Sykes-Picot Centennial

This past Monday, May 16, was the centennial of the signing of the then secret Sykes-Picot Agreement that divided up former Ottoman territories between UK and France, with substantial remnants of the division still abiding, even as I write this it is still for a few more minutes the 81st anniversary of the death of T.E. Lawrence, aka, "Lawrence of Arabia," whose role in connection with the Sykes-Picot Agreement was ambiguous and now a matter of debate.

His public image and his conduct at Versailles put him as apparently an enemy of Sykes-Picot and a supporter of  Arab nationalism, supposedly suppressed by Sykes-Picot, but more recent scholarship has Lawrence's position as more complicated.  He and Sykes were both on the UK delegation at Versailles, even as he was also representing the interests of Prince Faisal ibn Hussein al Hashim, direct descendants of the Prophet Muhammed and the traditional local rulers of Mecca. His father, Hussein, held the old position of Sharif of Mecca, but would also as a result he would become the King of Hejaz, the long strip of land along western Saudi Arabia containing both Mecca and Medina.  So while Lawrence did  not get his unified Arab nation, but his friend Faisal and his brother and father would all become kings with British support.

The other view is that while Lawrence put on this grand show of  opposing the Sykes-Picot division of the Arab Middle East between France and Britain, he was not as opposed as it  appeared he was. More  precisely his accounts of being shocked when he learned  of  it after the Bolsheviks released the word, with the Russians also supposed to be getting serious chunks of  Turkey that Ataturk militarily kept them from getting.successfully.  But France and UK got most of what they wanted.

I saw the film Lawrence of Arabia with Peter O'Toole as  Lawrence when it first came out over a half century ago, when I was at an impressionable age and it impressed me greatly.  I still consider the early desert cinematography and the great score by Jarre as some of the finest in all film.  At that age I found some of the later scenes annoying and upleasant, but educational as I saw  the film more times as I got older.

A particular scene involved Lawrence's supposed learning of Sykes-Picot.  He was in Cairo in the office of the very real General Allenby (played by Jack Hawkins), who would take Jerusalem from the Ottomans with the assistance of troops of Prince Faisal (played by Alec Guinness), who was also in attendance, as Lawrence spoke passionately with them about the need for an Arab nation, only to break out into bleeding on his back,  Faisal informs him of his naivete advocating the Arab nation given that the Sykes-Picot agreement already divided its territories between them, with Lebanon and Syria coming out of the French  side of it and Jordan, Iraq, and Israel came out of the British side, although France was supposed to get northern Iraq where now Daesh-ISIS-ruled Mosul is, and also a lot of oil, which British troops from Basra came to hold and did. And while they were promised a nation at Versailles, the Kurds did not get one when the final agreements were drawn at San Remo in 1920, which ratified that the British would get Mosul, which would end up in Iraq rather than Syria.

After Faisal informs him of the supposed perfidy in fact Faisal demands that the fourth person in the room explain what was up, so the mysterious Dryden, not a real person and played by Claude Rains, explains the Sykes-Picot agreement there to Lawrence, who is suitably upset.  However, this is one place where the film is historically inaccurate more seriously.  Most of  the major characters shown in the movie were real historical people even if occasionally there was a misrepresentation of what they did.  But this Dryden never existed.  However, near the beginning of the movie he is shown asking Lawrence to "assess the situation" just before Lawrence goes off to run around in the Arabian desert with Faisal blowing up Turkish rail lines among other things. It is now known that Lawrence was advised by a senior Whitehall official before he left to be with Faisal.  But that figure was none other than Mark Sykes of the Sykes-Picot agreement.  So this "Dryden" figure who is given the job of explaining the Sykes-Picot agreement was none other than Sykes himself in reality, although probably forewarning  Lawrence of the basics of the agreement before Lawrence ever left to see Faisal.

In the early 1920s Lawrence would work for Winston Churchill and with Gertrude Bell would draw the boundaries of Iraq, with a line from the Sykes-Picot agreeement dividing Iraq, Syria, and Jordan (the latter nation a pure creation of the Sykes-Picot agreement), although their moving the southernmost boundary a bit north from that of the old Ottoman province of Basra became Saddam Hussein's excuse for invading Kuwait, to gain the northern part of it to overcome this great wrong committed by Gertrude Bell and Lawrence, with Gertrude Bell rumored to be a mistress of Faisal's, whom they all installed as King Faisal I of Iraq.  He also  played bridge a lot with Bell and was just fine interacting in European society while appearing fully western in suits and all that, unlike he did  at Versailles with Lawrence, all in his proper Arab robes. Faisal I was succeeded by his son, Faisal II, who would be assassinated in 1958 when his monarchy was overthrown by a military could that would lead to the leadership of the Baath Party and Saddam Hussein some years later, with this bringing to an end the Hashemite monarcy in Iraq.

In contrast to Iraq, the new nation of Jordan has done quite well, not falling apart like either Iraq or Syria.   Its current king is Abdullah II ibn Hussein al Hashim.  His great grandfather, Abdullah I, was the more obscure brother of Faisal I and never made appearance in any of the movies.  He was made king of Jordan even as his brother was made king of Iraq.  Abdullah I would be assassinated outside the al-Aqsa mosque, third holiest site in Islam in the Haram al Sharif or for the Jews, the Temple Mount, in Jerusalem.  The man who shot him was a Palestinian nationalist under the impression that Abdullah was on the verge of recognizing the state of Israel, which ha may have been.  But his son Talal did not, although Talal's long-ruling son, Hussein, would eventually make a peace deal and recognize Israel.  His son, Abdullah II  rules a still mostly peaceful Jordan.

The other Hashemite monarchy was Hejaz, where Sharif Hussein, father of Faisal I of Iraq and Abdullah I of Jordean, was made king.  However he would fall from power when Abdulaziz ibn Abdul Rahman al Sa'ud came storming out of the desert from Riyadh to conquer Hejas and then take the title of  King of Saudi Arabia and Protector of the Holy Cities (Mecca and Medina).  This whole business would manifest itself  at Whitehall in a debate between Lawrence who sided with the Hashemites and Hussein against Harry St John Philby, who advised Abdulaziz and converted to Islam, marrying extra wives, while also being the first European to cross the Empty Quarter and fathered Kim Philby, the famous Soviet spy.

Today Daesh-ISIS emphasizes Sykes-Picot as the ultimate western imperialist design that they are undoing, wiping out the boundary of Iraq and Syria.  They imitate the Ottomans by claiming to be caliphs (or at least this al-Baghdadi) whose sultans were caliphs until Ataturk decided to end  the remnant of the empire in the early 1920s, controlling the core Turkish remnant of the  Ottoman Empire, so he abolished it and declared the Republic of Turkey, which still exists.

I do not have a bottom line on this.  Sykes-Picot certainly was a bunch of European colonial powers dividing up territories of the Ottomans successfully, with some of the borders and governments it established still in place, with some other parts not resembling its design well at all (no Israel in the agreement, Mosul and its oil were  supposed to be French not British).  Much did not follow it and much has changed from even what followed it initially. Nevertheless, its shadow continues.

Barkley Rosser

Eduardo Porter on the Need For Fiscal Stimulus

I agree with this call:

At the very least, the dismal forecast calls for the government to prepare for another bout of fiscal stimulus. The recovery by now is already seven years old. With interest rates near rock bottom, the Fed would have little room to prevent another spike in unemployment if the economy were to falter.

I agree with this because I believe we are still far from full employment. But alas, I’m not sure what Porter is really trying to say here? A lot of what he writes suggests we are near full employment with potential output growth being rather limited:

But that cyclical tailwind — bolstered by putting idle resources back to work, which brought the unemployment rate down to 5 percent from 10 percent — is spent. The jobless rate will not fall from 5 percent — close to what economists consider full employment without excessive inflation — to zero. What remains is an economy at the mercy of two powerful dynamics. The first is a gradual shrinking of the work force as a share of the population, as it is squeezed by successive waves of retiring baby boomers and no longer gaining from the one-time surge of women into the paid work force in the 20th century. The second is a persistent decline in productivity growth over the last dozen years. Lakshman Achuthan of the Economic Cycle Research Institute adds it up this way: Over the next five years, labor force growth of half a percentage point plus productivity growth of half a percentage point will push the economy ahead at the anemic pace of just 1 percent a year. even the Congressional Budget Office’s modest projection that the economy will grow by 2 percent a year over the next 10 years is excessively optimistic, he argues, relying on a tripling of the rate of productivity growth from its average of the last five years.

OK – if he is this pessimistic, then why open with this?

Back when “Gunsmoke” was on TV and Lyndon Johnson was president, the United States economy managed to storm ahead by nearly 5 percent a year for nearly a decade. What we would give to recover some of that power!During Ronald Reagan’s presidency two decades later, the rise in the economic cycle, coming out of what was then the worst downturn in the post-World War II era, averaged a bit over 4 percent a year.

A little fact checking please. From 1964 to 1966, real GDP growth did average 6.3% per year as we lowered the unemployment rate from around 5.7% to 3.6%. This, however, is not 5% growth for a decade. And even the most Keynesian economists back in 1966 were saying the fiscal stimulus from the triple whammy of the 1964 tax cut, the Vietnam War build-up, and the Great Society programs may have gone too far. From 1983 to 1985, real GDP growth did average 5.3% per year but that was our economy coming out of a massive recession engineered by a vicious use of monetary contraction to kill inflation. Hey as we are bringing up unusual periods, let’s go back to the Korean War which created 8.4% per year growth for two years. Of course, the unemployment rate started at 6.6% and fell to 2.5%. After this military Keynesianism, we saw a decade with three recessions. I know that I may be beating a very tired horse here but one cannot talk about growth rates over a decade without specifying what the current output gap is and detailing a model of our potential output will grow over time. Porter’s pessimism on this score seems to be out of line with his hope for the benefits from his proposed fiscal stimulus.

Neo-Bonapartism In The Nuclear Age

I have gotten bored with all the "Benito Trump" talk.  Yeah, sure, he actually looks like Il Duce at the right angle, and he certainly has the bombast and ego and nationalism, as well as the curious mixture of right and left economic appeals all muddled up so that who like the bombast and the nationalism can find something they like (he is a socialist like me!  he loves big business like me!), with ultimately the message to be on economics that both business and labor should subordinate themselves to the great leader for purposes of moving The Nation forward.  Yes, that is fascism, but the term has been overused to the point of meaninglessness, and indeed because it is tied to full out genocide in Hitler, it has become a general swear word, with leftists declaring it right wing and rightists declaring it left wing, and so on.

So I want to point out what it replaced, what is its origin, what the same basic political impulse was called before Benito came along with his party in the 1920s and dredged up this old Roman term for a bunch of sticks tied together to name his party.  That older term is Bonapartism, after, yes, Napoleon Bonaparte.  So we have most of the elements there.  He came out of the French revolutionary left just as Mussolini came out of the Italian Socialist Party (and the Nazis were the National Socialists) and Donald Trump used to support Dems like Hillary.  But then he went right in asserting a strong nationalism, maintaining certain nods to the left but also strongly supporting the bourgeois and big business right in asserting the superiority of France and its power.  This peculiar combination was Bonapartism, and whenever a "Man on the Horse" would appear, especially in France, but also elsewhere in Europe, making these kinds of mixed appeals that the class conflict would be subsumed into nationalism under the leadership of the Man on the Horse, this was Bonapartism, with Napoleon's nephew, Napoleon III, a perfect practitioner.  Some would say that this continued in France on down through Charles de Gaulle even.

Now I will accept that Bonaparte may not have been bad as the fascists or even as modern day Donald Trump.  He did support liberation of some minorities, especially the Jews from old feudal restrictions. But he also clearly believed in the superiority of the French over all other people and their right to rule them. 

Now one area where Trump might look better than old Bonaparte or the later fascists is in the parts of  his foreign policy where he seems to want to avoid too many entanglements abroad.  Of course he has been lying that he opposed the Iraq War when it started; he supported it.  But on some foreign policy subjects, he almost looks reasonable, but there are two important caveats.  One is simply his label for  this, "America First," which for any student of US history was the label of the pro-Nazi and fascist sympathizers who did not want the US to  get into WW II.  Oooops!

Bit the more serious is when we get to the most important policy issue of them all, even more important than global warming, and far more important than any domestic economic issue: nuclear weapons and nuclear war.  Part of his staying out of the rest of the world has been his call for letting Japan and South Korea get  nuclear  weapons.  I shall simply note that trying to halt nuclear proliferation has been one of the highest goals of nearly every US president since WW II and for good reason.  But here is the Donald just fine with it.  Let them have nukes!

Then, even more seriously we have him talking loosely about using tactical nuclear weapons against ISIS.  No presidents or presidential candidates have talked about using nuclear  weapons.  It is not done. Even Barry Goldwater did not do so, and since the retirement of the late Curtis E. LeMay, no significant figure in the US government has done so.  This silence was matched globally after awhile, and I would give Thomas Schelling back door credit on this for helping to establish as a global focal point norm that nobody would be the first to use nuclear  weapons, and nobody would even talk about doing so.'

But now this norm has broken down, and neo-Bonapartist Trump is part of it.  I shall note that he did not start it, however. The credit for that goes to people around Trump's pal, fellow neo-Bonapartist Vladimir Putin, who at the time the Russians grabbed Crimea and sanctions were put on Russia for doing so, started yapping about how they could destroy New York City with their nuclear weapons.  The cat was let out of the bag at that point,and Putin indeed fits the neo-Bonapartist scenario, appealing to resentments about national failure and leaning both left and right on economic policy while assuming more and more dictatorial power.  So, yes, here in the nuclear age, we have neo-Bonapartists recklessly bringing us closer to nuclear war with their irresponsible and loose talk.

Barkley Rosser

You Grow the Pie?

The New York Times recycles boilerplate nonsense:

YOUR MONEY: Disproving Beliefs About the Economy and Aging 

The notion that the job market is a zero sum game — more jobs for one group translates into fewer jobs for another group — is deeply ingrained. Economists call the belief that there are only so many jobs in an economy the "lump of labor fallacy." 

But the truth is that growth in the number of jobs for older people tends to run in parallel with gains for younger workers. "There isn’t a fixed number of jobs," Ms. Carstensen said. "You grow the pie."

When I see a pie growing, I toss it in the compost.

Where to begin? "The notion... is deeply ingrained." Deeply ingrained in WHAT? WHO thinks this notion, aside from Ms. Carstensen, Christopher Farrell and other disciples of unidentified "economists" who call this believerless belief the "lump of labor fallacy"?

The old zero sum game gambit AGAIN? Oh come on. Haven't the boilerplate recyclers heard of prisoner's dilemma yet?

Issues with Econ 101 at Three Levels

The debate about what’s right/wrong with introductory economics, which has raged intermittently since the financial crisis, is back again (here, here and here).  I’m preparing a paper on this topic for a conference this summer, so it’s been on my mind.  Here is a structuring proposal:

There are three aspects to what people like or don’t like (often the latter) with Econ 101.  The first is pedagogy—the way introductory econ is presented in the classroom.  This includes issues like the role of lectures vs workshops and projects, the balance between marching through models and exploring applications and empirical debates, and behind it all, whether the main purpose is to induce students to accept particular economic doctrines or to cultivate critical thinking on open-ended (but not anything-goes) economic questions.

The second is the intellectual content of the principles course, particularly as it is encoded in the leading textbooks.  There is a lot of drag on the textbook front, and the gap between standard 101 content and the current trajectory of the discipline is arguably wider than it has been in generations.

The third is the state of economics itself.  Some of what critics object to in intro econ is an accurate representation of how most economists think and the assumptions on which their research is based.  For instance, for every behavioral economist who tweaks U-max, there are fifty whose work is based on toy models firmly situated in Umaxia.  That includes not only most New Keynesian macro, but the micro models that apply welfare criteria to policy choice.  All of the literature on “optimal” carbon prices, for instance, is based on the assumptions that (a) there is this universal substance called utility and (b) everyone acts at all times to maximize it, so that, in the absence of market failure, prices convey utility information.  If Econ 101 takes a narrow, unrealistic line on utility and human decision-making, it could just mean that the limitations of that view are more obvious at that level than they are higher up.

Of course, these three dimensions overlap and influence one another; it’s somewhat artificial to put them in separate boxes.  But I think debates over 101 can be benefit from being clearer about just what it is that irks us.

Make America Fake Again!

Immaterial labor, unconventional oil, multi-level marketing, fictitious capital, negative interest rates, counterfeit politics...

You've really got to read the Italian Autonomist Marxists -- people like Paolo Virno and Maurizio Lazzarato -- if you want to get a handle on what's up with the Donald Trump shtick. More precisely, cultural theorists have used the Automists' concept of immaterial labor to analyze the appeal of Trump's reality game show, The Apprentice. The show is a metaphor for the man, the campaign and the distinctive "virtuoso" labor of neoliberal capitalism.

What it all boils down to is the blurring of the boundaries between work and entertainment; employment, unemployment and precarious under-employment; advertising, entertainment, news and education (of a sort). In this twilight "workplayce," it is the image of competitive personality -- rather than any substantive competence -- that succeeds. Doing the job -- or any job at all -- is secondary to projecting that image. The pinnacle of success is celebrity.

I have to confess that I have never watched a single episode of The Apprentice. For that matter, I have never watched a single episode of any TV "reality" show. I don't feel like I have missed much. However, there are people who build their dreams and aspirations around "brandom" -- brand fandom. This is nothing new, just more pervasive.

What I'm getting at here is that Trump's nomination is no anomaly. It's the new normal personified.

Did I mention the blurred boundaries between work and entertainment? Writing blog posts is my entertainment. I am writing this "at work" (although not on work time). In isolation, the critique of immaterial labor is unsatisfying because it seems to lead into a hall of mirrors made of signifiers and subjectivities. Where is the substantive anchor? Isn't there some universal unit in which value can be evaluated?

It helps to recall the sense in which the seemingly new has been there all along. In his notes on James Mill, Marx observed the way that debt transforms the human personality into a commodity:

Credit is the economic judgment on the morality of a man. In credit, the man himself, instead of metal or paper, has become the mediator of exchange, not however as a man, but as the mode of existence of capital and interest. The medium of exchange, therefore, has certainly returned out of its material form and been put back in man, but only because the man himself has been put outside himself and has himself assumed a material form. Within the credit relationship, it is not the case that money is transcended in man, but that man himself is turned into money, or money is incorporated in him. Human individuality, human morality itself, has become both an object of commerce and the material in which money exists.

It is difficult to avoid a moral judgment of the morality implied in the human personality becoming an object of commerce. However, that is just the kind of restraint needed to arrive at an objective evaluation of what is happening. Regardless of whether it is a good thing or a bad thing, it is an historical process and any transcendence of it will also entail an historical process, not a moral judgment.

Criticisms of Donald Trump's policy positions or of his supporters' alleged racism or xenophobia are incidental, if not irrelevant. In crucial respects, Trump is indistinguishable from Hillary Clinton or even Bernie Sanders. He is a celebrity projecting "larger than life" personality traits that have become an object of commerce. Clinton's or Sanders's personalities and what they stand for may be more appealing to particular market segments, but... it all comes down to what was once provocatively referred to as "The Selling of the President."

But it is not just a matter of sovereign citizens acting in their capacity as sovereign consumers expressing their presidential brand preferences. Those brands are counterfeit, as are the debtor/citizen/consumers electing them!

Since, owing to this completely nominal existence of money, counterfeiting cannot be undertaken by man in any other material than his own person, he has to make himself into counterfeit coin, obtain credit by stealth, by lying, etc., and this credit relationship – both on the part of the man who trusts and of the man who needs trust – becomes an object of commerce, an object of mutual deception and misuse. Here it is also glaringly evident that distrust is the basis of economic trust; distrustful calculation whether credit ought to be given or not; spying into the secrets of the private life, etc., of the one seeking credit; the disclosure of temporary straits in order to overthrow a rival by a sudden shattering of his credit, etc. The whole system of bankruptcy, spurious enterprises, etc.... As regards government loans, the state occupies exactly the same place as the man does in the earlier example.... In the game with government securities it is seen how the state has become the plaything of businessmen, etc.

In other words, phoniness is a large part of Trump's appeal to his supporters -- as it is to the supporters of Hillary Clinton and Bernie Sanders. None of it will restore "the American Dream" or "the middle class." Presidential politics is part of the problem, not the solution.

Will Trump Do the Kudlow Deficit Dance?

Noah Smith notes:

Donald Trump is difficult to take seriously on policy matters, because he’s kind of a random idea generator -- he just throws out a lot of different policy plans, many of them contradictory. This is a great defense against criticism from policy wonks -- as soon as we criticize one of his proposals, he just offers up the exact opposite. For example, he’s advocated reducing the federal debt, spending more and cutting taxes (or possibly not).

OK – Trump 2016 flip flops a lot like Romney 2012 flip flopped. And President Reagan told us he would balance the budget with massive tax cuts and increases in defense spending. Art Laffer explained how this all worked on a cocktail napkin. But Paul Krugman informs us that Trump has sought the assistance of two economic experts:

Still boggled by reports that Trump, having realized that the numbers on his tax plan aren’t remotely credible, has decided to fix things by bringing in as experts … Larry Kudlow and Stephen Moore.

Of course the title of Pauls’s blog post was “Send in the Clowns” as he documented some of the real whoppers these two right wing know nothings have written over time. But my favorite goes back to November 2002 when Kudlow wrote:

The federal budget deficit was $158 billion for fiscal year 2002…As a result, actual economic performance has fallen below the long-term 3.5% historical trend line, which reflects the economy’s indisputable potential to grow. If that trend line were extended through 2002, as though no slowdown had occurred, then the potential third-quarter gross domestic product would have been $9.829 trillion. Instead, actual GDP fell $364 billion short of the mark. Cumulatively, over the past two years, the loss of potential GDP comes to $1.95 trillion — a considerable amount. All this would be academic were it not for the fact that total output in the GDP account (as compiled by the Commerce Department) equates with the taxable income base of the nation’s economy. So a smaller output pie means a shrinking tax base. If you apply the 18% economy-wide tax rate of recent years to the nearly $2 trillion loss of potential output, you get a $351 billion shortfall in tax revenues — which we’d be counting now if the economy had been running at full steam.

A $2 trillion output gap sounds yuuuge! Given that GDP in 2002 was $10.877 trillion, Kudlow was implying an output gap over 18%. Gerald Friedman take note! The CBO, however, suggests that the output gap at the end of 2002 was less 3%. So where did Kudlow get his insane calculation? First of all the 3.5% historical trend assumption was a bit silly since most estimates of potential output growth were lower. But that is not the big mistake here. After Kudlow took his trend line estimate of potential output, he found 8 quarters worth of estimated output gaps – all expressed in annualized terms. While anyone with a brain would have averaged the series but Kudlow summed the numbers thereby overstating the annual output gap by a factor of 8. With Kudlow – it is hard to tell. Is he really this incredibly stupid? Or does he just assume his audience is so stupid that he can blatantly lie to them?

The North Korean Workers' Party Congress

The seventh Workers' Party of North Korea congress has just ended, the first since 1980 when the nations' first leader, Kim Il Sung, announced that his son, Kim Jong Il, would succeed him, which he did  in 1994.  This congress was convened by his son, the 33-year old Kim Jong Un, who has used it to consolidate his power.  Among the more noticeable  of  things that happened is that he was named to be Chairman of  the party.  It has been widely noted that the congress fits in with a policy of elevating the party in comparison with the military, which was apparently favored by his late party.  So the congress elevates both the party and Kim Jong Un.

What is of perhaps more interest for  readers of this blog is what economic policies came out of the congress.  It is interesting to me at least that prior to the congress outside observers were very much up in the air about what it would do regarding economic policy, aside from reconfirming the "byungjin" policy of simultaneous pursuit of nuclear weapons and economic growth, or as some wags have put, both guns and butter. 

A particular issue of controversy involves agricultural policy, which has involved an unofficial spread of more  or less free markets.  This came about after the famines and extreme food shortages of the 1990s and early 2000s, with the situation much improved, if not  great. Many thought that perhaps the congress would make this policy official, although it was always understood that they might not.  In the end, they did not.  Official ideology of socialism remains in place, even as the reality in agriculture at least is one of more or less free markets now.

Probably the only other notable decision was to resume five year plans.  Many outsiders probably think that they never went away.  We (and I am guilty of this) have long described its economic system as this holdover of Stalinist command socialist central planning, and indeed it is a socialist command economy, with the notable exception of the agricultural sector as noted above.  However, fiver year plans were abandoned in the late 1980s while Kim Il Sung was still in power and prior to the end of Communist Party rule in the Soviet Union and Eastern Europe.  So this is also a return to a more officially formal socialist position.

BTW, it should be noted that the North Korean economy is probably doing better than many think.  We are back to a situation where there are widely competing estimates of how  its economy is doing.  The Bank of (South) Korea estimates that North Korean GDP has been growing at about 1-2% per year, but numerous other observers, such as Andrei Lankov, who is based in Seoul, think it is  growing at more like 7% per year.  There certainly has been a lot of construction going on in Pyongyang recently, although this at least partly reflects a growing inequality between the capital city and the rest of the country in economic conditions, with the northeastern part especially poor.  Much of these disagreements indeed involve trying to figure out some of  these sectors such as agriculture, where it is clear that official data probably do not reflect reality.

Barkley Rosser

How Easy is Income Shifting?

Oxfam got the signatures of 300 economists on a letter than noted in part:

To counter this, the economists are calling for governments to agree new global rules requiring companies to publicly report taxable activities in every country they operate, and to ensure all territories publicly disclose information about the real owners of companies and trusts. Jeff Sachs said: “Tax havens do not just happen. The British Virgin Islands did not become a tax and secrecy haven through its own efforts. These havens are the deliberate choice of major governments, especially the United Kingdom and the United States, in partnership with major financial, accounting, and legal institutions that move the money. The abuses are not only shocking, but staring us directly in the face. We didn’t need the Panama Papers to know that global tax corruption through the havens is rampant, but we can say that this abusive global system needs to be brought to a rapid end. That is what is meant by good governance under the global commitment to sustainable development.”

Even if we know how multinationals are shifting income to tax havens, can national governments do much about it under current law? President Obama is trying to end earnings stripping by using section 385 to recharacterize intercompany debt as equity. As this law firm explains what this is about, the discussion noted how weak this provision has turned out to be:

Two recent cases highlight the IRS’s approach (although, so far not so successfully) to attack these foreign intercompany lending transactions. In NA General Partnership & Subsidiaries v. Commissioner, T.C. Memo 2012-172, the Service attacked loans made to a U.S. entity from a foreign related entity (Scottish Power, via NA General Partnership & Subsidiaries). The IRS solely relied upon a debt versus equity attack to seek to have the U.S. interest expense deductions recharacterized as dividends and non-deductible in the U.S. The court applied traditional tests to determine if a given security is debt or equity and found for the taxpayer. The material terms of the security were more debt-like and the conduct of the parties (accounting entries, public and securities filings, etc., all treated the security as debt) was consistent with the intention to create debt between the parties. In PepsiCo Puerto Rico, Inc. v. Commissioner T.C. Memo. 2012-269, the IRS was again arguing in court whether a given financial transaction created debt or equity in the U.S. The taxpayer intended to create a security that would be treated as equity in the U.S. and debt by the related holder in the Netherlands. The IRS sought to treat the U.S. equity side of the transaction as a loan. The court, recognizing the intent of the parties and the economic realities of the transaction as the primary factors in deciding whether a given transaction should be characterized as debt or equity, reviewed the traditional debt versus equity factors (those mentioned above). Again, the IRS lost the case, as the intent of the parties and economic realities suggested the U.S. side of the transaction was equity and not debt.

The first case involved the acquisition of PacifiCorp by a UK entity, which was a version of hybrid financing. While the interest expense was deductible in the US, the UK chose not to tax the interest income. Tax free income! Now if you never heard of this entity, it is now owned by Berkshire Hathaway Energy (BHE):

A leading western U.S. energy services provider and the largest grid owner/operator in the West, PacifiCorp serves 1.8 million customers in six western states. The company is comprised on three business units: Pacific Power (serving Oregon, Washington, California), Rocky Mountain Power (serving Utah, Idaho, Wyoming) and PacifiCorp Transmission.

BHE owns several other US energy providers and has approximately $80 billion in tangible assets generating about $6 billion in profits. Let’s imagine for a moment that Warren Buffett gets into one of his corporate inversion moods and decides to relocate corporate headquarters to Edinburgh, Scotland. Let’s also imagine that the Scottish parent had extended a $60 billion 20-year loan on October 1, 2015 with an interest rate equal to 5%. What authority would the IRS have to challenge this aggressive planning? I’m sure Warren’s lawyers could successfully structure its agreements so that section 385 is no problem. I guess some hot shot IRS lawyer might pull out section 163(j):

the term “excess interest expense” means the excess (if any) of the corporation’s net interest expense, over the sum of 50 percent of the adjusted taxable income of the corporation plus any excess limitation carryforward under clause (ii).

Don’t you love the horrific writing of lawyers? What does this mean in our case? Since interest expense is less than 50% of operating profits before depreciation, section 163(j) does nothing for the IRS. So what’s left is to question whether the 5% interest rate is above the arm’s length standard. Alas, on October 1, 2015, the yield on 20-year corporate bonds with credit rating = BBB was over 5.3%. Unless the IRS can argue that the credit rating was something akin to AA, it will get nowhere under current law. I’m not saying Warren Buffett even considered this move but if he had – how would the IRS stop it?

Trump Back Peddles on His Debt Default Proposal

Apparently Donald Trump was on CNN trying to clarify his insane suggestion that the Federal government should be run like his Atlantic City disasters:

I said if we can buy back government debt at a discount, in other words, if interest rates go up, and we can buy bonds back at a discount, if we are liquid enough as a country, we should do that. In other words, we can buy back debt at a discount. People said I want to go and buy debt and default on debt, these people are crazy. This is the United States government. First of all, you never have to default because you print the money, I hate to tell you, OK? So there is never a default. But the point is, it was reported in the New York Times incorrectly.

The interview babbled on but let’s take him at his word here. Suppose you had purchased $100 million of 30-year government bonds at the beginning of the year. The Federal government has promised to pay the holder $3 million per year until 2045 and at the end of the year, the holder gets $100 million in principal. For the Federal government, their loan is not callable but you could sell this if suddenly interest rates went up from 3% to 4%. The only problem is that the present value of your future payments is now only $82.7 million. Trump’s brilliant idea would be to have the Federal government immediately retire this loan for the $82.7 million and then refinance it in the current market. But let’s see, the interest rate is now 4% not 3%. For the next 30 years, the Federal government will pay over $3.3 million in interest expenses as opposed to the original $3 million. Trump says he learned finance at Wharton. Something tells me that the finance department is denying he ever took classes from them.

The Capital Noncontroversy, or How the World Actually Works

EconoSpeak has been revisiting the capital controversy of the 1960s, fueled by Barkley Rosser’s posts (here and here) and stimulating comment threads.  The discussion has been thoughtful and well-informed.  Meanwhile over at Marginal Revolution you can find this pop introduction to aggregate production functions.

According EconDirectory.com, during the month of April MR averaged 43,285 page views per day, EconoSpeak 396.

Does the U.S. Have the Highest Corporate Tax Rate in the World?

Paul Krugman reports on his Twitter war with Donald Trump:

Yesterday I tweeted a response to Donald Trump’s claim that America is the highest-taxed nation in the world. Actually, he’s been busted on that claim repeatedly, which makes it even more shameful that TV interviewers just let it slide. But I’m also interested in the responses I’ve been getting, which I think tell you something about the broader situation – maybe call it the politics of epistemology. As you might guess, I’m getting a lot of denial, with quite a few people “explaining” that the international comparisons don’t include state and local government. Um, guys, maybe you shouldn’t make confident pronouncements about stuff you’ve never looked at.

Paul is noting that total taxes as a share of GDP is not really that high by international standards. I’m sure some conservative might scream “that’s average” and then go on some rant about marginal rates. My focus will be on corporate tax rates. KPMG has a handy comparison even if it is very incomplete. It claims that the corporate tax rate in the U.S. is the sum of a 35% Federal rate and an average state tax rate equal to 5%. Of course even domestic firms can get all sorts of tax breaks and likely pay less in state taxes. Multinationals are particularly adept at reducing their effective tax rates. Oil multinationals realize that several foreign tax authorities impose high surcharges on oil profits. I want to focus, however, on the battle between Wal-Mart and Puerto Rico. Puerto Rico imposes a 20% corporate tax but also includes a surcharge that can be up to 19% of profits if the firm’s revenues are high enough. The effective tax rate for the Puerto Rican affiliate of Wal-Mart is 39%. The 10-K filing for Wal-Mart notes that its U.S. tax rate is 37% even when one includes state taxes. And yet we see this claim:

The Secretary has not even proven that the use of transfer pricing to shift profits to other parts of the United States is a problem. As witnesses for both parties testified, the continental United States is not a tax haven like the Cayman Islands are... If Wal-Mart PR has managed to shift $79 million to, say, the State of Arkansas, those are profits on which Wal-Mart Stores will have to pay income tax at a rate of 38% or 39% – namely, a 35% federal corporate income tax, plus a 3% to 4% state corporate income tax.

Why does this matter? Consider this claim by one of Wal-Mart's expert witnesses - Professor Richard Pomp:

You’re not going to transfer profits from Puerto Rico to the United States, where it’s going to be taxed at a higher rate.

While I may have some sympathy with Wal-Mart’s claim that this particular alternative minimum tax discriminates against Wal-Mart, since when is 39% less than 37%?

Ben Rhodes Has Been Stupid And Irresponsible Regarding Iran

So today's New York Times has the story by David Samuels on Ben Rhodes, where they play bros loving Don DeLillo and Rhodes bragged about his mind melding with Obama over the last 7 years and how he set up echo chambers to fool ignorant and stupid reporters, not to mention out of it foreign policy establishment types.  Whoopee!  Of course, all kinds of people are all ticked off at him, calling him many names, although not the one I have called him, with others picking up some of what he has dropped and running with it to discredit the Iran nuclear deal.

This is the matter that I am concerned with, and the matter where Rhodes has seriously messed up.  Rhodes notoriously brags about putting forth a misleading story regarding the Iran nuclear deal in order to sell it to the US public.  The lie was that the negotiations started in 2013 rather than in 2011 as they did.  This was after "moderate" Rouhani became president, and this was what was sold to the ignorant media fools through the elaborate echo chamber Rhodes and his pals set up, of which he is clearly very proud. 

But for anybody who actually knows anything about Iran,  Rouhani was never ultimately in charge of the deal or foreign policy.  That person is the Vilayat-el-faqih, the Supreme Jurisprudent, the unelected (well, elected by a small group of senior clerics) Ali Khameini, the leader of the "hardliners.".  While Rhodes disses Hillary Clinton for  having voted for the war in Iraq in 2003, she was the one who sent someone to meet with a rep from Khameini in Oman that initiated   But she remains an annoying foreign policy establishment figure in Rhodes's view, while Kerry is barely mentioned, dismissed as someone who negotiated "details" while Rhodes and others had already negotiated the "framework.  But to get to get a deal, the US had to have the hardlining Khameini on board as he was and is in charge, the Supreme Jurisprudent.

The problem is that this revelation of this unnecessary and stupid echo chamber is that the enemies of the Iran nuclear deal are already using this to argue that the whole deal is no good because it was sold on this lie, that the negotiations were only initiated with the moderate Rouhani rather than the necessary negotiations with Khameini.  They should have sold it upfront with the reality of whom they were negotiating with, and frankly, people who play attention like me knew what was going on when it was going on. so it is true that most of the reporters are horrendously ignorant.  But that does not excuse that the revelation of this stupid lying will be used by the enemies of this very important and wise agreement to undercut it.

Ben Rhodes should be ashamed of himself.  I think he did this to sell himself for the post-Obama era, but I hope he has to go sit in a cottage somewhere and write his short stories, all by himself and reviled by the world.

Barkley Rosser

The Revenge Of Joan Robinson: Capital Theory Controversies Revive

It is easy to argue about what is the most important or influential thing that the late Joan Robinson did in economics.  More conventional types would probably point to her widely accepted and even textbookified Economics of Imperfect Competition.  Some would point to her later more philosophical and methodological writings about historical time versus analytical time.  Many Post (or post-) Keynesians revere her closenss to Keynes and Kalecki and see her as the godmother-founder of their movement  who could see the unity among their various bickering factions.  But others would look to her work on capital theory in the 1950s, her 1954 paper in the RES, "The production function and the theory of capital," along with the appendices to her 1956 The Accumulation of Capital, as well as her influence on Piero Sraffa to publish his famous book in 1960.  This was the trigger for the famous Cambridge controversies in the theory of capital that reached a culmination a half century ago when Paul Samuelson agreed that the "parable" he and some of his students had set forth was not true in general, given such paradoxes as reswitching (called the "Ruth Cohen curiosum" by Joan Robinson), with him declaring in 1966 in the QJE that, "the foundations of economic theory are built on sand."

As discussed elsewhere, we know that although the Cambridge, England side won an intellectual victory at that point, it turned out to be pyrhhic as those following the Cambridge, MA side simply ignored these results and proceeded to act as if nothing had happened, merrily estimating aggregate neoclassical production functions with well-behaved capital in them, with never a note or caveat about any potential problems, as well as building growth theory models, as well as general equilibrium macro models on such assumptions.  Joan Robinson may have drawn figures showing non-monotonic relations between "real capital" and "output," in the appendices of her 1956 book, as well as non-monotonic relations between interest rates and employment rates elsewhere.  But none of that mattered.  It was all to be ignored as oddities or whatever, things not to tell the children lest they become upset and lose sleep and cry when fed their porridge.

So it is a curious matter that the question of  capital theory has re-arisen recently.  It was just two years ago that Thomas Piketty's book, Capital, made the best seller lists.  Right now considerable attention is being paid to  Anwar Shaikh's voluminous magnum opus, Capitalism.  Both of these books take as their central issue that of the underlying forces driving secular trends in income distribution, particularly the division between wage incomes and profit or interest-based incomes.

Curiously, Piketty's theory remains firmly in the neoclassical camp regarding the questions raised by the old Cambridge, England school.  He briefly notes those controversies, but more  or less dismisses them, perhaps reflecting the influence of being at MIT for a long period of  time, even as he mocks excessive mathematical abstraction of much of modern growth theory.  Jamie Galbraith and others, including Shaikh, have taken Piketty to task for his dismissal of the issues raised by those old controversies, and many have criticized him for his super-aggregated view of capital that includes not  only land but also such things as collectibles, while others have taken him to task for  his arguments regarding r >g.  Where he has been most praised has been in his presentation of data supporting his broader arguments, as well as his ability to bring in broader historical and cultural support.  In any case, he is bringing the issue of capital and the foundations of income distribution front and center, even if he is not  doing so along British Cantabridgian lines.

Shaikh is an old fan of Sraffa's and a participant in the original  debates.  While he also does not present most of his theory as drawing on these old arguments, his approach is much closer to that approach in flavor and discusses it at some length sympathetically, even if he eventually draws more heavily on modern econophysics methods.  These fit nicely into his more Marxist approach,  even as he downplays Marx. But, of course, it was Marx who more sharply posed these questions regarding the nature of capital and how it affects income distribution, as well as power distribution, within societies.

I  note, of course, that the ever increasing emphasis  on financial theory in economics is itself an offshoot ultimately of capital theory, even if  it has gone off into its own niche with more emphasis on problems related to risk and uncertainty, while ignoring the broader issues of growth and income distribution.

I do  not know what Joan Robinson would think about this recent revival, but given what has been going on with income distribution trends in the higher income nations, I suspect she would not  be surprised.  And unlike many others, she always thought deeply about the problems of capital theory, taking account of historical and philosophical issues well beyond her peculiar graphs showing supposedly paradoxical relationships.

I close this by quoting myself from my 1991 book (p. 125):

"What really is capital and what does it mean for value, growth, and distribution?  Is it a pile of produced means of production?  Is it dated labor?  Is it waiting?  Is it roundaboutness?  Is it an accumulated pile of finance?  Is it a social relation?  Is it an independent source of value? The answers to these questions are probably matters of belief."

Barkley Rosser. 

Game theory and rationality -- the road less traveled

In "Game Theory and Cold War Rationality: A Review Essay," Roy Weintraub reviews two recent books, The World the Game Theorists Made (2015) by Paul Erickson and How Reason Almost Lost Its Mind by Paul Erickson, Judy Klein, Lorraine Daston, Rebecca Lemov, Thomas Sturm, and Michael Gordin (2013),both of which are published by University of Chicago Press.

Two of the "minor characters" in both of those books, Kenneth Boulding and Anatol Rapoport, merit particular attention for their role in mapping a "road less traveled" -- a road with ethical rather than strategic directions. Boulding is credited as a founder of ecological economics, along with Nicholas Georgescu-Roegen and Karl William Kapp. Boulding and Rapoport were plotting behavioral economics at Stanford two decades before Kahneman and Tversky arrived there. Boulding and Rapoport, again, cultivated the early work of Thomas Schelling that led to his Strategy of Conflict. Rapoport's Strategy and Conscience was an explicit reply to Schelling's book. Rapoport's experimental work with prisoner's dilemma anticipated Elinor Ostrom's.

The road taken by the mainstream was more constrained by Cold War ideology than was the approach pursued by Boulding and Rapoport. It was also elevated to orthodoxy by its ideological perspective. This is not to say that it was wholly unscientific. It was scientific to the extent that it could produce results useful to the prevailing purposes. This provisional scientificity is the essence of the qualifier "almost" in  the phase "almost lost its mind." But what may have been almost madness in 1960 or 1970 is today stark raving lunacy.

What Donald Trump Is Telling Us about Popular Understanding of Debt and Assets

I see Trump’s suggestion that the US haircut holders of treasury debt through a different lens than most observers.  Almost every year, I walk into an introductory economics class in the fall and try to disabuse students of the notion that debt and credit assets like bonds are two unrelated things.  They are shocked to discover that the savings bonds many have stashed away are pieces of the “national debt”, and that eliminating this debt would mean draining the world of all such bonds—that America’s collective public debt is (apart from foreign holdings, which is another story) America’s collective private wealth.  Yes, the unequal ownership of that wealth is scandalous, but that’s about how much inequality we have, not how much wealth.

So I see the same with the Donald.  It doesn’t sound like Trump realizes that his own bond portfolio would take a hit.  My guess is that he is as clueless as his supporters, none of whom have the slightest idea that the Great One has just proposed taking a slice out of their savings.  Interestingly, this observation hasn’t appeared in the popular media yet, at least from what I’ve seen.  Journos and pundits talk about how unorthodox the idea is and how it could trigger a financial crisis, but not that it’s a monetary form of self-cutting.

Incredible.

Growth analogies, microfoundations and Mathematical Biology of Social Behavior

You want MICROfoundations? In Mathematical Biology of Social Behavior, Nicolas Rashevsky attempted "the next step" of examining the social interactions of individuals in terms of the mathematical biophysics of the central nervous system. He paid special attention to economic questions of wealth, distribution, motivation, learning, rationality, habit, imitation, individualism and collectivism.

Rashevsky's mathematics must be seen as exploratory and often is qualified by the admission that assumptions are unrealistic but that more realistic assumptions make the math intractable. The results thus offer insights, not "conclusions." The contrast with alleged microfoundations as practiced by contemporary mainstream economists couldn't be starker. The latter embrace unrealistic assumptions as a feature, not a bug, because it enables them to crank out conclusions based on biases they are seeking to confirm.

Simon Kuznets on growth:

Growth is a concept whose proper domicile is the study of organic units, and the use of the concept in economics is an example of that prevalent employment of analogy the dangers of which have been so eloquently stressed recently by Sidney Hook. 

Sidney Hook on analogy:

As an argument it is formally worthless and never logically compelling. An argument from analogy can be countered usually with another argument from analogy which leads to a diametrically opposed conclusion. ...

At best an analogy can only suggest a plausible conclusion whose validity must then be established on other grounds. The uncritical use of analogies is the bane of much historical writing, particularly when the resemblances lack clear definition or when they are blurred and presented as identities. ...  The belief that society is an organism is an old but fanciful notion. It can only be seriously entertained by closing the eye to all the respects in which a group of separate individuals differs from a system of connected cells, and by violently redefining terms like "birth," "reproduction," and "death." 

Gregory Bateson on schizophrenia:

...the ‘word salad' of schizophrenia can be described in terms of the patient’s failure to recognize the metaphoric nature of his fantasies. In what should be triadic constellations of messages, the frame-setting message (e.g., the phrase 'as if') is omitted, and the metaphor or fantasy is narrated and acted upon in a manner which would be appropriate if the fantasy were a message of the more direct kind.

The Microfoundations of the Weeds in the Garden Model

Last fall John Cochrane argued:

Sclerotic growth is the overriding economic issue of our time. From 1950 to 2000 the US economy grew at an average rate of 3.5% per year. Since 2000, it has grown at half that rate, 1.7%. From the bottom of the great recession in 2009, usually a time of super-fast catch-up growth, it has only grown at two percent per year. Two percent, or less, is starting to look like the new normal…Our economy is like a garden, but the garden is choked with weeds. Rather than look for some great new fertilizer to throw on it, why don’t we get down on our knees and pull up the weeds? At least we know weeding works! …Cleaning out the weeds also needs a large effort of simple governance. The President has to revisit and rewrite the mass of executive orders and memos. The Congress has to get serious and pass laws that are actually laws, not thousand page instructions for agencies to figure things out. It has to get around to repealing laws everyone understands are bad — the Jones act restricting shipping, the ban on oil exports, and so on — and reforming laws that everyone understands need to be reformed. It needs to actually follow its own budget law. The heads of agencies will have to renew the staff and reorient them to growth-oriented policy, and undertake a sweeping house-cleaning of regulations and procedures. They will have to implement managerial techniques such as pervasive cost-benefit analysis, regular retrospective review, and sunsets.

I was so tempted to go snarky and ask what are the microfoundations of the weeds in the garden model of economic growth? Noah Smith did the heavy lifting for us:

Most of the so-called growth policies Cochrane and other conservatives propose don't really target growth at all, just short-term efficiency. By pretending that one-shot efficiency boosts will increase long-term sustainable growth, Cochrane effectively executes a bait-and-switch.

Brad DeLong notes Cochrane is up to his old tricks:

Sclerotic growth is America’s overriding economic problem. From 1950 to 2000, the U.S. economy grew at an average rate of 3.5% annually. Since 2000, it has grown at half that rate—1.76%. Even in the years since the bottom of the great recession in 2009, which should have been a time of fast catch-up growth, the economy has only grown at 2%. Last week’s 0.5% GDP report is merely the latest Groundhog Day repetition of dashed hopes…The third camp (mine) holds that the U.S. economy is simply overrun by an out-of-control and increasingly politicized regulatory state. If it takes years to get the permits to start projects and mountains of paper to hire people, if every step risks a new criminal investigation, people don’t invest, hire or innovate. The U.S. needs simple, common-sense, Adam Smith policies. America is middle-aged and overweight. The first camp says, well, that’s nature, stop complaining. The second camp looks for the latest miracle diet—try the 10-day detox cleanse! The third camp says get back to the tried, true and sometimes painful: eat right and exercise.

I guess we will eat healthy foods from that garden once we remove the weeds. Brad complains that a Cochrane chart of per capita income and some “ease of doing business” index is “Extraordinarily Unprofessional!” I was about to comment – where are the microfoundations but someone beat me to this again.

Prayer - Science = 0

Yes, it’s okay to talk about climate change right now. The devastating natural disaster in Fort McMurray is "consistent" with climate change.

The Fort Mac wildfire is horrific. Miraculously, no people have been killed. Saying that the unseasonably hot conditions in Alberta are "consistent with" climate change is not to say that they are "caused by" anthropogenic global warming. But there is no jurisprudential rationale here for requiring that guilt be established beyond a reasonable doubt. On the contrary, the precautionary principle is the appropriate standard for evaluating the possible connection. 

A lot of people go on social media to offer their prayers for the people affected by the disaster. There's nothing wrong with that. But what gets the Sandwichman's goat are the sanctimonious edicts against "politicizing" the disaster by mentioning the connection to climate change. "Now is not the time." And if not now, when?

Does Kevin Williamson Understand Keynesian Economics?

On July 12, 2003, Kevin Williamson wrote:

Draconian cuts. Indeed. This is all very good, and it deserves to become law. But it also offers a dramatic illustration of how difficult it is to cut spending without cutting the areas where the spending actually happens. This may be a minuscule cut in terms of overall federal spending.. That is why spending reductions on those kinds of programs are never really enough: You have to eliminate the program entirely. Conservative populists sometimes get mocked for promising to cut entire cabinet agencies, but, in the long term, that is the most promising model for achieving a healthy fiscal balance. Obligatory reminder: None of this matters very much without entitlement reform and controls on defense spending. Non-defense discretionary spending, i.e. the stuff everybody promises to cut or cap, is a small part of federal spending.

In other words, Williamson was pushing fiscal austerity hard. On May 1, 2016, he wrote:

President Obama’s term in office was preceded by a housing crisis and a subsequent recession for which he was as much to blame as anyone then in government — which is to say, not very much….President Obama insists — straight-facedly — that in the context of a wrenching financial crisis, the United States under his leadership performed better than any major economy in modern history. That isn’t even close to being true, of course. Obama’s presidency will coincide with a remarkably weak recovery, with GDP essentially treading water. His presidency will be the first in modern times to fail to coincide with at least one year of 3 percent economic growth.

I will turn the microphone over to Jonathan Chait and then return:

Williamson does not acknowledge the source of Obama’s claim. To be sure, the Reinhart-Rogoff finding is not gospel, but Williamson does not provide any argument against it or even provide any indication he has heard of it. Nor does Williamson provide any evidence to contradict Obama’s conclusion. Refuting the claim that the U.S. has outperformed other economies that have emerged from a financial crisis would mean naming one or more economies that have undergone a financial crisis and then enjoyed faster growth than the U.S. has since 2008. Williamson does not do so. Instead, he compares Obama’s recovery to previous recoveries from nonfinancial recessions. (And the metric he picks — whether or not the economic exceeded 3 percent growth in a single year — is ludicrously cherry-picked, as if a recovery is measured by the growth rate in its best single year, to count George W. Bush’s historically anemic economy as a success.) This follows Williamson’s assertion that Obama’s claim is false “of course” — apparently it is so obvious he needn’t bother providing even a single piece of relevant evidence against it. Update: I didn't even notice this on my first pass, but Williamson uses the term "fiscal crisis" when he means "financial crisis." A fiscal crisis is related to a country's government budget. A financial crisis is related to a country's financial system. These are completely different things.

Part of Williamson’s argument was that fiscal policy choices have little to do with the growth rate of the economy. And yet most economists blame the weakness in the U.S. economic recovery on the state and local fiscal austerity that led to an overall fall in real government purchases after 2010. Had Williamson had his way – we would have also had massive Federal austerity. In other words, Williamson had his way, our economy would likely be as bad as Europe’s.

Joan Robinson and Beggar Thy Neighbor Policies

Many thanks to Barkley for his tribute to Joan Robinson, which included this interesting line:

In 1937 she wrote her influential essay on "Beggar thy neighbour policies," which made the concept associated with competitive devaluations widely known, although the term had appeared before previously, used once by Adam Smith and also by a British economist named Gower in 1932.

Her critique is part of Part III of her Essays in the Theory of Employment. She goes beyond calling competitive devaluations a zero sum game by suggesting that they might raise interest rates, which would worsen a global depression. I’m not sure I entirely agree. Ben Bernanke recently noted:

Competitive depreciation became a contentious issue during the Great Depression. During the 1930s, the international gold standard collapsed, but it did so in a staggered way, with countries abandoning the gold standard at different times. The currencies of countries that left gold relatively early (like Great Britain, in 1931) depreciated relative to the currencies of countries that stuck with gold longer (like France, which left gold in 1936). The economies of countries that left gold earlier were also seen to recover more quickly from the ravages of the Depression. Some economists of the period, such as Joan Robinson of the University of Cambridge, argued that the recovering countries were doing so primarily through “beggar-thy-neighbor” policies of undercutting other nations in export markets.[1] In modern lingo, they were saying that depreciation was a zero sum game; gains for one country came only at the expense of other countries. However, over time, the recovery from the Depression became global, even as nations’ export shares and currency values stabilized. What was not adequately appreciated by Robinson and her contemporaries was that a country’s abandonment of the gold standard did more than affect the value of its currency: It also freed the country to use more expansionary monetary policies, which increased demand and incomes at home. The increases in total demand, for both domestic and foreign goods, served to promote recovery in output and trade in all countries, ultimately proving far more important than the temporary trade diversions created by changes in exchange rates. In other words, the monetary easings that followed the collapse of the gold standard amounted to a positive sum game.

Of course we are no longer on a gold standard even if Ted Cruz wants us to return to one. Bernanke had much more to say about these issues. Given that the 2016 campaign has revived populist notions of using trade protection in an attempt to shift the burden of weak aggregate demand from one nation upon another, we have another reason to consider the considerable contributions of Joan Robinson.

The Legacy of Joan Robinson

Over a week ago Joan Robinson came up in connection with the ongoing controversy over Gerald Friedman's analysis of Bernie Sanders's economic plan.  When criticized for apparent problems with it he declared that those who understand what he is doing are "Joan Robinson economists."  In going after him, Justin Wolfers ridiculed him for this, referring to such people as a "sub-tribe of Keynesians," which is not inaccurate, but somehow comes across as very sneery.  Noah Smith took this up, declaring that this was the coup de grace by Wolfers, and a commenter on his thread, "Britonomist," dismissed Robinson as someone who admired the North Korean economy, "maybe the worst economy ever in the world," with Noah thanking him for this piece of information.  I made some comments on this there, with pgl picking up on this for some further discussion.  Other than to note the reasonableness of  Peter Dorman's request for  Friedman to provide his model publicly for people to figure out what he is doing (which is becoming less and less important as Bernie's chances of getting the nomination seem to be approaching epsilon), I have no comments on all of that contretemps.  Rather, on thinking about it I shall  return to Joan Robinson and talk about her and her legacy for modern economics, given that various people have been using her name in vain.

Joan Violet Maurice Robinson (1903-1983) was without doubt the most important woman economist born before 1930 and maybe still the most important woman economist ever.  While she would end her days as a radical leftist, she came out of an elite background, her father a baronet and a major general in the British army in WW I, with her maternal grandfather a famous surgeon who taught at Cambridge University and one of maternal uncles a polymath who advised Winston Churchill.  She was close to her father, who was forced to resign from the British army near the end of WW I for publicly reporting on misconduct by the government in managing the war.  In his final years until his death in 1951 he lived with his daughter in her half of the house she shared with her husband, E.A.G. (Austin) Robinson, whom she married in 1925, who himself was an important Keynesian economist, adviser of the British government, and founder of the International Economic Association, with them producing two daughters.  A story I have from a primary witness is that she had a graduate seminar in her half of the house, and one time there was an unpleasant odor there.  The participants realized that her father was sitting in a chair in the room dead.

While she nearly got a Nobel Prize, and certainly deserved one, she suffered professionally from being a woman.  She was only appointed a Lecturer at Cambridge in 1937, well after she had already published several highly innovative and influential  works.  She was only made a Full Professor at Girton College at Cambridge University (which she had attended) in 1965, the year her husband retired from his professorship.  Rumor has it that she came closest to receiving the Nobel  Prize in 1975, the year Kantorovich and Koopmans got it for linear programming (which created a major stink among mathematicians who said that at a minimum George Dantzig should have shared it).  I do not know if she was thought of as a possible third for them or a replacement for them, perhaps with Piero Sraffa sharing, who also never got one while arguably deserving it, who could have shared it credibly with Leontief in 1973 for input-ouput analysis.  The Encyclopedia Britannica reports that her leftwing political views may have played a role in her not getting it.  I also heard it from a primary source that Assar Lindbeck, the committee's dominant figure then, once said that if either Joan Robinson or James Buchanan got it, it would be over his dead body, although  Buchanan did get it in 1986, with Lindbeck still on the committee and not dead, although Joan Robinson had  been dead for three years by then.

As evidence that she was clearly in contention in the mid-70s, I shall report something I observed on an elevator in the New York Hilton during the 1973 AEA meetings (the first I ever attended).  Lionel McKenzie, another who never got the prize but should have, was talking to somebody else.  McKenzie told this other person that "they are going to give it to Joan Robinson next for her Economics of Imperfect Competition, but she will refuse it."  As it was, she never got the chance to do so.

 Speaking of that 1933 book, that was her first major publication and remains one of her most important, indeed worthy of a trip to  Stockholm in and of itself.  Among other things in it, she invented the word "monopsony."  While she later wrote less about monopolistic competition, one can see that it remained very much on her mind if one reads her excellent 1977 article in the JEL, "What are the Questions?" a good overview of how she viewed economics near the end of her life.  She spends quite a bit of it going on about the issue of monopoly power and its importance.  I note that this is one area where her concerns are very relevant to current economics, with many now posing that increased monopoly power in the US economy may be playing a role in secular stagnation.

She was indeed a core Keynesian, one of the three people thanked by Keynes himself in the Preface to his 1936 General Theory.  She also supported Kalecki, whom Keynes had in to  Cambridge, but by all accounts did not like.  In 1937 she wrote her influential essay on "Beggar thy neighbour policies," which made the concept associated with competitive devaluations widely known, although the term had appeared before previously, used once by Adam Smith and also by a British economist named Gower in 1932.

In 1941 she published her famous Essay on Marxian Economics, in which she rejected the labor theory of value and basically supported redoing Marx along Keynesian and Sraffian lines.  She would indeed later praise both Maoist China and North Korea, but saw China in particular  as possibly offering another way of modifying Marx along useful lines.  However, Robinson was always known for her pithy remarks, and one from that era was "There is only one thing worse than being exploited, and that is not being exploited" (that is, unemployed).

The 1950s may have seen the high water mark of her work.  She set off the Cambridge  capital theory debates with her 1954 paper in the Review of Economic Studies, "The production function and the theory of capital," in which she took apart the idea of aggregate capital, with Paul Samuelson in 1966 agreeing that she was right.  The first time I ever met Samuelson (in the early 70s) I gave him a hard time about this issue, and he just completely agreed with her and said that capital must be modeled as being heterogeneous.  One of the more hidden but very important roles she played in the 1950s was to work on Piero Sraffa to finally complete his short, but important, 1960 book, Production of Commodities by Commodities: A Prelude to a Critique of Economic Theory.  He had been working on it for 35 years, but it was still only a prelude to a critique, not a critique itselfn.  Samuelson claimed that if he had published it in 1930, he would indeed have shared the Nobel Prize with Leontief.

In 1956 she published what is probably her magnum opus, although now widely ignored, The Accumulation of Capital, which in contrast to her later critiques of analytical equilibrium analysis in favor of looking at "historical time," was in fact a study of various equilibrium growth models, many of  which she provided amusing names  for such as "bastard golden age" and "creeping platinum age."  She did not generally use formal equations but rather favored figures and graphs backed up by clear verbal descriptions and discussions.  Apparently in 1949 Koopmans asked her to be on the board of the Econometric Society, but she refused on the grounds that she did not want to be part of something that produced things she could not read.  After 1960 her work increasingly moved towards more methodological issues, such as her 1962 Economic Philosophy, as well as work looking at development issues, especially in India, but also her highly controversial work on China and North Korea.

I commented on the China and North Korea matters in the linked-to threads from Noah and pgl, but I shall repeat some major points here.  Regarding North Korea, she visited there in 1964.  She accurately reported that its economy was performing much better than that of South Korea, which many now may not believe, but was true,with a real per capita income probably twice that in the South.  What happened was that the South did not grow after the Korean War in the 1950s under the corrupt Syngman Rhee.  It took off after he was overthrown by the military dictator Park Chung Hee (whose daughter is currently the president in the South), who instituted a strong indicative planning drive run through state-owned banks until  he was assassinated in 1979.  During the 1950s the North Koreans had  successfully followed a Stalin-style command centrally planned forced industrialization, which had resulted in impressive results by 1964.  While it continued to grow for some time after that, the South began to catch up, surpassed it in the early 1970s, and, of course, today is far ahead of the now seriously impoverished North, although it has been able to produce nuclear  weapons.  In 1977, in a single paragraph, she predicted the North would absorb the South. She may not yet have become aware that the South was ahead of the North in per capita income, but she may have been more influenced by the absorption of South Vietnam by North Vietnam only two years earlier in 1975.  She was not completely out of it on her observations of the Koreas.

She can be more sharply criticized regarding her views of China, regarding which she wrote a book defending the cultural revolution.  Apparently before  she died she pulled back on some of her admiration for Mao, but this is clearly an area that one can criticize her political and economic views more than on her observations on the Koreas, where indeed North Korea really was ahead of South Korea when she made her most detailed study of them. But she wrote much more about China than about the Koreas, visiting there on several occasions, although she visited India many more times.

The final, and maybe most important, influence of Joan Robinson today is on Post Keynesian economics, or post-Keynesian economics, with her preferring this latter spelling, the British version.  Indeed, although I cannot  prove it, I have heard it that she was the one who  coined this term, as she did so many others.  That there are two spellings is due to Paul Samuelson also using this term with her spelling to describe what we now call his "neoclassical synthesis," with him referring to "post-Keynesian eclecticism," which supposedly represented his position.  When American Post Keynesians got seriously going in the 1970s, led by Paul Davidson who founded the Journal of Post Keynesian Economics,they favored that spelling to distinguish themselves from Samuelson's formulation, which the British and other non-Americans were never bothered by. In any case, Joan Robinson is widely viewed as perhaps the founder of the movement, varied and eclectic as it is today, or at least the godmother and main inspiration of the movement.  But I  note that it has many sub-varieties, with the Wikipedia entry on it having a curious "family tree" that has 8 different boxes: Keynes's inner circle (which included  Robinson and her husband), Cambridge Keynesians (which also  included Robinson), early North American Post Keynesians, Kaleckians, Sraffians, Fundamentalists, Kaldorians (I show up on that list), and Modern Monetary, with some other lists adding Institutionalists, and with some people loosely on the tree but not in any box or founding one such as Keynes himself, Richard Goodwin, G.L.S. Shackle, and Hyman Minsky (who always claimed he was not a a "Post Keynesian"), along with some others.

So when Gerald Friedman wrote of "Joan Robinson economists," I think that he had in mind the general current set of Post (or post-) Keynesian schools, even if he may or may not have been thinking about any particular one.  I note that Bernie Sanders's top economic adviser on his Senate committee is Stephanie Kelton, on leave from UMKC, who is allied with the modern monetary (not to be confused with the "new monetarist") school, one of those listed in the Wikipedia family tree (and she is in that box there).  But I know that many others like  Bernie Sanders, and most think well of Joan Robinosn, even if they may not all necessarily agree with Gerald Friedman's analysis.  But then again, as Peter Dorman has noted, we have not yet actually seen his model, so one can think what one wants, I guess.  But clearly various aspects of Joan Robinson's thought and career are both relevant and currently influencing many economists today, including many who have never heard of  her through some of her ideas simply entering into basic textbooks, such as "monopsony."

Barkley Rosser

Note on 5/3/16:  Upon further checking while Joan Robinson did discuss golden ages in her The Accumulation of Capital, it was only in the later Essays in the Theory of Economic Growth, 1965, that she expounded most fully on the theories of bastard golden ages and creeping platinum ages, although apparently she initially wrote about them prior to that book.  Also, just for the record, she did use equations from time to time, if only sparingly.

Revenue Neutral. Politically Neutered.

Yesterday I was asked to write a comment on the debate over initiative I-732 in Washington State which would establish a revenue-neutral carbon tax, and I wrote several paragraphs.  Today, after sleeping on it, I realize there is a simple point to be made.

Here’s the background: The Washington initiative is loosely modeled on British Columbia’s carbon tax.  It would cover about 3/4 of the economy, taxing carbon at $25/ton.  Revenues would be offset by eliminating the main business tax, shaving the state sales tax by a point, and increasing low income tax rebates.  A group, Carbon Washington, was formed to promote it.  Meanwhile, another group, the Alliance for Jobs and Clean Energy, bringing together unions, social justice activists and more militant environmentalists, has publicly opposed the initiative.  They demand that revenues be funneled into social service programs and public investment.  The rhetoric has been heated; I attended a talk the other day in which supporters of I-732 were described as racists.

I have serious problems with the Alliance position, but I’ll put that aside for now.  Let’s talk about this “revenue neutral” thing.  Why would someone want a carbon tax to be revenue neutral, especially in a state with serious fiscal constraints like Washington?  I can think of two reasons.  First, it telegraphs to conservatives that there is nothing “big government” about the proposal: you can vote for the initiative while swearing on a stack of Road to Serfdom’s.  Second, it’s what results when you rebate the money.  The publicity of Carbon Washington has trumpeted both of these.

The first argument is a loser.  (1) The number of conservatives who believe climate change is a serious problem that requires government action but will only support a proposal if it leaves the size of government precisely unchanged is vanishingly small.  This is a political concession without an upside.  (2)  Meanwhile, by catering to the small government crowd, Carbon Washington has deeply alienated almost the entire left side of the political spectrum—the natural base for a vibrant climate movement.  Using carbon money to eliminate a business tax doesn’t help matters, and the formula used for tax offsets opens the door to the possibility that the system will be revenue negative in some years.

The second argument gets it backward.  It’s true that rebating the carbon money will result in revenue neutrality (or something close to it), but it’s the rebate, not the neutrality, that matters.  Putting a price on carbon, whether through taxes or auctioned permits, transfers money from the pockets of consumers to the government.  This is regressive, since it’s effectively a sales tax, one that low income people can hardly avoid.  But rebating the money is a second transfer, from the government back to the people.  The point of a well-designed rebate, like an equal per capita dividend, is that the combined system with both transfers is progressive, contributing to greater equality at a time when equality is in very short supply.  From a political perspective, you want to be able to argue this.  Revenue neutrality is only a means toward this end; why would you make that your selling point?  Lots of government handout schemes could be revenue neutral, but what people presumably care about is whether the overall revenue system is fair.

Conclusion: drop this revenue neutrality nonsense.  Propose carbon pricing systems that promote equality.  Don’t take the side of the ideological enemies of public action.  Return carbon money for social justice, not because there is some intrinsic value in keeping revenues just where they are.

Carbon Politics

I’ve always appreciated David Roberts’ voice in debates about climate policy.  He reads widely, looks for the strong points of arguments he otherwise disagrees with, and is open to changing his mind.  Even now, when I think he’s been substantially captured by a particularly blinkered stream within the climate change policy world, he’s still worth looking at.  Alas, however, his drift toward the Breakthrough Institute view of things is nearly complete.

It would take a book or more to explain why it won’t be possible to simply regulate, subsidize and innovate our way to climate stability.  (I’m writing it now in fact.)  Let’s skip over all that stuff for now.  Here I’d like to say a few words about the politics of climate policy.

Begin with DR’s position in a nutshell: Climate policy is constrained by public acceptance as revealed by polling and other empirical indicators.  The public will not support a price on carbon sufficient to achieve meaningful emissions reductions, but it will accept regulations such as fuel economy mandates and shutting down coal plants that are equivalent in their effects to a much stiffer carbon price.  Public opinion is even more of a constraint given the expectation that the fossil fuel industry will strenuously oppose any serious policy initiative at all: you need a lot of political approval to counterbalance them.  To the extent there is a political upside to carbon pricing it comes from the additional revenues it generates, which can be earmarked for popular spending programs on energy R&D and infrastructure.  These have the potential to create their own constituency, which will provide a political base for further climate action in the long run.

Full disclosure: he makes his case partly in response to a posting of short briefing papers by the Scholars Strategy Network (SSN), one of which is mine.  You may discount my reactions accordingly.

Anyway, I think there are two big holes in DR’s critique.  The first is that he doesn’t measure policy against its purpose.  If the goal is climate stabilization—and what else would it be?—the benchmark is the IPCC’s carbon budget for a 2/3 chance of keeping global temperature increases to 2º C or less.  That translates to roughly a 4% decline in global carbon emissions every year from now to the complete phaseout of fossil fuels.  (Delay makes the job harder, of course.)  For political and equity reasons, richer countries will need to cut even more, and the US, with its outsized per capita emissions, will need to cut more than that: an annual 8% cut is in the ballpark.  Now, I can hear DR’s voice in my ear.  You’re completely nuts.  This is so far beyond the bounds of political feasibility it’s a form of mental illness, not policy analysis.  I’d agree, except that the numbers are not a matter of choice—they’re dictated by the physics, chemistry and biology of the problem and the laws of arithmetic.  We’re a lot more likely to find unanticipated flexibility in politics than in the science of climate sensitivity.  From where I sit, DR’s position is the one that has issues with the reality principle.

That brings us to the second hole, the political system itself and its implications for what kinds of policies are feasible.  The implicit assumption behind DR’s piece is that we live in a democratic society where public opinion determines political outcomes: the more support there is for a policy, the more likely it is to be adopted.  Visually, he has in mind something like this:

Public support, as measured by polling, is on the horizontal axis; high carbon prices with revenue rebates are on the left with small minorities backing them, while low prices coupled with spending on green energy get majority approval.  The prospects for being adopted are represented by the vertical axis, and the upward-sloping line tells us that the more support a policy has, the better its chances of being enacted.

Would that it were so.

Now here instead are three diagrams from the groundbreaking study by Gilens and Page based on a database of 1779 policy initiatives they have assembled and analyzed.  The first is the relationship between public support at the median income level and the probability of adoption—flatland.

For the vast majority of the citizenry, it doesn’t matter what they think.  Of course, political popularity can make or break the careers of politicians, and that’s not a trivial effect, but the record of policy adoption moves independently from the electoral ups and downs of parties and politicians.  There is no democratic machinery in the US (or I suspect other large, wealthy countries) that converts the popularity of a proposal into prospects for enactment.

The second diagram illustrates what democracy looks like, but it applies only to the preferences of voters at the 90th percentile, which Gilens and Page take as representative of “elites”.  Their preferences do get translated into outcomes.

The third is interesting; it represents the relationship between political mobilization around an issue, as reflected in the formation of pressure groups and their lobbying and similar activities, and the probability that the issue will be decided their way.

Collective action works!  The problem is that mobilization requires resources, and resources are concentrated in a few hands.  But not always: Gilens and Page find that when bottom-up issue groups come together they can be just as effective as the top-down variety.

What does this all mean for climate policy?  First, that the absence of widespread public support for various policy initiatives is not a constraint, just as its presence would not be a basis for success.  (I suspect that public support for a policy tends to increase after its adoption, in a sense providing democratic justification ex post, but I don’t know of any empirical evidence on this one way or the other.)  By comparison, the move to privatize public education has gained considerable ground in the US without any indication of broad public support.  Elite preferences really do matter more.

Second, what really matters is the development of a dedicated mass movement for serious climate policy.  We can see it beginning to come together, but it still has a long way to go.  I think Theda Skocpol nailed it in her meticulous analysis of the failure of cap-and-trade in 2009: opinion polls, like votes in Congress, is more an effect than a cause of political action, and to get the job done that action needs to maximize citizen mobilization.  This model is in the background of my own paper on the SSN website, which is about overcoming the disagreement over the use of carbon revenues that currently impedes the development of a unified movement in Washington State.

In the grand scheme of things, DR occupies one end of the political optimism spectrum, where the existing political framework sets unbudgeable limits to what can be accomplished, a position I’ve referred to earlier as the politics of futility.  The other end is the pure willfulness of some portions of the left, for whom, if policies fall short, it can only be due to not enough of us wanting them badly enough—a shortfall of spirit.  In between is a large realm of empirically guided, pragmatic radicalism, keeping one eye on the world as it is today and the other on the prize.  I think DR used to be in this space, and he’s welcome back whenever he decides to rejoin it.