Saturday, December 31, 2011

Shopping Is Not a Perfect Substitute for Politics

The New York Times has an interesting piece today on the shortcomings of organic agriculture in its current, commercialized form.  They describe vast monocultures, drawdowns of aquifers, wasteful attempts to prevent natural blemishes and deformation of vegetables, and long-distance shipping in the off-season.

A few of their criticisms are spurious; for instance, it is better ecologically to ship tomatoes and basil from Mexico to the US during the winter than to try grow them in greenhouses, and trying to persuade consumers to remove such things from their diet for half the year is not a reasonable strategy.  Nevertheless it is quite true that an organic label does not guarantee that the agriculture that brought the food to your table is sustainable, ecologically or socially.

The roots of the problem lie with the idea that agriculture can be fixed by establishing labels like organic or fair trade, so that shopping does the work of social change.  Of course, shopping can be better or worse.  You can have no labels at all and drift inexorably to the lowest common denominator in all aspects of food production outside the purview of the consumer.  Or you can have labels like the ones we have today and give shoppers a choice in how much social responsibility they want to trade off for price, product differentiation or other consumerly objectives.

Don’t expect these labels to do everything, however.  They have to be kept simple and standardized, so they can’t address all the practices that arise in different environmental conditions.  Also, they are assigned to production on a producer-by-producer basis, so they can’t take into account the interactions at a regional or sectoral level.  For instance, even if it were possible to insert language about sustainable water withdrawals into the organic standards, what constitutes sustainable depends on what other users sharing the same groundwater resources are doing.  An individual farm may simply be the wrong unit of observation.

Real solutions require regulation and coordination, stuff like water and soil conservation districts.  Reducing the burning of fossil fuels in food production and distribution requires a systematic control over carbon emissions, such as the permit system I’ve pushed in the past (such as here and here).  And better labor practices require better labor laws and health unions to enforce them.  You shouldn’t expect shopping to take care of all this.

So why is all the burden placed on labeling and consumerism?  Because we’ve given up on politics, at least for now.  If you don’t think the rules of the game can be changed through collective action, all you’ve got left is shopping.  But remind yourself from time to time that this is duct tape, not real repair.

Thursday, December 29, 2011

Partisan Misrepresentation of Ricardian Equivalence is Nothing New

Paul Krugman catches Robert Lucas (not to be confused with Robert Barro - thanks for the comment David) misrepresenting Barro’s claim to fame:

But, if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder — the guys who work on the bridge — then it’s just a wash. It has no first-starter effect. There’s no reason to expect any stimulation. And, in some sense, there’s nothing to apply a multiplier to. (Laughs.) You apply a multiplier to the bridge builders, then you’ve got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn’t going to help, we know that.

Let’s get back to this after this abbreviated explanation of Ricardian Equivalence from David Andofatto. OK David, we know that in a life cycle world where households understand the long-run government budget constraint that households view all tax cuts (even the 1981 and Bush43 tax cuts) as mere tax surcharges that have to be repaid. But this model goes well beyond this. If fiscal policy involved a permanent increase in government consumption, it also involves a permanent increase in taxes which would be a wash as Barro alleges. So if the Obama Administration passed a law where we built a bunch of bridges every summer only to tear them down every winter for the rest of time, then maybe Barro’s claim makes sense.

But this is not the correct policy experiment. The building of a bridge is a temporary blip in spending intending to invest in the public infrastructure where the benefits will be long-term. The financing requirements can be met either by a blip in taxes or very low taxes each year over the future. And in either case, the fall in private consumption in the first year will be small in proportion in the rise in government spending to build this bridge (which it does not intend to subsequently tear down).

One would think this logic was well known. The reason for this blog post, however, is to note that Republican hacks have grossly misrepresented Ricardian Equivalence before. Recall all the fuss over why the Bush43 tax cuts would be better aggregate demand stimulus if that were to be made permanent as opposed to temporary? While that might be good life cycle theory if we could ignore a lot of other economic propositions – such as the long-run government budget constraint (and of course Ricardian Equivalence). Yet some Republican hacks even went so far as to dismiss any concern about crowding-out (even as the FED was already raising interest rates) based on the proposition that tax cuts do not raise interest rates ala Ricardian Equivalence and that Paul Evans AER 1985 paper entitled “Do Large Deficits Produce High Interest Rates”. But wait a darn second – the Ricardian reason for all of this is the assertion that tax cuts don’t encourage more consumption. This incredible dishonest mishmash was most evident when Victor Canto claimed in what National Review November 2002 piece that the Bush tax cuts would be more powerful in encouraging consumption if made permanent, while in another National Review November 2002 piece he used Ricardian Equivalence to argue that the tax cuts would not raise interest rates. To be fair to Mr. Canto – the National Review expects such brazen dishonesty if it is in defense of its rightwing agenda.

I should say that the Evans AER 1985 paper always puzzled me because the Reagan tax cuts did raise aggregate demand by raising consumption during a period when government spending was not reduced. And while nominal interest rates may have declined, real interest rates rose. In other words, we got classical crowding-out from a mix of expansionary fiscal policy and the Volcker tight monetary policy. Now if you wanted to remain a true believer of Ricardian Equivalence, I guess you could have argued that households expected the Reagan revolution to eventually get around to reducing government spending. Domestic spending after all was trimmed a bit even as defense spending soared. But we did eventually get that good old Peace Dividend – in the 1990’s.

Wednesday, December 28, 2011

Does The Italian Bond Sale Mean The Eurocrisis Is Over?

Yesterday Italy sold bonds for a little over 3% compared to over 6% in late November. Does this mean the eurocrisis is over? Not necessarily, but it may well mean that the markets have finally figured out that Berlusconi really is gone, that Italy is one of four countries in the eurozone that is running a primary budget surplus (Germany, Belgium, and Luxembourg are the others), and a much higher proportion of its debt is held domestically by the high saving Italians.

The worst ongoing problem in the zone is Greece. It is caught in a downward spiral that is hard to see an end to other than an exit from the eurozone. While some worry what will happen "if Greece defaults," the hard fact is that it has already effectively done so. The wholse argument over the size of the "haircuts" on its sovereign debt is really just an argument over how bad the default will be and exactly who will end up having to bear the cost of their default. But for all the worry about linkage and contagion if Greece defaults, by now it looks like the ECB's plan to support European banks will probably work to keep the dominoes from falling down in a row as a result. Maybe Portugal might also have to depart, but both Spain and Italy have better budget fundamentals than either the UK or the US. Probably the eurocrisis will end with all that.

What we may be looking at is a better than expected scenario. I find it increasingly amusing to read and listen to commentators who note that Christmas sales did better than expected and that gasoline prices keep dropping, but who then warn that all this will probably turn around next year. Well, yes, maybe it all will. The eurozone has pretty much fallen into a recession that will probably continue into the next year, and more worryingly China is clearly slowing down with its property bubble seriously cratering. But it may be that the US will return to its old role as the engine of growth for the rest of the world, at least somewhat. Probably the biggest fly in the ointment may be the purely artificial crisis being ginned up over sanctions on Iranian oil to stop their nonexistent nuclear weapons program (despite all the hoopla, the IAEA report did NOT report an actual nuclear weapons program there, despite some new findings of some past research regarding a potential to have one).

Friday, December 23, 2011

Daring To Disagree With Dean?

That would be Dean Baker, briefly a co-blogger on the old maxspeak, who warns that the recent upbeat reports on housing are not reliable, with them being too much based on highly volatile changes in multi-family housing. For details see as well as the closely related Dean must be taken seriously on these matters since his being the first to call the housing bubble all the way back in 2002.

I am not disagreeing with him very much. I agree that for much of the year the hype over a possible double dip in the US has been overdone, which partly explains the sudden surge of enthusiasm we are now seeing at recent high GDP growth rates, which are probably overdone due to being heavily driven by inventory adjustments that are likely to halt after the first of the year, not to mention the continuing likelihood of a European recession with a Chinese slowdown that will put a drag on externally, although those fears have been the main source for all the moaning and groaning in the markets for much of the past few months. And Dean is right on part of the details: single family home construction is barely above its pit in 2009 and not moving; nearly all of this recent increase in housing starts has been for multi-family dwellings, and that is a highly volatile monthly series.

Nevertheless, if one looks at the charts he provides and those he links to, there is a clear upward trend since spring, despite the month-to-month volatility, even if it is mostly in multiple family units. It is also true that it is regional, mostly in the Northeast and West, but any apparently sustained movement should be welcomed. In the chart he shows, with January 2002 as 100, there was a peak in mid-2006 at around 140. The pit in late 2009 was around 20, and it was below 40 this spring. But the November number is at 80. This will probably show declines in coming months, but if the general upward trend continues, this will mean that for the first time since 2006, housing will be a net positive contributor to the US economy, even if only somewhat weakly so.

The newspaper reports have it that rents have been rising in the regions where construction has been rising, reflecting an increase in household formation, with this rising demand finally crashing against the long-depressed supply. Overall housing starts remain far below where they once were, but the issue is direction, and that does appear to be upwards, if erratically and not throughout the US. Dean links to data on rents, but that does not show the most recent that has been reported in the papers.

So, this is at most a mild disagreement with Dean, but in fact I am willing to say that the news on the housing front is improving, at least in terms of a trend for multi-family construction, even if there is a continuing problem in foreclosures and in the single-family home portion of the market. So, while Dean threw in a mention of celebrating Hanukah, I'll throw in one for celebrating Christmas as well, :-).

Thursday, December 22, 2011

Lowering The Flag And Leaving Iraq

So, the US military has lowered the battle flag and the last official military have now left Iraq, although there will still be some engaged in advising and protecting the mammoth US embassy in Baghdad. Time for a reconsideration.

On the day that Saddam's last stronghold, his hometown of Tikrit, fell to US troops in April, 2003, I wrote a column published in my local paper, portions of which I posted on the old maxspeak. This was the moment of the highest US triumph, with the looting in Baghdad just starting and before the US stupidly disbanded the Iraqi army and fired all the Ba'athist civil servants, thus triggering the rebellion that eventually became the Sunni-Shi'i civil war, which seems to be picking up as the US leaves rather than tailing off. In that essay, I noted three positives and three negatives of the war, emphasizing that I thought the last of the negatives weighed more heavily than anything else. All six have come to pass.

The positives were that Saddam would no longer be violating human rights, that economic sanctions against Iraq would be ended, and that US troops would be reduced in Saudi Arabia, which had been a leading propaganda point of Osama bin Laden. Yes, despite the apparently tightening of authoritarianism of the Maliki regime and reports of ongoing torture, the human rights situation in Iraq is better today than under Saddam in general. Yes, economic sanctions were ended, but the benefits of that have been far overwhelmed by the subsequent economic collapse engendered by the ongoing war, with the effects of that still not ended. And the removal of US troops from Saudi was a strictly minor event, also overwhelmed by other events.

The negatives were that womens' rights would be worsened in the country as Shi'i fundamentalists would come to power, that the situation of Christians would also be worsened, and finally and most importantly, that this invasion would give al Qaeda a major propaganda gain. Womens' rights have not worsened as badly as I thought they might, but they have worsened. The situation of the Christians has been catastrophic, with more than half of their population having fled the country, not that this has registered one blip on the radar of the US fundamentalists backing the war. And, not only did al Qaeda get a propaganda boost, but as the civil war erupted al Qaeda gained a major foothold and became a major player in that war. More generally, the standing of the US in the Muslim world and more broadly was severey damaged by the entire episode and remains so.

Needless to say, I did not foresee the civil war or the scale of death and destructiont that followed. But then, just about nobody else did either, not at that point in time anyway.

One clear winner from the war has been the Kurdish population, who were under particular repression from the Saddam regime. They have won a virtual autonomy, now guaranteed as they remain power breakers in the federal government in Baghdad, and have been independently developing their oil industry with help of various minor oil companies from places like Norway and Canada. While not perfect, governance in autonomous Kurdistan seems to be reasonably competent, and the economic and social and political situation is almost certainly far improved over the previous period, something that cannot be said about the rest of Iraq.

Finally, I would like to comment on the whole issue of the role that oil played in the war, and here I shall largely be reiterating arguments I made long ago, although not in that original essay in April, 2003. While many thought and continue to think that the war was "mostly about oil," I have never accepted this. Yes, the first Gulf War was. Bush, Sr. clearly would not have bothered undoing Saddam's invasion of Kuwait if there were no oil there or if there was none in neighboring Saudi Arabia. As it was, it was the Saudis, satisfied that Saddam was contained, who held Bush Sr. back from rolling to Baghdad out of fear that this would lead to a pro-Iran, Shi'i-dominated government in Baghdad, which has indeed been an outcome of Bush Jr.'s invasion.

No, it was mostly about Bush Jr. trying to prove that he was a bigger man than his dad, a neo-Ronald Reagan, and many of the other backers of the war in the administration were neocons like Wolfowitz whose big concern was Israel and how Saddam's paying the families of Palestinian suicide bombers was an affront, not to mention the Israeli fear of the nonexistent weapons of mass destruction. As it is, the interests of Israel have basically never been in line with those of the US oil majors in the Middle East.

There was one player for whom oil was important: VP Dick Cheney, certainly a not inconsequential figure, and possibly the one who most effectively played on Bush Jr.'s inferiority complex vis a vis his dad to get him going on the whole thing. At a minimum, Cheney's own company, Halliburton, made money hand over fist, and there is a clear case of oil playing a role, if a minor one. It is also true that Cheney apparently semi-secretly plotted with various US majors about "getting back into Iraq" as a result of the war, although the CEOs of these companies were not enthusiastic about the idea of disruptions of oil production and transportation that might arise from the war and were not at all public supporters of it.

As it is, of course, the oil companies did make money as the price of oil rose with the disuptions that did occur, although these were not supposed to occur. Indeed, not only Cheney but Wolfie as well were fully under the delusion that we were going to be welcomed with flowers, and the drive to secure the Oil Ministry first in Baghdad was driven by the even more ridiculous delusion that as did Kuwait, Iraq would actually pay for the war itself out of their overwhelming gratitude. It is really astounding to think how such actually intelligent people (Paul Wolfowitz, whom I know personally, is in fact brilliant) could be so completely out of touch with reality.

In any case, the ultimate irony of this is that in the end, the US majors were probably right not to get too excited about all these prospects. They never came to pass. The Kurdish production is being handled by oddball small companies from around the world, although with a couple of minor US ones in there as well. And in the rest of Iraq, oil production has only barely gotten going again due to the ongoing problems of pipelines being blown up and so on, and the companies that have made contracts to do anything have been overwhelmingly non-US ones, with Chinese and Russian ones much more active than any US major. Cheney may have had getting the US majors into Iraq as a major goal of his own efforts, but this may have been the ultimate failure of the many that he was responsible for as VP of the US.

Wednesday, December 21, 2011

George W. Bush's Second Biggest Foreign Policy Mistake Revisited

Of course the first would be invading Iraq. But a close second not often remembered or even realized occurred two months into his term of office. It was the humiliation inflicted on then South Korean President Kim Dae-Jung, a Nobel Peace Prize winner and former torture victim of earlier military dictatorships in that country, when he arrived to visit the US. Secretary of State, Colin Powell, had planned on a continuation of the warming policies between the two Koreas and a friendly meeting with Bush and support for Kim. As it was, the "Vulcans" led by Cheney and Rumsfeld intervened to torpedo this and leave Kim not meeting in the cold and without his long-running policy. This also ended that round of negotiations with North Korea on nuclear weapons, with the Vulcans arguing that the US should pursue "regime change" in North Korea, which, hack cough, did not happen.

Instead what happened was that the nuclear negotiations came to and end and US-South Korean relations tanked until a more conservative government took over there. Not long after the end of the negotiations, the DPRK withdrew from the Nuclear Non-Proliferation Treaty and restarted its plutonium-based drive for nuclear weapons, which led to its successful acquisition of such not too long later. This is fish soup that cannot now be turned back into fish or spilled milk that cannot be returned to its container, a disastrous development that we might not now have to be dealing with at this time of leadership transition in North Korea, if Bush and his
Vulcans had not pulled this enormously stupid blunder.

Tuesday, December 20, 2011

KimJung Un should have such problems!

He doesn't have principles students telling him, on a final exam, that, for instance, the "shoe-leather costs" of inflation stem from "the rising price of leather" Or that hoary and hardy perennial, that the alternative to monetary policy is "physical policy" - carried out, no doubt, by the President's Council on Physical Fitness.

Why was I born?

Monday, December 19, 2011

How North Korea Became So Isolated

North Korea (DPRK) officially follows an ideology developed by its founder, Kim Il Sung, known as KimIlSungism (really), which his just deceased son continued to follow, and which it is likely will continue to be followed at least for awhile by his grandson, the Great Successor, Kim Jong Un. Besides generally following the Stalinist version of strict command planned socialism, somewhat loosened in recent years, the most famous aspect of KimIlSungism has been its doctrine of self-reliance, or juche (also transliterated as chuch'e). While some of the poverty of the DPRK is clearly due to its overemphasis on military production (fourth largest military in the world, and check out those nukes) and the typical stagnation of command planning, much is almost certainly due to the nearly autarkic approach due to KimIlSungism. Where did it come from? I see at least five sources.

The first is the Stalinist model itself. In the great struggle with Trotskyism, Stalin advocated "socialism in one country," although, of course, the Soviet Union was the largest nation in the world by far in land area. However, after WW II, this would be less emphasized as Eastern Europe went officially command socialist with the assistance of the Red Army in place. But in the DPRK, Kim Il Sung would cling to the older model.

Second is that after the death of Stalin, Kim would find fault even before Mao did to the moves towards thawing and loosening of the model that was going on in the Soviet Union. The first recorded speech of Kim supporting juche occurred in late 1955, prior to Khrushchev's 1956 deStalinization speech that reportedly upset Mao (according to official DPRK histories, Kim Il Sung gave his first pro-juche speech in 1930 at age 18, but no independent evidence supports this). With the failure of North Korea to conquer South Korea, and truce without official peace treaty after Stalin's death in 1953, the new leaders would go even softer with the Geneva summit in 1955, accepting the reunification of Austria, guaranteed to be neutral, a model possibly there for Korea that Kim rejected.

Third was the emergence of the Sino-Soviet conflict after 1956, although it would be a few years before this would become open and a problem for the DPRK, caught between the two. While Kim tended to side with Mao's critique of Khrushchev's ideological and policy deviations from Stalinism, he also disagreed with the more decentralized and agriculturally oriented version of socialism that Mao followed in China. As the conflict worsened, he wished to keep independent from both of them, which encouraged the idea of self-reliance. He also did not wish to go the capitalist road or fall into dependence on the capitalist West (or worse yet, Japan), so self-reliant juche became the way to go and was gradually developed over a long period.

Fourth was the emergence of his desire for a socialist monarchy, with his son to succeed him. Having a distinct ideology of self-reliant socialism fit in with this (and it is curious that some other dictatorships have followed the same path of de facto monarchy even if officially socialist republican, see Syria). Curiously, this is also consistent with traditional Confucian values of respect for family.

And the fifth involves the DPRK also falling back on traditional Korean attitudes and practices. Not only has Korea long been described as the most Confucianist nation, but prior to the Japanese conquest in 1910, it was also the most isolated, known as the Hermit Kingdom. In this it had long imitated Japan, but continued to resist being "opened up" even after Japan was by Commodore Perry's black ships in the 1850s, leaving it to the Japanese themselves to do the opening. Kim, of course, presented himself as the national hero of the anti-Japanese resistance, and this return to a traditional Korean practice burnished his credentials as the truly genuine national Korean leader who deserved to lead the unified nation.

Dear Leader Dead, Long Live Great Successor

While all had known that Kim Jong Il had long been seriously ill, his death on Saturday of a heart attack in a train has taken many by surprise, with citizens of the DPRK (North Korea) showing the same sort of hysterical grief they did when his father, Kim Il Sung (Dear Leader) died in 1994, which in turn repeated the sort of reaction seen in the Soviet Union on the death of Joseph Stalin.

In contrast with the long delay of reporting Kim Il Sung's death, it has taken only 48 hours for Kim Jong Il's death to be reported, with DPRK media reporting that his third son, Kim Jong Un, is to be called the Great Successor. Kim Jong Un had been reported to have been favored by his father and to have been groomed for acceptance by the family and military elites that rule the nation. Pretty clearly this ruling group has decided that he is to be the front man for continuing their dominance, although it is almost certain that it will be some time before he will be able to asert anything like the dominance his father and grandfather would come to have.

So, in the intermediate term the prospect is for stability, even as the South Korean stock market dropped 5% on the news before rebounding some, along with a drop in the ROK won as well, and various military maneuvers have been reported near the DMZ. Inter-Korean relations have been particularly bad during the past year, since military attacks by the North, thought by many to have been made to impress the DPRK military with Kim Jong Un on his appointment at a four star general.

Even as the near term seems to augur continuation of the system that has produced five straight years of GDP decline and ongoing malnourishment of large parts of the rural population, particularly in the nation's northeast. However, underneath this apparent stasis, many changes seem to be going on. Cell phones have spread widely, as have informal markets in various goods, towards which the government has oscillated in attitude. Chinese pressure to follow their model has steadily increased, and in recent months there have been reports of negotiations with the US. Kim Jong Un studied in Switzerland. So, there may be major changes down the road, if not immediately, particularly as the Great Successor may need to imitate in economic policy what was done in military policy this last year to assert his legitimacy to be officially on top of the nation's system. But this death and succession does mean the further future becomes much less clear.

Tuesday, December 13, 2011

President Gingrich Would Ignore The Humphrey-Hawkins Full Employment Act

I was scratching my head as to why any Presidential candidate would say Ben Bernanke should be fired until I read this:

"I would, first of all, demand a thorough audit [of the Fed]. Second, publish all the decision documents for 2008, 2009, 2010. Third, I would prepare legislation to eliminate the Humphrey-Hawkins Full Employment Act, which has totally confused the Fed," Gingrich said. The former House speaker went on to say that he would demand the Fed to hold "hard" money

There are lots of reasons why Newt should never be allowed near the White House again but this one has to go to the top of the list.

The Exegesis of Deceit

One of the steadiest hums of our time is liberal indignation at the dishonesty of the Right.  On any given day, you can hear the shock and disbelief: How can they say that?  Don’t they care about getting the facts right?  Don’t they realize they are being inconsistent?  Last week it was the Romney campaign ad that deliberately and even crudely misquoted Obama.  This morning I wake up to Krugman “truly amazed” at the way Paul Ryan would cite commodity prices on the way up and ignore them on the way down.  May I suggest that there is a method to this deceit and that being shocked is not an adequate response?

Let’s talk about Leo Strauss.  Strauss was a Jewish refugee from Nazi Germany who taught at the University of Chicago in the 1950s and ‘60s.  He was a classicist and did not write or speak much about modern politics or social theory.  You won’t find in his work a set of instructions for the conservative movement, and those who want to demonize him will be disappointed.  Nevertheless, his teachings as filtered through his students had a profound impact.

The cartoon version of Strauss, which is broadly correct, goes like this: The great philosophers of the past, each in their way, were led by the force of logic and experience to a dangerous insight, that no social or cultural arrangement can substitute for the necessity of virtue, and that only a small minority of individuals are truly virtuous.  (One can imagine how a refugee from the Third Reich might come to that understanding.)  Those who perceive this truth must write deceptively, since the unworthy masses, if they sense that they are being judged unworthy, will persecute the truth-teller.  Strauss provided readings of the canonical texts that claimed to show they functioned on two levels, as decoys for the average reader and secret wisdom for the initiate.  His classes attracted smart, intellectually ambitious students who thrilled to the notion that they were getting the real inside story about philosophy, politics and culture.

What matters is not Strauss per se, but how his message was transmitted through his followers.  As is well known, a number of prominent conservatives studied under him directly, and a much larger group was exposed to a less rarified version of the theory under the tutelage of second and third generation Straussians at colleges and universities from Claremont to Harvard.  As Strauss’ teachings passed from hand to hand, the strategic role of dishonesty grew and became more mundane.  According to the vulgar version, democracy is a myth.  Freedom and morality can be safeguarded only by the enlightened few, and deceit is central to their method.  (John Galt, anyone?)  Indeed, there should be no shame in being called out on a lie: to be shown to have lied in the service of a higher principle is to be honored, even though only those in the know will understand.

As strategic deceit filtered down from Plato and Machiavelli to the average poli sci major, a powerful discovery was made, that the ability to lie without shame is an immense personal resource.  We know, after all, that people often lie in order to advance their interests—has anyone been entirely clean in this respect?  Nevertheless, most of us are ruled by shame: when we are shown to have lied we become embarrassed and abandon the strategy.  How much more powerful it would be to not feel shame at all, to smile at the ones who have called out the lie and say, “That’s nice, and what are you going to do about it?”  The experience of “virtuous deceit” in personal life, not to mention political activism, was intensely empowering.

My reading is that contemporary movement conservatism in the US is imbued with the philosophy and practice of principled dishonesty.  It is worn as a badge of honor by activists.  It is impervious to efforts to evoke shame.  If a particular lie loses its value because it has become overexposed, you simply switch to a new one.  Because most people assume that shame is universal, and that no one would tell a lie if others knew they were doing it, they are vulnerable to the few who lie without shame.  It is a suit of armor that the factual arrows of naive liberals cannot pierce.

I don’t want to be misunderstood.  I am not saying that conservatives are necessarily wrong and those on the left necessarily right.  There are times when Dinesh D’Souza is factually correct and Naomi Klein is in error.  The difference is that Klein is not cynical about truth; she writes what she really believes, whether or not her beliefs are warranted.  D’Souza will not say this in public (Straussian discourse is always on two levels), but he separates the “inner” truth of his politics from the arguments he makes for it, and utilizes the freedom to say whatever will advance his cause.

What has gradually transpired in the past few decades is that movement conservatism has captured the Republican Party, fundamentally altering mainstream political discourse.  The rest of us haven’t figured out yet what to do about it.

Sunday, December 11, 2011

Obama's Payroll Tax Cut

When the cut was first announced, I wrote that it seemed to pose a threat to Social Security. Now, a few of the Democrats, especially Bernie Sanders, seem to be picking up on the risk to Social Security. What would have stopped Obama from making it a tax rebate in which the treasury would not have to leave the fingerprint on the Social Security system. Besides, it could be targeted to people who made under x millions of dollars a year. Of course, really smart CEOs do not have to pay the tax. They can take a one dollar salary, then cash in stock options instead.

Saturday, December 10, 2011

The Brussels Agreement: Why it will Fail

One response would be to point out the irrationality of the agreement itself—the minimal role that fiscal profligacy played in bringing on the fiscal crisis, the lack of any mechanism for rebalancing between surplus and deficit countries, and the unchanged charter of the ECB, which prevents it from behaving like a normal central bank.  Those arguments have been made, are being made and will continue to be made, and will apparently have no effect on the course taken by European politics.

So let’s look at the realpolitik, past and future.

First of all, it is important to bear in mind that this is an agreement of the European right.  The economic collapse of 2008 resulted in an electoral rout of social democrats throughout the continent (and in the UK).  That’s a story that needs more explanation, but for now the point is simply that conservative parties have absolute control over Europe, and the agreement just reached represents their priorities.  It is for hard money, austerity in the face of recession, full guarantees for creditors, and implicitly for reining in the costs of the welfare state, which must happen if the deficit targets are to be met under foreseeable conditions.  This is why politics matters, after all.

Not liking a political program is not the same as predicting its failure, however.  It could happen that the conservatives get their way and a socially regressive stability takes hold.  Under this scenario, the fiscal crisis recedes and Europe enters a long period of slow growth which is favorable for those who acquired wealth during the go-go years: the value of their assets is protected, and labor is mortally weakened.  For those who designed the Brussels agreement, and for those who bankrolled them, this would look like victory.

A clear-eyed view of the situation suggests, for me at least, that this outcome is unlikely.  I believe that the fiscal pledge will buy time—at most a year—for German support for peripheral finances.  It is essentially a quid pro quo: the countries of Europe make a (foolish) promise to bind themselves to a 3% deficit rule, and in return the main creditor country, Germany, softens its stance toward transfers.  How much softer?  From first appearances, it looks like about €250B net, with some financing moved forward from 2013 to 2012.  (This assumes that the €200B directed to the IMF is returned to Europe without leveraging Chinese or other commitments.)  Is that enough?  It depends on whether the market response is favorable.  If interest rates come down in Italy, Spain and the rest, debt can be rolled over until the economy subsides.  This means something like a quarter or two.  If interest rates shoot back up, the money is not sufficient.  In that case, everything depends on the ECB and whether Draghi now has implicit German forbearance to monetize a portion of euro-denominated sovereign debt.

But this about whether the plan can make it through the next few months.  I believe it is simply impossible for it to survive much more than this.  Absent a miracle, Europe is sliding into a recession.  This will affect Germany as much as the weaker countries, even more considering its dependence on Eurozone exports.  (Germany suffered an exceptionally sharp contraction post-Lehman too.)  The result will be a risk of debt deflation in all markets.  The sovereign debtors will again face default as public revenue dries up.  Speculative assets like real estate will resume their decline.  Overleveraged financial institutions—and Europe is the world leader in overleveraged finance—will need to be bailed out.  Of course, a rise in unemployment will trigger automatic stabilizers and increase the pressures for discretionary fiscal deficits as well.  It is likely that there will be a wave of elections in which center-left parties take revenge for their defeats of the past few years—Germany could lead the way, in fact.

When it comes to whether European economies will simply collapse into a deflationary spiral, or whether the Brussels commitments will be abrogated, I’ll put my money on abrogation.  This agreement has a ticking clock, and when the time winds down, it will be history.

Friday, December 9, 2011

The Meme that Refuses to Die: Government Debt Must Be Paid Back

No it doesn’t.  It almost never is.  To pay back government debt, you have to run a budget surplus, and while there may be modest surpluses from time to time, they don’t add up to more than a minuscule fraction of all the accumulated debt.  But don’t take it from me, look at the record.

The story is unmistakable: the US jacked up its public debt to finance WWII and increased it further in almost every year since then.  We are not paying off the debt left by our parents and grandparents, and our children and grandchildren will not pay off ours.

The debt burden depends on the ratio of debt to GDP as well as the interest cost in servicing it.  The way to reduce this burden is to have a combination of real economic growth, inflation and modest interest rates.  If you want to show your solicitude for the well-being of future generations, demand macroeconomic policies that will boost demand and raise inflation a bit, consistent with continued low interest rates.

What to avoid: nonsense like this excerpt from today’s column by Catherine Rampell of the New York Times:
Total debt for the United States — that is, also including corporate and government debt — hit another all-time high because government borrowing is still outpacing the rate at which households shed debt.
 Guess who will ultimately pay back that government debt: American households.

Thursday, December 8, 2011

A Theory About Polish Politics

This morning’s New York Times has a piece about Polish PM Tusk’s avid support for Germany’s stance in EU bargaining.  The article plays up Tusk’s pan-Europeanism and leaves out his equally passionate attachment to fiscal orthodoxy à la Merkel/Schäuble.  Putting both together, you have the classical liberal position, one that can still be found in every European country, although seldom with as much backing as in Poland.

I don’t have a detailed understanding of Polish politics, and I welcome comments from readers who can set me right, but here is my tentative explanation:

In every European country there are three historic political traditions.

religiously based conservatism, nationalistic and authoritarian,

liberalism, secular, internationalist, and devoted to free-market economics,

socialism, which can be more liberal or conservative in matters of religion and nationalism, but centers on economic egalitarianism.

(In some countries a Green pole has emerged, but this is new.)

What happened in Eastern Europe is that communist regimes discredited the left political tradition.  Where ostensibly left parties continued to hold their own politically in the post-1989 environment, it was on the basis of “competence” and the pull of patronage, not anything that deserves to be called socialism.  Each country is somewhat different, of course, depending on the circumstances of transition.

In Poland, as in Hungary, the ex-communists discredited themselves, failing to provide even a technocratic fig leaf for their patronage-based politics.  This has left the field entirely to conservatives and liberals.  Worse, both countries have the most reactionary of conservative parties, extremely nationalistic and hostile to democracy.  The election of Tusk in Poland was greeted almost everywhere else with a sigh of relief: here is a reasonable man and a reasonable party, someone we can work with.  One should not forget, however, that he is a liberal in a country that is virtually without a left—in other words, someone who has no need to trim his free-market ideology in order to compete for the support of the egalitarian wing of the electorate.

The point is that it is not just cosmopolitanism that draws Tusk toward the EU project, but also his approval of its neoliberal goals.  You could write a very different article about Polish EU politics foregrounding, instead of nationalism/Europeanism, the dichotomy of market liberalism versus the “social Europe”.

More on Teaching Intro

Peter started a discussion here. And Nick Rowe at Worthwhile Canadian Initiative, under the title "God and Man at Yale" has another one, with hundreds of comments. I'll add my two cents. This is a comment I sent to WCI actually.

I want an Intro. Course to show students "how to think like an economist," but I also want some time devoted to the limitations of such thinking. I used to teach the course with David Friedman's *Hidden Order* and Robert Frank's *Choosing the Right Pond*, so they could see how the same methodology - rationality plus equilibrium - could give you very different political-economic visions. But the methodology itself -whether wielded in support of libertarian or left-liberal politics - ought not to be accepted uncritically. So I would assign Dickens' *Hard Times*. The students hated the Dickens, so I dropped it and substituted Amartya Sen's "Rational Fools." I wanted them to understand how the phenomenon of "commitment", as Sen uses it, by which he means "counter-preferential choice" is a deep critique of the conception of rationality that economists use. Unlike the behavioral critique, which simply documents all the ways people make mistakes in maximizing, a Senian critique says that human beings are more than utility maximizers. As the late lamented David Foster Wallace puts the point in a discussion of Dostoevsky, "[Dostoevsky’s] concern was always with what it is to be a human being—that is, how to be an actual person, someone whose life is informed by values and principles, instead of just an especially shrewd kind of self-preserving animal." I don't think this deep critique cuts either right or left, but I think we do a disservice to our students by not exposing them to it. The fact is that most of them when they come to us are already "thinking like economists" in important and pernicious respects: they are cynical about the possibility of principled behavior, they are sure that behind every alleged "value" lies a preference, they are nihilistic about normative authority. The have been brought up, after all, in the age of "sophisters, calculators and economists."

At an AEA meeting one year long ago, there was a session on "Teaching the Principles Course" I attended, which was really just advertising for two new texts by the presenters, one of whom was Robert Frank. (The text he was introducing is the one I have used in the Micro split ever since - it's a great book.) Frank talked about how the book encouraged the students to be economic naturalists, and to apply the economic way of thinking to everything they came across. I asked a question: suppose a student comes to your office hours and thanks you for teaching him the EWT. He was in a long-term relationship and felt that he owed his partner loyalty, but that after learning that sunk costs shouldn't play any part in guiding one's choices, he decided - given that the net benefit of the relationship going forward was negative- that he owed his partner nothing, and consequently was dis-loyal. Frank seemed genuinely at a loss for a response and after the session sought me out to talk more about it.

John Taylor Clarifies His Summary

John Taylor is not happy with a critic from Paul Krugman. His most recent summary states:

Krugman says my conference summary suggested that “Bloom, Baker and Davis had showed that fear of Obama was holding the economy down.” No, my summary said or implied no such thing; there is no mention of Obama, Bush, or any politician in my summary. It simply says that these authors “presented their empirical measures of policy uncertainty and showed that they were negatively correlated with economic growth.” … As part of his presentation Bob said that now and going forward we should assume “no chance of conventional fiscal expansion; rather, possible cutbacks motivated by excessive federal debt.”

Contrast this to what Taylor originally wrote:

In sum there was considerable agreement that (1) policy uncertainty was a major problem in the slow recovery, (2) short run stimulus packages were not the answer going forward

Wow – I read (1) as saying a lot more than simply negatively correlated. I also read (2) as asserting fiscal policy was ineffective but now we know that Dr. Taylor meant fiscal stimulus was never tried and will not be tried. I’m so glad he cleared this up!

Wednesday, December 7, 2011

Climate Change Proposal

If a large number of countries wish to band together to limit climate change, could they impose a tariff on imports from countries that do not limit CO2 production, accusing the non-compliant of taking advantage of an unfair trade practice?

John Taylor May Have One Thing Right

Paul Krugman provides us with the summary of a conference at the Hoover Institute provided by John Taylor. Paul notes that Taylor’s summary misrepresented what Bob Hall said:

Taylor makes it seem as if Bob Hall showed that fiscal expansion is ineffective. Yet if you have actually been following Hall — which I have, carefully — you’d know that he has been producing extensive evidence that fiscal expansion does, indeed, work; he argues that the Obama stimulus made the slump considerably less severe. His complaint is that the stimulus wasn’t big enough — which is the same argument I made from the beginning.

For a more fair and balanced summary – see Noahpinion. But let’s also note the following from Taylor’s summary:

I presented research with John Cogan on fiscal policy showing that it had not been successful in raising government purchases and was ineffective regardless of the size of the multiplier.

In other words – we really did not try fiscal stimulus after all. Isn’t that also been what Paul has been saying for quite a while!

Tuesday, December 6, 2011


The word has come down from on high in Europe.  Merkozy have decided:

1. Henceforth, after Greece, there will be no more haircuts administered to creditors of sovereign debt.  All obligations will be paid in full, no matter what interest rate has to be paid or how onerous the debt service program has become.

2. Every country will be subjected to hard limits on its budget deficit and must even show progress toward reducing debt-to-GDP to 60% if it is now above that target.

There are problems with each of these taken alone, but has anyone noticed that, under predictable circumstances, they contradict each other?  You can explain this as a quid pro quo for the two main players in the Eurozone, but sometimes political agreements also have to make sense.

A Modest Tactic for Improving Teaching

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

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

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

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

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

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

Monday, December 5, 2011

A Republican Who Doubts the Laffer Curve?

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

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

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

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

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

Sunday, December 4, 2011

Mankiw’s Reply to the Walk-Out

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

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

First, what does Mankiw say?  I would summarize his argument in this way:

1. His Ec 10 course at Harvard is not much different from other mainstream introductory econ courses taught in other colleges and universities.  (Nor by implication is his textbook so different either.)  It’s the tried and true.

2. Economics is essentially an organized, rigorous way of thinking; it allows its practitioners to adopt a wide range of positions, so long as they reason clearly and respect evidence.  There is no intrinsic bias to the discipline.

3. Even economists on the left, like Paul Samuelson, have been the object of criticism coming from Marxists and others outside the mainstream.  This shows that it is not Mankiw’s personal conservatism that has sparked the protest, but the discipline of economics itself.  (The implication is that replacing the Republican Mankiw with another professor more associated with the Democrats would not placate the protesters.)

Let’s take these in reverse order.  I think #3 is correct, although this bears mainly on how well the protesters understand what they are protesting.  If they think Ec 10 can remain a mainstream introductory course but shed its conservatism under new management, they are wrong.  In other words, this is not about Mankiw.  (I don’t know anything about his skills as a teacher, but nothing has been written that suggests that he is unfit for the job.)  Perhaps a good precedent is the protest of French students several years ago against “autistic economics”, which targeted content and not, despite the moniker, personality.

#2 is on shakier turf.  Mainstream economic concepts and tools are valuable and well worth knowing, but they also contain implicit biases.  The most fundamental of these is the assumption that individuals are connected to one another almost exclusively through markets—that the essential aspects of the economy can be understood by employing models that incarnate this assumption, relaxing it in only a few narrow instances.  What are the connections that are left out or radically downplayed?  Culture, politics, language, environment: the relationships between people, and between them and their material world, that are the objects of study in such fields as sociology, politics, organization theory, social psychology, anthropology, geography and so on.  The problem is not that there is a division of labor between disciplines; that’s how it should be.  It is that assuming that economic interactions can be studied apart from all the others leaves power and culture out of the equation.  (Literally.)  That’s a bias.  Of course, it is entirely possible to stick to mainstream economic thinking and harbor non-mainstream views on other matters, but that doesn’t mean that the bias has disappeared, only that it has been overcome.  There is a reason why exposure to economics, and especially the worldview-defining core of microeconomics, tends to shift student views, on average, in a libertarian direction.

Repeat: the solution is not to simply throw mainstream economics into the dumpster.  There is a lot of good, useful stuff, and students should be exposed to it.  But the assumptions should be discussed openly and honestly, so that students can develop a sense for when economics has more to say, when it has less, and how its insights can be combined with those from other intellectual traditions.

As for #1, Mankiw is right, and that’s the problem.  It would not be an exaggeration to say that there is a central narrative at the introductory level that has hardly changed in at least a generation, perhaps longer.  It presents a system of perfectly competitive markets composed of rational, unconnected agents as the benchmark, from which specific deviations, like externalities, behavioral anomalies, sticky prices, etc., are considered one at a time.  Most of the interesting and important work in economics is about these deviations.  If you added up all of this innovative research, you would have a composite picture that is exciting, relevant—and light years away from the introductory narrative.

A huge gap has opened up between the introductory course and the work professional economists are actually doing.  Each departure from the narrative is considered one at a time, even though research has chipped away at all of them.  Unfortunately, this feeds back to the self-understanding of the researchers themselves: they get their central narrative from the vision of Ec 10 (or 101 or whatever) and see their own work as deviating in just one specific way from the benchmark model.  (To get published, this is exactly what you need to show, that your novelty, taken in isolation, enhances the benchmark’s explanatory power.)  Thus the introductory course still looks like a distillation of the research frontier, even though, if you put all the research results together, you would have something quite different.  Consider, for instance, the vast amount of work that has gone into the analysis of cooperation and its relevance in a wide range of economic situations.  Is this work mainstream?  Yes.  Has it entered the core narrative?  No.  It’s just another wrinkle, taken up at one juncture and then put aside when the next wrinkle is introduced.

The introductory economics course is a big, big problem.  I hope the walkout adds to the pressure for a fundamental rethinking.

Saturday, December 3, 2011

Occupy Chico State

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

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

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

Here is our unedited conversation.

Quote of the Day, December 3, 2011

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

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

American politics made easy.

Friday, December 2, 2011

Not the Best News on the Employment Situation

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

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

The Balanced Budget Multiplier is Not Negative

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

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

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

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

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

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

Morality: The Ecological Inference Problem

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

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

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

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

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

Thursday, December 1, 2011

Success and Morality in a Market Economy

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

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

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

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

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

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

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

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

Tuesday, November 29, 2011

Quote of the Day

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

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

The Genealogy of Occupation

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

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

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

The Problem with Pop Economics, Paul Seabright Edition

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

That’s my reaction to Paul Seabright’s The Company of Strangers.  The book came highly recommended to me, and since I’m working on a paper that touches on the theory of cooperation, I was looking forward to it.  Cooperation from an evolutionary and behavioral perspective is Seabright’s thing, and there is some catchy writing about it.  The bulk of the book, however, is essentially a rehash of mainstream econ which hardly adds anything to the standard textbook story.

What sealed the deal for me was the chapter on water.  Here’s an opportunity to explore the fuzzy boundaries of economic reasoning: problems of complexity and the resilience of natural systems, the contributions and limits of markets, deontological versus utilitarian approaches to social justice, and so on.  To do it, you would need two things, a strong background in the science and history of water systems management and a flexible, open-minded approach to economic assumptions and methods.  Both, alas, are lacking.

Seabright’s only historical reference is Wittfogel, which suggests he is unaware of the flourishing modern literature on the political ecology of water.  Where to start?  If you’re in the US, read Cadillac Desert; if you’re in Europe, check out The Conquest of Nature.  (You will learn that Frederick the Great was a true “oriental despot”; aside from warfare, the Prussian state’s main obsession was transforming the hydrology of the north German and Slavic swamplands.)  This matters, because water and political power have been intimately related through history, and power is not an afterthought.

Even more crucially, though, Seabright shows no sign of having studied hydrology itself.  He does not discuss aquifers and the messy patterns of groundwater withdrawal and recharge.  He doesn’t consider the problems posed by the variability of water supplies or the issues connected to river channeling and floodplains.  There is no mention of the ecological functions of surface water aside from their use in human enterprises like agriculture.  The man has written a whole chapter on water without doing any real research into it.

The result is that disjunctures between economic theory and aqueous reality are never recognized, much less pursued.  Water management, for instance is about both supply and demand, often in the same activities.  You might be able to analyze important management questions using the tools of cost-benefit analysis, but standard supply and demand analysis is useless.  (Go back again to the key management decisions described by Reisner.)  This doesn’t mean that prices can’t help distribute resources rationally, just that they are more pertinent to what might be called retail rather than wholesale matters.  And property rights can’t possibly be fashioned to encapsulate the interactions embodied in groundwater management.  And ecosystem services?  The point is not that economics is “wrong” in any absolute sense, just that economists must be humble: their tools can make only a modest contribution to better water policy, and, if they don’t understand them, they will end up doing more harm than good.

As for the issue of water and human rights, let me quote the passage that sums up Seabright’s opposition to guaranteeing a basic water supply to all people, rich and poor:
The great merit of charging a price for water is that we no longer need to argue who deserves it more: if people are poor they may deserve our help, but if water can be priced to reflect its scarcity relative to other goods, we no longer need to argue the case for helping them separately when we consider food, housing, water, clothes, and all the other aspects of their lives.  Proper pricing strengthens rather than weakens the case for helping the poor.  (Emphasis in the original.)
What strikes me most about this statement is its moral obtuseness, verging on narcissism.  The problem for the poor turns out to be the ease with which Seabright can make an argument for helping them.  Specifying rights in kind takes more time and effort and is therefore inferior to just giving people money and letting them spend it themselves.  No doubt this is true in some cases, but there is a reason decent societies specify entitlements to specific, essential goods like health care, education, legal representation and basic infrastructural services—like water.  The idea that there are primary goods to which all people should have a right, distinct from goods in general, is widespread and has received plenty of support from philosophers and political theorists.  What is lamentable in this passage is not that Seabright disagrees, but that he is so immersed in shallow Econ 101 doctrine that he is unaware that there is an alternative point of view.

Just as disturbing is his displacement of the needs and interests of the poor by the interest of the non-poor in having convenient arguments for providing support.  What matters, of course, is not how strongly the case for generosity can be made, but what sort of lives poor people are able to live.  In fact, there is a double meaning to his final sentence.  If water is priced out of reach of the poor, there is all the more reason to give more money to them.  That does not mean that they will get this money; more likely than not they won’t, and therefore pricing water is bad for them.

In arguing against Seabright, my point is not that people should never be charged a price for using water.  Quite the contrary: like most environmentalists, I see a lot of benefit in doing this, especially in contexts where water is not a primary good.  But I also know there are other factors to consider, and that, in any case, prices are simply tools to align individual and social incentives.  How could it not be society’s interest that poor people have access to enough water for drinking and sanitation?

In the end, the problem with most pop economics is not that it is pop, but that it peddles a simplistic view of the place of economics in the larger intellectual and moral enterprise.  General readers, even if they aren’t yet in a position to recognize the difference, deserve an economics that is thoughtful and probing.

Monday, November 28, 2011

Quote of The Day

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

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

Saturday, November 26, 2011

Some Like it Hot. So What?

In the world of climate economics, Richard Tol is a major name.  If his most recent post on the topic is any indication, he should pick another line of work.  Tol points to the desire of many people, including some of his economist colleagues, to move to warmer locations as “revealed preferences for climate”.  His final paragraph hedges a bit, but leaves the impression that the sunbirds are telling us something about policy:
Obviously, one cannot compare the individual impact of moving to a warmer climate with the impact of global warming, but at the same time it is clear that both Dublin economists specifically and intra-European migrants generally do not object to a warmer environment.
Yes, people move to warmer climates.  They lie under sun lamps and bake in saunas.  Thermo- and phototropism have nothing to do with the risks of climate change, of course.  The major risks are:

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

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

an increase in the frequency and severity of severe weather events

the loss of water storage in glacial formations

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

loss of agricultural productivity in tropical and many temperate regions

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

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

Friday, November 25, 2011

Montserrat Figueras

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

She was one of a kind.

Critique of the Political Scene Today?

As faction is the effect of that loose government which is unavoidable in a time of war and trouble; so, while faction is suffered to continue, it is a perpetual bar to better administration; for it emboldens the bad, and terrifies the good. Is a lunatic, whom the physician cannot approach without danger to himself. Some statesmen, therefore, when it rages high, withdraw from affairs, and will not administer the physic of their councils till the fit is over.
--Charles Davenant. 1698.

Wednesday, November 23, 2011

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

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

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

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

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

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

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

Tuesday, November 22, 2011

In Politics, Let No Mean No

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

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

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

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

Lessons for the Eurozone from US Fiscal Federalism

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

There are 50 US states (plus a few colonies), and each has its own budget.  By law, this budget must balance in 49 of them, and the holdout (Vermont) doesn’t operate differently in practice.  The logic behind this constraint has nothing to do with optimal fiscal policy—whether budget deficits are “good” or “bad” in any given context—but reflects the centralization of macroeconomic policy, monetary and fiscal, in Washington.  Suppose, for the sake of discussion, that a state, even a large one like California, decides to go its own way and runs a large fiscal deficit.  This would pose several challenges to federal-level policy:

It would add to the stock of dollar-denominated public debt, whether or not policy-makers, or the public, elsewhere in the country wanted it.  In other words, it would be undemocratic, imposing an outcome on a broader jurisdiction which that jurisdiction would be unable to decide on.

It would put pressure on Washington to guarantee, explicitly or implicitly, state-level debt.  As in today’s Eurozone debacle, it would be extremely costly to permit defaults by large members of the community; the effects would spill over to other state fiscal authorities.  But if the federal level guarantees state debts, there need to be limits on the borrowing choices of the states.  In this sense, there is some support for a German-style “hard” fiscal constraint on states.

It would also put pressure on the Federal Reserve.  Under normal circumstances, although not today’s liquidity trap, more public debt means higher interest rates, and this places a burden on all dollar-denominated public borrowers; it also has the potential to crowd out private credit creation.  The Fed is then forced to decide how much of this pressure it wishes to relieve through monetization, thereby assuming the risk of inflation.  Despite putative central bank independence, there is normally a loose coordination between monetary and fiscal policy, since the effects of each depend greatly on the other, but that would not be possible if it were state fiscal choices that were driving the aggregate public budget.  In fact, the thought experiment of active California (or other state) fiscal policy makes clear how important it is to coordinate monetary and fiscal spheres.

Up to this point, it looks like fiscal orthodoxy is the takehome message: if the Eurozone wants to centralize its finances, it needs to impose something like a balanced-budget rule on its member states.  If you are Wolfgang Schäuble, you can stop reading right now.

But it’s not so simple.  There are two big caveats that have to be taken into account.  The first is that the balanced budget rules at the state level apply only to operating expenses; these have to be financed out of current revenues (or surpluses set aside during balmier times).  States routinely issue bonds to finance capital projects, and these are just as surely fiscal deficits as any other form of debt-financed spending.  There is no statutory limitation on the capital budget in any state, although political resistance has usually kept bond issuance at moderate levels.  (In many states new bond issues have to be put to a public vote.)  One advantage of exempting capital projects from balanced budget rules is that, in theory, these project provide a stream of future benefits to offset future debt service.  If you think that dividing state budgets into operating and capital components and treating each differently makes sense, you would want to look for an alternative to a simple hardening of the Stability and Growth criteria.

The second caveat is the biggest: the federal government conducts fiscal policy.  It oversees the lion’s share of automatic stabilizers, such as tax receipts and transfer programs.  (Where it doesn’t, as in unemployment insurance, it tends to be more generous in backstopping the states—at least it was until the Republican Party decided it wanted to undo the New Deal.)  In other words, the federal government assumes the majority of taxing, spending and transferring activity in the US; even combined, the states are second-tier.  During 2010, for instance, and indulging in a bit of rounding, the federal government accounted for 70% of all government spending and 60% of all public revenues, with the rest going to all other levels of government.  (The difference between these two shares reflects the federal assumption of deficits.)  It would be presumptuous to claim that this is the right set of proportions, but it gives an idea of what the fiscal transformation of the Eurozone would entail.  Clearly such a shift of financial wherewithal from the members to the center cannot be undertaken without a corresponding political transformation—the creation of a consolidated, Eurozone-level democratic space.  (To his credit, by the way, Schäuble understands this.)

But it is not enough for the center to have fiscal capacity, it has to use it.  When the financial crisis of 2008 struck, it was essential for the federal government to use its borrowing capacity to make up for the credit collapse in the private sector; without the big budget deficits we’ve seen since then, we would be very deep in a depression.  In fact, as most reality-based economists recognize, the deficits should have been bigger; they should be bigger right now.  A different way to put it is that the fiscal restrictions on the states only make sense if there is no such restriction at the federal level, and policy is free to be as expansionary or contractionary as needed.  There must be no Stability and Growth criteria for center.

The link between these long-term considerations and the current negotiations over immediate measures is this: any pressure on governments to impose austerity in return for financial support should be balanced by fiscal expansion elsewhere in the system.  It should be at least euro-for-euro simply to retain the existing fiscal stance.  If you regard Eurozone-wide unemployment as too high or euro-denominated balance sheets too fragile, you would demand even more expansion than austerity.  This would anticipate the sort of viable consolidated fiscal mechanism of the future.  Imposing austerity without such a counterbalance anticipates a Eurozone whose consolidated fiscal account is simply the sum of member budgets, each subject to a deficit constraint—a US federal system without a US Treasury free to set policies as conditions require.  That’s a bad idea in good times and a death wish in the midst of a slump.