax. After all, newly possible prez candidate Rick Perry wants to get rid of it. And, hey, in the logic of the political supply siders who constantly tell us that revenues always go up when tax rates go down, this would be the ultimate solution for our budget woes and debt ceiling and all that, since zero tax rates should make the revenues higher than any other possible outcome, gosh darn it!

Clearly Grounds For Impeachment!

That's it. First Obama openly states in a joint press conference with Israeli PM, Netanyahu, longstanding US policy with regard to Israeli-Palestinian negotiations that final borders should be based on the 1967 borders with land swaps, leading to Netanyahu not only openly objecting to this strenuously, but to getting 28 standing ovations in Congress for complaining further about this to a mere 26 that Obama received for his State of the Union message; but now Obama flubbed a toast to the Queen of England, speaking over their national anthem as the orchestra began playing it in the middle of Obama's toast, an unforgivable blunder on the part of Obama, who clearly should have stopped in mid-sentence, as Rush Limbaugh explained in a 6 minutes and 42 seconds moment by moment explanation, clearly showing Obama's total unsuitability to serve as president ( http://www.mediate.com/online/limbaugh-rails-obama-on-toast-flub-im-tired-of-people-making-excuses-for-these-people ). Clearly, these actions by Obama are grounds for impeachment.

And, actually, it might be good to have those impeachment hearings going on those vitally important grounds, so that nobody will bother if Obama ignores the debt ceiling limit come August 2 and just orders US Treasury Secretary Geithner to just keep on issuing fresh US bonds to cover bills previously approved by the US Congress as they come due. Makes sense to me, :-).

On The Lighter Side: How To Pick Up An Economist

This has been floating around the blogosphere for awhile now, but figure we could all use a few chuckles, originally due to Sarah Skwire , http://www.modifiedrapture.com/wp/?p=210 .

The Top Ten Lines for Hitting on an Economist

1. You've got the curves to supply my demand!
2. Let's go to bed and try to disprove the law of diminishing marginal utility.
3. You're my very favorite kind of moral hazard.
4. I have a feeling you really understand the "nature of the firm."
5. Baby, I love you so much, I'm willing to forgo my exit option.
6. Wanna talk about our private goods?
7. You're an economist, I'm an economist. How about a little horizontal integration?
8. Now those are some tangible assets.
9. I'll reveal my preferences if you will.
10. Bottom up or top down?

The Food Stamp Fight

Newt Gingrich is receiving a lot of well deserved criticism for calling President Obama “the food stamp President" but as Dottie Rosenbaum notes cutting the food stamp program is part of Paul Ryan’s long-term budget plan:

The House-passed plan to convert SNAP (the Supplemental Nutrition Assistance Program, formerly called food stamps) to a block grant and cut the program by almost 20 percent rests on the false claim that the program is experiencing “relentless and unsustainable growth.”

Figure 1 of her CBPP discussion says a lot. First of all – the rise in food stamp recipients is a consequence of the Great Recession. As the economy recovers, food stamp payments are projected to decline. Of course countercyclical fiscal policy is seen as a bad thing by this generation of Herbert Hoover Republicans.

The other thing to note is that food stamp expenditures were less than 0.3 percent of GDP before the Great Recession and are projected to fall below 0.3 percent of GDP over time. As usual – GOP fiscal “discipline” is limited to big cuts in small programs.

What To Do If The Debt Ceiling Is Not Raised? Ignore It

We are indeed approaching an unprecedented situation. As I have repeatedly pointed out, the US is the only nation ever to have a nominal debt ceiling, long ignored as a trivial matter since its imposition in 1917, given the routine way it has been raised so many times previously. But now we approach a battle royal, where House Republicans refuse to allow for any tax increases as part of any deficit reduction deal, and it would be extremely unwise of Obama or the Dems to agree to the more radical of their demands for spending cuts, including the fact that the only way they can defeat Obama next year is if they can engender a financial crisis leading to a return to a recession, which they can then blame on him. And if he is foolish enough to let them do that, well, then he may deserve not to be reelected.

So, my proposal is that if the Congress is unable to come to some sort of reasonable deal that will allow a vote on raising the debt ceiling, Treasury Secretary Geithner should simply ignore the debt ceiling and continue to pay the bills as they come in, thereby avoiding any defaults or spending cuts or financial crises. The fact is, in the absence of any direct instructions from the Congress on which bills should be paid and which should not be in the face of crashing into the debt ceiling (surely we are not talking about paying no bills at all), he has no authority not to follow the instructions of the Congress in its latest budget, and spend what has been mandated. That will be the last coherent instruction from the Congress, and I say he should obey that in the absence of anything else more specific. Indeed, it will be the only responsible thing to do.

Now, many might complain that "the law is not being obeyed." Well, yes, and I think that is too bad. But many laws fail to get enforced. The last administration clearly broke our laws against engaging in torture, but they were not and are not being punished, although supposedly we are torturing no more now. About half the states have anti-adultery laws, but the only case I am aware of within decades of any of them being enforced was an absurd one near me in Luray, Virginia, where a district attorney was arrested for it after his mistress turned him in, testifying against him. He had been stupid enough to cheat on this mistress, but it was for cheating on his wife that he was officially put away.

As it is, this debt ceiling limit, not in force in a form like ours anywhere else (The EU has rules tied to percent of GDP, 60%, but never enforced with some countries in permanent violation, e.g. Belgium), is a stupid law anyway, like those laws against adultery. It should simply be ignored, the sooner the better, so as to render it irrelevant. Tea baggers may bring lawsuits, but who is going to arrest the Treasury Secretary? Will a court have the nerve to start making specific rulings about what should be cut and what should not be cut, or what taxes should be raised to meet the debt ceiling? No.

My main regret is that this charade will move us ever that closer to becoming a banana republic. But, if it comes about, it will be because we have banana Republicans in the House of Representatives.

Judgement

As Barkley reminds, the Day fast approaches. Sincerely do I hope, fervently do I pray that those who count on being raptured out of here come the 21st will indeed get their wish. But speaking of judgement, it's the grading season. My favorite exam was the one that defined "Aggregate Demand Externality" as follows: "When an increase in money demand leads to pollution."

Mad About Mahdis: Will The Hidden Imam Dis-Occultate?

I have already been too worried about the Rapture supposedly going to happen on May 21, according to Harold Camping of Family Radio Ministry, although he said this would happen once before already, and it didn't. In any case, I am glad that my wife, Marina, is scheduled to fly home from Moscow on May 22, so she won't have her pilot zooping off to heaven while her plane is halfway across the Atlantic Ocean.

But now comes the news reported by John Burgess at http://xrdarabia.org/2011/05/12/on-the-end-times-iranian-shia-version that various Iranian Shi'i clerics are being charged with sorcery for forecasting that the 12th Imam, who has been Hidden in Occultation for many centuries, will appear soon, bringing the end of the world. If they Hidden Imam dis-occultates, nobody will need to obey the government, so, wow, big surprise that the current government (already reacked by internal conflicts of various sorts) is cracking down on this sort of stuff. The good news is that apparently the Hidden Imam will only pull this trick three years after King Abdullah of Saudi Arabia dies, and as he is still alive, well, I guess we have at least three more years before this happens. Of course by then, Oct. 21 will have passed by, when, according to Camping the world will have already ended following the upcoming Rapture on May 21.

In any case, with all this sort of stuff coming up, who needs to worry about a failure to raise the debt ceiling (or better yet, simply abolish it all together)?

Is Paul Ryan Endorsing the Reagan-Greenspan Social Security Reform?

Paul Ryan’s Path to Prosperity argues:

Social Security is financed through a pay-as-you-go system, which means that current workers’ Social Security taxes are used to pay benefits for current retirees … Real reform – especially with respect to Social Security – must reflect demographic reality.

This statement may have been true 30 years ago but as Sita Nataraj and John Shoven noted:

In order to ease the burden on workers during the retirement of the baby boom generation, the 1983 Social Security Reforms set payroll taxes above the level needed to pay current benefits, thus partially prefunding the baby boomers' retirement. The military and civil service retirement programs followed suit in the mid-1980s and switched from pay-as-you-go financing to funded systems. The excess income generated by these retirement programs was held in the federal trust funds, which have accumulated almost $3 trillion since the reforms took place.

In other words, we did have real reform in 1983. Nataraj and Shoven, however, caution that focusing on the unified budget may have led the government to reduce taxes and increase spending such as we did during the Presidency of George W. Bush. Funny thing – Congressman Ryan wants to cut income taxes even further.

Speaker Boehner Claims Crowding-Out

John Boehner addressed the Economic Club of New York on May 9 claiming the recent fiscal stimulus actually hurt job creation:

The massive borrowing and spending by the Treasury Department crowded out private investment by American businesses of all sizes.

James Rowley and Mike Dorning of Bloomberg report that Boehner’s claim has been contradicted:

House Speaker John Boehner, giving Wall Street leaders his prescriptions for growing the U.S. economy and reducing the nation’s debt, built his case on several assertions that are contradicted by market indicators and government reports ... Boehner’s statement in his Wall Street speech that government spending “is crowding out private investment and threatening the availability of capital” runs counter to the behavior of credit markets. “Look at interest rates. Look at capital spending,” said Nariman Behravesh, chief economist of IHS Inc., a research firm based in Englewood, Colorado. “It’s very hard to come to a conclusion that there’s any kind of crowding out.” The cost of borrowing is low by historical standards. Yields on 10-year Treasury notes were 3.21 percent and yields on 2-year Treasury notes were 0.59 percent at 5 p.m. in New York yesterday, according to Bloomberg Data. Average spreads on investment-grade corporate bonds have narrowed from 1.64 a year ago to 1.39 on May 9, according to Barclays Capital.

It is nice to see real reporting on economic issues and the claims of certain politicians!

Blame Skidelsky For The Keynes "Central Plan" Fiasco

I have now had a chance to view the Econ Stories pieces done by John Papola with Lord Robert Skidelsky, including the one that supposedly provides the basis for the now-controversial Round Two of Keynes vs. Hayek, particularly the remark by "Hayek" accusing "Keynes" of having a "central plan." It is unclear what preceded the remarks by Skidelsky, but in the video showing him discussing the matter, with his comments interspersed with pieces from the Keynes vs Hayek video, there is no question that he asserts that Hayek was most motivated to criticize Keynes by his own fear of Soviet central planning (and his participation in the socialist planning controversy), even as he (Skidelsky) admits that Hayek never accused Keynes of being a central planner. Rather the issue was that he saw Keynes as a "thin wedge" for others who might be "let loose" to support such central planning: http://www.facebook.com/video/video.php?v=10150165612007003&=281384538984 .

What is really curious about this is that, as I commented before on an earlier thread on this, in his 2006 article, "Hayek vs Keynes: The Road to Reconciliation," which appeared in the Cambridge Companion to Hayek, 2006, Skidelsky never mentions this at all. He identifies Hayek as differing with Keynes on "where to draw the line" in government activities and also on his criticism of the "money motive." Skidelsky is clear that Hayek never thought Keynes supported central planning.

The discussion in the video is rather strange. Skidelsky is clear that Hayek never commented directly on Keynes's General Theory in print. He states that if Hayek did comment, particularly in bringing up this recently developed central planning critique, he did so "privately." In effect, he reconfirms that Hayek never made such an argument in print, although there is no question that Hayek was much involved with the socialist planning controversy beginning in the 1930s.

One item that Skidelsky seems to have missed is that during much of the 30s Hayek was working on his Pure Theory of Capital, published in the early 1940s, and reportedly viewed this as his fundamental critique of Keynes's ideas. The book did not get much attention, and it was after it was published that Hayek pretty much gave up arguing about Keynes's macroeconomics, although he would return to make comments about it later, more on grounds of its inflationary potential, again, not anything about some tendency to central planning.

Recently reported letters from the early 1930s by people on both sides of the debate also show no signs of any focus on central planning as an issue. The letter by four London economists, including Hayek, criticizing Keynesian views, focused on the role of hoarding, arguing for stimulating investment over consumption, criticizing public investment ("not a time for new municipal swimming baths"), and argued for a return to free trade from the trade war triggered by the Smoot-Hawley tariff. Not a word about central planning, even as a distant possible threat.

Bottom line here appears to have two points. One is that Papola and Roberts must be let off the hook on having put this claim by Hayek that Keynes supported a "central plan" into their video (and I apologize to them for blaming them). Of course, they did it, but it is also clear that Robert Skidelsky made such claims to them that supported what they did. What then is the final point of contention is when and where did Skidelsky come up with this view of what really bothered Hayek, given that he never said (or wrote) any such thing before, indeed appeared to specifically deny that Hayek made such an argument, and there remains no published evidence of Hayek ever making such a claim or argument about Keynes. So, let us blame Skidelsky for this fiasco of a misrepresentation of what Hayek thought about Keynes.

The Skunk At The Party -

Crooked Timber has a little Hume-fest going on with people sending their favorite quotes: David celebrates his 300th birthday today. I love reading Hume : I love the prose, that is - who doesn't? But much of what he says so charmingly strikes me as absurd.

It is Hume that we can thank - and when I say 'thank' I mean, of course, 'curse' - for the Belief-Desire Model of rational agency. The economists' very conception of rationality is his inheritance. You know the quotes - "reason is and ought only to be the slave of the passions"; " tis not contrary to reason to prefer the destruction of the whole world to the scratching of my little finger" yadda yadda. (Incidentally, Smith in the Theory of Moral Sentiments says, in effect, it is contrary to reason to prefer the destruction of the whole world - well it's an earthquake in China, actually- to a scratch on my finger).

But the thing is, if reason can't motivate without being filtered through some desire, we couldn't have an intellectual discussion, couldn't discuss the very question of whether practical reason is or is not purely instrumental, for example : if "discussion" means listening to and evaluating the arguments made, drawing conclusions from the evidence, changing one's view when confronted with an unanswerable objection- and so on. Reason must move me directly, e.g., to change my mind, to draw the conclusions that follow from what I believe - without any antecedent desire being necessary.

And don't get me started on is's and oughts!

I love The Dialogues on Natural Religion, I love the History of England. You can have The Treatise and the Enquiry, thanks. But I wouldn't have wanted to miss the former, so a grudging Happy Birthday, Davey.!

The Medicare Debate: Eliminating = Saving

The Ryan long-run fiscal plan has so many twists and turns, it is truly amazing. For starters, the Republicans are once again telling us that cutting taxes is the path to reducing the deficit. But then Paul Ryan did come up with one idea of how to cut government spending – his phase-out of the Medicare program. Of course, Speaker Boehner and other Republican leaders are realizing that if they get behind Ryan’s proposal to phase out Medicare, it will cost them politically. So they at first decided to duck and run from this idea. But ala Twitter, the Speaker wants us to know he has not abandoned the Ryan Medicare phase-out proposal:

Saving Medicare off the table? Absolutely not. Nothing is off the table except raising taxes. Tax hikes will hurt economy & job creation.

So the Ryan proposal is supposed to “save” Medicare by eliminating it! George Orwell would be proud!

Even If the Recent Slowdown in Real GDP Growth Were a Blip

David Leonhardt is rightfully concerned about the state of our economy and reports:

For the second straight year, the recovery seems to be at risk of stalling. The economy grew at an annual rate of only 1.8 percent last quarter — eerily similar to the 1.7 percent growth last spring, just when job growth started slowing down ... White House advisers and Ben Bernanke, the Federal Reserve chairman, argue that the bad news is a merely a blip caused by bad weather, a temporary cut in military purchases and other one-time factors. They may be right, too. Stock market investors certainly share their optimism: the Standard & Poor’s 500 index is near a postrecession high.

For the entirety of 2010, real GDP growth barely undone the decline in real GDP for 2009. And with zero growth for 2008, our economy is around 10% below potential GDP. So even if this were a blip and we returned to growth rates around 3% or 4%, we will be far below full employment for quite a while.

Ayn Rand and Me: Article Based on an Interview with Michael Perelman

http://michaelperelman.wordpress.com/2011/05/04/ayn-rand-and-me-article-based-on-an-interview-with-michael-perelman

Those Pesky Postwar Recessions

Well, the debate over my post on Keynes on central planning has gone viral all over the place, and I shall make no attempt to link to all of it. However, I do want to comment further on a point raised actually in Facebook debates on this by one of the makers of the video in question, John Papola. This has to do with the accusation that Keynes was (maybe) a supporter of what has been called "military Keynesianism," with the point being made in the video that unlike what lots of Keynesians supposedly said (Samuelson being provided in the debates as an example in 1943, although not Keynes himself), we did not go into a deep depression after WW II, even though there was no massive fiscal stimulus and there was this sharp drop in government spending with the end of the war.

This curiously relates to a matter that has been much argued about previously on various blogs, namely the nature of the short and sharp post-WW-I recession of 1919-20. Some have argued that this shows how wrong Keynes was, because laissez-faire was followed, including letting prices (and some wages) fall sharply in 1921, with the economy bouncing back very nicely, after having the unemployment rate soar from 5% in 1920 to 9% in 1921. Most economic historians have attributed this recession to "postwar adjustment problems."

OTOH, some of those making a big fuss about that recession somehow fail to notice that in fact there was a post-WW-II recession, if also very brief, if sharp. It occurred in 1945 with the sharpest decline in wartime spending, although not much remembered. However, the official stats have US declining in GDP by a whopping -12.7% in that year, although that number must be taken with some grains of salt due to all kinds of measurement issues and restructurings. Some say this exaggerates things as the unemployment rate only went from 1.5% to about 3.6%, a rise, but not all that much to get worked up about.

Two points. The first is that this latter event does not account for the massive decline in female labor force participation that occurred in 1945, from about 38% to about 30%. We all know (or should) that those withdrawing from the labor force do not count in the unemployment rate. That not very large increase in the UR does not disprove that there was a sharp (if short) decline in GDP. (Rosie the Riveter went home to boom out those babies, and to buy houses to be built, given that basically none had been for about 15 years in the US).

The other point, which is perhaps more cogent for the debates here, involves monetary policy. Frightened of rising inflation, the inexperienced Fed raised the discount rate sharply during 1919-20, halting doing so in June, 1920 as it became clear that the economy was plunging into recession. OTOH, the very loose monetary policy of WW II basically continued during the immediate postwar years, only finally ended with the Fed-Treasury Accord of 1951 in the face of rising inflation tied to the Korean War. So, it may well have been that the Fed was listening to Samuelson and was slow to tighten monetary policy, thereby helping to ease that postwar transition and make sure that the one after WW II was not as sharp as the one after WW I, despite the much larger adjustments that were made.

Added: For some strange reason the system is not allowing me to comment. So, I shall reply to some comments here in the main post.

To John Papola.

OK, I grant that you have "Keynes" saying "too bad" about the wartime achievement of full employment and accept that you recognize that he was a pacifist prior to WW II. In the same place he made his statement you quote he expressed optimism that full employment could be achieved after the war with aggregate demand management without interfering with individual decisionmaking.

I am not sure why you cite Higgs on reduced consumption levels due to rationing and so forth in WW II. Everyone knew about that, certainly including Keynes who discussed such matters in his "How to pay for the war," which was all about restraining the excessive aggregate demand associated with the war.

I continue to maintain that one needs to track labor force participation. Womens' participation rose at the beginning of the war above anything previously seen and then fell at the end of the war sharply. Anyone who quotes unemployment rate changes without noticing that is being disingenuous at best. I have no problem at all with tracking employment rates (percent of working age employed) rather than unemployment rates, which have always been known to suffer from these problems.

Russ,

The recession started in Feb. 1945, but went on for 8 months, with NBER giving the GDP decline as -12.7%, larger than any since, including our most recent recession. Sure, there were measurement issues and index number problems with all that restructuring, but the 2% increase in the official unemployment rate combined with the 8% decline in female labor force participation is consistent with a pretty sharp decline in GDP, if not necessarily a full -12.7%.

Did Keynes Support Having a "Central Plan"?

That he did is charged by "Hayek" in the freshly released "Keynes versus Hayek: Round 2" at http://www.youtube.com/watch?v=GTQnarzmTOc , put out by Russ Roberts and John Papola, with backing from the Mercatus Center at George Mason. Like its predecssor, it definitely sides with Hayek, but is also highly hilarious, with pretty much anybody able to enjoy Papola playing Bernanke handing out wads of cash to bankers, and some other goofy stuff, such as libertarian anarchist Ed Stringham eagerly interviewing "Keynes" after he is declared the winner in a boxing match after being knocked down by "Hayek."

However, I do find it disturbing that increasingly Austrians and some others have taken to charging Keynes with having supported "central planning," as indeed done in this video. Is this correct? I think that the answer is largely "no," with it certainly being that answer if one means by that command central planning of the Soviet type that Hayek criticized in his Road to Serfdom (which Keynes praised, btw, when it first came out).

I think the strongest evidence for Keynes supporting central planning comes from two sources, which I shall quote. The first comes from his 1920s essay, "The End of Laissez-Faire," which has been identified as the inspiration for the movement for indicative (non-command) planning that was seen after WW II in such countries as France, Japan, India, South Korea, and some other places, although not UK or US.

After noting that uncertainty can lead to inequality of wealth and the unemployment of labor, he states: "I believe that the cure for these things is partly to be sought in the deliberate control of the currency and of credit by a central institution, ans partly in the collection and dissemination on a great scale of data relating to the business situation, including the full publicity, by law if necessary, of all business facts which it is useful to know. These measures would involve Society in exercising directive intelligence through some appropriate organ of action over many of the inner intricacies of private business, yet it would leave private initiative and enterprise unhindered." (p. 318 from Essays in Persuasion)

One can argue that Keynes is offering a hopeless contradiction when calling for this "directive intelligence," probably the closest he came anywhere to command, with his simultaneous limit on that regarding leaving "private initiative and enterprise unhindered," this latter certainly not fitting with the full-blowin command socialist model at all.

Regarding the information gathering, well, of course that is now generally done in most higher income economies, and many have argued that this was the essence of the indicative planning operations carried out in many countries, when they worked at their best, as some claim was the case in France in the 1950s, when businesspeople needed some sort of external push to revive their animal spirits, to use Keynesian language, and that seeing projections of demands by others helped provide this.

The other passage that some have pointed to as possibly suggesting a central planner tendency by Keynes comes from the final chapter of the General Theory, p. 378:

"Furthermore, it seems unlikely that the influence of of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investmenet. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which publich authority will co-operate with private intiative. But beyond this no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community."

One can argue again here that Keynes is setting himself up for some sort of impossible contradiction, and Hayek may well have argued that such control of investment would lead to his road to serfdom slippery slope. However, it is clear from later passages that what Keynes had in mind was ultimately the control of the aggregate of investment rather than of its specific forms or details.

These almost certainly provide the strongest evidence for Keynes supposedly supporting there being a "central plan." But it looks at most, putting the two together, like one that involves lots of provision of information and data along with some sort of control of aggregate investment, while leaving most of the decisions up to "private initiative." This hardly constitutes a "central plan," and certainly not one of the sort that the actually existing Hayek criticized. The fictional one in the video should have spoken more carefully.

Is Donald Trump a Protectionist?

Justin Elliot reports on more hypocrisy from the DONALD:

Donald Trump has emerged in recent years as the nation's foremost China basher, going after the Asian superpower for undervaluing its currency and for taking American manufacturing and jobs ... Now, Trump has long complained about Chinese currency "manipulation" and has called for a large tariff on imports of products from China in order to bolster U.S. manufacturing. But he has also gone further, urging Americans to buy fewer products from China, claiming that Chinese goods are shoddy and maintaining that, in his own business dealings, he favors American manufacturing over Chinese manufacturing.

Trump claims he is running for the Republican nomination to be President. One would think candidates in that party would be singing the virtues of free trade as if it made everyone better off. But I would agree with Mr. Trump on the international macroeconomic issue that their undervalued currency does have at least a minor impact on U.S. aggregate demand. And no – everyone is not better off from free trade even if Chinese goods are high quality. But having just read Dani Rodrik’s The Globalization Paradox, let me suggest that Mr. Trump also read this excellent discussion so he might sharpen his questioning of the standard Republican talking points for free trade.

But I’ve left off Justin Elliot’s punch line:

So it's at least ironic -- and at most an example of gross hypocrisy -- that Trump's own line of men's wear, the Donald J. Trump Signature Collection, is manufactured in China.I discovered this after walking from Salon's offices to the large Macy's in midtown Manhattan, where an entire section is devoted to the Donald J. Trump Signature Collection of suits and ties. This particular corner of the store is decorated with an oversize portrait of Trump; the line promises to provide "the pinnacle of style and sophistication" and "the necessities to be boardroom ready all of the time."

The Census Bureau reports that we purchased almost $365 billion in goods from China last year of which over $59 billion was related to apparel and footwear. So Mr. Trump is not alone in sourcing apparel from China. And I’d never call his clothing crap even he does.

Do The Saudis Want Obama Out?

The Saudi oil minister has announced a cut in Saudi oil production, claiming that there is "too much oil on the world markets," although recent reports suggest that US inventories are plunging, http://www.commodityonline.com/futures-trading/technical/Crude-oil-surges-on-US-inventory-data-23374.html , and longer term data on OECD and global inventories falling also, http://www.eia.doe.gov/steo/#Global_Crude_Oil_And_Liquid_Fuels .

Jim Hamilton at Econbrowser argues that Saudi Arabia may be running into production limits, noting particularly that it has never gotten back to 2005 levels of production, despite much higher prices more recently, http://www.econbrowser.com/archives/2011/04/saudi_oil_produ_4.html . On Crossroads Arabia, John Burgess reports at least two more theories of what is going on, beyond the production problems story and the obviously false claim that there is "too much" oil on the market, http://xrdarabia.org/2011/04/19/saudis-too-much-oil-on-the-market .

One of these involves internal Saudi politics, that the royal family has promised large amounts of spending in the near term to avoid a serious internal upheaval, and higher oil prices now help achieve that. I note that if this is what is going on it is the first time ever that the Saudis have not viewed the danger of declining long term demand due to much higher prices as more important than short term monetary gains, although maybe they are spooked by all the uprisings, and also if they are beginning to run low they may be taking a shorter time horizon, not to mention that younger and less patient members of the royal family may becoming more influential.

The final one, which Burgess views as paranoid, is that the royal family wants to at least display unhappiness with Obama's responses to the Arab Spring uprising, if not actually wanting to bring him down, although it is clear that if oil prices soar high enough to bring a return to global recession, that is the most likely way to bring about a failure of Obama to be reelected in 2012. In any case, the royal family has been openly displeased at the US supporting the rebels in Egypt (eventually), and are even more upset at mild US criticism of Saudi intervention in Bahrain, which the Saudis view as a possible inspiration for their own Shi'a to rise up. While the Shi'a are only around 12% of the Saudi Arabian population, they are located in the oil-producing Eastern Province and have long held senior positions in ARAMCO, dating back to when it was owned by US oil majors that hired them when they were being discriminated against by the majority Sunnis of Saudi Arabia.

In any case, this is the first time ever that I have seen any officials from Saudi Arabia making statements about world oil markets that are clearly not in line with the widely reported facts. Something is up, and I suspect it is some combination of all of the above.

China to Become World’s Largest Economy by 2016 – So?

Brett Arends seems alarmed:

Under PPP, the Chinese economy will expand from $11.2 trillion this year to $19 trillion in 2016. Meanwhile the size of the U.S. economy will rise from $15.2 trillion to $18.8 trillion. That would take America’s share of the world output down to 17.7%, the lowest in modern times. China’s would reach 18%, and rising. Just 10 years ago, the U.S. economy was three times the size of China’s.

He could have mentioned that China’s population is over 1.3 billion while ours is approximately 0.3 billion. The CIA World Factbook noted that in 2010 China’s per capita income was only $7400 per year (ranking #126) whereas ours was $47,000 per year (ranking #10). One would hope that China’s growth would be such that its per capita income would surely converge to that of richer nations.

Lenovo Sucks: My Computer Held Hostage

Unbeknownst to me, my computer ended up somewhere in England, just before I have to leave town to address a delegation of Chinese visitors.

Up till now, I have had great luck with my computer. When I had a problem, I could send it back overnight, have it repaired the next day and have it come back on the following day. This time I only needed to repair a latch on the computer. I sent the computer back on Monday morning. I followed its movement to Lexington, Kentucky, where it got stuck. I was advised not to worry he was about to move again to nearby Memphis, where it was to be repaired.

UPS finally agreed to do a search for my computer. Later, they discovered that it was sitting in England. My computer then flew back to Lexington, Kentucky, not far from Memphis. My problem was that now on my problem was that now it had to pass through customs, where, UPS told me that it could take as much as a couple weeks to clear.

When I called Lenovo requesting a loaner, I got escalated up a couple levels to where I was told that the agent could do nothing more but to send a memo to somebody who was otherwise unreachable, and who would contact me sometime next week.

Obama v. Ryan on Rationing Health Care

Robert Pear reports on a controversy surrounding the President’s proposal to increase the power of the Independent Payment Advisory Board:

Mr. Obama wants to expand the power of the 15-member panel, which was created by the new health care law, to rein in Medicare costs ... Under the law, spending cuts recommended by the presidentially appointed panel would take effect automatically unless Congress voted to block or change them. In general, federal courts could not review actions to carry out the board’s recommendations. The impact of the board’s decisions could be magnified because private insurers often use Medicare rates as a guide or a benchmark in paying doctors, hospitals and other providers. Last week, in his speech on deficit reduction, Mr. Obama said he wanted to beef up the board’s cost-cutting powers in unspecified ways should the growth of Medicare spending exceed certain goals. Supporters say the board will be able to make tough decisions because it will be largely insulated from legislative politics. Lawmakers do not agree. Representative Paul D. Ryan, Republican of Wisconsin and chairman of the House Budget Committee, called it “a rationing board” and said Congress should not “delegate Medicare decision-making to 15 people appointed by the president.” He said Mr. Obama’s proposal would allow the board to “impose more price controls and more limitations on providers, which will end up cutting services to seniors.”

Paul Krugman notes:

Arguably the most important thing we can do to limit the growth in health care costs is learning to say no; we cannot afford a system in which Medicare in particular will pay for anything, especially when that’s combined with an industry structure that gives providers a strong financial incentive to engage in excessive care ... Mainly the attack is coming from Republicans, who want to dismantle Medicare, not save it — their proposal is that instead of having Medicare make choices based on expert advice, we should give seniors inadequate vouchers and let insurance company executives make those choices instead.

In other words, Congressman Ryan has an alternative rationing system – the free market. If you have little income and virtually no assistance from the Federal government, the price rationing system would basically tell you that you are not entitled to any health care services. Something tells me this is exactly the kind of society Congressman Ryan seeks. But would the rest of us agree with him if he were just honest enough to say so?

Fukushima in the last 9 days

2011 – April 20th. Japanese Government to introduce legal sanctions against those entering the 20 kilometre evacuation zone.
2011 – April 20th. Japan nuclear agency finally admits fuel has melted in reactors 1, 2 & 3
2011 – April 19th. Radiation at No. 2 spent fuel pool millions of times above normal & thousands of times higher than troubled No. 4 pool
2011 – April 19th. Chernobyl still leaking radiation. The current concrete “shield now has cracks, raising fears that 95% of the original nuclear material remaining inside the reactor could escape. Radiation levels directly over the sarcophagus are too high for the [new steel] arch to be built over it”
2011 – April 18th. Reports that hot radioactive fuel is being bulldozed into the ground.
2011 – April 18th. Hamaoka nuclear power plant must shut down. The reactors sit right above the spot where a massive Tokai region earthquake is predicted to strike.
2011 – April 18th. “"What is most serious is that even a month after the accident, we see no prospects of getting radioactive leakages under control," North Korean media reports.
2011 – April 19th. Clouds of radioactive steam rising from Fukushima reactors 1,3 and 4 at 6am.
2011 – April 18th. The Surrey Nuclear Power Plant in Virginia Forced to Shut Two of its Reactors after Tornado.
2011 – April 19th. A pair of thin robots on treads sent to explore buildings inside Japan's crippled nuclear reactor came back Monday with disheartening news: Radiation levels are far too high for repair crews to go inside.
2011 – April 18th. US Congressman Markey alleges that the head of the NRC told everyone not to write down risks they find from an earthquake greater than 6.0 (the Indian Point nuclear plant was only built to survive a 6.0 earthquake) 79
2011 – April 16th. Japan asks Brazil to ease food import rules (radiation-contaminated food). Brazil is considering the request.
2011 – April 16th. EU Raises Level Of Japan Nuclear Radiation Allowed On Ships, Cargo By 300%. Has already raised the amount of allowable radiation in food 20 fold.
16th April 2011: Japan Nuclear Radiation In San Francisco Milk Exceeds Infant Dose In Less Than 3 Gallons ….US FDA tolerates a much higher level of radiation contamination of food than does the US EPA. “FDA’s limit for Cesium-137 in a single liter of milk is 47 times higher than EPA’s annual maximum for human exposure…. There have already been allegations that EPA plans to relax radiation standards. In the wake of this conflict of agencies, expect someone to try to relax the MCL for radionuclides.”
2011 – April 17th. Breaking news on NHK at 7pm ET: Smoke/steam rising from ALL 4 reactor units — Workers evacuated
2011 – April 16th. Radiation in groundwater at the Number 2 reactor has increased 17-fold in a week
2011 – April 16th. “2 Days ago the waterlevel in no6 went down to zero (core barely covered) and the temp went up. A few hours later that data disappeared…. The waterlevel in all 3 (1, 2 and 3) reactors is much too low; the cores are "partially" exposed, meaning the upper half of the rods have melted down and the rubble is at the bottom: http://atmc.jp/plant/water/”
2011 – April 15th. Running for our lives. “so far the winds have blown most of the danger out to sea and onto the northern American continent. If the winds turn and blow to the south for any length of time it could mean curtains for Tokyo…. Life goes on as before and if you want evidence for that just look at your newspaper, Yahoo news summaries or your television to see. But sorry, that is not the truth—not true at all as a tragedy on a civilization-size scale silently falls down on us in the form of nuclear mists of fine very dangerous particles.” “Part of the world ended a month ago in terms of the total destruction of parts of northern Japan and it is true of energy production and industrial capacity, which are collapsing in Japan and around the world like dominoes….” When I saw the videos of explosions on the atomic power station in Japan I knew immediately it was a great catastrophe, and that information is being withheld on an unimaginable scale.”
2011 – April 15th. Dr Christopher Busby estimates that about 400,000 people within 200 kilometres of Fukushima will get cancer from this accident.
2011 – April 15th. Nuclear fuel has melted in three reactors at Japan's Fukushima Daiichi nuclear power plant and fallen to the lower sections of their container vessels, raising the specter of overheated material compromising a container and causing a massive radiation release, the Atomic Energy Society of Japan said in a report released on Friday.
What Really Happened Webmaster's Commentary
THE FULL ARTICLE: “Fuel in the No. 1 and No. 2 reactors has made contact with air, while the No. 3 reactor's rods have remained underwater, the group said…. Tokyo Electric Power indicated it could drop sandbags filled with zeolite into the nearby ocean as soon as Friday to help curb the spread of radioactive contaminants… Workers earlier this week transferred roughly 660 tons of radiation-tainted water out of an underground passage, but fluid flooding the area reached its original depth by Friday morning, …Contaminated water has hindered efforts to restore cooling mechanisms needed to help prevent additional radioactive material from escaping the site… A nuclear waste treatment area intended to receive the water was still undergoing inspection for possible weak points in pipelines.”
2011 – April 15th. Nuclear firm says it has no blueprint to resolve crisis. Sydney Morning Herald seems to be trying to paint a rosier picture.
2011 – April 14th. Edano forced to retract PM saying Fukushima permanently uninhabitable. Fukushima milk being sold to Japanese.
2011 – April 14th. Japan considering relocating Government out of Tokyo
2011 – April 13th. Radiation from Japan shows up in the Southern Hemisphere (Australia, Fiji, Malaysia, Papua New Guinea). “To date, more than 35 radionuclide stations that are part of the International Monitoring System (IMS) have provided information on the spread of radioactive particles and noble gases from the Fukushima accident.”
[A history of the global dispersal of radiation from the Japan nuclear emergency. 12th March – 3rd April 2011]
2011 – April 13th. First time radioactive cesium found in spinach, arugala and kale in the San Francisco Bay area.
2011 – April 12th. Japanese computer models for March 14th – 16th showed very heavy emissions of radioactive iodine and cesium. This month old assessment resulted in an upgrade of the nuclear disaster to Level 7 on 12th April 2011. Seiji Shiroya, a commissioner of Japan’s Nuclear Safety Commission said that the government delayed issuing data on the extent of the radiation releases.
2011 – April 12th. Elevated levels of radiation found in Ontario
2011 – April 12th. “It’s been a month since the 9.0 Earthquake, tsunami, and the first of a series of explosions at the Daiichi reactors. Since that time, Japan has received 980 earthquakes and aftershocks: a number so staggering that it is almost incomprehensible. Numerous explosions have occurred as well, and every day it seems the Japanese nuclear and government official reveal a little more about the true nature of the on-going tragedy at Fukushima.”
2011 – April 12th. "The troubled nuclear plant… is facing a wide array of fresh threats that could persist indefinitely, and that in some cases are expected to increase as a result of the very measures being taken to keep the plant stable,” according to a confidential NRC assessment.
2011 – April 12th. Radioactive Seaweed Detected In Puget Sound
2011 – April 12th. Secret weapons program inside Fukushima nuclear power plant?
2011 – April 11th. Strongest radioactive cloud covers Vietnam and dispersed on April 9th and 10th.
2011 – April 11th. Reporting has ceased on the dry well radiation readings of reactor number one. Have the nuclear fuel rods breached their containment core? “Japan now appears to have an abundance of radioactive sea salt that's unfortunately caked on top of the spent fuel rods and actually preventing much more water from reaching those rods. In a sense, spraying salt water on spent nuclear fuel rods is sort of like spraying them with a slow-acting insulation. It's only a matter of time, it seems, before that insulation make it impossible for water to keep the rods below meltdown temperatures.”
2011 – April 11th. Fukushima radiation taints US milk supplies at levels 300% higher than EPA maximums (figures from 2 weeks ago) + What’s wrong with the ‘science’ being used by the EPA.
2011 – April 11th. Meanwhile, a French Research Body On Radioactivity (CRIIRAD ) has broken stride with the corporate controlled media/experts and released a stern warning: “The risks associated with iodine-131 contamination in Europe are no longer “negligible.” Pregnant women and infants are advised against drinking fresh milk and eating vegetables with large leaves.
2011 – April 11th. Breaking News: New Quake Hits Japan, Fire At Fukushima Nuclear Reactor #4 Follows
2011 – April 11th. Extremely high levels of radiation in Japan. University researchers challenge official data.
2011 – April 11th. Russia to send back radioactive cars from Japan
2011 – April 11th. Yukio Edano: “"There are some places where cumulative levels of radiation are increasing depending on climate and geographical conditions, even outside of the 20-kilometre radius circle,". Japan added to the 20 kilometre evacuation zone … on Monday, as a powerful aftershock rattled the nation a month after its biggest recorded earthquake wrought devastation. The move to restricts pockets (only) beyond the current 20-kilometre evacuation area.” + The high priests of this kind of world tell us not to worry as they raise the limits of what is considered “safe” as they did in Japan—the water is now “safe” to drink in Tokyo because they moved the goal posts and raised the limits of what is “safe.” + “, the Japanese authorities have found that the areas beyond 20 km radius could be exposed to over 20mSv during the course of the next one year, approximately until next March…” 139
50 millisieverts (50,000 microsieverts) is the safety standard for evacuation. It assumes emissions are temporary. “We are discussing how best to issue evacuation orders based on data and standards for accumulative radiation.”

Abolish The Debt Ceiling!

That's my solution to the impending crisis over raising the legal US debt ceiling that threatens to shut down the US government, throwing us into many difficulties, and possibly crashing global financial markets if the US Treasury defaults on debt, thereby possibly throwing us back into a deep global recession. It is fear of political paralysis over raising the debt ceiling that lies behind the S&P's announcement yesterday of a downgrade to "negative" of prospects for US debt ratings, even though that remains AAA, which has in turn triggered Republicans like Eric Cantor to double down on demanding stronger budget cuts (really do in Planned Paranthood???) as the price for allowing another round of raising the debt ceiling.

As near as I can tell, I am the first person to publicly call for abolishing the debt ceiling, but there are very good reasons for doing so. The top is that the US is the only country in the world that I could find after considerable searching that even has one. Lots of googling only turned up a 2009 move in Germany to limit debt by its states, or Lander, although not on its federal government. A study by the Congressional Research Service, updated in 2008, made estimates of "debt ceilings" for many countries, but these were based on estimates of those countries' abilities to handle the interest payments of their debts, and the paper explicitly distinguished these artificially estimated debt ceilings from the "US legal debt ceiling" http://fpc.state.gov/documents.organization/105193.pdf . This study covered pretty much all of the high income OECD economies. Maybe Gambia or some other totally obscure country has a debt ceiling like the US does, but so far I have been unable to find a single one, much less any that have ever had one.

So where did it come from? The first such debt ceiling was imposed by Congress in 1917 at the time of US entry into WW I, when they passed the Second Liberty Bond Act, which allowed the US Treasury to issue long term bonds to fund the war effort. That initial debt ceiling involved several, each tied to different kinds and maturities of the US debt instruments. In 1939 these were unified into a single overall debt ceiling, which has been our system ever since. With the massive borrowing during WW II, the ceiling was raised by huge amounts each year. In more recent years, until now, the increases have usually been pro forma, with a total of 69 such increases since 1962.

So, this is something that people completely take for granted in the US, but for which there has never really been any good reason to have and now is clearly a major source of potential damage and trouble, with nothing good served at all by continuing to keep it. The irony is that it is especially ridiculous in a system of divided executive and legislative power such as we have, although that is probably why it was put in in the first place, to keep a war-fighting executive in line. In parliamentary democracies, if there is a profound dispute over budgets, there is a vote of no confidence, the government falls, there is an election, and the new one gets to deal with the mess. In ours, there is no fall of government if there is a breakdown between the branches as we seem to be heading towards, but we may get a politically caused financial collapse for which there is absolutely no good reason whatsoever, a weird gift from Mr. Madison's separation of powers.

So, I say, let us get rid of this dangerous monstrosity, the sooner the better. Abolish the US debt ceiling, and now!

A Laugher for Tax Day

Arthur Laffer is always good for a laugh. Sensitive to the heavy burden borne by readers of the Wall Street Journal, he bemoans the fact that the rich must employ so many people to find or develop tax loopholes. His remedy is to allow the rich to avoid taxes on capital income altogether with the flat tax.

Laffer, Arthur. 2011. "The 30-Cent Tax Premium: Tax compliance employs more workers than Wal-Mart, UPS, McDonald's, IBM and Citigroup combined." Wall Street Journal (18 April).
http://online.wsj.com/article/SB10001424052748704116404576262761032853554.html?mod=ITP_opinion_0

The Latest Effort To Mess With Social Security

Meteor Blades at http://www.dailykos.com reports that Senators Graham, Paul, and Lee are proposing to put in a phased increase in the Social Security retirement age to 70 and to also limit the benefits paid to higher income people. First of all, I agree with Dean Baker and Bruce Webb, both of whom continue to do yeoman labor pointing out the many flaws in the arguments by many commentators about social security, that there is no serious financing problem with social security.

That said, I agree with Blades that this is a pernicious proposal. Raising the retirement age will hurt minority and blue collar workers. It is also not clear that we will continue to see increases in life expectancy, with poor white women particularly showing declining life expectancy in recent stats. Yes, cutting benefits to higher income types would be progressive, but it would also undercut them being willing to support the system. If somewhere down the road (not now), a fix is needed, raising the income cap on fica would be preferable as a progressive solution.

I also note that these proposals resemble those put out by Bowles and Simpson, who co-chaired the Cat Food Commission, and which some commentators think was wonderful, although the commission never formally put anything out as a whole, due to opposition to any tax increases by the likes of Paul Ryan. Ironically, Ryan has left social security alone in his bizarre budget proposal, just passed by the House without a single Dem supporting it. He is too busy going after medicare and medicaid, while proposing massive tax cuts for the rich that mean that his budget would run even higher deficits over the next decade than the status quo. What a joke, given all the serious commentators claiming he was "serious."

"A Letter from John Ketch, Esq. Asserting His Right to the Necks of the Over-Grown Brokers." (1721).

John Ketch was the famous hangman, long-dead at the time, but John Trenchard and Thomas Gordon, the authors of the Cato's Letters published this call for the punishment of the banksters who perpetrated the disastrous South Sea Bubble. Sadly, the bankers went unpunished, beginning a long tradition.

Justice is not dead in the United States. Barry Bonds is convicted of his high crime. Our country is protected from Bradley Manning. And besides, Martha Stewart served time. The real culprits go free. Instead, the people will pay the price, while financial profits soar.

Conclusion: The Bogota Symposium on my Work

I met with the students on my second day at the University, along with my outstanding translator, who was there for me that every session, sometimes translating me into Spanish, and sometimes including my hosts into English for me. As the letter I posted yesterday suggested, they were all familiar with books of mine. They asked questions that showed a political awareness that would have been unlikely in a US, setting. Part of the interest in talking with me, was a desire to know how to respond to a transformation of the country that is underway. In addition to the impending free trade agreement with the United States and the arrangement for three military bases, the government is planning a massive reform, a word that should make any right-minded person tremble.

Presently, the country is fairly generous with students, apparently far more than United States. All this is going to cease because the program was funded with World Bank money, which now must be repaid. In addition, universities will be privatized and turned into trade schools for the extractive industries, upon which the new economic plan rests. Colombia has already been under a heavily neoliberal program. The new move smacks of a combination of absurdity and violence.


After meeting with the students, I did an interview with a magazine published by the University. My first lecture was entitled "the Crisis in Capitalism from a US Perspective." Each of the commentators based presentation on one of my books, together with their critique of my talk, as well as material of their own interest. German Umana [pardon the absence of the Spanish characters here.] Was the first commentator. I was very impressed by the depth of his critique, delivered with a vigor that seemed common among the presenters here. The professor told the audience that his daughter reprimanded him for not participating in the massive demonstration that day.

I did not know it at the time, but Blanche was there at the demonstration, taking pictures of the Army tank, but not of the helicopters at the demonstration. She was told that the show of military force was necessary to protect the demonstrators in case that the FARC would unleash violence there.

My afternoon lecture was called "The Social and Environmental Consequences of Neoliberalism." The commentator, Prof. Irma Banquero Haberlin, mostly concentrated on the environmental toll of the petrochemical industry in Colombia. Her presentation was very informative.

The next day, my first lecture was, "The Exclusion of Labor in Economic Theory." The commentator, Prof. Luis Armando Banco did an excellent job of commenting with the usual Colombian enthusiasm. He correctly used commentary to address a blind spot in my work: the condition of immigrants in the United States.

The final talk was "The Larger Theoretical Problems with Economic Theory." The commentator was Isidro Hernandez. His presentation was less political, but more on a high academic level, which I appreciated very much.

I would've appreciated the conference much more if I had not been plagued by food poisoning, which I got from eating two bites of an airplane salad. Blanche's was much worse.

Because my schedule, I saw nothing of Columbia, except the airport, the hotel, the University, and the road back to the hotel. The speakers and the students, however, offered a great deal of information. The most informative talk came from Eduardo Sarmiento Palacio [I spelled his name wrong yesterday], trained at the University of Minnesota in highly technical economics, and formerly director of national planning until criticism of the government marginalized him.

Correction: Some of the students told me that my report of the number of students in the economics program was about 140, not 340.

A letter from Bogata

I hope to write about my experience, but here is a letter to give an impression of my reception. I will be forever grateful for my encounter with these wonderful people.



http://michaelperelman.wordpress.com/2011/04/09/a-letter-from-bogota/

Probably Prosser Wins After All: The Two Wisconsin Traditions

With 14,000 missing votes from the City of Brookfield in pro-Prosser Waukesha County to the west of Milwaukee appearing late, Prosser now leads by several thousand, a pretty strong lead, if still a strong comeback by Kloppenburg from her 55-25% loss in the primary. Kloppenburg is asking for inspection of the results, and the county official in charge has strong GOP links and was accused of improprieties in a similar case in 2006 that switched the outcome of an election, but more likely than not, my recent post was wrong, even if I caveated that a recount could overturn the result (oh, and Hawthorne, I am at rosserjb@jmu.edu).

In any case, even before this apparent switch in outcomes, I wish to address the nasty remarks by Gov. Walker from before this switch. Whereas Kloppenburg said her support was due to people wanting an independent judiciary, Walker used the occasion to slam the city of Madison as being out of touch with the rest of the state, despite the large number of counties that went for Kloppenburg, and clearly the state is deeply split and polarized and will once again be a toss-up close race in the next presidential election. There are two traditions there, with neither being able to claim some exclusivity or definitive edge in support.

One of them dates from the founding of the Republican Party in Ripon, Wisconsin in 1854, with many German refugees from the failed revolutions of 1848 participating, with them being strongly anti-slavery and reflecting the principles that would appear in the later Progressive movement, initiated by former Republican President, Theodore Roosevelt when he ran as a third candidate in 1912, coming in ahead of the incumbent Taft (who pathetically won only Utah), although Wilson won the election.

As it was, Wisconsin followed this movement probably more than any other state, with its Robert M. ("Fighting Bob") LaFollette, a governor and senator (whose distant cousin serves even now as Wisconsin Secretary of State, Douglas LaFollette), becoming a main national leader of the movement and party and its presidential candidate in at least one election. His bust is in the state Capitol, and he is widely regarded as the state's greatest political figure in its history. It was he and his movement who were largely responsible for Wisconsin initiating many social programs later adopted at the national level, such as workmens' compensation, and collective bargaining for public sector workers, the latter now apparently to be ended. In any case, Robert M. LaFollette, and his whole family, were and are from Madison. It is the home and fountainhead of that tradition, which Walker mocks.

The other tradition is from the other branch of the state Republican Party, the Joseph P. McCarthy branch. That Walker is truly of that branch is seen in the demands by some of his allies to examine the emails of UW Professor William Cronon, who has criticized him and some of those around him. This matter has been blogged about here before, but it perfectly symbolizes exactly what tradition Walker is in and whose footsteps he is following in. These two traditions are clearly closely balanced in the state.

Personally, I'll take Fighting Bob LaFollette over Tail Gunner Joe McCarthy any day.

Labor Wins As Kloppenburg Defeats Prosser In Wisconsin

For those not following it, Wisconsin Assistant Attorney General JoAnne Kloppenburg eked out a 204 vote victory over David Prosser in an election for the Wisconsin State Supreme Court. Even though this thin margin might get overturned in a recount, it is great news for those who like me have seen Wisconsin as Ground Zero in the battle for worker and union rights. There are several reasons.

The most dramatic is the enormous turnaround involved here. Prosser is a longterm politician in the state who was once House Speaker in the Assembly (with the GOP in charge) and is the incumbent, while Kloppenburg is nearly unknown and never ran for office before. In the primary some months ago, Prosser was 30% ahead of her, although he had failed to win a majority. So, she came from way behind, with only a few weeks ago many saying she had no chance. Clearly this comeback reflected a huge surge of changed opinion.

Also, this changes the balance on the court, which may end up ruling on the various anti-union and worker laws Governor Scott Walker has been pushing through. Prosser was the most conservative member of a court with a clear 4-3 conservative majority, now to be switched, although it must be noted that officially the supreme court elections are non-partisan. But Prosser's Republican affiliations were well known, and he apparently served as a mentor of the new governor.

I cannot also resist noting that Walker has responded to this by blaming it all on the city of Madison, essentially claiming it does not deserve to be a part of the state. As it is, in the Madison mayoral election, previous two term Mayor, Paul Soglin, handily defeated incumbent Dave Czislewicz (sp?). The latter is reasonably progressive, but Soglin (who was a recently ex-student radical when first elected mayor in 1973) ran strongly on the matter of the recent demos in the city, and so support for him reflects this strong sentiment that has the gov so whinily annoyed, hah!

Visiting Bogotá

Our flight from San Francisco went to Houston, where we had to wait a considerable time because of delays. I happened to speak to several people were going to Bogotá for major petroleum industry conference regarding. They regarded Columbia as an important new frontier for petrochemicals.



We arrived in Bogotá where our hosts took us to an elaborate five-star hotel, where they put us up in an apartment rather than an ordinary hotel room. The hotel is a gigantic five-story complex, which probably covers two city blocks with a very large courtyard in the center, complete with a church. Blanche was told that foreign service officers used to stay here very frequently, but not so much anymore. Not surprising, quite a few of the people here are wearing apparel that show an affiliation with petrochemical industries.



We went to the University the next day to meet with the president and vice president, then went to a small auditorium, where the faculty, who already some of my books, posed questions to me. It was a very pleasant experience, except that in the course of our discussions, I learned that the country has no new petroleum deposits. Instead, the petroleum industry will use more intensive methods of extracting the remaining hydrocarbons.


I asked a group, if they knew anything about fracking. To my horror, they knew nothing about it. I showed them the trailer for gasland and the cover page for the New York Times series, Drilling Down. They were shocked at the trailer.



The economics department is quite large, with 442 students. Eduardo Samiento, an American trained economist, who was once quite influential in the country, but was somewhat marginalized after his criticism of the government became too irritating. Even so, he seems to have been able to create his own department with his own heterodox faculty, something almost unthinkable in the United States.



This afternoon, I will give my first address. I was told that people will be coming from other cities to share the address and the University expects that this will be the first time that the auditorium is expected to be filled. I will find out later how true this is, but for the moment I will enjoy the thought.



Finally, I will mention how much I enjoy the people here. The staff in the café in hotel struck up a conversation with Blanche, who told them that I was interested in environmental questions. One of them has invited me to give a talk Saturday evening to the local Greenpeace chapter. I just told him this morning about fracking, and he too was unaware. I mention him because he and another worker who of gone out of their way to procure food that would suit our the diet. In the supermarket, people routinely struck up conversations, especially with Blanche.



Regarding security, when our host took us to a shopping mall to get Sim cards for phones, the guards had to open the trunk and use dogs to check for explosives. Similarly, when I went there myself with my computer in my large fanny pack, I was checked with some electronic device.



At the same time, everybody who talks to us is curious about our own fears about security. They tell us that the elaborate security procedures are meant to put people at ease, rather than as necessary precaution. Even so, my host told us that we should be cautious about using a cell phone in public, because people snatch them whenever they see a target. At the little stand, where someone cracked our cell phone to make the sim card works, a young man came with a handful of cell phones to have some sort of work done on them.

Adam Smith on Education

I gave a talk last week at a local college called "What is living in the thought of Adam Smith and dead as a doornail in modern economics." One focus of the talk was this passage from Book V of WN:

V.1.178

In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations, frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of his stationary life naturally corrupts the courage of his mind, and makes him regard with abhorrence the irregular, uncertain, and adventurous life of a soldier. It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expence of his intellectual, social, and martial virtues. But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.

Notice the rationale for government intervention here: this has nothing to do with correcting a market failure, nothing to do with efficiency; the argument is that the great body of the people produced by a commercial society with a refined division of labor would otherwise be, as he goes on to say, "deformed in an essential part of their humanity." And this is most emphatically not education as "human capital." Tellingly, when I ask my history of economic thought students to write about Smith on the Division of labor, after we have looked at the first three chapters and the passage from which the quote above is lifted, and I ask were they any qualifications Smith made to his enthusiasm for the DOL in the opening chapters, students will cite this passage and say that here Smith is saying that The DOL may in fact make people stupid and so less productive after all!!! Obviously they have completely misread this passage. Why? They have already been so indoctrinated by their study of economics that they cannot think about what Smith thought was crucial - the way in which economic institutions shape character and preferences, for ill (as in this passage) or for good (there is lots in Smith of course about the way markets promote the virtue of prudence, eg). The further implication that one cannot evaluate economic institutions without evaluating the preference they promote or hinder is again simply unthinkable for someone who has received the standard education in economics, where the idea of evaluating preferences is a veritable contradiction in terms - since the efficient satisfaction of exogenous preferences is the sole evaluative criterion countenanced, and anyone who thinks otherwise is committing the grave sin of paternalism.

Does the Ryan Plan Reduce the Deficit and Does That Really Matter?

Douglas Holtz-Eakin praises the Ryan long-term budget proposal:

The Ryan budget would provide beneficial impacts on economic growth because it lowers marginal tax rates, controls spending, and reduces debt.

His argument that this proposal would be growth enhancing rests critically on the presumption that the reductions in Federal spending dominate the reductions in taxes.

Paul Krugman weighs in on this aspect of the debate:

Ryan is proposing huge (and largely unspecified) spending cuts; but he’s also proposing very large tax cuts, mainly, of course, for those with high incomes. And as you can see, a large part — roughly half — of the spending cuts are going, not to deficit reduction, but to finance those tax cuts. Actually, it’s even worse, since the revenue figure in the Ryan plan is simply assumed, and is clearly too high given what he’s actually proposing on taxes; so either the fall in revenue will be even larger than shown here, or there will be unspecified tax hikes on the middle class.

In other words, Holtz-Eakin’s argument rests on his belief that the Ryan plan actually does cut spending by more than it cuts taxes – even if a lot of the spending cuts are unspecified and the tax revenue projections are based on unspecified offsetting tax increases.

Oh but the National Review has a counterargument of sorts from Lawrence Kudlow:

Obsessing over the debt is not by itself a policy. Advancing the economy and setting the stage for more job creation is a policy. Mr. Ryan kept an important dose of Ronald Reagan in both the spirit and reality of his plan. Limited government, lower tax rates, and deregulation (of energy) will all promote the path to prosperity.

Yes – the same old Laugher Curve nonsense that one can cut taxes by more than one cuts government spending and still see faster long-term growth. After all, reducing national savings does not necessarily reduce investment in Kudlow’s supply-side world! After all – this worked wonders 30 years ago – right?

Our flight from San Francisco went to Houston, where we had to wait a considerable time because of delays. I happened to speak to several people were going to Bogotá for major petroleum industry conference regarding. They regarded Columbia as an important new frontier for petrochemicals.

We arrived in Bogotá where our hosts took us to an elaborate five-star hotel, where they put us up in an apartment rather than an ordinary hotel room. The hotel is a gigantic five-story complex, which probably covers two city blocks with a very large courtyard in the center, complete with a church. Blanche was told that foreign service officers used to stay here very frequently, but not so much anymore. Not surprising, quite a few of the people here are wearing apparel that show an affiliation with petrochemical industries.

We went to the University the next day to meet with the president and vice president, then went to a small auditorium, where the faculty, who already some of my books, posed questions to me. It was a very pleasant experience, except that in the course of our discussions, I learned that the country has no new petroleum deposits. Instead, the petroleum industry will use more intensive methods of extracting the remaining hydrocarbons.




I asked a group, if they knew anything about fracking. To my horror, they knew nothing about it. I showed them the trailer for gasland and the cover page for the New York Times series, Drilling Down. They were shocked at the trailer.

The economics department is quite large, with 442 students. Eduardo Samiento, an American trained economist, who was once quite influential in the country, but was somewhat marginalized after his criticism of the government became too irritating. Even so, he seems to have been able to create his own department with his own heterodox faculty, something almost unthinkable in the United States.

This afternoon, I will give my first address. I was told that people will be coming from other cities to share the address and the University expects that this will be the first time that the auditorium is expected to be filled. I will find out later how true this is, but for the moment I will enjoy the thought.

Finally, I will mention how much I enjoy the people here. The staff in the café in hotel struck up a conversation with Blanche, who told them that I was interested in environmental questions. One of them has invited me to give a talk Saturday evening to the local Greenpeace chapter. I just told him this morning about fracking, and he too was unaware. I mention him because he and another worker who of gone out of their way to procure food that would suit our the diet. In the supermarket, people routinely struck up conversations, especially with Blanche.

Regarding security, when our host took us to a shopping mall to get Sim cards for phones, the guards had to open the trunk and use dogs to check for explosives. Similarly, when I went there myself with my computer in my large fanny pack, I was checked with some electronic device.

At the same time, everybody who talks to us is curious about our own fears about security. They tell us that the elaborate security procedures are meant to put people at ease, rather than as necessary precaution. Even so, my host told us that we should be cautious about using a cell phone in public, because people snatch them whenever they see a target. At the little stand, where someone cracked our cell phone to make the sim card works, a young man came with a handful of cell phones to have some sort of work done on them.

Annals of Unscientific Economics: “....is consistent with....”

Sciences are distinctive in many ways, but they all have in common the drive to minimize Type I error. This, you will recall, is the risk of accepting a hypothesis when it is actually false, as against rejecting it when it is actually true—the Type II variety. Sciences are progressive, advancing over time, because they have systematic procedures for expunging falsehoods. Other fields of human achievement have much to offer, but they lack this particular trait. Biology in 2011 is “better” than biology fifty years ago in a way that music or politics isn’t.

If you are still wondering whether economics should be considered a science, think about all the articles you’ve read that claim to be testing theories, and where the key language is “is consistent with”. “The starred coefficients in Table 9 are consistent with the properties of equation 18", “The greater incidence of such episodes in countries in Panel A is consistent with the predictions in our model”, etc.

The long form of “is consistent with” is “we should be more willing to accept this theory because it could be explaining the data”. The short form of this long form is “rejecting this theory risks Type II error”. Remarkably, most economists think this approach is what makes economics scientific.

If you take Type I error seriously, you have to ask, does the evidence preclude any other explanation? Am I at risk of accepting a false explanation because there is another which is actually correct? In practical terms, this means two things: taking all plausible explanations into consideration and not just the one you want to support, and searching aggressively for all the elements in your data that might contradict your pet theory. This second admonition includes examining subsamples whenever feasible, for instance.

Because economics, as it is practiced, is more concerned about Type II than Type I error, it propagates and defends a vast array of dubious propositions, and there is little methodological resistance.

Not Exactly the Job Growth We Were Looking For

Mark Thoma wasn’t exactly cheering the latest employment report precisely because an employment to population ratio equal to 58.5% is still extremely weak. Kim Peterson notes one firm is about to hire 50,000 more workers:

The hiring binge is one result of the extraordinary business run McDonald's has engineered over the past few years. When the economy tanked, more people turned to the Golden Arches to dine on a budget.

We are eating at McDonald’s and not better restaurants because we are poorer. And these jobs are not exactly coming with very high wages.