A Modest Tactic for Improving Teaching

Yesterday’s lesson plan was fulmination; today’s is incremental improvement.

We—those of us who teach economics and other subjects—use exams and quizzes to evaluate students and assess our own effectiveness at reaching educational goals.  Some questions are narrow and technical, others broad and open-ended.  I want to talk about the narrow ones.

Narrow, close-ended questions are usually written to find out if the student can supply the correct answer.  The information we draw from them is whether the student “gets it” or not.  If not, and if there is enough time for it, we will go back and see if more explanation can facilitate the getting.

I propose the opposite approach: design these questions to see whether students have fallen into certain predictable errors.  If they have, unteach them.  The underlying conception behind this strategy is that the process of learning is not mainly, or at least only, that of gaining mastery over items of skill and knowledge, but also casting off false habits and beliefs.  The mind is not a tabula rasa but a messy blackboard, and if you simply try to overwrite it you will often get more mess at the end.  The critical tool is an eraser.

This is especially a problem in economics.  Students are exposed to a vast amount of information about economic topics outside the classroom, and a lot of it is wrong.  This exposure began long before they had the ability to question it, so false beliefs are often deeply embedded.  Worse, there are powerful interests operating through politics and popular media who benefit from particular misconceptions and feed them incessantly.  (Think, for instance, about why it is that most students entering their first macroeconomics class believe that inflation, by raising prices, reduces consumers’ real income—unaware that wages are also prices.)

If you want to organize assessment and teaching around error reduction, the key step is empirical.  You have to spend a lot of time listening to your students, not to find out whether they are saying what you want them to say, but simply listening to what they are saying.  What are their actual beliefs?  How do they define for themselves the technical terms you are using in the classroom?  How do they read equations, and how do they go about trying to manipulate them?  Look for errors in clusters, common pathways that lead them away from the goal you are trying to reach.  Then build the narrow questions in your exams and quizzes around what you have found, and use the results to guide your teaching in a more fruitful deconstructive direction.

A Republican Who Doubts the Laffer Curve?

Congressman David Schweikert of Arizona suggests that the payroll tax holiday will increase the deficit:

The simple fact is that this sort of temporary tax stimulus has repeatedly shown that without offsets, they only stimulate bigger federal deficits.

OK – but Republicans also want us to believe that tax cuts for well to Americans pay for themselves. The original Laffer curve was a proposition that even in a full employment economy, tax rate cuts so increase economic activity that tax revenues go up. Laffer described this in terms of reducing the wedge between the demand for labor and the supply of labor, which a reduction in the payroll tax would accomplish.

But to be fair to the Congressman – I should mention two points: (1) few labor economists ever bought the assumption that the labor curve was that elastic; and (2) we are not currently in a full employment economy. Point (2) would have us think in terms of the Keynesian marginal propensities to consume for households receiving the tax cut. If the household were very well to do, one would think the marginal propensity to consume would be low, which would lead to the conclusion that “tax stimulus” would “only stimulate bigger federal deficits”. But tax cuts for the working poor – which is what this payroll tax holiday is designed to accomplish – could lead to an increase in economic activity.

Conclusion – by any economic model, the Congressman has this exactly backwards. But what else is new?

Mankiw’s Reply to the Walk-Out

Whatever my disagreements with Greg Mankiw’s op-ed self-defense today, I appreciate that he takes his dissident students seriously and refrains from slinging labels, pulling rank or other repressive tactics.  Protesters don’t always get this treatment.

That said, I think Mankiw fails to see two ways in which his introductory course, and other mainstream econ courses, impose a worldview that makes thinking constructively about economic problems less rather than more likely.

Occupy Chico State

On Thursday morning while riding to school, the main entrance was blocked with police tape. Supposedly someone had called in a bomb threat. Later during the day, my office building was evacuated because of some kind of mechanical malfunction. Finally, a fire drill set off alarms and forced us to leave the gym. All that seemed like a series of curious coincidences.

That night I was scheduled to give a talk at the Occupied Chico State teach-in, which was supposed to be followed by a take-over of the administration building. Because of the (phony?) bomb threat, the building was locked down early.

I had intended to discuss a sequence of the Bonus March, the GI Bill, which made higher education more accessible, then Reagan's 1966 institution of tuition for the previously tuition-free university system, culminating in the mess we have today. On Friday, I gave a brief overview of the talk on our local NPR station.

Here is our unedited conversation.

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

Quote of the Day, December 3, 2011

“If you have the 1 percent saying, ‘Tax the 99 percent’ and the 99 percent saying, ‘Tax the 1 percent,’ you have a standstill.”

—Joseph Zarelli, lead Republican budget negotiator in the Washington State Senate, as quoted in the New York Times.

American politics made easy.

Not the Best News on the Employment Situation

Before we get too giddy over the news that the unemployment rate fell from 9.0% to 8.6%, we should note that the employment to population ratio barely increased from 58.4% to 58.5%. The big news really is that the labor force participation rate fell from 64.2% to 64.0%. Only hacks like Lawrence Kudlow get giddy when the unemployment rate falls because folks are no longer officially in the labor force. Most of us consider the discouraged worker effect bad news.

Also mind you that the rise in the employment to population ratio is due to the reported rise in employment per the household survey which claimed employment rose by 278,000. The payroll survey claimed an increase of only 120,000, which was really disappointing given that ADP said private employment rose by 206,000. Private employment per the payroll survey did rise by 140,000 by government employment fell by 20,000 (4000 drop in Federal employment, 5000 drop in state employment, and 11,000 drop in local government employment). As noted in my previous post the Senate Republicans wants even less government employment. Go figure.

The Balanced Budget Multiplier is Not Negative

Senate Republicans have a condition for supporting the continued payroll tax holiday:

Senate Republican leaders introduced a bill that would keep the payroll tax rate at its current level for another year. The cost is roughly $120 billion. Senate Republicans would offset most of the cost by freezing the pay of federal employees through 2015 and gradually reducing the federal work force by 10 percent.

The marginal propensity to consume for reductions in payroll taxes maybe be high but it is still less than unity. So if we reduce government purchases by the same amount as reduce payroll taxes – this proposal would be contractionary. I guess the good news here is that some of the reduction in government purchases would be deferred.

I guess in a world of PAYGO, however, we should ask how the Democrats propose to offset the loss in payroll taxes revenues:

Senate Democratic leaders want a deeper temporary reduction in Social Security payroll taxes. They would provide payroll tax relief to employers as well as employees. And they would offset the cost with a 3.25 percent surtax on modified adjusted gross income in excess of $1 million.

In other words, raise taxes on households who are not liquidity constrained which means if there is anything left to Barro-Ricardian equivalence, perhaps the marginal propensity to consume for changes in taxes on the very well to do is less than the marginal propensity to consume for reductions in payroll taxes. So if the goal is to increase aggregate demand – then the Senate Republican idea is awful whereas the Senate Democrat idea makes sense.

Morality: The Ecological Inference Problem

One further word on the hazards of assessing the moral position of a country:


The moral culpability of a population is not evenly distributed among its members. This is true in issues of war and peace as well as debt service. If one talks of “punishing” miscreants, as Merkel has done, some attention should be given to whether those being punished are the ones who misbehaved.

Unfortunately, the entire point of the bailout process is to cushion the losses of financial institutions, many of which (and many of whose high-level officers) profited by assuming excessive risk: they got the returns in the boom and now the taxpayers are stuck with the losses in the bust. Moreover, the taxpayers are disproportionately those who did not prosper in the bubble economy; ordinary working people have their taxes withheld from their paychecks and skimmed off through the VAT. The fast-and-loose crowd are shielded by unreported income, legal and illegal tax dodges and the like. True, the line can be fuzzy – low income people pay under the table too – but the balance of the burden does not correspond to the balance of the benefit.

This unfairness is a moral issue. To ignore it à la Merkel is a moral problem.

It reminds me of a saying: When the budget cuts come, we hear that it is the fat that will be cut, not the bone. Unfortunately, it’s the fat that makes the cuts.

Success and Morality in a Market Economy

There has been a lot of talk about economic success and moral virtue recently: the Tyler Cowen encomium to the morality of Teutonic creditors I jumped on yesterday, the Zingales conflation of meritocracy and justice that Andrew Gelman skewers today, and, on the other side, the complaint one sometimes hears from the 99-percenters that we are being dragged down by the greed of the other 1%.  My favorite observation on all this comes from one of the most eminent of Victorians, John Ruskin.  (Incidentally, I first came across this quotation in P. S. Atiyah's magnificent The Rise and Fall of Freedom of Contract.)

In a community regulated by laws of demand and supply, but protected from open violence, the persons who become rich are, generally speaking, industrious, resolute, proud, covetous, prompt, methodical, sensible, unimaginative, insensitive, and ignorant.  The persons who remain poor are the entirely foolish, the entirely wise, the idle, the reckless, the humble, the thoughtful, the dull, the imaginative, the sensitive, the well-informed, the improvident, the irregularly and impulsively wicked, the clumsy knave, the open thief, and the entirely merciful, just, and godly person.

I Hope “The Moral Superiority of the Germans” Isn’t Translated Into German

Merkel et al. hardly need more encouragement. But if they must read this latest howler from Tyler Cowen, let them also bear in mind:


1. The entire premise of the argument is incoherent. On the one hand, TC says he is not comparing the morality of the German people to other Europeans—that would be “false and repugnant”—but rather the “system-wide” virtues of Germany versus those of the peripherals. On the other, he judges the peripherals to be morally inferior because they wish to default on their debt obligations. But the “they” who choose to default are not systems but individuals. So, yes, this is an argument about some people being more moral than others.

2. Saving and borrowing are partly matters of choice, but also matters of circumstance. Consider, for instance, the permanent income hypothesis, which tells us that when your income rises unexpectedly you save more, and when it falls you save less—even though your preferences for saving out of permanent income remain constant. This is where the trade surpluses and deficits come in. Without adhering to any particular model of savings behavior, it is clear that Germans have had more income because of their exports (half of German income is earned in the export sector), and countries with trade deficits have, for this reason, lower incomes. Of course, net savings and the current account are two measures of the same thing.

3. Even worse is the claim that default is simply a matter of choice—that those who propose defaulting on debts are less moral than their creditors. Except for Greece, loans taken out by public and private borrowers were generally in good faith. The economic catastrophe that decimated their finances was unanticipated. You could say they engaged in poor judgment by not taking the risk of such a catastrophe into account, and you would be right, but this verdict applies equally to the lenders. It is simply foolish, for instance, to say that, if interest rates remain at their current level, Italians are “choosing” to default. At 7% they have to pay 8.5% of GDP just to roll over, and the economic shrinkage this implies would raise that share year after year. Yes, Italians have assets, but if they sell them so that the state can tax the sales and redirect the revenues to debt service, then the returns on those assets will no longer accrue to Italians, and we are back, more or less, at the same point.

4. To sum up, the injunction to honor debts is like a lot of other obligations in this world. You should provide for the needs of your children. You should return your books to the library on time. If I lend you my car, you should avoid having it damaged in a collision. If you can do these things you should. If you can’t it depends on the reasons. Throwing poor parents into prison because they don’t give enough support to their children is neither good morality nor good economics. Same with people who get sick, can’t go out, and have overdue library books. Same with someone in a borrowed car who ends up in the middle of a giant crash. If the real estate market crashes in Spain, and the government is forced to step in to prevent a financial meltdown, what is the morality or economic sanity of demanding that the people of Spain be punished and forced to undergo a generation or more of austerity?

Quote of the Day

"....distributive justice without participative justice can only ever be coincidental."

W. Neil Adger, Jouni Paavola, Saleemul Huq and M. J. Mace, Fairness in Adaptation to Climate Change (MIT Press, 2006)

The Genealogy of Occupation

Much has been written recently on the question of where the Occupy Wall Street movement came from. The assumption seems to be that it represents a new manifestation of the counter-globalization ethos that first showed up in Seattle, 1999.

In some ways this is true, but the actual tactic, camping out, looks to me like an evolution from the tree-sitting strategy of radical environmentalists. Forget about Facebook and Twitter: this is the REI generation, and they want to climb and bivouac their way to liberation. It really makes sense when you think about it. To transgress the landscape of capitalist property rights, you need the proper gear. The only anomaly I can see is that pepper spray is being used against the campers, not by them.

Footnote: It might be argued that the starting point was really Greenpeace, which drew on small craft culture for its maritime adventures. Having noodled around in both outdoor and boat equipment shops, I think I can say that they represent two rather different slices of humanity, and the probability of crossover was slim. Of course, Greenpeace was also practicing urban mountaineering around the same time as Earth First was exploring the canopy zone.

The Problem with Pop Economics, Paul Seabright Edition

Maybe you’re in a hurry, so here is the problem in its general form: most of the reading public, even most of the fairly well-educated reading public, have little exposure to mainstream economic reasoning.  If they ever took an econ course, they did not come away with a durable understanding of opportunity costs, markets as cost-benefit algorithms and coordinating devices, market failure, etc.  This means there’s always an audience for a book that packages these rather standard ideas in a clever, unexpected or cool way.  Unfortunately, underneath the ribbons and shiny paper, it’s the same old same old.

Quote of The Day

I am currently making my way through Hume's History of England - a pure joy - and ran across a quote to share. In his discussion of the 1640 Long Parliament and the execution of Lord Strafford, he has this to say about the Puritan leaders Pym, Hambden and Vane:

Some persons, partial to the patriots of this age, have ventured to put them in a balance with the most illustrious characters of antiquity; and mentioned the names of Pym, Hambden, Vane, as a just parallel to those of Cato, Brutus, Cassius. Profound capacity, indeed, undaunted courage, extensive enterprize; in these particulars, perhaps the Roman do not much surpass the English worthies: But what a difference, when the discourse, conduct, conversation, and private as well as public behaviour, of both are inspected! Compare only one circumstance, and consider its consequences. The leisure of those noble ancients was totally employed in the study of Grecian eloquence and philosophy; in the cultivation of polite letters and civilized society: The whole discourse and language of the moderns were polluted with mysterious jargon, and full of the lowest and most vulgar hypocrisy.

Some Like it Hot. So What?

In the world of climate economics, Richard Tol is a major name.  If his most recent post on the topic is any indication, he should pick another line of work.  Tol points to the desire of many people, including some of his economist colleagues, to move to warmer locations as “revealed preferences for climate”.  His final paragraph hedges a bit, but leaves the impression that the sunbirds are telling us something about policy:

Obviously, one cannot compare the individual impact of moving to a warmer climate with the impact of global warming, but at the same time it is clear that both Dublin economists specifically and intra-European migrants generally do not object to a warmer environment.

Yes, people move to warmer climates.  They lie under sun lamps and bake in saunas.  Thermo- and phototropism have nothing to do with the risks of climate change, of course.  The major risks are:

• sea level rise that inundates, or ravages with storm surges, coastal areas that are home to much of the world’s population

• the extinction of species that cannot adapt at the rate at which their environment is changing

• an increase in the frequency and severity of severe weather events

• the loss of water storage in glacial formations

• shifts in rainfall patterns that could subject more regions to drought, fire and other hazards

• loss of agricultural productivity in tropical and many temperate regions

• and above all, the potential for positive feedback mechanisms (release of methane from peat bogs, permafrost and clathrates) that could trigger runaway, catastrophic increases in atmospheric carbon concentrations.

Personal preferences for a few degrees of temperature more or less have nothing to do with it.  Tol seems to be another poster child for the tendency of economic expertise to coexist with appalling ignorance about just about everything else.  Is economics worse this way than other fields, or am I just more sensitive to it because it rubs off on my reputation as well?

Montserrat Figueras

This extraordinary singer died a few days ago at the age of 69.  She had it all: purity of tone, deep personal expression, the ability sing in a vast array of styles, from Arabic and Sephardic to medieval to opera to folk song.  If you haven’t heard El Cant de la Sibilla, her recreation of a medieval religious incantation, or Ninna Nanna, her complication of lullabies from around the world and across the ages, you are missing something wonderful.

She was one of a kind.

Critique of the Political Scene Today?

As faction is the effect of that loose government which is unavoidable in a time of war and trouble; so, while faction is suffered to continue, it is a perpetual bar to better administration; for it emboldens the bad, and terrifies the good. Is a lunatic, whom the physician cannot approach without danger to himself. Some statesmen, therefore, when it rages high, withdraw from affairs, and will not administer the physic of their councils till the fit is over.

--Charles Davenant. 1698.

Is The Italian Crisis A Possible Self-Fulfilling Prophetic Negative Bubble?

Many observers are declaring Italy to be the key to whether the euro will collapse and along with it possibly most of the world economy. Having removed the near term problem from office, Silvio Berlusconi, the markets are not satisfied with the appointment of respected economist technocrat, Mario Monti, to replace him, with bond yields continuing to rise, thus threatening to bring about a crisis. What is it that Monti is or even can do to stop this?

Quite likely not a damned thing. Looking at supposed fundamentals, there should not be a problem with Italy. It is one of only four Eurozone nations that is currently running a primary budget surplus. The others are Luxembourg, Belgium, and Germany. Where is the problem?

Well, some say, aha!, look at the national debt to GDP ratio, a too high 120%. However, not only has Italy had a ratio such as this for a long time, and even been higher prevously, such as in the early 1990s, it has a much higher share of its debt domestically held, Italy has a much higher savings rate than most European nations (on the order of 17%). This would explain the NY Times story today that as long as Italians continue to hold their own debt, the euro will be saved.

What about proposals being made in Italy? One is that the retirement age be raised from 65 to 67. Maybe this should be done, but again, Italy has a primary budget surplus, and 65 is higher than quite a few other European nations have as a retirement age. And if such a "reform" is passed, it will have little near term impact on the budget balance, although maybe doing so will induce that magic effect of "raising confidence," thus bringing down the interest rates.

The other is labor market reforms, particularly to open up various professions to more entry and competition. This will be hard to pass, but I think there may be reasons for doing this, and this may well help increase the growth rate, which has been low for a solid decade, and needs some stimulus, however achieved. But, again, this is not likely to affect the budget balance at all. Why this would bring down overly high interest rates is also very unclear aside from hoping for the "confidence fairy" to suddenly appear.

That the confidence fairy has not appeared with the removal of Berlusconi is disturbing. It looks increasinigly to me that these high interest rates are simply a self-fulfilling negative bubble on Italian bonds unjustified by any actual fundamental phenomena. Even with the high interest rates, most reports suggest that Italy can manage to avoid any defaults for at least another year. It is not Greece, or even the less troubled Portugal, Ireland, or Spain. It is basically solvent. The only real threat is the high interest rates, apparently existing because of the fear of what high interest rates can do, a possible self-fulfilling prophecy, an empty, if still dangerous negative bubble.

In Politics, Let No Mean No

The recent elections in Spain point once again to a flaw in the voting procedures of all supposedly democratic countries: they prevent citizens from expressing what they actually think in the voting booth.

Do you suppose there was a sudden outpouring of love for the Spanish right?  More likely, there was an outpouring of disgust for the Socialists and the economy-without-a-future over which they preside.  The ballot, however, did not offer the opportunity to vote against the party in power, only for the opposition.  Thus the conservative Popular Party will enter government with what it claims is the support of the majority, when the reality is that is probably has less support than it had at the time of the previous election—which it lost.

There is a simple solution: provide voters with the option of either voting for a candidate or party, if they want to express support, or against a different one if they want to express rejection.  The final tally would be the number of votes for minus those against.  In a two party/candidate race the final result would be the same.  In a multi-party race, voters would have to think strategically about whether their feelings are more concentrated for or against any particular alternative.  In either case, you would see clearly the extent to which democracy was working, in the sense of producing a government that citizens actually support.

My guess is that, given a negative option, the people of Spain would have delivered two verdicts, one against their current rulers and the other, only somewhat less intense, against their future ones.  They should have had that chance.

Lessons for the Eurozone from US Fiscal Federalism

If the euro disintegrates because of a failure to take short-term measures needed to support it, we won’t have to worry about long run governance issues.  Just in case the e-zone gets through the immediate crisis, however, here are a few thoughts based on US experience.

A Business Cycle Theory Suitable for a Parallel Universe

I just glanced at Tyler Cowen’s model of a Eurozone downturn and noticed there are a couple of minor elements missing—the trade imbalances between the surplus and deficit countries in the period leading up to the financial crisis, and the financial crisis itself.

That’s right: Cowen explains the current Euromess without any reference to what transpired in 2008.  Imagine how much worse it would be if the crisis that actually happened actually happened.

Education with a Twist—An Oliver Twist

Let’s let the newt speak for himself:

You say to somebody, you shouldn’t go to work before you’re what, 14, 16 years of age, fine. You’re totally poor. You’re in a school that is failing with a teacher that is failing. I’ve tried for years to have a very simple model. Most of these schools ought to get rid of the unionized janitors, have one master janitor and pay local students to take care of the school. The kids would actually do work, they would have cash, they would have pride in the schools, they’d begin the process of rising.

I don’t know what your reaction was, but the first thing that popped into my mind was, why take it out on the janitors?  If the school was failing it wasn’t their fault.  According to Gingrich, it’s the teachers who can’t make the grade.  So why not put the kids to work following lesson plans, going over last year’s standardized tests, etc.?  There would be as much pride in this as in cleaning toilets.

But let’s not get hung up on details.  Isn’t it nice having a historian running for president—someone who knows what was really good about the good old days?

Piggy No. 3: German?

Speaking of Germany and economic virtue, here is a question about the Walt Disney classic, Three Little Pigs. Take a look at the third little piggy, the one who builds his house of bricks.  He wears overalls.  In American pop culture circa 1933 (the date of the cartoon’s release), only farmers and Germans wore overalls, and I don’t see a farm.  Also, the first two piggies play the flute and fiddle, while No. 3 has a piano with sheet music.

Am I reading in too much?  (I do not see the framed portrait of dear old dad as a string of Würstchen as a corroborating clue, by the way.)

The German Obsession with Inflation

As a footnote to the previous post, here is an observation about the German obsession with inflation.  Media accounts always bring up the hyperinflation of the 1920s and its supposed role in ushering in the Third Reich.  This is bad history: a decade transpired between the inflationary madness of 1923 and the handing off of the chancellorship to Hitler.  That trope should be buried once and for all.

More generally, while the experience of the ‘20s is invoked by Germans themselves, I think it’s little more than a convenient rationalization.  Most Germans are generations removed from this era; it has as little relevance for them as, say, the great Mississippi flood of 1927 has for those living along its banks today.

The real reason is that Germany is a country of savers.  The savings rate is high, and savings are distributed broadly.  Saving is valorized by the culture; you could argue that it is seen as the greatest virtue of all, above courage, generosity and all the rest.  It is an act of self-denial that looks to the future—one’s own and that of the generations to come.  To have savings is to be free.  Germans see the capital stock of the country as the product of their own savings, and to a large extent they are right.  The mass savings institutions, the Sparkassen and the Postbank and savings banks, constitute the bulk of German finance.  Germany is a savocracy.

The great threat to savings is inflation.  Long before hyperinflation destroys savings altogether, modest inflation chips at their edges.  Policies that permit inflation to increase penalize savers, and this makes them immoral, since saving is the epitome of morality.  Better to allow your economy to go down in flames than to resort to the wickedness of the printing press; at least, in the rubble, you will have your savings to draw on.

Among other things, this perspective fails to take account of where savings come from.  Yes, they come from choices people make, but they also come from the income that make those choices possible.  Cut someone’s salary in half, and no matter how virtuous they are, their savings will take a hit.  And a significant part of German income derives, directly and indirectly, from its trade surplus with debtor countries like the Eurozone peripherals and the US.  In other words, the virtue of savings is inseparable from the vice of debt.  Simple accounting identities require this to be true, but it to point it out is to remove yourself from respectable public opinion in Germany.

Of course, it’s easy for me to see this as an American, the product of a massively indebted society buffered by the exorbitant privilege of minting the world’s currency....

The Power of One

European institutions, including the Eurozone, remain treaty organizations whose members are sovereign countries.  This is why important policy decisions have to be unanimous.  As a result, we have heard the lament that small, wayward countries have an unwarranted veto power and can hold everyone else hostage.  You know, the Finns, the Slovaks and their ilk.

In fact, the small and weak do not have this power.  If they try to throw sand in the gears, they will be put in their place one way or another.  A country like Finland, for instance, is simply too vulnerable to political and financial pressure to try to dictate Eurozone policy single-handedly.  Was anyone surprised when the True Finns, a party that campaigned on xenophobic nationalism, backed down and allowed the latest Greek financing package to go through?

The real threat to multilateral institutions has always been the veto power of the strong.  This is true of the US within the UN system, and it is increasingly clear that it is true of Germany in the current euro fiscal crisis.  As the moment of reckoning draws near, and as the need for a true lender of last resort to backstop euro-denominated credit becomes inescapable, one after another, the members of the zone are falling into line and demanding that the ECB mature into a real central bank.

Everyone except Germany.  Angela Merkel draws her line in the sand: “If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen.”  Hans-Werner Sinn, an economist whose every pronouncement is accorded scriptural authority, spits out the epithet “printing press” six times in a recent op-ed demanding that the ECB remain neutered.

In a nutshell, the German position is that any risk of inflation, no matter how small the inflation or the risk, outweighs the possibility of a financial meltdown resulting from a shortfall of euro liquidity.  If a country undergoes a run on its banking system or sovereign debt (typically connected), it is a sign of profligate living, and the specter of default is needed as an incentive for “reform”.  This attitude—and it is simply an attitude, not a rational economic argument—is the proximate reason why the global economy is on the brink.

So Germany, the biggest, strongest, richest country in the Eurozone is the rogue state, exercising its veto in increasing defiance of world opinion.  Forget the True Finns; the parties whose absurd demands are threatening to plunge Europe, and the rest of us, into crisis have names like the Christian Democrats, the Free Democrats, the Social Democrats and the Greens.  Will any of them start to crack before it's too late?

Strike at California State University

Two of the campuses of California State University are striking today. The timing of the strike is unfortunate, coming at the same time as fees are raised once again almost 10%. The union realizes that pay raises are a small part of the overall abuse of higher education in California, but strikes are only permitted in opposition to the contract with University system. Chronic underfunding began during the first term of Jerry Brown, when the passage of proposition 13, frightened him. Not only is the administration grossly overpaid, its management style is arrogant and heavy-handed. Finally, the gutting of public education at all levels means that students come to the University underprepared and, more often than not, lacking the funds to pay for their education. Not only do they fall under a heavy debt burden, they work too many hours after school in order to focus on their education. To add insult to injury, all of us have to listen to public figures telling us how our economic future depends upon educating young people, presumably without any tax burden unless such funds are directed to hedge funds engaging in charter school scams.

Väsen

I’m slow to get up this morning after a concert last night by this great Swedish folk group.  They played in an ancient church—great acoustics—in the tiny village of Freepsum in northwestern Germany.  Although they’ve been together for 22 years, this was the beginning of their first German tour.  (“We’ve had a lot of time to practice”, said Roger Tallroth, the guitarist.)

On stage, the core of Väsen is Olov Johansson, who plays the nyckelharpa–like its name says (in Swedish), a stringed instrument with keys.  He flies through complex runs in the dance tunes and produces a resonant tone for the slow airs.  While a few of the pieces they played were traditional, most were composed by one of them, especially the fiddle player, Mikael Marin.

Väsen’s virtuosity is exceptional.  Their sound is rich with harmony (think Ravel), even when they are blasting away at high-tempo polkas.  Toward the end of the night they started to fool around, and this was good too.  Lucy in the Sky with Diamonds mixed in with 18th century Swedish fiddle standards—why not?

They will be returning to the US in a few months, playing the Wintergrass festival in Bellevue in February and other events.  Not to miss.

Paperback version of The Confiscation of American Prosperity

I am writing a first draft of my introduction to the paperback edition of my book. Any feedback would be very much appreciated.

The Confiscation of American Prosperity: From Right-Wing Extremism and Economic Ideology to the Next Great Depression first appeared in October 2007, just as the stock market was peaking. Judging by the public pronouncements by economists and the business press, the economy appeared modestly healthy before the breakdown of the subprime mortgage market. In fact, the weakness of subprime mortgage market was a symptom of deeper problems that had been eating away at the economic core.

In addition to a diagnosis of these deeper problems, such as growing inequality and an emphasis on financial activities, rather than more productive economic endeavors, the book offered a historical analysis of the willful gutting of the economy that occurred over the last four decades. The Confiscation of American Prosperity presents this history in the form of a crime story, beginning with an accounting of the economic plunder engineered by a small part of society, with the complicity of both political actors and many, if not most, economists. The second part of the book describes the way that this group was able to carry out the theft of enormous wealth. In the tradition of crime stories, the third part of the book examines the expected retribution. The final section addresses the incompetence of the economists, who should have acted as policeman while the plot was unfolding.

The recent protests of the Occupy Movements indicate a deeper understanding of the crime than either the business press or the economic analysis following the meltdown of the financial system. The protesters correctly realize that many of the most serious perpetrators have escaped from the crisis without retribution. Their outrage might contribute to some modest retribution, but the expected retribution discussed in the book will come from more serious economic disruptions that are all but certain, without addressing some of the economic imbalances created by the crime. Of course, the economy can begin showing signs of health once again, but sooner or later the imbalances will take a serious toll on the economy.

Historically, economic crises do tend redress some imbalances, but political mobilization is also an important element in returning to a more healthy balance. One can only hope that such mobilization will be effective enough to prevent another Great Depression.

The Moral Philosophers' Stone: A Compleat History of 'A Certain Quantity of Labour to be Performed.'

In the past couple of weeks, the Sandwichman has uncovered not one but TWO previously unheralded milestones in the history of "best-known fallacy in economics". The first is a erudite defense by an accomplished first-generation political economist, Rev. Thomas Chalmers (1820), of the proposition that "there is a certain quantity of work to be done; and this quantity, generally speaking, does not admit of being much extended, merely on the temptation of labour being offered at a cheaper rate..." The second is a spirited plea by Dorning Rasbotham, Esq.(1780) for the use and encouragement of machines that attributes to "some persons staggered by this argument" the false view that there is only "a certain quantity of labour to be performed."

Ecological Headstand has commenced a series on "The Moral Philosophers' Stone: A Compleat History of 'A Certain Quantity of Labour to be Performed.'" The antiquity of Rasbotham's fallacy claim and the cogency of the Chalmers proposition suggest the persistence of the former as a pre-analytical, essentially pre-industrial fossil, petrified by ad hoc explanations.

Discipline, Hard Work and Obscene Wealth

It’s taken a day for this to settle in, but I find myself to be really embarrassed on Tyler Cowen’s behalf.  Yesterday he published a New York Times op-ed on the subject of why American’s don’t revere the rich, even though riches are usually the result of discipline and hard work.

Put aside his indirect reference to Steve Jobs (“earning money through production for consumers, as Apple has done”).  Rightly or wrongly, Jobs was admired because he brought industrial design values—beauty arising out of function—to high-tech products; he seemed to be as much an artist as an entrepreneur.  Over at Microsoft, Steve Ballmer has a work ethic second to none, and he will die a very rich man, but I doubt there will be much public outpouring of grief.

Let’s get to the core issue.  Assume there are four individuals, A, B, C, and D.  A and B are at the struggling end of the working class, C and D are rich.  A and C have only an average attachment to work and self-discipline; B and D drive themselves to the limit.  Suppose their annual incomes look like this:

A: $20,000
B: $30,000
C: $200,000
D: $2,000,000

If you had a lot of observations like this, and if you could somehow measure “work ethic”, you would find a healthy coefficient on it in an income regression.  But what would this have to do with the popular revulsion against an income distribution so skewed to the top?  The problem is not that there is a return to hard work, but that the return is so obscenely large at the high end and so small at the bottom.  Think of that old Jesse Jackson speech:

I know they work. I'm a witness. They catch the early bus. They work every day. They raise other people's children. They work every day. They clean streets. They work every day. They drive vans with cabs. They work every day. They change the beds you slept in these hotels last night and can't get a union contract. They work every day. No more. They're not lazy. Someone must defend them because it's right, and they cannot speak for themselves. They work in hospitals. I know they do. They wipe the bodies of those who are sick with fever and pain. They empty their bedpans. They clean out their commode. No job is beneath them, and yet when they get sick, they cannot lie in the bed they made up every day. America, that is not right. We are a better nation than that.

What does it mean when someone can see the self-discipline of the millionaire but not the double- and triple-shifts of the working poor?  Like I said, I’m embarrassed for Tyler Cowen.

OWS and its “Leaders”: A Lesson from the 60s

To a large extent, the New York Times sets the news agenda for American journalism.  Today’s Times backgrounder becomes tomorrow’s conventional wisdom throughout the broadcast media and the regional press.  So we should take notice when Arthur Brisbane, the Times’ “public editor”, writes of Occupy Wall Street

An investigation into origins would lead to the identities of early leaders, at least, and the search for the broader leadership of the movement should continue from there. I polled a group of journalism educators on the question of how The Times should direct its coverage henceforth. Not all agreed on this, but most said it was important to understand who the leaders were and what demographics they represented.

This brings me back in time, to the late 60s and early 70s, when another largely formless movement was making itself felt in America.  On the ground, this radical upsurge was composed of affinity groups, underground newspapers, community storefront projects and streetcorner networks.  It had a visceral distrust of leaders and authority, of having others speak for you.

Nevertheless, a pathological symbiosis developed between the media and a relatively small number of movement self-aggrandizers.  The ambitious would-be leaders discovered that they would be anointed by the media as long as they adopted ever more outrageous postures and rhetoric, and the media found that by focusing on them they had a story they could cover in a convenient, template-satisfying way.  Unfortunately, that was not all.  Because the movements of the time had weak institutional structures, they ultimately depended on media coverage to attract new recruits and hang onto old ones.  Thus, when “leaders” like the Weathermen and the Black Panther Party flamed out, they sucked the rest of us down with them.

But here’s the thing: neither I nor anyone I knew in this movement chose these “leaders”, nor did we feel represented by them in the slightest.  Our story, whatever it was, had little to do with its representation in the media.  We were seeking something completely different, but this quest was cut off and even our memory of it was gradually erased by years of repetitive, fixated discussion of our Promethean but, alas, flawed “leadership”.

Lessons?  They are partly about the role of the media in refashioning social movements so they fit the standard journalistic model of who they are and how they should function.  Even more, they are a warning to the movements themselves, that they have to give thought to their own self-defined structures that convey who they are, what they believe, who is permitted to represent them, and how new recruits can join in.

Naomi Klein on the Politics and Economics of Climate Change: Hit and Miss

Klein got her start, at least outside her native Canada, as a cultural critic in the wonderful book No Logo.  Since then, with each project she has dipped further into economics, with a weird bifurcation: her political and cultural analysis has become even more insightful, but her understanding of economics has not kept pace.  This was a problem in The Shock Doctrine, and it is a problem in her missive on climate change on view in the current Nation.

A first time investigation of the architecture of the international ownership network

It seems incredible that any economist, as late as this year, would claim that for the very first time in history there has been performed an investigation into the network of owners of global capital. But that is indeed what authors Vitali, Glattfelder and Battiston state in the opening paragraph of their abstract entitled 'The network of global corporate control'.

“The first investigation of the architecture of the international ownership network is presented, along with the computation of the control held by each global player. We find that transnational corporations form a giant bow-tie structure and that a large portion of control flows to a small tightly-knit core of financial institutions. This core can be seen as an economic “super-entity” that raises new important issues both for researchers and policy makers… network control is much more unequally distributed than wealth. In particular, the top ranked actors hold a control ten times bigger than what could be expected based on their wealth…”

"...nearly 4/10 of the control over the economic value of TNCs in the world is held, via a complicated web of ownership relations, by a group of 147 TNCs in the core, which has almost full control over itself. The top holders within the core can thus be thought of as an economic “super-entity” in the global network of corporations. A relevant additional fact at this point is that 3/4 of the core are financial intermediaries...."

The implications are mind boggling. How incredibly fragile must the global economy be when such an incredible lack of diversity of enterprise (and therefore also of intellect and strategic resilience) are present.

It is possible to see our world now facing very serious global trading and current account imbalances due to these enormous organisations having moved their gigantic 'enterprises' into pockets of cheap labour, land and currencies to gain an artificial economic advantage. As one big TNC after another diversifies into many enterprises there is a simultaneous loss of diversity for the economic system as a whole. This problem escalates when TNCs combine strategies through global networks. It's not surprising that vast portions of world trade have long metamorphosed into non-trade intracorporate transactions.

Major Economic Reporting Breakdown at the New York Times

I sometimes carp about minor missteps, but this is big.  In a front page “explanation” of how the eurozone got into a sovereign debt crisis, there is criticism of myopic banks, lax regulators and spendthrift peripheral governments, but no mention of the fundamental underlying cause, the swelling imbalances between surplus and deficit countries in the currency union.

The Times reporters and editors need a refresher in introductory economics.  The fundamental identity that connects financial balances to a country’s international position is

BP + BG ≡ CA

where BP is the net savings of the private sector (income minus spending for households and firms), BG is the government's fiscal surplus or deficit, and CA is the current account balance (mostly trade).

Over the decade of the 00's, the peripheral countries were running ever larger trade deficits with the core countries, especially Germany.  At first these deficits were financed by private sector borrowing, but after the financial crisis hit private sector leverage froze, economies contracted, and governments stepped in to do the borrowing themselves.  Before 2008 the problem was too much borrowing in real estate, banking and other sectors; after it was too much borrowing by the government.  Yet, as long as the trade imbalances grew, one or the other was unavoidable.

(From a macro identity point of view, if governments had not increased their deficits post-2008, incomes would have collapsed.  This would sustain the identity by curbing imports on the right hand side, but would have allowed an economic freefall.)

So the real story, the one that the Times should have told, is about how the imbalances grew, why few noticed, and how the eurozone framework, with its utterly irrelevant “Stability and Growth” criteria, was unable to cope.

Skip the Times and get your news and views from the econ blogosphere.

Footnote: Nothing Greece and Italy do by way of budget policies or “reforms” can solve their sovereign debt problems.  They might as well sacrifice goats to the gods.  The only practical significance of the current political drama is that it will or won’t persuade the core countries to open the liquidity spigots, write down debts and resolve the banks.

Moral Mythology and Economic Reality in the Eurozone

What more is there to say?  Europe is on a precipice, political as well as economic.  Eurozone leaders think they have time to slowly habituate their constituencies to incrementally greater commitments, as if we didn’t know from centuries of experience that financial crises descend with terrifying speed in the form of bank runs, panicked asset dumps, and other spasms of runaway positive feedback.  Greece, Portugal, Spain and Italy will not edge gently toward insolvency; one or more of them will undergo a sudden phase change, and the game will be up as soon as it has started.

And incantations of austerity and reform are pointless.  Simple arithmetic demonstrates that the peripheral countries cannot pay their way out of debt through primary fiscal surpluses: at current real interest rates and debt loads it just can’t be done.  Moreover, fiscal tightening throughout the zone can only lead to a severe recession, and as indicators of the slump materialize the panic dynamics will intensify.

Worse, the “reform” imperative—the demand that deficit countries privatize and deregulate—is punitive nonsense.  Politics in the surplus countries seems to demand that there be a story about wayward prodigals to the south who must be stripped of their comforts and put to the yoke.  Put aside this morality tale and there is no economic logic whatsoever.  There is no theoretical or empirical reason to believe that Greece, Italy and the rest are in deficit because they have too much public employment or their workers have too many rights.  (Where there is corruption and clientelism, any sort of employment, public or private, can be uneconomic.)  In fact, those who want to force-feed these reforms, with public displays of abject political submission to them, have never even tried to make this case.  There is no argument to critique, no evidence to rebut.  “Reform” is not a rational economic program for restoring trade balances; it is about exacting a cruel price on entire populations so that bailouts come with a quid pro quo.  Receive a transfer and you must sacrifice.

Of course, the bailout funds go directly to the creditors, mainly private banks, so even this attempt at moral equivalence is beside the point.

Eurozone policy, and most journalistic coverage of it, is in a parallel universe of virtue and vice, benefactors and supplicants, industrious and indolent, modern and honest versus traditional and corrupt.  It satisfies a craving for moral order.  Unfortunately, the real universe is about to crash into it and smash it to pieces.

Only Once In A Century: 11/11/11/11/11/11

At eleven seconds past eleven minutes after 11 AM this Friday, November 11, 2011, the time/date in succeeding digits will be for the only time this century a sequence of a single digit repeated a dozen times, 11/11/11/11/11/11. Enjoy it while it lasts.

Since the century began on 01/01/01 (no year zero, 2000 was indeed the last year of the 20th century), I have been thinking about those once a year days when one has the same two-digit number repeated three times for the date. There will be one more of those next year for this century on 12/12/12. I think the only one of these that got much attention was 07/07/07, which somehow became a faddish day to get married, one of my faculty colleagues (not in my dept) doing so then.

While thinking about this upcoming event this year, I was thinking about the fact that it was the old Armistice Day and remembered hearing when much younger that the armistice that ended WW I between France, Germany, Britain (and its empire), and the US was signed on "the eleventh hour of the eleventh day of the eleventh month" in 1918 (the war went on for several more years in some other locations). This got me thinking about time as well as date and how this one was full of elevens.

Then on Nov. 1 I was sitting in a piazza in Trento, Italy drinking some macchiato (gave a lecture there the next day) and saw a sign for the date, 1/11/11, and realized that we were dealing this time with a sequence of a single digit. Putting that together with my thoughts about both time and date led me to the conclusion I am posting on now here, which I think I am the first person to point out.

So, on Friday, when the moment comes for you wherever you are, have a happy onece-in-a-century 11/11/11/11/11/11.

Bribing Doctors to Abandon the Poor

Do I have this right?  The New York Times has an article today about the Cuban medical mission in Haiti.  After describing the modest perks doctors get for signing up, it says:

They are not allowed to bring their families with them, but the other incentives make it “a pretty good deal,” she [Katrin Hansing, a Baruch College professor] said, that has helped keep down defections. Still, a program the United States has run since 2006 that is tailored to attract Cuban medical professionals abroad has enticed several hundred to defect.  

Does the US really have a program to bribe Cuban doctors who are serving the poorest and most at risk populations in the world to quit, emigrate, and join the dysfunctional American medical establishment?  Is this cynical or what?

If the article is saying what I think it says, I have even more respect for the Cuban medical authorities, who continue their life-giving services abroad even though they lose many of their best and brightest in the process.

Tomorrow’s News Today

Care to know the future?  Then read Michael Pettis, who has been on top of things for many years running.  Nothing is certain, but I think his scenario, where a bank run crashes eurozone policy and forces Greece (for starters) out of the common currency, is the one we’ll probably see.

Euro Clarity

Let’s take a moment to sort out the euro mess.

The missing link

Science and Random Trials

Don't read this while drinking coffee, as you might snort it out your nose laughing !

http://www.bmj.com/content/327/7429/1459.long

Attack of the Killer Seniors

They are gathering in coffee shops, gyms and multiplexes, conspiring to wreak havoc on the US economy.  You know who they are: the boomers and near-boomers, the demographic bulge that will rip a giant hole in fiscal budgets and push working-age taxpayers into martyrdom or worse.

Don’t take it from me.  David Leonhardt, in today’s New York Times, talks about the impending collision of slow economic growth with “sharply increasing claims” that “come from the aging of the population”.  He quotes Benjamin Friedman of Harvard: “These are very difficult moral issues.  We are really talking about the level at which we support the elderly retired population.”

This is common wisdom, one I’ve heard more times than I care to remember.  Does it matter that it’s wrong?

1. Aging, and increases in the proportion of the population no longer active in the labor force, is nothing new.  The US and other industrialized countries have been adapting to this trend for generations.  In fact, the increase in retirees we face in the future is not nearly as dramatic as those we’ve dealt with in the past.

2. The secret weapon against the attack of the seniors is not growth per se but productivity growth, output per worker.  As long as this increases faster than the ratio of retirees to active workers—and it has ever since we started gathering statistics on it—we can afford to take of our elders and improve living standards for the young and spry simultaneously.

Demographics is a false issue.  I’ll trust the motives of those who pound that drum when I start seeing articles about how the economic burden of the defense (i.e. war) budget poses a moral issue that demands courage and sacrifice, etc.  The demographic bulge I worry about is predator drones.

Question

How can the right wing blame unemployment on educational (skill) deficiencies and then shortchange the entire educational system?

This day in 1963 - The President of South Vietnam assassinated.

1963 was a pivotal year. It was the year that OPEC acted unilaterally to raise prices for the first time. It was a time when a charismatic new American president, John Fitzgeral Kennedy, presented his proposals for tax reform for his nation. Included was a plan for the removal of the special-privilege oil depletion allowance enjoyed by large oil companies. He also issued Executive Order 11110. Its aim was to strip the US Federal Reserve Bank of its power to loan money to the United States Federal Government at interest. Kennedy ordered the printing and release of $4.2 billion in US notes, paper money issued through the Treasury Department ‘without paying interest’ to the Federal Reserve System.


In 1963 E Howard Hunt, Chief of Covert Action in America's Central Intelligence Organisation's Domestic Operations Division was involved in the subsidizing and manipulation of news and publishing organisations. Hunt was eventually implicated in the November 1963 assassination of President Kennedy .

But on this day, 2nd November, of that year, the assassination of the President of South Vietnam was another careless step toward the long drawn-out Vietnam War that cast such an ugly shadow over the decade that followed.

"The coup was very swift. On November 1, 1963, with only the palace guard remaining to defend President Diem and his younger brother, Ngô Ðình Nhu, the generals called the palace offering Diem safe exile out of the country if he surrendered. However, that evening, Diem and his entourage escaped via an underground passage to Cholon, where they were captured the following morning, November 2. The brothers were executed in the back of an armoured personnel carrier by Captain Nguyen Van Nhung ...Diem was buried in an unmarked grave in a cemetery next to the house of the US ambassador.
...
Upon learning of Diem's ouster and death, Ho Chi Minh is reported to have said, "I can scarcely believe the Americans would be so stupid." ....After Diem's assassination, South Vietnam was unable to establish a stable government and numerous coups took place during the first several years after his death...."[1]

A White House tape of President Kennedy and his advisers, published in 2003, confirmed that top U.S. officials sought the coup against Ngo Dinh Diem "without apparently considering the physical consequences for Diem personally." [2]

The previous month US President John Fitzgerald Kennedy had been insisting that one thousand U.S. troops in Vietnam, "euphemistically referred to as advisers", be recalled.

"He was a prudent executive, not inclined to heavy investments in lost causes. His whole presidency was marked precisely by his capacity to refuse escalation-as in Laos, the Bay of Pigs, the Berlin Wall, the missile crisis. [3]"

Indeed, Kennedy was deeply skeptical of the recommendations presented by his Joint Chiefs of Staff for military intervention in South Vietnam.

"The military proposals for Vietnam, he said, were based on assumptions and predictions that could not be verified - on help from Laos and Cambodia to halt infiltration from the North, on agreement by Diem to reorganisation of his army and government, on more popular support for Diem in the countryside and on sealing off Communist supply routes. Estimates of both time and cost were either absent or wholly unrealistic. [4]"

In an interview with one of America's cold war warriors, Dr Walt Rostow was asked to comment about the consequences of "the war for South East Asia?"

WR: Well, for South East Asia it's turned out to be fine, because at last Indonesia has gone in to take off very fast, seven per cent now, and Singapore, Malaysia, Thailand, Taiwan, Hong Kong, South Korea are doing fine, even Philippines is coming along. So, South East Asia is... Lyndon Johnson achieved what he was after in South East Asia. ...As a development economist I have to say, when a country does well, like South Korea or Taiwan or something, it's because of the people in the country, otherwise you're pushing on a string. But we did play a very useful part in helping them. It's amazing, but in this period of 1960 to, what 1975, '80, they were going on average at eight per cent a year for wages. That means they more than doubled in ten years. So they're four times the size, as it were, GNP per capita at the end of this period and the beginning. They were different countries....[5]"

War to increase GNP: 'managed' capitalism.

[1] http://en.wikipedia.org/wiki/Ngo_Dinh_Diem
[2] JFK and the Diem Coup, by John Prados
Posted - November 5, 2003
http://www.gwu.edu/~nsarchiv/NSAEBB/NSAEBB101/index.htm
[3]Arthur Schlesinger
http://www.spartacus.schoolnet.co.uk/JFKschlesinger.htm
[4] 'Kennedy', Theordore C Sorenson, special counsel to the late president. Hodder and Stoughton 1965. Page 652-653.
[5] INTERVIEW WITH WALT ROSTOW
http://www.gwu.edu/~nsarchiv/coldwar/interviews/episode-9/rostow1.html

Does Italy Really Deserve To Be A Scary Halloween Story?

Last week after the latest European summit, most of the markets were jumping, with the Russell Index rising over 5% on Thursday, Oct. 28. Then word came that the spread over their German equivalents for Italian ten-year bonds had risen to over 6%, pushing the level in August just before the ECB began buying Italian and Spanish bonds, with the ECB this time supposedly doing so again, but not succeeding in halting the rise (maybe needed to do more, but the Germans and their constitution won't let them?). Now everyone is freaking out that perceived failures by Italy to reform will doom the euro and the EU, with the Daily Mail even fancifully forecasting major European war by 2018. Is all this really justified?

Of course, the simple answer is "yes" because the markets say so, and it is clear that Italy is so big that nobody can bail it out if it defaults. But how likely is that really? Yes, its debt-GDP ratio is about 120%, but it has had a greater than 100% such ratio for a majority of years over the last half century, with nobody much bothered as Italians have a high savings rate and most of this debt is internally owned. Indeed, for years Italy was the poster boy for Ricardian equivalence (high deficits, but high savings rate offsetting its stimulative effects). Furthermore, Italy is running a primary fiscal surplus, before interest payments on debt, generally viewed as not warranting such panic. More is going on here, and I think there are two parts, a short-term one and a long-term one.

The short-term one is simple: Silvio Berlusconi. Both Merkel and Sarkozy have barely been able to restrain their justified contempt for this 75-year old clown, who continues to hang onto power despite disastrous polls and multiple investigations about matters personally fiscal and sexual. His reform plan might actually be credible, although much of the problem is outsiders do not think he can get it through parliament, and his coalition is as shakey and quakey as they come. The centerpiece of raising the general retirement age from 65 to 67 looks like a mostly symbolic matter, given the budget is already in primary surplus. But, even though he continues to be "Il Cavaliere" strutting about in fancy suits on his TV channels and the front pages of the Italian papers, his support is less than 25%, reportedly confined mostly to elderly rural women who have not yet heard that the Roman Catholic Church has tired of fronting for him. He is the short term problem, and indeed he should go, as everybody says. But, the rascal is hard to get rid of, surviving a no-confidence vote (narrowly) a few weeks ago.

The longer term problem is that growth has slowed, now a ten year phenomenon of barely 1% per year growth. This is what has opened up the divergence of competitiveness between Italy and Germany and made for a need for Italy to devalue, thus ultimately straining the Eurozone with trade imbalances. It is easy to forget that Italy was a growth wonder back in the 70s, 80s, and even 90s, with its small clusters of exporting firms praised by Michael Porter. It is the increasing weakness of these firms that lies at the heart of Italy's longer run problems, and it is not obvious what can be done about it. Some say they are too small to deal with larger Chinese competitors or even the Mittelstand firms of Germany. I am in Florence where high-end textiles have been a big deal since the Benedictines produced them in the 1200s. Gucci, Pucci, and Salvatore Ferragamo all started here. Gucci has a production facility a block and a half from where I am staying, but they were bought out long ago by LvMH, the giant French firm. They are still hanging in there. Salvatore Ferragamo is still run by a widely admired family member, but can they continue to produce in Italy rather than China? I do not know. Many call for labor reforms in Italy, and some would help (including of academia), but this is indeed a longer term problem, and getting growth going again will not be helped by forcing a useless recapitalization of banks that will probably lead to cutbacks in lending and a return to outright recession in much of Europe.

Krugman of Mass Destruction

UPDATE: See also Krugman, Ike, Keyserling, Keynes and Kalecki: "Siphoning Off a Part of the Annual Increment of GNP" in response to today's column by Krugman, "Bombs, Bridges and Jobs."

Paul Krugman, check your thoughts and your sources! In a blog post titled More Thoughts on Weaponized Keynesianism, Krugman wrote:

Economics, as I say often, is not a morality play. As far as creating aggregate demand is concerned, spending is spending – public spending is as good as but also no better than private spending, spending on bombs is as good as spending on public parks.

Economics is not a morality play but spending on bombs is NOT "as good as" spending on parks. In a comment, reader valuethinker from London pointed out that the lowest multiplier estimate for stimulus spending was for defense manufacture. This is not a trivial side issue but the core of the problem. Spending on the wrong things ultimately defeats the purpose of Keynesian stimulus. Keynes knew this. It's a shame Krugman doesn't know his Keynes.

In his post, Krugman also cited "the Kalecki point that admitting that the government can create jobs undermines demands that policies be framed to cater to all-important business confidence." Krugman linked to Rortybomb who linked to MRZine for the Kalecki paper. In that paper, Kalecki had more to say that is germane to Krugman's argument that "spending on bombs is as good as spending on public parks":

One of the important functions of fascism, as typified by the Nazi system, was to remove capitalist objections to full employment.

The dislike of government spending policy as such is overcome under fascism by the fact that the state machinery is under the direct control of a partnership of big business with fascism. The necessity for the myth of 'sound finance', which served to prevent the government from offsetting a confidence crisis by spending, is removed. In a democracy, one does not know what the next government will be like. Under fascism there is no next government.

The dislike of government spending, whether on public investment or consumption, is overcome by concentrating government expenditure on armaments. Finally, 'discipline in the factories' and 'political stability' under full employment are maintained by the 'new order', which ranges from suppression of the trade unions to the concentration camp. Political pressure replaces the economic pressure of unemployment.

So, yes, "spending on bombs is as good as spending on public parks" -- even better if you're a fascist! By the way, Professor Krugman. You still haven't replied to my earlier letter.

WSJ Oped Defends Perry’s Tax Proposal with More Supplyside Silliness

Yesterday’s oped can be found here:

One attack on a flat tax is that it won't raise enough revenue to fund the government—as if the current tax code is doing that well. But Mr. Perry and other Republicans shouldn't play this static revenue game. The flat tax is desirable precisely because of its spur to faster growth and more job creation, and the dynamic effect those would have on government revenues. The Perry campaign yesterday released a revenue analysis of its plan by John Dunham and Associates that estimated revenues of $2.781 trillion by 2014 and 19.5% of GDP by 2020 (compared to $2.3 trillion and 15.3% in fiscal 2011). All such estimates are speculative, but the point is that revenue history is on the side of the reformers. After the Reagan reform of 1986 that reduced tax rates to 28% from 50%, tax revenues rose by 36% from 1986 to 1990.

Oh boy – the old dynamic scoring canard that somehow fiscal irresponsibility would lead to faster growth! I find it fascinating, however, that the WSJ editorial page has now turned to the second half of the 1980’s rather talking about that alleged doubling of nominal Federal tax revenues (which of course included payroll taxes) following the 1981 tax cut. Memo to the WSJ editorial board – much of what happened since 1981 under Reagan included tax increases. But never mind that.

This John Dunham and Associates “analysis” was ably discussed by Matt Rognlie:

I never thought I’d see the day when I had to lecture a Republican presidential candidate on the importance of supply-side analysis, or the dangers of overexuberant demand-side logic. Apparently that day has come! The truth, of course, is that neither Rick Perry nor his staff have any idea of the analysis behind their numbers. Instead, they hired a consulting firm that specializes in using IMPLAN to create exaggerated estimates for the effect of particular industries (“Meat! Responsible for 5 trillion jobs!”) in order to please its lobbyist clients. The firm evidently knows nothing about tax analysis; it has no credentialed public finance economists on its staff and no experience in analyzing tax policy. When asked to conduct a study, it turned to the only game it knew: IMPLAN, which just happens to be a absurd way to analyze national fiscal policy.

Weak GDP Growth and Fiscal Contraction

The advance estimate for real GDP during the 3rd quarter of 2011 is out showing annualized growth of only 2.5 percent with final sales growing by 3.6 percent (inventories fell). Consumption and fixed investment both grew but the said news is that real government purchases were unchanged. As BEA notes:

Real federal government consumption expenditures and gross investment increased 2.0 percent in the third quarter, compared with an increase of 1.9 percent in the second. National defense increased 4.8 percent, compared with an increase of 7.0 percent. Nondefense decreased 3.7 percent, compared with a decrease of 7.6 percent. Real state and local government consumption expenditures and gross investment decreased 1.3 percent, compared with a decrease of 2.8 percent.

In terms of 2005$, real government purchases were running at an annualized rate of $2508.2 billion in 2011Q3 according to this advanced estimate which is where we were in 2011Q2. This is actually below the $2509.6 billion figure for 2009Q1. Real government purchases peaked in 2010Q3 at $2570.3 billion (a mere 2.4 percent increase) but having been declining ever since. While this decline is most evident at the state and local level, Federal purchases (both defense and nondefense) are below their 2010Q3 peaks.

Our attempts at fiscal stimulus a couple of years ago were meager at best. Over the past year, we have been cutting government purchases. Isn’t any wonder why the Great Recession continues?!

Unemployment, Machines and Social Cost

Peter Frase reviews the e-book by Erik Brynjolfsson and Andrew McAfee of MIT, Race Against the Machine. Mark Thoma links to a New York Times review of the e-book.

To the Sandwichman, it looks like deja vu all over again. Eternal return of the same old, same old. I'm sure Professors Brynjolfsson and McAfee mean well, but it sounds to me like they are thinking inside the boxes -- and by boxes, I mean "those empty boxes" that D. H. Robertson lampooned in 1924:

The boxes, if I may make free with the metaphor, are not in my view properly to be loaded upon the same cab. It is almost as though one were a hat-box, and the other a monstrous compound of a box at the opera and a [flower?] box growing alongside a garden path.

"The problem of unemployment" is a phrase that has two meanings. One of those meanings has to do with an understanding of what unemployment is. The other has to do with the dislocations caused by unemployment and the search for a solution. You're not likely to find a good solution to unemployment if you don't understand what it is. And modern thought seems committed to avoiding such an understanding.

Unemployment is not an unfortunate accident, a structurally-inexorable tragedy or the just deserts of lazy people not spending enough time and effort honing their marketable skills. Unemployment is a functional relationship that both enables and compels firms to shift part of their overhead costs to society and individual workers. Is that so hard to grasp? Unemployment works -- that is until it doesn't anymore.

Guns don't kill people. People kill people. Machines don't discharge workers. Firms discharge workers. One would think, therefore, that unemployment would have something to do with "the nature of the firm" as well as the problem of social cost. All that other stuff is empty boxes.

Both John Maurice Clark and Ronald Coase examined "the nature of the firm and the problem of social cost." Clark received a standing ovation when he presented his paper, "Some Social Aspects of Overhead Costs," to the annual meeting of the American Economic Association in 1922. The reception of Ronald Coase's theorem by the Chicago school economists was initially more muted. George Stigler recalled the occasion when Coase was summoned to Chicago from the University of Virginia to explain:

We strongly objected to this heresy. Milton Friedman did most of the talking, as usual. He also did much of the thinking, as usual. In the course of two hours of argument the vote went from twenty against and one for Coase [with Coase voting for the affirmative] to twenty-one for Coase. What an exhilarating event! I lamented afterward that we had not had the clairvoyance to tape it.

There's just one little problem with "the problem of social cost." The word "unemployment" doesn't appear in Coase's article. Nor does the word "labor." The word "employment" does appear but it refers to employment of factors of production, not to jobs. That's what Sandwichman's paper, "The Problem with The Problem of Social Cost" (which will soon be edited into two complementary papers) is all about.

Sandwichman wants to know: is there a Sveriges Riksbank prize for taking down a Sveriges Riksbank prize-winner?

Perry’s Cut, Balance and Grow

To no one’s surprise, Rick Perry proposes another variation of the Republican dream of cutting taxes for high income individuals and still balancing the budget somehow. I’ll leave to others to have fun with his tax proposals as we focus on this:

We should start moving toward fiscal responsibility by capping federal spending at 18% of our gross domestic product, banning earmarks and future bailouts, and passing a Balanced Budget Amendment to the Constitution. My plan freezes federal civilian hiring and salaries until the budget is balanced. And to fix the regulatory excess of the Obama administration and its predecessors, my plan puts an immediate moratorium on pending federal regulations and provides a full audit of all regulations passed since 2008 to determine their need, impact and effect on job creation.

Where exactly is Perry proposing to slash Federal spending again? The Government Accountability Office shows that spending on Social Security and major health care entitlements were about than 10 percent of GDP in 2010 and will grow to 13.5 percent of GDP by 2030 even if we don’t repeal ObamaCare under the best of circumstances. If the Republicans have they way in their zest to gut Obamacare, health care entitlement spending will be even higher.

Federal purchases of goods and services were over 8.4% of GDP in 2010. Admittedly Federal spending as a share of GDP has been inflated by the recession but if we go back to 2007, Federal purchases were almost 7% of GDP of which 4.7% of GDP went to national defense. So even if we eliminated nondefense Federal government purchases somehow, the combination of defense spending, Social Security, and major health care entitlements would exceed 19% - even under the best of circumstances.

Of course – the notion of cutting government spending to get us out of a recession – or expansionary austerity - seems to be based on “some shoddy scholarship”.